Wealth Management

Wealth Management operates a diverse portfolio of financial services businesses. It provides financial planning, insurance, private banking, 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, Australia, Europe (Great Britain & Ireland), New Zealand and Asia.

Sources of Operating Profit

	Half year to		Fav/ (unfav) change on		Year to		Fav/ (unfav) change on
	Sep 03 $m	Mar 03 $m	Mar 03 %		Sep 03 $m	Sep 02 $m	Sep 02 %
Life company – planned profit margins	123	118	4.2		241	263	(8.4)
Life company – experience profit/(loss)	9	(4)	large		5	(33)	large
Capitalised losses	7	3	large		10	(4)	large
Life company operating margins (1)	139	117	18.8		256	226	13.3
Operating profits from non-life businesses
- Operating profits (2)	58	49	18.4		107	139	(23.0)
- NAFiM investor compensation and associated costs	(11)	(8)	(37.5)		(19)	(45)	57.7
- Strategic investment expenditure	(15)	(13)	(15.4)		(28)	(23)	(21.7)
Investment earnings on shareholders' retained profits and capital from life businesses	42	16	large		58	(5)	large
Operating profit after tax and outside equity interest	213	161	32.3		374	292	28.1
Revaluation profit/ (loss) after tax	5	(205)	large		(200)	(152)	(31.6)
Net profit before significant items and after outside equity interest	218	(44)	large		174	140	24.3

⁽¹⁾ Life Company operating margins are net of outside equity interest.
⁽²⁾ Operating profits from non-life businesses includes Private Bank and the shareholders' funds of life insurance companies and other businesses.

Wealth Management produced operating profit after tax and outside equity interests for the year of $374 million, an increase of 28.1% on September 2002. The result accommodates a significant increase in compliance and regulatory expenditure as the industry went through some of its most significant changes this decade. During the year the business continued to invest for future growth, with $28 million after tax of investment expenditure included within the above result to fund strategic investment programs in both Australia and the UK.

Revaluation profit for the September half was $5 million reflecting an improvement in the business outlook.

Life company operating margins

Life company operating margins increased by $30 million, an increase of 13.3% on September 2002.
Planned profit margins decreased by $22 million, reflecting the impact of large withdrawals in the traditional business due to the decline of the secondary market and the incorporation of negative disability experience outcomes from 2002 into 2003 assumptions. Lower sales and funds under management, impacting fee income within the investments business, were offset by anticipated growth in inforce annual insurance premiums.

Experience profits were positively impacted by actively managed business expenditure and favourable investment conditions in the September 2003 half resulting in higher fee income. Within the insurance business, disability claims experience has stabilised and lump sum experience remains favourable.

Capitalised losses of $10 million were reversed during the year, reflecting favourable experience and latest available data.

Operating profits from non-life businesses

Operating profit from non-life businesses decreased $32 million. Whilst the Private Bank continued to record strong growth with a 17% increase in earnings, and the Australian investments businesses recorded stable earnings in difficult operating conditions, the UK non-life businesses were adversely impacted by negative investor sentiment.

The result also includes $32 million of compliance costs and expenditure on regulatory projects such as FSRA and superannuation legislation changes.

Additional compensation and associated costs of $19 million have been provided in relation to NAFiM investor compensation announced in August 2002.

Strategic investment spend in both the Australian and UK businesses has continued with a number of key initiatives delivered during the course of the year. The profit impact of this expenditure was $19 million and $9 million respectively.

Investment earnings on shareholders' retained profits and capital from life businesses

Investment earnings generated on shareholders' invested capital in the statutory funds of the life businesses were $58 million. The improved performance correlates to the movements in the major stockmarket indices in those periods. The result reflects the significant volatility experienced in the half year to March 2003 and steady improvement in equity market returns in the September 2003 half year. Shareholders' capital is invested in fixed interest and cash (73%) with the remaining balance in equities, consistent with the investment profile of policyholder assets and regional regulatory requirements.

Operating profit by business segment ⁽¹⁾

	Year to		Fav/(unfav) change on
	Sep 03 $m	Sep 02 $m	Sep 02 %
Investments (2)	142	184	(22.8)
Insurance (3)	204	137	48.9
Other (4)	17	44	(61.4)
Profit from operations (after tax) (5)	363	365	(0.5)

⁽¹⁾ Reflects operating profit by business type irrespective of the legal entity through which the business is written. This differs from the sources of operating profit disclosure, where all business written through life company statutory funds, irrespective of the business type (investments or life insurance) is included in life company operating margins.
⁽²⁾ Investments includes funds management, funds administration, asset management and on-line investing.
⁽³⁾ Insurance includes retail insurance (covering life insurance, income insurance and general insurance agency) and group insurance for members of a corporate, business or club.
⁽⁴⁾ Other includes the shareholders branches of the life companies, private bank, advice solutions and other businesses.
⁽⁵⁾Profit from operations by business segment includes life company operating margins and operating profits from non-life businesses. It excludes NAFiM investor compensation and associated costs, strategic investment expenditure and investment earnings on shareholders' retained profits and capital from life businesses.

The Investments result was impacted by unfavourable market conditions particularly in the first half on the UK and Australian investments business. The Insurance business was positively impacted by growth in in-force annual insurance premiums, stabilising claims experience and favourable lump sum business experience, while Other profits decreased primarily due to increased regulatory and compliance spend.

Key Performance Measures

	Half year to			Year to
	Sep 03	Mar 03		Sep 03	Sep 02
Sales ($ bn) (1)	7.1	5.3		12.4	16.4

	As at
	Sep 03	Mar 03	Sept 02
Total funds under management and administration ($ bn) (1)	73.1	65.1	65.6
Market share – Australia %
Platforms – master funds & wraps (2) (3)	19.2	N/a	N/a
Retail funds management (2)	13.7	14.1	14.5
Net annual retail inflows (2)	11.3	16.7	22.5
Wholesale funds management (2)	6.7	6.3	5.7
Net annual wholesale inflows (2)	30.7	29.0	5.8
Retail risk insurance (4)	14.7	14.1	13.7
New retail risk annual premiums (4)	16.5	16.8	14.9
Other (no.)
Financial advisers (5)	3,215	2,972	3,309
- Bank channels	643	643	783
- Aligned dealerships	2,572	2,329	2,526
Full-time equivalent employees (FTEs) (6)	6,174	5,910	6,105

⁽¹⁾ Sales and funds under management and administration have been restated to exclude joint venture interests.
⁽²⁾ Source: ASSIRT Market Share Reports as at June 2003, December 2002 and June 2002.
⁽³⁾ At 30 June 2003, National/MLC changed the methodology used to report Platform data to only include assets on the MLC platform. As a result prior period market share data is not comparable. (Market share based on the old methodology: March 2003: 24.3%, September 2002: 26.7%).
⁽⁴⁾ Source: DEXX&R Research Reports. Retail risk insurance includes term, trauma and disability insurance at June 2003, September 2002 and March 2002.
⁽⁵⁾ Significant business is also sourced from Independent Financial Advisers (IFAs). There are currently active relationships with over 1,600 IFAs. Financial advisers at September 2003 include 1,403 for the Australian business and 1,812 for the UK and Asian businesses, which compares with 1,463 and 1,509 respectively at March 2003 and 1,501 and 1,808 respectively at September 2002.
^{( 6)} FTEs at 30 September 2003 include the impact of acquisitions (Plum Financial Services Limited (152) and an increased interest in Advance MLC Assurance Co. Limited (Thailand) (20)). It also reflects the increased number of FTEs engaged in regulatory, compliance and strategic reinvestment projects.

Funds under management / administration

Strong investment returns and the acquisition of the remaining 50% of Plum Financial Services Limited in the September 2003 half has led to funds under management and administration increasing by 11% on September 2002.

Investments

With a market share of 19.2% at 30 June 2003, Wealth Management continues to be the number one provider of retail investment platforms, (masterfunds and wraps) in Australia. Market share in retail funds under management is 13.7%, with second position retained. The decrease in net annual retail inflows reflects the impact of lower inflows during the first half of the year. Wholesale funds management market share increased to 6.7%.

Insurance

Wealth Management held the largest share of the Australian retail life insurance market as at 30 June 2003, with a 16.5% share of annual new business sales and a 14.7% share of premiums in force.

Efficiency measures

Robust cost containment together with growth in the insurance business has resulted in a cost to premium income ratio for the year of 20% compared with 22% for the 2002 year, exceeding the 2004 full year target of 21%.
The cost to funds under management ratio for the investments business achieved 60 basis points* as a result of cost containment and higher closing funds under management. This compares with 67 basis points for the year ended 30 September 2002*, and against a 2004 target of 65 basis points.

*Excluding NAFiM investor compensation and associated costs.

VALUATION AND REVALUATION PROFIT/(LOSS)

Valuation of businesses held in the mark to market environment increased by $158 million from $6,475 million at September 2002 to $6,633 million at 30 September 2003. Values shown are directors' market valuations. The valuations are based on Discounted Cash Flow (DCF) valuations prepared by Tillinghast – Towers Perrin (Tillinghast), using, for the Australian and New Zealand entities, risk discount rates specified by the directors.

The components comprising the change in value are summarised below:

NAFiM subsidiaries Market value summary ($m)	Net assets	Value of  inforce bsuiness	Embedded value	Value of future new business	Market value
Market value at 30 September 2002	1,301	2,252	3,553	2,922	6,475
Operating profits after tax of NAFiM subsidiaries (3)	293	-	293	-	293
Capital and other movements (4)	25	-	25	-	25
Increase in shareholders net assets	318	-	318	-	318
Revaluation profit /(loss) components before tax:
Business assumptions & roll forward
Roll forward of DCF (5)	-	399	399	-	399
Change in business assumptions & experience	-	(235)	(235)	(324)	(559)
Revaluation profit/(loss) before tax (6)	-	164	164	(324)	(160)
Excess movements (7)	(47)	47	-	-	-
Market value at 30 September 2003	1,572	2,463	4,035	2,598	6,633

⁽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⁾ 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.
^{(3 )}Operating profit after income tax is before revaluations and excludes operating profits of entities outside the market value accounting environment; ie. the operating profits after tax from NAFiM's own business, and other entities not owned by NAFiM.
⁽⁴⁾ Capital and other movements represent movements in value such as the payment of dividends, capital injections and reductions, acquisitions of subsidiaries and foreign exchange movements on intragroup debt related to international subsidiaries.
⁽⁵⁾ The roll forward represents the growth over the period at the valuation discount rate over and above operating profit.
⁽⁶⁾ The revaluation profit/(loss) before tax does not include revaluation uplift in respect of NAFiM's own business. AASB 1038 requires assets of a life company to be valued at net market value; since NAFiM is the parent life entity, the change in market value of its own life business is not brought to account.
^{( 7)} Excess movements represent excess on the transfer from associate to subsidiary of Plum Financial Services Limited, increased interest in Advance MLC Assurance Co. Limited (Thailand), foreign exchange impacts on the net assets of international subsidiaries and market value of intragroup debt.

Revaluation profit/(loss)

The full year revaluation loss of $160 million before tax comprises second half revaluation profit of $79 million and first half revaluation loss of $239 million. The components that contributed to the full year revaluation loss comprised the effect of assumption changes and experience, offset by the anticipated growth in the business above current levels of operating profit (ie. the roll forward of the DCF).

The assumption changes primarily comprised lower retail sales volumes than anticipated at September 2002, resulting in a reduction from 51% to 43% in the ratio of the Australian value of future new business to total Australian market value. Further, weaker operating environments have reduced the values of the international businesses, as has the overall strengthening in the Australian dollar. The impact of these factors has been mitigated to some extent by the active management of expenses.

The adverse impact on value of poor investment returns in the March half has largely been offset by improved investment returns experienced in the second half.

Included within 'capital and other movements' is a net capital injection of $135 million, which includes a $140 million injection into the insurance business to support the growth in the risk insurance business. A favourable foreign exchange movement on the intra-group debt related to the international subsidiaries is also included in this category.

Entities held within the mark to market environment include operations in Australia, Europe, New Zealand and Asia. Value by both region and business segment are summarised below:

	At 30 Sep 2003
NAFiM subsidiaries Market value summary ($m)	Net assets	Value of inforce business	Embedded value	Value of future new business	Market value	At 30 Sep 02 Market value
By region
Australia	1,221	2,062	3,283	2,492	5,775	5,430
Europe	209	261	470	34	504	616
New Zealand	20	47	67	10	77	97
Asia	122	93	215	62	277	332
Market value at 30 September	1,572	2,463	4,035	2,598	6,633	6,475
By business segment
Investments	768	1,189	1,957	1,750	3,707	3,847
Insurance	695	1,242	1,937	848	2,785	2,444
Other	109	32	141	-	141	184
Market value at 30 September	1,572	2,463	4,035	2,598	6,633	6,475

Actuarial assumptions applied in the determination of market value

Actuarial assumptions applied in the determination of market values for significant Wealth Management businesses held within the mark to market environment are summarised as follows:

	September 2003			September 2002
Assumptions applied in the determination of market value (1)	New business multiplier (2)	Risk discount rate (3) (%)	Franking credit assumptn (%) (4)	New business multiplier (2)	Risk discount rate (3) (%)	Franking credit assumptn (%) (4)
Insurance – Australia	9.1	11.0	70	10.1	11.0	70
Investments – Australia	9.1	11.0 - 12.0	70	8.7	11.0 - 12.0	70
New Zealand	6.8	11.25 - 12.50	70	8.3	11.75 - 12.75	70
Hong Kong	9.0	12.5	-	9.0	12.5	-

⁽¹⁾ The bulk of the European valuation was performed on an aggregate basis. Where the European business valuations identified separate values of inforce business and future new business, approximate methods were used to derive the value of future business that did not involve new business multipliers. The risk discount rate used in European valuations at 30 September 2003 was 10%.
⁽²⁾ Australian new business multipliers represent the multiple of value arising from the 12 months to 30 September 2002 and the 12 months to 30 September 2003 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. For New Zealand, the new business multiplier applying to the WM valuation of the retail investments business has been disclosed. Whilst this multiplier does not recognise other parts of the Wealth Management New Zealand product range (eg. wholesale investment and life insurance business), the disclosure of this multiplier is considered appropriate to demonstrate the impact of changes in assumptions over the 12 months to 30 September 2003.
⁽³⁾ Risk discount rates are gross of tax and have been derived using the Capital Asset Pricing Model. For the Australian and New Zealand businesses, the rates applied in the directors' market valuations, as shown in the table above, are 0.5% higher than Tillinghast's standard rates for DCF valuations of such businesses.
⁽⁴⁾ The valuations of Australian and New Zealand 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 other than New Zealand comprise the present values of estimated future distributable profits after corporate tax.