Bad time to sell

Spec­u­la­tion about who po­ten­tial buyer could be

Finweek English Edition - - Nothing Sacred - SHAUN HAR­RIS

WHO MIGHT BUY the con­trol­ling stake in Mu­tual & Fed­eral? A South African in­sur­ance com­pany is al­most cer­tainly out of the pic­ture – that would be un­likely to get past the com­pe­ti­tion au­thor­i­ties. Over­seas groups would be in­ter­ested – and one pos­si­bil­ity might be Aon. SA in­vest­ment com­pany Brim­stone has an ef­fec­tive 18% in­ter­est in sub­sidiary Aon SA and a sim­i­lar stake in Aon Rein­sur­ance Africa.

Brim­stone also holds 39% of black em­pow­er­ment in­surer Lion of Africa, in part­ner­ship with Comm­life Hold­ings (the fam­ily busi­ness of deputy chair­man Fred Robert­son) and San­tam. That part­ner­ship could, or might al­ready have made, a bid for M&F. Private eq­uity play­ers are also a pos­si­bil­ity.

Ac­tis, a large private eq­uity in­vestor in emerg­ing mar­kets and Africa, is clearly in­ter­ested in fi­nan­cial ser­vices and led the con­sor­tium that bought Alexan­der Forbes. M&F looks like a more com­pelling in­vest­ment, es­pe­cially when the in­sur­ance cy­cle turns up again.

M&F MD Keith Kennedy makes no bones about be­ing dis­ap­pointed with the short-term in­surer’s in­terim re­sults. But he be­lieves the cy­cle has turned and says he’s bullish about the out­look for next year. “This has been

The big news com­ing with M&F’s re­sults was the an­nounce­ment that 75% par­ent Old Mu­tual would start a com­pet­i­tive process next month to sell its con­trol­ling stake. Ba­si­cally, that looks like an auc­tion – as Old Mu­tual says it’s speak­ing to po­ten­tial over­seas and lo­cal buy­ers. An ear­lier po­ten­tial sale to Royal Bafo­keng Hold­ings was called off in March when the two par­ties couldn’t agree on price. Though all fi­nan­cial share prices were un­der pres­sure at the time, the failed deal ap­pears the main rea­son be­hind the sharp de­cline in M&F’s share since then. How­ever, it has re­cently shown signs of re­cov­ery, gain­ing nearly 2% when re­sults were the tough year. We were af­fected by a com­bi­na­tion of three fac­tors: large in­dus­trial and com­mer­cial fire claims, an in­crease in weather claims and in some of the group schemes, es­pe­cially in the mo­tor book. But if you look at the un­der­writ­ing loss (R23m) we ac­tu­ally made a loss of R67m in the first quar­ter and a sur­plus of R44m in the sec­ond quar­ter. So I think the turn­around is ev­i­dent.” re­leased last Tues­day.

While Kennedy says he couldn’t speak on be­half of the sell­ers, he felt Old Mu­tual sell­ing con­trol might “take away some of the spec­u­la­tion” that’s been hang­ing over the com­pany.

M&F’s re­sults – head­line earn­ings per share down by 69% – were put into con­text by a trad­ing state­ment from com­peti­tor San­tam say­ing its head­line earn­ings and at­trib­ut­able earn­ings per share were ex­pected to be be­tween 85% to 95% lower when it re­ports in­terim re­sults on 27 Au­gust. Rea­sons are sim­i­lar to M&F’s – large in­dus­trial ac­ci­dent and fire-re­lated claims and the in­vest­ment re­sult (see other re­port).

We were crit­i­cal of M&F’s ear­lier trad­ing state­ment, say­ing head­line earn­ings per share would be 50% to 70% lower and spec­u­lated at what might be go­ing on at the com­pany. San­tam’s trad­ing state­ment sug­gests it’s an in­dus­try is­sue as claims rise and eq­uity prices, a large part of in­sur­ers’ in­vest­ment port­fo­lios, drop.

M&F’s in­vest­ment in­come de­clined by 52% to R278m. The value of its eq­uity hold­ings dropped by more than R1bn from the cor­re­spond­ing pe­riod, but it’s only a real loss if M&F sells shares. Kennedy says it would be fool­ish to change the in­vest­ment port­fo­lio now.

Some busi­ness, he says, was de­lib­er­ately shed as M&F can­celled “un­der­per­form­ing blocks of busi­ness”. That saw pre­mi­ums for per­sonal lines – roughly 70% ve­hi­cle, 30% non-ve­hi­cle (but held un­der one pol­icy) – con­tract by 2%. How­ever, gross pre­mi­ums in its com­mer­cial port­fo­lio were up about 9%, a com­bi­na­tion of pre­mium in­creases and new busi­ness, Kennedy says.

“Now that we’ve taken ac­tion in the group schemes port­fo­lio – to­gether with what looks like a turn in the claims cy­cle – I ex­pect to see un­der­writ­ing re­sults im­prove dra­mat­i­cally.” He feels earn­ings for the full year will im­prove on the first half fig­ures.

Dis­ap­pointed. Keith Kennedy

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