Bad time to sell
Speculation about who potential buyer could be
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