Opportunity or disaster of the year
Analysts fear what might come next
WHAT WE DO know is that by the yearend – also the end of Old Mutual’s financial year – South Africa’s largest life insurer and wealth group is going to look very different. How different we don’t know, or even if Old Mutual is going to survive without being broken up and sold (a likely prospect for its overseas plc operations).
Right now analysts are grappling with three questions: how much of Old Mutual will have to be sold, what further losses and write downs can be expected and will it maintain, reduce or perhaps not even pay a dividend in its current financial year?
In a Pan Europe research report by James Pearce, of Cazenove, the outlook is bleak. “The board hasn’t addressed the strategy which has generated an apparently unmanageable group, and we believe that further negative surprises will follow,” Pearce writes.
That echoes the dark, off-the-record mumbling of a few analysts here at home, who say there will be further write-downs – they just don’t know how much. It’s believed the full extent of possible loss exposures in the United States have not yet been fully revealed by Old Mutual, if in fact they are
even yet fully aware of possible liabilities.
“Part of the problem has become Old Mutual’s primary listing in London, where analysts generally don’t like life insurers,” says Paul Stewart, MD of Plexus, an asset manager that’s been closely monitoring financial shares for some time. Stewart admits Old Mutual could become a takeout target but is quite optimistic on the share. “I think there’s an opportunity. Every man and his dog hates the share now – but on an embedded value basis there’s value.”
Stewart is referring to the poor performance of its share price. Stripping out dividend payments – at around 1240c/share by the middle of last week – Old Mutual is back at its listing on the JSE 10 years ago following its demutualisation. And that through one of the strongest bull markets the JSE has seen.
Cazenove isn’t as charitable. “We assume the US$250m of fresh capital injected into the operation (the troubled US Life exposure to Bermuda) in the second will be lost too, along with an equivalent amount of closure costs or loss on disposals and or reinsurance.” The conclusion? “Although the stock looks superficially inexpensive, we doubt that Old Mutual’s troubles are over; and in any case the new CEO (Julian Roberts, who replaced Jim Sutcliffe) will probably have to take unpalatable remedial action in the US at year-end. Accordingly, we downgrade our rating from in line to underperform.”
The pity is that Old Mutual SA still looks pretty vibrant and is a powerful brand in the local market. There have been botches in the past, notably at banking subsidiary Nedbank (its profits collapsed in 2003, followed by a R5,2bn rights issue), but it’s still one of the country’s leading life companies.
What’s the next bad surprise?