It’s nice to be able to shrug off a R450m-odd US exposure so glibly
ANYONE WHO GOT a clear grasp of Old Mutual’s possible losses in the United States from its latest announcements is a better man than I am – which, you may think, is not difficult. We’re told that the exposure to assurer AIG is US$237m – call it R2bn and you won’t be far wrong – but that Mutual holds no AIG shares, minimal reinsurance exposure and no derivative exposure. It does have “exposure” of $76m to senior debt, $84m to insurance policies and $77m to subordinated and hybrid debt.
Mutual has also revealed its US Life subsidiary was exposed to Lehman Brothers to the tune of $50m senior unsecured debt and $5,7m collateralised derivatives (no, don’t ask me) but claimed that’s “not material within the context of Old Mutual”.
It’s nice to be able to shrug off a R450modd exposure so glibly and, in fairness, Mutual is capitalised at R68bn. And it’s reassuring to know that it’s monitoring the situation. I would hope so, too.
But what investors want to know is just what the chances are of recovering any of those amounts. Is any of the AIG senior debt secured? What’s the status of the insurance policy exposure? Has the “subordinated and hybrid” debt any value (frankly, I doubt it)?
Add up Mutual’s total exposure to both firms and at R2,5bn it can be argued they’re still not material to an outfit Mutual’s size. But that’s hardly the point, is it? Fact is, this is just Mutual’s latest in a string of misadventures since it entered the US market, following in the tracks of Investec, Sage Holdings and Discovery. Only at Sage Holdings did that prove fatal. But the conclusion is inescapable: however successful SA’s financial services firms may be in exporting their expertise to some parts of the world, the US is best stayed out of.
Mind you, it’s difficult to feel much sympathy for Mutual. I happen to share the view expressed so trenchantly by Stephen Mulholland recently: that Old Mutual’s move to London was largely motivated by a not particularly impressive former CEO’s desire to have his pension – totally excessive in any case, considering his achievements – paid in sterling rather than rand. You have to question whether the decision was subjected to wondered whether buying Skandia wouldn’t have a similar conclusion. Fortunately, that wasn’t so. But the fact is that Mutual’s migration overseas has done little for its original SA investors. Though no financial services share could have been immune to the current slump, Mutual has fallen by more than 40% over the past year but its stay-at-home rival
The fact is that Mutual’s migration overseas has done
little for its original SA investors.
adequate scrutiny by a board that, however well meaning, may subconsciously have been swayed by similar considerations.
But once the decision was taken there was an irresistible need to justify it by expanding internationally and the snakeoil salesmen in the US saw Mutual coming. It was inevitable that those most eager to sell wouldn’t have the best quality businesses and there must have been those who later Sanlam by less than a quarter. And Sanlam’s price is still double what it was five years ago.
Now don’t get me wrong. I still endorse a company’s right to domicile itself to best advantage: if a country can’t persuade its companies, or its people, to stay, the fault is with the country, not the emigrants. But a decision to move should be taken in a company’s best interests, not because of personal cupidity. (See story on page 32.)