Mu­tual’s mis­ad­ven­tures

It’s nice to be able to shrug off a R450m-odd US ex­po­sure so glibly

Finweek English Edition - - The Company You Keep - MICHAEL COUL­SON coul­sonmh@gmail.com

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.)

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