Rough year for Old Mutual’s local arm

OLD Mutual Emerging Markets has had a rough year as have its peers in the insurance industry.

The group also incurred heavy losses at its Mutual & Federal business, which reported a 71% dive in its property and casualty business.

“We’ve made a lot of changes to management and we’re implementing a turnaround strategy for Mutual & Federal,” said Iain Williamson, acting CEO and financial director of Old Mutual Emerging Markets.

Williamson said the group expected Mutual & Federal to break even in the new financial year. It expected the changes, and a slight up-tick in economic growth, would make 2017 a less challenging year.

“In recent years, M&F has disappointed on operational performance,” said Adrian Cloete, a portfolio manager at PSG Wealth.

Cloete said achieving the group’s goal of turning Mutual & Federal around to a longterm underwriting margin of 4%-6% would be a big improvement on 2016’s underwriting margin of only 0.9%, down from 3.1% in 2015.

But turning the business around would not be easy, said Brad Preston, chief investment officer at Mergence. “I think short-term insurance is a market that significantly benefits the large-scale players (Santam, Outsurance etcetera), with regulation making this more so in future,” he said.

Preston said many financial service players wanted to have full suites of products for client retention and were “willing to run some of these businesses at suboptimal margins or returns to achieve this, leading to very poor economics for marginal players”.

Looking at aggregate operating profit, the group’s rest of Africa operations contributed R1.7-billion, up 18% compared with 2015, Latin America and Asia businesses contributed R0.6-billion, up 43%.

One surprise was the performance in Zimbabwe, where the unit recorded a 20% jump in profit to R848-million last year. Williamson attributed this to the country’s currency crisis, which sent investors piling into dollar-denominated investments.

The banking crisis in Kenya — to which the group was exposed through microfinancer Faulu Kenya — also had an effect.

Old Mutual Emerging Markets has renewed its focus on growth in Sub-Saharan Africa, and Preston said this made sense. “Africa will be hard and require a long-time horizon, but I think it is a large enough opportunity to focus on,” he said.”

Cloete said the sharper focus would improve the probability of Old Mutual Emerging Markets adding shareholder value when doing acquisitions going forward.

Williamson said the group was looking at growing its inorganic reach, although at the moment it would continue

We’ve made a lot of changes to management

with smaller “bolt-on acquisitions” such as the one it had in Kenya with Faulu.

As far as the group’s managed separation went, Old Mutual plc CEO Bruce Hemphill said it was on track and the process should be completed by the end of 2018. By then, Old Mutual Wealth will be listed on the London Stock Exchange.

Regarding the ownership of the Old Mutual name, Hemphill said the Old Mutual brand belonged to the Emerging Markets business, which would continue to be called Old Mutual.

“Whether they end up calling themselves Old Mutual Holdings or Old Mutual Emerging Markets is up to them, but they’ll determine that at the appropriate time,” he said.

Cloete said although Old Mutual was currently trading at a discount to net asset value, it was expected that, with the listing of Old Mutual Emerging Markets as a holding entity, it would trade at a premium, as Sanlam did.

This is, however, something that will be determined by the market: “If OMEM produces good results, consistently grows its embedded value and adds shareholder value through well-priced acquisitions, then the market should reward it with a premium rating,” said Cloete.