A tale of two insurers

DIVERGENT: DIFFERING FORTUNES

Old Mutual hits low, Sanlam soars.

In 1999, the year Old Mutual became a listed company, its stock reached a high of R16.15 per share. Last month, the company’s shares hit a low of R17.70. This is, of course, not a completely fair comparison. The Old Mutual plc that listed 20 years ago included an interest in Nedcor (now Nedbank), and its UK assets have since been unbundled. It is nevertheless extraordinary that its share price should be trading in a similar range to where it was two decades ago.

This is particularly the case if it is compared to Sanlam, which demutualised and listed a year earlier at R6 per share. That company’s shares are now trading at R75.

A clear winner

The graph put together by Denker Capital contrasts the performance of these two companies since Old Mutual listed. To try to make the comparison more accurate, Denker has added back the value of Quilter and Nedbank shares after the managed separation that was completed last year to provide a broadly complete picture.

Although this graph doesn’t include dividends, it is obvious that shareholders in Sanlam have enjoyed far superior returns. What has defined this distinct difference in fortunes can be neatly summed up in two words: capital allocation.

“If you look at Old Mutual and Sanlam, the main difference is in how they allocated capital,” says Kokkie Kooyman, portfolio manager at Denker Capital.

“Both of them had fairly large life insurance businesses and as growth in those core businesses slowed, they looked to use the cash generated there to grow into other areas,” he adds.

In Sanlam’s case, the company looked for growth firstly in other financial services business in South Africa, such as Sanlam Investments, Glacier and Sanlam Private Wealth. It also expanded across Africa and into India through buying a stake in Shriram Capital and developing Shriram’s life and short-term insurance with the Shriram Group.

Old Mutual, on the other hand, immediately sought to internationalise into developed markets – first in the UK, and then countries such as the US, Portugal, Australia and Sweden. Its ability to succeed in these markets, however, did not match its eagerness to externalise its revenue streams.

Value gained, value destroyed

Old Mutual made two particularly poor, and expensive, purchases – United Asset Management in the US in 2000, and Skandia in Sweden in 2005. It has since incurred losses in selling most of both.

Sanlam, on the other hand, looked for regions where it could more obviously be competitive.

“Sanlam realised that it’s easier to go into emerging markets where you have an expertise differential, and you can add something to whoever you do a joint venture with,” Kooyman says.

An important question for investors is why these companies should have taken such different paths.

For Kooyman, two things stand out: “In the end it comes back the quality of the management you have, and then how they are incentivised. It looks like the Old Mutual guys were most probably incorrectly incentivised.”

Read the full story on moneyweb.co.za