A tale of two insurers

DIVERGENT: DIFFERING FORTUNES

Old Mutual hits low, Sanlam soars.

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.

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.”

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