Can Old Mutual get it together?
The life insurer’s banking swing at the mass market could prove a win for the company
The economy gives, and it takes. That’s clear in Old Mutual’s 2022 results.
Whereas the life insurer had solid business growth in its mass and foundation cluster, which targets lower-income clients, its personal finance and wealth management unit got whacked. No wonder the company is targeting the mass and foundation cluster once it restarts its banking endeavours.
In this unit, the economic travails of South Africa became clear as persistency
how long clients renew their policies worsened in 2022. High unemployment and lacklustre economic growth, combined with inflationary pressures, are taking their toll. Nevertheless, Old Mutual recorded a 48% jump in the value of new business, at a margin of about 7.5%.
“The sales numbers are encouraging, but time will tell whether the benefits of higher sales will be negated by a deterioration in persistency given the economic conditions,” Royce Long, owner of Obsidian Capital, tells the FM. “[The company] did strengthen [its] persistency assumptions, funded in part by the release of excess Covid provisions in the 2022 financial year. This should provide some support should persistency weaken on the back of a sluggish economy in the year ahead.”
On the lending side of its mass and foundation cluster, the skewing effect of a large unwinding of provisions for bad debt in the previous financial year wasn’t repeated in 2022. This gave a clearer picture of the health of the market that Old Mutual is targeting.
Old Mutual’s credit loss ratio of 4.4% and net lending margin of 13.6% may point to the level of profitability that a proposed bank might generate. In comparison, Capitec, which mainly targets the lower-income market, reported a credit loss ratio of 3.3% and a net lending margin of around 9.4% in the six months to end-August.
Old Mutual grew its loan book by 5% to R15.5bn, which is comparable to that of Discovery Bank’s R12.7bn in deposits and R4.8bn in loans on December 31. Even if Discovery had had loan disbursements equal to 80% of deposits (R10.2bn), Old Mutual would still be a larger lender.
On the other hand, in its personal finance and wealth management unit, which is arguably the largest source of inflows, a decline in annuity sales and “a significant decrease in demand for offshore investments” dragged gross inflows down by 5% from a year earlier, to R77.1bn.
“A good indicator to look at is net client cash flows,” Long says. “Positive net client cash flows, assuming everything else is equal, is typically a good sign for an insurance company. Within personal finance and wealth, net client cash flows, albeit not material in relation to funds under management, have been negative for both 2021 and 2022. It will be interesting to see if the group can turn this around.”
In addition, the personal finance and wealth management unit struggled to get its business mix right and to increase sales of life products something CEO Iain Williamson says the company addressed in the second half of last year. As it tried to attract new clients, as with other life insurers targeting the wealthier markets, it had to give up some margin.
In fact, the value of new business margin almost halved from an already weak 0.9% in 2021 to 0.5% last year. Yet this may have helped it regain market share, which rose from 8.8% in 2021 to 10.5% in the first nine months of last year. Compared with Discovery Life’s margin on new business of 4.5% for the six months ended December, down from 6.8% a year earlier, Old Mutual has some way to go yet.
Old Mutual is clearly wary of the impact of the struggling economy on the demand for life insurance products: “There is considerable uncertainty over whether the overall industry market will grow in the current economic environment,” the company said in its financial results.
Williamson says: “The macroeconomic environment is expected to remain challenging, which will continue to worsen financial pressure on our customers.” However, he is hopeful that the company has now navigated its recovery phase.
For shareholders, though, Old Mutual increased its full-year dividend by 13% to 76c a share. It trades at a forward p:e of 5.9 and a dividend yield of 6.9%. This compares with Sanlam’s forward p:e of 9.55 and dividend yield of 6.7%.
Clearly, the company still has to convince shareholders it’s on the right track: over the past 12 months, Old Mutual’s share price has lost 17.7% against Sanlam’s 10.6% gain.