‘Unsexy’ mutuals seek higher profile
Going to stock markets ’adds no value to customers‘
CAPE Town seemed an odd place for mutual insurers to be talking about raising their profile. The mutual business model has been all but abandoned in this country.
But this is where the International Cooperative and Mutual Insurance Federation’s chief executive Shaun Tarbuck said his organisation had to raise the profile of mutual insurers and push their agenda at the G20, where worldwide financial industry strategy decisions are taken.
Tarbuck was speaking at the federation’s biennial conference earlier this month. This was the federation’s first conference in Africa.
South Africa’s biggest mutual insurers, Sanlam and South African Mutual Life Assurance Society (now known as Old Mutual) demutualised in the late 1990s.
Tarbuck was unequivocal about demutualisation. “A few mutuals are still going to the stock market, but it’s difficult to justify. It’s often motivated by greed, not a business decision. It adds no value to the customers. It just enriches a few.”
❛ It’s tough to get into the media if you don’t have a share price to talk about
He also argued that the boards of mutuals, which are typically democratically elected and do not allow executives full sway, tend to be stronger and more challenging and result in better governance than in a public listed company model.
The federation has 220 members from 72 countries with a 5.5% share of the global insurance market and $1.53-trillion (about R15.5-trillion) in assets.
Mike Jackson, CEO of South African mutual insurer PPS, said the low profile and number of mutuals came down to an inherently unsexy business model.
“It’s tough to get into the media if you don’t have a share price to talk about. Mutuality needs to be rebranded. It must be seen as responsible capitalism — the way capital is acquired, spent and the profits distributed.”
He said mutuals that demutualised had traditionally gone to market for capital, particularly if they were stressed, as well as due to pressure from members to perform when markets are running.
“With the mutual model, value is unlocked slowly over time, whereas if you list, value is unlocked instantly, but you lose your mutual values. Members just become policyholders after everyone had profited in the short term.”
Growth constraints were a thorny issue for many mutuals. “As long as we get new members, growth will be organic. We’re not at the mercy of analysts checking our growth curve and selling out. We’re not driven to replace business and our lapse rates are much lower than the industry average. We are hugely capitalised.
“There’s no need to go to the market — and 2008 tested that. However, a thinly capitalised mutual has a problem,” Jackson said.
When the bourse was performing well, mutuals came under enormous pressure from within the organisation and without, said Jackson. There were those who would like to profit from a listing.
“We invest surplus capital in the JSE, so the member is benefiting anyway. We’ve achieved a return of 17% compounded per year for a decade. We can justify not listing by getting the best of both.”
In the late 1990s, the pressure was too much to bear for Sanlam and Old Mutual.
According to Andrew McGregor of Who Owns Whom, in 1990 South Africa’s three largest investors — Anglo American, Sanlam and South African Mutual — controlled altogether 75% of the JSE’s market capitalisation. Sanlam had a controlling stake in 64 listed companies across diverse sectors while SA Mutual had controlling stakes in 74.
Two decades later those collective interests had subsided to below 25% following mass unbundlings, partly motivated by competition legislation and a quest for tighter focus on core businesses.
By 2009, Sanlam had a stake exceeding 25% in four JSE-listed entities and Old Mutual just two.
Ian Cruickshanks, chief economist at the South African Institute for Race Relations, said demutualisation was part of a global process that concentrated the minds of management teams.
“They realised they were there for more than their members. With shareholders they could raise capital and enter new business areas. They wanted to spread their wings in the financial services arena.”
Old Mutual’s strategy was to go global immediately, while Sanlam’s was to wait and see, Cruickshanks said. “Unfortunately, Old Mutual went forth into disasters, like in the UK and then into Europe with deals like the Skandia purchase.
“It cost the company billions when I think they didn’t understand the area. Why were the sellers selling those businesses? Then the company blew capital taking on American financial services companies in America. Who’s ever been able to do that?”
On the domestic front, Cruick- shanks said Sanlam worked well in markets they understood, including into Africa and India, using partnerships to smooth the way. “There were extravagant expectations at Old Mutual, while Sanlam played the tortoise to Old Mutual’s hare.
“Neither would have been able to get access to foreign capital via a dual listing without demutualisation but you have to look at the results — it doesn’t always work.”
RE:CM chairman Piet Viljoen agreed that demutualisation did not automatically create value. “A mutual is a business structure that struggles to fund growth— in fact it can be a handicap to growth potential. It’s the growth strategy that follows demutualisation that will either create or destroy value. Sanlam policyholders benefited tremendously, as management’s sensible growth strategy created value for policyholders, who became shareholders post demutualisation.
“Those who opted to stay on benefited from the value growth — a good four to five times the share price. Conversely, Old Mutual destroyed a huge amount of value for its policyholders and shareholders in its efforts to grow.
“Old Mutual moved their headquarters and primary listing to London at a time when acquisitions in developed markets were expensive, while developing market acquisitions would have been cheap.
“As a result of overpaying for its targets, it had to perform a lot of write-offs, rendering the firm finan- cially vulnerable. Now that it has stabilised its finances, it’s doing the opposite, selling developed-world assets cheaply, and expanding into expensive developing markets.”
David Shapiro, deputy chairman at Sasfin Securities, said he wasn’t so sure about the levels of external pressures and greed, but said Sanlam and Old Mutual had simply reached levels where they became difficult to run in existing formats.
“There were lots of reasons they went down that path. In the 1990s the financial services sector was broadening. The two companies had made their names selling insurance, but this was a different climate where companies were being driven by deals, products and trading. They had to join the shift in direction.
“Old Mutual’s ambitions nearly blew it away. It was only once Julian Roberts [CEO] came to sweep clean that Old Mutual saw a reversal.
“Since 1999, if you’d bought Old Mutual at R12 that August, over 13 years your annual yield would have been 7%. That’s like sitting in cash,” said Shapiro.