Insurers’ different takes on tactics
OMEM and Sanlam seek growth in emerging markets
OLD Mutual Emerging Markets (OMEM) will have to play catch-up with rivals such as Sanlam once the business is hived off from parent Old Mutual.
Many local insurers have placed a greater focus on their emergingmarket strategies, with a particularly strong emphasis on the African market.
Sanlam, Old Mutual’s closest rival by market capitalisation, has been on an aggressive acquisition drive in emerging markets. The companies have chosen different strategies for these regions and some analysts feel Old Mutual could learn from Sanlam’s approach.
“Sanlam prefers to purchase stakes in existing business, maintain their branding and leverage off what those businesses have already done, thereby staying very close to what made the business successful to start with,” said Nishlen Govender, an investment analyst at Citadel.
This allowed Sanlam to benefit from African growth while not disrupting a business and its client base, said Govender.
Sanlam now holds a 30% stake in Morocco’s Saham Insurance, which gives it access to the 20 African countries where Saham has a regional presence.
OMEM has a presence in eight African countries. Its expansion strategy, which differs greatly from Sanlam’s, may be the reason it has not seen much growth. “Old Mutual tends to enter a country and convert businesses to reflect the Old Mutual model, often rebranding them, thereby losing aspects of the company’s brand and paradigms,” said Govender.
While one could argue for both methods, he believed that Sanlam’s strategy was superior.
To avoid relying too heavily on Africa while seeking emergingmarket returns, Old Mutual and Sanlam have also turned their attention to India. This week, Sanlam increased its stake in Shriram Life and Shriram General Insurance by 23%, bringing its ownership to 49%.
OMEM owns 26% of Kotak Mahindra, an Indian insurance firm. It remains to be seen whether it will follow in Sanlam’s steps and increase its holdings following regulatory changes that permit foreign companies to hold up to 49% in insurance companies in India.
Govender said it was important that they had access to highgrowth areas such as Asia and subSaharan and central Africa. “This allows these businesses to capture new business in regions with low insurance penetration and thus higher growth vectors.”
The unbundling of Old Mutual, expected to be completed by 2019, could delay OMEM’s plans to expand. The next two years will probably be dedicated solely to carrying out the separation programme effectively.
Adrian Cloete, a portfolio manager at PSG Wealth, said OMEM would probably be the largest player in most markets in South Africa after the separation. “They will have a renewed focus on South Africa as well as other emerging markets and will therefore be a strong competitor to the other players in the South African insurance market, like Sanlam, MMI, Liberty Holdings and Discovery.”
Despite the surprise resignation of OMEM CEO Ralph Mupita this month, analysts are not too concerned about a successor, who is likely to be an internal candidate.
Mupita’s resignation as well as the unbundling, while largely welcomed by the market, raise questions about the difficulty of the process and whether Bruce Hemphill, an external candidate, who became Old Mutual CEO in 2015, was the best person to take the company apart.
But 36One analyst Nico Smuts said “the odds were stacked against any internal candidate for the CEO position”. He said the board needed to appoint someone who could dispassionately dismantle the group. “This is difficult to do if one has strong ties to the people who will be made redundant.”
Wayne McCurrie, a portfolio manager at Ashburton Investments, agreed, saying the South African operation had been undervalued by the market because of the financial crisis.
He believed the sum of the parts was worth more than the whole. “The share price is undervalued at its current rate. One could argue that OMEM, once unbundled, is worth R50,” said McCurrie. Old Mutual is trading at around R32.
The resilience and strong performance of the South African operations helped Old Mutual’s UK and US businesses to weather the financial crisis in 2008.
“They had to plug in massive capital to keep things going in the US and the UK. That excess capital came from South Africa,” said McCurrie.
Old Mutual unbundling could delay Old Mutual Emerging Markets’ plans