Mutual & Federal de-lists after four decades

03 February 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Mutual & Federal (JSE: MAF) is a cornerstone of South Africa’s short-term insurance industry. Together with Santam and Zurich it accounts for the bulk of the country’s short-term motor and personal lines business. The group has an interesting history that can be traced back to the South African Fire and Life Assurance Company in 1831. After 64 years of profitable trading SA Fire and Life was acquired by London & Lancashire, which was in turn absorbed into the Royal Group. In 1970 the Royal Group in South Africa merged with the SA Mutual Fire and General insurance company to form a JSE-listed short-term insurer – Mutual & Federal.

The 8th February 2010 marks the next step in M&F’s evolution. After almost four decades as a listed company its shares will be de-listed from the JSE. This follows the successful acquisition by Old Mutual (JSE: OML) of all M&F shares not already in its hands. M&F minority shareholders will receive Old Mutual shares in exchange for their M&F shares, an arrangement set out in Old Mutual’s November 2009 Scheme of Arrangement and accepted by an overwhelming majority of minority shareholders. The delay in finalising the transaction was largely ascribed to delays in obtaining regulatory approval.

Highs and lows as a listed company

We spoke to Keith Kennedy, managing director of M&F about business before and after the change. He observes that M&F is quite accustomed to change. One of the group’s earliest challenges was to sort out the teething troubles that come with merging two major entities, Royal Group and the SA Mutual. “Over the last 40 years we have seen the underwriting cycles reach big lows particularly in the early 90s and some very impressive highs, notably in 2004,” says Kennedy.

The group has overcome numerous challenges. Kennedy reminisces: “A major challenge for M&F – and probably the whole industry – was in the late 1990s when the rand weakened substantially against international currencies with a direct bearing on the cost of claims.” Highpoints included the group’s ability to pay substantial dividends to its loyal shareholders. M&F declared special dividends totalling R6.75bn over the last decade.

Old Mutual’s timing couldn’t be better

A couple of days prior to de-listing – on 19 January 2010 – M&F published its final JSE trading update. The update suggests declines in underwriting surplus through 2009 will be offset by improvements in the value of listed equities. The group’s realised and unrealised investment surpluses show a dramatic swing, with an expected surplus of R200m versus the R600m deficit previously recorded. Other factors such as retrenchment costs and one-off strategic expenses dented 2008 results, but will not recur in 2009. As a result M&F expects basic earnings per share for the year to 31 December 2009 to be between 540% and 560% higher than those of the prior corresponding period. Headline earnings would be 620% to 640% higher. It certainly looks like a win-win situation. Old Mutual timed its minority shareholder offer to perfection – minorities will be satisfied with the 1.73 Old Mutual shares (worth R21.90 at today’s close) they receive for each of their M&F shares.

Business as usual for staff, customers and brokers

Will Mutual & Federal implement any immediate changes following the takeover? Kennedy notes that Old Mutual was always a major shareholder in the group and as such there was no need to diverge from its current business focus. “Our focus will be on developing the broker market and developing the UMA market from a premium growth point of view,” he said. As always, M&F would distinguish its offering through first class service delivery to brokers and clients. Computer systems and business models developed over the last few years will be put to full use.

We wondered how the executive of the two companies would interact given that not so long ago Old Mutual considered the business non-core. For now it will be business as usual at M&F, says Kennedy. “We are not anticipating significant changes in our reporting lines and operational structure following the minorities deal.” M&F will remain a separate company with its own board and will continue to comply with all elements of the Companies Act and the Short Term Insurance Act. He added that he would continue to report to Julian Roberts until further notice. “The main difference for the M&F executive team is that our relationship with Old Mutual will become much closer,” he said.

Strong brands are forever

Old Mutual is unlikely to tamper with the M&F brand. “Mutual & Federal is a very strong brand in the short-term insurance industry,” says Kennedy. Over the next few years we will reinforce the brand as part of the Old Mutual Group. Kennedy says his focus will be on bedding down the change and maintaining the operational excellence M&F clients are accustomed to. “Our staff, customers and brokers can rest assured that many exciting new developments await us. This process might have signalled the end of the Mutual & Federal listing, but it has also ushered in a new era that we are ready to embrace in order to see this company succeed and prosper.”

Editor’s thoughts:
Mutual & Federal will get down to ‘business as usual’ after its 8 February 2010 de-listing. We don’t expect any cultural changes at this wholly-owned subsidiary of Old Mutual, especially considering Old Mutual’s previous 74% interest. Were you surprised to learn that Old Mutual was ‘buying’ M&F given its failed attempt to sell the business to Royal Bafokeng Holdings? Add your comments below, or send them to

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