Market turmoil won’t get Old Mutual down

Julian Roberts, newly appointed chief executive at Old Mutual, tried his best to remain upbeat when the company released its third quarter trading statement on 6 November 2008. “We have delivered a resilient performance in what have been extremely challenging market conditions with our South African and Nordic businesses continuing to deliver excellent results,” he said. He went on to claim that the company was “well capitalised” and liquid despite the fall in global equity markets and volatile exchanges rates.

Although the 13 page update is full of positive comment on group operations in South Africa, Europe and the US we’re sure shareholders and policyholders aren’t out of the woods yet. The company is bound to take further strain as the credit crisis tightens its stranglehold on world markets.

Has South Africa done enough to wing Old Mutual’s respect?

In recent times Old Mutual has been rather dismissive of some of its South African operations. The group executive took a decision to get rid of its stake in short-term insurance company Mutual & Federal – a sale which has yet to be finalised. And it often seemed as if the South African life business finished a distant third to the UK and US operations under previous chief executive Jim Sutcliffe.

With the US and UK struggling, Old Mutual is again overjoyed with returns from its Nordic and South African operations. Skandia weighed in with SEK4.6bn in net client cash flows and a 35% improvement in APE in the local currency. “In South Africa, sales growth was excellent with life sales on an APE basis up 16% in rand terms due to sales force growth, increased productivity and a swing to life single premium sales,” said the group. The South African business remains well capitalised – easily covering the statutory requirements. They had particular praise for the group’s local banking operation, Nedbank. Nedbank showed deposit growth of 28% for the period and boast an 11.7% capital adequacy ratio. And although there was a strong increase in impairment charges the 1.02% credit loss ratio is in line with that of its peers.

On the other hand, UK operations achieved net client cash flows of £1.4 billion while funds under management fell only 13% compared with a 24% decline in the FTSE 100. One shouldn’t forget that the insurer absorbed additional investor cash during the period!

US operations still in the doldrums

In the US Old Mutual reported a slight reduction in life sales on an APE basis for the nine months to September. There are, however, two major sticking points in the US business. The first is the reserving problems at the company’s Old Mutual Bermuda Business. The company has made an offer to all of its ‘guaranteed’ policyholders in that region which would see their fund premium topped up to 85% of original premiums. It sounds a bit like a ‘take it or leave it offer’ when the group’s statement is considered: “We believe this is an attractive offer in the current climate and that the cost of policyholders accepting the offer will be covered by the current guarantee provisions made.” Part of the reason for slower APE sales in the region was the decision to remove the costly “guaranteed variable annuity riders” with effect from 15 August 2008 – a decision which led to a significant reduction in new business in September.

The second problem is the level of impairments in the US Life business. Old Mutual reported impairments of $531m in its bond portfolio. Despite these problems Old Mutual says it is adequately capitalised. The group was satisfied with the US asset management business, and reported $4.2bn in net inflows after adjusting for “outflows due to a cessation of securities lending.”

Market conditions will remain tough

The worst of the global financial crisis is not yet over. On the weekend we read about two more US banks filing for bankruptcy. As we know the US market is particularly problematic for Old Mutual – where the company is at pains to extricate it from a range of trading errors. Roberts believes the company will survive the turbulence. “While we expect market conditions to remain difficult in the balance of the year, I am confident that the Group as a whole remains resilient and our businesses are well positioned to deal with the challenges,” he says.

Old Mutual shareholders may not be as confident. The company share price has been in a downward trend for as long as anyone cares to remember. In February 2007 Old Mutual changed hands at more than R26 per share – today you can buy it for only R9.32… And that’s lower than the price achieved at Old Mutual’s demutualisation.

Editor’s thoughts:
Any company involved in investment management has taken a hammering over recent months. These companies derive fees in direct proportion to the assets they have under management – so if markets fall 30% they have a much smaller asset base to charge against. And performance fees will be practically non-existent under current market conditions. Do you think that life insurance companies are overly optimistic given the current economic outlook? Add your comments below, or send them to gareth@fanews.co.za