Old Mutual hits the long road to recovery

On 9 March 2009, shares in South African life assurance company Old Mutual plc (JSE: OML) closed below 480c per share. But as tempting as this ‘bargain’ price seemed, only the hardiest punters were queuing up to buy. Old Mutual had taken shareholders on a 24-month slide, losing 81.7% since its 26 February 2007 high of 2623c. What causes a company of Old Mutual’s stature to go to the wall?

Cynics point to Mike Levett, the listed entity’s first chairman and chief executive, who was instrumental in moving the company to London upon demutualisation in 1999. More recently the traditional South African businesses have taken a bit of stick from what many perceive to be an ‘out of touch’ UK management team. The recent ‘on off’ disposal of Old Mutual’s interest in short-term insurer Mutual & Federal was typical of the UK attitude to so-called non-core South African operations. It’s amazing how quickly attitudes changed after Skandia and Old Mutual SA emerged as the group’s strongest links through the financial crisis.

New broom sweeps clean

Current chief executive Julian Roberts may finally have identified some of the problem areas, saying Old Mutual plc will introduce a stronger centralised management structure in coming years. “We are moving the governance of our businesses to a more centralised model, which we believe will reduce risk and bring better control,” he said. This is one of the decisions taken to undo the damage caused during the Jim Sutcliffe era. The second major decision is to restructure the group.

Roberts concludes that a major restructure wouldn’t be possible under current economic conditions. Instead he announced a range of interim measures in the group’s preliminary 2008 results, published 4 March 2009. These include the sale of the Australian business, an immediate exit from Portugal and a rationalisation of business in continental Europe. Old Mutual would maintain two hubs in Berlin and Paris to service mass market and affluent hubs respectively. And it was decided to scale back operations in India and China too. “We will scale back significantly our aspirations in the Far East and will therefore close our office in Hong Kong,” said Roberts. But there’s more!

On 4 March 2009 Old Mutual finally announced its US Life offshore business, Old Mutual Bermuda would be closed to new business. Old Mutual initially tried to rebuild the business by writing specialist investment products to meet clients needs. They subsequently concluded that the group would not “be able to launch products that meet risk requirements successfully and provide a satisfactory return on capital.” According to Roberts, “one of [the group’s] key priorities is strengthening governance and risk management and we have taken the decision to close [Bermuda] to new business with this in mind. We have improved controls across the group and each business has been allocated clear risk appetites within which it must trade.” He added the decision would create “greater certainty in respect of the business’ future liabilities.”

On the hunt for bargains

There’s more good news on the acquisition front. Despite decisions to streamline the group’s operating activities, management is prepared to chase a solid investment opportunity when it presents. Early in March, Old Mutual SA announced – subject to competitions commission approval – they would purchase 100% of financial advisory group Acsis “for an undisclosed amount.” The company will operate as a standalone business. And perhaps Old Mutual SA managing director, Paul Hanratty, gives insight that Roberts is not prepared to. He says the purchase confirms Old Mutual’s new focus on savings and wealth management.

The acquisition secures a mix of private client and institutional retirement funds, strong client relationships and a unique consulting model. “With this acquisition we can gain access to these target market. Acsis, with its relationships with the leading financial planners in the country, will play a key role going forward in reaching these access points,” said Hanratty. Acsis’ management is committed to the business for five years. Chief executive, Andrew Bradley: “We are enthusiastic about our future relationship with Old Mutual. It provides us with the opportunity to enhance our business and services, while preserving the unique qualities that have contributed to our success to date. Like previous changes in ownership, this will not have any impact on our principles, business model or on the service we provide.”

Old Mutual’s share price has completed the first few miles of the long road to recovery. Buoyed by an improved outlook for international financial shares the company has clawed back from the sub-500c lows to close at 712c on the JSE yesterday. Here’s hoping the restructure hastens the share price recovery further.

Editor’s thoughts: Although concerns remain around the US Life business it seems the bulk of the group’s European and South African operations are financially sound. As financial conditions ease, Old Mutual will be able to follow through on its longer-term plan to streamline the group. Would you buy Old Mutual shares at current prices? Add your comment below, or send it to gareth@fanews.co.za