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Emerging market growth offers a life line for insurance giant

17 May 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

In the 12 May 2011 issue of Finweek, Old Mutual was singled out for perpetrating South Africa’s seventh biggest corporate blunder. The magazine was ranking what they believe to be the worst economic, corporate and political policy mistakes over the past d

Old Mutual embarked upon a turnaround strategy some time ago and continues to improve in leaps and bounds under current group chief executive Julian Roberts. But it was touch and go for the company as its shares plummeted to less than R5 at the climax of the sub-prime stock market collapse. Old Mutual is looking much healthier today. Management realised the group would have to exit its unprofitable businesses and reduce debt if it hoped to survive. Over the past decade the company completed the successful purchase of Swedish insurer Skandia, exited its disastrous US life business, started the ball rolling on a partial listing of its asset manager OMIGSA and continues to look for a buyer for its Nedbank stake.

Mixed signals in the latest quarter...

Is the financial services company still on track? A couple of days ago it issued a trading update for the first three months of 2011. “This has been a quarter of steady operational performance by the group, building on the momentum we established in 2010,” observes Roberts. “We continue to see strong growth in emerging markets and in our UK Platform business.” A good starting point to evaluate a financial services business is to consider its funds under management and net client cash flows. The group reports total funds under management of £303.1 billion at 31 December 2010, a disappointing 1% improvement over 12 months previously. They say “equity markets ended the period flat, but were volatile due to events in Japan, the Middle East and North Africa as well as continued sovereign debt concerns in Europe!”

These concerns reflected poorly on net client cash flows across the group. “At a group level, we experienced net client cash outflows of £2.6 billion, driven by net outflows of £3.7 billion at our US Asset Management,” they say. Old Mutual’s Long-Term Savings division bucked the trend, attracting £0.9 billion of client cash flows thanks to strong retail flows and flows into the non-South African emerging markets businesses. The jewel in the South African crown was the OMIGSA asset management business which attracted huge cash inflows to alternative funds such as its Housing Fund (R4 billion) and its Agri Fund (R0.4 billion). The company believes socially responsible funds will play an important role in helping to build South African infrastructure and increase jobs going forward.

Tough going for new business

The life insurer is finding it tough going in the insurance space. Group sales measured on an Annual Premium Equivalent (APE) basis decreased by 4% to just £369 million. This decline was largely due to a 51% slump in Italian sales after a temporary government tax concession was lifted in that jurisdiction. Against this backdrop the company is looking to the emerging markets to bolster its performance. The group’s wealth management division is still reeling from the long-term impact of recession. APE sales in this division were down 17% to £175 million. The UK Platform continued to grow, with gross sales up 6% on the comparative period to £1.4 billion. The sales momentum continued beyond the period end with platform gross sales of £2 billion for the four months ended 30 April 2011. Wealth Management unit trust sales increased by 8% to £1,163 million.

Fortunately APE sales in emerging markets increased by 13% to £115 million – with South Africa leading the way. We contributed strong growth in regular premium sales along with an impeccable 48% increase in the so-called ‘mass foundation cluster. Local investors still have a huge appetite for unit trusts, with sales in South Africa up 14%. Old Mutual states: “Other emerging markets businesses performed strongly with APE sales up 37% in Namibia and up 25% in Colombia and Mexico.” The South American operations benefited from increased productivity from their tied sales forces too!

Old Mutual’s South African banking and insurance interests (Nedbank and Old Mutual) maintained the earnings momentum exhibited in the six months to December 2010. Net interest income at Nedbank grew by 6% to R4.284 billion, while non-interest revenue increased 16% to R3.531 billion. The credit loss ratio from impairments improved from 1.51% in the comparative period to 1.15%. At Mutual & Federal gross written premiums for the period were flat at R2.2 billion. Underwriting conditions remained good, though the trading environment remains highly competitive.

For the time being management is quite happy with their progress. “We are continuing to make good progress in delivering the group strategy, with initiatives underway at each business unit to reduce costs, improve margins and deliver improved returns on equity in line with our stated targets,” says Roberts. Shareholders will hold thumbs the finalisation of the US Life sale on 7 April 2011 marks the beginning of a new and profitable chapter in the Old Mutual story.

Editor’s thoughts: Although life insurance companies have expanded to offer diversified investment products to retail and institutional investors, they still rely heavily on private demand for their risk products. One of the challenges facing insurers is the state of the consumer post-recession. The economy is recovering slowly – and although consumers are slightly better off than two years ago they are facing a range of inflationary pressures through 2011. Do you expect demand for death, disability and income protection products to pick up through the remainder of 2011? Add your comment below, or send it to gareth@fanews.co.za

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