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Old Mutual battles a strong British currency

17 August 2007 Gareth Stokes

Old Mutual reported their half-year interim results for the year to 30 June 2007 on 10 August. The group which has a primary listing in the UK reported steady profits on the back of strong underlying growth. The strength of the pound against the US dollar

Old Mutual South Africa (OMSA) delivered another strong performance and had it not been for the continued strength of the pound their contribution could have been even more significant. Chief Executive, Jim Sutcliffe was quick to acknowledge the currency impact, stating: "Group earnings have been muted by the strengthening of sterling against the rand and the US dollar, and the provisions following the completion of the actuarial review in the USA."

In today's FAnews Online our feature article focuses on the contribution made by OMSA to Old Mutuals latest interim results. OMSA, Nedbank Limited and Mutual & Federal continue to benefit from a strong domestic economy underpinned by forecast GDP growth of 4.4% this year.

New life business trending higher

Sutcliffe was pleased with South Africas contribution to group profits: "OMSA's overall profit was up 28% benefiting from the JSEs strong performance and some one-off items." All of the South African operations made significant contributions to the group.

Retail life sales were strongly higher in each of the categories under which OMSA reports. The Retail Mass division improved significantly, with new life sales up 32% to R120 million. Similarly the Retail Affluent division contributed R174 million in new life sales, up 16%. "Across OMSA, the after-tax value of new life business was R324 million, 29% higher than in 2006, reflecting primarily a higher margin in Retail Affluent. The Corporate margin was lower because of a lower proportion of with-profits annuity business this year compared to last year."

It seems that prospects for growth in new life insurance business remain strong, particularly in the Retail Mass grouping, which focuses on low income customers.

OMSA wants to become the dominant player in the financial services environment in South Africa. It already has significant clout in the long-term insurance, short-term insurance, bank and investment fields. "Measured by assets under management, OMSA is number one in the life industry and aims to be number one across the entire savings and wealth management business. Working with Nedbank and M & F, OMSA aims to build the number one financial services franchise in South Africa."

Delivering solid performance in a tough short-term environment

Mutual & Federal contributed to the group results with another solid six month performance. The company had to adapt to a number of challenges in the short-term industry, including continued decreases in profitability, a generally softer short-term insurance market and disappointing contributions from the motor insurance section. "The underwriting results were significantly influenced by a sharp increase in the frequency and severity of industrial and commercial fire claims"

Part of the response to market challenges has been to increase premiums. This helped M & F to lift gross premiums by 8% for the period under review. Mutual & Federal generated an underwriting surplus of R109 million, down 22% from the surplus of R140 million in the first half of 2006. The combined ratio (the ratio of claims, commissions and expenses to net earned premiums) increased to 97.1% (from 96.1%), mainly as a result of the increase in the claims ratio from 63.6% to 68.8%.

Bancassurance makes a massive contribution

Much has been written about the impact of bancassurance on the insurance sales channel in South Africa. OMSA increased sales in this channel by a massive 33% in the six month period under review. The figures reveal that overall life sales through Nebank now account for "15% of OMSA's total life sales on an APE basis."

And while ordinary South African citizens are concerned about credit extension and suffering the nasty side effects associated with credit growth, OMSA is revelling in the resultant credit life sales. This category of insurance remains an extremely profitable one.

To achieve its objective of becoming a top all-round financial services company in South Africa, OMSA will focus on extracting the best results from its local customer base in coming years. The interim results reveal that OMSA services 3.2 million customers, Nedbank 3.9 million and M & F 1.1 million. Thats a substantial client base to work with. The real 'meat' in these statistics is that less than 1 million of the OMSA and Nedbank customers are shared leaving huge opportunity for cross selling in the future.

Editor's thoughts:
When measured by assets, Old Mutual SA occupies first place in the domestic life insurance industry. The company benefits from a well-established brand which it hopes to further develop through initiatives like the recently launched investment boutique franchises. Do you think that Old Mutual SA is on track to become the first choice financial services provider in South Africa? Send your comments to
gareth@fanews.co.za

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