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Royal Bafokeng makes a play for Mutual & Federal

09 November 2007 Gareth Stokes

Mutual & Federal (M & F) is one of South Africa’s largest short-term insurers. And it has long been majority owned by Old Mutual. However recent events indicate that Old Mutual is ready to sell its 76.85% stake to a local suitor. The group confirmed th

For those of you not familiar with RBH it is the investment vehicle of the Royal Bafokeng Nation. The company represents a community of approximately 300, 000 Tswana-speakers in the North West province. RBH owns 13.4% of Impala Platinum and holds a 32.1% stake in Merafe Resources among others. Interestingly the group already owns a 10% stake in locally listed short-term insurer, Zurich SA.

Peculiar timing as M & F reports a strong third quarter

The timing of the announcement coincided with M & F’s third quarter trading update. It revealed numbers that would impress even the most fickle controlling stakeholders. But apparently it has not done enough to secure a place in the Old Mutual stable. In the nine months to September 2007 gross premium income improved to 7.018 billion. Net earned premiums also strengthened to R5.816 billion while the underwriting surplus came in at R298 million.

The company provided return on capital of 33.5% over the nine months. And if this was not enough, shareholders were rewarded with improvements in some of the key short-term insurance ratios. The underwriting ratio climbed from 4.4% to 5.5% despite tough domestic conditions. And the group’s overall solvency ratio reached 49%.

M & F is extremely pleased with the underwriting result, stating that “growth in premiums and improved risk selection combined with generally lower levels of claims” were responsible for the third quarter success. Refinements in technical reserve calculations and a change to the internal long term rate of return (from 11.5% to 15.6%) boosted the underwriting surplus and operating profit respectively.

Solvency improvements equal cash in hand

Good news for shareholders is that M & F only needs to maintain a 44% solvency ratio, which means the board has decided to return some of the excess capital to them. This will be by way of a capitalisation award or (if preferred) a special cash dividend. “The value in aggregate of the award is R580 million, which translates to 200 cents per share,” read the statement.

With all the good news, the question to ask is why Old Mutual is prepared to discard such a solid performer? Old Mutual chief executive, Jim Sutcliffe, said Old Mutual was focussed on asset and money management, meaning M & F was pushed to the fringes of company activities. He confirmed that the move had “nothing to do with any lack of confidence in South Africa.” So we must conclude that the sale is for strategic reasons.

Shortly after the announcement speculation emerged that UK listed Old Mutual had tired of its South African assets and was getting ready for a thorough spring clean. And since M & F was up for grabs, the next logical step would be for Old Mutual to flog its 51% stake in Nedbank. The suggestion is not that outrageous against the backdrop of Barclays’ purchase of a controlling interest in Absa and the more recent Industrial & Commercial Bank of China’s 20% nibble at Standard Bank.

But Sutcliffe was quick to set local investors at ease. He confirmed that “the South African business [remained Old Mutual’s] core business.” Furthermore he pointed out that Old Mutual’s holding in M & F (worth about R6 billion at the proposed sale price) only represented about 4% of the company’s South African balance sheet. The last word on the matter: “Nedbank is not for sale!”

Editor’s thoughts:
M & F has performed admirably in a year acknowledged by many in the industry as one of the more challenging in recent times. The Royal Bafokeng Holdings acquisition will not detract from the company’s operations in any way. On the contrary the short-term insurer will probably become one of the most empowered listed insurance companies on the JSE. Is Old Mutual’s decision to part ways with M & F a mistake? Send you comments to


Added by Ganes, 15 Nov 2007
Royal Baf**eng seems to have an excellent current stable of investments in their portfolio. Good for black empowerment advancement., Good for SA stability. The sale will boost share holders profits, but will it be prudent for an Old Mutual RA holder to collect his maturing investment before the sale and the huge cash injection expected???
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