Telling it like it is – Old Mutual updates its 2008 outlook

Old Mutual chief executive Jim Sutcliffe remained upbeat as he presided over his group’s Interim Management Statement for the three months to 31 March 2008. UK listed Old Mutual includes Old Mutual South Africa (OMSA) which in turn has exposure to South A

“Old Mutual’s diversified business model and international portfolio enabled us to achieve a resilient performance in the first quarter against a background of challenging market conditions. Achieving net client cash flows of £2.1bn in this context is very pleasing, although falling markets impacted our level of funds under management,” said Sutcliffe.

What about South African operations?

It seems the outlook in South Africa remains positive. Although OMSA’s asset management business faces numerous challenges, the long-term insurance division achieved solid sales growth. The update for Q1 2008 shows that the total funds under management are 3% lower at R433bn. This decline is due in part to volatile stock markets which triggered “net client outflows of R3.6bn.” OMIGSA attributes this situation to “restructuring in some client funds, heavy exposure to traditional mandates in two of our boutiques, weak short-term performance and market conditions proving unfavourable for our Property and Income Specialist boutiques.” Unit trusts faired slightly better with total sales of R4.732bn, a 19% improvement.

Total life sales were 10% up on an APE basis reaching R1.121bn. Management believes the group’s extensive retail distribution channel has boosted sales in the retail affluent and mass affluent market. And the improvement in sales is even more impressive given the huge knock the average South African consumer’s net disposable income has taken. Despite the challenges “life recurring premium sales growth of 5%” was achieved. The group mentions it benefited from its recent acquisition of a credit life book which allowed it to weather the combined negative impacts from the National Credit Act and higher interest rates. The update concludes “there was strong growth in life single premiums, which were 22% up on the comparative period.”

As for the remainder of the year, OMSA is confident its retail sales will pick up. The company has “invested heavily in growing the salaried sales force in this quarter, which increased initial expenses in the period” and “anticipate that the investments in new advisors and training will bear fruit later in the year, with the effect on margin of higher investment in distribution likely to be offset by higher sales volumes.”

Not plain sailing in the general insurance industry, but...

M & F is in the doldrums at the moment. Shares in the JSE listed subsidiary of OMSA have fallen more than 15% since the beginning of the year. Market volatility aside there are two main reasons for this fall. The first is that the proposed purchase by Royal Bafokeng Holdings of OMSA’s controlling stake in M & F fell through. And the second is investor’s dissatisfaction with the board’s dividend decisions – they chose to defer the final 2007 dividend. A R1.35 per share capitalisation award (with a cash dividend alternative) was subsequently declared. And this move will hopefully restore confidence in M & F and lead to a reversal in its share price slump.

For the first three months of 2008 M & F improved gross premiums to R2.6bn. Claims were heavy and “the underwriting account was negatively impacted in the quarter by a significant in crease in the frequency and severity of fire losses on the commercial property account and substantial weather-related claims on the personal portfolio.” It seems that short-term insurance margins will come under severe pressure for the full year 2008.

Shares stutter on the London Stock Exchange too

Stock markets can be cruel, and the fact that Old Mutual missed first-quarter forecasts was not welcomed by the London Stock Exchange. To make matters worse the company no longer believes it will hit is full-year 2008 forecasts either. There are a number of reasons for the lacklustre performance. Obviously market conditions in the banking and financial sectors are not helping. But the insurer is also being stymied by flat first-quarter sales and a serious dip in insurance margins. The result is sales missing analyst estimates by around GBP 12m, coming in at £426m instead of the expected £438m.

Old Mutual shareholders are probably less than impressed with the company’s performance year-to-date. The share has underperformed its peers by as much as 18% so far and is 25% below January open. And with tough economic conditions setting in there’s not much hope of an improvement in the short term. Despite the ‘doom and gloom’ reality of the company’s stock market performance management remains upbeat. Old Mutual PLC concludes: “Looking forward, we are tightening our grip on expenses as markets reduce our revenue, and optimising our capital allocation. Retirement savings remains a growth industry for those with good investment performance and we are well placed to outpace our competitors.”

Editor’s thoughts:
If the share price performances of the country’s listed short and long-term insurers are anything to go by the insurance industry is going to experience a dismal 2008. Do you think asset management businesses at large insurers will show further net cash outflows this year? Send your comments to gareth@fanews.co.za, or respond below.