United Kingdom- and South Africa-listed Old Mutual plc is looking to improve the performance of its South African operations through a combination of strategies, including cost cutting in its back office and implementing more efficient systems, as well as boosting the numbers of its sales force, according to CEO Jim Sutcliffe.
In its latest trading update for the quarter to the end of March 2004, South Africa’s largest life insurer reported a fall in its total life assurance sales to R655-million from R803-million on an annual premium equivalent (APE) basis a year earlier. While individual recurring premium sales rose by 7% for the quarter, total single premium sales were down 29%.
Group business sales on an APE basis declined 76%, while individual APE was up 5% compared with the first quarter of 2003. The total value of new business was R87-million, only 71% of that of the previous year, and margins were also lower at 13,3%.
Meanwhile, aggregate net client cash flows across the life and asset management businesses were positive for the period at R1,1-billion (up from R0,5-billion in the year-earlier period), although the life business experienced negative net policyholder cash flows.
On Thursday, Sutcliffe said that the group has already started to implement several measures to boost these results, based on the general principle of “removing the back office function while increasing the front office, customer-facing function”.
“This does mean reducing the numbers of back office staff while increasing the numbers of our sales force,” he explained. “For example, we have a new employee benefits administration system that requires fewer people to operate. As we transfer our clients on to it, we will capture the staff reductions implicit in this, and the process is under way.”
He acknowledged that Old Mutual is having trouble growing its sales force.
“It’s true that we have been trying to expand our sales force, and the numbers are rising slowly, but we really haven’t done the job as yet.”
However, ahead of the enforcement of the Financial Advisory and Intermediary Services Act on September 30, the group has an opportunity actively to recruit independent brokers and raise the number of its tied brokers, he believed. Research conducted in other countries indicates that, of all independent advisers before the introduction of new regulations, 25% joined a tied agency, and Old Mutual is looking to take advantage of this.
According to the CEO, other strategies being undertaken by local management to boost performance include the streamlining of the group’s retail product offering to both reduce the number of products and design simpler products, particularly for the lower end of the market.
Simpler products would be less costly for investors, he pointed out, while clients preferring more complex vehicles would have to pay higher minimum premiums.
Contributing to the group’s lower sales and margin over the first quarter was a trend for South African investors to opt for unit trusts over life-wrapper investment products, Sutcliffe confirmed. While Old Mutual’s margins were undoubtedly lower on unit trust products, its return on equity (ROE) was higher for these products, he noted.
“There has been a trend for investors to go for unit trusts over life products over the past few months, and this is likely to continue for the short term. But over the medium term I wouldn’t be surprised to see the pendulum swing back — it’s done this historically.
“Life-wrapper products are not as attractive right now because of a combination of tax and liquidity factors. Unit trusts have a better tax environment (since the tax rate of 30% can look attractive to individuals whose income is taxed at a higher rate), and there is a lack of flexibility in life products for the first five years.
“Also, the costs involved in life products are higher due to the guarantees usually provided.”
He believed that, while Old Mutual has lost market share in its employee benefits business, it is unclear whether it has lost ground to competitors in its other markets because of the complexities of measuring the combined life and asset management/unit trust markets and the reporting differences between companies.
Regarding employee benefits, he said he was “not too concerned” over the loss of market share. The management is not taking any remedial action on the employee benefits front, either concerning products or staff, he revealed.
Rather, he was confident that the pipeline will produce the requisite sales in what was traditionally a “lumpy” business, even on an annual basis.
Commenting on the group’s other operations, Sutcliffe said there are no plans for acquisitions in the United States, as Old Mutual is happy with its current balance between life insurance and asset management businesses, and there is potential for strong organic growth. The company also wishes to avoid taking on extra costs.
In the UK, Old Mutual has not been deterred from seeking a further acquisition by its recent credit rating downgrade from Fitch, the CEO said. This is because the pricing of its £1,1-billion revolving credit facility, possibly to be used for the acquisition, has already incorporated the likelihood of the downgrade, and because Fitch has said it wanted to see a better balance of income streams — which would actually encourage a UK purchase.
Looking ahead, Sutcliffe said he expected the group’s employee benefits business to improve for the year, while the investor switch in favour of unit trusts is likely to continue. However, Old Mutual will still derive “decent” net cash flows from its operations for the year, he predicted. — I-Net Bridge