Old Mutual South Africa (OMSA), the South African subsidiary of listed insurance and financial-services group Old Mutual, has seen its operating profit grow by only 2% in 2005 — to R6,07-billion from R5,96-billion in 2004 — due to only modest 2% growth in its life-assurance profits and a 13% reduction long-term investment return (LTIR), which offset the strong growth of 48% in asset-management profits for the year.
Reporting its final results on Monday, Old Mutual said OMSA recorded life-insurance profits of R3,8-billion in 2005, versus R3,75-billion in 2004, hit by a R716-million charge relating to the industry-wide agreement with the National Treasury to improve early termination values for certain clients with retirement annuities and endowment policies.
Another significant negative was an increase of R115-million in the share-based payments charge to R270-million, driven by the increase in Old Mutual’s share price and the effect of the group’s continuing high investment in its distribution capacity.
The group’s LTIR of R1,45-billion was R215-million lower than 2004, reflecting the lower rates applied across all asset classes, combined with increasing the cash component of the portfolio, and lower investible assets following Old Mutual’s increased investment in Nedbank.
The smoothing effect of the LTIR masked the strong investment gains made on the group’s shareholder portfolio during the year on the back of underlying market strength.
Life-assurance sales on an annual premium equivalent (APE) basis were 12% higher at R3,93-billion, but the value of new business fell by 12% to R614-million and the life new-business margin deteriorated to 16% from 21% in 2004, in a move that Old Mutual said was part of the group’s initiatives to improve its products’ value-for-money.
Bancassurance efforts through both Old Mutual Bank and Nedbank continued to bear fruit, the group said, helping group business life sales rise by 16% and individual life sales rise by 10% during the year.
The group’s asset-management business recorded a 48% increase in adjusted operating profit to R801-million from R542-million in 2004, helped by an 87% rise in unit trust sales to R9,35-billion. However, client outflows saw total client funds under management rise by only 16% to R362-billion from R312-billion a year earlier, with the increase driven by higher equity markets.
Net client cash outflows totalled R18-billion, of which R10-billion came from the Public Investment Corporation in the first half of the year. Only a net R1-billion outflow occurred in the second six months, Old Mutual said.
The main area of outflows was experienced by Old Mutual Asset Managers, which suffered from the widespread trend to break up balanced mandates and direct funds into specialised investment mandates.
During a conference call with wire journalists following the release of the results, CEO Jim Sutcliffe said that although local market conditions remain extremely competitive and pressure on margins continues, the group has targeted margins of between 15% and 20% going forward. The 16% new-business margin recorded in 2005 is within this target range.
He was optimistic on prospects going forward, given the continued robust economic growth forecast for the new year, and new tax cuts announced in February. The strong growth experienced in Old Mutual’s distribution capacity — in both independent brokers and tied agents — in the past year also gives it an advantage over its competitors. — I-Net Bridge