As unexpected as the appointment of a company outsider to head Old Mutual may have been, the move suggests an organisation that, despite its London listing, is serious about reconnecting to its 170-year-old South African roots and readying itself for further forays into Africa.
In some ways, the continent is the company’s past, present and future. It started life in Cape Town in 1845 and 64% of its earnings still come from South Africa, with another 5% from the rest of Africa. It has plans to increase this, though, and has allocated R5-billion to acquisitions beyond the Limpopo in a bid to become an “African financial services champion”.
Old Mutual also still retains ownership of one of South Africa’s big four banks, Nedbank.
But further African expansion is not without risk and it faces fierce competition from its counterparts in the South African market, analysts say.
Despite its parallel ambitions to expand its British wealth management business, the necessity of the firm’s London base has not escaped scrutiny. Bruce Hemphill, a former Liberty chief executive for wealth, insurance and non-bank financial services, who will succeed the departing chief executive, Julian Roberts, will be stepping into a more streamlined organisation. It is a different entity from the debt-ridden, embattled life assurer that Roberts turned around after he took the helm in 2008, when the financial crisis began.
Hemphill will be the hand that steers Old Mutual’s further growth into Africa. It is his expertise on the continent and in Old Mutual’s largest market, South Africa, that made him an attractive choice.
“Bruce will have a good grip on the South African financial services landscape and also a good understanding of the opportunities on the African continent,” said Patrice Rassou, the head of equities at Sanlam Investment Management.
Hemphill’s track record in bancassurance (the sale of insurance products by banks) is one of the points Old Mutual emphasises when giving reasons for his selection. Under his watch as chief executive of Liberty between 2006 and 2014, the “bancassurance” partnership between Liberty and Standard Bank into Africa was cemented.
“Hemphill’s knowledge of bancassurance relationships will help the group, including Nedbank, in South Africa and in the rest of Africa,” Rassou said. Most recently, the company has upped its stake in the Kenyan insurance and financial services group, UAP Holdings, which has given it exposure in Uganda, South Sudan, Tanzania, the Democratic Republic of Congo and Rwanda.
But Hemphill’s deal-making ability is another drawcard, according to Liam Hechter, a financial analyst at Anchor Capital, particularly in the face of Old Mutual’s acquisitive strategy in wealth management in Britain in the medium term.
The group had adopted a strategy to diversify its earnings away from the capital-intensive life insurance business and to move towards “a more capital-light” wealth management model, Hechter said. That included using the capital from the successful listing of its United States asset management subsidiary to fund the purchase of the British-based wealth manager Quilter Cheviot for £585-million.
But, Rassou said, executing Old Mutual’s African growth plans would be a challenge and there was a high risk of overpaying for assets.
As part of its emerging markets unit, which includes the South African business, a major focus has been on what Old Mutual terms its mass foundation cluster – or clients in lower-income market segments.
Rassou said persistency (the amount of business that an insurer is able to retain without clients lapsing on their premiums or moving to another provider) in the entry-level market remained an issue.
But that is just one of the challenges facing the company. Hechter said its exposure to South Africa’s sluggish economy was another.
Bruce Hemphill takes over from Julian Roberts as chief executive this year. (Peter Foley, Bloomberg)
Old Mutual’s head of corporate affairs, William Baldwin-Charles, said persistency was being closely managed.
“For entry markets, in particular, we work to innovate our products to alleviate pressure on our customers’ incomes whilst allowing them to provide for their financial futures, for example, [through] our recent 2-in-One savings product and the increase in cover for our funeral products.”
According to the company’s preliminary results released in February, the mass foundation cluster grew 36% on the previous year, contributing slightly less than R2-billion to its operating profit.
The higher-end retail affluent segment contributed a larger R3-billion but grew only 16% on the previous year. Rassou said its British private wealth business also needed to be bedded down and, with the purchase of Intrinsic, the largest network of financial advisers in Britain, it would have to adapt to regulatory changes contained in the Retail Distribution Review. This is aimed at increasing transparency for consumers in the investment industry and has ramification for how insurers go about marketing their products through brokers and advisers.
He said the necessity of its London listing would also have to be scrutinised. But the company said its demutualisation and listing in 1999 allowed it to access international capital markets and to develop in South Africa and its adjacent markets. Besides expanding its African business, the “vertically integrated UK business is well positioned to grow rapidly, having the ambition to be the leading retail investment business there,” Baldwin-Charles said. “Finally, [in] the US, we seek to grow our institutional asset management business.”
Asief Mohamed, the chief investment officer of Aeon Investment Management, said that, besides expanding into Africa with its attendant risks, South Africa was also a competitive market, with the likes of Discovery taking market share.
Discovery’s incentive affinity programmes worked well to retain clients and achieved better lapse and claims ratios than other life assurers, he said. Hechter echoed this. “One could argue that the growth prospects and product offerings don’t appear as exciting as local insurance competitor, Discovery, who are constantly disrupting in their space.”
Not as robust
Compared with Old Mutual’s nearest competitor, Sanlam, its earnings outlook and growth prospects did not appear as robust, he said.
“Sanlam has made some very value -accretive investments in Southeast Asia and India, regions that offer attractive growth opportunities. Sanlam has also been very good at growing capital-light business units, embarking on this strategy earlier than Old Mutual,” Hechter said.
Baldwin-Charles said, in the preliminary results released in February, Roberts was “delighted” with the group’s performance.
“We have invested significantly and reallocated capital in our key markets, including Africa and the UK. Our focus for 2015 is on integrating the acquisitions being made and delivering the operational improvements and creating value from these investments,” she said.
“We reported good underlying profit growth in 2014, with well-diversified earnings, and have a strong balance sheet.”
According to Hechter, as of December 2014, Old Mutual’s market share of new business in terms of value was 28%, Sanlam’s 21%, Liberty’s 15%, Discovery’s 21% and MMI’s 15%. Regarding market share based on annualised premium equivalent, or revenue, Old Mutual led with 30%, Liberty’s was 25%, Sanlam’s 15%, Discovery’s 7% and MMI’s 23%.
No easy task
Righting the ship was no easy task. But, most analysts agree, Roberts leaves the company in a far better state than he found it.
Old Mutual had made some ill-timed acquisitions before the 2008 collapse and was exposed to “toxic subprime debt”, Hechter said.
But Roberts stabilised the ailing company and simplified the business. During his tenure, shareholders had enjoyed a total return in pounds sterling of about 230%, and 283% in rand terms, outperforming both the FTSE 100 and FTSE life insurance indices.
By the company’s own calculations, Roberts oversaw returns to shareholders of 204.6% in the London-listed stock, compared with 69.8% on the FTSE 100, and 274.5% in the JSE-listed stock compared with 139% on the JSE Top 40 index.
Roberts has successfully degeared the group’s balance sheet, and rid Old Mutual of noncore assets. Hechter cited the disposal of US Life in 2011 for $350-million to the Harbinger Group and the sale of Old Mutual’s Nordic business to Skandia Liv for £2.1-billion in 2012.
Beside deals such as its listing of the US asset management subsidiary and purchase of Quilter Cheviot, the company has managed to pay down £1.7-billion in debt.
It is in this sleeker vessel that Hemphill will now sail.