There were no nonexecutive directors visible at the Old Mutual interim results this week, in case it overshadowed the presentation. The occasion belonged to interim CEO Iain Williamson and the management team.
Williamson, of course, was parachuted into the role following the caustic rupture between former CEO Peter Moyo and the board.
Moyo is still arguing for his job, and the lawyers’ fees between the warring parties are racking up, but Old Mutual is clearly intent on a new body to lead the life insurer: the appointment of a new permanent CEO is "in progress".
Given the viciousness of the Moyo-Old Mutual breakdown, it’s probably no wonder that the board has taken to robots.
Specifically, the introduction of 122 bots which have saved 2.8-million minutes of processing time. That’s equivalent to working five years nonstop. These bots aren’t cuddly R2-D2 lookalikes seen in commercials — they look much like standard desktops. But they have also helped reduce the downtime on its website by 50% year on year.
Old Mutual has also begun to clean up its product range (or "estate"), merging five equity unit trusts into one. And in spite of the board shenanigans, the group has continued to cut costs and is close to its R1bn target.
The market, however, has all but ignored the numbers. A 10% increase in adjusted headline earnings and a decision to spend up to R2.4bn on share buybacks failed to ignite any recovery in Old Mutual’s share price, which has sunk 16% since Moyo was first suspended on May 24.
Still, Old Mutual remains a strong cash generator. Its R3.74bn of free cash more than covers a 45c a share dividend, though its share buyback doesn’t fully reflect the R4.1bn it received from the sale of the Latin American business.
As with Liberty, the biggest jump was in its shareholders’ funds investment return, which increased by 34% to R1.1bn.
Growth in profit from operations was much more muted: up 2% to R4.5bn. The biggest disappointment was Old Mutual Insure (formerly Mutual & Federal) — it was down 62% to R141m. Wealth & investments, which depends heavily on discretionary flows into equity products, saw its operating profit fall 9% to R710m. But perhaps a bigger disappointment was the 1% fall in the mass & foundation cluster (MFC).
What should be the engine room of the group had a 6% decline in sales.
Warwick Bam, head of research at Avior Capital Markets, says Old Mutual’s MFC slowdown appears to be mostly due to the stuttering economy.
"Clientèle Life reported similar pressures a few weeks ago," he says.
These pressures are making themselves felt in Old Mutual’s loan book, where defaults rose sharply in the second quarter of 2019.
In the first half the credit loss ratio for Old Mutual Finance increased to 7.9% from 5.4% in the comparable period in 2018.
Management attributes the fall in MFC sales to load-shedding, lower adviser productivity, and adviser training prior to launching a new savings product.
But Bam argues that "the overwhelming impact is a reduction in affordability".
Old Mutual remains the largest life office in the employee benefits market and Old Mutual Corporate reported a 2% increase in profit to R870m.
Williamson complains that growth has been held back by the slow pace of section 14 transfers into its umbrella fund. These are approvals from the Financial Sector Conduct Authority to transfer assets from one pension fund to another. Once they are in the umbrella, Old Mutual makes money from investment fees, especially from its high-margin smoothed bonus funds as well as group life assurance.
As for its Zimbabwe business, Williamson says it is no longer appropriate to recognise the profits of that operation, as funds cannot be moved out of the country. "Considering the cash is trapped in Zimbabwe, the earnings are less meaningful for investors in assessing a value for the group," he says.
The rest of the Southern African operations, however, grew operating profit by 12% to R362m, with unit trust and life sales increasing in Namibia in spite of the local recession.
East Africa broke even after a R108m loss the year before; in fact, the Kenyan short-term insurer is performing considerably better than Old Mutual Insure in SA.
West Africa remains a peat bog of losses, though at least they were down 8% to R94m. But it has some potential winners, such as its pensions administrator in Ghana and credit life sales in Nigeria through Ecobank.
Old Mutual doesn’t talk much about its China business, a joint venture with power producer Guodian, but Williamson describes it as a "gem" that is not for sale. Its sales were up 60% year on year. "We changed it from a unit-linked investment business into a protection business focused on life, disability and critical illness."
In China foreign firms are being encouraged "to transform the financial services industry", says Williamson.
The irony of Moyo’s excision from the company is that Old Mutual seems wedded to his "eight battlegrounds" strategy.
Moyo previously described these as "areas where we need to defend and consolidate our leadership position; areas where we need to improve our performance; and areas that will strengthen our competitiveness and productivity".
Whether this will help close the 27% discount at which Old Mutual trades to group equity value, estimated at R24.16, is uncertain.
Investors can’t be blamed for staying away so long as it keeps scoring own goals.
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