Unshackled: why Old Mutual is ditching Nedbank

After a year as permanent CEO, Old Mutual’s Iain Williamson has moved the final chess piece in a tortuously long simplification process for the venerable insurance giant.

Last week’s surprise distribution of the group’s remaining 12.2% Nedbank stake to grateful shareholders is a boon to Old Mutual and the bank’s investors, and lifted the insurer’s share price as much as 8% on the day.

But at R13.45 Old Mutual is still 35% down on where it traded when it moved from the London Stock Exchange to the JSE three years ago.

Back in April 2019, it touched R23. That was before it dumped CEO Peter Moyo, which left it rudderless — and locked in an acrimonious court battle — for more than a year.

Back then, there was understandable excitement about the prospect of a focused African life office.

It had completed an ignominious retreat from the world stage, selling its US life business F&G Life, its US asset manager BrightSphere and most of the Skandia operations, including the Scandinavia mother ship.

The only good overseas asset left to distribute was Quilter, the UK wealth manager in which the former Skandia UK operation is the core. This now has a market capitalisation of R51.7bn. It looks certain to overtake the R63.3bn market value of Old Mutual after the Nedbank unbundling.

Says Williamson: "We kept the substantial Nedbank holding in 2018 as, at that time, we needed the capital, but our capital has since been optimised."

Moyo had talked about improving operational synergies with Nedbank. But, says Williamson, "we revisited that and realised we could not take them any further. Nedbank is a good distributor of our complex life products and short-term insurance [neither of which the bank produces in-house] but purely from a commercial arm’s-length point of view."

It speaks volumes that Old Mutual’s mass market money account is a joint venture not with Nedbank but the far smaller Bidvest Bank.

Nedbank CEO Mike Brown says the unbundling doesn’t affect the strategy, day-to-day management or operations of the bank. The most obvious benefit, he says, is that there will be an increased free float in Nedbank shares, increasing liquidity as well as the weighting of Nedbank in the JSE indices, which will see index funds forced to buy more of the bank’s stock.

Allan Gray portfolio manager Jacques Plaut says that though management teams are often reluctant to take actions that will shrink the business, even if it benefits shareholders, Old Mutual under Williamson and CFO Casper Troskie has been friendly to shareholders when it comes to capital allocation.

Capital has been given back through buybacks (R4.9bn), special dividends (also R4.9bn) and ordinary dividends (R12.8bn).

The unbundling in two stages of almost all its majority stake in Nedbank was worth R38.8bn.

Mutual was also able to pay out capital after releasing R8bn of residual cash trapped in the former Old Mutual Plc structure, selling the Latin American business for R4bn and gaining a further R1.5bn through group restructuring.

The Nedbank news preceded Old Mutual’s annual capital markets day, where it shares information on itself with the market.

Nic Stein, co-manager of the Coronation Top 20 Fund, says the event was short on meat, especially compared with the more detailed presentations in the days of Old Mutual Plc.

"But I was pleasantly surprised at the progress the group has made in introducing new technology," he says. "And after the Nedbank unbundling it will be much freer to implement a more aggressive push into loans and transactional banking."

And he says the introduction of Old Mutual Protect has made the process of getting life assurance a lot simpler for clients and brokers alike. "It will be a big step forward if this ease of use can be replicated in the new savings product," says Stein.

But he is concerned that Old Mutual still has a lot of market share to lose, against higher-quality and hungrier businesses such as Sanlam and Momentum Metropolitan.

Both companies made the cut in Coronation’s Top 20 Fund, while Old Mutual didn’t.

Even in Old Mutual’s stronghold, the mass and foundation cluster (MFC), Capitec has eaten its lunch with its funeral policies, which rapidly reached a million sales.

Under Hillie Meyer, Metropolitan has hugely increased agent productivity in the sector, with sales per agent more than doubling in the past three years.

At Old Mutual, on the other hand, sales at its mass cluster fell from more than R4bn in 2019 to barely R2.5bn in 2020.

Divisional MD Clarence Nethengwe says his competitors have made inroads in the short term, but argues that Old Mutual has "deep roots" in its communities.

"If there is a broken window in the neighbourhood, the first place the locals go to report it is their Old Mutual agent."

He says Old Mutual has also broadened its distribution.

Its core work-site marketing, with products presented to groups and agents based in key client nodes such as Chris Hani Baragwanath Academic Hospital, now accounts for 46% of sales.

Nontraditional sales, such as mobile purchases, now account for 54%.

Funeral policies still account for 60% of sales, savings products for 35% and life for 5%. And he says life and funeral product sales in 2021 to date are now 9% ahead of 2019.

Plaut says there are further opportunities to simplify, not least by downscaling Old Mutual’s underperforming exposure to the rest of Africa. The West African operations are still unprofitable and below scale, while in East Africa it has battled to integrate the operations it bought from French insurer UAP.

And while its dominant Zimbabwean business is highly profitable, this isn’t recognised on the group income statement as dividends cannot be repatriated.

Warwick Bam, head of research at Avior Capital, says Old Mutual will continue to reduce whatever excess capital remains, as management’s performance targets depend on capital efficiency.

That means, at least, some sort of capital return for investors.

Williamson was unveiling the group’s new tack last week: the replacement of Moyo’s seven battlegrounds strategy with a softer approach known as "a truly mutual strategy".

The mantra repeated throughout the day is to rectify, simplify and amplify, though not necessarily in that order.

"The old strategy was focused on the divisions improving their returns and market share, but as silos. The new emphasis will be cross-selling and co-operation." He says the group can leverage its strength in life and savings products to grow into other financial services such as short-term insurance and lending and transactional services.

Plaut says that during the presentations, management spoke openly about mistakes, which never happened at the height of Old Mutual Plc’s 20-year adventure overseas.

But if Mutual has challenges at MFC, they are even more pronounced in the core middle market business.

"Old Mutual has lost traction to more aggressive newcomers such as Discovery," says Kerrin Land, head of the personal finance unit.

Also, though she won’t name it, to a resurgent Sanlam.

Land says over the past year the group has had a successful launch of its new flexible death and disability product, Old Mutual Protect, which replaces its Greenlight range.

Over the next 12 months it will launch a savings range to replace the Max series, which will include smoothed bonus funds as well as a "sensible" range of unit trusts and market-linked life products.

The group is now clawing back market share in unit trusts, though from being the largest player at the time of demutualisation in 1999, it now barely makes the top five.

Williamson says Old Mutual Insure, the former Mutual & Federal, is going in the right direction, though he says its returns are not yet within the group’s target range. Stein says it is now a long way behind Santam and Outsurance, perhaps even Hollard, and none of them is standing still.

But Insure has attracted some high-profile talent, such as Christelle Colman, who joined from Telesure to start Elite Risk Services, a high net worth motor insurance division. Bam says Insure is a useful business to have if it complements the existing distribution channels.

Old Mutual was the last life office to introduce a rewards programme (just three years ago) and is offering juicy incentives to hold Old Mutual products in all the financial services buckets.

Plaut says Allan Gray will use the opportunity created by the higher free float to increase its holding in Nedbank, though the team also considers Old Mutual to be an attractive asset. At R13.45 Old Mutual trades on a hefty discount of 35% to its last disclosed embedded value of R20.90. This adds the present value of the life book to the group’s net worth.

But Bam says Mutual’s discount is attractive only if the group can consistently grow in SA without relying exclusively on cost savings.

And Stein warns that if Old Mutual cannot lift itself out of its current decline it will start to resemble a value trap.