Old Mutual shares fell over 8% on Tuesday on the release of its interim numbers to end-June, as headline earnings per share slid 7% and assets under management fell by a similar margin. And now there’s the Competition Commission probe to deal with too. The FM spoke to CEO Iain Williamson.
What exactly is the commission after?
All we know, based on the evidence it seems to be attempting to gather, is that it’s focused on pricing of life cover products, so essentially your household risk.
Would you swear you’re competitive there?
From an Old Mutual Corporate perspective, we wouldn’t stand for any deliberate or known breaching of the laws of the country in general. We’ve got a track record in that regard, so that’s clear. But irrespective of the investigation, this is an insanely competitive industry to my mind. You’ve got independent intermediaries comparing everybody’s prices on a weekly basis, deciding how to place business.
Also, the products are quite complicated and we try to differentiate based on features and benefits and so on, so it’s not all about the price either. And if you look at the margins of the various players in the sector, on protection business they have made in the last little while, we’ve all made massive losses courtesy of Covid. The new business margins are not wide. So to me, the empirical evidence points to a very competitive industry.
Were you warned of last week’s raid?
No. Nobody had any inkling that it was coming, so it was quite a surprise.
Are SA insurers all scrabbling for the same pool of dwindling customers, given our unemployment and GDP growth rates?
More recently I think that is very much the case in SA. There are some growing pockets of the market, to be fair. Despite the fact that, globally, people always talk of SA’s high insurance penetration, if you look at what people should have, compared to what they do have, from even a risk cover perspective, people are in aggregate woefully underprovided. The retirement conversation is another kettle of fish. The silver lining is that people really should be doing more. And that in itself creates a huge opportunity, so it’s a slightly doubled-edged sword in that sense.
Are you referring to Old Mutual’s mass & foundation cluster?
Not only that. What you are seeing is a middle-class demographic playing out — and there’s a big opportunity there.
A better job market would presumably lead to a boom for you, but can you rely on that happening? How do you ensure growth in the next five to 10 years?
The following winds that would be very helpful would be GDP above 2.5% growth, employment growing, inflation coming down — that’s the sweet spot for us and I guess most other industries. So anything we can do to get to that place would be very positive. The past six months have certainly constituted what I would call a strong headwinds environment: rising inflation and falling employment. If you could just get those headwinds to be neutral, [that] would be helpful.
Are all bets off at this point for your own growth targets?
I suppose one of the data points is that inflation almost definitely peaked in July. So 7.8% is high, but it should come back in the target range in the course of next year. So that’s one ray of positivity. The trade balance is very good at the moment, so that also helps. And the world in a way has a bigger problem than we do; I don’t know when last I could say that.
So on a relative basis, certainly among emerging markets, we actually look quite attractive at the moment. We all get frustrated because of the slow pace of reform and seeming lack of policy alignment, but I’d prefer us as a corporate to focus on what we can control.
You say persistency levels are under pressure. In layperson’s terms, how bad is it? How many people are letting policies lapse, say, out of 10?
If we had one in 10 that would be a proper problem. For us, a variation from the central case scenario of 3%-4% would be significant … so that’s built into all our models. We try to gaze into the crystal ball every full year and say: what do we expect for the coming period? And if we expect a cyclical variation, we provide [for that] in advance.
So what we’ve done in the mass & foundation business is [to] set aside what the guys refer to as a short-term provision, but it’s essentially a provision for the cyclical worsening in persistency. And so far what we’ve seen has played out against what we provided; our concern is that it will take longer for it to revert to normal than what we’ve allowed for. So that’s the risk.
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