Not so long ago bancassurance was the buzzword in financial services. Standard Bank was the most successful at this, distributing life products often linked to vehicle finance and home loans through the Charter Life business, later absorbed into Liberty.
One of the most successful, though often overlooked, businesses within Absa was Absa Life, with its profitable book of embedded life products.
Old Mutual had its own banking subsidiary, Nedbank, yet the cross-selling between the groups was negligible, and they competed in asset and wealth management.
The more recent trend has been for life offices to build their own banks. Discovery has bet the farm on the expensive rollout of Discovery Bank — with ambitions to offer full-service retail banking.
Old Mutual, having unbundled Nedbank in 2018, is less ambitious. It is definitely not going to build a second Nedbank but it has nonetheless got a full banking licence.
Speaking to the FM after Old Mutual announced its interim results to June 2024, CEO Iain Williamson says the group is already carrying out many of the activities of a bank.
“We have a R16.5bn unsecured lending book through Old Mutual Finance, which already has a limited branch network, and we have a transactional account with half-a-million clients, managed on the Bidvest banking licence.
“But we don’t yet have control of the entire value chain. Without a banking licence in our own right we do not have the benefit of taking deposits, which would give us a lower cost of funding.”
Williamson says Old Mutual Bank will initially be transaction-led and a core offering for the clients of the mass and foundation cluster (MFC). This is a sweet spot for Old Mutual. MFC operating profit increased by 30% year on year to R944m, while group operating profit fell 3% to R4.24bn.
Momentum Metropolitan (MML) reported the full year to June 2024 last week. Jeanette Marais, who took over from Hillie Meyer as CEO in August 2023, says the life office has no plans to set up a bank. This sets it apart not only from Old Mutual but also from its estranged cousin Discovery Holdings, which was also a subsidiary of FirstRand in its past life.
“We believe in focusing on what we do best and continuing to do it better. Banking is not one of our core competencies,” says Marais. “We don’t buy the argument that you need to start a bank to own the client. Through open banking we will all soon have access to the same data.”
The life office’s quasi-banking product, Momentum Money, will be discontinued at the end of October.
Marais tells the FM she can understand why a bank such as Capitec would use its branch and online network to distribute simple insurance products, but MML is an unashamedly adviser-based business.
She expects that the independent financial advisers and the tied sales force will remain the dominant distribution channels, “but by no means the only channel”.
“Myriad [the life and disability protection range] now generates 28% of its premium income from direct online and social media channels,” she says.
Marais’s first year in the hot seat has been busy: Momentum launched its best-of-breed unit trust range, Curate, and the group digitised its legacy recurring premium savings range Investo.
In employee benefits, it has rolled out Momentum Grow, which offers full digital access to risk and retirement benefits for SMEs. Alongside it is the surreally named Dragonfly, a marketplace platform, which has grown sevenfold in the past two years.
Marais concedes that short-term insurer Momentum Insure isn’t best in class but she calls it a solid business with a respectable market share. It has a product range — including basic motor insurance — that an insurance and asset management group such as MML needs to offer.
Momentum Insure started life as Outsurance’s broker channel but Marais concedes it will never be an Outsurance, “nor does it need to be”.
She says the combined short-term insurance result for the group looks considerably better if Momentum Insure is combined with Guardrisk. Guardrisk is the clear market leader in the cell captive market — in which third parties such as retailers sell insurance on their own brand, which Guardrisk underwrites in the background.
Over the past three years Guardrisk has generated R1.04bn in cash, while Momentum Insure has swallowed up R577m.
Through Metropolitan Life, MML is No 3 behind Old Mutual and Sanlam in mass market insurance, in which funeral cover is the dominant product.
Metropolitan is still significantly smaller than Old Mutual MFC, with R600m in earnings compared with an annualised R1.9bn at Old Mutual.
MetLife is also a business that seems to be going through permanent restructuring. Not for the first time MML highlights “sales workforce management and value of new business challenges” but assures analysts that “there is good progress on a five-point turnaround plan”.
For Old Mutual the challenge is in the personal finance and wealth management cluster: its middle-class life and savings business and its products for the affluent such as investment platforms.
This core life and savings cluster’s operating profit fell by 27% to R1.39bn. Williamson says there has been a focus on higher-margin, complex risk products. In the uncertain investment climate, there was an 18% increase in guaranteed annuity sales as interest in investment-linked annuities declined.
At Momentum, hybrid annuity sales — which aim to combine the best features of linked and guaranteed annuities — rose 243% over the 12 months.
There was a turnaround in net client cash flow at Wealth Management from a R6.46bn outflow to a R2.44bn inflow. This was driven by flows into local unit trusts and the offshore platform Old Mutual International.
Old Mutual Investments was rocked by the departure of its MD Khaya Gobodo, which was announced just hours before the results presentation. But Williamson says Gobodo was given the chance to become CEO of a private company, which was too good to pass up.
Williamson says Gobodo will leave the division in good shape, especially now that its main operating units, the Old Mutual Investment Group and Futuregrowth, are majority black-owned. This will help them to secure pension fund mandates.
The investment cluster’s earnings were down 15% to R547m. The decline was off a high base; the cluster received substantial performance fees from its Alternative Investments cash cow in the prior period.
Both Old Mutual and MML trade at a discount of about 16%-20% to embedded value — the standard method of measuring life offices, which combines NAV with the actuarial value of the life book. Both groups have been buying back their shares to take advantage of these discounts.
The question is whether these shares are classic value traps that will get even cheaper. The case for Old Mutual revolves around whether it can build a fortress position in the mass market with the bank. But it has underperformed rival Sanlam for more than 20 years, and investors are increasingly disillusioned.
For MML, which has a much smaller market share, the case is more closely tied to providing holistic solutions for the affluent market with its investment platform and risk businesses.
Any success MML might enjoy in the mass market from Metropolitan is barely priced in, so it would be a free option.
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