Life insurance usually gives steady, if not spectacular, returns and is considered a defensive sector. So the interim results from two of SA’s largest life assurers came as a shock.
Liberty reported a 15% fall in operating earnings to R1.1bn.
Old Mutual Emerging Markets, which is dominated by the SA life business, saw its profit — even after the accounting manipulation known as "adjusted" operating profit — fall by 22% to £260m and by 5% in rands.
Even Liberty’s rock-solid individual arrangements business had an 18% fall in earnings. And for the first time since 2010 there was negative client cash flow of R353m, against R2.85bn positive in the same period last year, which was much more in line with the usual trend.
Liberty group CE Thabo Dloti says that recurring premiums held up well and were up 5% to R2.2bn. But single premium business fell 5% to R9.9bn.
This was mainly because the organisation could not supply two critical products which were in demand: a guaranteed investment plan, in which tax losses are used to enhance returns on products held for five years; and an offshore domiciled platform, in a market dominated by Old Mutual International, Sanlam’s Glacier and MMI.
"We have international products in rands through Stanlib but we haven’t had the tools to offer to a fully externalised offshore product," Dloti says.
Old Mutual had both these products and its single premium business in the retail affluent market (which competes directly with Liberty) increased by 9% to R9.4bn. Old Mutual Emerging Markets CE Ralph Mupita says there was demand for smoothed bonus funds and guaranteed products as clients reduced their risk appetite in volatile markets. There was a solid 9% increase in recurring premium sales in the mass and foundation cluster (MFC, which used to be headed by Dloti).
By current trends MFC will overtake retail affluent as the main source of Old Mutual group profit within about two years.
This sells low-price risk and savings products (say, R150 to R250/month) into the broader SA and has provided the template for expansion into Africa and even Mexico.
Liberty has only limited exposure to this market through its group arrangements, which include the corporate and health businesses. Dloti has made a brave stab at taking on Old Mutual in the corporate market, though Old Mutual still makes about eight times as much in these lines of business. Dloti says returns can be lumpy from corporate business.
Liberty had no new bulk annuity sales in the six months to June. Even its umbrella retirement fund, which is receiving a pipeline of new employers, is experiencing a decline in members as existing employers cut back on their workforces.
And it has been cautious about group risk (death and disability cover.)
That looks wise, given that Old Mutual has had a spike in claims in unexpected areas such as cardiovascular and cancer, though HIV claims fell.
Mupita must wish the managed separation at Old Mutual included the unbundling of Mutual & Federal (M&F), which is struggling to make a profit. Investors are expecting market leader Santam to report an underwriting margin of at least 4.5%, in the satisfactory weather conditions in the first half.
M&F made a loss of R44m and had a negative underwriting margin of 1%, in SA and the rest of Africa, with the biggest hit coming from its Credit Guarantee unit. Inevitably, weather was blamed.
Again, Dloti must be happy he has taken his time to get into short-term insurance in SA, though Liberty already has a decent-sized operation in Kenya. Dloti needs to build scale for the group outside its traditional affluent insurance business, otherwise Liberty is in danger of being considered a mature ex-growth business. The dynamism of the Donald Gordon years must be buried somewhere in the corporate culture, and perhaps some renewed energy at parent Standard Bank will help.
For Mupita, Old Mutual’s managed separation means he will no longer have the London head office to lean on or to blame.
He will need to prove there is value in a multinational conglomerate, which is almost as diversified as the now-disbanding Old Mutual Plc.
Mupita says the business will have similar range and diversity to Sanlam so it will not be unique. And there is some growth in the non-SA operations. Life sales in the rest of Africa were up 9% to R542m and in Asia and Latin America they were up 56% to R1.36bn.
Maybe one day all these operations will want to be liberated from the dead hand of head office.
But the managed separation will be good for shareholders who do not want the distraction of some poorly chosen northern hemisphere assets. This time around, even the poster boy of the group, UK-based Old Mutual Wealth, had a poor six months, with operating profit down 31% to £104m (and losses of £17m before adjustments).
The US institutional business OMAM had a 29% decline in its adjusted profit to US$91m as performance fees and other revenues fell.
There have been some benefits from controlling Nedbank but the bancassurance agreement will stay intact, as it is not dependent on ownership.
Old Mutual will keep a cross-holding of at least 17%, which it hopes will be enough to ensure co-operation.