After a managed separation from its London parent, Old Mutual Limited offers investors a clearer, more targeted investment proposition

Pan-African financial services group Old Mutual Limited (OML), which listed on the JSE on 26 June, offers exciting prospects to investors, thanks to its considerable scale and leading market positions.

Its formation is the culmination of a ‘managed separation’ that started in 2016. Aimed at unlocking and creating shareholder value, it involved the splitting of Old Mutual Plc – which was head-quartered in London with its primary listing on the London Stock Exchange – into four standalone businesses with separate operations in various markets across the world.

OML, the business focused on emerging markets, will be headquartered in SA with its primary listing on the JSE and secondary listings on the London, Malawi, Namibia and Zimbabwe stock exchanges. This shift represents the anchoring of the group on the continent, where Old Mutual has been an iconic brand for 173 years.

According to CEO Peter Moyo, the feedback from investors has been very positive. ‘Investors like the fact that OML now offers them a simpler investment choice than before. Old Mutual Plc was a complex conglomerate consisting of interests in several jurisdictions – the UK, Africa, Asia, Latin America and the US. With OML now focused on Africa, they have a clearer line of sight of the investment proposition we represent,’ he says.

One of the group’s obvious strengths is its formidable presence in the market. ‘OML is probably the largest insurance business in sub-Saharan Africa with 12 million customers and R1.2 trillion in funds under management. Last year we reported adjusted headline earnings of R13.4 billion – the largest among our traditional South African peers,’ says Moyo. ‘The depth and breadth of our capabilities positions us for attractive growth prospects over the near and long term across all our markets,’ he adds. ‘The business is highly cash-generative, and it is well-positioned in the right markets to extract value from our franchises and deliver sustainable long-term growth and returns for shareholders, while creating economic value for our stakeholders.’

Shortly after assuming his role as CEO last year, Moyo outlined eight strategic ‘battlegrounds’ that he believes the business should concentrate on to keep on winning. He summarises these into three focus areas: ‘Firstly, areas where we need to defend and consolidate our strong market positions; next, areas where we, frankly, need to improve our performance; and finally, areas where we need to strengthen our competitiveness and productivity.’

He adds that the business is making great strides in consolidating its leadership position in the large established businesses, the Mass Foundation Cluster (MFC) and corporate. There are also strong signs of improvement in Wealth and Investments, and Old Mutual Insure.’

While the operations in East and West Africa have not yet performed according to expectations, Moyo confirms that the remedial action already taken, particularly in East Africa, is beginning to show the desired results.

Growth potential
Jonas Mushosho, OML MD Rest of Africa, explains that loss ratios have been a critical focus across the East African businesses. ‘Although we are under no illusions as to the work that still needs to be done, these regions nevertheless present considerable potential for the future of the group,’ he says.

Mushosho points out that while the SADC region is the mainstay of his division, with 1.8 million customers on its books, East and West Africa’s large populations, substantial economic growth and low insurance penetration are an attractive prospect.

‘A comparison of the countries in which we operate shows that in East Africa, for example, the population size of the countries is about four times that of the SADC region,’ he says. ‘Economic growth in East Africa is expected to exceed 6% per year. Insurance penetration ranges from 0.3% to 2.8% of GDP, compared to about 17% of GDP in South Africa. Clearly the potential is huge.’

Diversified businesses
OML CFO Casper Troskie says the fact that OML actually comprises a number of businesses – several of which are market leaders – is a major advantage. ‘These businesses offer exposure across the entire spectrum of insurance, savings and investment, and give us a well-diversified income stream that lends resilience to the group. If there is a downturn in any one of these businesses, the others are likely to compensate for it.’

He says the same applies to OML’s capital structure. ‘The different segments have different capital profiles. For example, businesses writing retirement annuities need to have capital available on a long-term basis while the capital needs of other businesses may be more short term in nature. We make use of this natural diversification of our capital base to optimise our capital structure, thus improving our capital efficiency.’ He explains the group has a strong balance sheet and reserves ‘that are well in excess of those we are obliged to hold to protect our policy-holders’.

Branching out
Moyo singles out the group’s well-developed distribution capability as a major competitive advantage.

‘We have the largest multi-channel distribution network in the industry, including a large and productive agency force. Although our customers currently prefer face-to-face contact – whether it be at home, in one of our branches or at work – as we look to the future, we are increasingly focused on growing our digital and direct channels.

This also allows us to streamline our processes and drive efficiencies. The breadth and depth of our distribution reach gives us a distinct competitive advantage over our peers, both traditional and new.’

By the end of 2018, the group had a tied agency force of 7 900, deployed mainly in the MFC and Personal Finance business segments, as well as 323 branches in the six major cities of SA.

The plan is to grow the branch network by about 30 branches per year.

Talent and technology
Reviewing the progress made on some of the other ‘battlegrounds’, Moyo remarks that OML’s talent and technology capabilities are key enablers of its success and competitiveness. ‘We’re proud to be a certified top employer across all 13 African countries in which we operate and we will continue to strengthen our people, our human capital, through our accelerated talent development programmes,’ he says, adding that ‘overarching all our battlegrounds is the need to execute in a cost-efficient manner, what we call cost-efficiency leadership’.

Moyo notes that the group is targeting run-rate cost savings of R1 billion by 2019, net of the cost of achieving it. ‘The savings will predominantly be delivered across the following areas – more efficient operating models; additional oversight of IT spend and processes; minimising the use of consultants; improved procurement and better utilisation of the group’s properties and facilities; and ensuring economies of scale across distribution channels.’

OML has refreshed its key performance indicators, setting demanding but achievable targets for key metrics such as ‘results from operations’ – the new measure it has adopted for reporting on the performance of the operational segments – and return on net asset value.

‘Our product offering and market exposure gives us confidence that we can grow our results from operations at nominal GDP plus 2% over the three years to 2020 and support a return on net asset value of average cost of equity plus 4%,’ says Moyo. He adds that the business is transitioning from being product-focused to being customer-led. ‘To achieve this we are fostering a culture that is agile and execution-focused, while ensuring diversity and inclusion across the workplace.

‘As our culture changes I’m confident our teams will increase their focus on winning in the market, both by meeting the needs of our customers with a variety of innovative product offerings as well as by implementing processes that facilitate speed, simplicity and cost-effectiveness.

‘We expect further strategic gains both in the near and medium term as we continue to progress on our eight battlegrounds. The benefits of scaling our businesses is something we expect to be fully evident over the medium to longer term.’

No. 1 Mutual Place
107 Rivonia Road, Sandton
Johannesburg, 2196
+27 (0)11 217 1000