Bruce Hemphill. Picture: RUSSELL ROBERTS
Bruce Hemphill. Picture: RUSSELL ROBERTS

It is tempting to see Old Mutual’s almost 20 years of being based in London as a waste.

There was certainly enough wasted money. Instead of paying dividends back to shareholders and doing share buybacks, as rival Sanlam did, Old Mutual SA’s dividends were funnelled up to the UK holding company — and for what? It tried its hand at UK stockbroking and futures trading through Gerrard, US life through Fidelity & Guaranty Life and offshore mutual funds through Sage Life in Bermuda.

All added red ink to the financials.

Old Mutual will have got some change from the US$2bn acquisition of United Asset Management (renamed OMAM US), which at least had good brands such as Barrow Hanley and Acadian. It disposed of this interest after a listing in the US.

Its only real success has been the UK portion of its Skandia acquisition, the heart of Quilter Plc, which will soon have a secondary listing on the JSE. Quilter will be a different kind of rand hedge, similar to being able to buy directly into Investec Wealth in the UK.

Old Mutual CEO Bruce Hemphill says the separated group will be far better aligned with shareholders. In theory, SA domestic investors and emerging-market funds will invest in SA-based Old Mutual Ltd, while UK mid-cap investors will buy Quilter.

But many SA investors will hang onto their Quilter shares, much as they have hung onto UK property shares such as Capital & Counties. Some might even ignominiously ditch their Old Mutual Ltd shares and keep those of Quilter.

The reconstituted Old Mutual will now, in almost all its markets, compete head-on with Sanlam, which has built up a far stronger reputation for prudent financial management.

Sanlam CEO Ian Kirk says he certainly respects the local Old Mutual operation.

After Sanlam sold its mass-market business, Metropolitan Life, to a BEE consortium in 1993, it was only a bit player in the sector — until it bought African Life in 2005.

By then Old Mutual had built the leading position with what it originally called Group Schemes and now calls the Mass Foundation Cluster (MFC). It is the biggest contributor to group operating profit of R3.16bn, and this is growing by 3% while profit in the traditional mid-market personal finance business has fallen by 8%.

The new CEO of Old Mutual Ltd, Peter Moyo, says it’s proof that even a mature business can grow, provided it can bring products to market that are relevant to its customers.

In anticipation of the group unbundling its controlling stake in Nedbank, MFC is growing its Old Mutual Finance (OMF) footprint.

OMF isn’t technically a bank, but it quacks like one, offering a Money Account transactional facility, ATMs and loans.

Sanlam’s entry-level Sky business is still substantially smaller (comparable to number three Metropolitan), with R875m in net operating profit. It also sells almost entirely risk or protection products with little savings, while MFC is equally split. Protection income is more volatile, as it is subject to the vagaries of mortality experience.

But while Old Mutual’s entry into the mass market was well-executed, it gave up its lead in two areas: short-term insurance and Africa.

Mutual & Federal was the leading short-term business in SA, built up by Mike Levett, who went on to be chairman of Old Mutual itself. Now called Old Mutual Insure, it looks rudderless, without even a permanent CEO. Yet Sanlam’s Santam subsidiary is a large listed company in its own right, with a R37bn market cap.

To be fair, Old Mutual Insure had a far better year, with the underwriting margin increasing from 0.9% to 3.7%. Its direct-to-consumer iWyze business also came into profit, contributing R20m to the R312m underwriting pot.

In contrast Santam had a 6% underwriting margin and a surplus of R1.28bn in the same operating environment, with catastrophes such as the Knysna fires.

Old Mutual historically built up large businesses in Zimbabwe and Namibia, but it has struggled to build profitable footholds elsewhere. Its Southern Africa business made R1.52bn before tax in 2017, mostly from Zimbabwe. There was a loss of R61m in East Africa, where it has struggled to integrate its acquisition of local competitor UAP. There has also been limited demand for its portfolio of office suites in South Sudan. Moyo says there is a "capital-lite" approach in West Africa.

Just as Old Mutual is beating a retreat, Sanlam has made the largest acquisition in its history, buying the balance of Saham Finances for $1bn. Kirk says Sanlam currently has just R2bn in discretionary capital, and it will fund the deal with a combination of equity and debt. It will now operate in 33 African countries, including Francophone and North African countries where none of its SA competitors have a presence.

Things have proved toughest in Sanlam’s backyard. Kirk says disruptive pricing from competitor Bona Life led to a 14% fall in the value of new business in Botswana, usually the largest contributor to the rest-of-Africa portfolio.

In India, Old Mutual withdrew from its joint venture with local conglomerate Kotak Mahindra, which makes sense as it refocuses on Africa. Much like Standard Bank, it has dropped all pretensions to being a pan-emerging-markets group. Its businesses in Colombia, Mexico and China will surely be sold at the right time.

Kirk says Sanlam remains committed to India, which accounts for 42% of the non-SA profit, but it no longer has ambitions to expand in Southeast Asia. Malaysian motorcycle insurer Pacific & Orient was a poor acquisition, with profit down 61% to R24m last year.

Old Mutual is still the leader in the employee benefits market. It has a torrent of asset-based fees, so it had a healthy 12% growth to R1.57bn, even though risk underwriting got worse.

Sanlam is way behind, with employee benefit profit up 4% to R443m, and it has a substantially smaller umbrella retirement fund — a sector that needs high volumes to pump cash.

At least for the investor, Sanlam and Old Mutual will be comparable businesses, much as the major banks are. There may even be pressure for Old Mutual to dispose of the 19.9% of Nedbank it intends to keep. Investors never liked the bank holding any more than this, and neither did they like its hybrid developed-market/emerging-market status.

The refocused business is already a great improvement.