Old Mutual under pressure

Johannesburg - Analysts are beginning to question how long Old Mutual can continue to throw money at its US Life operations, despite it being a well-capitalised business.

Financial services businesses such as banks and insurers have been in the firing line since the financial crisis has reared its head. Companies such AIG, Bear Stearns and Morgan Stanley have been high-profile victims of the credit crunch.

Dual-listed Old Mutual has been one of the worst-hit counters on the JSE, having seen its share price fall from a high of 2 495c to hit a low 720c. The company has had enormous problems with its US life operations and the infamous 'Bermuda book' that has required the company to make a number of capital injections into these operations to keep them afloat.

Last week, an analyst report was issued by a stockbroking firm Barnard Jacobs Mellett to its clients in which an analyst said that Old Mutual continued to face capital pressures.

In his synopsis, the analyst said: "Company failure remains a remote possibility".

However, the analyst did go on to say that this was unlikely and should the business face pressures around its capital, a "last-resort" scenario would see the company forced to sell off assets such as short-term insurer Mutual & Federal (M&F), its US asset management business and Swedish bank Skandia Banken cheaply.

BJM has declined Fin24.com's request to provide further information on the commentary included in the report.

In early September, Old Mutual set aside an additional $250m extra as provision for its US life operations and exposure to US mortgage lenders Freddie Mac and Fannie Mae.

The company subsequently reported a $237m exposure to US insurance giant AIG which the US government was forced to bailout as capital pressures mounted and further provisions were required against more write downs.

At the same time, CEO Jim Sutcliffe stepped down and was replaced by Julian Roberts as he failed to stem the tide of negative news relating to problems in the US.

Neill Young, an analyst at Coronation Asset Management says he would put "a very low probability on company failure - at the very least, forex controls mean the SA assets are probably reasonably well ringfenced. However, I don't think a rights issue is out of the question - capital is increasingly tight in the group."

Patrice Rassou, a portfolio manager at Sanlam Asset Managers (SIM) also believes that the offshore operations are valued extremely cheaply. He said: "I think that market is already pricing in a worst-case scenario - the market cap is implying the whole offshore operations at zero."

Asset firesale?

One of the common criticisms of Old Mutual is its complicated structure and offshore growth strategy.

Rassou says this is one of the reasons the Old Mutual share price has been punished. He said: "A premium is being paid for simple business models and management teams which are seen as conservative and able to navigate through these rough waters."

Young believes that management is under increasing pressure to unlock value and to free up capital - even if this means selling off assets cheaply.

Old Mutual is currently planning to sell off its 74% stake in short-term insurer in a sorely depressed market.

Earlier this year, Royal Bafokeng Holdings (RBH) were in negotiations to buy the stake at around 2 300c a share. Since then the share has fallen to around 1 400c per share and analysts have failed to identify a serious bidder for the company.

Young says: "I think they are going to struggle to sell M&F in this environment, and I would be disappointed if they did at the current price."

Both Young and Rassou indicate that they have heard nothing about any planned sales of Nedbank.

Matthew Gregorowski, the head of communications for Old Mutual in London, confirmed that there had been some analyst speculation around the capital position of the insurer. However Old Mutual is currently in a closed period at the moment and is not able to provide further comment at present.

The company will release a third quarter trading update on Thursday November 6 and provide further guidance to investors then.

However, Gregorowski did indicate that an analyst report circulated on Monday by an investment banking firm, included some inaccurate calculations around the capital position of the business and Old Mutual had been in contact with the analyst concerned to correct.

One person who holds a contrary view regarding Old Mutual is UBS analyst Michael Christelis. UBS on Monday released a note from Christelis in which he upgraded Old Mutual from "neutral" to "buy".

At 10:00 on Wednesday morning, Old Mutual was trading 12c lower at 768c (down 1.5%).

- Fin24.com