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Old Mutual, which has warned that it may miss some of its medium-term targets due to market turmoil caused by the coronavirus, says it has seen the gains it recorded from the third quarter of 2019 reverse in the first two months of 2020.
Interim CEO Iain Williamson said 2019 was an "extraordinarily challenging" year, not only for Old Mutual, but for its peers too. The group only started seeing "an upswing" from its 2018 results in the third quarter of 2019. But 2020 looks set to be even worse as those gains have been reversed and the threat of a global recession is starting to seem more realistic every day that passes.
Bloodbath
"One of our founding values at Old Mutual is to be a certain friend in uncertain times. We've implemented measures across all of our operations...However, even with the best measures, downside risks remain," warned Williamson about the impact of the coronavirus and South Africa's depressed economy during the company's results presentation.
Old Mutual became one of the biggest losers on the JSE on Monday, as its share price tanked by as much as 19% by 14:37, following the bloodbath that swept across the JSE as global panic selling intensified. Analysts said the share price dive had more to do with that market turmoil than the fact that the company missed market expectations.
"Old Mutual’ s results were slightly behind market expectation but not significant enough to justify the share price reaction today. Today’s share price reaction relates directly to the economic impact of a Covid-19 shutdown, in my view," said Avior Capital Markets’ head of research, Warwick Bam.
Old Mutual did, however, miss market estimates. Protea Capital Management’s senior analyst, Richard Cheesman, noted that the market had expected the company’s adjusted headline earnings to be 4% higher than Old Mutual reported on Monday.
Karl Gevers, head of research at Benguela Global Fund Managers, said the fact that Old Mutual under-performed next to its peers like Sanlam when the JSE closed on Monday, highlighted the fact that the market was disappointed.
The insurer, which is the second largest in the country in terms of market capitalisation, reported the first set of full-year results since its managed separation and subsequent unbundling of Nedbank and Quilter. Its adjusted headline earnings rose 5%, below the market consensus of 9%.
Testing times
The insurer’s results from operations were down 2%, indicating that operationally it was a challenging year. Higher catastrophe-related claims at its short-term insurance business, Old Mutual Insure and a spike in death claims in the life business were behind the 2% drop.
"If you talk about the test of time, that company has to be Old Mutual; and 2019 was certainly the most testing of times," said Williamson.
"Our customers’ ability to save and invest came under unprecedented pressure. When times are tough, people, particularly those in the Mass and Foundation segment save less and are more cost-conscious," he added.
Nevertheless, the Mass and Foundation Cluster, Old Mutual’s business unit that predominantly serves low-income earners and is the biggest contributor to the group’s profits, grew its operational earnings by 13%.
The divisions that dragged down the group’s profits were Personal Finance which recorded a 14% decline, Old Mutual Wealth and Investments – down 10% – and Old Mutual Insure, whose profits from operations tanked 65%, from R670 million in 2018 to R233 million. The company’s operations in the Rest of Africa delivered double-digit growth in operating profit of 15%.
Williamson said given that the company has revised its GDP outlook down from the "touch above 1%" it predicted in October last year, and because the spread of coronavirus, Old Mutual anticipates that meeting its return on net asset value target and compounded annual growth of 2% above GDP will be challenging.
Bam said given Old Mutual’s size in South Africa, indeed organic growth will be very challenging without an expanding economy.
