A decade ago, Old Mutual set out to conquer the world
with an aggressive global expansion strategy that, for the most
part, brought costly disappointments. Julian Roberts, the insurer’s
CEO since 2008, has worked wonders in unwinding strategic blunders
and restoring the insurer to robust financial health.
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Since
becoming Old Mutual CEO in September 2008, Julian Roberts has
wielded a big axe. He had to. His task has been to repair damage
caused by an ill-conceived acquisition strategy that began after
Old Mutual’s demutualisation in 1999 and its shift of domicile and
headquarters from South Africa to the UK.
In the latest and largest of a
series of disinvestments, Old Mutual is to sell its Nordic
business, Skandia Insurance, to Swedish insurer Skandia Liv for
£2.1bn ($3.3bn). The cash offer is equal to a third of Old Mutual’s
market capitalisation in mid-December 2011.
Unlike previous disinvestments,
Skandia Life’s sale was not initiated by Old Mutual which had seen
its Nordic operations as a core part of its strategy. But for Old
Mutual the deal initiated by Skandia Liv was too attractive to turn
down. The price represents a premium to Skandia Life’s pro-forma
net asset value of £1.7bn and to its pro-forma embedded value of
£1.9bn as at 30 June 2011.
With the sale will go Skandia
Insurance’s long-term savings, banking and insurance operations in
Sweden, Denmark and Norway. The operations include Skandia Link, a
unit-linked pensions operation, online banking unit Skandiabanken
and health insurance unit Private Health Care Solutions. In the
first half of 2011, the Nordic operations recorded an adjusted
operating profit before tax of £60m.
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By GlobalDataA notable aspect of the deal is
that Skandia Liv is a subsidiary of Skandia Insurance which Old
Mutual acquired for £3.6bn in February 2006 following a hostile
bid. Skandia Liv, Sweden’s largest life insurer, operates as a
mutual which precludes dividend payments to Skandia Insurance.
Skandia Liv’s corporate structure prevented potentially significant
efficiencies being realised, noted Roberts.
Commenting further on Skandia
Insurance’s sale, he said: “This transaction represents a material
step in the execution of our restructuring programme. We intend to
use the proceeds from the sale to accelerate the reduction in group
borrowings and to return surplus capital arising from the
transaction to shareholders.”
Old Mutual, he added, also intends
to reassess its debt repayment plan. Prior to the sale of Skandia
Insurance, Old Mutual had set a target of reducing its debt by
£1.5bn by the end of 2012. Old Mutual will not pay tax on the
Skandia Insurance sale proceeds.
Adding further to Old Mutual’s cash
inflow, its sale of Skandia Insurance was followed a few days later
by its sale of Skandia Life Assurance’s Finnish branch to Finnish
insurer OP-Pohjola osk for an undisclosed sum. The branch has gross
assets of €1.3bn ($1.7bn).
On completion of the deals with
Skandia Liv and OP-Pohjola osk, Old Mutual will retain ownership of
the Skandia brand outside the Nordic region. This includes the UK
where it operates its major Skandia investment platform business
which provides access to investment funds from 80 fund management
firms. At the end of September 2011 total assets of £32.2bn were
invested through the platform.
Already axed
Old Mutual’s exit from the Nordic
region follows other measures taken by Roberts, the first of which
was closing Old Mutual Bermuda (OMB), its US life insurance
operation’s offshore unit, to new business in March 2009. In 2008,
OMB recorded a loss of $508m and absorbed $582m in new capital.
Old Mutual completed its exit from
the US life market in April 2011 with the sale of its troublesome
US life insurance operation to US private equity firm Harbinger
Capital Partners for $350m. Shortly afterwards, Old Mutual exited
the US retail mutual fund market through the sale of its 17 US
mutual funds to Touchstone Investments. Old Mutual remains active
in the US institutional asset management market, reporting assets
under management of £145bn as at 30 September 2011.
Developing
markets
Sale of its Nordic businesses has
increased the significance of Old Mutual’s developing market
operations which contributed 49% of sales in the first nine months
of 2011. If Nordic region sales are excluded, developing markets’
contribution rises to 53%.
South Africa, where Old Mutual was
founded in 1845, is the dominant developing market component,
contributing 65% of developing market sales of £2.366bn in the
third quarter of 2011. In terms of net profit, South African
operations contribute more than three quarters of the group
total.
However, in many respects South
Africa’s life insurance and asset management segments have far more
in common with developed markets than developing markets. For
example, life penetration at 12% of GDP in 2010 ranked the country
second only to Taiwan, according to Swiss Re.
Old Mutual’s objective is to
increase the contribution of other developing markets over the next
decade. The insurer’s other developing market operations include
Skandia Mexico and Skandia Columbia. Exposure to China is through a
50% stake in Old Mutual-Guodian Life while in India Old Mutual has
a 26% stake in Kotak Mahindra Old Mutual Life. In Africa Old Mutual
operates in Botswana, Kenya, Malawi, Namibia and Zimbabwe.
As a key part of its developing
markets strategy Old Mutual is harnessing experience gained in
South Africa to develop suitable products. Of particular focus are
underserved markets in Africa where Old Mutual has mooted an entry
into West Africa and intends gaining scale in East Africa.
Investors appear to like what they see of Old Mutual’s strategy
of reducing debt and risk and its high developing market exposure.
The insurer’s share price has risen by 150% since Roberts’
appointment and responded to the news of Skandia Insurance’s sale
with a rise of over 20%.
