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January 9, 2012updated 13 Apr 2017 8:46am

An ill-conceived strategy unwound

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

By LII editorial

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.

 

Table showing OLD MUTUALSince 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.

A 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%.

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