Old Mutual’s return home after a 17 year misadventure was never going to be plain sailing. And while profits slipped 9 percent in the first six months of the year, the bigger concern for CEO Bruce Hemphill though must be the challenging conditions in its core markets. Which may put the spotlight back on his ‘excessive pay package’ of R203 million. And while Brexit may take its toll on UK operations, the successful municipal elections in SA, which has seen the local currency hit a 9 month high against the dollar, may be cause for optimism on his homecoming. Hemphill says the managed separation (splitting the company into these four pillars) was progressing well, but news that Britain’s Financial Conduct Authority is investigating, could delay 2018 plans. The group recently sold off its US business for $1 billion, and Old Mutual Wealth Italy. – Stuart Lowman
By Carolyn Cohn
LONDON, Aug 11 (Reuters) – Investigations into Old Mutual by Britain’s Financial Conduct Authority (FCA) could delay its break-up plans, its chief executive said on Thursday as it reported a nine percent fall in first-half operating profit.
Old Mutual plans to break into four parts comprising its South African bank Nedbank and U.S., UK and emerging markets businesses.
The financial services provider said on Thursday it was on track to complete the process by the end of 2018.
Old Mutual Wealth is one of UK six insurance firms placed under investigation earlier this year over the treatment of long-time insurance customers.
“These things take time…it is theoretically possible that it could impact (the break-up timetable),” CEO Bruce Hemphill told Reuters by phone, adding there was leeway for the break-up process to extend beyond 2018. “We’ve got the flexibility.”
The firm’s preferred option is to list its wealth and emerging markets businesses although it hasn’t ruled out sales of the firms.
Analysts say the wealth business should carry a price tag of at least three billion pounds.
Hemphill said the FCA’s probe could affect the value of the wealth business if it requires Old Mutual to compensate customers.
Deutsche Bank’s sale of British insurer Abbey Life is facing delays as bidders struggle to decide on a valuation due to the FCA investigations, sources familiar with the matter told Reuters earlier this year.
The FCA has not given any timing for the completion of its investigations.
Old Mutual reported a 9 percent drop in first-half adjusted operating profit to 709 million pounds ($922.34 million), short of the 769 million forecast by analysts in a company-supplied poll.
“An uncertain environment continues in our three largest markets of South Africa, UK and U.S. which may lead to further challenges,” the firm said in a trading statement.
Old Mutual shares were down 5.9 percent to 212 pence by 0759 GMT, making it one of the worst performers in the FTSE 100 index .
“Whilst we acknowledge the strategic rationale for a break-up, we are yet to be convinced that it will add value to shareholders in the near term,” Bernstein analysts said in a note.
The firm said it would pay an interim dividend of 2.67 pence per share, a one percent rise on a year earlier.
Old Mutual 2016 interim results
Old Mutual media statement
Old Mutual plc, currently separating itself into four standalone businesses, known as the managed separation, today publishes its results for the six months to 30 June 2016.
Bruce Hemphill, Group Chief Executive, said:
“The first six months of the year were characterised by volatile currencies and lower average equity markets but our underlying performance demonstrated the strength of our franchises and the positive momentum within each of our businesses.
“We are making good progress with our managed separation strategy we announced in March 2016 and which we expect to be materially complete by the end of 2018. At this stage, we are doing a lot of preparation work that will lay the foundations for the future and is critical for success. We are clear about the task at hand and we are absolutely confident that this is the right strategy to unlock value.”
Summary
The macro-environment has been challenging with a weaker rand against the first half of 2015 and lower average market levels. Pre-tax adjusted operating profit (AOP) of £708 million down 9% in constant currencies, down 22% in reported currency;
- IFRS pre-tax profit of £608 million (H1 2015: £683 million);
- AOP earnings per share 8.0p down 11% in constant currencies, 22% in reported currency;
- First interim dividend of 2.67p; second interim dividend expected to be in the mid to upper end of the cover range of 2.5 to 3.5 times AOP;
- Adjusted NAV at 193.3p per share (FY 2015: 178.9p per share) boosted primarily by a strengthened rand and US dollar from year-end levels;
- NCCF of £3.5 billion (excluding Rogge), down 13% in constant currencies; FUM (excluding Rogge) at £342.7 billion up 4% in constant currencies and up 13% in reported.
Business performance
Business performance shown below is in the functional currency of each business. During the six months, each of our businesses experienced challenging conditions in their main markets.
OMEM – solid operational performance, with a strong contribution from the South African life business:
- APE sales up 25%; VNB up 28%; ROEV up to 14.8% from 12.3%;
- AOP down 5% to R5.7 billion due to underwriting losses during a period of weak economic growth;
- IFRS pre-tax profit of R5.5 billion (H1 2015: R5.4 billion).
Nedbank – very strong performance from its South African operations:
- Credit loss ratio reduced to 0.67% (H1 2015: 0.77%) whilst strengthening portfolio coverage ratios;
- Headline earnings growth of 2% to R5.4 billion including Ecobank Transnational Inc. (ETI), earnings up 20% excluding ETI;
- IFRS post-tax profit attributable to Old Mutual equity holders of R3.0 billion (H1 2015: R3.0 billion).
OMW – good underlying momentum, although lower profits due to Heritage charges, operational challenges and tough markets:
- NCCF up 39% to £3.2 billion; benefits of vertical integration – Intrinsic provided 33% of Platform NCCF and 26% of OMGI NCCF;
- AOP down 31%, including a £21 million charge from changes to customer fees in Heritage book and lower operating margins;
- IFRS pre-tax loss of £(17) million (H1 2015: £(27) million), following disposal write-offs and IT expenditure.
OMAM – Lower profits with negative net flows following hard asset disposals:
- Strategic delivery: acquisition of Landmark Partners (estimated to complete in August 2016); $400 million debt raising in July 2016;
- FUM of $218.8 billion up 3% (FY 2015: $212.4 billion); NCCF of $(0.5) billion providing positive $3.9 million of annualised revenue impact;
- AOP down 29% to $91 million, excluding exceptional performance fee earned in H1 2015 AOP down 17%;
- IFRS pre-tax profit of $97 million (H1 2015: $116 million).
Managed separation
The managed separation process, announced on 11 March 2016, is progressing well. As previously stated, implementation will require a balance to be struck between value, cost, time and risk and using the full flexibility of the capital management policy:
- Significant work is being undertaken to prepare the businesses for independence, which is critical for success of managed separation. Business readiness, particularly for OMEM and OMW, is the main determinant for the timing of the process;
- Redesign of the head office with new purpose of supporting managed separation: around 50% headcount reduction by year-end, leading to a £10 million run rate saving from 2017;
- Agreed to sell Old Mutual Wealth Italy to ERGO Italia (owned by Cinven) for a consideration of €278 million, completing OMW’s withdrawal from Continental Europe, expected to complete 2017;
- Accelerated monetisation from OMAM to plc of Deferred Tax Asset (DTA) and seed capital arrangements estimated at between $270-280 million on a fair value best estimate actuarial basis, between 2016-2018;
- Capital markets event to be held on 11th October 2016 in London, including presentations from each business.
Current trading and outlook
The second half of the financial year has started in line with management’s expectations. An uncertain environment continues in our three largest markets of South Africa, UK and US which may lead to further challenges, although:
- In the UK, OMW is in a strong position given its model of providing advice-driven investment solutions to financial advisers and customers via a vertically integrated, multi-channel business. Despite uncertainty over investor sentiment we have seen positive inflows of money since the EU referendum result, although we do not expect the first half’s strong NCCF to repeat in H2;
- OMEM expects economic conditions in South Africa to remain tough with consumers under pressure. However, the business is in good shape and we continue to focus on our customers by offering a broad and innovative product suite that meets their needs through all stages of the economic cycle.
- Nedbank expects growth in Diluted Headline Earnings Per Share (DHEPS) in 2016 to be positive but lower than the growth achieved in 2015 and the target;
- OMAM should benefit from its soon to be completed acquisition of Landmark, which has been successfully financed in the US bond market;
We announced a new capital management policy in March, the aim of which is to provide flexibility, recognising the need to balance complex considerations, including the background of volatile markets, costs associated with the managed separation and continued investment in the businesses while increasing their capital strength.
We are still at an early stage in the managed separation with significant variables ahead of us and therefore any dividend under consideration for the year ending 31 December 2016 is likely to be at the mid to upper end of the cover range of 2.5 to 3.5 times adjusted operating profit. The full effects of the capital management policy on the dividend will be felt in the second half.
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