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Old Mutual reluctantly enters the spotl... Venmyn predicts more mines over the next... Northam - acting in shareholders' worst ... |
Old Mutual reluctantly enters the spotlight
The assurer is finding transparency comes hard after years of being a mutual, writes MARCIA KLEIN
DEMUTUALISATION is a complex and costly procedure fraught with new difficulties at every turn. As it moves down this road, SA's largest assurer, Old Mutual, is becoming acutely aware of some of the harsh realities, one of which is that it lays itself far more open to scrutiny than in the past. Over the past two weeks, after releasing its results for the year to June, this scrutiny has included suspicion that the stock market crash has left the insurance giant vulnerable and possibly in financial trouble. Old Mutual is known for its conservatism in financial management but also in releasing details about how it operates. This week MD Gerhard van Niekerk was at pains to explain the misconceptions about its financial position and to emphasise that the impact of market volatility on bonuses and the effects of demutualisation should not be confused. He said as listing neared, there would be greater transparency. Most of the suspicion arose following the announcement by chairman and group CE Mike Levett that Old Mutual may exercise its right to remove its non-vested, or non-guaranteed bonuses, following the decline in the stock market. The move is not unprecedented - non-vested bonuses were reduced after the October 1987 crash. Van Niekerk said Old Mutual had declared bonus rates of between 5% and 7% for the year compared with 15% in the previous year. Other life offices have either not declared bonuses for the period of the market crash or have reduced their interim rates to zero. The recent movement of the JSE was totally out of line with normal fluctuations, said Van Niekerk, and because of conditions, the latest bonus was declared in a non-vested form, meaning it was not guaranteed to policyholders. About 20% of the assurer's smoothed bonus policy liabilities are in this form. Van Niekerk said it would be irresponsible for Old Mutual to declare fully guaranteed bonuses out of investment performance that can be lost again. "The recent fall in the market has been so great that Old Mutual's board would be fully justified in removing a portion of non-vested bonuses currently accruing to policies." But it is, instead, waiting to see what happens over the next month or two before coming to a final conclusion. "If there is no improvement in the market it will be necessary to remove some non-vested bonuses from policies currently in force." These would be restored if the market recovers. Van Niekerk said the actions "are a sign of sound financial management, not of financial weakness", adding that it would have taken the same steps irrespective of demutualisation plans. He said any possible question mark over Old Mutual's solvency, based largely on the estimated 20% decline in the value of its free reserves, "is totally out of line". "We had capital of just over R31-billion at year-end and the latest figures stand at around R25-billion (a 20% decline) which is still a significant number." These free reserves represent excess capital which is available as a last resort to meet policy guarantees, and there is no indication the company would need to access this capital. "By using the bonus-smoothing mechanism and through the ability to take away non-vested bonuses, Old Mutual can manage the stock market fall without calling on this capital." Van Niekerk emphasised that upon demutualisation, free reserves remained in the group. "We are merely giving everyone a right which they can trade. It is like a piece of undivided land, where people may have the right to a plot, but the land remains." In demutualisation, the free assets are converted into share capital. Shares are issued free to policyholders, "but the capital remains intact and available to meet policy guarantees". "We are not paying out of any reserves, our capital remains intact. There is no cash going out and if new shareholders want cash, they must sell to third parties. If their shares are sold to foreigners, this will bring in forex. "We worked out that if we were capitalised at say R60-billion, the average of various independent estimates, and if say 10% was sold to foreigners, this would be equivalent to about 20% of the forex reserves of southern Africa. Timing of demutualisation, both of Sanlam and Old Mutual, could have been better, with the crash coming after the two started an almost irrevocable journey towards demutualisation and listing. "Is this the right time to demutualise? Whether we are a mutual or a proprietary, we are satisfied with our financial position. Demutualisation or not, policyholders' benefits will remain intact. In fact, the Old Mutual will have to put down guarantees that the reasonable policy benefit expectations will be the same after demutualisation as before." Although the timetable has not been announced, and it is unclear if demutualisation will take place in a good or bad economic environment, Van Niekerk says "the balance sheets of the country and of individuals will be significantly strengthened and people will have more choice" on Old Mutual's demutualisation. The value of policyholders' shares may be less than some originally expected, "but on the other hand they are getting their shares for nothing and getting their fair share of the organisation. The consumer impact may be less than expected, but personal balance sheets will be positively affected." Cosatu's opposition to demutualisation has seen Old Mutual begin a consultative process with unions, a process which Van Niekerk believes will lead to a better understanding of the project and of the implications to both the assurer and Cosatu's "common client base". Constructive discussion with Cosatu is just one area of a general increase in transparency and communication which are necessary if Old Mutual wants to change into a company, and especially if it intends listing in London, where the investment market is not as tolerant of secrecy as in SA. Van Niekerk says Old Mutual will be more open as soon as it can. "We are now in a position where key decisions must be taken which have a material impact - we must make sure the scheme is developed first, and then a lot of information will flow."
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