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Old Mutual remains cautious about Covid-19

Prepared for a third wave of infections and deaths similar to the first.
Image: Bloomberg

The presentation of Old Mutual’s results for the year to December was noticeably a sombre affair when management unpacked the effect of the Covid-19 pandemic and warned that the crisis might not be over.

A few key facts illustrated the impact of the pandemic. First, CEO Iain Williamson mentioned that Old Mutual paid an unprecedented R13 billion in life claims during the year under review.

Secondly, the life insurer identified more than R6 billion in additional costs brought about by the pandemic.

Williamson and CFO Casper Troskie told their audience that Old Mutual performed well, with income from operation falling by only 14% – before taking into account the extra costs.

The effect of the separately identifiable direct Covid-19 items eventually resulted in adjusted headline earnings falling by 75%  from R9.8 billion in 2019, to less than R2.5 billion in 2020.

It was one of the most challenging years Old Mutual has ever faced, said Williamson. “It was a period of extreme crisis and uncertainty that left no human life untouched.

“We experienced unprecedented volatility in local and global capital markets, while lockdowns and travel restrictions impacted on economic growth locally and globally,” said Williamson.

However, it was management’s comments that the crisis is not over yet are concerning.

Batten down the hatches

Williamson referred to the high excess mortality rates as published by the SA Medical Research Council (SAMRC)– rather than deaths as a result of Covid-19 infections – to illustrate the severity of the pandemic.

The total excess mortality rates basically show higher than normal deaths from all causes, including those related to the extreme difficult economic challenges brought on by lockdowns.

Williamson pointed out that the SAMRC expects another jump in excess mortality due to a third wave of Covid-19 infections and deaths. Its estimate indicates that the third wave could hit during winter and that the death count could be higher than during the first wave.

Old Mutual’s management team mentioned other concerns, such as the challenges in rolling out vaccines, their efficiency, uncertainty around the duration of immunity and the possibility of further new Covid variants.

Proof that the pandemic is still serious – although life is getting back to normal, with shorter curfews and little restrictions on alcohol, tobacco and T-shirt sales – can be found in the fact that Old Mutual paid out a massive R1.9 billion in death claims during January and February 2021.

This figure indicates that death claims could be as high in the new financial year as in 2020 if the third wave of infections and deaths materialises.

Old Mutual has prepared for this eventuality. The insurer increased initial special reserves raised mid-2020, with around R2 billion remaining to help cover unexpected events.

Customer and community support

In addition to the R13 billion paid in claims during 2020, Old Mutual has offered financial support to customers, intermediaries, communities and employees. These included premium relief to policyholders, offering R4 billion in free insurance to healthcare workers and interim payments in respect of business interruption claims.

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Old Mutual donated medical supplies, protective equipment and funding to front line healthcare workers and regional hospitals in African countries where it operates.

“We are also involved in a pipeline project to supply oxygen to the Queen Elizabeth Central Hospital in Malawi. We are actively involved in the Business For South Africa (B4SA) vaccination support programme and we will lend our public voice in promoting safe vaccinations across the continent,” says Williamson in his message to shareholders accompanying the results.

Digital enablement

Like most companies, Old Mutual accelerated the evolution of its business towards a business model increasingly supported by new technology.

“We have made good strides operationally and simplification remains a key focus to enhance efficiencies across the business,” says Williamson, adding that the process started long before anybody even “heard of Covid-19”.

He notes that the digital enablement resulted in the migration of approximately 15% of workloads to a cloud infrastructure to date and that the process is continuing.

“Digital offerings to enhance the customer experience that were already in development were accelerated and rolled out during the year, enabling us to meet customer needs remotely,” said Williamson.

In SA, Old Mutual introduced alternative direct digital channels such as email, USSD and WhatsApp, to pay funeral claims and facilitate disinvestments, with a significant increase in their use towards year end and into 2021. Interestingly, it claims that an increase in the use of artificial intelligence and robotic processing improved claim authorisation speed, with 80% of funeral claims paid within four hours.

In the Southern and East African regions, Old Mutual introduced USSD features and a Facebook Messenger Chatbot to assist customers with opening investment accounts, managing their accounts and requesting withdrawals.

Old Mutual noted the success of new websites and mobile applications to provide access to its product range, by quoting strong growth in active digital customer numbers. It reported 406 000 active digital customers, representing 50% growth over a year ago.

It also enabled employees and some advisers to work remotely. A new secure digital platform allows advisors to do an online needs analysis, make recommendations, pre-populate personal information, verify client identity and save advice records securely in the cloud for easy access, according to the update. More than 10 000 advisors have been accredited to use the new digital platform to date.

Weathering the crisis

Williamson and Troskie reiterated that Old Mutual is financially strong to weather the crisis and prepared to resume growth once the economy starts recovering.

That directors approved a final dividend of 35 cents (albeit much lower than the 75 cents in 2019) to lend credibility to their claim.

Unfortunately, it seems that investors still need a lot of patience. The share price is still less than half that in the beginning of 2019 (which were around R24), with the drop in the Nedbank share price from R240 to R124 taking much of the blame.

Share price over three years

Troskie noted that the book value of Old Mutual Finance (largely its investment in Nedbank) was written down by R8.7 billion. He says that no further adjustments should be necessary, adding that Nedbank is “currently trading at a discount of all measures of value”.

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