Old Mutual specifically mentioned in its trading update preceding the announcement of its results for the year to December that the update is merely a preliminary indication of what shareholders can expect when it publishes its results at the end of February.
This first update states that headline earnings per share (Heps) and EPS would be over 20% lower than that of the previous year (2019: Heps 236.1 cents and EPS 208.3 cents) – the standard announcement required for shareholders in terms of the JSE’s listings requirements, when a company realises that earnings will differ by more than 20%. This change is “due to the significant impact Covid-19 has had on our business operations and results.”
Old Mutual advises that a further trading statement will be published to provide more specific guidance once there is reasonable certainty regarding the extent of the decline and the related ranges of the expected decrease in Heps and EPS.
It is telling that the share price did not react much to the trading statement, with shareholders probably expecting much the same performance in the second half than in the first.
The results for the six months to June showed that headline earnings declined by 28% to R4.2 billion compared with R5,8 billion a year ago and headline EPS declined by 25% to 96.3 cent (128.1 cents). Adjusted Heps however, showed a 66% drop.
Management says in the new update that operating conditions remained challenging in all the business clusters during the second half of 2020. Nevertheless, they indicated that business volumes have shown recovery in the second half, despite the tough economic and operating environment.
Net client cash flow (premiums, deposits and investments received form customers less claims, surrenders and maturities) has increased significantly, despite the unusual environment. “Positive NCCF of R10.1 billion is R7 billion higher than the prior year, driven by strong investment flows across the group in the second half,” according to the operational update, but it was unfortunately “partially offset by higher outflows in Old Mutual Corporate as a result of the deteriorating economic environment year.”
Management also reported a continued improvement in advisor productivity, with sales trending towards historic levels.
But that seemed to be the end of the good news.
Covid-19 impact growing
“Whilst there are encouraging signs of recovery in our sales metrics, we are concerned about the rapidly increasing rate of Covid-19 infections in our key geographies and the impact that the pandemic could have on our customers, economic recovery and mortality rates,” warns Old Mutual.
The life office is currently in the process of finalising life reserves based “on the global experience of the impact of the pandemic and the potential of a more sustained spread of the virus.”
“There remains a large degree of variability in the data and we are monitoring infection- and mortality-related claims data on a weekly basis. We expect to communicate the outcome in the near term,” says management.
Any large adjustments will impact on profitability, but not necessarily on headline earnings.
Then there is the issue of business interruption claims that can also impact earnings.
The trading statement says that following a lengthy period of legal uncertainty, shareholders are advised that Old Mutual Insure has commenced the process of finalising all outstanding (valid) claims for business interruption.
“The complex question as to whether customers with business interruption extensions for infectious and contagious diseases are entitled to cover for the Covid-19 pandemic and the related government enforced national lock-down has been the subject matter of several court cases.
“The recent rulings on this matter by the Supreme Court of Appeal of SA have provided legal certainty and we have therefore commenced with processing valid business interruption claims with specific conditions that are materially the same in nature as those already decided by the courts,” says the statement.
Old Mutual Insure the latest loser in Covid-19 claims battle (Nov 26, 2020)
‘Tsunami’ of legal certainty, now insurers must pay up (Jan 19, 2021)
Santam to process claims of 4 000 more clients hit by Covid-19 lockdown (Jan 25, 2021)
Old Mutual warned that the business interruption and business rescue reserves that it put aside at the half-year mark at end-June 2020 (R464 million) will increase by between R85 million and R140 million.
The impact on headline earnings and headline EPS would depend on specific accounting policies to account for this highly unusual event.
Once again, the share price shows that shareholders are not expecting any nasty surprise. The share fluctuated between R18 and R22 for most of 2019 following the unbundling of Old Mutuals asset management business, to fall sharply to less than R11 when the pandemic and the resulting lockdowns hit SA.
Since January 2020, the share has hovered between R11 and R13, maintaining a price/earnings ratio of 6,3 times.