The group's boss, Bruce Hemphill, has wasted no time at all since joining in November. His speedy strategic review has concluded that there are limited synergies across its four underlying businesses. The increasing weight of regulation in Europe and its home market has increased "cost, complexity and constraints" for the group. The current group structure, the review concluded, inhibits the growth of the individual businesses and prevents shareholders from accessing the full value of the constituent parts. Going it alone would see £80m in annual central costs evaporate, the reasoning goes, giving better accountability for shareholders and a more appropriate market value and capital structure. It would so remove a 'group discount' from the market value.
A quick stock-check is in order. The first of the four group businesses is Old Mutual Emerging Markets, which offers life and general insurance, asset management and banking services, mostly in sub-Saharan Africa: South Africa, Namibia and Zimbabwe deliver 95 per cent of profit. The second underlying business is Nedbank, which is one of the largest banks in South Africa, listed in Johannesburg. The lender offers retail and wholesale banking services alongside insurance products.
The third is of course Old Mutual Wealth, which has more than 3,000 advisers on its books, a diverse investment platform and a retail fund management business, Old Mutual Global Investors. The latter is not to be confused with the fourth underlying business, branded OM Asset Management, a New York-listed global fund manager with 80 per cent of its clients stateside, and the majority of that money coming from institutional investors. OMAM invests through underlying 'boutique' asset managers, which operate their own investment strategies from value equities to real estate, and where the boutiques' management retain a big equity stake.
The reader will identify the only area of major overlap between the emerging markets operation and Nedbank, and the group was keen to insist that this relationship and its targeted synergies will continue. The group envisages distributing its Nedbank stake to shareholders, leaving just a strategic minority holding. There may well be equity activity for other subsidiaries as well, with a listing for Old Mutual Wealth widely anticipated.
The impact of the rand's depreciation on its South African businesses' contribution - as well as the political mismanagement in the country on the share price - have been well covered. But regulatory drift on retirement reform also seems to have made it harder for the group to straddle its continental breaks. In South Africa, new laws have extended the obligation to buy an annuity to certain types of savings, whereas the UK government has ripped a hole out of the guaranteed retirement income market by liberalising access to pensions. The UK wealth operation is having to adapt to a market that arguably takes it further from the reflection of its South African cousin.
Both OMEM and Nedbank have also been designated by regulators as "domestic systemically important financial institutions" under the country's new 'twin peaks' regulatory model, which is another pain point in the current group headache. But a major stress may well have been Solvency II, the pan-European capital requirements for insurance companies that came into effect in January. The reform is fiendishly complicated even for companies operating in just one territory. The group ended up with a solvency ratio of 135 per cent, which was well below peers, but only because excess capital in South Africa could not be counted.
Back-of-a-beer-mat calculations by analysts for the value of the group's constituent parts come out between 200p and 235p, meaning there could be decent upside on the current share price of 194p. The market appears sold on the logic, but the break-up is as yet light on detail. Management has also relegated the dividend behind restructure costs, and is looking to reduce the debt pile as part of the process, meaning equity investors may have to wait in line.
Indeed, these are hardly easy times to raise money in financial services, but prospects look good for Old Mutual Wealth's evolution into a 'vertically integrated' manager, offering financial advice, wealth and investment management, akin to St James's Place (STJ). The emerging markets business will also have a more understandable investment case, and some of the knottier multi-jurisdictional issues should be unpicked. We look forward to the solo albums.
