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Old Mutual increases Covid-19 provisions

Much depends on the clinical situation, but certitude is in short supply
September 1, 2021

 

  • New business sales boost profitability
  • Forward claims levels impossible to predict

Regardless of the industry, it can be difficult to assess if pandemic-linked effects are temporary in nature, or whether they form part of a wider structural trend. So, although Old Mutual (OMU) returned to profit at the half-year mark, reinstating the half-year dividend in the process, it was unable to provide clarity over the future impact of Covid-19.

That’s understandable; nobody else has a clue. Nevertheless, mortality claims from the virus were worse than underwriters had anticipated. South Africa has its problems beyond the clinical sphere, but deaths linked to the virus accelerated rapidly in January, before tapering off through to May. Unfortunately, mortality rates picked up again due to the spread of the Delta variant. As a result, the insurer has increased its provisions by ZAR 1.98bn (£99.1m) to reflect the third wave of infections.

Excluding the pandemic-linked impacts, the results from operations – the group’s measure of operating profit – increased by 8 per cent to ZAR 4.67bn, which is in line with 2019 levels, and bosses are now targeting 5-10 per cent growth on pre-pandemic levels by 2023. Results benefited from profitable new business sales, together with a recovery in equity markets, though net earnings were held in check by the upsurge in mortality claims.

It’s worth noting that the financial impact of the virus decreased by 49 per cent from H120, but even with the best will in the world, underwriters are struggling to arrive at a meaningful estimate of excess deaths and resultant claims for the remainder of the year – and perhaps beyond. Shares are changing hands at an undemanding 10 times consensus earnings, but given the opaque clinical situation we remain circumspect. Hold.

Last IC view: Hold, 97p, 2 Sept 2019

OLD MUTUAL (OMU)   
ORD PRICE:76.45pMARKET VALUE:£ 3.60bn
TOUCH:76.35-76.6p12-MONTH HIGH:76.95pLOW:43.35p
DIVIDEND YIELD:3.9%PE RATIO:5
NET ASSET VALUE:1,447¢SOLVENCY RATIO:177%
Half-year to 30 JunGross premiums (ZARbn)Pre-tax profit (ZARm)Earnings per share (¢)Dividend per share (¢)
202039.7-6.58-1290.00
202141.07.0967.825.0
% change+3---
Ex-div:16 Sep   
Payment:11 Oct   
£1=ZAR19.98