Old Mutual, whose half-year earnings dropped by two-thirds, is unlikely to show meaningful recovery for another year as it forecast worsening Covid-19 death claims and weak demand for insurance products in an economy expected to suffer its deepest contraction since the 1930s.
CEO Iain Williamson, who took over permanently in July after leading the company for over a year on a temporary basis, said it was possible that even by the end of 2021, "we’re not quite back where we were at the end of 2019".
Williamson’s comments echo the Reserve Bank’s sentiment, whose governor Lesetja Kganyago said recently it would take time before activity levels returned to pre-pandemic levels, with the economy only expected to grow 3.7% in 2021, after shrinking more than 7% in 2020.
For Old Mutual, which expects GDP to fall 7.5% in 2020, it would make selling insurance difficult because consumers’ debt-squeezed finances are expected to take another hit from large-scale retrenchments across multiple industries.
Mortality claims
As a result, the company would focus on reducing costs, Williamson told Business Day, as Old Mutual braced itself for a worsening wave of Covid-19 mortality claims in the six months to the end of December.
"We need to focus on cost and efficiencies and make sure that those are appropriate for the size or the fabric of the revenue that we are generating," he said.
The company’s adjusted headline earnings for the period tumbled 67% to R1.7bn, due to weak demand for new business, or premium earned from the new contracts, as a result of the lockdown in the quarter to the end of June.
Williamson said the company’s policy lapse rates were also under pressure and the number of clients dropping policies was higher than in the first six months of 2019 — particularly in the Mass Foundation Cluster, as consumers’ spending power dwindled in the face of rising joblessness.
The Mass Foundation Cluster is the part of the business that targets consumers at the lower end of the market.
The insurer, which recently emerged from a protracted legal battle with former CEO Peter Moyo, who was ousted on allegations of conflict of interest, has set aside R2.8bn to help it tackle the effects of the virus on its business and accommodate imminent claims.
It said it anticipated a worse mortality claims experience in the second half of 2020.
Old Mutual competitor Liberty Life had reserved R3bn to cover future death claims, while Discovery had set aside R3.3bn for the same purpose.
"We think we’re being prudent. There’s no current indication that it’s insufficient," Williamson said of the capital reserved for Covid-19 effects.
Williamson added that, though still elevated in August, claims had been coming down since July after a peak in June.
"Our expectation is that you’ll have a shape of a curve that’s related to the pandemic that washes through, and that by the end of the year we should be returning to more normal levels, unless there’s a second wave or another round of lockdown," he said.
Some of the company’s opportunities for growth include targeting the upper end of the market in the short term, as well as broadening its offerings in the Mass Foundation businesses, he said.
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