Ashly DhaniAn outstanding feature of Old Mutual’s results for the six months to June 2023 is that the rich seem to get richer while the middle class is losing the fight to improve their position in life — high living expenses are forcing them to cash in their investment policies and sell their unit trusts to cover their monthly expenses.
The life insurer’s Personal Finance and Wealth Management division reported that, on balance, clients were forced to “withdraw savings to fund liquidity needs”.
“We delivered strong profits supported by higher assets under management and administration, while the weaker rand improved revenue from offshore client portfolios and seed capital investments in Wealth Management,” the division’s management notes in an overview of its performance.
“However, the impact of a strained economy continues to exacerbate financial pressure on our customers resulting in increased levels of disinvestments from savings and investments.
“Net client cash flow for the segment of negative R6,46 billion was worse than the positive R2 billion reported in the prior period,” it says.
“In Wealth Management, liquidity requirements in a challenging operating environment resulted in outflows from a number of large clients across local and offshore platforms, coupled with lower offshore and treasury advisory inflows. In Personal Finance, increased disinvestments from savings and investments were partially offset by the strong single premium inflows.”
Group’s reaction
Old Mutual’s response was to follow the money: “We launched Private Clients by Old Mutual Wealth to further expand our high net worth client proposition.”
An overview of the performance of the Old Mutual Investments cluster also shows that high-net-worth individuals are adding to their investments, but average clients have been cashing in theirs.
Gross inflows improved by 71 percent to R17,4 billion, but “client liquidity requirements” resulted in a net outflow (from low-margin money market funds) of nearly R4,3 billion. However, Old Mutual notes that this was an improvement of 33 percent from the prior period.
The same trend was evident in the banking and lending businesses, with Old Mutual Finance reporting that banking profits were “adversely affected by higher credit losses” and that the credit loss ratio increased to 7 percent during the six months under review compared to 4,6 percent a year ago.
The Mass and Foundation Cluster reports that results from operations increased by 3 percent compared to the prior period, primarily driven by good operational performance and winning market share from other life insurers.
However, management notes that the good operational performance was dampened by the continuing high rate of cancellation of policies, which necessitated additional short term persistency provisions.
“Our customers continued to be severely constrained by the increased cost of living,” the division reports.
“Gross flows of R6,85 billion grew by 10 percent due to the positive impacts of annual premium increases and the inclusion of flows from our credit life business following the increase in shareholding of Old Mutual Finance in December 2022. These were partly offset by worse persistency.
“Net client cash flow increased by 9 percent to R2,9 billion, largely due to the increased gross flows, partly offset by higher surrenders as more customers access their savings for support during difficult financial times.”
Overall, funds under management grew by 6 percent to R1,3 trillion, driven by positive local equity market performance, but partially offset by the higher outflow of investment funds as clients were forced to access their long-term investments.
Disposable income under pressure
Old Mutual chief executive Iain Williamson notes in his commentary on the results that customers’ disposable income remains under pressure, which led to increased disinvestments on savings and investments as they seek to fund their liquidity requirements.
“Net client cash outflows of R7,25 billion were worse than the prior period due to large outflows in Personal Finance and Wealth Management and Old Mutual Investments. Client liquidity requirements in a tough operating environment resulted in net outflows from low margin money market funds in Old Mutual Investments and increased disinvestments in Personal Finance and Wealth Management,” he says.
Williamson told investors and clients in a discussion of the results that everybody knows that the macro-economic environment remains challenging — in all the markets the group operates in.
“Disposable income growth has lagged inflation. Inflation remained relatively persistent during the first quarter of 2023, averaging 7 percent due to continued high food prices.
“This, together with elevated unemployment continues to negatively impact real income growth,” he says.
“Stubbornly high unemployment, with nearly 8 million people actively looking for employment, increased the unemployment rates. Load shedding continues to impact on the economy.
“Our customers’ disposable income remains under pressure which led to increased disinvestments on savings and investments as customers seek to fund their liquidity requirements.”
Positive
However, Old Mutual tried its best to put a positive spin on the challenges. “Inflation eased to 5,4 percent in June 2023 from 7,1 percent in March, due to lower fuel and food prices.
“The second quarter of 2023 marked a turning point for the global economy in terms of growth, inflation and monetary policy settings. Inflation slowed during the second quarter, compared to high inflation in the first few months of 2023,” it says.
“Growth in China slowed in the second quarter and incremental policy easing measures were implemented to support the economy. These included interest rate cuts as well as other monetary and fiscal easing measures.
“South Africa’s economy rebounded in the first half of 2023 following a decline in the last quarter of 2022. Growth was recorded in the first quarter, followed by a continued recovery in the second quarter.”
According to Williamson: “Despite the dual impact of electricity shortages and a confidence crisis, more efficient production processes combined with significant private sector energy generation supported economic activity.
“Strong growth in private sector investment in energy generation projects and ongoing rebuilding of inventories also added to growth.”
Despite this improved growth, the rand reached a record low against the dollar due to the reaction to SA allegedly compromising its non-aligned stance concerning the Russia/Ukraine conflict.
“This exposed the economy to increased risk around potential sanctions and expulsion from the African Growth and Opportunity Act,” according to Old Mutual.
However, Williamson says strong marketing initiatives and a healthy pipeline of new business will support improvements in net client cash flow.
“I remain confident in the clear strategic direction of our core and growth businesses. While the macro-economic outlook in our markets is expected to remain challenging for our customers, we remain focused on delivering strong top-line growth across our business, creating excellent value, and improving efficiencies as we continue the work to becoming our customers’ first choice.” — Moneyweb
Bongani Ndlovu