Old Mutual’s profits double despite impact of Covid claims

Old Mutual turned in a strong performance in the year to the end of December, despite the negative impact of Covid-19-related death claims, with the group’s retail segments paying some R13 billion in claims linked to the pandemic, its annual report shows.

Total claim pay-outs by Old Mutual’s life businesses in South Africa came to about R21bn.

The results contained a slew of good news for investors:

• Headline earnings increased 42% to R7.2bn;
• Headline earnings per share rose 41% to R1.64;
• Basic earnings per share were R1.51 compared to a loss of R1.16 last year;
• Return on net asset value increased from 3.8% to 9%;
• The final dividend per share rose 46% to 51 cents;
• Gross flows increased by 4% to R194.8bn;
• Life sales (annual premium equivalent) increased by 16% to R11.4bn;
• The value of new business grew to R1.3bn from R621 million in 2020;
• The VNB margin improved from 1.1% to 1.9%, recovering to just below the group’s medium-term target range of 2% to 3%;
• Funds under management increased 15% to R1.3 trillion; and
• Unbundling 12.2% of its 19.4% stake in Nedbank returned R10.7bn to shareholders.

Despite the improved inflows, net client cash flows declined to R0.1bn from R9.6bn in 2020, mainly as a result of Covid-related mortality claims from the life businesses and lower inflows compared to the previous year in the Rest of Africa segment, the group said.

As the table below shows, Covid-related impacts knocked R4.7bn off Old Mutual’s results from operations. ROF, which is Old Mutual’s non-IFRS profit measure, is adjusted headline earnings before tax and minority interest, excluding net investment return on shareholder assets and finance costs.

Nevertheless, adjusted headline earnings shot up from R2.4bn to R5.4bn.

Mortality claims worse than expected

The group’s mortality claims were worse than it expected, with R6.8bn in excess deaths claims. This, as well as lower short-term interest rates, saw the return on embedded value decline from 3% to 1.4%.

However, the group’s embedded value rose 7% to R70bn, mainly because equity market gains led to higher-than-expected asset-based fee income on investment products, as well as higher-than-expected shareholder investment returns.

The pandemic provisions raised in December 2020 and June 2021 were insufficient to offset excess death claims last year. Old Mutual released R5.3bn from its pandemic provisions to offset the impact of excess deaths on its profits.

After raising additional provisions of R2.2bn in the second half of 2021, the group has R2.9bn for future Covid-related mortality claims.

“There remains considerable uncertainty with respect to the actual excess mortality experience that will emerge in our group assurance business. This will be impacted by possible new Covid-19 variants, the speed of roll out of vaccinations and the uncertainty around the impact of long Covid-19. We will continue to monitor experience and review our pricing, benefit features and reinsurance strategy accordingly,” Old Mutual said.

The group undertook a number of actions to offset the impact of Covid and maintain the sustainability of the risk product book. These included price increases for new individual underwritten policies for unvaccinated lives and rate reviews on corporate group life schemes. In the case of Greenlight policies, the pricing basis for premium reviews at the end of the guaranteed period was adjusted to take into account the expected future cost of Covid-19.

Impact of Covid claims by cluster

The table below sets out the impact of Covid claims on the group’s different clusters.

In the Mass and Foundation cluster, claims during the third wave were similar to those in the second wave. The segment had excess death claims of about R1bn, which were largely offset by the release of provisions. There were lower excess death levels during the fourth wave compared to the previous waves.

RFO increased from R1.2bn to R2.7bn, which Old Mutual attributed largely to the turnaround in the credit losses for the banking and lending business. The direct pandemic impact of R264m was significantly lower than R743m in 2020.

Personal Finance experienced significantly worse excess claims than in the second wave, with provisions insufficient to cover the excess deaths.

The cluster saw an RFO loss of R127m, from a profit of R160m in 2020, largely due to the net pandemic impact of R2.9bn (2020: R2.6bn).

In Old Mutual Corporate, mortality underwriting losses emerged in the group life assurance portfolio as the impact of the third wave was worse than expected due to the slower-than-expected roll out of vaccinations, the emergence of the Delta variant, higher average claim sizes, as well as a lower proportion of claims being covered by reinsurance.

Net of reinsurance, excess death claims of R1.5bn were more severe than the release of R1.2bn of the provisions set aside in December 2020 and June 2021.

However, direct Covid impacts fell 37% to R791m, and RFO recovered significantly from R87m to R727m on the back of higher asset-based revenue (funds under management rose 12% to R304bn).

In Old Mutual Insure, the absence of significant Covid-19-related business interruption and rescue reserves saw the cluster move from a net underwriting loss of R357m to a profit of R449m. BI and rescue reserves fell from R715m in 2020 to -R21m last year.

The insurer paid R1.2bn in BI claims in 2021, of which R1bn was for settlements and R200m for interim payments.

Claims in Rest of Africa were muted until the second half of 2021, when Namibia experienced its first significant wave, resulting in a significant increase in excess deaths.

The cluster recorded an ROF loss of R391m, compared with a profit of R192m in 2020, because of Covid impacts of R924m.