Old Mutual, the South African insurance and banking group listed in London, is about to issue a heavy profits warning in a move that will inevitably revive worries about the fragility of the entirefinancial services sector.
The news is likely to come as a shock since it is barely a month since Old Mutual, which is a member of the FTSE 100 index, issued an up-beat trading statement, saying that a disappointing performance at its Nedcor banking associate in South Africa had been offset by a “solid performance” elsewhere in the group.
The warning will also, for the moment at least, damage Old Mutual’s plans to develop its life insurance and fund management business in Britain with a major acquisition.
Nedcor is again thought to be causing Old Mutual problems, with a need to make large provisions at the South African bank feeding directly through into reduced earnings for Old Mutual.
There was market speculation yesterday that the write-down in South Africa could stretch to 2bn South African rand (pounds 170m), but Old Mutual is also thought to have been hit by recent weakness in the rand which, again, translates into a drop in reported profits in Britain.
Old Mutual has already installed new management at Nedcor, in which it holds a 53% stake, and has agreed a revival plan. But the timing of the profits warning – coming just days before the company’s December 31 financial year- end – will cause huge embarrassment and reinforce a sense that Old Mutual has become worryingly accident prone.
It is already fending off accusations of poor management controls, after becoming embroiled in the “market timing” scandal in the US, which saw two of its most high-profile American executives, Gary Pilgrim and Howard Baxter, forced out in November.
The Securities & Exchange Commission, the main US financial watchdog, and Eliot Spitzer, the New York state attorney-general, subsequently charged the two men with fraud, alleging that they duped investors by allowing hedge funds to trade in and out of mutual funds run by Old Mutual’s Pilgrim Baxter subsidiary.
Old Mutual acquired Pilgrim Baxter as part of its $2.2bn (pounds 1.3bn) takeover of United Asset Management, with the two executives pocketing $400m for their stake.
Mr Spitzer, who began the whole inquiry into the murky relationship between the hedge funds and mutual funds in September, has already said that Pilgrim Baxter should return all management fees paid by ordinary investors over the past five years -which is thought to be about $250m.
Industry analysts pointed out that whatever settlement Old Mutual eventually reaches, the group’s US business is likely to have seen a flood of redemptions by investors angry at the way they have been treated – a move which could have serious longer term consequences for Old Mutual’s American fund management business.
Old Mutual floated on the London stock market in 1998, but has suffered a series of false starts in trying to build its British business.
It is known to have held discussions earlier this year about buying either Britannic, the small British insurer, or the UK assets of AMP, the Australian insurer which later decided to float its British business, under the name of Henderson.
Old Mutual’s international ambitions have been fuelled by the fact that most of its cash-generative operations are in South Africa, with currency restrictions making it difficult to route investment to other parts of the group. Any damage to its stock market rating caused by the profit warning will, in turn, affect its ability to use its shares to fund further expansion.
