This is old new, but indicative of the challenges facing the U.S. fixed index annuity business with the compression of spreads.
By Philip Stafford
Published: August 6 2010 09:26 | Last updated: August 6 2010 22:40
Old Mutual has sold its US life business to hedge fund Harbinger Capital for $350m (£219m) in a deal that will help the Anglo-South African financial services company pay down debt, as it jettisons businesses that hurt its financial position during the crisis.
The sale would cut Old Mutual’s capital position by about £100m, the company said, but will also reduce significantly its exposure to credit risk by shedding a business that was carrying mark-to-market losses of more than $2bn at the depths of the crisis.
“The sale will reduce our capital surplus by about £100m, but because our risks will be significantly reduced we will target a lower surplus,” said Julian Roberts, chief executive. “Our continuing business is almost entirely capital-light, unit-linked savings products.”
The company, which is working to reshape and turn round its business after it was hit hard by the effects of the financial crisis on its US and Bermudan units, announced in March it would look to sell its US life business and partially float its US asset management.
Some investors had hoped for a wider ranging restructuring and rumours persist that Old Mutual may sell its stake in Nedbank, the South African bank, with Standard Chartered and HSBC seen as potential buyers.
Mr Roberts declined to comment, but has said that the bank satisfies Old Mutual requirements that its businesses produce returns on equity of at least 15 per cent.
News of the US life sale came as Old Mutual reported interim operating profits up by a better than expected 43 per cent to £735m on the back of strong retail sales among affluent South Africans and cost- cutting. Pre-tax profits to the end of June increased from £160m to £443m and the board is reinstating the interim dividend with a payment of 1.1p.
Philip Broadley, finance director, said the US sale would bring in net cash proceeds of $364m, which the company would use to pay down debt – which stood at just under £2.5bn at June 30 – as it looks to cut its borrowings by at least £1.5bn by the end of 2012.
Old Mutual will retain some exposure to its US life business. Up to $125m of the sale proceeds will be put into an escrow account for six months to cover Harbinger against losses on the sale of certain credit assets. Old Mutual will also continue to finance $300m of reserves in the business for five years.
Shares in Old Mutual rose 0.8p to close at 124.4p.