Business Daily (Nairobi)
James Makau
8 May 2008
As far as headhunting for the corner office goes, Old Mutual's botched attempt to poach a senior executive from rival British American Kenya will go down in history as the ultimate put down in corporate Kenya this year.
Picture this. Last October 2007, Old Mutual in a quiet, but surprising move announces that Mr Stewart Laird Henderson, the CEO of the Kenyan subsidiary is leaving.
The new leadership, from headquarters down in Johannesburg, in characteristic corporate politeness even offers a few kind words and plays a tribute to the man who has built the company from an also-ran to the top league.
Among Mr Henderson's achievements during his term is the acquisition of the country's largest asset management business from Barclays Bank, today with over Sh77 billion under its care and integrating it into local operations although its ran separately.
The exploits of the company in the unit business which delivered superior returns during the bull market on the Nairobi Stock Exchange has made Old Mutual one of the most talked about companies in many middle-class Kenyan homes, offices and social places.
With Mr Henderson's exit begins the hunt for a new chief in the local scene, which ends in February 2007 with the poaching of Mr Dominic Kiarie, the managing director of British American Asset Managers (BAAM), a subsidiary of the much bigger rival and a business controlled by billionaires Benson Wairegi, Jimnah Mbaru among other powerful and politically connected corporate chieftains.
All is quiet as Mr Kiarie, who had taken a month's leave from his employer as he served notice before ascending to the thrown at Old Mutual plays what is considered to be a premature April Fools joke on his new employers with the news that he had declined the job offer and would not report on April 1st as expected.
Then all the hell seems to break loose at Old Mutual-pointing to chaos that could have culminated with the exit of Mr Henderson in October.
It is in the wake of Mr Kiarie's snub that the company announced that the long serving managing director of the asset management division, Mr Rick Ashley was also leaving in April.
Sources say that Mr Ashley's division had been managing investments-particularly equities-on behalf of the Group, which had made the company very popular with the public and raised Mr Henderson's star within the firm. The company soon announced that it had merged the asset management division-which handles Sh77 billion of pension funds money-with the investment services division that marketed and operated collective investment vehicles such as unit trusts.
Previously, the heads of fund management, investment services and insurance services reported to Mr Henderson as the CEO.
Now, under a new structure announced last month, fund management was merged with investment services to form the Old Mutual Investment Group (OMIG)-an acronym, which some insiders have taken to jokingly call "Oh-my-God". This job was given to Mr Henderson's protégé Ms Laura Chakava, whom the company in its publicity material had glowingly paid tribute to for building the unit trust division and by extension revolutionalising the industry in Kenya.
According to Mr Grant Pote, acting CEO, this is the business model that Old Mutual is now using in other African operations to exploit the synergies that exist between the two businesses.
Slightly over a month since Mr Kiarie declined the job at Old Mutual, second-guessing what could have motivated an ambitious and Cambridge educated executive to leave such a huge opportunity on the table with one of the most prestigious insurer in the world and go begging back for his old job in a small division of a big local company has become the latest parlour game in Kenya's financial services industry.
What is it that Mr Kiarie, who had the privilege of reviewing Old Mutual's operations, saw for him to turn down the offer -even after his appointment had been publicized- and risk a backlash in the top corporate recruitment circles?
Inquiries by the Business Daily have largely been stonewalled by Old Mutual's management here, including declining to provide the annual report for 2007, though the company in the past distributed the reports freely despite being under no legal obligation to do so.
The company had by the time we went to press not published its balance sheet in the local press-though of all major insurers-it usually provides the bare minimal disclosures required by law.
Mr Kiarie declined to be drawn into the matter for the record.
However, interviews with several key players who are familiar with the events reveals a complex series of events that could have led to Mr Henderson departure and though they are specific to Old Mutual, they are emblematic of the Kenyan insurance sector and the fund management industry in the last one year after share prices suddenly collapsed on the NSE in March 2007 after the bubble of unusually high stock prices that are not supported by high quality profits burst.
Events that led to the ouster of these two executives point to the challenges that the company has faced growing the business in a year where the benchmark NSE 20 share index returned negative six per cent and underperformed other emerging frontier markets on the continent. This was a dramatic turn of events after a five-year period of uninterrupted growth in stock prices.
The events also highlight some of the risks that come with an aggressive investment strategy that leans heavily on quoted shares and a weak management structure that cannot deal with a fast expanding business in rapidly shifting financial markets.
Several high ranking executives in the know at Old Mutual who did not want to be named because they were not authorized to speak on behalf of the company told the Business Daily that Mr Henderson was politely asked to leave.
"He even realized that after staying on the job for too long that it was time to go in order to align the business with the changing strategy that the group wanted to pursue," a source said.
These people said that "certain legacy issues" had emerged in the business that was now being fixed.
Talk in the market, which insiders confirm, was that the two top managers were pushed from the jobs following pressure from headquarters in South Africa to deliver faster and bigger profit growth. Indeed, the profit performance of Old Mutual has remained luck-lustre compared to less diversified rivals with smaller asset management businesses.
With Sh77 billion worth of assets under its name, Old Mutual Kenya is one of the financial sector's heavyweights in the East Africa region spanning operations from insurance to asset management and investment management services.
Events at Old Mutual point to problems tied to the challenges that its executives have faced growing its three businesses-life insurance, fund management and investment services-in a rapidly shifting environment.
Old Mutual has now created a single investment company, Old Mutual Investment.
But the goings on at Old Mutual as well as the performance of the firm's Life business and fund management has more to them than meets the eye, a factor that has led to a management rejig by the South African office.
Mr Henderson is largely seen as the force that built Old Mutual's operations in Kenya having overseen the growth of the firm's life business in particular. From a portfolio of less than Sh1 billion in 1994, Old Mutual's life business is now estimated to be worth between Sh5 billion.
Old Mutual's life funds became amongst the most lucrative when it bought into stocks during the depressed years at the bourse between 1998 and 1999. This strategy would prove to be a blessing at the height of the bull market that started with the economic resurgence that followed President Kibaki's first year in office in 2003.
With between 50-60 per cent invested in stocks, the growth of the firm's portfolio has been phenomenal in tandem with that of the NSE equity market. By the close of 2006, data from the Insurance Regulatory Authority shows that Old Mutual had invested Sh2.4 billion out of its Sh5 billion in total assets in quoted shares. Though such an investment strategy can generate huge profits during good times and in a rising market, it can lead to a major erosion in the value of assets on the balance sheet in bad times and this usually depresses reported profits if international accounting rules are followed.
But it is this heavy leaning of Old Mutual's Life business to the stock market and a slow down in its fund management business that exposed the firm to serious problems and to what industry insiders say may have caused the departure of Mr Henderson and Mr Ashley.
Between 2002 and 2006, the NSE 20 Index more than tripled, translating into huge investment incomes for the growing number of insurers who had turned to the NSE to invest their float, the excess cash generated from premiums after claims have been settled.
But in 2007, the bull run ended with a market correction in March 2007, marking the start of a depressed year at the NSE.
This came as a picture emerged of growth in the insurance industry's core business being largely overshadowed by huge gains on the insurer's investment in listed shares and properties as players raced to cushion themselves from lower margins in the underwriting.
Across the industry, underwriting profits, while still moving forward, continue to dwarf the sectors growing investment gains.
AIG Insurance Kenya for instance invested a maximum of 10 per cent of its assets at the stock market, which pales in comparison with the industry's average that stands at between 30 and 40 per cent.
But like many investors who had failed to adequately anticipate the longevity of the bear run, insurance firms with heavy equity portfolios at the NSE watched in horror as the market slumped. The insurance industry at the end of 2006 had invested Sh25 billion on the stock exchange.
CFC Life for instance registered a decline of Sh173 million in investment income last year down from Sh855 million in 2006.
In the first half of 2007, the value of stocks dropped 20 per cent following the market correction in the first quarter, leaving insurers facing near uncertainty of asset erosion in the current year as they adjusted the value of their investments on their balance sheets to reflect the reduced share prices.
Life business, according to analysts, is extremely sensitive.
The heavy leaning towards investment income and the decline in underwriting income across the industry has been largely attributed to price undercutting.
Very few insurance firms had kept their presence at the stock market at the bare minimum. The top five insurance firms had more than Sh1 billion invested at the NSE.
The growing number of insurance companies that had been riding the stock market boom saw their profits more than double in 2006 and were now seriously exposed to real losses as the NSE began running on empty.
Only a few firms preferred to stick their necks in the industry's core business of underwriting risks even as acute price undercutting in the industry took its toll on the underwriting business.
In 2002, Old Mutual ventured into the asset management business when it bought BarclayTrust Investment Services after the Retirement Benefits Authority declared that an institution could not act as both a fund manager, administrators as well as a custodians.
Mr Henderson is credited with the consolidation of the asset management business as well as Old Mutual's foray into the collective investment schemes.
While the unit trust business has had measures of success, the fund management - under Rick Ashley- had been under the spotlight in the last two years.
As the Kenyan investment climate continues to come of age, the number of fund management firms in the financial services sector has also been on the rise. Many of these fund managers have had their eye on one big apple, the Sh300 billion pension fund industry.
For a long time, the likes of Old Mutual and AIG Investments have been the major forces to reckon with, investing on behalf of most of the pension funds in the country. On its website, AIG Investments boasts of having over Sh48 billion in assets under management.
But with 14 licensed fund managers in the country and the continued deepening of the capital markets, more players have been claiming stake to this Sh300 billion pension fund pie with tidy returns to show for their clients.
Last year, the pensions sector turned to government securities and offshore investments to boost the value of its assets following the sluggish performance of the NSE.
Preference for alternative investment avenues marked departure from recent trends that saw the NSE emerge as the most preferred investment hub.
This shift saw the value of assets on quoted equities topple, for the first time, the value of the industry's assets held in government securities-which had remained the sector's cash cow.
Data from the RBA shows that the pension industry held shares worth Sh86 billion up from Sh83.3 billion in December 2006.
The sector tied about 77 per cent of its assets in six blue chip companies including EABL, Bamburi Cement and Kenya Commercial Bank. Others are Barclays Bank, BAT and Kenya Airways.
Though the schemes are yet to post their returns for 2007, sources at RBA indicate a huge fraction of the schemes look set to post lower returns compared to what they did in 2006.
Insiders say that Old Mutual's fund management side lost a number of pension fund tenders last year, a factor that made South Africa re-assess the performance of the unit.
Be the first to Write a Comment!
Copyright © 2008 Business Daily. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
