Jim Jones

Jim Jones

Troubled life assurer Old Mutual has rushed to take emergency steps to stem losses in its US life business that had been dragging down the entire international group.

Old Mutual has stopped accepting new business through its US life offshore operation based in the Bermuda tax haven.

Old Mutual had aggressively pursued business in the US by offering products with growth guarantees.

But these guarantees have proved to be sustainable only in markets that management ill-advisedly believed would continue to rise.

Recession and market declines have shown up how faulty management's strategy had been.

The disclosed cost thus far has been in the region of $280million in provisions to cover the product guarantees already in place, with the group having to re-finance the over-stretched US operations.

This refinancing will be drawn from other assets in the group, assets that, in general, cover policies and liabilities in other countries.

In announcing the group's 2008 year-end profits a few weeks ago, new chief executive Julian Roberts told analysts that the people responsible for the US debacle had been kicked out.

Old Mutual is no stranger to escaping problems with guaranteed products.

As far back as 1998, ahead of the group's demutualisation in 1999, the directors had to scramble to rebut analysts' estimates that guarantees represented an actuarial liability of some R100billion and that, with a falling stock market at the time, assets were insufficient to cover the liabilities.

Had that been the case, there would have been no actuarial surplus that could be converted into the equity capital of the demutualised group - a demutualisation that made many directors wealthy. "Guarantees" were not what policyholders believed them to be.

And, at that stage in mid-1998, Old Mutual sought to salvage some of its position by clawing back policy bonuses that had already been declared. Policyholders lost out badly.

Yesterday Roberts said that the closure of the Bermuda business would provide "greater certainty in respect of the business's future liabilities and will therefore strengthen the group as a whole".

He assured shareholders and policyholders that the Bermuda business remained financially sound with excess capital that exceeds the regulatory minimum.