Several million people and their families will be affected by the listings of South Africa’s two largest life insurance groups on the Johannesburg Stock Exchange (JSE) within the next 18 months.
For more than a year market observers have been expecting Sanlam and Old Mutual to announce their plans to demutualise and list on the JSE. Demutualisation — changing from a mutual association to a company — effectively separates the policyholders, or customer base, from the shareholders.
Sanlam and Old Mutual have an estimated seven million policyholders with life policies, unit trusts or pension policies, or are involved in investment schemes offered by the life assurers. When they list, both groups will be among the top five companies on the JSE, with only De Beers, Anglo American and South African Breweries possibly being larger. Together Sanlam and Old Mutual are estimated to have a market capitalisation of between R60- billion and R90-billion.
Their listing will mean a strong boost to the JSE’s insurance sector, which will make it a major indicator of the overall market direction and mood. Currently the insurance sector’s weighting (literally the amount of influence it has on the overall market) is 10,4%, but this should rocket to about 17,6% once both groups have listed. In comparison, the gold sector’s weighting is about 2,97%.
Analysts expect the arrival of Sanlam and Old Mutual on the JSE to heighten competition among insurance companies as they try to build their market share and profitability to attract the institutional investment that provides a stable shareholder base. It may also affect the share prices of other insurance groups more directly since the increase in insurance equity up for grabs means institutions will be reviewing their holdings and deciding on how to reshuffle their portfolios.
There could be an increase in investment capital from foreign investors who may see either Sanlam or Old Mutual as cheaper alternatives to investing in their own markets. Both firms are known to have aggressive overseas expansion plans.
Individual policyholders, who for years have provided the funding and who currently control the companies’ reserves, are another source of capital. As payment for their portion of the reserves, policyholders would be entitled to receive shares. But how the formula would work is another matter altogether.
Both Sanlam and Old Mutual have said they were looking at recent demutualisations in the United Kingdom. In those cases the policyholders in the core business received either share allocations or were allowed to participate at preferential rates. For example, in the case of UK company Norwich only the life-policyholders received shares while those with pension schemes or who were unit-trust holders found themselves out in the cold.
Policyholders need to look at their “windfall” of shares with care. Analysts have pointed out that share prices in the UK fell soon after the listings as many private investors tried to sell their shares and take the cash. One analyst said about 25% of the private investors and policyholders sold their shares. “South African’s have a much lower propensity to save. We estimate that around 40% of the policyholders will sell their shares, hopefully to do the right thing with the money,” he said.
People tend to rush into buying policies from companies proposing to demutualise and list in the hopes of getting cheap shares. This could be risky, given the uncertainty about how Sanlam and Old Mutual are going to distribute their equity.