South Africa’s insurers including Old Mutual (OML), Sanlam (SLM), Liberty (LGL), Capital Alliance (CPT), Metropolitan/New Africa Capital (NAC) and Sage (SGG) can expect to experience difficult sales conditions over the near-term as they encounter negative sentiment from investors who have seen very poor returns — less than 5% in most cases — on their maturing policies, according to Old Mutual Asset Managers (OMAM).
Speaking at a media presentation in Cape Town on Tuesday, OMAM insurance analyst Steven Levin said that overcoming the damage from these poor policy returns, due largely to the weak equity market conditions prevailing over the past five years, would be one of the biggest challenges facing insurers over the next year or so.
“Insurers are finding it tough going over the short-term,” he commented. “They are trying to get the message across that small or no bonus declarations in some years are better than overall losses and that investors must think long-term, but it will be difficult. Investors are still petrified of the market, but when their sentiment eventually improves it is conceivable that insurers will re-rate by 30%.”
He said this loss of investor confidence was reflected in market ratings of the companies, with the sector’s shares currently trading at a historic price- to-embedded value (EV) ratio of only 0,79 times (down from 1,03 times in March 2002), representing about a 17% discount to EV. The poor performance was closely correlated with equity market performance, he noted.
Levin added that he believed smoothed bonus products made sense for pension funds interested in protecting their members from market risk, but made less sense for individual investors.
At the same time, there was an argument to be made for insurers not charging enough for the capital they were required to set aside in times when their funds were posting negative returns while they declared positive smoothed bonuses.
Despite the poor performance of local insurers to date, their outlook was still much more positive than that in Europe, the analyst said, where insurance companies were facing major capital crunches thanks to large equity market losses, the selling of mis-priced guaranteed policies, and low starting capital requirements.
“South African insurers are very strongly capitalised — with perhaps the exception of Sage-compared to their European counterparts,” Levin stated. “UK and European companies are trading at their EVs or even at 10% discounts to their EVs, a far cry from the 60-80% premiums at which they used to trade. Some, such as Allianz, are even issuing equity at deep discounts to their share prices.”
OMAM’s top share pick in the sector was Liberty, he said, given its strong sales performance in the recent past. Capital Alliance was also performing well, while Old Mutual was hampered by its international operations despite strong local sales and Sanlam was still revamping its operations under its new CEO.
Further consolidation among the smaller players in the sector was also a possibility, he noted, with Sage a possible target for acquisition by Capital Alliance, Liberty or even FirstRand (FSR).
Sage’s reputation had been damaged-perhaps irreparably-by the problems in its offshore operations, and it remained to be seen if its recent recapitalisation by shareholders would be sufficient for it to turn itself around.
However, in the short-term deals were not likely, he believed.
“I can see value in sector consolidation, but management at many of the companies have proved to be resistant to such deals, and there are also many different issues that have to be dealt with before further consolidation can happen. The potential is therefore in the longer-term.” – I-Net Bridge