The South African life assurance industry has become the latest victim of a poor global economy and subsequent dire straits for financial markets, but a silver lining is appearing in the form of a slight improvement in the investment markets.
Liberty, South Africa’s third-largest life assurer, this week posted half-year earnings below already negative market expectations as poor equity markets damaged investments and kept customers away.
It was followed by Old Mutual, South Africa’s largest life assurer, which, while managing solid six-month earnings, also reported a 15% drop in operating profit.
Investor uncertainty has also resulted in a lower demand for insurance products, especially single-premium investments. These conditions resulted in slower sales and negatively impacted on earnings.
The rand’s strength has also played havoc: the currency has gained more than 13% on a trade-weighted basis this year, which boosts companies’ earnings in sterling, but depresses them in rand.
In the case of Old Mutual, currency translation effects, particularly the comparative strength of the rand in the first half of this year, affected the overall picture as shown in the two reporting currencies. While rand strength boosted sterling operating earnings at the South African businesses, it had the reverse effect for those shareholders who consider the results in rand.
Leading world equity research company Merrill Lynch said the sector is now lagging the market, delivering only 11,8% (the same as banks) over the past three months compared to the overall market’s 15,8%.
“We doubt that the interim results are likely to change the market’s enthusiasm for the life assurance stocks in the short term,” the research noted. Merrill Lynch further stated in its analysis that the operating profits in life assurance were in line with estimates for all regions.
“In both the South African and United States life businesses, management expects that margins should be restored to the low 20% and high teen levels in the South African and US businesses respectively. They have already noted that the increase in bond yields in the US will allow for better margins than those experienced in the first half of the year,” the research notes added.
Perhaps the most critical indicator of just how much the equity market is under pressure arrived in the form of the JSE Securities Exchange’s latest half-year results, published Thursday afternoon.
The JSE said that, compared to the same six months last year, equity market value traded declined by 12,5%.
The stock market in the world’s largest economy see-sawed since March with investors now showing caution about pushing the market higher and many saying that a solid economic recovery has already been factored into share prices.
But, Old Mutual chief executive Jim Sutcliffe said on Thursday that the recent recoveries of the US, United Kingdom and South African equity markets — the three principal markets in which it operates — from their low points earlier in the year hold out the prospect of better times ahead.
Sutcliffe said the group has produced “solid earnings in the first half, although life assurance sales and margins were lower against a background of volatile market conditions.”
Old Mutual issued a trading update in May, revealing the group’s South African life operations showed no new-business growth in the first four months of this year, and that the group may have lost some market share.
Earnings jumped a massive 45% in operating profit to R4,899-billion. In sterling terms the operating profit was up 78% to £378-million. However, the company’s adjusted operating profit of R5,122-billion for the six months ended June was down 15% from a year ago with adjusted operating earnings per share down 21% at 73,4c.
In sterling terms, adjusted operating profit was up 4% to £395-million with adjusted operating earnings per share down 3% to 5,6 pence.
Old Mutual said its adjusted embedded value was R50,212-billion, down 7% from R54,267-billion at the end of December last year.
The company blamed the lack of “a sufficiently competitive range of absolute-return products” for hurting individual business sales in South Africa. “Group business premiums were also held back by market conditions, which deterred our clients from purchasing with-profit annuities, and by uncertainty in the pensions arena as a result of recent legislation,” it said in a statement.
Sutcliffe said the group continued to look at opportunities to build its UK business, but was in no hurry. At present, about 60% of Old Mutual’s business is in South Africa, 30% in the US and 10% in the UK.
Life assurance operations in South Africa benefited from fixed-interest related gains and positive mortality and retention experience, while in the US, Old Mutual’s life assurance company continued to see the effects of growth in sales in 2002 come through.
Mutual and Federal once again made good progress, he added.
Old Mutual South Africa reported a rise of 6% in its operating profit to R2,9-billion but the value of new business after tax was down 29% to R285-million, while new business margins after tax were down to 18% from 25% before.
Finance director Julian Roberts said that Nedcor’s results have been disappointing, as they were negatively affected by poor market conditions and the effects of the BOE deal.
The US life operations saw a 29% increase in adjusted operating profit to $62-million. However, the value of new business was down 51% to $22-million, mainly due to the US interest rate cycle being at a low ebb.
The US asset management business showed net cash flow of $2,4-billion compared to $3,9-billion for the second half of last year, while adjusted operating profits amounted to $61-million from $50-million in the second half of last year.
In the UK, Gerrard was again able to make a small profit as a result of its cost-cutting efforts. Adjusted operating profit before tax was up 16% to £36-million.
Earlier this week, the Liberty Group said it was to focus on its domestic operations for the “foreseeable future”, with the emphasis on cost reduction and improving service levels.
Chief executive Myles Ruck said on Wednesday that entry into other market segments and Africa would be explored in the months to come.
As in the case of Old Mutual, Liberty also noted that some confidence is slowly returning to the investment market. It reported a 46% decline in basic headline earnings per share for the six months ended June 30 to 130c.
Although the group issued a profit warning in May, cautioning that stock-market weakness and the rand’s strength were likely to result in lower earnings at the half-way mark as well as for the full year, analysts polled by I-Net Bridge had expected headline earnings per share to have shrunk only 19% to about 196c for the half- year.
Headline earnings were down 46,2% to R355,9-million, primarily attributable to the reduction in the life fund operating surplus, while the rate of increase in indexed new business slowed to 6,1%.
The embedded value per share has decreased by 3,4% to R53,42 since December 31 last year.
Liberty said its core business remains strong with cash inflows from insurance operations rising to R1,7-billion for the period, from R1,6-billion.
Ruck said that although the headline earnings per share were “disappointing”, the net cash flow from insurance operations “in this market was extremely good.
“We are really confident about the future for Liberty, but there is still lots of work to do in areas like service and getting costs down,” he said, adding that he expected more volatility in the future for the insurance industry.