Weaker prices a buy­ing op­por­tu­nity

In­sur­ance shares still sound

Finweek English Edition - - Companies & markets - SHAUN HAR­RIS shaunh@fin­week.co.za

MU­TUAL & FED­ERAL'S (M&F) re­cent trad­ing up­date, warn­ing that head­line and ba­sic earn­ings were ex­pected to be down 40% to 50%, spooked the mar­ket. The share price dropped, and so did the other shares of listed short-term in­sur­ers San­tam and SA Ea­gle.

But it was prob­a­bly an over­re­ac­tion. M&F’s price con­tin­ues to trend down­wards, but San­tam has come back strongly, touch­ing a new high for the year. SA Ea­gle, prob­a­bly less trade­able than even its tightly held com­peti­tors, is not much of an in­di­ca­tion of the state of the short-term in­sur­ance mar­ket.

But San­tam, the largest in­surer, is, and it sug­gests that while the re­turn to nor­mal­ity for short-term com­pa­nies af­ter the su­per cy­cle be­gan three years ago has not been that com­fort­able, busi­ness is prob­a­bly still fine. Even for M&F.

It’s prob­a­bly pick­ing up more strain in the short-term mar­ket due to its rel­a­tively large ex­po­sure to cor­po­rate busi­ness – where pre­mium un­der­cut­ting is rife – but the fun­da­men­tals seem in place. That should be con­firmed when CEO Bruce Camp­bell presents fi­nan­cial re­sults for the year to end-De­cem­ber next week.

There have been floods, some large fac­tory fires, and the grow­ing havoc on South Africa’s roads, but that’s the busi­ness in­sur­ance com­pa­nies are in. It’s built into the pre­mi­ums clients pay, and the com­pa­nies are well cap­i­talised – so well that they are pay­ing out spe­cial div­i­dends, in­ci­den­tally one of the rea­sons M&F lists for its ex­pected de­cline in earn­ings.

The other rea­son in the trad­ing up­date is harder to fathom – “re­duced re­turns on listed eq­ui­ties”. M&F’s fi­nan­cial year cov­ers one of the most spec­tac­u­lar years seen on the JSE, so ei­ther there’s been some se­ri­ous (and ill-ad­vised) reshuf­fling in its in­vest­ment port­fo­lio or its as­set man­agers got things badly wrong. Both seem un­likely, so the re­sults pre­sen­ta­tion next week should be en­light­en­ing.

Of more con­cern, as M&F’s re­sults will prob­a­bly show, is the state of the mo­tor book, where ac­ci­dents, re­pair costs (es­pe­cially for im­ported ve­hi­cles) and hi­jack­ings have cut mar­gins to the brink of un­prof­itabil­ity.

This is where con­sumers can ex­pect in­sur­ance rate in­creases. In­creases in house­hold cover should be kept in check by the di­rect in­sur­ers such as Out­surance.

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