Weaker prices a buying opportunity
Insurance shares still sound
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.