Weak economies test the health of life insurers
Most investors focus on growth and dividends but long-term strategy in testing times bears scrutiny
SOUTH Africa’s life insurers make for difficult comparisons. Covering a diverse range of target markets, territories and business activities, they can hardly be lumped together.
But in a week when most of them will be delivering their results, comparisons will nonetheless be made.
Competition for market share is at its fiercest, best captured by increasing advertising spend by giants such as Sanlam.
For most investors the only relevant metric will be the dependability of growth and a dividend, something that will become more challenging as economic growth continues to flag.
The outperformers in recent years, and for contrasting reasons, in the insurance sector are Discovery and Sanlam.
Sanlam’s solid track record stems from savvy acquisitions in developing markets on top of a stable earnings base back home, while Discovery has set out to give birth to new business units that will play disruptor.
While few investors quibble with Sanlam’s strategy, analysts believe Discovery’s investment case polarises investors.
Discovery, which posts its full-year results on Tuesday, has been delivering the highest returns on embedded value — essentially a measure of net asset value plus estimated future profits — in the sector.
But this is a crucial period for the group, which has been spending on new business units to ensure future growth.
Worryingly for some, spending in the UK’s healthcare sector pits the company against a well-functioning National Health Service and a UK economy in uncertain times.
“You have to believe that the J-curve will kick in, that Adrian Gore has invested in the right things,” said Fairtree Capital analyst Ryan Cloete.
Locally, “Discovery is a solid business, and the local health business continues to surprise us. It has reached maturity yet still keeps growing.”
In a recent coup, Discovery picked up two medical scheme contracts from rival MMI Holdings, which owns brands such as Metropolitan and Momentum.
“Growth will be harder the bigger Discovery gets. The next spurt of growth should come from the UK business. But this will be more difficult than in South Africa,” Cloete said.
While Discovery was investing heavily, he said, investors should see earnings reduce significantly. However, should new business units such as its joint ventures in the US and Asia as well as its new banking unit pay off, it may steal market share.
Discovery has hired a team of bankers to step up efforts to create a new lender.
Actuaries Gore and Barry Swartzberg left Liberty Life to start Discovery Holdings in 1992, taking it to its eventual 1997 listing on the local bourse.
Today, Discovery’s market cap is more than twice that of Liberty, whose tie-up with Africa’s biggest bank by assets, Standard, hasn’t yielded the results one would expect.
Liberty has been losing market share thanks to its reliance on Standard Bank’s lending growth, which has been low, and due to a lack of entry-level products. Analysts believe the move by other banks to take life cover on credit products in-house is hurting Liberty’s earnings, despite potential lurking in Standard’s African footprint.
While Liberty’s high-end product line may protect it in a weak economy, analysts hope the company will be able to show success in dealing with the loss of certain tax benefits, which forced it to reprice some products, and in product diversification — to make up for the loss of its ability to write guaranteed capital bond products — when it posts its next results.
Sanlam’s acquisitive growth strategy that had been focused on Africa had been brilliant, PSG Wealth portfolio manager Adrian Cloete said, but it had hit wobbles in the past year.
Sanlam, which gets about 20% of its profits outside of South Africa — which seems to drive sentiment about the share — has had challenges dealing with its African portfolio, with Ryan Cloete saying investors would assess whether they were indeed once-off issues.
The group, which posts halfyear results this week, has posted some of the highest variances in embedded value for shareholders, but has been dealing with what were said to be onceoff operational issues in Zambia, Kenya, Malaysia and India.
It was a stock “that investors who want a properly diversified insurer have been piling into”, Ryan Cloete said.
“They will want to see strong operational earnings, since the performance of the shareholder portfolio is largely out of management control.”
Consensus is looking for 7% to 8% growth, roughly in line with management’s guidance.
MMI Holdings, much like Liberty, has been facing market share and volume challenges.
Apart from those challenges, the company is still dealing with legacy issues related to the merger of Momentum and Metropolitan, including rejigging its agent channels.
Ryan Cloete said management was happy to temporarily lower its dividend cover slightly below its target range to keep investors who bought for the dividend yield happy. “This can sustain the investment case for investors who want a secure dividend, but then earnings will need to bounce back to more normalised levels.”
Kagiso Asset Management’s Justin Floor said MMI’s core strength was generating cash.
“Our focus right now is on watching for signs that it will allocate this incremental capital profitably, going forward.”
MMI has shown a 15% improvement in its most recent quarterly recurring premium sales and Ryan Cloete said if it could demonstrate increasing productivity and agent sales, the market could get excited.
Analysts believe investors in Old Mutual will be thankful the South African business is operating well and gaining market share.
The outperformers in recent years are Discovery and Sanlam