Insurers: Boom or bust?

Johannesburg - Investment experts are adopting a wait-and-see attitude towards short-term insurers while the companies decide on strategic direction in poor-performing times in the equity market.

On Wednesday, FirstRand insurance subsidiary Momentum Group announced the resignation of CEO EB Nieuwoudt, to be replaced by chief financial officer Nicolaas Kruger. This announcement followed shortly after Santam announced that it was continuing to face "severe pressure" in the market and that earnings would be "substantially below that of 2007".

When FirstRand reported its annual results in September, Nieuwoudt was one of the few people cracking a smile - thanks to a strong performance from Momentum. Fast forward three months and he has now announced he would be stepping down to "pursue his own interests".

Thursday morning saw Old Mutual announce an abrupt about-turn on its decision to sell of its insurance subsidiary Mutual & Federal (M&F) after being adamant that the business was "non-core".

In its statement, Old Mutual said that it was not going ahead with the competitive bid process for the sales of its stake in M&F saying: "Mutual & Federal is a good business with a well-respected brand. It has provided strong returns on equity and cash flows over a number of years and will remain part of the Old Mutual Group".

This was followed by Peter Flint, the head of the African arm of the world's largest insurer AIG, saying that Africa held great opportunities for the insurance sector.

Flint said: "I have already visited Kenya and Uganda and see great potential and optimism in those markets. And South Africa, as a gateway country to the rest of Africa holds great promise as the leading light on an emerging continent."

These announcements come less than a week after one of South Africa's largest reinsurance operations, Hannover Re, received an upgrade from ratings agency Standard & Poors from BBB+ to A with a stable outlook.

Wait and see

Following Santam's announcement, stockbrokers Barnard Jacobs Mellet told clients: "Currently trading at a forward dividend yield of about 6%, we regard the counter [Santam] as fair value and retain it in our high dividend yield portfolio."

Funds were net buyers of both Santam and M&F in the quarter to end-September 2008.

However with stock markets being hit hard in October, investors will need to wait until the December quarterly unit trust figures have been released to see whether investment experts reduced their holdings in equity market sensitive stocks.

Since hitting a high of 9 500c/share in early October, Santam has lost 31% to trade at 6 500c while M&F has declined 16% from 1 620c to 1 350c - including 8.6% following the announcement from Old Mutual.

Stockbroker Imara SP Reid currently has a "hold" recommendation on M&F, issued in September.

Tough operating environment

Both M&F and Santam have both had a tough time in 2008, with the businesses suffering from a number of fires and natural disasters that have hit South Africa this year. With equity markets heading down at a rate of knots from October, insurers are increasing pressure.

In its announcement on Wednesday, Santam did confirm that the company had experienced fewer large-scale industrial claims in the second half of the financial year to date.

According to some M&F brokers who spoke to Fin24.com, there had been some concern about the uncertainty around the sale process which they felt had been drawn out and negatively impacted their willingness to write business.

In early November M&F CEO Keith Kennedy recently told Fin24.com: "There might be a little bit of uncertainty, but it hasn't affected the underwriting business as a whole."

On Thursday M&F closed 5.2% down to 1 400c while Santam added 1.5% (100c) to close at 6 600c.

- Fin24.com