Johannesburg - A crocked hedging strategy at Liberty; a recovery story at Old Mutual; another period of sit-and-wait for Metropolitan shareholders; and an enigmatic transformation at Discovery Holdings were the key features of the reporting of the JSE-listed insurance businesses.
Sanlam wrapped up the reporting period with a 2% decline in headline earnings to 87.5c, a return described by analysts as "slightly ahead of performance".
Johan van Zyl, Sanlam CEO told investors "Challenging trading conditions are expected to persist for the remainder of the 2009 financial year".
The first impression of analysts at stockbroker Barnard Jacobs Mellet (BJM) was that Sanlam's share was looking "very expensive relative to its peers".
Francois Du Plessis of asset management company Vega Capital said that the sector itself held little appeal for his firm, adding that insurers remained largely a proxy for the equity markets. Should equity markets weaken, then the ability of the firm to generate returns from policy holder funds would be diminished.
The insurance sector has been knocked by increased levels of lapses across their portfolios as South African consumers have faced pressures on their disposable incomes. This has forced investors to take a long, hard look at how these businesses are transforming into genuine diversified financial services firms.
National Health Insurance
With many of the insurers expanding their reach into medical insurance in South Africa, a key area for investors are the implications of the introduction of the National Health Insurance (NHI) initiative currently mooted by government.
Speaking to Fin24.com on Wednesday, Preston Speckmann - the chief financial officer of Metropolitan - said although there were opportunities for the existing players to assist in the administration of the NHI, he nonetheless urged caution against rushing into the implementation of the system. If it was incorrectly implemented it could "prove costly", he said.
Metropolitan enjoyed a handy 26% increase in profit on the back of growth in its healthcare operations primarily by growing its exposure to the Government Employees Medical Scheme (Gems).
The company which is being viewed as most vulnerable to the NHI implementation is Discovery.
The Adrian Gore-led insurance company, which reported full year results on Wednesday, showed a 32% increase in operating profit to R1.7bn. Despite the threat of the NHI, analysts pointed out that if one looks at the earnings from Discovery, the life insurance business is now reporting a bigger contribution to profit (R1.1bn) than the healthcare business (R1bn).
Going global
A key area for analysts studying the insurance sector for growth prospects is the ability of these insurers to develop business beyond South Africa's borders.
Both Discovery and Old Mutual have been burnt with previous forays into the US and both have been forced to retreat back to their tried and tested South African businesses.
Van Zyl said that Sanlam's diversification strategy into new markets, including India where the group has entered into a series of small scale joint ventures, and the UK, was starting to pay off.
"This diversification includes market segmentation, solutions offerings and geographical presence, which provided a platform for ongoing growth in new business volumes and a sound level of profitability," he said.
Sanlam's UK business wrote 18% more business totaling R955m while other international operations outside of Africa contributed R76m.
Discovery is also dipping back into international waters and is in the early days of a joint venture with UK insurance giant Prudential. The South African firm is injecting its knowledge and systems alongside the weight and customer base of the UK firm.
Liberty, which was trying to deflect attention from its whopping R1.8bn loss for the first half of the year, made much of its relationship with parent Standard Bank and its moves into Africa as potential sources of earnings growth.
Analyst recommendations
Having reviewed the performances from the various groups, analysts identified Discovery as the outstanding share, but thought that Liberty Holdings should not be written off if its hedging strategy proves effective.
Liberty entered into a series of ill-timed equity market and currency hedges meaning that they have missed out on the recent rally in the stock market.
Analysts said Sanlam was trading at a 4.6% discount to its group equity value - Sanlam's equivalent of the embedded value calculation reported by other insurers. The embedded value figure is used by the insurers to work out how much they could expect to earn in the future from its existing policies.
In comparison, Metropolitan was trading at a near 20% discount to its embedded value of 1654c while Discovery was around 24% beneath its embedded value figure. Liberty trades at around a 17% discount to embedded value but has a series of hedging activities in place which have weighed on the share price.
BJM said Discovery remained its preferred entrant into the insurance sector with an "overweight" recommendation on Liberty Holdings.
Vega's Du Plessis said that while he thought Sanlam had "some of the best management around", he had been impressed by the way that Discovery had been able to reinvent itself.
Another analyst who spoke to Fin24.com thought it was important to note that Discovery had managed to increase its final dividend from 23c to 33c.
Sanlam closed down 0.5% on Thursday.
- Fin24.com
* Writer holds shares in Liberty Holdings