Life insurers buck market trend

Johannesburg - Despite the weak consumer environment and a stuttering equity market recovery, share prices in the listed life insurance sector have held up well.

Deteriorating macro economic conditions and rising policy defaults were among the reasons why Credit Suisse Standard Securities recommended on Friday that clients reduce their exposure to financial services group Old Mutual, after a strong rally in its share price in recent months.

Old Mutual had recovered from under 500c/share in March to touch 1 100c late last week.

Liberty Life CEO Steven Braudo recently told Fin24.com that Liberty had also seen an increase in policy defaults.

However, from a sectoral perspective Credit Suisse recommended investors to retain an "overweight" bearing in life insurance companies. As equity markets recover, the embedded value of assets under management will increase, according to Credit Suisse.

Stockbrokerage Barnard Jacobs Mellet has also been upbeat on the prospects for the sector, with a recent upgrade of Metropolitan.

Confidence up

According to a recent survey prepared by the Bureau for Economic Research in Stellenbosch, confidence in the SA life insurance sector in general is higher than in the banking sector.

During the last quarter, life insurance confidence moved from a revised 50 index points to 51 points on a scale of 100, in comparison to banking which is at 39 points.

"The fundamentals for life insurers have not changed much in the second quarter of 2009," said Tim Rutherford, insurance industry spokesperson at consulting firm Ernst & Young.

"By and large, the sector continues to be driven by continuing weak investment income. Despite more stability in global financial markets, investment income continues to fall, driven by significantly lower interest rates, which reduces interest earnings."

The local market has rallied strongly since March, in line with its global peers. This has provided a handy boost to listed insurers' share prices to the end of June 2009. Here's how they performed:

• Old Mutual has climbed to 1 093c from 596c (83%).
• Metropolitan has risen from 1 100c to 1 157c (5.1%).
• Sanlam was up from 1 530c to 1 730c (13%).
• Liberty Holdings lagged with its share price falling from 6 400c to 6 033c (-6.25%), which analysts attribute to its hedging strategy.

Rutherford also cautioned that Ernst & Young expects no growth in investment-related savings during the third quarter as consumers reduce their savings spend.

"Once again, life insurers face an environment in which the position is one of net cash outflows," he said.

Sanlam has already warned its headline earnings were 23% lower for the six months to end-June, "primarily due to the negative investment market performance".

- Fin24.com