Old Mutual vs Liberty Holdings

Johannesburg - Insurance giants Old Mutual and Liberty Holdings will remember 2009 as a rocky era in their respective trading histories.

However, while Old Mutual has rallied 118% since the beginning of March, Liberty Holdings - handicapped by a backfiring hedging strategy - has risen by just 5.5% over the same period.

"Old Mutual is racing away again as buyers continue to upweight a share that has shown deep value for a while now," said stockbrokerage Barnard Jacobs Mellet.

After it suffered losses in new business territories, the group's turnaround strategy was boosted by a rebound in global equity markets.

On the other hand, Liberty has not been able to participate in the upside after it took a series of bets that equity markets would continue to fall and that the rand would weaken against the dollar - positions which have been wide of the mark.

A starting point for weighing up the two companies is comparing the embedded value (EV) figure, and the discount that the shares trade to the embedded value. In Old Mutual's case the figure remains about 27%, while Liberty Holdings has seen a narrowing to 17%.

Embedded value is a metric used by an insurance company to calculate what the underlying business is worth, based on calculating the total assets invested and the profits expected to emerge in the future from the insurance contracts which have been written.

Apart from its hedging strategy which has not paid off, Liberty's life insurance business took a battering as embattled consumers opted to cash in their policies to service debt.

Speaking to Fin24.com on Wednesday, Stephen Braudo, CEO of Liberty Life, said at present demand for Liberty's risk-based insurance products oustripped that for life insurance products, which provides some clues on consumer attitudes.

However, investors who believe the rand has gained too much against the dollar and that equity prices are now ahead of themselves, may see merit in Liberty's hedging strategy.

Also, Liberty continues to offer an attractive dividend yield of just under 6%, in comparison to Old Mutual which elected not to pay a dividend last year. Old Mutual management has indicated it is looking to resume paying dividends as soon as possible.

Bond issuance

Old Mutual brought some cheer to investors on Monday when it announced it had issued a £500m bond to bolster its balance sheet.

Old Mutual spokesperson Matthew Gregorowski told Fin24.com that the money raised by the bond was to be used for improving the balance sheet of the wealth manager and not for acquisitions. The issuance is to mature in October 2016, providing the group with further long-term funding resources.

He emphasised that it was not to address any liquidity issues, but rather to take advantage improving sentiment in global capital markets.

According to Gregorowski, the money would be used to roll over an existing £100m facility which matures in December 2009, as well as to reduce exposure in the Old Mutual Plc revolving credit facility.

- Fin24.com