The past year was a tough one for South Africa’s short-term insurers.
These are usually very stable businesses, which have in the past proved to be outstanding investments.
But as the economy tightened and business and individuals started to cut back on insurance cover, the effect flowed through to the large listed insurers in the form of reduced premium income and underwriting margins.
In 2008 the insurance companies were also hit by a rare double whammy.
Typically lower premium income and tighter margins can be offset, at least for a while, by investment income.
It’s a big number in the accounts of insurers, the return the companies earn on the free cash flow business and individuals pay for insurance cover every month.
But the sharp downturn in equity markets had insurers scrambling to rebalance portfolios and not enjoying the double-digit growth they normally get from equity markets.
Light at the end of the tunnel
At the time of writing, however, the outlook was much improved for short-term insurers.
Equity markets had come back and some of the large companies indicated in trading statements that growth in earnings would be substantially better than in the previous two years.
The main reason, as market leader Santam indicated in its trading update, was due to an improvement in investment performance.
There were also changes to the listed company line-up. For years now we’ve been predicting that one of the large groups would delist from the JSE, and this year it happened when Mutual & Federal (M&F) delisted from the JSE on 8 February.
Major shareholder Old Mutual had for some time been trying to buy out minority shareholders and it finally got its plan together late in 2009.
The buyout, while at a fair price, was not a very elegant process and upset some minority shareholders who did not necessarily want shares in Old Mutual and objected to the length of time they would have to hold these shares in limbo.
But that’s now history and M&F is gone from the main board of the JSE, removing one of the last listed entry points for investors into the short-term insurance sector.
The only remaining large group investors can buy is Santam, though parent group Sanlam is also keen to take out minority shareholders.
It seems that all that’s saving Santam is its high share price, up about 26% over the year at the time of writing.
The buoyant share price can be seen on the table.
When it was compiled, Santam’s market capitalisation was R9.46bn.
By late February it had climbed to R12.32bn.
Zurich Insurance Company SA is difficult to invest in as the shares are tightly wrapped up by Zurich Financial Services in Switzerland and Royal Bafokeng Finance.
The share hardly trades on the JSE, a great pity as this too could be a good entry point for investors looking at the short-term industry.
We also have to wonder how long Zurich will remain listed.
It may not be on the table next year.
In general the share price performance of all the listed companies has been good through a difficult time on the market.
Glenrand MIB, which is now out of retirement fund administration and concentrating on risk and insurance broking services, saw its price advance by 29% over the year.
Its business outlook is also better, though 2010 is not going to be an easy year.
As an insurance broker, Glenrand MIB is caught between clients trying to cut down on insurance costs and the underwriters who are also on a cost-cutting curve.
Indequity has cleaned up its business structure and is now a clearer investment in insurance.
Earlier it was neither fish nor fowl, the company comprising three business units that spanned investments, investment banking and insurance.
But Indequity has now restructured, saying only the insurance division will need equity capital as it grows.
Insurance is the only listed entity now, the other divisions unbundled into a “non-listed group”.
Global warming risks
New risks are also being brought to market.
Ian Kirk, CE of Santam, told a conference recently that the effects of climate change were making some risks, particularly large farming land, uninsurable or too expensive to insure.
However, it’s well known that insurers always look at the gloomy side of the business.
It remains a solid industry – the pity is that there are not more investment opportunities.