Santam: short-term favourite

2009-08-30 10:02

Johannesburg - Between the two short-term insurers Santam and Mutual & Federal (M&F), Santam is by far analysts' favourite.

Both shares are good investments, but Santam is far ahead of its competitor, to judge from underwriting results.

Paul Kahumuza, an analyst at Old Mutual Investment Group, said Santam has always delivered underwriting profits better than the industry average.

Investec Asset Management analyst Sarine Barnard said Santam's underwriting results have stood head and shoulders above those of M&F, especially over the past five years.

"Santam has never suffered an underwriting loss, not even in the previous distressed cycle for the insurance industry." In the six months to end-June Santam produced an underwriting profit of R88m, while M&F suffered an underwriting loss of R96m. "Santam has managed to make an underwriting profit, and the experience of its management team is reflected in that," an analyst explained.

On the other hand, Mutual & Federal's management team is fairly new.

Santam is proactive as far as industry issues are concerned, declared Barnard. The company has, for example, already gone through the process of evaluating its capital needs while M&F is only doing so now.

In July, when M&F announced its interim results, shareholders were disappointed when it passed its dividend for the second successive year.

Barnard however said that this was the correct decision to protect its capital in the current cycle. She believed M&F will again begin paying a dividend at the end of this year after reviewing the investigation into its capital requirements.

When the interim results were announced in July, M&F chief executive Keith Kennedy said the investigation would be complete within two months, after which M&F would formulate its dividend policy.

From a valuation viewpoint, Kahumuza considered Santam much more expensive than M&F, which is why he would prefer M&F as an investment at this stage.

Santam is currently trading at 2.3 times its book value compared with M&F, which is trading at 1.6 times its book value.

Barnard expected M&F to do considerably better in the second half of its financial year and turn the first-half loss around to break more or less even.

The risk that M&F's underwriting results will be worse than those of the industry as a whole is reflected in the share price, she pointed out.

M&F's shares are not as freely available as they should be. At the moment only 14% of its shares are freely tradable because Old Mutual owns a 75% controlling interest and empowerment shareholders 11%.

The JSE requires that at least 20% of a company's stock should be freely tradable.

According to Barnard this makes it likely that Old Mutual will again try to get hold of the whole of M&F.

A year or so ago Old Mutual decided that M&F was not a core operation, but an attempt to sell it failed. Now Old Mutual is taking a fresh look at M&F as a core investment.

"This raises the possibility that in the next three years Old Mutual will indeed make a bid to buy M&F," she believed. This is not an immediate prospect because Old Mutual first needs to resolve other problems.

Sanlam, which has a 54% stake in Santam, would also like to own the whole company. But, before that can happen, Santam's share price will have to fall very sharply.

Dr Johan van Zyl, the chief executive of Sanlam, is well known not to overpay for any asset.