Life insurance sector outperforms JSE Alsi

Despite a depressed economy marked by high interest rates and stubborn inflation that is adding pressure to already strained household budgets, South Africa’s life insurance sector has managed to achieve impressive gains on the JSE.

Since the start of the year, the five-member Life Insurance Index has outpaced the JSE’s benchmark All Share Index (Alsi), gaining around 17% compared to the latter’s rise of just over 4%.

Read: Discovery Life payouts decrease to R11bn, but Covid-19 effects linger

The sector is largely still staging an unwinding from the stresses of the recent pandemic years, says Dudu Tembo, portfolio manager at Argon Asset Management.

The life insurance industry was among the sectors that bore the brunt of the Covid-19 pandemic, which saw claims rise to uncontrollable levels along with huge disruption to new business prospects.

In anticipation of adverse mortality claims and heightened policy lapses due to loss of income and other pandemic-related factors, insurers had to make huge provisions, the remainder of which make earnings look healthier in recently released financial results, says Tembo.

“It became clear that mortality levels and morbidity levels were going to come down, so they were able to release those provisions,” she explains.

JSE Alsi vs Life Insurance Index

Insurers have also come off low levels entering 2023, with the share prices of major listed groups dropping by double digits last year as the global bond market suffered big losses on the back of bond yields spiking – in turn putting pressure on life companies, which typically move in tandem with the markets, says Radebe Sipamla, financial services investment analyst at Mergence Investment Managers.

Improved stock performances

With the JSE posting something of a recovery after ending the 2022 year flat, improved stock performances in the sector are also being buoyed by better market performances, despite a little volatility.

Leading the rally in the sector so far this year are Sanlam and Discovery, with the share prices of both groups having strengthened more than 19% and 18%, respectively.

Sanlam and Discovery’s share price performance YTD

The two are also being punted for their out-of-South Africa exposures, helping them better weather local market headwinds, the biggest being the country’s erratic power supply.

Sanlam, South Africa’s largest insurer, dominates in the rest-of-Africa region and Discovery in more developed markets.

The former has significant African business through its Saham Group entity that it acquired in 2018 and which operates in more than 25 countries across North, West, and East Africa as well as the Middle East. Saham predominantly writes personal lines general insurance business.

Joint venture

Sanlam also entered into a joint venture partnership with German insurer and asset manager Allianz in a deal that will see the two merge their existing and future African operations to create the largest non-banking financial company on the continent.

“That’s going to result in a lot of synergies and a lot of cost savings; and the market appreciates that,” says Sipamla, adding that Sanlam is the bellwether of the sector.

Read:
Momentum Metropolitan’s profits surge nearly 30%
‘Proceed with caution’ Old Mutual says
Sanlam and Allianz to create joint Pan-African insurance company

Sipamla adds that Sanlam has been making small bolt-on transactions in the broker market, which is helping the company to both own client relationships and contain costs.

“If you don’t own the client relationship, you’re at the mercy of the brokers; you leak margins to the brokers,” he says.

Source: Moneyweb/Profile Data, based on the JSE’s close on Friday, 30 June. 

Apart from Discovery’s partnership with Chinese insurer Ping An, its reach across Asia and some parts of Europe makes it stand out among its peers, according to analysts.

“Discovery is really the developing markets’ play … they’ve expanded [and] partnered with a lot of insurers in Europe and Asia to provide a Vitality engine to those businesses,” says Tembo.

Old Mutual has come third in the sector’s stock rally, with its share price up over 15% this year.

Although the business is performing well operationally, the market is still scarred on the back of its historical spat with former CEO Peter Moyo, which ended in a dragged-out court process, says Sipamla.

Over a five-year period, Old Mutual’s stock has fared the worst, shedding just less than a third of its value.

Old Mutual’s share price over five years

“Management just needs to work harder in letting the market know that there is stability,” says Sipamla.

“Investors are still a bit cautious – even though operationally they are doing the right things, they are getting market share, and their margins are improving.”

Lagging behind is Momentum Metropolitan Holdings, which has only managed to gain 5% year to date.

Sipamla believes the business, which was essentially born from the merger of Metropolitan Holdings and Momentum Group in December 2010, needs a strategy rethink.

“They need to decide if they are going to make tough choices there and act on them and really integrate the two so that it is one unit,” he says.

Read/listen:
Old Mutual’s concerned the power crisis, GDP slump will spur policy lapses
Sanlam expects to build on record performance