Insurers hint at a treacherous 2009

Gareth Stokes, FAnews Online Editor

As South Africa Inc teeters on the brink of technical recession – likely to be confirmed when Statistics SA releases first quarter 2009 GDP growth – we thought it would be prudent to look at recent trading updates from the insurance industry. Business activity in the first three months of the year might give us a good idea of how 2009 will pan out.

First to post its Three-Month Interim Management Statement (to 31 March 2009) was long-term insurance giant Old Mutual (JSE: OML). The company is desperate to deliver a better performance than the one which saw shareholders dumping the stock in 2008. But we can already see some similarities. The first is the upbeat assessment from group chief executive, Julian Roberts. He says Old Mutual “delivered a solid performance for the first quarter [2009] despite the operating environment being profoundly different to the same period last year.”

Words like ‘closure’ and ‘downsize’ seem out of place

Roberts almost immediately counters his “solid performance” claim. He says sales were affected by the “shift in consumer sentiment, the closure of Bermuda to new business and the deliberate downsizing of [the group’s] US Life business.” And the best Roberts could muster for ‘funds under management’ was that these had held up well “relative to the marked fall in equity markets.” Old Mutual’s focus remains on tightening expenses across the group and strengthening its capital position. So where does that leave Old Mutual? In the first quarter of this year long-term saving sales fell 14% to £315m. The group says this decline was largely due to the impact of poor consumer confidence on single premium business. Old Mutual South Africa (OMSA) and the rest of Africa managed a 5% improvement in long-term savings sales over the period. Group unit trust sales fell by a similar margin to £1.458bn as consumers shifted from equities to low risk alternatives. These disappointments were offset by strong sales from OMSA and the rest of Africa which ended 33% higher.

If we look at OMSA in isolation then there’s not too much to complain about. Life recurring premium sales (on an APE basis) were 9% higher at R763m. This included an increase of 12% in risk products and 6% in savings products. Recurring premium sales in the mass segment grew 42% while group life assurance sales in the corporate sector were 55% higher. Life single premiums disappointed, falling 13% to R331m due to “the weaker economic climate and concerns over financial market stability. There were some big cash outflows in the fund management space. R2.2bn net outflows were recorded excluding the R21.7bn withdrawal by the Public Investment Corporation to meet ongoing government-mandated empowerment objectives. OMSA funds under management fell 11% to R415.8bn due to “net client cash outflows (including the PIC withdrawal) and declining equity markets.”

Old Mutual is still in recovery mode, so we can’t expect too much from the group through 2009. The South African operation proves that a well managed life insurance company will survive the worst a recession can throw at it.

Short and sweet M&F trading update

What about the short-term space? When the Mutual & Federal Quarterly operational update for the three months to 31 March 2009 landed in our inbox recently, we assumed the media company had trimmed the ‘fat’ to make it easier for us to read. Imagine our surprise when we discovered the official SENS announcement was equally thin. “Growth proved particularly challenging during the period, with gross premiums declining by 7% over the comparative period,” says M&F. The gross written premium for the period came in at R2.385bn as opposed to R2.566bn in the first quarter of 2008. Net earned premium declined by 11% to R1.854bn. The reasons for the decline in premium were extensively covered in the group’s 2008 Annual Report.

Top among them is that M&F cancelled a number of unprofitable portfolios during the year, resulting in a 43% reduction in personal schemes premiums. The group also reported a 16% decline in risk finance premiums received from furniture retailers, due to accounting policy changes in that sector. Accounting changes aside the level of business from the furniture retail sector will have suffered due to tough economic conditions, indebted consumers and the impact of the National Credit Act too. M&F says its solvency ratio – a measure of net assets to net premiums – reached 42% at the 31 March 2009. This ratio was 41% at the end of 2008.

Good news for shareholders is that the company’s restructure is now complete. M&F’s business model has morphed from a “fully decentralised structure to a regionalised basis.” The group also announced the partial implementation of its new insurance system. Once fully implemented across all portfolios M&F will benefit from substantial service and economic benefits. The short-term environment remains difficult; but company’s that are well-managed and take the necessary steps to trim operating costs and other unnecessary overheads should survive.

Editor’s thoughts:
The great thing about a JSE-listed company is that it smoothes the good and bad areas of the business to provide a single ‘profit’ or ‘loss’ number. It’s more difficult to determine the impact of tougher economic conditions on the individual practices and financial intermediaries who contribute to Old Mutual’s success. How have you experienced Q1 2009? Are you confident that you will write enough new business to stay afloat through 2009? Add your comments below, or send them to gareth@fanews.co.za