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Where are those lights

11 August 2004 Angelo Coppola

(11.8.04) Such is the case with Old Mutual with respect to their interims released yesterday for the six months to June 2004.

Adrian Clayton, at PSG Fund Managers reports that the life business in the US had an excellent six months, with new business escalating 21%, with equity indexed annuities flavour of the second quarter.

Astute management managed to climb on the bandwagon of the switch of attention away from fixed interest business towards an equity indexed trend.

Margins were good at 22%, but as has been shown from tons of historical data on the US life side, margins are more volatile than a pregnant hippo, so excessive margins must be taken with a pinch of salt.

The South African life side was where concerns abound regarding new business and is also possibly where a story exists behind the numbers. In Q2 individual recurring premiums fell off a cliff after a relatively solid performance in Q1.

The question that begs asking is whether the industry is in decline - consumers are saturated with risk product and have also possibly not had their expectations met with respect to buying investment linked risk products.

Considering the industry, wide poor performance on the single premium side of things last year, Old Mutual did not shoot the lights out in terms of growing these sales. Whilst new business was far from booming, the SA life business did however again demonstrate its strong profit underpin.

In terms of valuations, none of the South African life companies are expensive; in fact they are dirt cheap. The market has, however, not been in a re-rating mood for the sector, with many stocks trading short of their embedded values.

It must be said that the lack of new business must be playing a major part in preventing a re-rating and this is once again possibly the result of a heavily traded industry.

Whist industry dynamics don't look great, the stocks are already reflecting this and considering their strong cash generating abilities and the high dividend yields available, opportunities abound in the sector.

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