If you ask asset managers to choose a sector in which they wish there was more scrip, they will unhesitatingly say short-term insurance. Mutual & Federal has given the best compound return of any share on the JSE over the past 35-40 years.
Santam is another high-quality business and last year the two companies had record underwriting margins (underwriting profits as a percentage of premiums). Santam achieved a 7,8% ratio, M&F 6,6%.
Santam CE Steffen Gilbert says nobody expected the second half of the year to be even stronger than the first. "Hailstorms in Pretoria, more crop insurance claims and the Makro fire have taken us back to earth, which is no bad thing."
Gilbert says that until June 2003 insurers could rely on hefty cash returns from their free floats - claims made but not yet paid - but with money market rates down 5,5 percentage points over the past 12 months, they have to be sure that they can make a return from underwriting rather than simply from their investment income.
An underwriting loss looks unlikely, however, as premium income continues to grow. M&F has reported an 18% increase in gross premium income in the first three months of the year. Gilbert says this will be a stretch for Santam, as it is coming off a higher base. "Premium increases are averaging about 9%: we need to grow the number of premiums quite substantially to repeat last year's growth."
The volume of business in the short-term industry is likely to come under pressure as some brokers are forced out of the business by new legislation requiring them to become qualified.
The leading listed domestic insurance broker, Glenrand MIB, has had a strong 12 months, in which its share price has doubled to 370c. CE Dave Harpur says it is not in a rush to acquire brokers, "but once people have assessed the compliance and governance costs and infrastructure needs of operating in the new environment I expect that many will leave the industry."
Glenrand MIB has had a much happier year than its main rival, Alexander Forbes. The Forbes share price of R10 is well down on its 12-month high of R13,55.
But Forbes derives 40% of its income from its international operations. Glenrand MIB sold its international business in March 2003. Harpur says the timing was determined by Glenrand's UK management, who wanted to increase their stake, and Glenrand preferred to exit rather than stay on as a minority shareholder.
Forbes CE Rael Gordon says that in the long term the group's diversity will be a strength. Not only is Forbes diversified between the SA and UK markets, but it also has an almost even split between risk services (a fancy name for insurance broking) and financial services, which includes actuarial and health-care consulting and financial planning. Financial services has had more muted growth than insurance broking over the past two years.
The biggest potential upside for Forbes is in its UK multimanager business, Investment Solutions UK, which recently took over the administration of Merrill Lynch's pooled portfolios. And the group recently got its first toehold in continental Europe when its UK actuarial consultants, Lane Clark & Peacock, acquired Ernst & Young's actuarial consultancy in Belgium.
Forbes must be frustrated that while the market seems to be marking it down for its international strategy, it cannot get enough of the Discovery expansion story.
Alexander Forbes was part of the Alsi 40 index for a couple of years from 2001. But now, with a market capitalisation of R3,54bn, it has less than half Discovery's market cap of R7,37bn. Discovery recently joined the Alsi 40.
Barely a year ago, Discovery's long-running dispute with the registrar of medical schemes seemed to cast a shadow over the group. Its life business was growing well, but it was capital-hungry and there was scepticism over whether Destiny Health in the US would ever break even.
The turning point proved to be the R875m rights issue and the raising of R280m in offshore debt. Discovery Life then no longer had capital adequacy problems. And there was a much more robust strategy in place in the US, as Destiny no longer tried to sell its product in the US on its own, but developed strategic partnerships.
And as an encore, Discovery CEO Adrian Gore recently unveiled Prudential Health, a joint venture with the UK's second-largest life assurer.
Discovery and Glenrand MIB have certainly been the star performers of the insurance sector over the past 12 months. Mutual & Federal is constrained by its tiny free float, especially now that Old Mutual owns 88,2% of the shares. If Mutual had had its way, M&F would have been delisted, but the share has such passionate minorities that it has stayed on the boards.
If you take the contrarian view that the most promising shares are the ones that have done worst in the past year, then Alexander Forbes is the share to watch over the next 12 months.
