Though there are only five companies in the insurance sector, it is far from being a generic sector.

On the one hand, there are the three short-term insurance underwriters - Mutual & Federal (M&F), Santam and SA Eagle.

On the other are the two insurance brokers - Alexander Forbes and Glenrand MIB.

Glenrand is quite closely aligned with the short-term insurers as its insurance broking arm, known as Risk Services, accounts for virtually all the group's income. But Alexander Forbes has quite different drivers. Twenty years ago it was also primarily an insurance broker, then known as Price Forbes, but more recently the growth has come from pension fund administration and consulting and, even more spectacularly, from its asset management arm, Investment Solutions.

What all these companies have in common is their ability to generate cash. Both the brokers and the underwriters have use of a free float of premium income - brokers for the 30 days before they are obliged to hand over the premiums, and underwriters between the time of the claim and when it has to be paid out.

Mutual & Federal, along with Remgro, has been one of the top performers on the JSE over the past 40 years, though it has been overtaken and outperformed by Santam in recent years. Unlike European and US insurers these companies rarely make underwriting losses and they do not have the "long tail" losses over liability issues such as exposure to asbestos, which have blighted the income statements of international insurers and the Lloyd's market.

The underwriters are the favourite shares of some of the leading asset managers in the country such as Piet Viljoen of Regarding Capital Management and Errol Shear of Absa. These companies throw off so much cash that investors have got used to hefty special dividends - most recently an 800c dividend from M&F last September, which reduced its net asset value by a quarter.

Of these, Santam is the only one with a sufficiently large free float to be attractive to institutional shareholders, though this will diminish and Sanlam has indicated a desire to increase its holding to 80% - some to be sold on to a broad-based BEE consortium, but this will also be a long-term shareholder.

M&F has only a 12% free float, while SA Eagle's is barely 5%. Old Mutual attempted to take out the minorities in M&F three years ago but the investors were reluctant to let go of their holdings.

Will SA Eagle's parent try the same thing? In July the business will be rebranded as Zurich Insurance Company SA, which means it is unlikely to disinvest and probably signals that it aims to buy out the minorities.

SA Eagle MD Nick Beyers isn't denying a buyout is possible. "The issue comes up from time to time. We are definitely working more closely with Zurich. We are re-entering the large corporate market using their capacity. We recently became the lead insurer for the Gautrain."

M&F is the second-biggest shareholder in SA Eagle, with 11%, and even though it has been a passive shareholder it certainly raises obvious competition issues. The Royal Bafokeng Nation, with a 10% stake in SA Eagle, will almost certainly remain invested if it delists.

The insurance market has become a lot tougher this year. Benevolent weather conditions and a strong rand (which lowered replacement costs for motor parts) led to unprecedented double digit underwriting profits in 2004, headed by Santam with a 14,7% margin.

Underwriting margins in 2006 remained above average at around 5%-6% but M&F MD Bruce Campbell says these were flattering as insurers released provisions. There were underwriting losses in personal insurance, particularly on the motor book.

"We should have repriced this business much earlier. We did not appreciate, for example, the extent to which the costs of repairing imported cars have been 30% to 40% higher than for a locally made car in the same price range."

Insurers have a number of challenges over the next few years, over and above their usual underwriting and cash management challenges. One is the financial sector charter (FSC) requirement to launch products into the lower end of the market. Santam was the first to launch a home or household insurance product; M&F's offering will be launched soon.

"We will not be able to target this market through our usual broker-based distribution channel, but we have a great opportunity to target it with the help of the distribution footprint of our sister companies Nedbank and Old Mutual. We have jointly launched green shops offering a full suite of group products into rural areas," says Campbell.

Another challenge is to meet the procurement requirements of the FSC. Campbell admits it will be tough to meet the 2008 deadline, by which time they will be expected to do 50% of their business with BEE-accredited suppliers.

"Unlike other financial services businesses, which procure from large IT businesses and other corporate service suppliers, we are dealing with a wide range of small businesses such as builders and panelbeaters who will find it tough to become BEE-accredited.

"But we will do all we can to help our suppliers to become BEE-accredited and to give more business to BEE businesses."

The intermediary world remains very white, so it was certainly a landmark event when Peter Moyo was appointed as group CEO of Alexander Forbes, the largest short-term and long-term insurance intermediary in SA.

As Top Companies went to press it looked as though there was a strong possibility that Forbes would be delisted, as there was an offer pending from a private equity consortium headed by Actis. Though there might still be a listed vehicle through which investors could invest in the business - investment houses such as Allan Gray and Stanlib have been keen to remain invested in the business.

The Alexander Forbes share price is lower than it was in 2000, even though there has been the strongest bull market in history in the intervening years. The business endured some disappointing numbers from its international businesses, and more recently it was forced to admit that it had made secret profits from its retirement fund clients. But the Alexander Forbes brand and franchise remain strong.

There is also constant speculation that Glenrand MIB will be delisted, and perhaps even partitioned. Its Risk Services business has as strong a name as Forbes in the corporate insurance broking market, but unfortunately its attempt to rival Forbes in the benefit services (retirement and health consulting) area has been a resounding flop, which drags down the rest of the business.

Moyo is adamant that even if the delisting takes place, Alexander Forbes will remain in its present form (though there are always pressures for private equity groups to realise profits by selling off parts of the business).

"We sold our International Risk Services business to the US-based broker Lockton last year. All the businesses we are left with are good businesses," says Moyo.

There were significant losses in the Financial Services business as it gave secret profits which it had made from retirement funds back to clients. But Moyo carried out a professional damage limitation exercise and few clients were lost - and those that moved went to Old Mutual and Absa rather than to Glenrand MIB.

Moyo says Forbes has the deepest supply of intellectual capital in its various lines of business and no business can offer the same breadth of services to clients. "We will need to reinvent our business as people increasingly take responsibility for their own retirement savings. There will be a greater focus on advising members of retirement funds directly and not just interacting with trustees."

Investment Solutions (IS) is now the biggest profit contributor to Alexander Forbes. It will not show the same exponential growth as it showed in previous years but it will remain a hugely profitable business. It is highly scalable, as it will not need to increase its overheads, but its assets will continue to grow at least in line with the market. Do not be surprised if the private equity group takes Investment Solutions back to the JSE before the rest of the group.