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‘Of the insurers, I’d pick Sanlam to hold in portfolios at the moment’

Gary Booysen of Rand Swiss compares long- and short-term players in the local insurance sector.

SIMON BROWN: I’m chatting with Gary Booysen, a portfolio manager and director at Rand Swiss. Gary, I appreciate the early morning time. We’ve seen results from most of our sort of long- and short-term insurers – Momentum, Liberty, Santam, Sanlam.  What at Rand Swiss is your view on the local insurance sector, both long- and short-term insurance? Is this a space you’re interested in? Are you sort of staying far away or are there perhaps some stocks in particular that you are thinking might be worth a look at?

GARY BOOYSEN: Yes, there’s always place for an insurer in a portfolio, and when you get very difficult years like we had in 2020, the nature of markets is that that probably is the time to accumulate, even though the headline numbers are looking pretty bad. If you go across all of those results you can see headline earnings all getting smashed, down probably between 30% and 60% if you just take a spread across the different insurance businesses. But most of them remain profitable, not wiping out all of their earnings. I think that’s optimistic – that if you do get a recovery and the third wave of the Coronavirus is not too bad, you will see a fair price recovery.

If you look at the actual share prices, you can see the short-term guys haven’t recovered at all; but I don’t know if that’s really the place where you are going to find the value.

If you look at Santam’s results specifically, you can see that it raised incredible provisions for the contingent business-interruption liability that they could potentially have. We’ve seen all of the insurers battling in the courts – everything from saying that the Coronavirus didn’t cause the business interruption, it was the government which was tossed out by the Supreme Court of Appeal. But Santam itself, with the Ma-Africa Hotels case going back to the Supreme Court of Appeal just over the period of the indemnity, there’s a lot of murk around what this is potentially going to mean, because how much was covered by the re-insurance business. It’s very difficult to say what the impact is going to be, and at the moment the markets of the short-term insurance specifically are not giving them the benefit of the doubt. 

Read:
Santam: High Court ‘erred’ in business interruption judgment (Jan 13)
Santam fails to get Guardrisk’s Café Chameleon appeal postponed (Nov 24)
Listen: Santam sees up to R5.3bn in business interruption insurance claims

We haven’t seen the recovery that you’ve seen with something like Discovery, which bottomed at around R54.50, and is back now to almost above R140/share. So you can see the likes of Discovery and the long-term price have recovered a little bit more quickly. 

Discovery shares over a year

But for me, if I had to pick one insurer and it’s an insurer that we hold in portfolios, we would go with Sanlam at the moment. I think they’ve an interesting not-new strategy, but they’re really pushing it in digital drives. They’re changing the way the distribution model works. And while there is some risk of disintermediating the traditional distribution set, which is their independent financial advisors, I think this is something that can release significant profits for the business. 

I think Discovery is a little bit too expensive. It has always been a popular one among clients, but they are kind of relying on the bank as a way of, I suppose, really driving new earnings. They’re trying to get some of their existing medical scheme clients across to invest in the bank and all the other products. But again, I think a lot of those clients are already wrapped up with independent financial advisors and, because of that, [there’s] risk. And that for me just means that their big kind of runway that they’re saying, ‘Oh, you know, we’ve only got 6.2% of medical-scheme clients as banking clients. Look at the potential opportunity’ – a lot of those clients are already clients of Investec or clients of Standard Bank Private Broking, or wherever it may be. And I think they’re going to find it a little bit more difficult … to move those clients across.

[So] with us it’s probably Sanlam, which I think has got strong new business volumes coming through. Their solvency cover ratio is 191%, so that they are strong. Their balance sheet is really strong. And with the share price in Sanlam not having recovered, I still think there’s an opportunity to get in now. It is up obviously off its lows. It was trading just below R40 in part of the pandemic, and is back to above R60 around now. So you’ve seen a significant boost, but I still think there is some to come on Sanlam. 

SIMON BROWN: I was quickly having a look at the Liberty chart; that share is back at 1993 levels. That is 30 years. That is a staggering-looking chart. Gary Booysen, portfolio manager at Rand Swiss liking Sanlam in the local insurance space.

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I won’t buy stock in a company if the remuneration package of the CEO is a secret. No way.

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