Sanlam, Old Mutual poised for South Africa life-insurance recovery: Barclays

By David Whitehouse
Posted on Tuesday, 18 January 2022 11:09

Sanlam headquarters in Cape Town. REUTERS/Mike Hutching

Shares in South African life insurers Sanlam and Old Mutual are undervalued and don’t reflect their prospects for recovery, according to a research note from Barclays.

The country’s economic environment will be “mildly supportive” for a rebound in affluent lines such as life insurance. Entry-level insurance business will be under pressure from higher inflation and declining formal employment, analysts Larissa van Deventer and Chee Chuen Lim write in the Jan 17 note.

The analysts expect “strong earnings recoveries” for Sanlam and Old Mutual for the full year 2021 from a low starting point in 2020, while stressing the element of  uncertainty in their forecasts. Barclays forecasts that Sanlam will report full-year 2021 earnings growth of 30%, while profit at Old Mutual will more than triple.

  • Sanlam reports full-year 2021 results on March 10, followed by Old Mutual on 15 March.
  • Sanlam is currently trading at a price to enterprise value of around 1.0, compared with a historic average of 1.2, Barclays says. It also has “sufficient discretionary capital to sustain the dividend”.

Downside risks for Sanlam include lower than expected growth, especially in the group’s remaining Africa operations that are exposed to currency volatility and political risk, Barclays says. The company said in December that it is exploring strategic alternatives for their African operations, excluding South Africa, with German insurer Allianz.

  • That leaves an “overhang of uncertainty” over their future role, Barclays says.
  • Barclays hopes that exposure will be reduced to Sanlam’s remaining Africa operations. Many emerging Africa countries have few resources to deal with Covid and are lagging in vaccination programs, the note says.
  • Most African currencies depreciated against the rand in 2020.
  • Sanlam’s rest of Africa operations are likely to offer “muted growth at best, with high uncertainty and risks skewed to the downside.”

Lessons learned?

Barclays predicts “modest” South African GDP growth this year, with inflation being contained within the target band. Still, entry-level kinds of insurance business face downside risks, especially if food and petrol prices stay high and employment continues to drop.

The case for Old Mutual is based on a “continued operational recovery and valuation upside” which the share price does not reflect, the analysts write.  There have been false dawns before with the company abandoning its international growth strategy in 2018. “We concede that Old Mutual has disappointed in the past with continued changes in management and strategy, and inconsistent execution.”

This time it really is going to be different. Management told investors on 23 November that they aim to expand the group’s digital banking capabilities, though without making acquisitions, and see China as central to the group’s future. Barclays says that management has “used the pandemic to catch up where the group lagged on digitisation, been upfront about the mistakes of the past and seems to have a reasonable plan to correct those mistakes and move forward.”

  • Covid-19 provisions by the two insurers to date are likely to be sufficient, Barclays says. The fourth wave is not likely to have a further negative impact for either company.
  • Barclays is “overweight” on both stocks, and it raises Sanlam’s target price from R80 to R82 a share in the report.
  • Sanlam stock currently trades at R62.20, and Old Mutual at 68.9 pence versus an unchanged target price of 81p.

Bottom line

Barclays sees South Africa’s affluent life-insurance segment as ripe for recovery.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options