Analysts estimates show 2019 could be another rocky year for insurers
Sanlam, Old Mutual and Liberty all saw their investment returns decline in 2018 as the JSE all-share index lost 11.37%
Equity analysts are divided about how the country’s largest insurer, Sanlam, will perform in 2019. The company published analysts’ estimates which show that they all expect it to lift headline earnings and value to shareholders.
The estimates, based on input of five sell-side analysts, are similar to analyst consensus that Bloomberg and Reuters publish about listed companies. They were, however, compiled in February, before Sanlam reported the decline in 2018 earnings.
Like other life insurers, Sanlam had a tough 2018, thanks to South African equity market losses, which caused the insurer’s investment returns to plummet 57%. Its peers, Old Mutual and Liberty also saw their investment returns decline by 41% and 81%, respectively, as the JSE all-share index lost 11.37% in 2018.
After seeing 2018 profit declines, analysts said life insurers might continue to struggle if the weak equity markets persist and consumer spending does not turn the corner.
The disparity between highest and lowest estimates given by analysts on some of Sanlam’s financial indicators demonstrate how difficult it is to say with conviction how the insurance industry is likely to do in 2019 . For instance, while the highest value of new business (VNB) that analysts expect Sanlam to achieve in 2019 is R2.28bn, 14% higher than 2018, the lowest is R1.79bn. That is 9% lower than the VNB of R1.96bn that Sanlam achieved in the 2018 financial year.
The same goes for the VNB margin, which indicates profitability of insurers: the lowest forecast is 2.42%. It is lower than what Sanlam achieved in both the 2018 and 2017 financial years.
Karl Gevers, head of research at Benguela Global Fund Managers, said that consensus from Reuters — not related to one published by Sanlam — show that analysts reduced their estimates on Sanlam’s earnings per share by about 7% in the last quarter.
“It’s a vague impression of where the market thinks fees and earnings will be. The disparity between the lowest and highest estimates shows uncertainty around the company’s specific dynamics. The timing of the Saham acquisition has created some noise. The performance of Saham is quite challenging to forecast given its exposure to multiple African jurisdictions, all in different stages of business life cycles,” said Warwick Bam, head of research at Avior Capital Markets.
Sanlam’s 2019 earnings will include contribution from the additional 53% stake in Moroccan insurer Saham Finances whose acquisition was finalised later in 2018. Gevers said while Sanlam is still attractive as it is trading at a premium to its group equity value, the market expects that the Saham acquisition might have a slight drag on the company’s return on equity.
The other factors that are likely to have caused the disparity in analysts’ estimates are expectations on economic growth in SA and performance of the bond and equity markets.
Bam said analysts have different views on the quantum of these impacts: “If the equity and bond markets perform better than 2018 then the whole insurance sector will improve earnings in 2019.”
Gevers said given that markets had a strong start to the year, he expected it to support the earnings of insurers in 2019.