Life companies have a large part of their net worth invested in the JSE, and they earn fees on many products as a percentage of its market value.
This means that many investors buy life insurance shares as geared plays on the market. And this year should have been a time to gear up on market exposure, with the JSE up 26% in the 10 months to October and producing a spectacular 13,9% return in the third quarter alone.
Liberty is particularly geared to the market because of its 90/10 policies, in which the shareholders take 10% of the profits and 10% of the losses from the products. Analysts estimate that this item alone would have generated earnings of R150m in the third quarter.
Yet Liberty's trading update for the first nine months of the year was remarkably subdued. It simply said that, year to date, there was a reduction in losses in the first half.
Leading life analyst Risto Ketola says that management is doing as much as it can to strengthen the group's reserves.
"The senior managers at Liberty are sick and tired of having to explain away earnings disappointments that are more linked to actuarial assumptions or accounting policies than to actual underlying operations.
"The current financial year is the clean-up period that should lead to more stable earnings in 2010 and 2011."
Even with a strong market, Ketola believes that Liberty will not make enough in the second half to offset the R1,2bn loss in the first half, and will report a headline loss of R177m.
In contrast, Sanlam's trading update for the 10 months to October was stronger than the market had expected, with headline earnings - including capital gains on the shareholders' portfolio - up fivefold over the first 10 months of the year. Analysts are adding R200m or 10c/share to their forecasted earnings.
The highlight of the year for Liberty has been the acquisition of CfC Insurance Holdings in Kenya, which meets its ambitions to become a leading player in the East African life, health and short- term insurance markets.
CfC was acquired from parent company Standard Bank.
The acquisition of the African Life business by Sanlam in 2005 gave it a major source of growth at higher margins than in SA. The recurring premium sales in the rest of Africa were up 37%.
Sanlam is establishing itself as a quality investment manager under its new chief investment officer (CIO) Gerhard Cruywagen, who was previously with Prudential. Sanlam CEO Johan van Zyl says that for the first time since he took over in 2003, there have been significant net institutional flows into the group. These total R10bn so far this year. In contrast, Liberty's asset manager Stanlib had net outflows of R17,6bn. Stanlib has been without a CIO for most of the year, though it is expected that the temporary holder of the position, Stewart Rider, will be appointed. It will be a bold move, as Rider, a top insurance analyst, has never worked as a portfolio manager.
He will certainly have his work cut out for him, as Stanlib still trails the other fund management groups. It remains bottom out of the 11 managers in the Alexander Forbes Large Manager Watch over the 12 months to October, with a 17,7% return (in its house-view balanced funds). In contrast, Sanlam is fourth with a 26 % return.
Liberty remains a powerful sales organisation. A 3% fall in sales for the first nine months of the year, at a time when disposable income was under pressure, is respectable. But Ketola says that in the third quarter itself sales were down 8% from a year earlier.
Van Zyl says that the strongest growth at Sanlam has been in its group assurance - death and disability cover primarily for pension funds.
Sanlam is expected to be the market leader in group assurance this year.
It has also been more successful than its life office peers at attracting lump sums into its linked-product business, Glacier.
The Sanlam share price has risen almost 40% over the past year. Liberty is up just 25%. Its trading update was much less detailed than that of Sanlam. Perhaps there is not much good news to highlight. Nonetheless, of the two, Liberty must have more upside.
Ranking the Analysts 2009
