While the pandemic created excess mortalities and hammered life insurers’ profits, it did reinforce how critical life insurance is and how important the institutions that write this cover are to the broader economy.
The pandemic has faded into an endemic, mortalities have drifted lower (though they remain slightly elevated on some metrics and we still do not know the effects of Long COVID) and life insurers’ profits are recovering nicely.
Despite this, not a single JSE life insurance group’s share price is trading higher than it was at the close of 31 January 2020 (i.e. pre-pandemic) and all of them are currently trading at significant discounts to their Embedded Values (EV):
Discovery (DSY) continues to shovel cash into the furnace that is their loss-making bank while watching members trading down from its higher-end schemes to lower-end (i.e. lower margin) ones. Despite the Group’s strong management, it feels like Discovery’s prospects are, at best, to tread water for the foreseeable future.
Sanlam (SLM) has setup a good pan-African partnership model and, more recently, has made an offer to gain control of Afrocentric Investment Corporation (ACT). The latter may allow it to go head-to-head in challenging Discovery’s Vitality while also bolstering Sanlam (via Afrocentric) other offerings. This reason adds to the argument that Discovery may drift sideways for now while the pan-African partnership and the linkage with Afrocentric add to Sanlam’s growth appeal.
Of the two most discounted against their EV’s, Old Mutual (OMU) has been through several years of clean-up, unbundling their UK operation (now called Quilter Plc), their stake in Nedbank, and being embroiled in a public spat with its former CEO, Peter Moyo. The Group has a lot of work to do to repair its reputation on this front.
That leaves Momentum Metropolitan (MTM), which is our preferred pick in this sector.
Momentum Metropolitan’s share is both cheap against its peers (average discount to EV is now 34% while MTM’s is currently 49%) and cheap against its own historical discount to EV (which averages 17%). In fact, when measured against its own average discount to EV, its share price is currently trading at over one standard deviation beyond its average!
Thus, if all Momentum Metropolitan’s share price does is “mean revert” to its historical 17% discount, then there is a “free” 32% upside in its current share price. In the meantime, patient investors can pick up the share’s 6.6% Dividend Yield…
While all life insurers’ profits should recovery post-pandemic, Momentum Metropolitan’s management have quietly driven a turnaround in the Group. They have wisely cut head office costs, focused other operations and begun regrowing the Group’s core franchises. While these efforts have been obscured by COVID distortions, as the effects of the pandemic dissipate, these initiatives should begin to reflect in firmer sustainable margins and create a medium-term growth lever for its bottom line that many of its peers currently lack.
Finally, Momentum Metropolitan’s balance sheet is well capitalized. While management have reaffirmed their commitment to paying generous dividends, they have also allocated capital to a reasonable-sized share buy-back program. And, when a company is buying their shares back at a c.49% discount to their view of fair value, you can be pretty confident that this will be extremely accretive to the remaining shareholders.
Even if you do not believe that the discount to EV will “mean revert”, the combination of bottom-line growth and highly-accretive share buy-backs should boost forward EV nicely and, thus, pull the share price along with it. In closing, while we view the broader life insurance market as offering good recovery potential at a discounted price, we think that Momentum Metropolitan, specifically, offers the best upside. At a little over 1500cps, Momentum Metropolitan is currently offering investors the unique combination of a deeply discounted share, strongly recovering profits and the combination of good dividends and value accretive share buy-backs.
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