One of the curses of journalism is that you are constantly trying to simplify things that really cannot and should not be simplified.
A long time ago I asked a financial analyst what the rationale was for investing in an insurance company. The problem with insurance companies is that the risks are by definition unknowable. If you invest in an insurance company you are essentially trusting that the actuaries within the company have calculated the underwriting loss correctly.
But the upside of investing in insurance companies is that an underwriting loss can often be sustained because insurance companies sit on a huge “float” — money they control but do not own. This is because over the years people are making contributions to their life insurance policies but will only draw down those investments much later. So, the investment analyst told me, you invest in insurance companies essentially because they are a leveraged bet on the markets. If the float is managed well, and invested well, life insurance can deliver market-superior returns.
But the magic involved in managing the float is the difficult part, of course. Insurance companies are unique in this respect. You need people running them who understand not only their own business but a full range of other business too. They have to be super-business people. My guess is that this is the fun part of working for life insurance companies, because you need to understand the world in its most profound sense to invest in it properly.
Over the past 20 years, Sanlam has returned over the past 20 years 1,208%, while Berkshire has returned a piddling 382%
The most famous example of a well-managed float is the US insurance company Berkshire Hathaway, run by the acclaimed duo of Warren Buffett and Charlie Munger. Their rules of investing are legendary; often very simple, but more often seemingly simple but deceptively insightful, as the best investors always are.
So here is something that tickled my fancy: if you had invested 20 years ago in Sanlam and Berkshire Hathaway, which company would have performed better? Here is a clue: one performed twice as well as the other.
The answer, of course, is Sanlam. Over the past 20 years, Sanlam has returned 1,208%, while Berkshire has returned a piddling 382%. The comparison is unfair, of course. Inflation has been higher in SA, which tends to exaggerate stock price increases. Berkshire is a $530bn company and Sanlam is an $11bn company, and it’s normally much harder to consistently grow a large company than it is to grow a smaller company.
But still, the US is a much larger playing field, so one would expect the dimensions to be larger. And thousands of people don’t troop off every year to Stellenbosch to hear former Sanlam CEO Johan van Zyl or current CEO Ian Kirk talking about bitcoin and such stuff.
The danger is that the differences between insurance company performance can be enormous. Since Metropolitan merged with Momentum in 2011 to become MMI, its share price has been more or less flat. Discovery, on the other hand, outperformed even Sanlam’s booming stock price. And just to show how dependent these companies are on the stock market, it is notable that Sanlam’s share price over the past three years has been flat, unsurprisingly, like the stock market itself.
One crucial number with insurance companies (and banks, for that matter) is the price-to-book ratio, because it allows one to estimate the value of the company without the frills of all the intangibles. By this measure, both Berkshire and Sanlam are riding extremely high. Berkshire is at 2 and Sanlam at 2.7, which is almost twice as much as MMI, Liberty or the new Old Mutual. So for investors these are highly priced companies, as the price-to-earnings ratios also show. But often highly priced companies are highly priced for a reason.
How do they achieve that value? This sounds a bit fluffy, I know, but I think they do it by being creative (and I don’t mean by that creative as in dishonest; creative as in original and experimental). Berkshire’s investments are extraordinarily diverse, which would normally lead to a conglomerate discount. But the joy Buffett and Munger take in making these investments and the logic they bring to the process is palpable.
Last week, Sanlam struck a series of deals that I think were reflected badly in the media because they are so complicated. Essentially, the company expanded its black empowerment deal with its regular black empowerment partner, Ubuntu Botho, simultaneously struck a deal with Ubuntu Botho to go into business together in some specific areas of the financial services industry, and paid down the purchase of a Moroccan company, Saham Finances.
Some aspects of the deal worry me a bit. The extension of the black empowerment deal is the usual SA innovation, where the anticipated share price rise does the heavy lifting, as opposed to the existing shareholder who is out of pocket, but not hugely.
Yet, after three years of a flat share price and a fully priced share, I wonder whether this time it’s going to work as well as it did in the past. In addition, the businesses the company is going into with Ubuntu Botho, the consortium led by billionaire Patrice Motsepe, are exactly the kind of businesses Sanlam itself could and should, and often does, go after.
Kirk tells me the problem is that often investment mandates require much, much higher black empowerment credentials than even Sanlam itself has, so these businesses are probably out of their reach. Interestingly, he also says the staff component of the black empowerment deal is to a lesser degree open to all staff. This is different from last time, because then Sanlam had about 25% black staff and now it has about 75% black staff.
Who knows what will happen in the future — I certainly don’t. But it is great to see the business creativity involved in deals like this. Sanlam is thought of as a life insurance company, but considering its diverse business units, it’s much more of a financial services hybrid. To make this work, it will need to keep that creativity going.
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