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Old Mutual and Sanlam growth bonanza
Demutualisation is set to add 2% to the country's growth rate over the next two years, writes MARCIA KLEIN
Of the R70-billion, almost R30-billion could find its way back into the economy within two years of listing as policyholders spend their money on durable and semi-durable goods. These estimates are contained in a report by stockbrokers Fleming Martin, the most detailed study to date on the effects of the two demutualisations, which will take place over the next two years. According to Fleming Martin, the average windfall per policyholder will be R11 000. The gross payout of R70-billion represents 11% of forecast 1998 GDP. This suggests that the effective impact on the SA economy is likely to be three times as big as it was in the UK, which has seen a number of demutualisations, including those of Norwich, Halifax, Alliance and Leicester and Woolwich building societies. The effect on private consumption expenditure (PCE) is also forecast to be three times as big as the UK, with the payout estimated at 18% of forecast 1998 PCE. Fleming Martin values Old Mutual at a market capitalisation of between R44-billion and R52-billion. Sanlam is expected to have a possible capitalisation of R21-billion to R28-billion. The R70-billion-plus value of the two groups would account for 7% of the JSE's market capitalisation, with 6.3-million policyholders potentially becoming shareholders. Assuming a market cap of R45-billion, Old Mutual would command 3.9% of the all-share index or 23.3% of the insurance sector. Sanlam, with an assumed market cap of R30-billion, would have 2.6% of the all-share index or 15.5% of the insurance sector. The listings of Old Mutual and Sanlam will probably affect Liberty Life, which will lose its status as the largest listed insurer. There has been much speculation about how much of the windfall will be cashed in and spent in the broader economy. Fleming Martin says research in the UK showed that over 75% of the £30-billion (R240-billion) in demutualisation payouts was saved, while 25% was spent. Of those who decided to save their payments, 60% held the shares, 16% invested the proceeds in unit trusts and 17% sold their shares. Fleming Martin says the assumption that 25% of windfalls will be spent in SA is at the low end, as SA consumers have a higher spending propensity - as much of 40% of the shares could be cashed in over the first two years of demutualisation. This would release R32-billion into the economy. If 25% to 40% were cashed in, it would boost PCE growth by 4% to 7% "and could effectively almost double the PCE growth rate". But the impact could be spread over two years as policyholders may take some time to decide. If 30% were cashed in, PCE growth in 1999 would increase to almost 6% compared with the previous forecast of 3.5%, and GDP growth could rise to 4.8% in 1999 from earlier estimates of 3.5%. Most Sanlam and Old Mutual policyholders are in the middle-income bracket, earning between R2 000 and R8 000 per household a month. In the UK, policyholders were generally higher-income earners. SA policyholders' income distribution "suggests a greater consumption bias compared with a greater savings bias in the UK". In addition, about 86% of SA policyholders are under the age of 54, while in the UK, policyholders were older. This also favours a bias towards consumption. It is expected that smaller shareholders could sell their shares, ploughing the money into durable and semi-durable sectors. In the UK, only 2% of people who received windfalls said they would use their payouts to repay debt. Fleming Martin estimates that SA's declining interest rates don't favour debt repayment. The report says most windfall money will be spent on durable and semi-durable goods.
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