Investment options drying up
LAST YEAR was not a particularly good one for short-term insurance companies. Recent results from Santam and SA Eagle list similar reasons – increased claims, especially for motor insurance from increased accidents and hijackings, and floods in a number of parts of the country and Namibia.
Yet while this is largely a reversion to more typical underwriting patterns, even a tough year shows what good shape the large insurance companies are in – and why they have proved to be such sound investments for longer-term investors.
The problem for investors is that the controlling shareholders of the shortterm insurers are even more aware of the quality of the companies than they are. And over the past decade investment options in the sector have dried up significantly.
SA Eagle and M&F are tightly held by controlling shareholders and are largely illiquid.
That leaves Santam, South Africa’s largest short-term insurer and really the only viable entry for investors into the sector. Parent Sanlam holds 54,7% and it’s no secret it wants more, raising the possibility of an offer to minorities last year that fell away in September when it became clear that, like M&F minorities three years ago when Old Mutual tried to take them out, Santam shareholders wanted and probably deserved a large premium to the market price.
It also doesn’t look like any insurers might be listing soon. In the early days of direct insurer Outsurance there was vague talk of a possible listing, but joint MD Willem Roos says it’s not really discussed now. “We don’t need capital and have a strong shareholder (FirstRand) if we did, so there’s no reason to list.”
So it’s only Santam, and the current three proposals in place involving Santam shares are justifiable on business grounds. But a more sceptical minority shareholder taking a look at the broader
picture could be forgiven for thinking, as we do, that this looks like an attempt by Sanlam to get in through the back door. It could again be leading up to a future offer to minorities.
First is an intended voluntary offer by Santam to buy back 10% of its shares, at a fairly attractive R102/share. It could be argued that as the only real entry to the short-term industry the offer should be more generous, but it does represent a premium of 8,5% to the weighted average share price in the week before the announcement.
CE Steffen Gilbert explains very logically that this “capital reduction” would optimise Santam’s capital levels and move towards lowering the solvency margin to the targeted 40%. It’s an exercise in capital efficiency that groups such as M&F are working towards as well, though not in the same way.
Then there’s Sanlam’s offer to mop up shares exceeding 10% of Santam’s equity. This would be “equitable treatment” for all shareholders, it says. You can’t argue with that if there’s a rush to sell Santam shares. But building up its stake in the short-term insurer is also what Sanlam wants.
Finally, there’s the BEE transaction, where Santam shareholders have no choice but to sell 10% of their shares for R82/share, a large discount even though “empowerment discounts” have become an accepted part of business.
Institutional minorities might look hard at this. What about a small private shareholder? The offer is sell us shares now at R102, because later you have no choice but sell us 10% at R82/share.
Investec Asset Management is the largest minority, with nearly 5% of Santam’s shares held in client portfolios. CEO Hendrik du Toit says Investec will “keep our options open and cards close to our chest”.
But as a general comment, referring to the current spate of private equity deals and companies wanting full control of subsidiaries, he says: “Small, private investors must watch out for special deals, they should seek advice before selling out their shares.”
That word of caution should be heeded by small investors in Santam. As Du Toit says, there are no free lunches.
Capital efficiency. Steffen Gilbert