In­vest­ment op­tions dry­ing up

Finweek English Edition - - Companies & markets - SHAUN HAR­RIS

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

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.