Slimmed down and lookin’ fine
RMI’s unbundling is a windfall for investors, who now get pure access to Outsurance, the jewel in the crown
Rand Merchant Investment Holdings’ decision to unbundle its stake in Discovery (25%) and Momentum Metropolitan Holdings (MMH) (27.3%) may have been a long time coming, yet the effect on RMI’s shares was electric.
As Abax portfolio manager — and RMI shareholder — Anthony Sedgwick points out, RMI was trading at a 29% discount to its sum of the parts until the announcement, which pushed the share price up almost 20% early this week.
With the stroke of a pen, RMI becomes an almost pure play general insurer through Outsurance and its 30% holding in UK insurer Hastings Insurance Services. At the moment, Santam is the only other dedicated short-term, underwriter listed on the JSE.
“We think Outsurance is an excellent business and view having more direct exposure to this asset as a positive,” says Allan Gray portfolio manager Tim Acker.
Abax, along with Coronation and Allan Gray, has already approved the unbundling in principle, which Acker says will give shareholders more flexibility.
Laurie Dippenaar, the former RMB and FirstRand CEO who helped create both Discovery and MMH in their current form, says the unbundling makes strategic sense.
“They are both mature companies which no longer need adult supervision.” And, of course, unlocking the
RMI discount is an added bonus.
So what will investors be getting in the new-look RMI?
For a start, strong positions in three markets: SA, Australia and the UK.
In RMI’s results for the year to June 2021,
Outsurance contributed
R2.3bn (up 14%) to
RMI’s normalised earnings of R3.5bn, while its share of Hastings delivered a further R585m (up 20%).
Outsurance now has 1-million policies in SA and an 18% market share of the personal lines market, while RMI’s Australian subsidiary Youi has 1.1-million policies and a 4% market share. But both of these are overshadowed by Hastings, which has 3.1-million policies, though only 8.3% market share. But RMI CEO Herman Bosman says this is growing as Hastings has a 10% share of newly issued policies, and means RMI is likely to exercise its option to increase its holding in Hastings to 40% by May next year.
Bosman says Youi operates on the Outsurance model, attracting clients to its own call centre through advertising. But Hastings attracts more than 80% of its business through price comparison websites such as GoCompare and Moneysupermarket.
It means Hastings pays commission to the websites when it gets leads, and does not have to keep the same fixed cost infrastructure and advertising budget as Outsurance. Price comparison websites have not taken off in SA or Australia, and SA’s bestknown price comparer, Hippo, is primarily a sales vehicle for its sister companies in the Telesure group such as Budget, Dialdirect and 1st for Women.
It’s not just insurance that RMI investors will have exposure to: other businesses in RMI include RMI Investment Managers and venture capital arm AlphaCode. Dippenaar argues that it still makes sense for RMI to hold these assets and says they are no longer a drag on earnings, having turned from a R10m loss in the 2020 financial year to a R142m profit in 2021.
And what of MMH and Discovery, now out on their own?
MMH CEO Hillie Meyer says the life office valued RMI’s support when its performance slumped about four years ago, “But it isn’t clear what value RMI can add to business now that our internally generated strategy is paying off. And we can fund our expansion and acquisition plans organically.”
Meyer describes it as an amicable parting and hopes RMI’s representative on the MMH board, Lisa Chiume, will stay on after what RMI calls “the restructure”.
Discovery CEO Adrian Gore says his business had a great partnership with RMI and its
predecessors, which he describes as “patient and supportive”. Gore isn’t concerned that once RMI has exited from its 25% stake, Discovery will be vulnerable to a hostile bid.
“We still have a strong relationship with [RMI’s main shareholder] Remgro, my partner Barry Swartzberg and I own 10% of the business and the Public Investment Corp supports our strategy. We still have a 25% block against hostile bidders.”
Discovery’s international portfolio investors such as Baillie Gifford and Comgest are likely to stick with the company as a rare financial growth stock in the emerging markets universe.
The other side of this week’s unbundling is a capital raise, and RMI will need to strengthen its balance sheet with a R6.5bn rights issue to reduce its hefty R11.8bn gross debt, which will no longer be serviced by MMH and Discovery’s dividend flow.
It plans to keep its gross debt at no more than 2.5 times attributable earnings.
Sedgwick says he hopes RMI’s parent Remgro will consider a similar unbundling exercise, but he isn’t optimistic.
“When RMI made the announcement, Remgro’s share price should have increased by 4% on a sum of the parts basis, but in fact it increased just 2%. The discount just keeps widening.”
Outsurance has been a spectacular success since its launch in 1999, but competition is now far keener. Its siblings Discovery Insure and Momentum Insure operate in the direct as well as the broker market. Santam’s MiWay subsidiary is now profitable and Douw Steyn’s
Telesure, which invented the direct category in 1985, now has seriously competent professional management. But the market is grateful to see another short-term insurer on the JSE.
As for Discovery and MMH’s former parent, FirstRand has proved that it can do just as good a job providing insurance to clients in-house. FNB used to outsource insurance to MMH, but FNB Life is now a large insurer in its own right, covering 6-million lives. While the pandemic drove its claims 70% higher in the six months to end-June, it nonetheless still made a profit of R1.3bn, 15% down on the same period in 2020.
FirstRand, in fact, has achieved its best-ever six months to June with earnings of 276c a share, beating its previous 2019 record by 6%. FNB remained the dominant contributor with earnings up 33% to R16.3bn; wholesale bank RMB grew profit 25% to R7.1bn, and vehicle finance specialist WesBank’s earnings surged 47% The contribution from UK-based challenger bank Aldermore more than doubled to R2.7bn.
”I would love to be able to say something controversial about FirstRand,” says Coronation banks analyst Neill Young, “but it is just a very well-managed business.”