Laying the recent past to rest
Sanlam’s R6.5bn bid for Assupol is based on nursing the insurer back to pre-Covid growth levels
Sanlam’s buying spree, picking up smaller competitors, is steaming ahead.
It is now making a run for Assupol at a price tag of R6.5bn. The latter, started as a burial society for policemen more than a century ago, generated gross insurance premiums of over R5bn in its financial year through end-June.
After Sanlam’s announcement, Assupol’s share price rose from R11.50 to R13.99 on the Cape Town Stock Exchange, albeit on very thin trading volumes.
Assupol became a target when its two largest shareholders, Bidvest (46%) and the International Finance Corp (19.4%), indicated their intention to exit their investments. This created “timing that is opportune to acquire an excellent asset”, Sanlam CEO Paul Hanratty told investors last week.
According to Hanratty, Assupol covers 5-million lives via 2-million policies in a “defensive” market mainly consisting of government employees. Hanratty said Assupol’s clients are skewed to living in Gauteng, whereas Sanlam has historically been underweighted in the area.
During the investor call, concern was raised about Assupol’s performance since the pandemic. Michael Christelis, equity analyst at UBS, questioned the return on embedded value of Assupol, at 12%, which equates to half what it was in 2019.
“There is no question [that] if you go back a number of years, this business regularly produced strong new business premium growth, strong VNB [value of new business],”
Hanratty said.
“There has been a very sharp deterioration in recent years.
Our expectation is that under our ownership and with the right management and oversight, we will expect that management team to get back to their historic growth levels.”
On struggling persistency at Assupol, Hanratty said Sanlam had experienced a “not too dissimilar” situation at BrightRock, another life insurance company it bought a few years ago and also hit hard by the pandemic.
“[Assupol] battened down the hatches since Covid and we can now open them again,” Hanratty said.
Sanlam’s play for Assupol is reminiscent of Clientèle’s R1.9bn offer for 1Life, in November. Clientèle will settle the amount by issuing 117.8-million shares at R16.25 apiece. According to Clientèle, the combined book will have 1.5-million lives under cover.
Assupol’s embedded value at end-June was R7.07bn, according to the company’s most recent financial statements, and it was trading at a market cap of R4.9bn the day before the Sanlam announcement.
Comparing the two takeover targets, it’s clear that the acquirers value each entity differently. Sanlam aims to buy Assupol for 92% of its embedded value, whereas Clientèle is willing to fork out 106% of 1Life’s embedded value.
“I think the difference in valuation between Assupol and 1Life could be the scale and quality of the performance of the businesses,” Patrick Mathidi, head of equity and balanced funds and co-founder of Aluwani Capital Partners, tells the FM. “Assupol is a lot bigger and 1Life is smaller.” Assupol’s recovery story since the pandemic is also a determinant of the value Sanlam has placed on it.
“The business is still in the recovery phase following Covid,” says Hannes van den Berg, head of South African equity and multi-asset at Ninety One. “If you ask me whether the price is too high, the question is whether it is too high considering current profitability, or what profits were before Covid, or what the profit can potentially be as the company recovers over the next year or two?”
Considering that an Assupol under Sanlam will unlock regulatory capital for the latter, the purchase price may not be too steep.
“According to calculations we have made, there seem to be synergies when Assupol is situated within Sanlam,” says Van den Berg. “One such synergy is the capital requirement, which will be much more lenient when Assupol is in the bigger stall, and we also see IT and back office savings. The potentially lower capital requirement and cost reductions make the purchase price more attractive.”
However, “as the transaction is today, we think it is a reasonable offer for Assupol”, Van den Berg says.
The question now turns to whether the takeovers of Assupol and 1Life suggest there is still some vim left in the funeral and life insurance markets, especially among the clients that Assupol services — lowerincome policyholders. For instance, Assupol will be integrated into Sanlam’s retail mass cluster. The inclusion will endeavour to fill a hole left when Capitec terminates its funeral product co-operation agreement with Sanlam’s developing markets unit at the end of October.
“The funeral cover space is growing,” says Mathidi. “Lapse rates in premiums are very low, making the margins very attractive. From a cultural point of view, you always want to give your loved one a decent funeral. So, clients would rather default on other payments and keep their funeral policies going.”
With two insurers being bought out, it also raises the question whether the life insurance market in South Africa is becoming a concentrated space.
“You’re going to end up with very few very big players, which is not great, ultimately, for competition,” says Mathidi. “But so far, the competition authorities are giving the thumbs-up. They’re not seeing the challenge yet.”