SHARES in Rand Merchant Investments (RMI) took a 14 percent leap on the JSE yesterday following its proposed business shake-up that will result in the unbundling of life insurance assets Discovery Limited and Momentum Metropolitan and a shift towards a focus on property and casualty (P&C) insurance.
RMI, the owner of OUTsurance, and UK personal insurer Hastings, is also planning a R6.5 billion rights issue, “which is considered the most equitable and efficient mechanism to optimise RMI’s capital structure as a result of the unbundling”.
The restructuring would also help the company tackle its R11.8bn debt and reduce it closer to R6bn, a level “more commensurate with the asset base”.
RMI, which is currently the largest shareholder in both life insurers, owns 25 percent of Discovery and 27 percent in Momentum Metropolitan. It expects the unbundling to unlock shareholder value through a reduction in the discount at which it currently trades to its underlying intrinsic value.
RMI has been the largest strategic investor in these two principally life insurers since 1992 and has generated stellar returns from both, in partnership with entrepreneurial management teams led by Adrian Gore, Barry Swartzberg and Hillie Meyer.
Commenting on the announcement, Herman Bosman, chief executive, RMI, said the restructuring marked a significant milestone and was in line with its strategy of investing in unlisted, futurefit, geographically diverse, short-term insurance assets.
“We want a focused and specialist company in RMI focused on P&C first of all. Second we will have a strong bias for unlisted assets which are globally relevant but more difficult to access or impossible to access in other ways. We want to have more predictable cash flows to shareholders on an enhanced basis when compared to the recent past. We will be disciplined about creating local non-competing local champions,” said Bosman.
The group said 65 percent of shareholders had indicated their support for the restructuring and implementation which would be subject to the regulatory and shareholder approval.
The unbundling would likely be concluded by the end of the second quarter of 2022. The rights issue would be implemented before the unbundling and shareholders were scheduled to approve the rights issue in November
RMI said it would remain invested in and committed to the two emerging businesses in its portfolio, AlphaCode, and RMI Investment Managers, in line with its long history and track record of fostering entrepreneurial businesses.
Discovery said RMI planned to participate in any potential equity capital raise required to fund Discovery’s investment into Ping An Health Insurance. Discovery holds a 25 percent stake in Ping An Health, the Chinese health provider said earlier this month it planned to make further investment in Ping An Health.
“The proposed change in the shareholding structure of Discovery as a consequence of the Proposed Unbundling will not impact its business model, operations or capital and solvency position and the Founders and the Discovery management team remain committed to delivering on Discovery’s strategy and growth potential,” Discovery said.
Momentum Metropolitan said the transaction did not impact its capital structure, solvency position or strategy.
“Momentum Metropolitan will continue to execute the Reinvent and Grow strategy over the period from 2022 to 2024. The Transaction does not impact any forward-looking or outlook statements that were previously communicated,” Momentum Metropolitan said.
RMI said post the unbundling, it would provide unique access to a geographically diversified portfolio of future-fit assets, which generated reliable income streams and provide significant growth potential.
These core short-term insurance assets include OUTsurance, Youi and Hastings, which are all local champions in their respective markets. “Collectively these companies provide access to 5.2 million customers, gross written premiums worth more than $2 billion (R29.6bn) and leading positions in South Africa, Australia and the UK, respectively.
“Their underlying financials are competitive relative to a global peer set, with strong cash generation, which positions RMI for an attractive dividend profile post restructure with a target dividend payout ratio of 50 percent of free cash flow generated,” said Bosman.
RMI also reported its annual results yesterday. For the year ended June it delivered a 15 percent hike in normalised (results) to R3.5bn in a period marked (by) Covid-19 challenges. It said assets under management (AUM) increased by 24 percent to R32.9bn in 2021, reflecting the strong bull market in South African equities, up 25 percent, global equities, up 16 percent and South African bonds, up 14 percent.
Total net inflows across the portfolio amounted to R5bn for the period, with R5.8bn invested into retail portfolios, resulting in a 37 percent increase in total retail AUM at R51bn at year-end, whereas alternative strategies – hedge fund and private equity – increased by 38 percent with R35bn under management. It declared a gross final cash dividend of 22.5c per ordinary share.
RMI’s shares closed 14.5775 percent higher at R35.30 on the JSE yesterday.