The life assurance sector might not be the most obvious place to scour for value. The prolonged lockdown has meant salary cuts, job losses and increased pressure on disposable income. This is bound to see policyholders rethinking their policies, maybe even having to let policies lapse.
However, Clientèle is an intriguing proposition.
The share is fairly illiquid, with about 87% of the issued shares owned by two shareholders. IM started taking an interest in Clientèle when noticing that financial director Iain Hume has been a persistent buyer of the share since end-April. By IM’s calculations Hume has snapped up shares worth around R11m — which would suggest the company’s main number cruncher sees upside in the stock.
Investors will need to speculate why Hume does not share the market’s jaundiced view on Clientèle’s prospects. The share has more than halved from the R20 levels seen in mid-2018.
The key statistics from the weak interim results to end-December showed the value of new business at R50.9m, recurring embedded value earnings of R282m and an embedded value of R18.94 a share.
It’s not been easy for Clientèle with increased pressure on its clients’ disposable income, which hampers their ability to pay insurance premiums.
Worryingly, directors — in their interim commentary — admitted that a major contributor to the results was the "adverse withdrawal experience and ongoing occurrence of widespread debit order disputes" that have affected most market insurers in SA. "Withdrawals and disputes have been worse than management’s expectations and this has affected insurance premium revenue, the value of new business and recurring embedded value earnings."
The negative withdrawal and unpaid premium experience variance for the interim period topped R74m.
Operationally, new business production volumes — though a little higher than the corresponding interim period the previous year — were again below expectations for the traditional telesales and independent field advertisers channels. This was partially offset by increased production from the newer agency and mass-market broker distribution channels.
The annualised investment return for the period of 5.5% (2018: 1 %) from the group’s investment portfolios was better — but below the actuarial assumption.
On the bright side, Clientèle’s loyalty programme, Clientèle Rewards, was well subscribed. Rewards contracts have now been taken up by about 15% of the client base.
It is also encouraging to see Clientèle launching another differentiating offering, Clientèle Mobile, which offers airtime and data — giving further discounts to Rewards members.
These innovations will hopefully improve the persistency and the quality of new business written.
IM can’t really see Clientèle enjoying a bustling second half. But the group is efficiently managed and it has enough innovations to win market share when the economy shows some signs of stabilising.
The share does appear undervalued on an embedded value basis.
One potential curve ball — with some upside potential — is the possibility of Clientèle making an offer to its (relatively) small pool of minority shareholders. A buyout offer carrying a decent premium price of R12 a share would set back the majority shareholders not much more than R500m.
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