This will be a first for IM — covering a company that has a listing on one of the new alternative stock exchange platforms that have, in recent years, started up in rivalry to the JSE.
There are not a plethora of listings on these markets yet, with the bulk of the effort seemingly offering secondary listings to existing JSE listings.
But the 4Africa Exchange has a handful of listings not already found on the JSE and IM reckons that Assupol, the well-established assurance company, is one of the more interesting plays on this platform.
Small assurers, mind you, have a mixed track record on the JSE. Some rewarded shareholders well — like Capital Alliance — while others ended up in a smouldering heap (think Crusader Life, Rentmeester and Sage).
It could also be argued that any craving to invest in small companies in the life assurance space would be catered for by buying into Clientèle Life, which is listed on the JSE.
That said, Assupol has its attractions and is certainly showing its mettle in a tough time for life assurers. IM would, however, recommend that Assupol be considered only by the patient punter looking for steady returns off a relatively low base.
IM does not foresee value unlocking corporate actions, but believes there is enough low hanging fruit in the lower end of the assurance market for Assupol to sustain a decent growth rate once the effects of Covid are sanitised out of the system.
Assupol harks back to 1913 when it was set up as a burial society for members of the SA Police Service. It has in recent years shifted its focus to a broader assurance market — even if there is probably still a civil servant bias to the customer base.
First and foremost Assupol has not escaped the ravages of the Covid pandemic, which is expected to have a significant impact on life assurers for some time to come. The group has indicated that it established "explicit reserves" of R77.4m (after tax) to provide for any excess claims. In its latest interim report Assupol noted these reserves were sufficient to cover the claims of the first wave.
The group reported that by December 2020 another surge in reported deaths started to emerge during the so-called second wave, and that it experienced a similar increase in Covid-related claims during this period. So explicit Covid mortality reserves of R145.6m (after tax) were provided for the expected excess claims relating to the second wave. There will obviously be a more substantial cost for the third wave too.
The material impact of the pandemic can be seen clearly in Assupol’s interim numbers to end-December. New business annual premium equivalent showed a decrease of 17% to R534m — a decent-enough achievement considering there were restrictions in the face-to-face distribution channel during the Covid lockdowns. Interestingly, the group’s direct marketing distribution channel recorded year-on-year sales growth of 12.6%.
The saving grace for Assupol was the net investment return (after tax) earned by the shareholders’ fund for the six-month period of R116m — a return of almost 10% compared with the 3% notched up in the corresponding interim period in 2019.
Assupol’s lean and mean corporate culture has also helped the group through the pandemic — which pushed up insurance benefits and claims over R925m from R575m the previous interim period. Operating and administrative expenses were dragged down to R624m from R640m, while commission expenses were reduced to R444m from R465m. Investment management expenses were also reduced from more than R7m to closer to R5m.
Specifically, Assupol directors disclosed that staff salary increases were delayed for six months and management did not receive any cash bonuses — which is commendable in these times of continued corporate largesse.
In terms of a pure value proposition — which, of course, assumes the well-managed Assupol emerges from Covid without too many nasty side effects — there is quite a bit to make investors sit up and take notice.
The embedded value of Assupol’s current business is about R6.2bn or R14.69 a share. Earnings in the interim period came in at 62c a share, and should exceed 100c a share for the full year.
On a pure value and earnings multiple basis Assupol’s current valuation is hardly stretched. There is also a decent full-year yield to boot. For investors who are willing to buy good companies at bad times, Assupol could be well worth accumulating at current levels.
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