Outsurance, like Discovery, was originally a start-up in the FirstRand stable. Until recently, few would have predicted that the specialist motor insurer’s market value would overtake Discovery’s … let alone insurance giant Old Mutual’s.
Outsurance was for years buried in the conglomerate Rand Merchant Investment Holdings (RMI), into which FirstRand had unbundled its insurance interests, including its 25%-plus holdings in the Discovery and Momentum groups. Outsurance almost looked like an afterthought.
CEO Marthinus Visser says the group was by no means the first direct insurer. Douw Steyn had started Auto & General in 1985, 13 years before Outsurance launched in 1998.
But Visser says that while older direct insurers were and are strong on marketing and claims management, the secret sauce for Outsurance is its actuarial and analytical firepower. It has an enormous database to mine, with a 20% market share of the South African motor insurance market.
In Australia, its Youi subsidiary has a 6% share — but in a much larger market. South Africa has 12-million cars on the road, but only 4-million are insured. In contrast, Australia, has 19-million cars, all of which must be insured under compulsory third-party cover.
Youi now accounts for two-thirds of group revenue, though Visser says the profit margin is higher in Outsurance’s core South African business.
Outsurance recently opened in Ireland (where it trades under the Outsurance brand) and expects to break even within two years. A few years ago, the group exited the New Zealand market, a similarly sized economy with a similar car pool (about 2.5-million vehicles in both cases).
Visser says the attraction of Ireland was that bodily injury insurance is included in comprehensive cover, which is not the case in New Zealand. In South Africa, bodily injury is covered by the Road Accident Fund and does not form part of comprehensive insurance either.
Visser says there is plenty of runway in the three territories and Outsurance has no plans to launch in other countries for now. But it has a list of top 40 markets, not necessarily English-speaking, though it helps that all three current territories, at least theoretically, speak the same language.
Outsurance has looked at countries in East and Southeast Asia, as well as the Netherlands and Switzerland.
Life insurance is divided into two parts. Direct life cover, bypassing intermediaries, is still a niche in South Africa, where brokers and tied agents continue to dominate long-term insurance. Direct funeral cover, however, is another story. And Outsurance has partnered with Shoprite, the country’s largest supermarket group, to distribute its funeral cover. This could provide a significant growth opportunity, whereas it might not have made sense to maintain its traditional life cover as a standalone business.
Outsurance recently disposed of its Outvest direct investment business to Alexforbes
Outsurance recently disposed of its Outvest direct investment business to Alexforbes. It fits better with Forbes, where asset management and retirement fund administration are the core businesses. This demonstrated to the market that while Outsurance generates mountains of cash, its capital management is highly responsible.
This is certainly one of the reasons Outsurance has a far better rating than Old Mutual, which has a long history of bad investments and poor capital management.
Discovery, the second-highest-rated insurer, with a 16 p:e, is undoubtedly highly innovative and creative, but many investors prefer the simplicity — what management prefers to call “focus” — of Outsurance.
Outsurance’s former stablemates in RMI both have also-ran short-term personal lines insurers. Discovery Insure and Momentum Insure are underwhelming units of their groups. Telesure, as Auto & General’s holding company is now called, is Outsurance’s most serious competitor in direct insurance, along with Santam’s MyWay unit and Old Mutual Insure’s iWyze.
Visser says the Outbonus and the tagline “You always get something out” still reel in clients, though it does not always claim to be the cheapest option.
Outsurance’s huge advertising budget isn’t being cut back. Visser says that while it can be tempting to reduce costs, it needs to stay in the limelight. If it cuts back on visibility, there is an immediate impact on sales. It has had to respond to the decline in broadcast television, and to be creative to remain visible in an age of streaming and the growth of below-the-line social media.
Outsurance looks fully priced, even for a bullish growth investor, if perhaps not quite as richly priced as Capitec. It is a hold for now.
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