The listing of OUTsurance on the Johannesburg Stock Exchange has created one of the most direct ways to invest in a predominantly property & casualty (P&C) insurer. Formerly housed in the RMI Holdings stable, OUTsurance was rarely given the attention that it deserved.
Under RMI Holdings, the valuation of OUTsurance was obscured by RMI’s listed investments – Discovery and Momentum Metropolitan. Shareholders have since received their allocation of Discovery and Momentum shares, which were distributed by RMI Holdings as it continued its evolution into OUTsurance. With the unbundling complete, all that remained for RMI was to be renamed into OUTsurance and the transition was complete.
OUTsurance Group, the listed entity, is now comprised of two divisions – OUTsurance Holdings (the insurance businesses) and RMI Treasury, which houses what remains of RMI’s investments. OUTsurance Holdings is made up of two core segments – OUTsurance SA and Youi. In South Africa, OUTsurance offers car, home, business, life, funeral, and pet insurance, as well as investment services. And, in Australia, Youi provides car, home, business, and compulsory third-party (CTP) insurance.
Youi contributes 56% of the group’s gross written premium and 39% of normalized earnings, with OUTsurance contributing 44% of gross written premiums and 61% of normalized earnings.
Looking ahead, the group intends to grow its offshore exposure through an expansion into Ireland. It offers the group further international diversification with long-term growth prospects. Ireland boasts historic market profitability with a track record of success by foreign entrants, and it has a positive stance towards inward investment.
The size of the financial commitment required for a successful entry is within OUTsurance’s appetite for capital risk and earnings strain relative to new ventures. The insurance license application process is underway and market entry is forecast in the first quarter of 2024.
With the rising inflationary environment, the group has experienced higher claims cost and claims inflation, which has resulted in good premium inflation in response. Higher interest rates have also provided an underpin to revenue growth. This was particularly prevalent in Australia, where it came off a relatively low base. The depreciation of the rand relative to the Australian dollar created a nice tailwind for Youi’s numbers, which were up strongly.
Given OUTsurance’s almost 20% market share in Personal lines in SA, the business is more reliant on economic growth than it is on pricing action. OUTsurance reacted quicker than most of its peers in response to escalating claims inflation. This resulted in growth that was more weighted towards premium inflation in OUTsurance Personal, than it was towards unit growth.
Higher claims costs in SA were driven by more than just claims inflation. Compared to the COVID era, where there were significantly less road miles driven, the group experienced a fast normalization of vehicle accident claims frequency. Other headwinds, which have become pertinent in the local operating environment are not limited to: wetter weather; higher loadshedding-related claims; higher vehicle theft of certain vehicle brands; and higher reinsurance costs.
The focus within OUTsurance Business has been on reaching profitability and its internal margin targets. It made immense progress in the last period, with the operating loss halving to R100 million. Premium inflation played a role in the improved performance, but because of the estimated market share of only 4%, the division saw strong unit growth, with a lesser reliance on economic activity than its Personal line.
Youi Direct saw significant premium inflation. Relative to historical norms in Australia, it has typically experienced greater premium inflation than SA. And, apart from general inflation, Australia has also had higher natural peril losses in recent times due to the wet La Nina cycle, higher costs of reinsurance, and increased claims retention levels. This has historically resulted in more volatile earnings reported in Australia than in SA.
Over the last decade, OUTsurance has grown its gross written premiums at a compounded average growth rate (CAGR) of 13%, with a 17% acceleration in the last period. Going forward, management believes that it can maintain a long-term run rate of low-to-mid teens growth. Its relatively low market shares in OUTsurance Business and Youi provides significant runway for premium growth.
Its operating profit over the same period has grown at a 10-year CAGR of 11% – slightly short of premiums growth. However, OUTsurance still boasts several new ventures that are coming through their J-curves, which should boost earnings over the medium-term.
The group remains adequately capitalized with all businesses trading well above targeted solvency ratios. There are big capital commitments to come and, as a result, the group is keeping a surplus of R1.7 billion for two crucial investments. OUTsurance intends to acquire a further 5.3% stake in Youi, which should be completed by October 2023. The remainder of the capital set aside is to fund the group’s entry into Ireland.
The depreciation of the rand has markedly pushed up the funding requirements for the two commitments in Youi and OUTsurance Ireland. As a result, we expect the group’s dividend to be increased at a slower rate than its earnings growth.
One of the primary reasons that we invested in RMI Holdings initially was to gain exposure to OUTsurance. With its previous investments unbundled to shareholders, almost all that remains is OUTsurance. We maintain our favorable view on the company and expect it to perform well going forward.