Indequity Group's unknown quantity

2/3/2012 1:20:00 PM

Is the Indequity group’s recent launch of a new line in insurance about to haul it out of obscurity on the JSE? Though Indequity has performed with some aplomb of late, at the moment there is very little trade in the tightly held share (management and directors hold around 72% of the issued stock). What’s more, by retaining a listing on the JSE’s moribund development capital market instead of transferring to the higher-profile and more vibrant AltX, Indequity, which specialises in niche insurance offerings, is certainly not helping to attract the attention of serious market participants. And with a market capitalisation of around R36m, a free float of not much more than 5m shares and no investor outreach programmes, it’s unlikely Indequity will stroll into the sights of even the most determined value hunter. It’s a great pity. The JSE does not offer much choice for punters who fancy a dabble in short-term insurance. Aside from stalwarts Santam and Zurich, investors can get indirect exposure to niche insurance offerings through investment companies like Conduit Capital (Constantia) and Brimstone (Lion of Africa). Indequity is a relative newcomer to the insurance market. It entered in 1996 as an insurance broker, writing personal lines business for wealthy individuals on behalf of the larger local insurance companies. It morphed into a fully fledged insurer in 2000 when it acquired an existing insurance company, developing personal lines products around the Uniq-cover and Probiz brands. Admittedly Indequity can’t claim to be a financial services rocket à la Discovery, but the steady growth in the insurance business is commendable. Underwriting profit has grown every year since 2003, stretching from R5,5m in 2006 to over R16m in 2011. Indequity CEO Lourens van Rensburg says that though the personal lines business is competitive, the company aims to grow net premiums, which topped R31m in 2011, by at least 20%/year. He says that if the targeted growth rate can be achieved, perhaps with a strong year or two along the way, Indequity could be looking at collecting net premiums of between R75m and R100m. He says that though Indequity’s growth in premiums slowed last year, the company still managed to produce sufficient profits (equivalent to 31c/share) and cash flow thanks to the quality of the premiums. “We have always stressed quality over quantity. We’re fanatical when it comes to writing business at the right price — even if it means sacrificing some [opportunities].” Comments accompanying Indequity’s results for the year to end-September made an enticing statement regarding the launch of a “truly revolutionary product” which had elicited a “phenomenal market response”. Van Rensburg says the product involves insurance against depreciation on a vehicle. “We’ve gone through an encouraging test phase, and launched the product, which is a world first, at the start of 2012.” Though it’s too early to make a call on prospects for “depreciation insurance”, success in this new line may well drive growth at such a pace that Indequity can no longer fund the expansion from internal resources. That might well be the company’s market-making moment: having to look at raising fresh capital, possibly by way of issuing new shares to new investors for cash. But Van Rensburg says fundraising by means of a share issue would place the company in a quandary. “It’s all about the cost of capital. At the moment we don’t think the share is trading at a level where we [would] feel comfortable issuing new shares to raise capital. The price does not reflect what we’ve achieved in the business in the past few years.” This all makes for an interesting year ahead for Indequity, which, though not on investors’ radar screens, might be keenly watched by predatory competitors. Van Rensburg notes: “We are reluctant to talk about informal discussions we’ve had with other companies in the past. But we are not keen sellers, and regard ourselves as extreme long-term players who want to build value for shareholders.”

Financial Mail