Looking for yield? Consider Assupol – 78c divi on a 500c share price

OTC listing Assupol delivered sparkling financial results in the year to end June, declaring a total dividend of 78c a share – 48c of which is a repayment of capital. The company's 8 500 shareholders have made an active market in the shares which are traded on the Equity Express platform. Assupol has asked the Financial Services Board for a one year exemption from the recent ultimatum to get an exchange licence or stop trading.  In this Special Podcast, CEO Rudolf Schmidt talks about the well capitalised niche insurer's background, its financial results and logic behind the fat dividend declaration. – AH

ALEC HOGG: Rudolf Schmidt is with us in the studio. He is the Chief Executive of Assupol, a company that's been around for 100 years Rudolf, but only recently started becoming available to investors when you decided to demutualise it. It's only four years ago.

RUDOLF SCHMIDT: That's correct, Alec. We demutualised in 2010, but the company's been around since 1913. It's a really, niche insurer in the South African market.

ALEC HOGG: Focusing on…

RUDOLF SCHMIDT: Our primary focus when we were established back in 1913 was just, to provide life insurance to serving police force members, so exclusively for the police force. However, by 2000/2001, we started diversifying into other markets as well: healthcare, education, and the broader government services etcetera.

ALEC HOGG: And today…

RUDOLF SCHMIDT: And today, that is our core market. We really focus on the civil service (the Government service) for the primary reason that it gives us a very good premium collection methodology through the Persal system and most of our client base – our target market below LSM – are employed by that market.

ALEC HOGG: Yes, it's a fantastic business if you can get into it. Warren Buffett has something called Geico in the United States, which started off as a Government Employees insurance company as well that spread into becoming more of a car insurer. I suppose the sky's the limit if you have a strong base of this nature.

RUDOLF SCHMIDT: Yes, I think the benefit is that the products we're selling today are very simple. They're at the bottom end of the market. As financial literacy improves in the market, we will see people starting to buy up, and diversifying their investments into other ranges as well.

ALEC HOGG: Why demutualise?

RUDOLF SCHMIDT: Well, at the time that we looked at demutualisation, I think there was quite a bit of pressure from the regulator. Our capital adequacy ratio was round about one-point-five times, so there was bit of nervousness on their side. We were the only real mutual still around because some of the other mutuals that exist, such as AVBOB, operate under a separate Act and we were busy growing, so our growth was funded by internal resources. By demutualising, you get access to the capital markets. You can either go for debt financing or you can raise equity in the markets, which can then fund your growth.

ALEC HOGG: And you've decided to list your shares on the OTC with Equity Express, rather than going for a Johannesburg Stock Exchange listing. What was the thinking there?

RUDOLF SCHMIDT: The primary thinking was that as we went through the demutualisation process, we had a number of policyholders who had become shareholders, who did not want to be long-term shareholders and we needed to raise capital so that we could redeem those shareholders. We thought that if we couldn't raise enough capital through our capital raising process in the two years given to us by the demutualisation scheme, we would have to go to the market. However, we were very fortunate. We brought in the International Finance Corporation as our first investor, taking up 20 percent of our equity. Thereafter, the Women's Investment Business took up another ten or 13 percent and finally, Investec Bank came in and they took up another 30 percent. Together with a dividend that we declared internally, (from life into holdings), we had enough money so that we did not need to go to the markets for a listing.

ALEC HOGG: So why stay on the OTC? Why not go to the JSE?

RUDOLF SCHMIDT: Primarily, our reason for not being on the JSE is firstly, we have a very stable shareholder base. Secondly, we don't need capital and as a result of the stability in our shareholder base, we're providing sufficient liquidity through the OTC system.

ALEC HOGG: And you've had a fantastic run lately. I was just looking back at your share price: R3.85 one month ago. Then your results came out and they're very strong. The share price today…you'd have to pay R5.00 if you want to get Assupol shares, so there is an active market.

RUDOLF SCHMIDT: There's a very active market, yes.

ALEC HOGG: How many shareholders do you have?

RUDOLF SCHMIDT: Probably close to 8500 shareholders.

ALEC HOGG: And one of the more active markets then on the OTC. Just to get to your results themselves for the year-to-end June: everything that I looked at in the numbers, looked extremely strong. Your capital adequacy ratio, as you were saying, was at one-point-five. It's now at two-point-seven. If you were on the JSE, your institutional shareholders would already now be starting to agitate for you to give back some of that cash, but I see you did pay a special dividend in this past year.

RUDOLF SCHMIDT: Yes, we did. I think the special dividend comes as a result of our reinsurance refining of our models, which released about R272m.

ALEC HOGG: Just explain that. What exactly is that, when you're 'refining your reinsurance models'?

RUDOLF SCHMIDT: When we established a product line back in 2010, we had no idea of what our expectations would be from a mortality experience side, so we made certain provisions for the mortalities. Over the last four/four-and-a-half years, our experiences have been far better than what our modelling predicted.

ALEC HOGG: In which way? People living longer…

RUDOLF SCHMIDT: People were living longer. The mortalities weren't as high. We weren't paying out. We looked at the reserving we were doing, which was excessive to what our requirements really were and with the regulator and everyone wanting us to move closer to best estimates, we released those profits back to our shareholders.

ALEC HOGG: And how much were they?

RUDOLF SCHMIDT: That was about R272m.

ALEC HOGG: So that is round about half of the profit that you achieved in this past financial year.

RUDOLF SCHMIDT: Yes. That is why we say we look at our earnings from two perspectives. We look at the net profit after tax and the sustainable earnings. Our sustainable earnings came up at R335m, which is about 18 percent up from last year so we're strong on the sustainable side as well. What we do there is we strip out all the once-off experiences, like the reinsurance refining. We also had a very strong equity market, so our capital market assumptions are round about eight-and-a-half/nine percent. That was our expectation. We came in much higher, so we took that out of our results as well.

ALEC HOGG: That 'embedded value growth' of 32 percent: when one assesses life assurance companies, that's the number you focus on. Thirty-two percent is a superb result, but is that including the reinsurance profits?

RUDOLF SCHMIDT: That's including the reinsurance profits as well, yes.

ALEC HOGG: If you took them out…

RUDOLF SCHMIDT: You would probably have to cut about R200m out of the embedded value – R150m to R200m out of the embedded value calculation.

ALEC HOGG: So the increase would be…what?

RUDOLF SCHMIDT: Closer to 20 percent.

ALEC HOGG: Even so, that's a pretty good result. When you go forward, I suppose the thing for the management team…that must be worrying you a little bit, as you do have shares now held with various shareholders. You must be looking enticing for a takeover.

RUDOLF SCHMIDT: Yes, but I think we've structured the company in such a way that with our core shareholders being Invested, the WDB, and the IFC there's a very small free float out there. I believe that as long as we deliver on shareholder expectations and beyond, we're not going to have big sellers in the market very quickly.

ALEC HOGG: You've kept under the radar. Has that been 'on purpose'?

RUDOLF SCHMIDT: I think that to some extent in the early stages, yes, but I think the rebranding of Assupol over the last four years – the changing of our distribution models becoming much more aggressive on our distribution side – has put us onto the radar screen. I think that just being an unlisted company is something that the financial markets in the past haven't paid much attention to.

ALEC HOGG: When you say you are expanding, are you going beyond Government employees now?

RUDOLF SCHMIDT: Yes, we are. It's always been part of our strategy. Our core market is the Government employees, but the products that we provide, the services we deliver, and the infrastructure we have is appealing to the broader, lower LSM group.

ALEC HOGG: Rudolph, it was interesting, going through the numbers again. At the time of the demutualisation, you did offer shareholders the ability to sell their shares and they could have sold them in 2013, at R2.50. I guess those who did sell would be very disappointed today, given what's happened to the price since then. What percentage of them, did cash in?

RUDOLF SCHMIDT: We had about 92 percent of our shareholders cashing in at that time, policyholder who were converted to shareholders. I think it was a reality of the economic climate in South Africa and how stretched the consumer is.

ALEC HOGG: Not a question of maybe not having lots of shares to go around, so cashing in because it wasn't a sizeable part of their portfolio. What was the average amount that people would have gotten?

RUDOLF SCHMIDT: The average amount was between R2800.00 and R3500.00. If you take our core target market, it's a significant injection of capital into their monthly expenditure side, so I don't think it was a question of the shares being too little. For them, holding a share certificate, which may be worth more in the future is worth far less than having cash in the bank today to settle some debt, pay for education, or something like that.

ALEC HOGG: But 8500 is still a big shareholder base. In terms of JSE-listed companies, anyway, you would be one of the bigger (not huge, but one of the bigger) companies. Are you intending to consolidate those numbers more in future?

RUDOLF SCHMIDT: Yes. I think that if you look at the results, we've kept back some capital for that purpose. In the New Year, we will probably make an offer to the smaller shareholders, to (1) try and reduce our shareholder base and (2) to reduce the cost of running a very expensive shareholder base.

ALEC HOGG: And is Assupol available for any investor? Can anybody buy the shares through the OTC?

RUDOLF SCHMIDT: You can, as long as you have… Firstly, it's for private individuals. We need to be able to FICA. The party, who buys the stokvels and something like that, can't invest.

ALEC HOGG: But any other private investor is allowed to…

RUDOLF SCHMIDT: Yes, that's correct.

ALEC HOGG: Rudolf Schmidt is the Chief Executive of Assupol.