Discovery, Momentum were ‘magnificent’ investments, but RMI says it’s time to move on | Fin24

RMI CEO Herman Bosman says Discovery and Momentum Metropolitan gave the group some of the best returns over the years.
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• Rand Merchant Investment will unbundle its stakes in Discovery and Momentum Metropolitan Holdings (MMH) to its shareholders.
• The company continues to own OUTsurance and wants to focus on short-term insurance. 
• Also, because Discovery and Momentum are competitors, they pose a regulatory challenge for RMI.

On Monday, Rand Merchant Investment Holdings (RMI) announced is its decision to unbundle its stakes in Discovery and Momentum Metropolitan Holdings (MMH) to its shareholders – a move that will see the group focus on short-term insurance. 

Discovery and MMH make up 39% of RMI’s total portfolio – the group’s third- and fourth-biggest investments. RMI holds 89% of the short-term insurers OUTSurance; the OUTsurance sister company in Australia, Youi; as well as a stake in the UK tech-based insurer Hastings. 

“[The unbundling is] not a vote against life insurance. It’s much more driven as a natural choice of our structure,” said RMI CEO Herman Bosman. 

Bosman said life insurance, which RMI first invested in from 1985 when it acquired an insurer named Magnum, had been a wonderful industry to invest in. 

Discovery delivered a total return of approximately 308% since RMI’s listing in 2011, and MMH returned 115%.

The Rand Merchant group of companies has held stakes in both companies since the early 1990s. The group bought a controlling interest in Momentum Metropolitan in 1992 and also provided Adrian Gore and Barry Swartzberg with the seed funding and the life insurance license to build Discovery in 1993.

“Discovery started with R10 million. So, we made 8 500 times money if you think that the business is now worth around R85 billion. In the case of MMH, in 1992, we invested a couple of R100 million on a turnaround of struggling business. And it’s now worth R30 billion. They’ve been magnificent,” said Bosman.

But apart from RMI wanting to be a specialist investor in short-term insurance, Discovery and MMH are competing with each other, which made it more challenging to manage over time as SA’s competition regulations changed.

Also, because RMI only held about a quarter of these companies’ shares, its ability to influence them, especially in quick strategic moves, was much more limited than the group’s control over its other investments.

“At some point when you have such mature, self-sustained businesses competing, you have to start thinking about the fact that your ownership is not efficient. So, we are removing the inefficiency of our life insurance ownership,” said Bosman.

RMI hopes that this unbundling will narrow the discount at which its shares trade on the JSE, if not eliminate it. Although the intrinsic value of RMI’s portfolio increased by 19% in the year ended on 30 June, the company’s share price increased by 7%, widening the discount at which the group was already trading.

On Monday, following the unbundling announcement, its share price rocketed almost 15% to R35.30 – its highest level in more than two years.

Preference for unlisted investments

The unbundling of Discovery and MMH will leave RMI with no listed investments in its portfolio.

Although OUTsurance and Hastings have bigger market capitalisations than MMH as calculated by RMI’s internal valuations, they aren’t listed. And they have not communicated any plans to do so.

Bosman said while RMI cannot rule out the possibility of ever investing in a listed stock again, it will have a “very strong bias” towards unlisted companies in the future. He said RMI believes that’s one of the attributes that make investment holding companies specialists is owning companies that investors don’t have access to through a stock market.

Of the investments that RMI is left with, it’s only minority stake is in Hastings. It has the option to increase its stake from the current 30% to 40%. But Bosman said the company is happy with its partnership with the Nordic insurance group Sampo, which hold 70% of Hastings. 

“We think that we’re now combining the best of thinking in Australia, South Africa, Scandinavia, and the UK,” said Bosman.

But he said RMI’s “aspiration” to become an international short-term insurance investor will come with “a healthy dose of discipline” and selectiveness.

Because its existing investments still have more growth potential, Bosman said RMI would be happy to keep its portfolio as it is. 

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