Insurance & Reinsurance

AMTRUST FINANCIAL SERVICES Bollore

ASX Listed Managed Investments Monthly Report

Capital Continues to Flow Into LMIs Through April and May we have seen three more listed managed investment vehicles (LMIs) start trading on the ASX including two fixed income focused listed investment trusts (LITs), Perpetual Credit Income Trust (ASX:PCI) and MCP Wholesale Income Opportunities Trust (ASX:MOT). Refer to our LMI Monthly Update of 18 March 2019 for more details on these LITs. Pengana Private Equity Trust (ASX:PE1) units listed in April after it raised $205m, at the lower end of its $100m to $600m target range. PE1 is a unique offering in that it is the only LMI that will provide exposure to a well-diversified portfolio of global private equity investments. Although the PE1 raising was towards the lower end of expectations we remain comfortable that it will still be able to achieve its objective of building a well-diversified portfolio and maintain our Recommended Plus rating. The listing of PCI and MOT continues the recent trend of fixed income managers tapping the LMI sector for funds. Given the domestic and global low interest rate environment and the potential for further interest rate cuts, it is not hard to see why these offerings are attracting strong demand. These fixed income trusts are offering investors higher yields than available on bank deposits, which are the traditional avenue for retail investors looking for a reliable income stream. However, with rates now so low and even negative factoring in inflation, yield hungry investors have gone in search of yield in alternative fixed income products which were once on the periphery of the retail market and only generally accessed by institutional investors. These products are now being increasingly accessed by retail investors through LMI products and unlisted unit trust structures. However, investors need to be aware that while the underlying assets can produce a higher yield and pay regular, stable income, the risks are higher than traditional bank deposits. Investors should always ensure that they understand the risks associated with any new fixed income offerings and are comfortable including these in their portfolios. These products don’t come with any guarantees, unlike bank deposits, and a significant deterioration in global credit conditions could have an impact on returns. The addition of PCI and MOT takes the total number of fixed income LMIs to six and we are aware of two more offerings in the pipeline, including one from Partners Group, a global private markets investment manager which is planning to launch a listed investment trust later this year. The Partners Group LMI will invest in a portfolio of global debt instruments in a segment of the market that is not generally accessible to retail investors. We will provide more information on the proposed LMIs as it comes to hand. In addition to funds flowing into new LMIs, there have also been a number of secondary market raisings in recent months. In May/ June VGI Partners Global Investments (ASX:VG1) successfully raised $300m via a placement and entitlements offer. VG1 shareholders also stumped up $75m for shares in the Manager as part of an IPO offer for VGI Partners (ASX:VGI). There have also been a number of secondary market raisings by fixed income LMIs with NBI Global Corporate Income Trust (ASX:NBI) raising $476m via entitlement and shortfall offers. This was the maximum under the offer and funds will be invested in accordance with NBI’s strategy to invest in global, high yield, liquid corporate bonds. In June, Qualitas Real Estate Income Fund (ASX:QRI) raised $34.7m via a placement to wholesale investors and in July Gryphon Capital Income Trust (ASX:GCI) announced entitlement and shortfall offers to raise up to $108m. These offers show that the fixed income LMIs are having no trouble finding new assets for their investment portfolios and there is no shortage of investors willing to provide the funds. This sector had a market cap of $3bn at the end of May and with the new offerings yet to come to market and secondary market raisings we expect this to be well over $4bn by the end of 2019. Spotlight on DUI and Rating Upgrade Diversified United Investment (ASX:DUI) is one of the older style internally managed LICs. Listed on the ASX in 1991, the company invests in a portfolio of ASX-listed securities to generate income and capital appreciation over the long-term. Whilst the portfolio is predominantly invested in Australian large caps, up to 5% can be held in small-caps via an allocation to small cap fund managers and up to 20% (currently 15%) can be held in international shares via ETFs and international fund managers. The portfolio has performed well with DUI at the top of our performance table (see above) for LICs with an Australian shares focus. It has outperformed the S&P/ASX 200 Accumulation Index over 1, 3, 5 & 10-year periods. The outperformance can perhaps partly be attributable to the small international holding, but individual Australian stocks, such as an overweight position in CSL, have played a large part. The portfolio is managed by the Board which meets on a monthly basis to review the portfolio. All four directors have significant market experience. Like the other internally managed LICs, DUI is low cost with a management expense ratio of just 0.12% p.a. The fully franked dividend yield of around 3.5% is a little lower than some other Australian share focused LICs. Given the strong and consistent portfolio performance we are upgrading our rating for DUI from Recommended to Recommended Plus. At the time of writing the shares are trading at a 6.5% discount to pre-tax NTA. We believe this is a good entry point for long-term investors seeking exposure to a well-managed portfolio of Australian shares with some modest international exposure. Bailador has a Good Year Technology focused LIC, Bailador Technology Investments (ASX:BTI) had a good FY2019 with pre-tax NTA per share at 30 June 2019 up 18.2% for the 12 months. The increase in NTA was driven by sizable upwards revaluations in a number of its key portfolio companies including SiteMinder (+30.4%), DocsCorp (+19.3%) and Straker Translations (+25.7%). We shone the spotlight on BTI 12 months ago in our June 2018 Monthly LMI Update when the shares were trading at $0.74. This was after write-downs in a couple of its portfolio companies, including iPRO which was completely written off in 2017. At the time we wrote “Overall, the portfolio now appears to be in relatively good shape and with the underlying portfolio of businesses growing revenue at an annual rate of 35% there appears to be good valuation upside. At current prices we think BTI probably offers good value given the large discount to pre-tax NTA and the potential for valuation uplifts over coming months.” We did remind investors that “private equity style investing is more suited to higher risk, patient investors and that it should form only a relatively small portion of a well-diversified portfolio.” We note that returns from this style of investment can be lumpy and take time to emerge. Investors who acquired BTI at the time have done well with the shares now trading at $1.07. Despite the strong share price performance the shares are still at a discount to the June 2019 pre-tax NTA of $1.31 per share and also the post-tax NTA of $1.21 per share. We will take a closer look at BTI and its prospects in our next Monthly LMI Update. Our rating for BTI is Recommended Plus.

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17 Jul 19
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STOREBRAND

Pressures confirmed for 2019

Storebrand posted a H1 19 net profit of NOK945m, down 28.1% yoy. Operating profits declined by 21.5% to NOK1,005m. This is the second disappointing quarter for the Norwegian insurer. While lower profitability was expected from the Guaranteed pensions segment (-27.8% in profit before amortisation to NOK460m), the core Savings (non-guaranteed) business was expected to be more resilient. The Insurance segment was hit by a higher combined ratio (89%). The pressure on the bottom line should continue in the next quarters.

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12 Jul 19
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Prudential

The finishing straight line for the demerger

M&GPrudential announced its strategy a few months before the expected split of the insurer. The insurer will be structured into business units: Savings & Assets management and Heritage. While a development strategy will be implemented in the first BU, the large With-Profit business of the Heritage unit will be closed to new customers and managed by a specialised company (Diligent). The earnings and the capital position of M&GPrudential are likely to be fragile and would depend on the updates for longevity assumptions.

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05 Jul 19
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Randall & Quilter Investment

Randall & Quilter Update Note - Ramping, & Quickly

The full year results released at the end of April met revised expectations and guidance given that they were impacted by the delayed completion of several Legacy acquisitions. These transactions, including Global Re, have now closed and will feature in 2019 results. In the meantime, Randall & Quilter's strategy to invest in two key businesses with different capital requirements and complementary earning patterns is bearing fruit. Legacy continues to provide opportunities for growth, with a strong pipeline and market tailwinds. This is also a Brexit proof and recession resistant model. The completion of the Global Re deal is transformative, and demonstrates that large scale transactions are achievable. Program Management hit its ambitious Contracted Gross Written Premium target for 2018, and growth continues apace as the competitive advantage of its high-quality insurance paper pays dividends in a market in which many Lloyd's insurers are reducing their new business In other developments, the successful capital raising, the AM Best ratings upgrades, and inclusion in the AIM 100 index are all positive developments. Finally, the question over succession planning, which had been of concern to some investors, has been convincingly answered. In summary demand is strong in both businesses, the platforms are scalable, and the respective markets are changing shape in favour of Randall & Quilter's offering. The balance sheet is in good shape and ready for further acquisitions. Management continue to be adaptive and entrepreneurial, and yet maintain a sensible approach to risk. As a result of all this, we expect the business to continue to perform well. Consensus is thin due to the limited coverage, but forecasts for Randall & Quilter's adjusted 2019 EPS come in at around 18p/share. Consensus distribution and Net Tangible Assets (NTA) per share also increased. The valuation remains undemanding, at a 5.2% yield and a significant P/E discount to the larger Life consolidators.

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04 Jul 19
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Assicurazioni Generali

The final sprint for Tranquilidade is underway

According to Bloomberg, Generali is one of the two main bidders in the acquisition of the Lisbon-based insurer Tranquilidade. The transaction would cost €600m. The targeted company has a strong presence in Health and Automobile, two business lines that interest the Italian operator. Relative to the sector valuation multiples, the P/E is acceptable contrary to the P/Book which seems to be expensive. Acquiring the second player in Portugal will require financial sacrifices.

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01 Jul 19
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KMK RAI ECK GFIN GAN OKYO PRM LWRF RQIH WGB

Small Cap Feast

ReAssure Group plc - The Group is a leading closed book life insurance consolidator in the United Kingdom with 4.3m policies, £68.7 billion of assets under administration on a Post-L&G Illustrative Basis. It is considering a premium listing segment of the main market. Voyager AIR The Com pany w ill focus on the acquisition, leasing and m anagement of prim arily widebody aircraft, w ith asset management services to be provided by Amedeo Limited he IPO will comprise a Placing and Offer for Subscription of Shares to raise up to approximately US$200m· IMC Exploration Group (NEX: IMCP), focused on acquiring and exploring prospecting licence areas w hich have high potential for natural resource, is looking to admit its shares to the standard list and will withdraw for the NEX Exchange. TBC

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01 Jul 19
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AEGON

The good deal with Santander

The partnership between Aegon and Banco Santander is not new. It began in 2013. Spain is not particularly a cornerstone in the profitability of the Dutch insurer, but the reinforcement of the relationship with the leader in the banking sector would allow it to progress in the implementation of its recovery plan.

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27 Jun 19
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Mapfre

Mapfre and Santander: a cooperation of leaders

The Non-Life business of Mapfre is under pressure with a voluntary rigorous underwriting policy and growing competition. The deal with Santander is an opportunity to increase sales volumes at a relatively lower cost. In addition, the expertise of the bank in the SME segment is a guarantee for the quality of the future business.

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27 Jun 19
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CNP Assurances

CNP and La Banque Postale: closer than ever

After the authorisation by the AMF, La Poste has avoided the launching of a bid for CNP’s minorities and a major step towards the creation of a large public financial unit have been achieved. The impact on the operating performance of CNP would be gradual and the new machine would not function perfectly before H2 20. Now, the next phase concerns the valuation of La Poste, which is an issue between the French government and the Caisse des Dépôts et Consignations.

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26 Jun 19
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SAMPO OYJ-A SHS

Sampo sacrifices a small part of Nordea to keep its solvency

Sampo will distribute one Nordea share for each ten Sampo shares held as an extra dividend. This decision aims to decrease the insurer’s stake in the bank below 20% to benefit from more favourable regulation in terms of the Solvency II. This move will not have a significant impact on the internal dividend stream and Sampo would be able to distribute a strong dividend.

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