COVERING THE BASES - JSE MAGAZINE

COVERING THE BASES

With SA still accounting for 90% of life insurance volume premiums on the continent, the African expansion potential for JSE-listed insurers is immense

COVERING THE BASES

In 2013 global reinsurer Swiss Re showed how life insurance sales in the rest of Africa failed to keep up with the spurt in recent economic growth.

To put it into perspective, while SA has the vast majority of the continent’s life insurance volumes (90%), the country’s share of the African economy is substantially smaller (around 30% of sub-Saharan Africa’s GDP, according to the World Bank).

This statistic underlines the untapped market that Old Mutual and Sanlam (SA’s biggest insurance players) continue to expand into. Volumes and value are not directly comparable, but given SA’s significantly larger affluent market, the total value of premiums is likely to make up even more than 90%.

Potential is one thing, but translating it into sales is the challenge facing JSE-listed insurers. Africans who have recently moved up into the formal consumer class may have more immediate spending priorities than long-term financial security for their families. These could include buying appliances such as fridges and stoves, for example.

Key to tapping into new African markets is financial planning education and marketing as there simply is no historical culture of buying formal life insurance products elsewhere on the continent. However, there are informal long-term savings schemes, such as community-based burial societies. Opportunities will also occur in very different market segments, such as corporate pensions. Here the historical diversification of JSE-listed insurers into areas such as asset management will give them further positive prospects.

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Also, although it appears counter-intuitive, government regulation of the vibrant economic growth in sub-Saharan Africa can also prize open markets for insurers.

For example, as a result of regulation, Nigerian insurance premiums will increase fourfold over the next five years to $6.3 billion as the country begins enforcing a 2004 law making coverage compulsory for businesses. This is according to a forecast by the National Insurance Commission of Nigeria.

The diversification of JSE-listed insurers into areas such as asset management will give them further positive prospects

There will be scepticism about implementation, which includes compulsory vehicle and building insurance. However, it helped lure investment from Old Mutual and Sanlam to the country, reported Bloomberg.

It’s been two decades since SA rejoined the global economy and in that time JSE-listed firms have learnt through trial and error that Africa, like any continent, is not homogenous. In general SA insurers do not have a ‘sprinkler’ approach to economic growth on the continent. Instead they usually select the highest growth countries that also offer relatively low political risk, such as Ghana, Nigeria and Kenya.

JSE-listed MMI Holdings, with businesses in 12 African countries, identifies the opportunities and challenges extensively in the firm’s 2013 integrated report. Mervyn Cookson, CEO of MMI Holdings unit Metropolitan International, highlights the challenges of premium collection in markets where many do not have bank accounts. Here Cookson says increasing use of mobile technology to resolve problems of this kind, will include mobile banking. This aims to take advantage of the millions of people who have cellphones and are part of the rising consumer class on the continent.

The challenge for expanding companies is to find the delicate balance of combining the advantages of uniformity, and tailoring operations for individual country markets. One way to go about it is by scaling up ‘one-size-fits-all’ systems.

This is particularly applicable in the IT-reliant long-term insurance sector as duplicating IT can be expensive. For MMI Holdings this means ‘implementing efficient and cost-effective business processes that are standardised across all operations’, including ‘restricting the number of IT systems in use until there is only one system per line of business’. But crucially, ‘customisation will be at the margins for local conditions’, says Cookson.

While running the core elements of an IT system from Johannesburg might be cheaper, this is not necessarily the case with regard to staffing. MMI says it ‘decentralises to respective African countries as soon as sufficient scale has been reached to steadily reduce costs’.

While the tension between country-specific customisation and scale applies to IT, it may be just as true for marketing. Advertising through pay TV, football team sponsorships and the internet have all reduced boundaries, prompting MMI to build one international brand, Metropolitan. In the year to June 2013, MMI Holdings headline earnings were up from R2.16 billion to R2.52 billion.

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‘A disappointment to some extent has been the relatively slow rate of growth of Ping An Health into the mid-level individual market’

RICHARD FARBER, FINANCIAL DIRECTOR, DISCOVERY HEALTH

While JSE-listed life insurers still have a long way to go to profit from the growing African market, they have hardly been standing still. Sanlam, which unlike Old Mutual kept its primary listing in SA, illustrates this trend. As recently as a decade ago Namibia, formerly governed by SA, was ‘international’ business for Sanlam.

‘In 2003 our traditional SA operations contributed 97% of gross operating profits, while Namibia and other international operations contributed 2% and 1% respectively. By 2012 the contribution to gross operating profits from our traditional SA operations was 75%, while our other operations contributed the remaining 25%,’ Sanlam group CEO Johan van Zyl says in the 2012 Sanlam integrated report.

Sanlam, with a presence in 11 African countries, focused on Asia in 2013, where it bought two stakes in companies in the Indian Shriram Group for a combined R3.2 billion. In the six months to June 2013 Sanlam headline earnings were up 44% to R3.47 billion.

Despite dull economic growth in SA since the 2008 global financial crisis, the entry-level market has continued to grow here – for now at least. According to Old Mutual, which owns a majority stake in Nedbank, the company added as many as 500 000 clients to reach two million, in what it calls the ‘mass foundation market’, which includes funeral and education policies.

This growth, between 2009 and 2012, occurred in the market that earns up to R3 000 a month, according to Old Mutual group financial director Philip Broadley. In November 2013 Old Mutual predicted that this target market would grow by around 7% to over 14 million by 2017.

Broadley predicted the segment one notch up, the ‘mass market’, would grow much faster at 23% to over 9 million people. This market, which consists of people earning between R3 000 and R12 000 a month, was the sweet spot in the retail boom before the financial crisis.

Old Mutual, which has directed its focus back to Africa after struggling to earn the same returns in Europe and the US, said net income in the six months to June 2013 jumped from £262 million a year ago to £423 million.

While there may be more opportunities in the entry-level segment where market penetration is lowest, SA’s tepid economic growth of under 2% for the first nine months of 2013, announced after Broadley’s presentation, could put the brakes on further positive structural change.

Long-term insurer Altrisk, a wholly-owned subsidiary of the biggest unlisted short-term insurer Hollard, says industry-wide players have even struggled at the top end of the market. Life insurance sales in 2013 were ‘flat or negative’, and this is expected to continue in 2014, says Altrisk MD Michael Blain.

‘At the moment we are seeing retrenchments in the middle and upper management layers, which is a concern, since this is largely the insured population.’

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Liberty Holdings, which is majority-owned by Standard Bank and formally follows the ‘bancassurance’ model aimed at benefiting both parties, focuses on the more affluent end of the market. Liberty Holdings, which operates in 15 African countries, says it has graduated from ‘fixing’ the business to ‘growing’ it.

In the six months to June 2013 headline earnings were up 4.9% to R1.67 billion as long-term indexed insurance sales of R3.1 billion are up 11.8%. As important to this result was Liberty’s ability to eke out growth in invested premiums despite declining emerging market equities and weaker bond and currency markets in SA.

Local knowledge in Africa may give these JSE-listed firms an advantage over developed world rivals

For life insurance companies timing is everything. This is because profits are not simply generated from selling insurance to consumers while managing the claims risk, but also from the performance of hard to predict financial markets where the premiums are invested.

Discovery Holdings is another diversified financial services company that evolved from a medical aid business to expand into life insurance and asset management. Discovery, like MMI Holdings, is 25% owned by RMI Holdings, which was spun off the RMB Holdings banking group that includes FNB. While Discovery is already over 20 years old, it is also the youngest of the big players in the sector on the JSE, underlining how tough it is for start-ups to take on established firms.

The group is the most aggressive JSE-listed long-term insurer in China, where it has a 25% investment in medical insurance firm Ping An Health. Discovery financial director Richard Farber says in the company’s 2013 annual report that ‘a disappointment to some extent has been the relatively slow rate of growth of Ping An Health into the mid-level individual market’.

But Farber maintains that it was always going to take time to gain traction, adding that he is ‘optimistic about the potential of the private health insurance market in China’.

Discovery ‘total comprehensive income for the year’ (profit as defined by Discovery) to June 2013 was R2.71 billion, up from R2.61 billion in the previous year.

Clientèle Limited is the smallest of the six long-term insurers and, eschewing an asset manager is the closest to a pure play life insurance company. Clientèle said in the year to June 2013 it had focused on attracting more sustainable customers with lower lapse rates. As a result premium revenue was up only 2% to R1.22 billion. But investments were up 19%, lifting headline earnings to R293 million, says Clientèle managing director Basil Reekie.

While Clientèle may be a smaller player in foreign markets, the concentrated nature of the rest of the listed life insurance sector in SA makes for a continuation of the dynamic phase companies are seeking in emerging markets.

Size, and cross-holdings with some of the biggest financial services groups, including some of the big four banks mean intellectual and financial capital as well as partnership opportunities should be relatively easy to find.

Local knowledge in Africa may give these JSE-listed firms an advantage over developed world rivals when it comes to continuing the expansion north of the Limpopo.

For Old Mutual and Sanlam in particular, with combined war chests of about R7 billion, African acquisitions are not a case of if, but when, say sources in both companies. However, in Asian emerging markets the big five local insurers will face substantial challenges.

In the East, SA firms will have less of a competitive advantage with regard to local market experience. They will also face more competition from western businesses and indeed from domestic firms in China and India.

In short, straight-talking government relations and superb domestic contacts will be required, along with the usual doses of discipline, execution and good luck.

By Tom Robbins
Image: David Maclennan