Get­ting its mar­ket right

Mar­gin strain eas­ing

Finweek English Edition - - Companies & markets - SHAUN HAR­RIS

IT’S STILL EARLY DAYS in the quest for the life as­sur­ance in­dus­try to de­velop low­cost yet prof­itable mod­els for de­liv­er­ing life prod­ucts to the low-in­come mar­ket, par­tic­u­larly since the new Zimele-ap­proved con­cept has been handed down to in­sur­ers. So while it’s small, it’s also en­cour­ag­ing to note that Metropoli­tan man­aged to grow its re­tail new busi­ness vol­umes by 14% over the year (endDe­cem­ber) and earn a slightly higher re­tail new busi­ness mar­gin – 12,1% against the pre­vi­ous pe­riod’s 11,5%.

It clearly helps that Metropoli­tan is the dom­i­nant in­sur­ance player in the mid­dle- to lower-in­come mar­ket, but like the other groups it was also bat­tling against thin mar­gins. The re­tail new busi­ness mar­gin was 8,2% at the in­terim, so this change in di­rec­tion, if sus­tain­able, could be an early in­di­ca­tion that the in­dus­try is start­ing to adapt to lower-cost, bet­ter value for money prod­ucts.

Metropoli­tan Group CE Peter Doyle be­lieves the im­proved mar­gin is sus­tain­able.

“For a long time we said the ear­lier higher mar­gins in the mar­ket were not sus­tain­able. We’re tar­get­ing a range be­tween 12% and 15% for new re­tail busi­ness.” But he also points to the del­i­cate bal­ance for life com­pa­nies: “A bal­ance be­tween value for the clients and value for share­hold­ers.”

That has long been one of the crit­i­cisms lev­elled against the life in­dus­try – that it has pro­vided solid re­turns for share­hold­ers but has been short on the value propo­si­tion for pol­i­cy­hold­ers. How­ever, the scales have tipped over the past two years as reg­u­la­tors and ris­ing con­sumerism have ham­mered the in­dus­try. There seems lit­tle doubt that value-for-money prod­ucts are be­ing in­tro­duced by all the life com­pa­nies. What must be guarded against, how­ever, is let­ting the pen­du­lum swing too far and caus­ing share­holder re­volts.

But just on div­i­dend and cap­i­tal dis­tri­bu­tions, in­clud­ing a fair smat­ter­ing of spe­cial div­i­dends when life com­pa­nies see no ac­qui­si­tion op­por­tu­ni­ties and in­stead re­turn cap­i­tal to share­hold­ers, all the large groups re­main at­trac­tive in­vest­ments. It has a lot to do with the strong eq­uity mar­ket of the past three years, but with the em­pha­sis on cap­i­tal man­age­ment sur­plus funds are reg­u­larly re­turned to share­hold­ers.

Metropoli­tan has been no ex­cep­tion, ag­gres­sively re­turn­ing cap­i­tal to share­hold­ers for the past two years. The trend con­tin­ues, with the year-end div­i­dend up 23% and a spe­cial div­i­dend of 77c/share.

This fol­lows a cap­i­tal re­duc­tion equal to 100c/share paid in April, which if in­cluded makes the div­i­dend in­crease 33%.

But eq­uity mar­kets can and will change. The real mea­sure of suc­cess re­mains growth in pre­mi­ums, and Metropoli­tan in­creased to­tal pre­mi­ums re­ceived by 40% to R11bn, or to R4bn on a net funds ba­sis, up from R769m in 2005.

Doyle is pleased with this growth and says the lapse rate – a lit­tle wor­ry­ing at nearly 16% at the in­terim – has im­proved across all types of busi­ness.

Metropoli­tan’s lapse rate is closely watched by com­peti­tors who have ar­gued that while its dis­tri­bu­tion sys­tem into more rural ar­eas seems to be work­ing, it can only be judged a suc­cess if new poli­cies aren’t ter­mi­nated soon af­ter be­ing writ­ten. If Metropoli­tan’s lapse rate con­tin­ues to im­prove, it should an­swer the crit­ics.

Doyle says Metropoli­tan sup­ports Gov­ern­ment’s pro­posed com­pul­sory State pen­sion plan, but cau­tions that ex­e­cu­tion may take longer than the en­vis­aged 2010 dead­line. Is it work­able? “I think it is, but how it’s go­ing to work is still un­cer­tain. It can take a long time to im­ple­ment a project like this, the devil is in the de­tail so I think a bit of cau­tion is re­quired.”

How­ever, he says he’s con­fi­dent Na­tional Trea­sury will adopt the right approach, as it has demon­strated with the Gov­ern­ment Em­ploy­ees Med­i­cal Scheme Con­tracts (GEMS). Metropoli­tan was awarded two of th­ese con­tracts in 2005, and while many life com­pa­nies have strug­gled or ex­ited health­care ad­min­is­tra­tion, Doyle says Metropoli­tan Health oc­cu­pies a unique po­si­tion in the mar­ket where “its big­gest com­pet­i­tive ad­van­tage is price”.

In a few ar­eas Metropoli­tan has been quite con­trar­ian com­pared to the rest of the in­dus­try, en­ter­ing health­care ad­min­is­tra­tion when many life com­pa­nies were get­ting out, and mak­ing a suc­cess of em­ployee ben­e­fits while it proves a drag on the per­for­mance of other groups. Con­tri­bu­tion to prof­its from Metropoli­tan Health in­creased by 155% (off a low base), and from Metropoli­tan Em­ployee Ben­e­fits by 33%.

Even as­set man­age­ment, where Metam ap­peared to be hav­ing a tor­rid time about 18 months ago, seems on the mend, im­prov­ing its con­tri­bu­tion by 33%. “We haven’t said much but there’s a real turn­around hap­pen­ing there. Ob­vi­ously in­vest­ment per­for­mance has im­proved but there are also strong in­flows of funds,” says Doyle.

With all busi­ness units do­ing well, does this of­fer pro­tec­tion against the of­ten spec­u­lated view that Metropoli­tan is an ac­qui­si­tion tar­get. Is some­body try­ing to buy Metropoli­tan? “The short an­swer,” says Doyle, “is no.”

New busi­ness mar­gins up again. Peter Doyle

METROPOLI­TAN... IM­PROVED PER­FOR­MANCE NOT IN THE PRICE

Source: I-Net Bridge

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