Getting its market right
Margin strain easing
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