NOMPU SIZIBA: Financial services group Alexander Forbes expects that the fix-it phase of its journey will take another two years. Although it recorded a significant drop in profit in the year through March, its CEO Andrew Darfoor says the group is starting to show signs of tangible progress with regard to its five-year Ambition 2022 strategy. My colleague Ingé Lamprecht spoke to Darfoor earlier today and asked him what the group’s major challenges were over the past year.
ANDREW DARFOOR: I would encourage you to look at ‘normalised’, because there is a lot of noise in our numbers. So let me try and expand on that.
Last year we saw the business… peak up, so we apportioned a gain on R754 million. So clearly that flattered last year’s numbers. So when you compare like with like, obviously the numbers are down, which is why we encourage a look at normalised, which strips out the impacts of those one-offs.
So on a normalised basis profits were up 5% and what was pleasing was that areas aligned with our growth strategy were up. In our institutional cluster, which is really our corporate employee benefits umbrella platform, we saw profits up 13%. In our investments business we saw profits up 29%, which means that for the institutional cluster as a whole profits were up 23%. So we had 8% growth, 23% profits in our institutional cluster.
In our retail cluster we saw some pleasing performance, particularly from our short-term insurance business, which was up double-digit growth.
So I think overall the way I would categorise our performance when you look at it on a normalised basis is that all of our metrics were moving in the right direction. We delivered on our expense targets two years ahead of plan and our expense ratios were down, our margins were up, our profits were up and we maintained a strong profit to cash conversion, which actually led us to increase the dividend payout to our shareholders. So our total shareholder return was 21.9% for last year. If you think back to July 2014, when we listed, we’ve generated just over R4 billion of cash and we paid out just over R2 billion. So the trick for the future is can we continue delivering growth, cash and improving dividends? I think we can. This is five-year journey. I think you are right to say that the fix-it path will probably take another 18 to 24 months. What I mean by that is we to modernise our technology platforms. We invested R1 billion over three to five years and by 18 to 24 months the vast majority of the benefits of that would have been delivered and we’ll start to see that though.
I also want us to get our retailisation rate to double-digit. So we’ve gone through 3% retailisation to 8.7% retailisation and all that means is that our institutional and other members now have a retail solution. Home insurance, car insurance, savings products, … product – we want to get that to double-digits. So I hope that gives some perspective on the numbers.
INGÉ LAMPRECHT: Thanks, Andrew. Just to get back to the original question, what were your main challenges over the past year?
ANDREW DARFOOR: The main challenges are the areas I’ve highlighted. How do we get our expenses down faster – we’ve made progress there. How do we improve our retailisation – we are making progress there.
I think in terms of our emerging markets business we saw good performance in Namibia, but we also saw weaker performance across some of other countries, notably Nigeria, Uganda and Zambia. So we’ve got some plans where we want to focus on how we fix those businesses, how we invest the growth in those businesses. So I would say that we’ve still got more work to do.
I think our balance sheet is not as efficient as it could be. We’ve done a review of our balance sheet and we think there’s a significant amount of trapped capital in our balance sheet. And over the course of the next 12 months we will be seeking to unlock inefficiency in our balance sheet which will release surplus capital. When that happens, we have a choice – do we reinvest that surplus capital back into the business or do we pay it out?
I think those areas are some areas that we’ve got work to do.
INGÉ LAMPRECHT: Your figures include R32 million related to the specific employee retention strategy. What does this refer to, exactly?
ANDREW DARFOOR: When I arrived and I looked at the five-year Ambition 2022 journey, it was important to me to know that I’d locked in leaders and team members who were, I felt, critical to the success of the strategy over the five-year period. So what we did is we looked at the top 150 leaders and I determined who I thought were absolute mission-critical for the journey. We locked them in. It’s essentially a two-year lock-in period with a retention payment, a one-off cash payment that we made to members of the top 150. But we also went wider and selected specific people that we thought were critical to our journey. It was important to me to know that I could embark on the journey with these key individuals that have strong institutional knowledge and the skill sets and competencies I felt we needed for the journey. So that’s what that relates to, a one-off payment – which is why we are treating it as a one-off payment in our numbers.
INGÉ LAMPRECHT: The results mention the challenging economic and political situation. Do you find it difficult to attract new clients in the current environment?
ANDREW DARFOOR: What we’ve been able to do in the last year is we kept our client retention strong at about 98%, and we saw strong new business winds in a key number of our areas of business. So in our healthcare business we generated 10% revenue growth with a number of new business winds. In our umbrella business we saw good asset growth in our umbrella business, up 9%. We saw the number of members up 12%, number of clients up 8%. So I think despite it being a tough economic environment to operate in, it’s in a 1.3% GDP economy – and I think a week or so ago we saw the first quarter actually was in recession, when we think about it. Despite that we are seeing good top line [growth] through a number of important new business winds.
So all we can do in this economy is continue to have a strong value proposition arm and get out there and win new business, which we are doing.
INGÉ LAMPRECHT: With regard to the value proposition, there has been an unprecedented move from standalone retirement funds to umbrella finds on the back of Treasury’s pension-fund reforms, so you’ve converted 18 standalone clients to your umbrella fund offering. Do you foresee a time when greater benefits of scale will translate to all-in fees of, say, 75 … for members?
ANDREW DARFOOR: Ja, I think that’s the journey we’re on. Certainly as the largest standalone company provider to stand alone, what we certainly feel is that of our 300 or so standalone clients it’s really working with the trustees to make the decision of what’s the right structure for them and, as part of that journey, 18 made the decision with our support to move to umbrella. I think more will make that decision. But certainly for us it’s a scale game. So we want to have scale in standalone, scale in umbrella, more efficient operations and we can pass on that cost to the member. So I do see a world in which we have much lower costs, to enable people to preserve more of their income, their savings for retirement. I do anticipate a world where we see much more consolidation of pension providers to have scale and really lower the cost of sales and pass on those benefits to customers.
INGÉ LAMPRECHT: Your investment business saw what you referred to as uncontrollable cash withdrawals, something that is prevalent across the retirement industry. What is happening? Are people cashing out their retirement benefits?
ANDREW DARFOOR: Exactly that. This is not a new trend. We saw it last year and the year before, and generally when the economy is tough people go to the source of cash, which is their provident. So what we did see was the outflow of that. We call it “uncontrollable” because obviously we don’t make that decision. It’s the decision of the individual. What we can, however, do is we can influence behaviours and we call that preservation and capture rates. In the year you saw our preservation rates up to 55%, which means that we are talking to more people, we are engaging with more people, while saying to them, actually one of the smartest decisions you can make in your life is not to cash in your provident when you leave your employer. You must preserve that. So we are starting to see some good… there.
But more generally on our investment business, what I would say is that we saw profits up 29% in the investment business, strong inflows into the business, margin improvements of 600 basis points and a number of new client wins. So overall we are getting the assets in and we are doing everything we can to change human behaviour around withdrawals. But in the tough economy you are going to get people who make that decision.
INGÉ LAMPRECHT: Just to end off, Andrew, where will you focus your efforts in the period ahead?
ANDREW DARFOOR: It’s more of the same. We have an investment thesis of cash flow plus growth, so it’s about how we continue to improve our expense ratios, how we continue to drive up margins, which in turn equals more profit, which means more cash, which means we can continue… to all shareholders. So it’s about the client experience, how we improve the client experience, how we retain our clients, how we win new clients and how we grow faster. So cash – we want to deliver; growth – that’s what we are aiming for; and we also want to deliver on our technology initiatives because that will improve the customer experience.