| Fri 31 May 2002, 0:00 | | New Africa Capital - Quarterly Update - May 2002 |
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New Africa Capital - Quarterly update - May 2002
Alpha code - NAC
ISIN number - ZAE 000033361
New Africa Capital
Quarterly update - May 2002
New in force business
The group new business figures for the quarter ended 31 March 2002 are shown
below. The basis used is consistent with that used in the embedded value
calculation. Policies are included from the date that they become in force
as opposed to the date on which they are concluded (production figures).
There is usually a delay up to three months between these two dates.
NEW BUSINESS PREMIUMS 3 mths to 12 mths 2001 %
# 31.3.2002 to average change 2002
Rm 31.12.200 quarter (annualised)
1 Rm
Rm
Recurring premiums
Individual life 154 484 121 27
Gross premiums 180 582 146 24
Lapses at inception (26) (98) (25) (6)
Employee benefits 16 155 39 (59)
170 639 160 6
Single premiums
Individual life 202 1 033 258 (22)
Employee benefits 212 1 958 490 (57)
414 2 991 748 (45)
Annual premium 211 938 235 (10)
equivalent (APE)
Lapses as a % of gross 14% 17% 17% 18
premiums
# Provisional new business premiums subject to adjustment at the year-end
valuation.
The trends in respect of both individual life recurring premium business and
lapses at inception are improving. Employee benefits recurring premium
business is currently below the level attained during 2001, as are both
categories of single premium business. In the case of employee benefits
single premium business, this is partly as a result of a move towards off
balance sheet business and partly because of the erratic nature of such
business. The position has since improved and at 30 April 2002 the figure
for single premium income, including off balance sheet inflows, was in line
with the corresponding period in 2001.
New business production - individual life
Total new business production was higher than that written during the same
period in 2001. The main drivers of this improvement were Metropolitan
Direct and Metropolitan Namibia.
An upsurge in the new business production of Metropolitan Direct, which is
campaign driven, boosted total new business production for the quarter.
Metropolitan Direct is dependent on its ability to source new campaigns to
sustain growth.
While other categories have been lagging the 2001 comparatives, it is worth
mentioning that there has been a marked uptrend in ordinary individual life
new business production since the end of the quarter. Year-to-date
production after the first three weeks of May is on a par with the
equivalent figure for 2001.
Conservation
It is particularly pleasing to be able to report an improvement in the lapse
experience at inception of business written in the last quarter of 2001 that
came into force in the first quarter of 2002 (refer to the table above). It
must also be borne in mind that most of this business was written prior to
the roll-out of Predict, the lapse predictor tool for excluding potentially
high lapse rate business prior to inception. The beneficial effects of
Predict will therefore only be seen in subsequent quarters.
The Predict tool is able to determine with a high degree of accuracy those
policies with a propensity to lapse within the first year. Based on the
risk of lapse ranking, the following two business interventions are applied:
New business applications that score within the top 10% of high risk
policies are declined.
For new business applications that fall within the next 15% of high risk
cases, commission is paid on an "as and when" basis over the first 12 months
of the contract.
At one of the pilot sites, it was particularly encouraging to see that the
rate of lapses at inception declined from 55% in February to 12% in May
2002.
Delayed detection of lapses at inception
It should be noted that in some cases there can be a delay of up to five
months between the date on which an insurance policy is concluded and the
date on which it eventually lapses. This excludes any potential delay
between a client deciding that he/she wants a policy and the company finally
accepting his/her application as complete.
Assuming that a policy is accepted by an insurance company on 20 January,
the date of the first premium deduction could be as late as 31 March. If
this premium is not received, it will be re-submitted for payment in the
following month (April) and possibly the month thereafter as well (May).
Only then will the insurance company be able to determine that the policy
should be classified as "lapsed at inception", a full five months after the
date on which the policy was accepted.
Cost-saving drive
With New Africa Capital having committed to a saving of R 50 million on
actual expenses incurred in 2001, each of the businesses and support
services within the group was asked to review its budget for 2002 and
determine ways of effecting the necessary reductions.
The central focus of the cutback exercise was, and continues to be, costs
attributable to individual life operations, especially fixed acquisition
costs in respect of new business. Growing businesses were not requested to
take aggressive remedial steps that would in any way detract from their
ability to capitalise to the full on growth opportunities.
Management is confident that the group as a whole will save well in excess
of the targeted R50 million in administration expenses by the end of the
2002 financial year, despite having made adequate provision for future
expansion. These savings will not all be attributable to new business costs.
Short-term interventions for long-term gain will mean that the bulk of the
cost savings will only start flowing through in the second half of the
financial year.
Business processes are currently being optimised and, where necessary,
further rightsizing measures will be implemented. Both existing and proposed
business projects are also being reviewed and re-evaluated on a cost versus
growth basis.
The group finance director will continue to measure and monitor progress,
with the various operating entities being held fully accountable for
delivery in terms of the cost-saving goals which have been fully integrated
into the group`s performance management objectives for 2002.
Metropolitan Health Group
The right-sizing of the health business has been completed without
compromising the levels of service offered to its clients, says Blum Khan,
CEO of the Metropolitan Health Group (MHG).
In spite of having lost the administration contract for Topmed and Selfmed,
the two Sanlam medical schemes, which the latter sold last year, the
Metropolitan Health Group is operating profitably, showing improved margins
over the same period in 2001.
Now that OpenPlan, the open scheme administered by MHG, is showing
favourable financial results, the group anticipates that it will become an
attractive retail product in the future.
In line with MHG`s commitment to exploring alternative business
opportunities, its traditional source of revenue, in terms of fees derived
from members under administration, is now being supplemented by licensing
fees derived from franchise agreements and clients who purchase managed care
programmes. In this regard, MHG have signed their first international
franchise deal for implementation later this year.
In January MHG rolled out its first franchise agreement with LAMAF, a scheme
for local authorities with
40 000 lives under administration. By April this year a second, similar
agreement with SAMWUMED (formerly a municipal workers medical aid) with 45
000 lives, was rolled out.
When the Bankmed administration division was corporatised in January 2000,
Bankmed (the medical scheme) retained ownership of 19.9% of the newly
created company in terms of a concession granted by the Council for Medical
Schemes. As part of the original agreement the New Africa Capital group had
an option to acquire this shareholding from Bankmed when the latter`s
concession expired.
This concession has now expired and NAC has acquired these shares from
Bankmed with effect from 1 January 2002 for approximately R100 million. In
terms of the original purchase contract MHG will continue to be responsible
for the administration of the Bankmed scheme for at least another three
years, subject to the attainment of all normal service level criteria.
This acquisition is part of the ongoing integration of MHC and MetHealth,
which are already fully merged at an operational level, and further aligns
shareholder interests in MHG.
Metropolitan Asset Managers
The house view, represented by the Global Managed Fund, under-performed its
cumulative benchmark for the quarter ended 31 March 2002 by 3.7%. This under-
performance excludes the negative performance that resulted from derivative
exposures implemented for the Guaranteed Fund.
The under-performance reported for 2001 continued for the first quarter of
2002. Stock selection was the reason for MetAM`s under-performance, with its
underweighting in gold mostly to blame. Other major negative contributions
came from life assurance, banks and platinum. All these sectors have,
however, staged a strong recovery since quarter end. Views are taken on a
three-year investment horizon where periods of short-term underperformance
are likely.
Macro asset allocation contributed positively, with the house being
aggressively underweight in bonds in favour of equity.
Compounded versus benchmark performance clearly indicates that the under-
performance continued, but that the trend has turned.
Market overview
Global markets
Equity markets failed to sustain the strong performance of the fourth
quarter of 2001. Subsequent economic releases indicated that a US recovery
was taking place, but the really bad news of the Enron debacle and
escalating tensions in the Middle East once again brought home the reality
that equity prices are still stretched.
Interest rates in the US are at a forty-year low and the anticipation of a
recovery, as well as increased government spending, spooked the bond market.
Long-term interest rates are on a rising trend and US corporates are using
this last opportunity to raise capital by issuing debt at attractive rates.
The European and Asian equity markets followed the same pattern as the US,
with Japanese equities outperforming other markets for a change thanks to
the weaker yen and improved global growth prospects. Emerging markets
performed well due to the higher gearing to interest rates and weak
currencies.
Commodity prices started to recover during November 2001 and maintained this
trend into 2002 as global growth sentiment improved.
Local markets
Resource shares continued to dominate the equity market during the quarter.
This is not surprising given the rand hedge qualities of these shares. Once
the realisation had set in that gold mining companies stood to benefit most
from the substantially weaker rand and the gold price itself had showed some
resilience, gold shares became very attractive and outperformed the market
by a substantial margin. However, non-mining resources outperformed mining
resources. MetAM held a high resource weighting relative to its peers, but
still slightly less than the all share weighting.
Financial stocks once again de-rated on bad news from the micro-lending
industry, and banks exposed to the lower end of the market came under
pressure, notwithstanding the good overall earnings prospects for this
sector. The insurance sector, in which MetAM holds an overweight position,
did not show the growth that was achieved in the past. Recent and
anticipated interest rate hikes are not beneficial to the financial and
industrials sectors.
Industrial shares moved sideways over the quarter, with IT shares (MetAM
slightly overweight) taking another beating. Consumer stocks remained under
pressure from shrinking margins and declining discretionary spending. Tax
relief has not yet had an impact on consumer spending, but increases in the
prices of fuel, transport and food have taken their toll.
The rand`s 5.4% appreciation against the US dollar was not enough to offset
tremendous inflationary pressures, from both imported goods and foreign
demand for locally produced goods. Even before the first official consumer
inflation figure was published, it had become clear that the 2002 inflation
targets were out of reach.
The bond market reacted negatively to the deteriorating inflation outlook
while the delay and uncertainty in privatisation issues, together with the
huge forward book losses, prompted a sell-off in the bond market.
MetAM`s performance
Fund Return Ranking
%
MANAGED FUND
(Global)
3 months to 31/03/2002 -1.5 42/57
12 months to 31/03/2002 16.5 53/57
36 months to 31/03/2002 16.2 26/43
FUTURE BUILDER
3 months to 31/03/2002 -4.3 5/5
12 months to 31/03/2002 -2.5 5/5
36 months to 31/03/2002 7.1 2/5
OPTIMUM GROWTH
3 months to 31/03/2002 -0.5 16/57
12 months to 31/03/2002 16.2 54/57
36 months to 31/03/2002 11.8 43/43
Source: Alexander Forbes Manager Watch, March 2002
Market outlook
The outlook for domestic growth is not good. The weaker rand will bring
stimulation in the form of higher export earnings, import substitution and
some pre-emptive spending, but higher inflation and interest rates will
start to bite.
The economy is still not creating jobs, and, although labour productivity is
improving, overall productivity is not. The higher oil price is partly being
offset by a higher gold price. Domestic demand will be under pressure from
lack of discretionary spending. Margins of exporters and primary producers
are improving, but for retailers and banks margins are deteriorating.
The next quarter will be critical for South Africa. The resources cycle is
mature and domestic growth is required to arouse investor interest in local
financial and industrial shares. Financial stability remains the priority
for 2002 and the rand exchange rate will continue to be the central
character in this quest.
The performance of the rand will also continue to determine the performance
of resources vs. financial equities. A stronger rand is needed for
financials to outperform in the next quarter or two. Better performance of
financial shares is likely since financials are very cheap on most valuation
bases and stimulus in the form of lower real rates and a faster growing
monetary base will benefit banks and other financial stocks. IT and media
shares are also dependent on a global upturn, but are likely to outperform
only once fixed investment improves.
Date: 31/05/2002 05:00:00 PM Produced by the SENS Department
