RMIH final results June 2018
Earned premiums net of reinsurance for the year ended June 2018 increased by1% to R14.173 billion (2017: R14.064 billion), profit before taxation jumped 12% to R5.403 billion (2017: R4.838 billion), profit for the year attributable to equity holders of RMIHH climbed 17% to R3.897 billion (2017: R3.327 billion), while headline earnings per share from continuing operations grew 15% to 269.7 cents per share (2017: 234.2 cents per share).
The board of directors of RMIH has declared a final cash dividend of 65 cents per ordinary share for the year ended 30 June 2018. The number of capitalisation shares which RMIH shareholders may elect to receive under the scrip distribution alternative has been determined in the ratio of 1.71053 fully paid RMIH shares for every 100 RMIH shares held on the record date.
Outlook and future value creation
Discovery has built a strong portfolio of businesses at different maturity levels, all meeting stringent actuarial, market competitiveness and client service metrics. The established businesses are of significant scale and continue to grow, with Discovery Health leading in open scheme market share, Discovery Life leading in new business market share, Discovery Invest in the top ten retail asset takers and VitalityHealth and VitalityLife in the top five market leaders. In addition, these businesses entered adjacent industries over the year, manifesting in the launch of Discovery for Business in South Africa and the introduction of the long-term savings business, VitalityInvest in the UK, further building the Vitality UK composite model.
The emerging businesses of Discovery Insure, Vitality Group and Ping An Health, while taking longer than expected to grow, all turned profitable over the year and demonstrated their potential. Discovery Insure is the fastest-growing short-term insurer in South Africa, Vitality Group is building a leading global behavioural insurance platform and Ping An Health is the leading private health insurer in China. All three businesses continued to scale and innovate while maintaining positive actuarial dynamics, offering substantial value to the Global Vitality Platform.
Due to the scale and growth rate of the established businesses, the growth model is proving to be less linear as time progresses. This is driving the need to invest in large strategic initiatives with significant growth potential, which is the rationale behind launching Discovery Bank and VitalityInvest. Excluding the effect of the Bank, Discovery expects continued growth without recourse to additional capital. The Bank will flatten earnings for the 2019 year, as post-launch, the amortisation of the build cost will emerge. Thereafter, organic growth is expected.
A fast-moving and increasingly digital landscape plays to Hastings' strengths. Its capabilities in agile pricing, analytics and anti-fraud combined with its disciplined underwriting and strong capital position means it is well-placed to continue to identify and grow in profitable parts of the market. These core attributes have transformed the business from a small disruptor in 2011 into a household name in the UK short-term insurance market, a market with over 50 million car and home policies.
Looking forward, Hastings will continue to invest in technology. It is continuing with the phased roll-out of the next-generation Guidewire platform, with home policies now live on selected price comparison websites and car renewals migration underway. Guidewire will enable continued delivery of operational efficiencies. Hastings also developed new digital capabilities over the last few months and launched a new Hastings mobile app. Hastings is continuously developing its pricing and anti-fraud platforms and announced its participation in a mobility and vehicle technology research programme, alongside a range of other partners from the automotive and mobility sectors.
MMI's vision is to be the preferred lifetime financial wellness partner with a reputation for innovation and trustworthiness. The group strategy, which focuses on client-centricity, growth and excellence, remains intact. However, the specific strategic objectives will be set in more practical and meaningful terms, with an increased focus on execution and delivery. To this end, MMI has made good progress during the year. The reset in priorities was done to enable improved performance and future growth. Key activities include encouraging a more entrepreneurial culture, increased focus on successfully growing core businesses in South Africa and exiting marginal operations outside South Africa. MMI has simplified its operating model and empowered its businesses with end-to-end accountability from sales to service. Centralised functions need to demonstrate clear efficiency or standardisation benefits. MMI will also be increasingly vigilant in not attempting too many new initiatives at any given time.
The maturity of the South African insurance markets and modest short-term macroeconomic growth prospects continue to put pressure on MMI's revenue growth expectations. MMI will therefore also focus on financial discipline, cost-efficiencies and streamlining infrastructure. Building the foundation for longer-term prosperity will depend on a strong distribution and service culture and relevant digital enablement.
OUTsurance's strategic focus includes:
- Growing its market share and product range in Australia. Over the last two years, Youi's new business growth has slowed, resulting in a stagnating market share. The successful delivery of various operational improvements and product innovation can steer the business back to growth. Youi's entry into the bodily injury market has been successful and continues to grow its commercial insurance capability, which is an exciting long-term growth proposition;
- Enhancing digital capabilities and infrastructure. OUTsurance has materially increased its investment in the group's technological capability and digital skills as it aims to more rapidly digitise its client experience across all products;
- Establishing a leading tied-agent distribution capability. The commercial insurance strategy is the primary growth initiative of the South African operation and will continue to receive significant focus in 2019 and beyond. The agency-force is also expected to make a significant contribution to the distribution of personal lines products;
- Grow the product footprint of OUTsurance Life. OUTsurance has recently entered the South African funeral insurance market, which is large, competitive and profitable. The team is also working to refocus the underwritten life operation to ensure its competitiveness and strength of its client proposition;
- Earnings diversification. The disruptive threat of autonomous vehicles, ride-sharing and continuous improvements in vehicle safety is material to the size of the vehicle insurance profit pool. Although this threat is of a long-term nature, it is important that the group's future dependency on motor insurance is reduced. OUTsurance will continue to consider various opportunities to expand within the financial services sector; and
- Regulatory environment. Regulatory changes within the financial services landscape remain a constant. OUTsurance remains well-positioned to adopt new regulations and to contribute positively to the design thereof.
OUTsurance remains confident that Youi's growth will recover in the near term and that it will deliver on the exciting growth initiatives of the South African operation. Expansion in the South African economy is expected to remain challenging, which, coupled with historically low premium inflation, will contain the growth prospects of the OUTsurance personal lines operation in the near term. The group will continue to maintain strict adherence to its underwriting discipline and invest in its operational capability to drive world-class client service.
RMIH Investment Managers face a challenging South African market. However, the appetite to allocate assets to boutique managers remains in place, with a positive upward trend over the past two quarters. Many affiliates have been able to raise long-only mandates, with hedge funds remaining under pressure.
Affiliates across the portfolio remained focused on delivering good investment performance for their clients while continuing to strengthen their businesses with a well-diversified client base and adding to their investment and operational capabilities. RMIH Investment Managers has implemented a new shareholder value map which will enhance the team's focus on six functional areas including strategic support, asset raising, thought leadership, marketing, industry 4.0 and operations, risk and finance. These aim to add targeted value to affiliates in an innovative, focused and transparent manner.
The RMIH Investment Managers team is currently concentrating on the growth phase of the business, which includes the implementation of strategic growth initiatives at each affiliate. The portfolio is largely complete but the team will remain opportunistic and add potential affiliates to either solve additional or underexposure in certain asset classes or to further add value to the portfolio. RMIH Investment Managers will ensure that its reputation as a trusted, value-adding but non-interfering shareholder of choice for the independent asset management industry remains a core philosophy.
The team and its partners in MMI and RBH are excited and committed to work with all its affiliates and support their growth paths over time to create a more diversified and transformed business. Alida de Swardt has settled in well as the new CEO and the shareholders remain committed over the long-term to see the success of the affiliate business model.
In addition to optimising its existing portfolio, RMIH plans to diversify and modernise its investment portfolio through opportunities across a wide spectrum of scale and lifecycles of financial services businesses.
Traditional financial services
The investment team continues to investigate potential investment opportunities, both locally and globally, that conform to RMIH's investment philosophy and generate superior returns for shareholders.
Next-generation financial services
AlphaCode's vision is to pioneer the next frontier of financial services by identifying, partnering and growing extraordinary next-generation financial services entrepreneurs. During the year, AlphaCode has had success with both partnering these next-generation businesses with its underlying portfolio companies to drive innovation and modernisation and building an investment portfolio of superior entrepreneur-led, early-stage fintech-focused businesses that have achieved some market traction and are poised for rapid growth.
During the year under review, AlphaCode participated in a large capital raise in Prodigy Finance, an international fintech platform that offers loans to postgraduate students accepted into business, engineering and law at the world's top universities, alongside one of Europe's leading venture capital fintech investors, Balderton Capital. In August 2017, RMIH invested in Luno, a crypto-currency platform that enables clients to buy, sell and store Bitcoin and Ethereum. Luno is a global platform with operations in South Africa, Nigeria, Malaysia, Singapore and 35 countries across Europe. AlphaCode has a strong pipeline of investment opportunities and will continue to invest in this space.
AlphaCode remains committed to building the broader entrepreneurial sector in South Africa by supporting high-impact next-generation financial services entrepreneurs, with a strong emphasis on transforming financial services and partnering with young, black entrepreneurs. As part of this commitment, AlphaCode has launched three new programmes to identify, partner and grow entrepreneurs at all stages of their journey. AlphaCode Explore is a 12-month learnership programme which will develop and upskill 20 data scientists and enable them to build and proto-type fintech businesses. AlphaCode Incubate seeks to identify and reward early-stage, high-potential black-owned financial services businesses. Each year, eight businesses will be selected to complete a customised 12-month programme and benefit from an entrepreneurial package worth R2 million each. Lastly, AlphaCode Accelerate is a 24-month scale-up programme that provides mentorship, expert guidance and support services to financial services businesses in the growth phase, on the path to scale and job creation.
After year-end, Andile Maseko was appointed as the new AlphaCode eco-system manager.
There are several factors that could strain RMIH's earnings growth in the 2019 financial year:
- The group had an exceptionally low claims experience in the 2018 financial year, especially in the South African and Australasian operations of OUTsurance. This also contributes to lower premium inflation;
- Cyclical movements, regulatory reform and the impact of Brexit on the environment in which Hastings operates;
- MMI being in the process of repositioning its business, with a focus on getting the fundamentals in place for longer-term growth; and
- Investments into new initiatives like Discovery Bank are expected to result in significant additional expenses for Discovery in the following financial year.
Over the longer term, RMIH remains confident that its clear strategy, in conjunction with its solid investment portfolio that is underpinned by unwavering values, will allow it to continue delivering on its primary objective of creating enduring value for shareholders.