LEWIS GROUP LIMITED - Industry Regulations And Changes To Insurance Products

Industry Regulations And Changes To Insurance Products

Lewis Group Limited
Incorporated in the Republic of South Africa)
Registration number: 2004/009817/06)
JSE share code LEW
ISIN: ZAE000058236

("Lewis Group" or the "Group")

INDUSTRY REGULATIONS AND CHANGES TO INSURANCE PRODUCTS


The Lewis Group provides the following update on regulations impacting
the industry, the potential impact of new and draft regulations on the
Lewis Group and changes to the structure of insurance products sold by
the Lewis Group.


A.    Draft credit life insurance regulations
      The Minister of Trade and Industry published draft regulations on
      13 November 2015 which proposed a maximum cost of credit life
      insurance       applicable       to     “other     credit    agreements”       (category
      applicable       to    Lewis     Group)    of    R4.50      per   R1   000   of    cover,
      calculated on a reducing balance.


      In       addition,    if   the   credit     life    insurance       provides      for   the
      settlement of the consumer’s total obligation in the event of
      temporary disability or the consumer is unable to earn an income,
      the maximum cost may increase by R1.00 to R5.50 per R1 000 of
      cover.


      The following factors should be considered when assessing the
      potential impact of these draft regulations on the Group:


        -   Approximately 12% of total insurance revenue of Lewis Group
            is generated by operations outside of South Africa and is
            therefore not impacted by the new regulations.


        -   The regulations are expected to apply only to new credit
            contracts.      The   full     impact    of   the      regulations     on    the
            Group’s earnings will therefore be on a phased basis and
            take approximately three to four financial years to have a
            full   impact   as   new   business   converts    to   the   proposed
            standard product and lower rates.


        -   Credit life insurance in South Africa [for Lewis Group] was
            approximately R570 million for the financial year ended 31
            March 2015.


        -   The regulations are only in draft form and the Minister has
            called for public comment on the draft regulations. Lewis
            Group will be making a formal submission.


        -   The Group will, if necessary, also adjust its merchandise
            pricing to support the business model.


B.   Review of limitations on fees and interest rate regulations
     Regulations    published    on    6   November   2015,    which     will   be
     applicable from 6 May 2016, prescribe a maximum interest rate of
     23.25% (repo rate + 17% per year) in regard to “other credit
     agreements” which is the category applicable to Lewis Group.


     Lewis Group currently charges an interest rate of 23% and the new
     regulations are therefore not expected to have a negative impact
     on revenue.


     The maximum initiation fees and monthly service fees prescribed
     in the regulations are higher than the fees currently charged by
     Lewis Group.


C.   Change from term to monthly insurance products
     Lewis Group has previously offered term insurance products across
     all its trading brands. The insurance premiums for the term of
     the contract were therefore paid across to the Group’s wholly-
     owned insurance subsidiary, Monarch Insurance, on the date of the
     contract coming into effect.


     Following the acquisition of the Beares chain in late 2014, the
     decision was taken to introduce a monthly insurance product, with
      the   first   offer   being   extended   to   customers   of   Beares   from
      December 2014.


      The monthly insurance offering was extended to customers of Best
      Home and Electric in July 2015 and is expected to be extended to
      customers of the Lewis brand during the first half of 2016.


      The change from term to monthly policies will result in less
      capital being allocated to the insurance business and further
      strengthen the group’s cash resources.


      The group remains strongly cash generative and its gearing is
      expected to remain below management’s target ceiling of 34%.


Cape Town
2 December 2015

Sponsor: UBS South Africa (Pty) Ltd

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