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Financial services

Jurie Strydom   David Smith
Jurie Strydom
CEO of Regent Insurance Group
  David Smith
CEO of LiquidCapital

Highlights

Regent individual life business performed well, with net premium income up 16%
Strong performance from Regent’s Lesotho and Botswana subsidiaries
Excellent performance from other financial services with LiquidCapital the major contributor
A joint venture saw Regent appointed underwriter for Clicks Financial Services, which is well-positioned to sell insurance products to its approximately three million Club customers
LiquidCapital launched the new Ariva product, a private leasing joint venture initiative with a leading listed retail group, providing alternative funding solutions for the entry level car market
LiquidCapital saw continued growth in policy sales, with funds under management exceeding R2 billion and representing over 600 000 active contracts
Investment in and enhancement of LiquidCapital’s core competence in fleet management and administration

Divisional overview

The financial services division is central to Imperial’s strategy of optimising its position in the vehicle-sales value chain. It provides customers with a range of financial services and products, from vehicle financing via joint venture alliances to insurance and maintenance plans, and leverages off Imperial‘s strong distribution and retail network capability in the motor vehicle industry.

In addition to these vehicle-related financial services, the division also sells life and short-term insurance products to the broader South African market.

The financial services division is separated into the businesses that fall under Regent Insurance, and those that are grouped under Other financial services, the primary business of which is LiquidCapital.

Imperial’s motor retail and distribution businesses have cell captives with Regent. For reporting purposes, the results of these are included in the financial services division.

The division also includes Imperial Fleet Management, a joint venture alliance with WesBank, through which we offer full maintenance leasing (FML) solutions to clients.

Operating units

Regent   Other financial services
     
Regent is Imperial’s insurance business and offers a range of life and short-term insurance products to Imperial’s customers, as well as the broader market.

In the short-term insurance market, Regent’s offering spans a range of specialised products that provide cover to meet the unique needs of business and individual customers. Offerings include cover for passenger cars, commercial vehicles, travel, property, goods-in-transit, accident and health, amongst others.

As a part of the vehicle-sales value chain Regent’s short-term insurance business also underwrites extended warranties, credit shortfall, tyre cover and paint and dent protection. It also manages a significant book of warranty funds.

The primary channels through which these products are sold include banks and dealers, brokers, a call centre and through LiquidCapital.

Regent’s life business offers specialist niche life insurance products to individuals and groups, targeting the emerging market. With a historical base and strong position in the credit life market, Regent has expanded its life product range to include funeral cover and savings products. Through Cedar Employee Benefits, Regent also offers a range of employee benefits and consulting services.

 
LiquidCapital is the most significant contributor to the other financial services business. Positioned as a one-stop-shop for motor-related financial services products, it provides a full suite of value-added financial products and vehicle financing solutions.

LiquidCapital primarily leverages Imperial’s extensive dealer network to market and sell its products. Call centres act as a secondary sales channel for LiquidCapital products and also provide an important sales channel for Regent’s products. The company’s direct consumer-facing channel, launched in the current year, has gained traction and brand recognition in the consumer market.

The business is also involved in contract maintenance, roadside assistance, service plans and vehicle maintenance products which it develops and administers in-house. It has some 600 000 active contracts under management.

During the year LiquidCapital launched the new Ariva product, a private leasing joint venture initiative with a leading listed retailer JD Group. The product provides alternative motor vehicle financing solutions to the entry level car market.

Fleet management is an additional focus area within other financial services. Imperial Fleet Management (IFM), a joint venture with WesBank, provides funding, insurance, sourcing, maintenance, disposal, leasing, logistical fleet management and value-adding services.

LiquidCapital manages its own demonstration and rental fleet of around 8 000 vehicles. It also delivers back-office services to IFM.

 

     

Market condition

Insurance underwriting conditions were weaker than the prior year, particularly in the short-term industry. Investment markets were also less favourable with lower interest rates and volatile equity markets.

The current cycle in the motor industry favours our financial services division as high levels of new contracts are generated, which provides a valuable growing annuity earnings underpin to our earnings.

Results

R million 2012   2011   Change
%
  H2 2012   H2 2011   Change
% on
H2 2011
  H1 2012   Change
% on
H1 2012
 
Insurance                                
Revenue 3 112   2 808   10,8   1 631   1 454   12,2   1 481   10,1  
Operating profit 419   525   (20,2)   206   275   (25,1)   213   (3,3)  
Adjusted investment income 175   206   (15,0)   95   63   50,8   80   18,8  
Adjusted underwriting result 244   319   (23,5)   111   212   (47,6)   133   (16,5)  
Operating margin 13,5   18,7       12,6   18,9       14,4      
Underwriting margin 7,8   11,4       6,8   14,6       9,0      
Other financial services                                
Revenue 887   601   47,6   535   316   69,3   352   52,0  
Operating profit 356   235   51,5   225   140   60,7   131   71,8  
Operating margin (%) 40,1   39,1       42,1   44,3       37,1      
Total financial services                                
Revenue 3 999   3 409   17,3   2 166   1 770   22,4   1 833   18,2  
Operating profit 775   760   2,0   431   415   3,9   344   25,3  
Operating margin (%) 19,4   22,3       19,9   23,4       18,8      

The financial services division as a whole performed satisfactorily.

Regent’s underwriting result declined 24% from R319 million to R244 million. The primary driver behind the underwriting result was a deteriorating claims experience in the short-term motor comprehensive business and certain other specialised lines. The performance of Regent’s other significant product lines in the short-term insurance business (Adcover, Paintech and Warranties) performed better and showed growth from the prior year. Regent disposed of its marine and aviation insurance books during the second half of the year.

The individual life business had an excellent year, with gross written premiums up 16% for the year.

Regent Botswana and Regent Lesotho also performed well.

Investment returns were lower year on year, reflecting the low interest rate environment. Regent’s exposure to equity markets increased from the prior year but still remains low relative to our exposure to interest-bearing investments.

The growth in other financial services was exceptional and it performed ahead of expectation. LiquidCapital has benefited from its exposure to the motor industry, which has shown strong growth especially in the entry-level segment of the market where our distributorships division is well positioned. The growth in the number of new maintenance plans written on the back of the strong new vehicle market provides a valuable annuity earnings underpin to our future profits.

The value of the advances book generated in our joint ventures with financial institutions to provide financing for vehicles has grown encouragingly, as have the funds under service, maintenance plans, warranties and roadside assistance.

The release from the funds created on the sale of service and maintenance plans was significantly higher than prior years due to a change in accounting estimate. Due to the lack of history, these releases have previously been accounted for at the end of a specific contract’s life. As these funds have now been in the group for a number of years with a good history of trends and claims experience, we have changed our accounting estimate on recognising these releases throughout the contract life, resulting in a normalised additional operating profit of R117 million in this year.

Volumes in Imperial Fleet Management are improving with a good pipeline of new business.

Key indicators

  Growth
%
  2012
Rm
  2011
Rm
 
Revenue 17   3 999   3 409  
Profit from operations 2   775   760  
Adjusted investment income (15)   175   206  
Adjusted underwriting result (24)   244   319  
Other financial services 52   356   235  
Operating margin (%)     19,4   22,3  
Weighted average invested capital 1   1 809   1 783  
Return on invested capital (%)     31,4   29,4  
Weighted average cost of capital (%)     12,2   12,4  
Return on embedded value – Life assurance (%)     18,8   20,8  
Solvency ratio – short-term (%)     43,7   46,4  
Capital adequacy ratio – Life assurance     4,4   4,2  
Net capital expenditure     307   (33)  
Number of employees 4   1 090   1 045  
Number of policies sold            
– Short-term policies     378 863   368 795  
– Life policies     219 207   239 170  

Risks and opportunities
   
Risks
 
Opportunities
Increased competition
 
Leverage synergies between group companies
Volatile investment markets
 
Continue to launch innovative new products
High claims experience
 
Further expansion of sales channels and distribution reach
Management of changing regulatory environment
 
Growing relationships with business partnerships
Policy lapse rates
 
Continued expansion into lower and middle- income groups
   
Growth of Ariva and alternative vehicle financing opportunities
   
Growth in the fleet business

Sustainability

Our people

The attraction, development and retention of skills are key priorities in the financial service division.

During the year Regent focused on the development of management and leadership, with ongoing participation in continuing developments.

LiquidCapital’s dedicated training centre continued to focus on upskilling call centre agents in sales skills, product knowledge and accreditation training in line with Financial Services Board (FSB) requirements. In total, 220 employees participated in training programmes run through the centre during the year. Call centre agents also benefited from on-the-job coaching and mentoring. Several managers participated in the group’s management development programme as well as various other training sessions.

LiquidCapital and Regent improved their overall B-BBEE ratings to level 3 and level 4 respective

Our impact on the environment

By nature the financial services industry has a low direct impact on the environment and is therefore not a material focus area for Imperial’s financial services businesses.

However, in line with a group-wide commitment to sustainability and environmental responsibility, both Regent and the other financial services businesses track and report on a range of environmental indicators including power, water and paper usage.

Commitment to our customers

Customer service, the protection of customer rights and the importance of meeting ongoing customer needs are important to the financial services division.

Customer service is an important differentiator in a competitive market and a key focus area for all the division’s businesses, the majority of which conduct regular customer satisfaction indexing surveys to measure and improve upon customer service levels.

Various pieces of legislation govern customer rights, including the Consumer Protection Act, and the proposed Treating Customers Fairly and Protection of Personal Information Bills. Imperial’s financial services businesses comply with all current customerrelated legislation and have implemented proactive plans to prepare for proposed legislation. For example, during the year LiquidCapital commissioned an external audit on customer data security which involved intensive penetration testing.

Key macro and performance drivers
Macro drivers
 
Performance drivers
Economic growth
 
Distribution channels and retention of clients
Interest rates
 
Customer satisfaction
Motor vehicle sales
 
Maximising return on capital
Regulation
 
Assumed risk and reinsurance
Disposable income
 
Economies of scale
Underwriting cycles
 
Innovation

Outlook and strategic objectives

Whilst underwriting conditions are unpredictable, earnings in the financial services division should grow in the future. We have not yet reached our full potential in this market and there is still significant opportunity in this area of the group due to our positioning in the motor industry. Regent’s investment portfolio continues to be conservatively managed.

LiquidCapital will continue leveraging its position by innovating new products and partnerships to create new sources of revenue and growth. It will generate growing annuity earnings on the back of new business being placed on its book in the current strong vehicle sales cycle.

Strategic objectives  
Regent
Improve operating and cost management efficiencies
Optimise the motor product offering and leverage the position of the Imperial group
Continue to develop the life insurance business offering in the emerging market
Seek new strategic partnerships where we can leverage off each other’s skills set and add value
Other financial services
Develop and grow alternative affordable financial channels for entry-level market motor vehicle buyers
Leverage and develop additional core competencies in fleet services and managed maintenance
Develop and grow the consumer-facing channel and entrench the brand
Seek new strategic partnerships where we can leverage off each other skills set and add value

 

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