Financial Services

Imperial’s financial services businesses create value by providing a substantial and growing client base with specialised and cost-effective motor-related financial services and products, both through Imperial dealerships and independent channels. Independent channels include non-Imperial dealerships, banks, direct sales and niche intermediaries, such as specialised brokers. These account for approximately 60% of the total product sales by revenue.

The insurance business also supplies life insurance products in the emerging market which are distributed through independent brokers, tied agents and affinity schemes.

The value proposition to clients is centred on responsive engagement at all stages of the vehicle lifecycle, supporting specific client needs with products which provide innovative and cost-effective ways to improve the vehicle ownership experience. Continuous investment in technology and automation is yielding operational efficiencies and provides detailed client insight data.

WHERE WE OPERATE

Whilst the majority of the business’ revenue originates in South Africa, there are also substantial operations in Lesotho and Botswana which provide significant annuity revenue and add diversity to the division’s income streams. In 2014, 16% of the revenue originated from outside South Africa.

From a client-facing perspective, a range of brands are used to promote the division’s products, as shown below. One of the key drivers for generating business in the division is our relationship with the client. Our substantial client base provides opportunities for growth and leverage to generate annuity earnings.

Other businesses within the division are MiX Telematics, an associate company specialising in vehicle fleet telematics and stolen vehicle recovery systems.

RESULTS OF OPERATIONS   R million H1 2014   % change on H1 2013     H2 2014   % change on H2 2013     2014   2013   % change on 2013     Insurance                                   Revenue 1 492   (10,1)     1 482   (9,0)     2 974   3 287   (9,5)     Operating profit 306   13,3     298   24,2     604   510   18,4     Adjusted investment income 168   11,3     108   8,0     276   251   10,0     Adjusted underwriting result 138   16,0     190   35,7     328   259   26,6     Margin (%) 20,5         20,1         20,3   15,5         Underwriting margin (%) 9,2         12,8         11,0   7,9         Motor-related financial services and products                                   Revenue 563   11,3     603   35,5     1 166   951   22,6     Operating profit 237   7,2     240   12,1     477   435   9,7     Margin (%)* 42,1         39,8         40,9   45,7         Total Financial Services                                   Revenue 2 055   (5,1)     2 085   0,6     4 140   4 238   (2,3)     Operating profit 543   10,6     538   18,5     1 081   945   14,4     Operating margin (%) 26,4         25,8         26,1   22,3         Return on embedded value – life assurance (%)                     27,6   21,5         Return on invested capital (ROIC) (%)                     32,0   31,4         Weighted average cost of capital (WACC) (%)                     10,5   12,2         Weighted average invested capital                     2 127   2 469       * The operating margin for motor-related financial services benefits from investment income and profit share arrangements, including banking alliances, where we recognise profit, but for which there is no corresponding revenue. KEY DATA REVENUE (Rm)   OPERATING PROFIT (Rm)   OPERATING MARGIN (%)

MARKET OVERVIEW

Insurance underwriting conditions in the short term industry improved in the second half. The first half of the financial year was impacted by adverse weather conditions. The termination of certain loss-making books of business contributed positively, resulting in the underwriting margins improving when compared to the prior year. Equity markets were favourable and resulted in higher investment returns.

Credit availability and approval rates remained stable during the year. As a result, the advances book generated through alliances with banks grew encouragingly. We were however negatively impacted by more conservative impairment provisions in the vehicle financing alliances and the maintenance funds were impacted by higher parts costs as a result of the weaker Rand exchange rate.

STRATEGY OVERVIEW

The core value proposition of the group is the integration of motor-related financial products and services into the vehicle value chain, complementing the offerings of the dealer, manufacturer and finance house. The start of the client lifecycle is the vehicle sale on the dealer floor.

However, an equally critical factor in the division’s success is the growth and retention of its client base through the innovation of new products and through accessing new sales channels. This requires insights into the vehicle ownership behaviour of clients and the ability to apply these insights to generate sales through direct marketing initiatives. This effort is supported by a sophisticated approach to customer relationship management (CRM), including an extensive IT infrastructure and business intelligence tools.

Revenue (R million)		Operating profit (R million)

FINANCIAL AND OPERATING RESULTS

RESULTS OVERVIEW

The division delivered an excellent result, achieving operating profit growth of 14%.

Insurance underwriting conditions in the short term motor industry improved in the second half. This, together with Regent’s decision to focus on its core markets and distribution channels, and to exit non-performing classes of business, increased underwriting performance by 27%, with underwriting margins improving from 8% to 11% despite the expected 10% reduction in revenue.

Buoyant equity markets led to higher investment returns. The division continues to manage its equity position prudently and reduced equity exposure in the second half to mitigate downside risk. Regent’s other significant product lines in short term insurance performed well, with improved penetration in a slowing new vehicle market. Regent Life performed well, with underwriting profit up 19% for the year, largely as a result of the Individual Life funeral book where gross premium income grew by 22%. Regional business beyond South Africa continues to contribute meaningfully to the division.

Motor-related financial services and products grew operating profit by 10%, despite more conservative impairment provisions in the vehicle financing alliances and the impact on the maintenance funds of higher parts costs resulting from the weaker currency.

The advances generated through the alliances with financial institutions grew encouragingly, as did the funds held under service, maintenance, roadside assistance and warranty plans. Innovative new products and improved retention and penetration rates in our sales channels also contributed positively to the growth in these businesses, providing valuable annuity earnings to underpin future profits.

Volumes in Imperial Fleet Management continue improving with new contract gains. Ariva, a private leasing joint venture, is performing in line with expectations in a market with high growth potential.

Net capital expenditure in this division mainly relates to vehicles for hire. In the current year, net R278 million was invested in the fleet, compared to net proceeds received of R237 million in the prior year. In the prior year, certain of these vehicles were leased through one of our banking alliances resulting in a cash inflow, whereas in the current year we acquired these vehicles by making use of our banking facilities.

WE HAVE ENTRENCHED OURSELVES AS A LEADING PROVIDER OF MOTOR-RELATED INSURANCE PRODUCTS ON THE BACK OF OUR STRONG DISTRIBUTION NETWORK, PARTNERSHIPS AND INNOVATIVE APPROACH TO PRODUCT DEVELOPMENT.

What were the major challenges during the year? For the insurance business, the motor vehicle cycle was challenging during the year, with hail and adverse weather patterns impacting negatively on performance. We have continued to refine the mix of our business in the insurance sector, ensuring that we exit product lines which are not profitable and reducing exposure to other less attractive or more volatile segments. We are starting to see the benefits of this process filtering into the division’s results. In a deteriorating economy, the insurance industry tends to experience higher lapse rates. We have worked hard to maintain our lapse rates in line with previous years. We have focused on quality, achieving 22% growth in the life insurance business without pursuing contracts which were not sustainable. We measure the size of the client base, not just the growth of new policies, to ensure that we retain clients and focus energy on our value proposition to the end user. This industry is highly regulated and in the period under review we invested time and resources in ensuring that our businesses are fully compliant with existing legislation and aligned with the evolving regulatory framework. Key regulatory developments include the Protection of Personal Information (POPI) Act and regulation relating to Solvency Assessment and Management (SAM) and Treating Customers Fairly (TCF). What did we achieve during the year? We have entrenched ourselves further as a leading provider of motor-related insurance products on the back of our strong distribution network, partnerships and innovative approach to product development. We are also starting to see the benefit of the streamlining of our business and a rationalised product portfolio which is less subject to market volatility. Lead generation and sales through our direct marketing channel grew significantly during the year, particularly as a result of investment in online marketing. We have deepened our capability in engaging with consumers on digital platforms, including for example with the launch of a new mobile application which provides significant additional value to approximately one million clients using roadside assistance.

Where do we still need to focus our attention?

We will engage substantially on two areas in the forthcoming period.

1 The first is the need to further integrate the financial services business within the Imperial vehicle value chain, ensuring clients’ vehicle needs are fully catered for throughout the lifecycle, and client retention is improved. This requires us to ensure that the client experience of our products and services is consistently excellent throughout the vehicle lifecycle, enabling us to move beyond a purely transactional relationship with the client. 2 The second area of focus is the need to maintain and improve cost efficiency in the face of increasing regulation in our industry, which we will achieve through investment in IT and business processes. FUTURE GROWTH PROSPECTS The growth in the underlying books of business in financial services will be impacted by slower growth in the new vehicle market. However, financial performance will be underpinned by the strong annuity revenue streams that flow from the installed base of business it has generated in the last few years. We will continue to identify growth opportunities in financial services by leveraging off our current distribution platform, improving retention, targeting new channels and innovating new products.