US bites as SA life companies realise local is lekker

2010-03-13 10:43

SOUTH African consumers are unlikely to receive lower ­premiums and better products – even though local life ­companies are focusing on the domestic and emerging ­markets to sustain their growth.

“There is no proof of collusion, but financial services companies tend to do similar things. This makes it difficult for consumers to find bargains,” said Lumkile Mondi, chief economist at the Industrial Development Corporation.

“The financial services market is concentrated, with too few players in it. Even the International Monetary Fund recently observed that. The last time life companies tried to come up with different offerings was when Discovery entered the market. Shortly afterwards, the other companies came up with similar offerings,” he said.

Mondi’s comments come as the country’s two biggest life companies, Old Mutual and Sanlam, this week announced that they would continue to focus on the local and emerging markets for growth. The two companies were reporting their financial performance for the year that ended in December.

Old Mutual chief executive Julian Roberts said he was more concerned about businesses that give a good return fitting together and was not so worried about which geographies they are found in.

The company plans to sell its US life business and list its asset management business in two years’ time. The US operation has been sucking in cash for many years and Old Mutual hopes its US decision will help cut its debt by £1.5 billion (about R16.8 billion) from the current £2.3 billion. The company said it boosted sales by 29% for the year.

Johan van Zyl, the chief executive of Sanlam, said diversification was key to ensuring sustainable future growth. He said the company would be looking for profitable growth opportunities and other ways of efficiently redistributing some of the capital this year.

Sanlam recorded a 3% growth in its new business to R103 billion.

Two weeks ago Discovery said it would maintain its ­focus after achieving 16% growth in new business to R3.2 billion in the six months to December.

An analyst who did not want to be named said low- to middle-income earners and emerging markets had been the main drivers of growth for local life companies. “A lot of recent growth has been coming from risk products sold to these categories of customers.

“The fact that commission is only paid upfront for risk products may have made financial brokers concentrate more on these products,” said the analyst.

Risk products include life, disability and dread disease cover. Life companies also offer insurance and asset management. The asset management function involves managing and investing large sums of money on behalf of clients.

The analyst said people in the lower end of the market tended not to allow their policies to lapse or be cancelled.

“This is why local companies keep making money,” he said, but he did not expect the insurance side of the business to post good performances.

The recession and financial credit crunch may also be contributing to the good run the life companies are enjoying.

“People’s fear of being left destitute after losing a bread­winner is making people focus on providing protection against unforeseen circumstances,” the analyst said.

His views are supported by Mondi.

“During good times there is an illusion that things will remain the same forever. In contrast, hard times force the realisation to sink in that things change,” he said.

The low penetration level of financial services on the continent provides a good opportunity for local firms. Mondi said the focus on growth on the continent was an opportunity for companies to make better returns than they would get elsewhere, while helping emerging markets to grow.

“Regulation in the US and Europe around the functioning of companies and compensation is making it more difficult for financial services firms to make money.

“Emerging markets tend to have less strict regulations and to offer better returns,” he said.

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