BIHL: The next chapter
Experts believe Botswana Insurance Holdings Limited’s broad based financial services value proposition will play a large part in starving off the competitive pressures in this space by giving the monster a differentiated competitive edge
BIHL kick started a fresh new 5 year strategy earmarked on delivering value through maximization of group capabilities. As of this year, the group shifted focus to collective value proposition of a broad based financial services group in order to enhance synergies. The strategy carries off from the past years’ growth and profitable strategy. Stockbrokers Botswana has observed that corporates have reportedly been highly receptive of this proposition, with a pipeline established for future business. An analyst at the brokering firm argued that increased investment in innovation and digitization will see an integration of group systems in order for the group to leverage off of data analytics to better understand and penetrate their overall client base, as well as develop and establish digital touch points to enhance customer experience. “Expansion through new distribution partnerships, improvement on existing ones, and expansion into complementary businesses also feature as key tenets of the strategy,” Donald Motsomi, the Research Analyst at Stockbroker Botswana dispatched in writing to investors.
Already, BIHL has installed Ronald Samuels to lead a 5 year strategy to transform Botswana Life through an aggressive focus on revenue growth and profitability, customer delight and distribution excellence. According to Motsomi, customer delight entails digitizing customer touch points, reducing paperwork and expediting policy activation, while distribution excellence pertains to increased training and incentives of agents and broker partners to enhance the quality and volume of business. Motsomi anticipates Botswana Life would see sustained growth of retail business mainly driven by continued growth of the affluent segment underpinned by promotion and development of new products, and increased reach outside of the capital city.
Botswana Life is worth mentioning, Motsomi says, because of its importance to the BIHL group. It’s the largest asset and the most profitable. In fact BIHL relies on the life insurer from sustainability. To understand its importance to the group, it’s important to also understand the performance of the group. In the past five years BIHL undertook growth and profitability strategy ending December 2018, P124 million of group profit was wiped off in between. In the first year full year (2013) that BIHL adopted the strategy, profit for the year were P494.7 million. By the end of last year, profits were down to P370.5 million, representing about 25 percent decline in course of this strategy.
Under its wings, BIHL encompasses a number of strategic assets directly and indirectly spread across the African continent. BIHL which is the most diversified financial services company has a strong hold in the insurance business. It is invested in the life insurance, asset management, funeral and investment solutions, and short term insurance.
BIHL currently owns three subsidiaries outright. That is the life insurer Botswana Life, asset manager Botswana Insurance Fund Management (BIFM) and general insurer Legal Guard. These three subsidiaries are leading players in their respective sector. But it is Botswana Life which has over the past years been to BIHL, what diamonds have been to Botswana: an important component of revenue. The life insurer is the group’s largest subsidiary, contributing 96 percent to revenue and 85 percent to operating profit, according to estimates by Stockbroker Botswana. So when Botswana Life sneezed, BIHL caught cold.
A key factor is that loss of market share was at play. Botswana Life market share shrunk to 63 percent in the 5 years it was exercising its strategy, from the highs of 80 percent. Motsomi concedes that market share has declined over the years owing to intense competition, more especially for corporate schemes and annuities. “Competition is intense under group insurance business and annuities where newer competitors have undercut pricing in order to acquire market share,” Motsomi writes adding that this has translated into reduced market share for Botswana Life and a squeeze on margins. “Under corporate schemes, competition will likely remain intense from product price undercutting”, he says. Motsomi fears that persistent aggressive pricing by competitors could result in stagnant or further pressure on BLIL’s market share and pressure on margins.
BIHL CEO Catherine Letegele has previously advised that Botswana Life will not be engaging in these pricing wars with a long term view on writing prudent, sustainable business. Botswana Life’s other problem was the discretionary incomes which remained under pressure amidst lower economic growth. BIHL previously cautioned that this increased lapses and cancellations of policies impacting also on general insurance businesses.
Government has recently increased public servants’ salaries for 2019/2020 financial year by 10 percent for A-B bands and 6 percent for C-D bands, with effect from 1st April 2019. Motsomi argues that the civil servant salary increments for 2019 and 2020 will serve to ease pressure on these employees’ disposable incomes. “This has the potential to filter through to sustained or improved persistency rates. However, more work needs to be done to increase financial education amongst households on the benefits of insurance.” BIHL has previously said it is focusing on promoting financial literacy and leverage off of its strong balance sheet as a selling point for annuity business. Available statistics show that Botswana has positive demographics characterized by approximately 60 percent of the population comprising of economically active individuals. But Motsomi argues that the challenge remains reducing the high unemployment levels to further harness the potential of these demographics, while increased financial inclusion is resulting in an uptake in participation by individuals at the lower end of the economic spectrum.
Botswana Life has a segmented approach when conducting its business with the retail customer base divided between low end and unbanked clients, entry level clients, and affluent clients. Motsomi observed that the entry level segment, being the most established, delivered a stable performance while the unbanked and affluent segments delivered strong growth, while the affluent segment comes off of a low base and is considered to have low penetration rates in the country.
Management is looking to open affluent branches outside of the capital city Gaborone to further tap into this segment. With large agent force of 550 – 600 direct agents and approximately 250 broker agents Motsomi argues this gives the life insurer a strong competitive advantage under individual life business.
BIFM has had its own challenges. The division contributes a negligible 4 percent to revenue and 14 percent to operating profit. But new competitors have entered the asset management space, a development which Motsomi argues will make it ever more challenging for the business to maintain market share going forth. In Botswana asset managers mostly rely on the country’ largest pension fund Botswana Public Officers Pension Fund (BPOPF) for mandates. The impact of the services of asset consultants is being seen, by observers, in increased splitting of mandates across the industry with a view of allocating asset classes to top performers in the different asset classes. To retain and win mandates, Motsomi says BIFM will look to consistently outperform benchmarks and their peers. “BIFM’s citizen economic empowerment share scheme not only serves as a staff retention mechanism but also aligns with the citizen empowerment ideals of Botswana’s largest asset owner, Botswana Public Officers Pension Fund (BPOPF).”
BIFM has been increasing attention on unit trusts, as more fund managers eye the BPOPF cake. But Motsomi says the unit trust business remains largely comprised of corporate cash, which tends to add volatility to AUMs as these funds are not sticky. “However, the retail book is growing steadily.”
BIFM’s operating profit declined 2 percent to P62 million (2017: P63 million) as a result of lower fees earned by the Zambian business, business-critical expenses which translated into higher costs, and the weakening of the Kwacha against the Pula. “We anticipate growth in AUMs to remain stable at current levels in light of the competitive landscape,” Motsomi says.
BIHL’s other subsidiary Legal Guard has been going through its own troubles coming from losses. In 2018 Legal Guard contributed 1 percent to group operating profit. After restructuring the company, BIHL has opted to sell the asset for strategic purposes. The arm is being sold to Botswana Insurance Company (BIC) which is owned 50 percent by BIHL. BIC’s performance in the past year was below prior year largely due to restructuring costs incurred in 2018.
BIHL owns further 26.17 percent in Letshego Holdings, 36.38 percent in Funeral Services Group (FSG) and 25.1 percent in NICO Holdings.
In the 12 months ending December 2018, the share of profit from associates and joint ventures suffered 27.5 percent decline to P52.9 million (2017: P72.9 million). This was due to poor performance of Letshego and its write down in fair value. A jump in impairments and a sharp increase in the effective tax rate to 50 percent (2017:32 percent) resulted in its adverse performance which filtered through to BIHL. Motsomi cautions that income from associates and joint ventures is rather volatile and difficult to predict. “Performance has been weighed down over the past two financial years by Letshego with two consecutive write downs in fair value. Our forecasts factor in a normalization of this line item following the write downs.”
The expert also cautions that the current turnover in senior management results in uncertainty as to the strategic direction Letshego will be taking. About 3 executive left under a cloud recently. When BIHL was asked about this Teobog Keepotsoe, the group’s spokesperson said “As with any business, there are challenges which are experienced from time to time but the BIHL Group remains committed to its shareholding in Letshego Holdings Limited (LHL) as we believe that under the able leadership of the Board, and through its new financial inclusion strategy, strengthening of its operations through investments in technology, people and strategic partnership the company is well positioned for continued growth”.