The share of profit after tax for subsidiaries of Botswana Insurance Holding Limited (BIHL) declined to 35 percent in the first half of 2021. This is compared to 57 percent reported for the prior period.
The decline was influenced by a 48 percent decrease in operating profit of Botswana Life during the reporting period due to unprecedented excess mortality (P354 million worth of claims) experienced during the period.
Bifm’s contribution increased because of the decline on the Botswana Life side. Bifm itself has seen growth in profitability and assets under management (AUM). But while Bifm’s operating profit increased by 24 percent, the two subsidiaries’ operating profit share contributed to the group declined.
The group’s associates came to the party this year with an increase of about P11 million from P113 million profit to P124 million. Associates contribution increased to 62 percent because of the pressure seen on the subsidiaries. That meant the reduction that was experienced on the subsidiaries side is actually mitigated by the contribution from associates reflecting the group’s diversification story which executives boast about.
Notwithstanding, Group CFO Kudakwashe Mukushi still believes a 35 percent contribution by subsidiaries in a year like this is a significant contribution. “It is a picture that we do not expect to persist into the future,” he said. Post the COVID pandemic, he expects to see that picture normalising back to “maybe what we were seeing last year or the year before”. “It’s one area that we will continue to focus on where we still want Botswana Life to do well”. But that does not mean the group will stop growing other parts of the business.
Nico Holdings, Funeral Services Group (FSG) and Botswana Insurance Company (BIC) continued to take a bit more of the cake in terms of profitability. Letshego showed good performance with operating profit increasing from 64 percent to 67 percent.
The pleasant part is return on embedded value for the various companies, including the life company, which showed a positive return on embedded value and return on equity value. Mukushi said the life company still remains a strong contributor, especially given the fact that it carried quite significant claims expense in the first half of the year. Botswana Life return on embedded value was 7.8 percent against target of 17.7 percent. “The return represents the resilient business because more often than not, if you go through a period like that (rising claims) we would probably have seen maybe a number that’s closer to zero or a negative number in terms of return,” Mukushi said. “It remains above average inflation and it remains strong.”
Bifm, with growth in AUM and good management of expenses, returned 17.1 percent above target of 15.5 percent. Its valuation responded because of the increase the AUM position and increased future earning capability. As, at 30 June 2021, Bifm’s total assets under management closed at P33.4 billion, including Zambia’s at P3.3 billion, which is an increase of 10 percent on the prior year.
Letshego saw an improved performance versus prior year and that performance put Letshego at 12.8 percent in terms of its return on group equity value versus a target of 16 percent. It is slightly below the target number of 16 percent but Mukushi said they see improvement in the way that business is performing with the new management that has come in.
FSG has done really well in the first half of the year with good growth that generated positive cash flows. This translated into better valuation and that in turn into a return on equity value of 53.8 percent, which is significantly above the 16 percent return.
FSG is a curious case given the dynamics presented by the pandemic. Analysts expected its numbers to be weighed down by funeral claims. Kaone Kebonang, Research Head at Imara Capital, raised this point, quizzing whether this growth was sustainable going forward and seeking also to establish if growth was brought by volumes versus price modelling of policies.
FSG has two product lines, the first being that they sell or distribute funeral assurance products on behalf of Botswana Life. In response, BIHL CEO Catherine Lesetedi said there has been no re-pricing of funeral assurance products. Instead, she said, they improved benefits two years ago for FSG assurance, and “we’ve seen clients move to the improved products on the funeral side and therefore there’s been a steady revenue increase on that line”.
The second part or the principal revenue generator is that of general undertaking, in other words, providing a service at a time of death. So, with the increase in mortality, and with the footprint and the expertise that the FSG group has, it was able to benefit. “We also appreciate that at that time, you need a service provider who can provide that service with dignity and do it very well,” Lesetedi said.
So FSG significant increase this time around has been its ability to provide undertaking services across the country. FSG market share is around 75 percent. But apart from market share and footprint they were inundated with funerals, similar maybe to the health system. Lesetedi said they were actually very good at providing logistics in such a way that they were able to actually accommodate clients who wanted to use the FSG service.
At BIC, the group previously indicated that it was looking at ways of utilising excess capital within the group and extracting it out of the company. This was so that it did not remain and continue to be a drag. This resulted in an uptick in valuation that has seen BIC returning 35.9 percent in terms of its return on equity value versus a target of 14 percent.
Nico Holdings continues to perform well. The bank and the life company are the biggest contributors, according to Mukushi, who added that “the biggest turnaround story that we’ve spoken about in the past few presentations is really at the bank”. “We see that coming through in terms of the valuation as well in that return on equity value of 35.5 percent, which is higher than the 25.2 percent target for that business,” he said.
As a group, the good performances in return all translated to a group return of 11.7 percent.
