In the latest Liberty Life annual report, CEO Myles Ruck spells out what he sees as the industry's challenges.
A relative newcomer to the industry, with just two years in the job, he is more candid than the typical life office CEO, who is often in denial about the industry's image.
Ruck says that at the core of the debate is the perception that there is an imbalance between the needs and requirements of policyholders, shareholders and intermediaries: an appropriate equilibrium needs to be re-established.
Ruck says policyholders are better catered to in the regulatory framework through the Financial Intelligence Centre Act (Fica) to prevent money laundering, and the Financial Advisory & Intermediary Services (FAIS) Act, which requires the licensing of intermediaries and a proper financial needs analysis before products can be sold.
But in spite of the new regulations, the life industry is constantly criticised for mis-selling, high costs, lack of transparency on some products and poor service. "But the policyholders who hold on through to maturity realise that it is a long-term investment that plays a vital role in their financial planning," says Ruck.
Metropolitan group CE Peter Doyle sees the main themes of the industry as the need to use, or give back, excess capital; a lack of revenue growth caused by stagnation in the upper-income market; and the demand for reduced cost of product delivery.
Life assurers started 2005 on the defensive. At the end of 2004, a damning report by independent actuary Rob Rusconi pointed out the poor value for money from one of the cornerstone products of the life industry, the retirement annuity (RA). Because RAs cannot mature before the policyholder reaches 55, they often have long terms, of 20-30 years. Sometimes more than 75% of the first-year's premium is swallowed up in commission. When clients stop paying premiums and make the policies paid up, they often end up with only a fraction of the contributions they have made.
There were a number of unfavourable rulings from the pension fund adjudicator. In one, Liberty was reprimanded for taking away R28 000 for costs and commissions from an RA in which total contributions had been R38 000. In a far more damaging ruling, Sanlam's RA fund, the Central Retirement Annuity fund, was forced to provide an annuity of R25 000 - which was the highest illustrative value of the policy when Sanlam quoted for business - after the capital accumulated in the RA could only buy an R11 000 annuity.
If this ruling is upheld by the high court, it will have serious implications for the life industry, which would be unable to meet the vastly increased policyholder obligations.
Life assurers underperformed bank shares in 2004, though there was a reversal in the early part of 2005, with some notable rallies in certain share prices.
Sanlam and Metropolitan have been the star performers - their share prices have increased about 70% over two years. Metropolitan, the market leader in the black middle market, is in a sweet spot. With the industry recording only a 4% increase in new recurring premium (debit order) income and a 15% increase in single premium (lump sum) business, Metropolitan showed a 12% increase in recurring premium income and a 24% increase in single premium income.
Metropolitan's Achilles heel used to be its new business margin, which was negative a couple of years ago. This increased from 12,5% to 15,2% during the year.
Old Mutual's recurring premium income is going backwards, with the important exception of its voluntary group schemes business, which competes with Metropolitan and African Life. This grew by 10% last year.
Sanlam has made its first forays into group schemes, though they accounted for just 4% of new premium income last year.
It acquired control of funeral policy specialist Safrican late last year, which will be jointly managed with Thebe. There has been strong speculation that it will buy African Life, one of the last remaining second-tier life offices.
Sanlam's rerating has less to do with its new business strategy than the rerating of its large investment in Absa and the superb performance of short-term insurance subsidiary Santam. But the market also appreciated CEO Johan van Zyl's decisive approach to cost cutting - he has delivered R250m of annualised savings from the core life business.
Liberty's share price has been flat in comparison. It does not have the benefit of banking and short-term assets, as it has long since unbundled its Standard Bank holding, and it has sold its short-term insurer Guardian National ( to Santam, which laid the foundations for that business's subsequent financial success).
But Liberty is the only one of the big three with positive cash flows (more money coming through the front door than leaving through the back) and it continues to defy pundits who argue that there is no growth left at the top end of the market.
There was a short-term disappointment in December when Liberty chose to buy Capital Alliance rather than give R3bn back to shareholders. But the acquisition gives Liberty the opportunity to reduce its back-office costs - Ian Kirk's team at Capital Alliance has the lowest administration costs in SA. It also knocks another player out of the industry - it took place just a few days after Kirk put life office Rentsure out of its misery.
The life industry is at last trying to bring in more transparency and better value for money products. Last November Old Mutual launched the Max range of investment products, in which the client can select whether to pay an upfront commission or to pay on an as-and-when (spread) basis. Momentum has come out with a similar concept in Investo 4.0, and it has enhanced its offering by giving cash from providers such as Spar, Cashbuild and Auto & General back into policies.
But the rush of innovation is not just a gesture of goodwill. Banquo's ghost at the moment is the threat from Discovery Life. It has been successful in risk-only business over the past three years. This month (June 2005) its undertaking to sister company Momentum not to write investment business runs out. Discovery has been successful at cross-selling from its medical aid client base into its life company, and it should do a similar cross-selling exercise into the new investment products.
Part of the insurers' back-to-basics approach has been that most offshore strategies have been scaled down. Sanlam dismantled its Sanlam International holding company, and split the London-based businesses into two - Sanlam Multimanager International (which was enhanced through the acquisition of Merchant Investors, an investment-focused UK life office) and the actuarial consultancy Punter Southall.
Liberty has abandoned its offshore strategy completely, though it has kept its multimanager Liberty Ermitage. Its international ambitions include such prosaic activities as running credit life books for Standard Bank's Namibian operation.
Old Mutual, of course, is the exception, though it is now growing its US life and asset management businesses organically and it's unlikely to make further acquisitions there. It is still, however, planning to buy a closed UK life book to give scale to its UK businesses, which now consist of the small asset manager OMAM UK and Selestia, a medium-sized fund supermarket.
