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A ‘capital light’ strategy to refocus on advice

22 June 2021 Gareth Stokes

On 11 June 2021, more than 18-months after its initial announcement, Alexander Forbes confirmed that it had completed the disposal of Alexander Forbes Life (AF Life) to Sanlam Life Insurance (Sanlam) for R100 million. The deal, first mooted late in 2019, was put on hold due to potential complications in managing the transaction through the uncertainty of pandemic. FAnews spoke to Dawie de Villiers, CEO at Alexander Forbes to find out why the business was letting go of around R1 billion in annual group risk and retail life insurance premiums.

Adopting a ‘capital light’ strategy

De Villiers said that the deal would allow Alexander Forbes to concentrate on its core advice-led retirement savings and investment activities, while freeing up capital. “Our core business is advisory, administration and asset management,” said De Villiers. “Insurance companies require a lot of capital and compliance resources, and keeping AF Life prevented us from achieving an appropriate return on capital for our shareholders”. The transaction also made sense because the business did not have sufficient scale to compete on a like-for-like basis with the country’s large life insurers. A smaller insurer carries similar fixed costs to larger competitors insofar compliance costs and the development of IT systems, for example. 

“Another compelling motivation [for the deal] is that we are striving to be independent and truly advice-led; if you sit with products at the back end then there are always questions around whether you are giving the best advice,” said De Villiers. “Sometimes your product meets best advice, but sometimes not”. Alexander Forbes still sees the broader employee benefits discipline as comprising of two main activities. The first is to protect the individual and his or her family with a range of death, disability and severe illness benefits within a group risk scheme; the second is focused on savings and building a pot for retirement for that individual within a retirement fund. “Group risk is key element of any retirement fund and as advisers, we will continue to look for the best products and services for our clients,” he said. The main change post-transaction is that the group will generate revenue from broking risk rather than underwriting it. 

Most of the premium was reinsured

Which brings us to the R1 billion question… Will Alexander Forbes regret the sale in terms of its impact on the bottom line? It turns out AF Life’s sizeable R1 billion in gross written premium was 80% reinsured to keep within the parent’s risk appetite. “We made on average around R20m per annum from the business, with the latest year negatively impacted by Covid-19; the [remaining] expense base and overheads will be easily absorbed,” said De Villiers. The impact on the bottom line is negligible; but the business frees up around R240 million in capital. 

The transaction, which will be finalised as a Section 50 transfer from one life insurance license to another, still awaits Competition Commission approval as well as the necessary go-aheads from the insurance regulators. Assuming these hurdles are cleared, the effective date for the transaction is 11 June 2021. The bulk of the liabilities will transfer on this date, but Alexander Forbes will still require some time to manage the remaining liabilities on its insurance license. “We have to clean up our license, then either close it down or sell it,” said De Villiers. He added that although there was an assessed tax loss in the AF Life license, this had not influenced the decision of how to structure the sale. Sanlam already had a life insurance license and thus only wanted the book. 

The good news for the acquiring firm is that AF Life is a solid business supported by an excellent and motivated staff complement. Approximately 30-40 staff members will move over to Sanlam with the transfer of the AF Life book. “We look forward to welcoming the AF Life clients and employees to Sanlam,” said Sanlam Group CEO, Paul Hanratty in a statement accompanying the SENS announcement. He noted that the transaction supported the insurer’s strategy of “building a fortress position in South Africa and further diversifying its pool of life insurance risks”. 

The worst is behind us, we hope…

Alexander Forbes, meanwhile, continues into its 2022 financial year with high hopes that the worst of the pandemic fallout is behind us. The group saw 30000 retirement fund members ‘lost’ to retrenchment processes last year and was processing a staggering 4000 case per month at the height of lockdown. Although this experience was slightly better than the overall rate of pandemic-related job losses, it still impacted on revenues and the bottom line. “We have been in communication with our clients and [it would seem] that most of them have completed their retrenchments and are gearing up for new growth as we exit pandemic,” said De Villiers. He expects to see green shoots coming through in more sectors of the economy in coming months, which should be good for the group’s advice-led strategy. 

Alexander Forbes’ advice-led solutions are delivered almost entirely inhouse to ensure consistent messaging to clients on key investment decisions such as asset allocation and offshore / onshore. According to De Villiers, another of the group’s key advice differentiators is that each client benefits from an adviser plus the wholesale team behind that adviser. 

Writer’s thoughts:
Our conversation with Dawie de Villiers raised an interesting side issue, being that of conflict of interest in the financial services sector. He said that it was possible for an advice-focused firm to place clients in risk products that were underwritten by that firm; but suggested that there was always a nagging question about whether the criteria for best, un-conflicted advice could be met in his way. What are your thoughts?  Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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