May 2002 Update is a newsletter produced by the investor relations department of New Africa Capital financial services group. It provides information on the different businesses in the group as well as financial news. Contact Nico Oosthuizen on (021) 9406111 or Sue Snow on (021) 940-6119 or send an e-mail to firstname.lastname@example.org or email@example.com for further information. New in force business The group new business figures for the quarter ended 31 March 2002 are shown below. The basis used is consistent with that used in the embedded value calculation. Policies are included from the date that they become in force as opposed to the date on which they are concluded (production figures). There is usually a delay up to three months between these two dates. 2001 NEW BUSINESS PREMIUMS # 3 mths to 12 mths to average % 31.3.2002 31.12.2001 quarter change 2002 Rm Rm Rm (annualised) Recurring premiums Individual life 154 484 121 27 Gross premiums 180 582 146 24 Lapses at inception (26) (98) (25) (6) Employee benefits 16 155 39 (59) 170 639 160 6 Single premiums Individual life 202 1 033 258 (22) Employee benefits 212 1 958 490 (57) 414 2 991 748 (45) Annual premium equivalent (APE) 211 938 235 (10) Lapses as a % of gross premiums 14% 17% 17% 18 # Provisional new business premiums subject to adjustment at the year-end valuation. The trends in respect of both individual life recurring premium business and lapses at inception are improving. Employee benefits recurring premium business is currently below the level attained during 2001, as are both categories of single premium business. In the case of employee benefits single premium business, this is partly as a result of a move towards off balance sheet business and partly because of the erratic nature of such business. The position has since improved and at 30 April 2002 the figure for single premium income, including off balance sheet inflows, was in line with the corresponding period in 2001. New business production – individual life Total new business production was higher than that written during the same period in 2001. The main drivers of this improvement were Metropolitan Direct and Metropolitan Namibia. An upsurge in the new business production of Metropolitan Direct, which is campaign driven, boosted total new business production for the quarter. Metropolitan Direct is dependent on its ability to source new campaigns to sustain growth. While other categories have been lagging the 2001 comparatives, it is worth mentioning that there has been a marked uptrend in ordinary individual life new business production since the end of the quarter. Year-to- date production after the first three weeks of May is on a par with the equivalent figure for 2001. Conservation It is particularly pleasing to be able to report an improvement in the lapse experience at inception of business written in the last quarter of 2001 that came into force in the first quarter of 2002 (refer to the table above). It must also be borne in mind that most of this business was written prior to the roll-out of Predict, the lapse predictor tool for excluding potentially high lapse rate business prior to inception. The beneficial effects of Predict will therefore only be seen in subsequent quarters. The Predict tool is able to determine with a high degree of accuracy those policies with a propensity to lapse within the first year. Based on the risk of lapse ranking, the following two business interventions are applied: New business applications that score within the top 10% of high risk policies are declined. For new business applications that fall within the next 15% of high risk cases, commission is paid on an “as and when” basis over the first 12 months of the contract. At one of the pilot sites, it was particularly encouraging to see that the rate of lapses at inception declined from 55% in February to 12% in May 2002. Delayed detection of lapses at inception It should be noted that in some cases there can be a delay of up to five months between the date on which an insurance policy is concluded and the date on which it eventually lapses. This excludes any potential delay between a client deciding that he/she wants a policy and the company finally accepting his/her application as complete. Assuming that a policy is accepted by an insurance company on 20 January, the date of the first premium deduction could be as late as 31 March. If this premium is not received, it will be re-submitted for payment in the following month (April) and possibly the month thereafter as well (May). Only then will the insurance company be able to determine that the policy should be classified as “lapsed at inception”, a full five months after the date on which the policy was accepted. Cost-saving drive With New Africa Capital having committed to a saving of R 50 million on actual expenses incurred in 2001, each of the businesses and support services within the group was asked to review its budget for 2002 and determine ways of effecting the necessary reductions. The central focus of the cutback exercise was, and continues to be, costs attributable to individual life operations, especially fixed acquisition costs in respect of new business. Growing businesses were not requested to take aggressive remedial steps that would in any way detract from their ability to capitalise to the full on growth opportunities. Management is confident that the group as a whole will save well in excess of the targeted R50 million in administration expenses by the end of the 2002 financial year, despite having made adequate provision for future expansion. These savings will not all be attributable to new business costs. Short-term interventions for long-term gain will mean that the bulk of the cost savings will only start flowing through in the second half of the financial year. Business processes are currently being optimised and, where necessary, further rightsizing measures will be implemented. Both existing and proposed business projects are also being reviewed and re-evaluated on a cost versus growth basis. The group finance director will continue to measure and monitor progress, with the various operating entities being held fully accountable for delivery in terms of the cost-saving goals which have been fully integrated into the group’s performance management objectives for 2002. Metropolitan Health Group The right-sizing of the health business has been completed without compromising the levels of service offered to its clients, says Blum Khan, CEO of the Metropolitan Health Group (MHG). In spite of having lost the administration contract for Topmed and Selfmed, the two Sanlam medical schemes, which the latter sold last year, the Metropolitan Health Group is operating profitably, showing improved margins over the same period in 2001. Now that OpenPlan, the open scheme administered by MHG, is showing favourable financial results, the group anticipates that it will become an attractive retail product in the future. In line with MHG’s commitment to exploring alternative business opportunities, its traditional source of revenue, in terms of fees derived from members under administration, is now being supplemented by licensing fees derived from franchise agreements and clients who purchase managed care programmes. In this regard, MHG have signed their first international franchise deal for implementation later this year. In January MHG rolled out its first franchise agreement with LAMAF, a scheme for local authorities with 40 000 lives under administration. By April this year a second, similar agreement with SAMWUMED (formerly a municipal workers medical aid) with 45 000 lives, was rolled out. When the Bankmed administration division was corporatised in January 2000, Bankmed (the medical scheme) retained ownership of 19.9% of the newly created company in terms of a concession granted by the Council for Medical Schemes. As part of the original agreement the New Africa Capital group had an option to acquire this shareholding from Bankmed when the latter’s concession expired. This concession has now expired and NAC has acquired these shares from Bankmed with effect from 1 January 2002 for approximately R100 million. In terms of the original purchase contract MHG will continue to be responsible for the administration of the Bankmed scheme for at least another three years, subject to the attainment of all normal service level criteria. This acquisition is part of the ongoing integration of MHC and MetHealth, which are already fully merged at an operational level, and further aligns shareholder interests in MHG. Metropolitan Asset Managers The house view, represented by the Global Managed Fund, under-performed its cumulative benchmark for the quarter ended 31 March 2002 by 3.7%. This under-performance excludes the negative performance that resulted from derivative exposures implemented for the Guaranteed Fund. The under-performance reported for 2001 continued for the first quarter of 2002. Stock selection was the reason for MetAM’s under-performance, with its underweighting in gold mostly to blame. Other major negative contributions came from life assurance, banks and platinum. All these sectors have, however, staged a strong recovery since quarter end. Views are taken on a three-year investment horizon where periods of short-term underperformance are likely. Macro asset allocation contributed positively, with the house being aggressively underweight in bonds in favour of equity. Compounded versus benchmark performance clearly indicates that the under-performance continued, but that the trend has turned. Market overview Global markets Equity markets failed to sustain the strong performance of the fourth quarter of 2001. Subsequent economic releases indicated that a US recovery was taking place, but the really bad news of the Enron debacle and escalating tensions in the Middle East once again brought home the reality that equity prices are still stretched. Interest rates in the US are at a forty-year low and the anticipation of a recovery, as well as increased government spending, spooked the bond market. Long-term interest rates are on a rising trend and US corporates are using this last opportunity to raise capital by issuing debt at attractive rates. The European and Asian equity markets followed the same pattern as the US, with Japanese equities outperforming other markets for a change thanks to the weaker yen and improved global growth prospects. Emerging markets performed well due to the higher gearing to interest rates and weak currencies. Commodity prices started to recover during November 2001 and maintained this trend into 2002 as global growth sentiment improved. Local markets Resource shares continued to dominate the equity market during the quarter. This is not surprising given the rand hedge qualities of these shares. Once the realisation had set in that gold mining companies stood to benefit most from the substantially weaker rand and the gold price itself had showed some resilience, gold shares became very attractive and outperformed the market by a substantial margin. However, non-mining resources outperformed mining resources. MetAM held a high resource weighting relative to its peers, but still slightly less than the all share weighting. Financial stocks once again de-rated on bad news from the micro-lending industry, and banks exposed to the lower end of the market came under pressure, notwithstanding the good overall earnings prospects for this sector. The insurance sector, in which MetAM holds an overweight position, did not show the growth that was achieved in the past. Recent and anticipated interest rate hikes are not beneficial to the financial and industrials sectors. Industrial shares moved sideways over the quarter, with IT shares (MetAM slightly overweight) taking another beating. Consumer stocks remained under pressure from shrinking margins and declining discretionary spending. Tax relief has not yet had an impact on consumer spending, but increases in the prices of fuel, transport and food have taken their toll. The rand’s 5.4% appreciation against the US dollar was not enough to offset tremendous inflationary pressures, from both imported goods and foreign demand for locally produced goods. Even before the first official consumer inflation figure was published, it had become clear that the 2002 inflation targets were out of reach. The bond market reacted negatively to the deteriorating inflation outlook while the delay and uncertainty in privatisation issues, together with the huge forward book losses, prompted a sell-off in the bond market. MetAM’s performance Fund Return Ranking % MANAGED FUND (Global) 3 months to 31/03/2002 -1.5 42/57 12 months to 31/03/2002 16.5 53/57 36 months to 31/03/2002 16.2 26/43 FUTURE BUILDER 3 months to 31/03/2002 -4.3 5/5 12 months to 31/03/2002 -2.5 5/5 36 months to 31/03/2002 7.1 2/5 OPTIMUM GROWTH 3 months to 31/03/2002 -0.5 16/57 12 months to 31/03/2002 16.2 54/57 36 months to 31/03/2002 11.8 43/43 Source: Alexander Forbes Manager Watch, March 2002 Market outlook The outlook for domestic growth is not good. The weaker rand will bring stimulation in the form of higher export earnings, import substitution and some pre-emptive spending, but higher inflation and interest rates will start to bite. The economy is still not creating jobs, and, although labour productivity is improving, overall productivity is not. The higher oil price is partly being offset by a higher gold price. Domestic demand will be under pressure from lack of discretionary spending. Margins of exporters and primary producers are improving, but for retailers and banks margins are deteriorating. The next quarter will be critical for South Africa. The resources cycle is mature and domestic growth is required to arouse investor interest in local financial and industrial shares. Financial stability remains the priority for 2002 and the rand exchange rate will continue to be the central character in this quest. The performance of the rand will also continue to determine the performance of resources vs. financial equities. A stronger rand is needed for financials to outperform in the next quarter or two. Better performance of financial shares is likely since financials are very cheap on most valuation bases and stimulus in the form of lower real rates and a faster growing monetary base will benefit banks and other financial stocks. IT and media shares are also dependent on a global upturn, but are likely to outperform only once fixed investment improves.