Conference Call transcript

Conference Call transcript 28 August 2015 HALF YEAR RESULTS 2015 Operator Good day ladies and gentlemen and welcome to the Britam first half 2015 results announcement. All participants are now in listen-only mode and there will be an opportunity for you to ask questions later on during the conference call. If you should need any assistance during the conference please signal an operator by pressing star and then zero. Please also note that this conference is being recorded. I would now like to turn the conference over to the Manager of Investor Relations, Ms. Carol Karugu. Please go ahead. Carol Karugu Thank you, Chris. Good day everyone and welcome to the Britam half year 2015 results announcement. Thank you very much for dialling in. I see we have 24 participants to this call, so thank you very much for dialling in. I would like to start by introducing the team we have on this side, and then we would ask that our group Managing Director takes us through the presentation together with our group Finance Director, and then we will take your questions right after. So to begin my introductions we have with us our group Managing Director, Dr Benson Wairegi. We have our group Finance Director, Gladys Karuri. We have Director Insurance business, Stephen Wandera. We have our [unclear] General Manager for the property business, Benson Kamau. We have CEO Asset Management Business, Jude Anyiko. And we have Senior Manager in charge of Actuarial Services, Dennis Mworia. So this team is happy and ready to start with our performance, our strategy and what the outlook is from the way we see it at Britam. Without further ado let me introduce our group Managing Director to start with an overview of the company and our strategy and how we have performed against the strategy. Dr Wairegi, welcome. Benson Wairegi Thank you, Carol. Thank you, participants to this presentation. We released our results for the six months ended 30 th June this morning. And the highlights of this presentation were the overview first of all of the macro environment. Then we looked at our business strategy and finally concluded with a discussion on the actual financial results and a review of our outlook for the business environment and the business for the future. In terms of the GDP and the economies of the countries where Britam is operational we did observe that the economies of these countries, in the seven countries including Kenya, have continued to register robust growth. Of course there has been a weakening in the recent past, particularly in Kenya where we have seen currency depreciation, high interest rates, inflation rising and [unclear]. It is anticipated that we should be having a [unclear] in the next month or so. So the Kenyan economy which has performed very strongly is experiencing shocks, but overall the outlook for the future looks quite promising. With regard to the other economies where Britam operates, in this economies; Tanzania, Uganda, Rwanda, South Sudan, Mozambique and Malawi, those economies have registered and continue to register very robust growth. and the combination of their performance together with Kenya s set the platform for Britam to continue growing and developing its wide product offering in this market and to the populations in these countries and continues to grow. It is a business for the benefit of all the stakeholders, particularly our shareholders. 1

We looked at the performance of the Nairobi Securities Exchange and we did recognise the fact that generally the stock exchange has been on a downward trend for reasons that have to do with several factors including the currency depreciation, the introduction of capital gains tax, which has been revised now not to capital gains tax but to a transaction tax. But generally the stock market has been on a downward trend. But we also did acknowledge or recognise that Britam s stock itself has performed worse than the rest of the market for reasons unique to us, more to do with perceptions. And these main reasons have been to do with our setback in the property segment when we fell out with the company where we had taken a 25% stake to further our property initiative. And you will appreciate the fact that we are in court. We can t talk too much about this. But that was one of the reasons why the market seems to have taken a negative view of Britam. Then of course recently we had one major problem with our shareholder based in Mauritius. Whereas this incident had nothing to do with how Britam as an organisation operates, the perception out there was that this shareholder had a major role to play in the management and leadership of the company. And those two twin factors, Acorn and Bramer, have been major contributors to the more than average drop in Britam s share price. In both these instances we have managed the peers in a way we think has been very good. Although the issues are not really resolved we expect them to be resolved amicably in both cases. But operationally Britam continues to operate without the negative effects of those two events. We then looked at industry highlights, more specifically the insurance industry, to set the context for the platform for the environment in which Britam operates. We observe that penetration is still very low. And whereas that is increasing and doing well it still hasn t reached the levels of countries like Mauritius, South Africa and the other emerging markets. But the trend is upwards, and with the growing middle class in Kenya and the rest of Africa we would expect to see insurance penetration increasing. And this presents an opportunity for any business of an insurance company that is having a footprint in this part of the world. With that increasing penetration we acknowledge the fact that the industry has registered commendable growth with gross written premiums growing by 20.3% in 2014, driven by the introduction of insurance schemes for civil servants and the armed forces. And life insurance grew faster than general insurance with a growth rate of 29.4% compared to the non-life growth of 15.6%. At this juncture it is important to note that Kenya recorded the second-highest growth rate in the world in the last year in as far as life insurance business was concerned. That confirms and affirms the fact that this market presents huge opportunities for insurance business. It is because of that and our leadership in this sector that in the first quarter of this year Britam became the number one life insurance company in this market. We expect to continue with that leadership position in the remaining part of the year and in future years. We then observed that there is a lot of activity in the M&A arena following Britam s acquisition of a non-life company called Real which has operations in Tanzania, Malawi and Mozambique in addition to Kenya. That seems to have triggered a wave of mergers and acquisitions in the industry, and we have seen a lot of activity in that area. We would expect that to continue. This is also a reflection of the ongoing consolidation of the industry. And then moving away from insurance we had a quite look into the property segment. We have seen a lot of property development activity. We suffered a setback ourselves in our property development ambitions because of that challenge we had with Acorn. But we are back on track, having revitalised and rejuvenated our property development division with the appointment of a CEO for the property division, and also the recent 2

recruitment of three key hires who will drive this property development initiative, revealing the development of a serviced apartment development in Kilimani, an upcoming upmarket area for Nairobi where we are targeting to spend about 2.3 billion Kshs in that initial development. Then finally our asset management business, which has grown significantly. In spite of the challenges we experienced with the departure of key staff last year we did observe that asset management presents another opportunity. And this business grew by 38.5% for its assets under management for the six months ending 30 th June 2015. With regard to our strategy, building on these initiatives and this market environment, we always remind our audience that in our 2012-2016 strategic plan we are pursuing four thrusts. One is regional expansion, which has largely been accomplished. Now Britam is operational in seven countries. That s a huge footprint. These markets present a population in excess of 160 million people, and that s a large market for our product. The second thrust is in IT enabled business transformation. We spent a considerable amount of resources in developing an IT strategy, which when finalised and completed in the next two or three years, will position Britam in a space of its own in terms of not just operational efficiency but in providing excellent customer service because our customers both internal and external will have the capability to interact with Britam realtime. It will also increase our distribution channel by enabling our financial advisors and our prospective customers to buy their insurance services from Britam not just through our financial advisors or brokers but also online through technology. The third thrust is in property. I have just explained, as I did in the morning, that we have now a property development strategy through the coming on board of that management team which will then start developing the land bank that we have in abundance. The final thrust is of course the local expansion where we have invested a lot of resources in growing our business. We now have 40 branches in the country, Kenya that is, 2,400 financial advisors, 300 external agents, all of whom distribute our products across the breadth and length of Kenya in the new constitution where we have 47 counties. These 40 branches provide a vital link between the head office and the branch network which makes it possible for our customers to reach us and communicate with us and buy our products in a very convenient fashion. Finally, in concluding our strategic discussion we did observe the four thrusts and the economies that we operate in the scale of our operations is huge, the platform is excellent, and this machine is ready to go. We are investing a lot in addition to these branch networks in growing the brand. Brand equity is high. Our share of voice in the media stands at 25%, surpassing every other player in our segment. We are the leader with the top of mind awareness of about 33%. Our human resources are unmatched, and we continue to grow our human resources both by way of recruitment and developing their capabilities. And with this expansion into the region we now have a workforce of 850 employees plus the 2,400 financial advisors. Performance management is key to the way we manage our staff. We continue to focus on staff development because it is through these human resource capabilities and competencies that we are able to deliver on the strategy that is so ambitious that everybody continues to feel under pressure and the energy that is necessary to push for these very high objectives. I think that is how we concluded the macroeconomic and internal business review, before we then focussed on governance, because this is very important particularly in the new and legal and regulatory dispensation of risk 3

management as opposed to compliance management in our sector. You will observe that our structure takes care of the three levels of defence when it comes to risk management. We have a very strong board with very experienced directors. The board is constituted into various committees, the risk committee, an audit committee, an investment committee, a human resources and compensation committee, and a nomination and governance committee. All of them constitute the kind of risk management framework that oversees the strategy development and execution. The second level of defence is the risk management function. We have a group risk and compliance manager who leads a team of five managers overseeing the risk framework. We are in the process of developing an enterprise risk management framework. And that is the second line of defence. And we concluded with the third line of defence, which is independent assurance, constituted by our own internal audit department it is a very well-staffed department looking at internal controls and ensuring that company policies and procedures are implemented and adhered to and then the external audit which then looks at the financial statements and providing the necessary assurance for our investors. That concluded our presentation on the general outlook for our business. And at this juncture I would like to hand over to the group Finance & Strategy Director, Gladys Karuri, to take you through the numbers for the six months. So over to you, Gladys. Gladys Karuri Thank you, Dr Wairegi, and welcome and good day, participants. I will take you through the numbers that we released this morning. With regards to our revenue the gross earned premiums and client management fees were 10.6 billion Kshs, a growth of 77% from 6 billion Kshs from June 2014 to June 2015. So a growth of 77% which is a huge growth reflected by growth in the different business. And I will be able to talk about that. In addition we looked at total income. That grew from 10 billion Kshs to 11 billion Kshs. That s a growth of 8%. The reason that growth is not as high as the 77% growth in core revenue is because of our investment in the stock exchange. Dr Wairegi has taken us through the performance of the stock market, and you are aware of that performance. We recorded a loss on our value in investment in the stock market of 843 million Kshs. If you compare that with what we had in terms of profit by June 2014 we had 2.8 billion Kshs that s a drop of over 3.6 billion Kshs in revenue gain. The total income therefore increased by 8%. Our [unclear] continues to be a concern [inaudible segment] from 3.5 billion Kshs to 10.6 billion Kshs. So that compared to the revenue growth of 77%. And you also have our operating expense, which is an area that we focus on, and we grew 34% from 1.8 billion Kshs to 2.4 billion Kshs. That compared to the 77% growth in gross revenue is also good and has [inaudible segment]. We now have finance costs arising from the issue of the bond that was done in July 2014 for 390 million Kshs. And therefore at the end of the day we made a profit before tax of 1 million Kshs. That s a drop of 65% from 2014 of 3 billion Kshs. And as you can see all other lines of the core business have performed very well, but the investment line and the stock market generally has resulted in a significant drop in the performance [inaudible segment]. Now, in line with that we ve looked at the performance of the core business which has had several gains and losses. And in June 2015, the six months compared to 2014 similar period, it is a growth of 18% from 1.1 billion Kshs to 2.1 billion Kshs. Now, if you look at that growth of the core business alone it has been a growth from 2011 to 2015. Of course in 2014 we had the discussion with regard to some of the investments we were doing. 4

We had just acquired Real and aligned our [unclear] methodology at that point in time, and therefore had a big drop in performance. But we have now recovered that and grown 18% to 2.1 billion Kshs in terms of the core business performance alone without the impact of the investment in the stock market. Now, in regards to the distribution of revenue or the sources of revenue within the group, what we have seen is regional businesses growing significantly at 708%, micro insurance also growing significantly at 89%, general insurance business, the Kenya business, at 63%, life insurance at 26% and asset management at 6%. So it is a growth in revenue for all lines of business including asset management, which had previously been affected by changes that happened last year. Now, in regards to their contribution to top line revenue, life insurance is now contributing 37% of total revenue. But life business is only in Kenya. The general insurance business is contributing just shy of 37% of total revenue, so very close to the life business. Micro insurance, 2%, and the regional business is now contributing 20% of the group s revenue while asset management is contributing 4% of the total revenue. Now, if you look at the regional business they are fairly new businesses. We have been trying to grow them now in seven countries. But with 20% contribution we actually expect to start seeing a significant contribution from a profit perspective coming from those businesses. Also with the general insurance now at 37% and having successfully integrated Real into Britam s general insurance business, what we expect now is growth after all the integration activities have been completed in the first half of 2015. With regards to the insurance business, insurance gives us the key driver of performance for Britam in total, contributing just shy of 96% of the group revenue. The Kenya business is contributing 80% of that and the regional business 20% of that. I think the message coming up from there is if you look at all the regional businesses they are contributing quite some decent amount to revenue for the group. If you look at Tanzania, 5.3%, Mozambique, 2.9%, Malawi, 3.6%, South Sudan, 3.7%, Uganda, 3.5%, and Rwanda, which is our newest entity this is the second full year of operations at 1.2% and growing. If you look at the revenue growth over the past five years, again a significant growth. We started at 5.6 billion Kshs for the full year in 2011. We are now talking about 10.6 billion Kshs for half of the year in 2015. And if you compare that with 2014 where we had 6 billion Kshs that is [inaudible segment]. Now on the highlights sheet our assets continued to grow. We have total assets of 76.6 billion Kshs. That is compared to 55 billion Kshs which we had in 2014 and about 72 billion Kshs at the end of 2014. The cash position also continues to be strong at 4.9 billion Kshs. Our total assets compounded annual growth rate is 36.7% for the five years from 2011, so a very good growth over the period of five years. In addition to that 76 billion Kshs we have also assets under management off balance sheet which are managed by our asset management business, and that has grown significantly from 54 billion Kshs which we had in 2014 to 74 billion Kshs in 2015. That is a growth of 86%. If you look at the compounded annual growth rate from 2011 to June 2015 that is 38%, again a story of significant growth in that core business of asset management. With the profitability of asset management also growing equally the profits reported was 941 million Kshs from asset management and that is consistent with what we have seen in the previous years, a compounded annual growth rate of 82% for the last five years. 5

Also looking at our life business, because the life business at 37% of revenue is currently the biggest contributor to profit, the embedded value continues to grow at 30% compounded annual growth rate for the five years from December 2011 to June 2015. Now, from December 2014 and June 2015 embedded value has grown by about 800 million Kshs which is another good story. I think in conclusion what I want to say on our performance is in regard to the core business those have performed very well, but we have actually been hit significantly by the drop in the stock market and specifically our strategic investment in Equity Bank. And therefore we had a drop in profit from 3 billion Kshs to 1 billion Kshs, but the core business is doing very strong. Thank you very much. I will hand to Dr Wairegi to continue the presentation. Benson Wairegi Thank you, Gladys, for that presentation. Towards the end of this presentation we will look at our asset mix. You ve just heard that the contributor to our poor bottom line is the depressed performance of the equity market. And the equity portfolio or investment in the stock exchange constitutes about 28% of our total assets. That is perhaps the biggest portion of our assets in the balance sheet. Then we have investments in fixed income which constitute about 27% of our total assets. Other assets constitute about 19%. Investments in associates at 9%. The associate here is Housing Finance. And investment in property has grown by minimal 1% to 10%. The objective for presenting this particular slide is to explain the fact that our main objective over the long term is to reduce the proportion of investment in the volatile NSE ordinary shares where we seek to have an exposure of 30% or below. That is a long-term objective because this particular exposure is predominantly in Equity Bank, where apart from the benefit we get by way of dividends and of course fair value gains when the market picks up, we are also able to leverage on that investment to grow our other businesses, particularly insurance and asset management business. We have been able to strike a very good relationship with Equity Bank and grow our other lines of business through that investment. So it is a delicate balance between the value of that investment in terms of where it stands and its contribution to our other lines of business. We therefore regard this investment as strategic. But we can grow our investments and our balance sheet in other assets, which is what we have been seeking to do, particularly in fixed income and property. We expect to dampen the contribution of Equity in the overall scheme of things to our balance sheet. The item we finished with is property, which has I ve just observed is at 10% of our balance sheet. I earlier on observed the fact that our property strategy suffered a setback when our relationship with Acorn didn t go very well. It has taken us a bit of time to rearrange ourselves. We now have the property team. We have the land bank, ample land bank. And within the first quarter of next year we want to have started our development in Kilimani, which is a development for serviced apartments with a current estimated value of about 2.4 billion Kshs. And that is set to begin in Q1 of 2016. This property development initiative will be done in conjunction with our asset management arm of the business because the asset management arm of the business will be in the position to complete this development to structure exits for other investors and enable the group to realise its investment. In our property development we target an IRR of 25%, and we are fairly confident based on our experience so far to realise these kinds of returns. So property, an area of growth as we ve identified, suffered a setback last year but we are back on track and hope to develop our first property early next year. 6

We conclude by looking at the outlook. We did observe, and I would like to observe here, that at present with our operations Britam has made a platform for sustainable future growth through our various strategies, beginning with the geographical footprint, our presence in seven countries, through innovation using information technology to innovate in both processes and product development, through our local expansion, the 40 branches I talked about in the 47 counties and the 2,400 financial advisors, and also our property strategy. This machine should be able to deliver on our ambitious strategy in the years to come. We could not complete this presentation without talking about our corporate social responsibility for the simple reason that within the communities within which we operate in all these countries it is the community that is giving us the license to operate. We like to identify ourselves with their livelihoods, with their aspirations. And these aspirations are primarily in the areas of health, education, environment and sports. Britam has taken a leading role in providing funding, sponsoring events and activities in many of these areas. Most of them are in the area of sports. We support Mathare United Football Club, which is not just a football club, but if you look at the origins of that club it came from the slums. So we develop the youth who live in these areas to grow their potential and to use sports as a medium for growing and developing their abilities and providing gainful employment as opposed to them spending lives in squalor and poverty in the slums. Health, we provide financing contributions to various causes. A campaign that we focussed on last year was the First Lady s Beyond Zero Campaign. But we also do a lot more in other areas of health through our products, providing supports for cancer patients and contributing to the causes around hospitalisation and medical bills for people who are stricken by various problems of health. Finally, as a result of our performance as a result of our activities particularly in the area of marketing management we have received a lot of accolades. Within the [coughing] Carol Karugu Dr Wairegi was just taking us through the accolades, saying that within the marketing field and within the insurance field we have managed to amass a lot of accolades. You will see this on our website as well. This is just a testament to the fact that the company is doing well. As Gladys alluded to in terms of fundamentals the company is doing well and the future looks great. So I think we are ready to now take your calls. Chris, if you are on the line you can now instruct the callers on how to dial in for the questions. The team here is ready. Operator Thank you very much. Ladies and gentlemen, at this time if you wish to ask a question please press star and then one on your touchtone phone. If you decide to withdraw your question please press star and then two to remove yourself from the question queue. Again, if you wish to ask a question please press star and then one now. We will pause a moment to see if we have any questions. Carol, it would appear that we have no questions at this time. Carol Karugu Okay. Do you want to just ask one more time so we make sure that nobody is left out? Operator Very well. Ladies and gentlemen, again if you wish to ask a question please press star and then one. Carol, we still have no questions in the queue. Carol Karugu 7

All right. Okay. I think we have no questions. We are open for questions. Like I always say after this meeting, after you have looked at the results, after you have looked at the presentation on the website please feel free to interact with us. I m happy to schedule a conference call or a meeting with any member of management as needs may be. Thank you very much for dialling in. from the Britam team thank you very much also for coming to this conference call. And we will see you next time. Thank you. Goodbye. Operator Thank you very much. Ladies and gentlemen, on behalf of Britam that concludes today s conference. Thank you for joining us and you may now disconnect your lines. END OF TRANSCRIPT 8