Alexander Forbes’s 2016 financial year has been the type that tests our organisation across multiple dimensions. In the first full year since relisting on the JSE, the South African trading environment has experienced an extraordinary mix of economic turmoil, political uncertainty and regulatory change. The financial services sector is inextricably linked to macroeconomic drivers such as job creation, economic growth, equity and bond markets and market confidence, and our business lines are no exception. Certain areas of our business such as LCP, AfriNet and the retail cluster performed very well in 2016 while the core South African businesses responded well to the increasingly difficult trading conditions that became more apparent as the year progressed. On a whole the group has navigated a difficult environment admirably, with 12% growth in normalised profit after tax (R950 million, up from R850 million in 2015).
Following the group’s listing in the previous financial year, we announced our new strategic intent spanning 2016 to 2020. This intent centres on our ambitions of growing our core business, leveraging that core and developing complementary businesses, striving for operational excellence and embracing innovation. In executing against this intent, we build and draw on the strength of our relationships with four key stakeholders: clients, employees, investors and the broader society. Our focus for the year under review was therefore on translating this intent into action.
The reconfiguration of our operating structures was completed during the year – an important step towards realising our intent. Our new institutional and retail clusters reflect Alexander Forbes’s client-centric approach to supporting clients’ financial well-being. Our employees, products and processes are now fundamentally realigned across the entire value chain and we are now far better organised to deliver on a fully integrated value proposition to both institutional and individual clients. At the same time, we remain mindful of the fact that for most of our clients who are also members in the funds we advise and administer, the integration of these two offerings is essential for the drive towards more affordable yet tailored solutions.
Group chief executive (interim) and chief financial officer
We are confident that the foundations have been laid for substantial growth. In addition, the recently established operations and technology (Optech) cluster now supports the group holistically in order to ensure better value for capital projects and to better prioritise resources.
Competition in the financial sector is on the rise and stagnant economic growth in South Africa means we must grow our business by competing for market share and exploring new products and markets. We are conscious that defending our leadership within the institutional space while forging a path in the retail sector requires that we remain responsive to the rapidly changing environment whilst maintaining the key relationships that are the foundation of our business. During the year we invested significant resources to realign our employees and distribution channels, equipping them to sell and service the entire suite of products and services within their cluster.
As mentioned earlier, we remain mindful of the fact that the institutional arrangements and relationships are all ultimately aimed at providing better outcomes and financial well-being for our individual clients (members within the funds we provide solutions to). We believe one of our key strengths as a group lies in our ability to combine these offerings for the benefit of our clients. Our primary strategy is to service individual members of our institutional business by demonstrating our value and the strength of our holistic product offering. The strength and importance of relationships are not one-way, however; we believe that by serving individual retail clients well, we will also bolster our reputation with their employers – our institutional clients.
We are cognisant that the challenging economy impacts our clients as much as it does the group and we have therefore carefully considered our product and service offerings, ensuring that we have a solution for every need. For example, churn in our insurance business has declined to 18% (2015: 20%), while gross written premium has grown 11% while the market grew 7% due in part to the introduction of a number of lower-cost products aimed at retaining clients.
The launch of a new tax-free savings account during the year marked the first time that clients have been able to not only access information but also transact online from the convenience of their computer or tablet without additional intervention. We believe that this represents an important step in our ability to automate and digitise client service, engaging with clients through the channels and platforms they prefer and serving their needs efficiently. In the coming years we hope to build on this success through the roll-out of our digitisation and modernisation strategy.
Our core institutional business retained its strong market position amid increasing competition and regulatory change. Leadership in the retirement fund industry is determined by membership under administration and assets under administration – both of which we grew from the previous year. Client satisfaction also grew to 86% (2015: 82%), while retention increased to a commendable 98.5% (2015: 97.6%). Financial Services continues to develop and improve its flagship umbrella retirement fund, providing relevant and cost-effective solutions to the South African market. Its AF Access and AF Coreplan umbrella funds showed strong growth in the year, albeit off a smaller base. Combined, the total assets under management in the institutional umbrella funds in South Africa increased by 9% in 2016 to R65.3 billion, with 9% growth in the number of active member records administered (more than 304 000) and a 16% increase in the number of participating employers (1 320). In the coming year, the cluster will launch an in-fund solution for its umbrella fund, marking a significant evolution for its flagship product. The solution will allow members to preserve and annuitise their money within the fund even as their circumstances change.
Operating income from consulting, actuarial and administration services to retirement funds grew by 5% in 2016 despite negative employment growth and retrenchment activity in our client base in South Africa. Through diligent expense management and operational efficiency the profit from operations for these business units increased by 12% in the year under review.
Our public sector division increased revenue by 4% to R216 million in 2016. While below the division’s desired growth rate, we nevertheless made good progress in building the Alexander Forbes brand and reputation within the sector and strengthened strategic networks and relationships.
It is only through the commitment of our employees that we are able to deliver against our strategic intent, and we remain grateful for their continued efforts. In order to attract and retain the best talent, we continually re-evaluate our employer value proposition in 2016, more clearly articulating the benefits we offer to our workforce. This includes fair and competitive compensation, opportunities for personal and career development, a comfortable work environment, and additional benefits and incentives. During the year, we developed a monthly total reward statement that outlines the full suite of rewards each employee receives through his or her employment with the company. We also continue to work to ensure that remuneration is both fair and well structured to allow for continuity and retention of top talent.
We are conscious that our drive for increased productivity has placed pressure on some of our employees and this was reflected in a decrease in our engagement index to 60.9 (2015: 63.8). While this decline is regrettable, engagement remains within a normal range for the industry and we are humbled by our employees’ embodiment of Alexander Forbes’s SERVE values. In 2016, we awarded 19 employees with platinum SuperSERVE awards, the company’s highest level of recognition for staff that go beyond expectations to support their colleagues and clients.
Alexander Forbes’s success is driven by its employees and it is only right that they share in this success. Following the issuance of 1 000 shares per employee after the group’s 2014 listing, we granted each employee a further 200 shares in the year under review. These have a vesting period of three years and help to align employee interests with the company while supporting their financial well-being.
Operating income from continuing operations grew 11% from 2015 to R5.4 billion in 2016. Revenue growth was significantly enhanced by the weakening rand exchange rate applied to international earnings; excluding Alexander Forbes International (AFIL), operating income for Africa grew by 4% to R3.5 billion.
In Africa, where 34% of the group’s revenue is linked to the assets under administration and management, income was negatively impacted by weaker markets. More significantly, the economic downturn has meant that clients continue to gravitate from specialist mandates toward balanced portfolios and index/passive portfolios, both of which result in lower net margins earned by the group. Investment Solutions’ diversified investment product range is well positioned to offer this flexibility and is an integral part of the group’s value proposition to clients. Growth in African operating income excluding asset-based fees was a commendable 7% in the current economic climate.
Operating profits from continuing operations, before non-trading and capital items, increased by 6% to R1.2 billion. This was similarly buoyed by the international operations’ currency exchange. Excluding these, the growth for Africa was a modest 1%, resulting in an operating profit of R924 million.
Operating expenses attributed to continuing operations (excluding non-trading and capital items) grew 12% to R4.2 billion, impacted significantly by exchange rates. In Africa, operating expense growth was contained to 5% (R2.6 billion). This expense base now also includes accounting for the newly introduced share-based long-term incentive scheme. In the past, this was provided through a direct shareholding structure prior to listing which had no accounting impact.
The overall group operating margin on net revenue was 22.5%, down from 23.4% in 2015. This was largely impacted by the absolute value of assets under management and the migration to lower-margin products within the institutional cluster as described above.
While we expect our client-centric approach to drive top-line growth in the medium term, our short-term focus has been on careful cost management. The introduction of the group shared services and operations and technology (Optech) clusters represents an important step in achieving this.
The Optech cluster has been instrumental in establishing a single source of accountability and expertise for group operations and technology and, in 2016, the cluster made great strides towards developing enterprise-wide systems and unified operational and client platforms. This will allow our P&L businesses to focus on growth and client service while the cluster enhances our operational and digital capabilities in line with its new strategic modernisation programme.
Our shared services cluster aims to improve operational efficiency by re-engineering the way we do things. During the year under review, the cluster has carefully considered the way our people, processes and use of technology can support the achievement of our strategic intent. We are in the process of implementing our newly defined shared services operating model.
In pursuing our higher purpose, we are committed to having a positive impact on the society in which we operate. This includes supporting the vulnerable, contributing to transformation, delivering financial education, investing responsibly and minimising the environmental impact of our operations.
In 2016, Alexander Forbes’s flagship In-4-Life programme provided R5.0 million to community partners who provided holistic support to more than 6 600 beneficiaries from early childhood development through to adulthood.
We are pleased to have maintained our level 2 B-BBEE empowerment status during the year. Progress was made with regards to employment equity and our South African workforce is comprised of more than two-thirds previously disadvantaged individuals (2015: 66%). Transformation at senior levels remains a challenge, however, and we will need to redouble our efforts here in the years to come.
Our Investment Solutions business remains an important player in South Africa’s developing responsible investment space. In the year under review, it assessed the environmental, social and governance credentials of 17 asset managers through its manager assessment and ranking system.
Alexander Forbes’s member education unit is housed within our institutional cluster. In 2016, the team travelled more than 40 000 kilometres to deliver 1 341 presentations, providing financial education services to over 22 000 individuals.
As a financial services company, our environmental footprint is small relative to other sectors; however we nevertheless are conscious of the obligation to carefully manage it as a good corporate citizen. Our biggest impacts are in the form of the electricity and water consumed by our offices and in the waste generated over the course of doing business. For the first time, we are now able to estimate our water and electricity consumption beyond our Sandton head office to all South African sites.
We would like to extend our sincerest thanks to Mr Edward Kieswetter who retired from his role as chief executive with effect from 8 February 2016 and wish him the best in his future pursuits. We are grateful for the foundation he has helped to lay and remain committed to guiding the group on its future path in pursuit of its higher purpose.
We would also like to acknowledge Mr Barend Petersen, who resigned as a member of the board effective 4 September 2015.
We are pleased with the way the group has endured through the challenging environment and are confident that our chosen path is a promising one. With diligent focus on executing our strategic intent paired with the continued support of our key stakeholders, we look forward to enhancing the value created, grown, protected and distributed by the Alexander Forbes Group.
Group chief executive (interim) and chief financial officer
30 June 2016