Environmental conditions were particularly difficult for the insurance and investment industries in South Africa in 2015. Very slow economic growth, rising unemployment, electricity supply uncertainty and political blunders combined with declining commodity prices and a dramatically weakened currency have not inspired business or investor confidence. The Alsi ended the year without growth and many members will have experienced a below inflation return on their personal investments.
However, at PPS we always take a long-term view and our strategies, both investment and operational, are geared to weather such conditions to the extent possible. The Society continues to do well in all the key areas, thanks largely to our stable and growing membership and our diversification across local and international assets and the growing number of profitable products. The professional market in which we exclusively operate is affected by economic factors to a lesser extent, and our 98% take up rate of our auto increase and our lapse rate of 4% support this view.
Finally PPS’ mutual model, which accumulates all profits for members as a retirement benefit, remains the jewel in the crown of PPS membership.
Members will be aware that the full value of their PPS Profit-Share Account is paid out tax-free at retirement. This value includes all operating profits and investment returns declared during the member’s tenure with PPS. This benefit, on retirement, is the primary advantage of PPS’ mutual model, where there are no outside shareholders – all profits accrue to members.
During 2015, 942 members retired with a total value of R508,4 million. Individual amounts varied from R100 000 to R2 million depending on the tenure with PPS and the amount of the premiums paid together with the number of products held, over the years.
PPS had an excellent year with respect to growth in sales and membership. An expanded product range was launched in March and support from independent and our in-house intermediaries has been exceptional. As a result, both our broker channel and our in-house life advisory consultants exceeded their targets and had record years. Our risk new business sales of R235 million (Annual Premium Income) exceeded last year’s production by 16% and independent research has shown that we have gained market share in our segment. Our number of in-force risk policies now stands at 249 790 – a new record.
PPS Investments new flows of R3,5 billion was 13% up on prior year.
New members were 7 050, up by 39% on prior year, and particularly pleasing is the growth in student members from across a broad spectrum of campuses. Of the new members 47% were African/Indian/Coloured, compared to 40% in 2015.
Over and above the new members there is an increasing number of existing members who are availing themselves of our new products such as short-term insurance and investments.
Profmed and Key Health remain the two medical schemes under administration, and both schemes have had excellent years from both a growth and a financial point of view. Profmed celebrated a record growth year and achieved the 30 000 member milestone. Profmed remains the preferred medical scheme for professionals and PPS members of Profmed receive a share in the administration profits.
The Defence Force post-retirement medical scheme continues to be administered by PPS Healthcare, who has an excellent relationship with this Defence Force unit.
During the year Professional Medical Scheme Administrators (PMSA) was renamed “PPS Healthcare” and moved to a new PPS-owned building in Centurion.
This division of the Group has had another excellent year. Notwithstanding slow growth in the savings industry and extremely negative markets, members continue to trust PPS with their savings and investments. Assets under management exceeded R21 billion (+15%) and 28 500 members now have accounts with PPSI. The individual investor base has grown 36% per annum over the last five years. New flows at R3,5 billion were 13% up on the prior year.
A seamless conversion of the administration platform took place in December. Old Mutual (OMIA) is exiting the administration business and PPSI together with Coronation jointly moved their administration to a new platform at Maitland. The new system will allow a more agile administration, more efficient portfolio reporting, and enable the development of new products to meet the needs of our members.
PPS launched short-term insurance to its members in 2007, via the formation of an insurance brokerage. This meant that PPS took no underwriting risk and was not exposed to underwriting losses or profits, but benefited from being able to assess members’ appetite for this product and as a broker, earned commissions on the premiums. Hollard Insurance was selected as the underwriter. This initiative showed that members did indeed desire to place their short-term insurance with us but many were serviced by brokers and were reluctant to move their business away from this, often, long-standing relationship. In addition the call centre distribution model was not always acceptable to members even if they did not currently have a broker.
Notwithstanding the above restrictions, this business has built up premiums of over R139 million per annum and 11 600 members. However, real growth would always be restricted by the above business model and so it was decided to apply for a licence to enable PPS to become the insurer and remove any broker conflict. To provide the quality of service at claims stage members deserve, it was decided to partner with Santam whose claims facilities nationally are unsurpassed.
As a 49% partner, Santam would also provide expertise and capital to the business.
The new entity moved to new premises in Parktown in November and was launched nationally in February 2016. The new structure means that members will be able to benefit when the business becomes profitable in the future, but in the meantime will enjoy competitive premiums and top level service.
The need for objective financial planning among PPS members is particularly relevant. Members are busy professionals who often do not devote enough time to their own financial affairs – especially long-term financial planning. Many advisers focus on a particular product set and do not have the inclination or expertise to provide advice on a number of products ranging from medical aids to life, investments and short-term as well as tax, wills and trusts. As members are accustomed to charging for their time and expertise, we believe they will be willing to pay a fee for specialist advice affecting their financial future. The division was launched in September and planners will be available in the Cape, Gauteng and KwaZulu-Natal from January 2016.
Members will be free to implement the agreed plan through this or any other division of PPS or through their own adviser.
Since inception, 75 years ago, PPS has focused exclusively on professionals in South Africa and Namibia. This “country dependence” was not an issue for the business in the early growing years but increasingly the need to expand beyond our region has become important for the long-term sustainability of PPS. Over the years management has conducted viability research in several countries in Africa but in each case the number of professionals who would meet PPS’ eligibility criteria was too small to justify the significant investment required. In addition, the legal and regulatory requirements differ by country, and can be very onerous and expensive and carry significant risks. Therefore, to justify the investment and return on risk, a critical mass of members is essential.
Research was conducted outside Africa and all indicators showed that Australia would be the most desirable option. A number of factors support this conclusion. Independent research showed that there are significantly more eligible professionals in Australia than South Africa, supported by the fact that the economy is four times bigger than South Africa’s. There is also a strong body of professional associations and the income per capita (at 67 000 USD per annum) is one of the highest in the world (nine times higher than South Africa’s) with a very low unemployment rate.
The legal/regulatory environment is similar to South Africa and there are a large number of financial advisers and professionals working in Australia who are ex-South Africans.
Based on the above, a business case was developed which was approved by the boards and we set about recruiting a specialist team in Sydney. One of the teams’ first tasks was to test the acceptance of a mutual insurer specialising in professionals among advisers, and they received a very positive response.
The bulk of the back office administration of the Australian business and consequent staff members will be based in Johannesburg, with a notable positive impact on viability.
Due to the lack of experience in the Australian market and the high cost of a life licence, it was decided to partner with a local insurer and “white label” the new company PPS Mutual Australia. In addition, to reduce the indemnity risk we partnered with a major international re-insurer.
Although the above mentioned decisions will impact on the initial profitability, they materially reduce the risk to South African members, who will benefit in the long run from the admin fees, royalties earned, and interest on the start-up loans.
The structure and ethos of this new entity will be very similar to SA, but the business will be owned by the Australian members with PPS South Africa having the final say on a number of key strategic issues.
We are very excited about this new venture, which received Australian regulatory approval in December 2015, and South African members now have a potential additional profit source for their Profit-Share Accounts that is not dependent on the South African economy.
During 2011, the Financial Services Board (FSB) introduced a new methodology for statutory reporting of assets, liabilities and solvency capital requirements for South African insurers, aligned to the European Union Solvency II standard. The target date for full SAM implementation is 1 January 2017. The initial parallel run commenced in July 2014, was enhanced during 2015 and will continue in 2016. PPS’ dedicated project team has been in place for the past few years dealing with the implementation of all the requirements under SAM. This has taken substantial time and focus from key management resources, as well as the Board and its various sub-committees, to ensure the required milestones around this implementation were successfully achieved.
PPS participated in the FSB’s consultative process preceding the implementation of SAM and numerous SAM returns have subsequently been submitted including quantitative impact studies, annual returns, quarterly returns and an own risk and solvency assessment (ORSA). Based on these, PPS Insurance remains financially strong under the SAM framework and is well positioned to deal with SAM requirements.
Many commentators believe that 2015 was a watershed year for emerging markets and South Africa in particular. Our currency is at all-time lows and economic growth continues to be insufficient to create jobs. However, professionals continue to be in high demand as a vibrant professional sector is essential for economic growth. As the Society enters its 75th year, PPS will continue to serve its members by providing world-class financial services covering needs from graduation to retirement.
Our governance structure with the PPS Holdings Trust and PPS Insurance Board continues to serve us well and I would like to thank all the Board members for their continued commitment to PPS and its members.
Mr M J Jackson
6 April 2016
PPS had an excellent year with respect to growth in sales and membership. An expanded product range was launched in March and support from independent and our in-house intermediaries have been exceptional. Our number of in-force risk policies now stands at 249 790 – a new record.