Fidelity earns investor loyalty

By Tawanda Mazorodze
FIDELITY life assurance of Zimbabwe (Fidelity) convincingly won the 2011/12 Zimbabwe Independent Quoted Companies Survey with a total score of 78,28 points.
After being voted the best insurance company last year, Fidelity shot up to the number one spot by virtue of a very high three-year compounded annual growth rate (CAGR) of 122,17% for its share price and returning 354,29% to shareholders in 2011 and rising profitability.
The life assurer’s high return on average equity (ROaE) combined with a strong qualitative score landed it top ranking this year.In other words it had a very balanced scorecard which made it outstanding.
The genesis of Fidelity
The company is a product of the acquisition of an 1836 UK incorporated business, Legal and General (Pvt) Ltd which changed its name to Fidelity in 1988. Since then it has grown organically through establishing a number of subsidiaries in Zimbabwe and Malawi with the life assurance division being the dominant business. Fidelity has sailed against the tide by excelling in an environment where the odds were against the insurance sector and consumer confidence was low amidst an almost extinct savings culture.
Phenomenal share price
Fidelity’s share price has been an excellent performer since dollarisation, with last year’s performance even more exceptional — rising more than 600% in 2011 and 354,29% between March 2011 and March 2012 — after growing at a CAGR of 122,17% in the three-year period commencing March 2009.
Operating in a sector closely aligned — if not one that lags — to the fortunes of the economy the current share price performance reflects a huge outperformance. The share price upward momentum has built up over the last three years and it has been held in good stead with a promising outlook. It is likely to remain a top performer in the short to medium term and is not likely to drop out of the top ranks in the Survey any time soon.
Technically profitable
Fidelity’s showed strong resilience after producing a sterling technical financial performance. Net premium income was particularly impressive after it grew by 53% to US$11,8 million on the back of strong demand for individual life products whose net premium grew by 95% to US$4,8 million, despite the challenging operating environment.
On the other hand, net claims and benefits only grew by 35% to US$6,8 million resulting in a technical profit of US$4,9 million which was 88% ahead of 2010’s US$2,6 million — a sign of strong underwriting processes (the process of rating and pricing risks before assuming them by an insurance business).
Total claims, benefits and expenses to net premium income ratio improved by 4,2% to 71% from 2011 attributable to a 4% decline in the management expenses ratio to 60%, though still high.
On how the company is going to deal with rising expenses finance executive German Mushoma says plans are underway to put them in line. “We are still to develop cost containment strategies for other units…” he said.
The core life business dominated the show weighing in 83% – 65% from Fidelity Life and 18% from Vanguard Life Malawi – to profit before taxes (PBT).
Growing employee benefits
One branch of the life assurance industry is pension management known as employee benefits (EB) in insurance jargon. Fidelity has not been wanting in this respect. The company is currently managing 80 schemes — a 90% growth from the 42 schemes that the company was managing in 2010. Malawi has been another positive spot following the passing of the Finance Bill in 2010 which has made pension schemes mandatory and Vanguard Life is well positioned to take advantage of this Bill.
The life assurer continued to augment its underwriting capacity through growing its surplus — the excess of the market value of assets over the present value of liabilities. Fidelity showed its fiduciary expertise after investment income — a measure of the life assurer’s ability to grow the policyholders’ assets and in turn create increased future underwriting ability — propagated by a whopping 524% to US$3,9 million whilst the asset base growth did not disappoint either budding by 61% to US$33,7 million. The company is surely on track to underwrite more business due to the growing capacity.
Ramping up returns
Fidelity’s bottom line came in at US$101 million of which US$7,9 million was transferred to policyholders and US$1,97 million was attributed to shareholders. The company’s earnings yield remained attractive at 11,7% whilst the total dividend paid was US$350,000 implying a payout ratio of 17,7% in 2011.
The life assurer has created an impressive policyholder bonus declaration record as a result of improved profitability. Management believes this is a sustainable course of action as it will continue to stir the business on a profitable course much to the benefit of both policyholders and shareholders.
Giving an insight into how the business intends to grow policyholder assets and in turn shareholder value going forward, group chief executive Simon Chapereka says: “We believe we have exciting projects in store coming through and the business model will continue to generate good growth rates.”
Disclosure concerns
Whilst it is true that the level of disclosure by local life insurance companies has been somewhat substandard, management at Fidelity has agreed to improve their level of disclosure. “We will consider the suggestions and where necessary adjust /disclose accordingly,” says Chapereka. Other disclosure requests include the embedded profit of the life business — the present value of future profits expected to emerge from the existing business which in other words is the intrinsic value of a life insurance business.
Where to from here?
The past has been an interesting story and finance theory tells us succinctly that the past is not a good predictor of the future. The life insurer has made a good start to 2012 and management is convinced that growth is going to come from increased demand for its products from the mining and agriculture sectors of the economy. There are numerous headwinds that are dogging consumer disposable incomes which could derail the target of US$20 million bottom line, but management remains upbeat projections will be met.