Andrew Darfoor: Hopes to grow the proportion of earnings from emerging markets
Andrew Darfoor: Hopes to grow the proportion of earnings from emerging markets

It is not surprising that Alexander Forbes points the market towards the normalised operating profit over the year to March.

At a 5% increase to R986m, it is an improvement on the 1% increase the year before.

The accounting profit, though, was down 80% to R327m, after several write-offs — R317m from AF Life alone — and a hefty 50% effective tax rate. Not that there weren’t some good trading results.

There was a 20% increase in the profit of the core retirement division. The umbrella fund, in spite of increased competition, with Allan Gray entering the market and Discovery coming in a few weeks, increased membership by 12% to 352,000.

In the short term the decision to bring its asset manager Investment Solutions in-house and rename it Alexander Forbes Investments is paying off and profit, which had been stagnating, was up 29% to R398m.

It increased the overall margin by bringing in alternative investments in housing development and infrastructure. And it launched an income-focused product branded Clarity, though it had to look outside the group, to specialist asset manager Colourfield, to develop this.

It does, however, plan to develop exchange-traded funds and other index or quantitative "smart beta" products in-house through a team recruited from Ashburton.

Alexander Forbes group CEO Andrew Darfoor says international investment can be offered much more cost-effectively now that it is outsourced to Mercer, the giant international asset consultant that owns 34% of Forbes.

Investments used to have a clumsy top-heavy structure with separate asset-consulting and multimanager teams, and even a third team, Caveo, researching hedge funds.

There have been a few high-profile departures from this team, including research kingpin Muitheri Wahome and Rob Southey, head of asset consultants. But Darfoor says he believes that in general the mix of skills at Forbes is improving.

"More than 90% of those scoring 3, 4 or 5 in their assessments (the better performers) are staying on while the proportion of 1 and 2 scorers (the worst performers) leaving has increased from 3% to 13%. I would like to increase that to 50%."

Darfoor makes no apology for employing some high-cost expatriates on his executive committee. They include John Mather, head of IT, and Christian Schaub as head of HR (not that there is any transparency on their packages).

"We have just started a five-year journey," says Darfoor, "and we need to have the right people on the bus." No less than R32m has been set aside for the retention of such employees.

But he says that over two years there has been a cumulative R308m reduction in costs. The group has just sublet a floor of its Sandton head office, which will save R70m over the balance of the lease.

Forbes has been a highly regarded player in the retirement consulting and administration sector, though with a high-cost structure. It has also built up a profitable investment business by aggressive cross-selling.

But it has been something of an also-ran in retail insurance products and financial planning. It is trying to change this through the cheesily titled "financial wellbeing for a lifetime" programme, as if competitors such as Discovery and MMI don’t use similar slogans.

And the proportion of institutional clients who own a Forbes retail product has increased from barely 3% to 8.7%.

Historically, Forbes used to cherry-pick its financial planning clients from the boardrooms of its institutional clients, and it has a sizeable R67.3bn under advisement. It is getting some traction in middle management, with more than a third of people earning R500,000 or more buying a retail product such as an in-fund annuity or preservation fund.

Darfoor is taking a small step towards opening up the Forbes product suite to outside distribution. But so far just three financial advisory firms have been approved to sell the range.

Alexander Forbes has anaemic operations in the rest of Africa, which make Liberty’s look dynamic. In Namibia Forbes is a solid business which made a profit of R54m but there were losses in Nigeria, Zambia and Uganda.

Darfoor told analysts the group would not be so patient about its investments in future. It has invested R28m in an African head office infrastructure to strengthen its legal and compliance backbone.

But Darfoor says that if the underperforming businesses in Nigeria, Uganda and Zambia cannot be turned around within 18 months they will be sold.

This would endanger Forbes’s ambitions to be seen as a pan-African business. To help its more than 250 SA-based multinational clients with their employee benefits across the continent, it works in alliance with Mercer.

Darfoor hopes to grow the proportion of earnings from emerging markets to 10%. Not just from Namibia.

The other problem child is the subscale retail life insurance business which sits with 6,000 policies when it needs at least 30,000 to be consistently profitable.

The Forbes financial planning consultants have not been very enthusiastic sellers of these policies, but Darfoor hopes the three firms that are now officially allies will take up the slack. Or they might prefer to support a product that’s more popular in the market.

AF Short-term Insurance, for example, had gross written premiums of R1.6bn, making it a respectable midsized player, and its loss ratio of 68% was better than the target of 71%.

Darfoor referred extensively in the presentation to the "size of the prize". It may sound like a game-show cliché but it refers to the possibility of stripping riches out of the balance sheet. He says there is capital to unlock and the gearing level is too conservative at 11%.

Since relisting in 2014, it has generated R4bn in cash and paid out R2bn in dividends.

This past year it paid out R829m in dividends and spent R276m on share buybacks.

In a traffic-light assessment of the results, Darfoor gives the group just one red light, for return on equity of 9.8% (the target is at least 12%). There are two green lights: one for containing core cost growth to 3% and another for the generous dividend cover of 1.2 times.

But he says there is a lot more work to do, on operating income and profit growth of just 5% and a cost-to-income ratio still steep at 70.9%.

Forbes continues to mint cash but high growth remains elusive.