THERE is a well-worn adage that you are much better off buying Liberty’s shares than its policies. This was particularly popular before 1998, when Old Mutual and Sanlam were both mutual societies without "rapacious" shareholders.
What they didn’t tell is that they might not have been paying dividends to shareholders but they were extracting capital from shareholders to build up industrial empires that made up large chunks of the JSE.
But policyholder or shareholder was always a false distinction. Buying the shares will always be higher risk, higher return.
If you know with hindsight that a life office is going to grow successfully, then you would always buy its shares rather than its policies, but then you are risking buying an insurer destined to collapse, such as IGI or Crusader Life.
Besides, it is not clear that the old adage applies now that Liberty is slowing down a bit in its late middle age. On a risk-adjusted basis, many Liberty policies, which can access a wide spread of investments, might well give a better return than the shares over the next five years.
One of the reasons life policies showed poor returns in the past is that they were most often packaged in a universal life wrapper. This meant only a portion of premiums went towards investment and the rest to life premiums. No wonder linked products, built around unit trusts, took over as the main home of discretionary savings in the early 1990s.
And with the introduction of Discovery Life, there was a full unbundling of risk cover from investment by 2000. It was not long before Discovery was cloned, most shamelessly by Old Mutual in its Greenlight range.
These days, I suppose it would be more pertinent to suggest that investors should choose Discovery shares rather than its policies. Of course, you should be able to have your cake and eat it too.
As one of SA’s most innovative companies with a market cap of R85bn, it should be part of your portfolio, if the investment managers of your pension funds and unit trusts are genuine long-term investors. If you have a private share portfolio I think the burden is on the manager to explain why he hasn’t bought the share.
It might be tempting to argue that shareholders are doing well as they exploit policyholders. But that is a trick that can only be played for a few years at most.
I have known Discovery CE Adrian Gore for almost 25 years, since soon after he formed the business. I can tell you that is not Discovery’s game. All of the clients of the Discovery Health Medical Scheme will have had complaints at some point — I had to take it to the internal tribunal as it was refusing to pay for a vital, but pricey drug. I am glad to say the scheme accepted the verdict of the tribunal, which went our way.
Discovery products can often be cheaper than those of their competitors if the client is proactive. Discovery Life policyholders who do enough to qualify as gold and diamond Vitality members qualify for paybacks — R2bn has been paid back to Discovery Life policyholders (excluding claims).
Counterintuitively, Discovery thrives on complexity at a time when most people are crying out for simplicity in financial services.
Just look at the other success story to come out of the 1990s (and also out of the RMB/FirstRand group) — Outsurance, which has focused on motor insurance sold on the phone and the simplest of all propositions: 10% of premiums back after three claim-free years. And more recently, Outsurance Life offers all premiums back after 15 claim-free years.
But Discovery has never found a bell it didn’t want to ring or a whistle it didn’t want to blow. This puts a lot of people off their products. I can completely understand when I hear, as I often do, "Why can’t Discovery cut out the cheap flights and movie tickets, and use the funds to improve medical benefits and life cover?"
Now, they are also giving free cups of coffee and smoothies to the more fanatical walkers and runners. Are these being paid for by the client, in the same way clients would pay for broker junkets in the past? I wouldn’t make that a reason not to consider a Discovery product, which now cover the spectrum of life, health and wealth.
I can’t stand the cheesy term "shared value", but in Discovery’s case, they do share a good portion of the extra profit they make from better mortality and lower claims with their clients, and much as we may dislike the holier-than-though attitude of Vitality gold and diamond members, they have a lapse rate that is 50% lower than those on the bottom rungs of the Vitality programme and their mortality is 70% lower. This means there is some nice fat to spread around Discovery’s more virtuous clients.
Discovery certainly finds it hard to explain shared value, which at the end of the day isn’t a million miles away from "You’ll always get something out." But instead of a neat phrase to explain shared value, Gore pulls out equations, including actuarial jargon such as Bent (qx).
For all that, I like the Retirement Income Investment Integrator (the concept, not the name). This encourages retirees to take as small as possible a portion of their retirement capital as income in a living annuity.
Diamond members who take the legal minimum drawdown of 2.5% a year out of their living annuities get a 50% income boost, silver members who take 5% get a 25% boost, and nobody gets a boost if they draw the 17.5% maximum.
Many of us might be puzzled as to why Discovery would want to dole out extra cash, but remember that it charges fees on any funds that stay inside the living annuity and stops earning these fees once the money has been paid out. It wants your money to stay inside its vehicle for as long as possible.
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THERE is a perception that in the hierarchy of financial advisers, tied agents in some way rank below independent financial advisers (IFAs). As journalists, we must take some of the blame as we have often argued that clients are being short-changed in that they are not being exposed to the full spectrum of product houses.
Now I am not so sure.
For a start, it is impractical for an IFA to offer the entire market — very often, they only offer products spoon-fed to them by aggregators such as Acsis or Analytics. When the rules change with the Retail Distribution Review, only a handful of genuine independents will be left standing. More will continue to gravitate into the agency forces: Discovery and Momentum are still building theirs up, Liberty’s remains very impressive, while Mutual and Sanlam have solid if unglamorous teams.
Old Mutual rather jumped the gun 15 years ago when it rebranded its agents as "personal financial advisers". A bit like rebranding a journalist as a published author.
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