LeapFrog, the world’s first
private equity firm focused on investment in the microinsurance
sector, has got off to a flying start, attracting solid,
high-profile funding support. Principal Doug Lacey provides
LII with insight into the firm’s investment strategy in
its African and Asian target markets.

 

Taken for granted in developed
economies, life insurance remains an illusive necessity for the t
majority of people in developing economies.

Putting this into perspective, a study by The
MicroInsurance Centre of low-income people in the world’s 100
poorest countries found that only 3% or 78m were covered by formal
microinsurance.

“We believe there may be a market for over
1.5bn microinsurance policies,” noted the research and development
organisation.

It is a shortcoming South African Andrew Kuper
has set out to correct with the founding of LeapFrog, the world’s
first private equity firm focused on micro-insurers.

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By GlobalData

What Kuper terms a “profit-with-purpose
investment proposition” has caught the imaginations of significant
backers, enabling him and his team to raise $110m in its 10-year
LeapFrog Financial Inclusion Fund.

 

Powerful backing

Leading the funding was the German
Ministry for Economic Co-operation and Development with $25m, and
the World Bank’s International Finance Corporation with $20m. Other
investors include Bermudan reinsurer Flagstone ($12m) and a trust
backed by billionaire George Soros, the Soros Economic Development
Fund ($7m).

Money is not all LeapFrog has attracted. Praise
too has come from former US president Bill Clinton.

“LeapFrog’s team is recognised as having opened
up a new frontier in microfinance and alternative investment,”
Clinton told 1,000 delegates to a Clinton Global Initiative event
held in New York in October last year.

Clinton went on to compare LeapFrog’s
initiative to Nobel laureate Muhammad Yunus’s work to bring
microcredit to millions of people, work that earned him the title
“banker to the poor”.

“LeapFrog is quickly becoming the insurer to
the poor,” said Clinton

Targeting Africa and Asia, LeapFrog has already
made its first investment, ZAR50m ($7.2m) in South African life
insurer AllLife. One of the world’s most unique life insurers,
AllLife when founded in 2005 was the world’s first insurer to offer
whole life cover to HIV-positive individuals. Cover has also been
extended to diabetics.

With LeapFrog’s backing, AllLife, which has
business of about ZAR1bn, anticipates growing from its present
5,000 to 50,000 HIV-positive and diabetic policyholders “within a
few years”.

 Together with Kenya and Ghana, South
Africa is one of three priority African countries selected by
LeapFrog. Investment of up to $25m in South African companies is
targeted with the selection process still underway, Doug Lacey, one
of LeapFrog’s five principals, told LII.

Lacey, based in LeapFrog’s Johannesburg office,
has held numerous positions in the insurance industry including
Africa divisional chief executive of African Life, a South African
insurer focused on low-income consumers in South Africa, Botswana,
Kenya, Zambia, Tanzania and Ghana.

With 1.6m beneficiaries in its home market
alone African Life, which was founded in the early 1980s, is one of
the world’s biggest microinsurance operations. African Life became
a wholly-owned unit of Sanlam, South Africa’s second-largest
insurer, in 2005. 

Since 2004 South African life insurers have
also marketed low cost life insurance products under the generic
Zimele brand. But despite this initiative and inroads by
low-income-focused insurers such as African Life and Metropolitan
Life, life insurance uptake by South Africa’s poor remains low.

According to non-profit organisation Finmark
Trust, out of 18m adults in the lowest five income categories a
mere 375,000 have life cover. And while 7.2m adults in these
categories have funeral cover, 61% of this is from informal
sources.

Access to life insurance also remains
inadequate with Finmark noting that in 2009 only 30.9% of the
population had access to formal life insurance products and 12.6%
to informal products. The remaining 56.5% had no access to products
at all.

Under-insurance provides significant
opportunity for growth of micro-insurance in South Africa with a
demographic profile skewed to the younger generation adding to this
potential, said Lacey. Based on Finmark data, 78% of South Africa’s
population is under 45 years old.

 

Kenya and India next

Lacey continued that LeapFrog is at an
advanced stage in Kenya with two investments that could total $25m.
Another two opportunities are being explored in India and
preliminary work is being done in the Philippines. Overall there is
a “healthy pipeline” of opportunities, said
Lacey.   

LeapFrog, he added, is looking to invest
between $5m and $15m in micro-insurance businesses. Start-ups are
not being considered but ventures involving companies with suitable
distribution reach will be considered, said Lacey.

A national retailer, for instance, can provide
an ideal distribution platform to which an insurance capability can
be added, explains Lacey. The joint venture (JV) between retailer
Edcon and composite insurer Hollard, two South African companies,
is a “classic example,” of what can be done, Lacey adds.

In the first quarter of its 2009-2010 financial
year to June 2009, Edcon reported its share of the 50:50 life and
general insurance JV’s net profit at ZAR64m, up 59% compared with
the same period in 2008-09.

The JV was established in 2001 and comes with
the Hollard’s three decades of experience across all income groups
in the country. LeapFrog recognises that not all microinsurance
ventures have this advantage and, said Lacey, offers support in
areas including business planning, product design, regulatory and
risk management and development of high-volume distribution
channels.

LeapFrog’s progress will be watched closely by
insurers and investors contemplating microinsurance. Of keen
interest will be profitability of its selected investments which
LeapFrog believes will deliver an internal rate of return (IRR) of
over 30%. In essence, the IRR is the annualised compound rate of
return anticipated between the purchase and sale of an
investment.

LeapFrog is seeking investments providing an
exit opportunity within five to seven years from the date of
investment.