RISK AND OPPORTUNITY REPORT
Opportunity report
Opportunity management
The objective of the integrated opportunity management approach employed by the MLP Group is to secure systematic and early identification of opportunities and their assessment.
This takes place within the scope of a standardised business strategy process, performed by the Executive Board once a year. To this end, assumptions made about relevant influential factors for future development are subject to an ad hoc check. Reasons for ad hoc checks can, for example, include major acquisitions, regulatory changes or changes in the market environment. MLP’s corporate strategy, and the opportunities associated with this, are derived from its corporate mission, which is examined and updated by the Executive Board on an annual basis. The current internal and external framework conditions, as well as influential factors are then analysed and summarised using established processes. A comprehensive analysis of the environment always forms the basis of this process. Among other things, this includes the macroeconomic and regulatory framework conditions, developments in the product area and also the competition. With regard to client and sales potential, we also use available market data alongside our own assessments. The analysis culminates in a comprehensive SWOT analysis (strengths, weaknesses, opportunities, threats).
MLP’s system of opportunity management is accompanied by continuous observation of the market and competitive environment from the company’s various perspectives. This process is organised locally in the responsible departments, which regularly report their findings to the respective member of the Executive Board. Product Management is a key player here, as it determines opportunities through intensive contact with product providers and industry experts, mostly in the form of product innovations. In addition to this, Customer Management engaged in extensive market research. Other important protagonists in terms of opportunity management are Controlling, which examines the market, to detect potential acquisition opportunities, as well as the organisational units of Corporate Communications, Risk Management and Compliance, which examine potential regulatory changes early on.
Opportunities
The opportunities in terms of the future business development can be subject to both external and internal influences.
Opportunities from changing framework conditions
The economic forecasts for the year 2016 suggest only limited opportunities for MLP. Although economic experts are assuming that Germany will enjoy further growth, the aforementioned reservations on the part of clients when it comes to signing long-term savings contracts will hinder progress. In the mid to long term, however, the greater need for private and also occupational pension provision should increase demand for these two products significantly again – particularly among MLP’s target groups. Should the German economy enjoy better development than assumed in our forecast, this will only have an indirect influence on short-term operating developments. However, should the reservations disappear altogether (contrary to our expectations) when it comes to signing long-term contracts, this would have direct positive effects for MLP.
The ever stricter regulation of the financial services sector in Germany, with the objective of stabilising the financial system and increasing investor protection, presents both challenges and opportunities for MLP. Stricter regulatory requirements will initially lead to additional costs and reduced productivity, as administrative costs increase and processes in the company have to be adapted. However, the regulation also tightens the quality standards required of market actors. This will accelerate consolidation of the market, as individual brokers will not be able to comply with the stricter requirements. The supply side of the market will reduce in size overall. With our consulting approach, which focuses on clients and their financial matters, we are able to clearly differentiate ourselves in the marketplace. In addition to this, we were quick to align our operations to the new framework conditions over the last few years, which will enable us to benefit from this development in the mid-term.
Corporate strategy opportunities
We see corporate strategy opportunities primarily in MLP’s positioning as a partner for all financial matters, a position which has been particularly strengthened over the last few years. Alongside support for private clients, we are now increasingly focusing on our business with corporate clients and institutional investors. In cooperation with our Group companies TPC, DOMCURA and FERI, we will further expand our portfolio for corporate clients and institutional investors in the areas of investment, risk management, non-life insurance and occupational pension provision. Additional opportunities could present themselves to MLP if the German federal government were to provide greater support – particularly in the field of occupational pension provision – as has been set out in the coalition agreement and which is constantly being discussed by the governing parties.
Interlinking these areas with one another and with the private client business will furthermore enable us to create corresponding revenue potential. In the private client business itself, MLP has an important USP thanks to its broad positioning. Further developing these opportunities offers important potential for the next few years. Additional increases are also possible, particularly in the field of wealth management, in which MLP clearly distances itself from the market through its highly transparent price model.
Within the scope of opportunity management, MLP examines the market for potential acquisitions. In the event of an acquisition, opportunities can arise which can increase revenue potential.
Business performance opportunities
As a pure service provider, our operational tasks comprise sales, product purchasing/product selection and sales support.
In the field of sales, our client potential in the private client business will increase even further over the course of the next few years. The need for well-trained employees in Germany is increasing, which in turn improves the basic conditions for our client group of academics. At the same time, the number of academics capable of and seeking employment is also set to rise in the mid-term, which will lead to greater new client potential for MLP.
We are also keen to use a more targeted penetration of our client base to achieve growth, in particular in the field of wealth management. Since our clients are generally very well-trained and thereby have excellent income prospects, they have a continuous need for sound financial advice and hold corresponding revenue potential.
The private client business is not the only area in which we see opportunities for winning and supporting new clients. There is also a high demand for independent, professional consulting in the business with corporate clients and with institutional clients, which we have now bundled at our subsidiary FERI. Particularly for institutional investors and high net-worth families, the need for consulting services is on the rise, above all in the field of alternative investments. In the non-life insurance sector, DOMCURA offers market actors such as brokers and other intermediaries a diverse product portfolio. The strengthening of the corporate client business thanks to the DOMCURA Group’s commercial and industrial brokers will generate further revenue potential.
Over the last few years we have introduced and implemented various measures to increase the productivity of our consultants. These include further development of our consulting programmes, even greater support for our consultants – for example in product selection – and even more effective service from the back-office in Wiesloch. The MLPdialog service centre also makes an important contribution to this. As an underwriting agency, the DOMCURA Group will in future also extend the added value chain of the MLP Group with its processes and expertise, in particular in the non-life insurance sector. The goal of these measures is to allow our consultants to focus even more on their core task, namely advising and supporting their clients. This provides important revenue potential for the future.
Opportunities from financial risks
The counterparty default risk measures are based on assumptions regarding future developments of macroeconomic circumstances, as well as developments on the credit markets. Economic framework conditions of this kind may develop more positively than anticipated, which could lead to lower potential losses than quantified by the risk measures. Any such potentially positive effects would present opportunities for MLP, which could be used to reduce risks.
These opportunities could in particular present themselves if the loss rates of non-performing loans in future are lower than assumed within the scope of risk quantification. In addition to this, positive developments in terms of loss rates might lead to a lower risk value than initially quantified. Even downward volume or utilisation trends in the credit portfolio can present opportunities in terms of the counterparty default risk. This can, for example, be caused by debtors paying off their loans faster than expected based on the contracts in place.
In terms of market price risks (uncertainty regarding changes in market prices, including interest rates, share prices, exchange rates and raw material prices, as well as the correlations and volatilities that exist between these), opportunities can also arise in the event of market developments that are more favourable than anticipated.
We have not identified any other opportunities which could result in significant positive development of MLP’s economic situation in future.
Summary
MLP sees several significant opportunities. These affect multiple fields, in particular corporate strategy and business performance factors, as well as financial risks. However, we believe that the changing framework conditions will only present limited opportunities in the short-term. The opportunities described, as well as those which are not yet known to us or are currently considered insignificant, could lead to a positive deviation from the disclosures made in our forecast.
