Insurance lights the way for FirstRand
Another of South Africa’s banking giants reported full-year results in Johannesburg yesterday. It was a difficult presentation for the FirstRand executive team as they joined the queue of local finance operations with weaker than anticipated full-year results. Management tried to shift focus from a significant R1.4bn loss at subsidiary Rand Merchant Bank’s Equities Trading Division – focussing instead on the company’s fantastic 10-year performance and the resilience of its diversified portfolio of banking and insurance businesses. And it would certainly be cruel to focus on the negatives in what turned out to be a solid overall performance.
FirstRand chief executive Paul Harris put things in perspective: “These results were achieved within an operating environment characterised by high inflation and high interest rates, which placed significant pressure on consumers and resulted in a dramatic increase in bad debts in the retail lending books of the banks.” It’s quite a familiar story: struggling consumers, rising bad debts and shocking investment results. But there were positives to report on too. In today’s newsletter we’ll focus on the proverbial ‘jewel’ in the crown – Momentum Holdings!
Top this if you can!
Momentum is one of four FirstRand franchises – the others include Rand Merchant Bank, First National Bank and WesBank. It received kudos for achieving an outstanding performance in difficult circumstances – most notably by applying a capital management strategy which largely protected it against poor capital markets. Momentum weighed in with an impressive 20% improvement in normalised earnings (to R2 004m,) in stark contrast to the 8% decline for the entire group (to R10 583m).
To unlock Momentum’s results we need a better idea of the group structure. Apart from the Momentum Group operations it incorporates an interesting mix of subsidiaries and associates. It consists of Momentum Medical Scheme Administrators, RMB Asset Management and Unit Trusts, FirstRand Alternative Investment Management, RMB Asset Management International and Lekana Employee Benefits. It also owns 85% of Advantage Asset Managers, 50% of Momentum Short-Term Insurance and 35% of Swabou Life.
The bulk of Momentum’s 2008 earnings came from Insurance operations (R1.459m) with Asset Management (R282m) and Investment income on shareholder assets (R263m) accounting for the balance. Return on equity surged from 25% to 30% and CAR cover before dividend was 2.2 times.
How does 40% growth in insurance new business sound?
It’s when we take a closer look at the group’s insurance result that we appreciate how effectively management has guided the group over the last 12 months. Momentum achieved a massive surge in insurance business with a 40% surge in new business to R28 873m. The value of new business was also 14% higher at R590m. “Momentum insurance benefited from a turnaround in new initiatives, better than expected risk profits and the positive contribution from new business written in the past few years.” The total earnings contribution from Momentum insurance was 18% higher at R1.184bn and the contribution from FNB bancassurance operations 90% higher at R275m.
New business was split between recurring premiums (R2.079bn) and lump sum premiums (R26.794bn). “Momentum’s success in attracting a significant share of the retail lump sum market continued, with new business inflows increasing 22%.” And if there was any proof needed as to the best distribution channel, Momentum insurance acknowledges that its success in living annuities and discretionary investments can be attributed to its “specific focus on specialist investment brokers via the extremely successful broker distribution engine.” The group’s distribution channel is still dominated by Independent Financial Advisers who account for 61% of APE in 2008 – a percentage that’s been fairly consistent for the last three years.
It’s now up to Momentum to meet the challenges that 2009 throws at it. Management expects trading conditions to remain difficult in the next 12 months. They expect market volatility will continue; consumers to feel further pressure on disposable income and regulatory reforms to accelerate. Against this backdrop the group will have to maximise the benefits achieved in sales & distribution and product diversification.
Editor’s thoughts:
Momentum’s results show that prudent financial management can prevent unnecessary losses on shareholder funds. The group improved investment income by 34% in 2008 by moving the majority of its shareholder funds into cash or near-cash equivalents. Why do you think Momentum insurance has done so well? Is it there innovative product, service or distribution channel? Add your comments below, or send them to [email protected]
