MMI, born out of the merger of Metropolitan and Momentum, released its financial results for the six months ended 31 December 2010 earlier today (Wednesday 9 March).
According to group CEO Nicolaas Kruger, each of the six MMI business units has embarked upon a detailed strategic planning and integration process to optimise operating structures and business models, which has included the identification of target markets, distribution channels and product offerings. A number of opportunities have been singled out during the integration processes currently underway and synergies are expected to flow through over the next two years.
MMI has adopted 30 June, the year-end of Momentum, as its financial year-end. In terms of the accounting guidelines, Momentum is the acquirer and Metropolitan the acquiree in the merger transaction. The group's interim results therefore constitute a consolidated set of figures, comprising six months of Momentum (July to December 2010) and one month of Metropolitan (December 2010).
Given the limited value of statutory figures such as these in reporting on the operational performance of the merged entity for the period under review, an additional set of pro forma results (combining six months of Momentum and six months of Metropolitan (July to December 2010 in both instances) has been included.
"MMI's operational scale across its six businesses is immediately apparent from the pro forma figures. Our larger geographic footprint in South Africa and the 12 African countries outside South Africa plus the greater diversity of products and services that we offer are major contributory factors in ensuring benefits of scale and revenue growth opportunities," says Kruger.
"Our overall financial robustness is equally obvious. However, some of the benefits of the merger - our enhanced skills base for example - will only become evident over time."
The fact that the MMI group had an embedded value of R31.1 billion (1 939 cents per share) at the end of the reporting period is further proof of its financial strength. Embedded value comprises a life assurer's net asset value (R18 billion for MMI) plus the present value of the future profits expected to be generated by its current book of business (R13 billion in the case of MMI). It is widely regarded as the appropriate base for measuring the value of a business of this nature.
An impressive annualised pro forma return on embedded value of 18.9% over the period testifies to MMI's ability to capitalise on improving investment markets despite ongoing volatility, thereby adding value for shareholders.
With an aggregated group statutory capital adequacy requirement (CAR) cover of 2.5 times, MMI's actuarial balance sheet also bears out Kruger's claims regarding the group's healthy financial position.
Although the Financial Services Board's (FSB) solvency assessmentand management (SAM) project will change the way MMI determines its economic capital in future, the R15.3 billion capital held by the group at 31 December 2010 comfortably exceeded its current economic capital requirement.
"The group remains appropriately capitalised, with a particularly strong balance sheet," says Kruger.
MMI's total assets under management and administration, amounting to R424 billion, is another of the measures that confirms the scale of this newly created player in the life insurance sector.
New business is the lifeblood of any company, and life insurers are no exception. On a pro forma basis, total new business amounted to R21 972 million over the six month period, written at a profit margin of 1.6% p a . The value of new business across the group amounted to R356 million. These numbers all confirm MMI's strong distribution capability, which brings with it solid future prospects in terms of new business growth.
Confirmation of the well-diversified nature of MMI's income streams was provided by the fact that each of its six businesses contributed to core headline earnings for the six months to December 2010. The largest contributors to the group's pro forma core headline earnings of R1 228 million were Momentum Retail (29%) and Metropolitan Retail (18%).
"Pro forma diluted core headline earnings of 77 cents per share represent a stake in the ground for MMI; we will be striving to surpass what should be regarded as a benchmark against which to measure future performance," says Kruger.
MMI declared an interim ordinary dividend of R948 million, or 63 cents per share (42 cents normal plus 21 cents special), thereby confirming the board's confidence in the group's financial strength and operational outlook. The normal dividend cover, on the basis of pro-forma diluted core headline earnings per share, is 1.9 times.
This declaration means that Metropolitan shareholders will be receiving a higher dividend payout than the 60 cents they were awarded a year ago. Although currently the MMI group's pro forma diluted core headline earnings of 77 cents per share are lower than those of Metropolitan for the second half of 2009 (79 cents), the embedded value per share has increased from 1 811 cents to 1 939 cents.
"Solvency II has been on international radar screens for quite some time and in South Africa the FSB is following this lead with its SAM project, in which MMI is actively involved, " says Kruger.
"Consequently 2011 will be another year of focus on capital management, with the optimum allocation and utilisation of capital to add value for stakeholders remaining a top priority for us.
"Our board believes that as a group MMI has begun implementing the appropriate strategies to unlock value and generate a satisfactory return on capital for shareholders over time."
Please refer to MMI's statutory announcement for further details of the results or see the followingpage for a summary Summary of MMI group's pro forma interimfinancial results to December 2010.
December 2010.
Diluted earnings - R1 369m
Diluted earnings per share - 86c
Diluted core headline earnings - R1 228m
Diluted core headline earnings per share - 77c
Embedded value R31 118m
Diluted net asset value R17 570m
Value of in-force business R13 548m
Embedded value per share 1 939c
Return on embedded value 18.9%
Discount to embedded value at 31 December 2010 14%
Total dividend per ordinary share 63c
Normal 42c
Special 21c
Dividend cover (normal, based on pro forma core HEPS) 1.9
Total assets under management and administration R424bn
New business PVP (present value of future premiums) R21 972m
Value of new business R356m
New business margin (PVP basis) 1.6%
Notes
• Core headline earnings are a particularly appropriate measure of the performance of financial services groups such as MMI in that items of both a once-off and an inherently volatile nature are eliminated, such as changes to the valuation basis, investment variances, fair value movements on shareholder assets and the amortisation of any intangible assets recognised due to business combinations.
• Diluted figures have all been adjusted for the convertible redeemable preference shares, the staff share scheme shares and the treasury shares in issue -all dilutory in nature. The preference shares were issued to MMI's strategic empowerment partner, Kagiso Trust Investments (KTI).
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