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A very good year

13 March 2008 Gareth Stokes

The latest financial services group to report full year results to December 2007 is Metropolitan Holdings. The first heading in the company’s press release reads: “Adding Shareholder Value” – and that is exactly what the group has achieved. 2007 was a year of firsts. It is the first time that total assets under management topped R100bn. And it is the first time diluted core headline earnings passed R1bn.

FAnews Online spoke to outgoing chief executive officer Peter Doyle for his views on the results and other insurance industry issues. Doyle (who will be replaced by Wilhelm van Zyl) is leaving Metropolitan at the end of March after a decade as CEO and 30 years with the group. We asked him if he had any immediate plans upon leaving Metropolitan. Doyle said he was “taking a sabbatical” and would “probably spend the rest of this year doing some research and reading that he wants to do.” He also has a number of positions on boards of trustees and other societies that will keep him busy.”

Solid performance from all divisions

Operating profits improved at each of the group’s five clusters. Retail, which is the largest contributor to the group, improved its operating profit by 6%. The smaller clusters were also on the move: corporate grew 21%; healthcare was up 25% and the international division surged 80%. The only disappointment was from the asset management division which fared only 1% better. Doyle believes the solid profit growth in the corporate, healthcare and international divisions are a direct result of the company’s diversification drive.

Improvements in the healthcare cluster prove that businesses can grow effectively despite the pressures of a heavily regulated environment. Doyle observes that “when Metropolitan started the health business it was a time when most of our competitors were selling or closing down their businesses, saying there was no future in the market because of regulation.” Metropolitan took a different approach and focussed on constructing a successful business to operate within the regulatory parameters. The competitive edge: “our cost of administration is lower than the long-term target that the registrar set. The only way you can do that is have a business of scale and that’s why we’ve targeted business with scale…” This focus is reflected in the success of the division. Principal members under administration grew from 500 000 to 660 000 last year, helped by the popularity of the Government Employee Medical Scheme (GEMS) which added 200 000 members.

Doyle believes Metropolitan’s most impressive achievement in 2007 is its positive net cash flow. “The most important result is our growth in net cash flow from clients. The industry has been through pretty turbulent times in the last three to five years around customer, media and market perception of life insurance companies… It’s been a tough time for us – but the fact is we’ve grown net cash flow from clients by some R12.5bn…” he said. Metropolitan has the enviable claim of positive cash flow since the business started more than 100 years ago. Doyle says this “means that customers have trust in the brand – and that’s probably the most important result.”

Insurers are further down in the food chain

An interesting observation following the latest round of insurance company reports is that new business seems to be improving despite all the concern around tougher economic conditions. Metropolitan is no different with a 32% spike in the value of new business. How is this possible?

Doyle believes that part of the reason for this strength is that insurance companies differ significantly from retailers and banking companies. He notes: “For the last few years retailers and banks have been doing fantastically and every time we present results we get asked why we aren’t doing as well as the retailers are doing...”

To answer this question Doyle observes that insurers are further down the food chain. “People first borrow money, then the spend money, then they get into debt, and then they start thinking about retirement savings and stuff like that.” There is also a body of evidence to support that insurance new business is strongly linked to jobs growth. Doyle points out that recent buoyancy in employment numbers has definitely bolstered the acquisition of new business across the industry. “On the new business side it is really more based on job growth and more steady and stable income…,” he says. The real threat to the insurance industry in coming years will be from worsening persistency and lapse rates as consumers feel the squeeze.

Diversification remains a focus area

We asked Doyle if Metropolitan was likely to diversify further. His answer: “We probably want to still diversify some of our products and distribution. But the clusters are pretty well established” He is happy that the new clusters have graduated from pilot or new business phases to achieve critical mass. In coming years “the focus is going to be a bit more on growing product and distribution” in the clusters and growing the international business in new geographic markets.

The international cluster has huge potential; but it will take many years before it makes a material contribution to group earnings. To demonstrate, Doyle points out that “Retail – which is now just below 50% of earnings – was the entire business three years ago.” It would be another decade before international business could reach 25% to 30% of group earnings. “But on the new business side it can start to be material in two or three year’s time.”

Regulatory concerns

Metropolitan is aware of the possible impact of retirement fund reforms on its business. Doyle believes it will have a big impact. “We definitely think the reform is going to come – there’s no doubt about it – in what form or fashion it comes is still open for debate. We hope to participate in it – not be a net loser – but a participator.” As far as the discussion document on commissions in the life industry go, Doyle believes coming changes will have a big impact on the way business is conducted. He observes that “the one thing is (as with a lot of this regulation) that it is such a long time coming that you’ve been doing things for years to prepare for it... [The commission regulations] are part of a long chain of things and we’ve known about it for a number of years.” Will this regulation precipitate a change in consumer behaviour? Will investors dump traditional life products for the more transparent unit trust industry?

Doyle says” “If you look at some of the detail, our biggest inflow in 2007 was in collective investments so there [may be] some truth in that.”

Editor’s thoughts:
Metropolitan’s results show a noticeable shift to collective investments. Do you think collective investment products will take over from traditional retirement annuity products as the life industry commission changes are implemented? Send your comments to gareth@fanews.co.za, or add them below.

Comments

Added by Ntate Chabeli, 14 Mar 2008
When will Metropolitan Life give shares to its policy holders like the other companies such as Sanlam and Old mutual?
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