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Health business outperforms at Metropolitan

16 March 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

South Africa’s fourth largest insurer is the latest to publish its FY2009 results. The company erased a shocking 2008 result as investment activities rode the equity market turnaround. Net income for the 12 months to 31 December topped R20.062bn (2008: R7.388bn), and profit attributable to ordinary shareholders increased to R1.129bn (2008: -R319m). If it hadn’t been for a strong investment performance the group would have reported less impressive numbers. Management reports that increased inflation and extensive job losses put pressure on clients’ disposable income, as well as on the group’s capital and operating profits during the year.

As much as the group focussed on the positives in its annual report, it’s difficult to ignore the 7% decline in diluted core headline earnings per share, from 151c in 2008 to just 141c last year. FAnews spoke to Metropolitan Holdings’ group finance director Preston Speckmann for his views on the latest results. Speckmann said considering the prevailing economic conditions, and the numbers reported for the first half, the group was satisfied with the result. And management is on record they’re pleased with their success in monitoring and managing the group’s equity market exposure, given the roller-coaster ride that was 2009!

Retail business limps along

Operating profit from the group’s retail business was 15% down on the previous period due to lower average investment assets and the worsening economic environment. New business present value premiums were 32% lower as changes to the commission environment made certain products redundant. Another decision impacting the profitability was to close certain loss making products in the Odyssey stable during the year. Speckmann said they experienced a definite switch from risk to savings business during the period, but remained satisfied with the overall mix of new business.

Insurance is all about annuity income and the surge in lapses and surrenders through turbulent economic conditions is impacting all domestic operators. The group said that focused management actions through 2009 resulted in better overall persistency than would have been expected through recession.

The group has scaled back its direct marketing partnership in response to the distribution channel’s negative impact on both operating profit and value of new business. It appears the persistency of the new business generated through the direct marketing channel was poor. Performance was further hampered by higher discount rates, the new commission structure and the introduction of early termination dispensations for the savings business.

Strong performance from health

The Government Employee Medical Scheme (GEMS) remains the driver in Metropolitan’s healthcare business. The group administers more than 855 000 principal members (covering in excess of two million lives) for the scheme, and is now entrenched as South Africa’s largest restricted medical schemes administrator. Profit before tax from this division was 8% higher than the previous year. Management was happy with this performance, said Speckmann. The GEMS business is still growing, albeit at a slower pace. Metropolitan will attempt to win additional medical scheme administration contracts as opportunities present. We asked Speckmann whether Metropolitan felt government initiatives such as National Health Insurance and social security were on the backburner for now. He noted that although implementation timelines had shifted, planning for these eventualities remains ‘top of mind’ at the group.

The group’s asset management business, comprising collective investment inflows and third-party mandates, remained flat at R39 million. MetAM delivered good absolute and relative investment performance over the period, with a particularly strong delivery on equity mandates. This is not surprising given the massive turnaround in equity markets since March last year. Unfortunately for Metropolitan, the division’s transaction and annual fees hinge on assets under management, and operating profit declined 6%.

Africa will drive growth

Two themes emerged in this year’s results statement. The first is the group’s continued drive into Africa. Metropolitan is well-positioned to provide accessible and affordable products to the largely untapped African market. Business in Botswana and Lesotho is on track, so the focus has shifted to North Africa. Metropolitan has a presence in Ghana, Nigeria and Kenya. Speckmann said the group would focus on building its Nigerian business over the next 18 months

The second centres on the ability of South African consumers to drive the economic recovery. Although net inflows of R1.5bn were recorded in FY2009, cash flows from clients came under severe pressure. Management acknowledged that its target market was under threat from rising food and transportation costs and rising unemployment. “Further deterioration in the above factors will reduce new business prospects and possibly challenge the persistency of the in-force book.”

Editor’s thoughts: Another insurer, another list of concerns about the plight of the domestic consumer. While segments of the domestic economy show signs of recovery, we can’t help but feel household debt and declining real disposable income dominate long-term purchasing decisions. Are you struggling to sell risk and savings products to the middle and higher income market? Add your comments below, or send them to gareth@fanews.co.za

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