Insurer positions for a better 2010

06 September 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Diversified financial services group Metropolitan Holdings announced an impressive set of interim results for the six months to 30 June 2010. The company’s 112-year track record with predominantly lower income clients continues to pay off. This set of financials will be one of the last “standalone” results from Metropolitan, as the group will merge with Momentum to form MMI Holdings once shareholder and regulatory approvals are obtained.

The results must be viewed against the backdrop of tough economic conditions and volatile investment markets. South African consumers have been slow to shake off their recession-induced behaviours. Improvements in household disposable income have been largely diverted to higher administered prices such as electricity, rates and even medical aids. And the JSE has bounced back and forth in a channel between 26 500 and 28 500 points for quite some time.

Moving in the right direction

“Key indicators such as core headline earnings (both in total and per share), operating profit and value of new business, all reflect double digit increases for the six months ended 30 June 2010,” said group chief executive Wilhelm van Zyl. “And the value of new business [from continued operations] was an impressive 38% higher.” Metropolitan’s retail operations were singled out for praise. Expenses in the division were greatly reduced and new business surged 108% to R54 million. The group only wrote R26 million of retail new business in the first half of 2009. Economic slowdown or not, Metropolitan worked wonders with cash. Van Zyl noted: “Against what were at times formidable odds, we succeeded in maintaining our unparalleled record of positive cash flows from clients.”

To survive in today’s competitive environment financial services companies must continually tweak their business models. Metropolitan made a range of changes in recent months, including the closure of its direct marketing channel, the sale of a wholly owned subsidiary (Union Life) and (of course) the deal with Momentum. Metropolitan also battled slower independent broker new business and tighter restrictions on third party distribution channels. These changes impacted on total new business volumes for the half year, and the impressive top line performance is ascribed to a better mix of business and a focus on more profitable product lines.

When you include non-continuing operations things look somewhat less rosy. Recurring premium new business was flat, while single premium income declined by13%, from R1.103 billion to R 960 million. Even so, retail operating profit before tax increased by 13% to R306 million! Although new business is important, the real measure of an insurers’ wellbeing is what it achieves from its existing book. Metropolitan was pleased to report improved persistency levels which reflect in the 2.3% (up from 1% last year) new business margin on a present value of future premiums (PVP) basis. It’s a mouthful; but they’re basically saying fewer policies were lapsed or surrendered in the latest half year.

More growth in the medical schemes administration space

The Metropolitan Health Group (MHG) continued to grow its number of principal members under administration. It now boasts approximately 912 000 medical scheme principal members and 2.3 million lives. MHG is the country’s largest administrator of closed medical schemes. Improved operational efficiencies and increasing economies of scale, plus the ongoing growth in member numbers, resulted in a 15% rise in operating profit after tax, to R47 million.

This contributed to overall core headline earnings for the half year of R414 million (or 75c/share), a 21% improvement on the first half of 2009. Core earnings reflect the true performance of the combined group operating entities. Metropolitan – like most of its peers – dwells on embedded value (EV) as a measure of its worth. The group’s EV remained at R18.09 despite the 60c/share distribution in April 2010. The interim dividend was increased by 5% to 42c/share.

A few words on MMI holdings

How will clients perceive Metropolitan in future years? “MMI Holdings will be the investor brand,” observed Van Zyl, “while the Metropolitan and Momentum operating brand will be retained in the customer-facing businesses within the merged entity.” The group chief executive expects more customers in lower income markets to benefit as a result of Metropolitan’s geographic reach in South Africa and the rest of Africa.

“Thanks to innovative development and distribution strategies, we will be in position to offer an expanded range of products that generate financial growth and engender financial security,” he said. “This will bring us another step closer to realising our vision of creating and protecting prosperity for Africa’s people.”

Editor’s thoughts: Strategic decisions seldom reflect in short-term results. The sale of Metropolitan’s Union Life business, the decision to scrap its direct sales channel and the merger with Momentum will reflect in the bottom line going forward. Is the recession over – and will the country’s insurers produce similar “solid” results when they report at year-end? Add your comment below, or send it to

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