Metropolitan delivers while preparing for new growth phase

Diversified financial services group Metropolitan Holdings, having focused on meeting the needs of customers predominantly in the lower income markets for the past 112 years, announced a sterling set of financial results today (Wednesday 1 September).

On track to merge with Momentum once all the requisite approvals have been obtained – from shareholders, regulatory bodies and the competition authorities – Metropolitan has once again achieved a strong financial performance in the face of tough operating conditions and volatile investment markets.

“Key indicators - such as core headline earnings (both in total and per share), operating profit and value of new business - all reflected double digit increases for the six months ended 30 June 2010.

The value of new business for the group was an impressive 38% higher,” says group chief executive Wilhelm van Zyl.

“Costs were well contained right across the group, with expense control in respect of the retail business in South Africa particularly good. Against what were at times formidable odds, we also succeeded in maintaining our unparalleled record of positive cash flows from clients.”

The value of retail new business for the six months under review, at R54 million, was 108% higher than for the corresponding period in 2009 (R26 million). Thanks to a change in the mix of business to more profitable product lines, this remarkable performance was achieved despite a reduction in overall new business volumes.

Volumes declined due to the closure of the direct marketing channel, the sale of Union Life (a separate insurance company), slower independent broker new business and restrictions on  various third party distribution channels. Recurring premium new business, excluding the closed businesses, was more or less on a par with 2009, while single premium income declined by13% (from R1 103 million to R 960 million).

Thanks mainly to higher average investment assets, good expense management and the closure of the loss-making direct marketing channel, retail operating profit before tax increased by 13% (R270 million in 2009 to R306 million in 2010). Focused management action ensured  acceptable persistency levels throughout the period, which contributed to an improvement from 1.0% to 2.3% in the new business margin on a present value of future premiums (PVP) basis.

In the corporate arena, an increase in annuity business was largely responsible for the 13% rise in single premium income, which increased from R419 million in 2009 to R472 million in 2010. Lower new recurring premium income and a change in the mix of business written resulted in a slight reduction in the new business margin on a PVP basis from 0.8% to 0.7%.

Substantial volumes of pure administration business secured on an off balance sheet basis via the Neon administration platform as well as by Metropolitan Retirement Administrators (MRA)  boosted the value of new business as it assisted with the recovery of costs.

The margins on risk business remained under pressure, especially in the case of funeral and disability products. Increased management fees in line with higher average assets under management, plus recovering risk profits, lifted corporate operating profit before tax by 31%, from R70 million in 2009 to R92 million in 2010.

At R75 million, new recurring premium income from all seven international operations was 10% above the level recorded in the first half of 2009 (R68 million), while an improved new business PVP margin of 1.7% (compared to 1.3% in 2009) was recorded. Despite tough business  conditions across the territories, international operating profit after tax showed an 11% increase (from R46 million to R51 million) thanks to reduced start-up losses in the newer regions.

The Metropolitan Health Group (MHG) continued to grow its number of principal of members  under administration, reaching 912 000 (2.3 million lives) in June 2010, compared to 829 000 members and 2.0 million lives in June the previous year, and entrenching its position as South Africa’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 (2009: R41 million).

The group’s core headline earnings for the half-year were 21% up on the first half of 2009 (from R342 million to R414 million) while core headline earnings per share, at 75 cents, were 14% higher (2009: 66 cents). Van Zyl points out that core headline earnings are an appropriate measure of the performance of financial services groups such as Metropolitan as they reflect the true performance of the operating entities. This is because items of both a once-off and an inherently volatile nature, such as changes to the valuation basis, investment variances and capital appreciation/depreciation, are eliminated.

Although Metropolitan paid out a dividend of 60 cents per share in April 2010, its embedded  value at 30 June 2010 remained strong at R18.09 per share (31 December 2009: R18.11). The group’s overall capital position ended the period slightly down in line with investment markets; its capital adequacy requirement was nevertheless covered 3.0 times. The directors’ faith in the group’s ability to continue growing its underlying earnings in the medium term is reflected in the fact that the interim dividend per share was increased by 5% to 42 cents.

“The group will be listed as MMI Holdings once the proposed merger with Momentum is implemented and will be transformed into a bigger and even better resourced undertaking, with excellent growth prospects,” says Van Zyl. (The new name of the merged entity was made  known when the detailed terms announcement was published on SENS on Thursday 26 August 2010.)

“MMI Holdings will be the investor brand while the Metropolitan and Momentum operating brands will be retained in the customer-facing businesses within the merged entity. In line with our economic empowerment objectives, customers in the lower income markets will benefit from

Metropolitan’s extended geographic footprint here in South Africa as well as 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. This will bring us another step closer to realising our vision of creating – and protecting – prosperity  or Africa’s people.”