Metropolitan’s operational performance bests economic circumstances during reporting period

Today (3 September) Metropolitan announced financial results for the six months to 30 June 2008 that reflect a noteworthy operational performance in tough economic times.

The group’s diluted core headline earnings per share, the best measure of operating profit because items of both a once-off and an inherently volatile nature – such as changes to the valuation basis and capital appreciation/depreciation – have been stripped out, increased by 14% from 61.28 cents to 70.03 cents.

Most group businesses increased their contribution to operating profit. The 34% growth year-on year in the contribution from the health cluster is highly commendable in these testing times.

“It is strategically significant,” says group chief executive Wilhelm van Zyl (pictured), “that our core profits came from different areas across the group. The fact that retail managed to maintain persistency levels despite increasing pressure on personal disposable income due to higher food and fuel prices was also a first-rate achievement.”

Van Zyl attributes this success to proactive management interventions, including concerted efforts aimed at enhancing the value proposition for clients together with an even sharper focus on intermediary training.

Net funds received from clients amounted to a creditable R5.6 billion, with most group businesses recording net inflows. In view of the difficult market conditions, the 19% increase in inflows into the retail business was remarkable.

The group’s ability to maintain positive cashflows has been, and continues to be, in striking contrast to industry norms of recent years, reflecting well on the resilience of the Metropolitan brand.

Metropolitan’s total recurring premium income, the lifeblood of any life insurance company, was 6% up on the corresponding period in 2007.

In addition to a robust 39% increase in single premium income, the retail cluster recorded  growth in new recurring premium income of 15%, resulting in a 21% increase in annual premium equivalent (APE). (APE is a measure representing 100% of recurring premium income but only 10% of single premium income, given that the latter is far more volatile by nature.)

Another pleasing aspect of group performance was the 17% rise in the APE of the established businesses in the international cluster.

From a corporate business perspective, the absolute performance of Metropolitan Employee Benefits was admirable in most respects, but not comparable to the corresponding period in 2007 when operating performance was supported by very good risk experience and new business boosted by a single exceptionally large annuity deal.

Thanks to its proven large-scale retirement fund administration expertise, Metropolitan  retirement  Administrators has secured the administration of a 10 000 member retirement fund as from October.

New business secured by the health operations continued to add significant value, boosted by substantial growth in membership of the Government Employees Medical Scheme (GEMS). The fact that MHG has recently been awarded the GEMS administration contract for a second three2 year term from 2009 is further evidence of their, and the greater group’s, ability to set the standard in large-scale administration efficiency and cost-effectiveness. This should prove to be an attractive attribute given the impending social security reforms, with their strong focus on retirement and health.

While Van Zyl is pleased with the way Metropolitan has continued to lift its operational performance “irrespective of the uncertain times”, he acknowledges that there is scope for further improvement in terms of efficiencies and even tighter expense controls.

“In line with our stated intention, we have begun securing new third party investment mandates.

Sustained growth in this area will help to boost our performance materially. The value of new asset management business has already shown a 38% improvement year-on-year, and our improving investment performance record should also start assisting in this regard.”

Although market conditions meant that absolute investment returns were lower, the asset management cluster achieved superior investment performance relative to its peers in several instances. For example, in the Alexander Forbes Large Manager Watch rankings to 30 June 2008 Metropolitan’s local managed fund was a first quartile performer for both the quarter and the year.

With total assets under management passing the R106 billion mark, Metropolitan remains firmly positioned as a player of substance in the financial services sector. Overall, investment market turbulence, with sharply dropping equity and bond values leading the way, impacted negatively on Metropolitan’s diluted earnings and diluted headline earnings per share, which fell from 124.15 cents in both instances to 40.80 cents (67% down) and 45.25 cents (64% down) respectively.

Spiralling interest and inflation rates brought with them a 2.5% increase in the discount rate used by the group to value its actuarial liabilities, which had a further dampening effect on its earnings and also negatively affected the value added by new life insurance business. However, as Van Zyl points out, these interest rates have reduced by 1.5% subsequent to the reporting date, which means that the value of new business written in the first half of the year is already considerably higher.

Turning to embedded value – a key life industry measure – the fact that the group’s embedded value per share showed only a slight reduction from 1 857 cents to 1 838 cents over the interim period (aided by share buy-backs and despite a final dividend payout of 59 cents per share in April) was a laudable achievement in the current volatile economic environment, bearing testimony to Metropolitan’s ability to withstand market turbulence.

An interim dividend of 40 cents per share was declared for 2008, 11% higher than in 2007,  indicative of the directors continuing confidence in the group’s medium-term growth potential.

“Although our dividend policy remains unchanged, we have adjusted the declaration rate to take into account current economic conditions,” says Van Zyl.

Looking to the future, Van Zyl comments that “Metropolitan’s entrenched position in the low and middle income markets continues to give us a competitive edge.

“Our efforts to enhance our stakeholder value proposition are ongoing, regardless of the tough times that both the company and its clients are experiencing at present, and our interim results for the most part demonstrate continuing success in this respect.”