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Metropolitan soldiers on as technical recession bites

27 May 2009 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

If you want a snapshot of the financial services environment then Metropolitan Limited’s three-month operational review is a good place to start. The company released its update for the quarter ending 31 March 2009 yesterday.

“Despite the global economic meltdown, Metropolitan recorded an 11% increase in new retail recurring premium business for the first quarter of 2009, thanks to the continued success of its targeted distribution strategy.” The group credits its strong customer-aligned service for strong persistency throughout its business and says the diverse revenue streams – generated from the group’s Asset Management, Corporate, Health, and International divisions – continue to enhance its income-generating capacity

Something to smile about, positive net inflows

The Asset Management division is showing signs of steady improvement. Metropolitan Asset Managers (MetAM) says the net inflows “reflect improved investment performances” as equity markets embark on the long road to recovery. Cash flows to the MetAM collective investment space improved slightly in Q1 2009 to R1.054bn, helping overall net group cash flow top the R3.3bn mark. MetAM has enjoyed positive Q1 cash flows in each of the last five years. But that’s where the division’s good news ends. Despite strong cash positions the operating margins remain under severe pressure as a result of the significant erosion of asset values through 2008 and early 2009.

Moving to the retail business, Metropolitan says new business recurring premiums for Q1 2009 continue a five-year trend, improving 11% to R209m. Reasons for the consistent improvement include “increased recurring premiums from the wholesale and personal financial adviser distribution channels, the successful focus on the quality of new ordinary business issued, and the new commission regulations being applied.” Metropolitan says they’ve witnessed a positive swing form savings to risk business as these regulations take effect. Lapse rates since inception remain within group targets of 15%. What does Metropolitan expect from its retail business for the remainder of 2009?

The group says consumer financial health remains the biggest challenge to the financial services industry through 2009. New business prospects and the persistency of the group’s in-force business will be adversely affected unless dips in net disposable income due to rising inflation, unemployment and tighter credit conditions aren’t compensated by inflation beating wage increases. We expect tough business conditions after Statistics SA’s announcement of a 6.4% contraction in South Africa’s Q1 2009 GDP growth! Metropolitan’s corporate division reported ‘lumpy’ new business. The highlight from the period was the signing of a second client – comprising 20 000 active members – for the Metropolitan Retirement Administrators. The transaction is effective 1 June 2009. Metropolitan says the “case for the International business division remains strong.”

Perhaps the CMS can find some savings here

Metropolitan Health Group (MHG) medical schemes administration business continues to grow from strength to strength. The group says its focus is on “managing existing clients and the smooth take-on of members joining the Government Employee Medical Scheme (GEMS).” GEMS is largely responsible for the increase in principal members under administration, from 700 000 in March 2008 to 770 000 (comprising 1.9 million lives) at 31 March 2009. MHG passed the two million life landmark early in May this year. Metropolitan Health administers more than 50% of the country’s restricted medical schemes.

A quick look at Metropolitan’s full-year results to 31 December 2008 reveals an operating profit of some R142m from MHG. If we add this amount to the R891m (earned in the full-year to 30 June 2008) by Discovery Health, the country’s largest open medical schemes administrator, then the industry is paying away R1.033bn in excess of cost on administration. “Is this an area the Council for Medical Schemes will clamp down on in future?” we wonder.

Editor’s thoughts:
Metropolitan’s Q1 update is not too bad considering the current economic climate. We expect life and investment companies will struggle in the remainder of the year as South Africa moves deeper into recession territory. Has the 6.4% contraction in GDP growth in Q1 2009 forced you to alter your business plan? Add your comments below, or send them to gareth@fanews.co.za

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