Quality over quantity as insurers fight market volatility

Has the recent stock market recovery lifted insurance and investment company performance? To find out FAnews took a quick look at Metropolitan’s trading update for the nine months ending 30 September 2009. Metropolitan begins its third quarter update with reference to “extreme investment market reduction and volatility.” The company provided a brief overview of sales activity in each of its major operating areas: retail business, corporate business, international business, asset management and healthcare.

Life book surprisingly robust

In the retail business, new recurring premium income for the nine months was R660m (down 1% on the same period in 2008) and new single premiums written came in at R1.594bn. There was a significant shift in the balance of this business towards risk and away from savings and single premium business. This resulted in a significant decline in present value premiums (PVP).

“The persistency of the group’s policyholder base has remained surprisingly resilient and overall the number of lives under administration on the active insurance books has continued to grow,” said Metropolitan. Like many of its peers, Metropolitan has committed resources to business conservation and retention in recent months. The group credits its persistency filter (PREDICT), first launched in 2001, for good persistency in these difficult times. The filter measures all new business against a set of criteria to ensure its long-term viability.

The group singled out a number of factors for poor new business performance in the first nine months of 2009. These included the economic downturn, increased employee strike action, changes to commission payment rules, the discontinuation of certain product lines and sales downtime due to FAIS training. To our knowledge this is the first time an insurance company has made specific reference to the impact of regulation on the effectiveness of its distribution force. The company’s sales force has clearly been impacted by demands on its time and the apparent reduction in selling incentive.

Health book posts strong growth

Metropolitan’s healthcare administration business showed strong growth in the nine months under review. The Government Employee Medical Scheme (GEMS) is the main driver of this business and now boasts close to 400 000 fee-paying members. The scheme adds approximately 500 members per day. At 30 September 2009 Metropolitan Healthcare Group (MHG) boasted 830 000 principal members and approximately 2.1m lives. MHG – through its managed care business Qualsa – also won a contract to provide strategic managed healthcare services to all registered benefit options in the GEMS scheme. The group believes this section of its business is relatively insulated from ongoing financial turmoil.

Metropolitan Asset Management (MetAM) experienced outflows in the period as third party mandates moved R811m out of absolute return and international funds. This was offset by positive flows into collective investments of R2.803bn (a 3% improvement on the previous year).

How to survive a market meltdown

Insurance and investment companies have taken unprecedented steps to protect capital through recent market volatility. When Metropolitan reported their interim results (till June 2009) they announced a significant reduction in group equity exposure. The group is concerned about the long-term security of the financial and equity markets. At this time Metropolitan “continues to actively monitor the capital position throughout its operations with a view to protecting shareholder capital and preserving policyholder assets during volatile investment market conditions.”

Asset values have improved markedly in the latest quarter, but remain significantly below 2008 levels. Metropolitan warned that declines in average asset levels impact on group earnings due to its asset-based fees model. With income under pressure, the group will continue to focus on expense management and emerging markets. “Management is confident that the group’s stated market positioning, together with its diversified income streams and sound business processes, will enable it to continue generating good operating results for the foreseeable future,” said Metropolitan.

Editor’s thoughts:
An interesting aspect in Metropolitan’s Q3 2009 update is the impact of commission changes and FAIS training requirements on the company’s sales force. The group says these changes have reduced efficiencies in its distribution channel in the latest period. Have you experienced any productivity declines due to regulatory interventions? Add your comments below, or send them to gareth@fanews.co.za