How to grow earnings 29% in tough economic times
There is precious little positive news for South Africa’s long-suffering citizens to sink their proverbial teeth into nowadays, especially if you ply your trade in the financial services sector. And those who dare to page or scroll through their preferred news sources before they exit bed each morning are more likely to pull the covers over their face and opt for a classic ‘let us start again tomorrow’ reset than jump up to meet the world head on. In this context, the mostly upbeat nine-month trading update from diversified financial services giant Momentum Metropolitan Holdings was welcome news.
Normalised headline earnings up 29%
The group noted that it was “encouraged by the steady earnings performance achieved amidst the ongoing economic challenges in its operating environment”. This writer thought it opportune to present a quick overview of the group’s total earnings before shining the spotlight on the various financial services businesses that contribute to this total. To begin, Momentum Metropolitan delivered ZAR3.351 billion in normalised headline earnings for the nine-months ended 31 March 2023, which was 29% higher than earnings in the comparative period. Unsurprisingly, much of the earnings outperformance was courtesy an improved mortality experience in the life businesses post-COVID, and the continued release of COVID-19 reserves.
Large life insurers always impress with their acronym, and their results and results announcements are chock-full of terms that only dedicated financial advisers, financial planners and insurance professionals understand. Using the update to illustrate this phenomenon, you will learn that the group’s PVNBP declined by 8% compared to the prior period, to ZAR50.1 billion; while the VNB contracted by the same percentage, to just ZAR388 million. The reasons for the decline in PVNBP was given as “lower new business volumes in Momentum Investments and Momentum Metropolitan Africa, partly offset by improved new business volumes in Momentum Life and Metropolitan Life”.
PS, the update is, of course, referring to the present value of new business premiums (PVNBP) and value of new business (VNB). And if you are struggling with these acronyms, the writer suggests foregoing trying to figure out how these numbers are computed.
Finally, some benefits to soaring inflation and interest rates
The first segmental performance that the group commented on was its Momentum Life business. Headline earnings from the life business were just over three times higher than the prior nine-months, at ZAR1.1 billion compared to ZAR338 million. “Earnings in the prior period were dampened by the negative impact of the third wave of COVID-19 infections which resulted in a large negative mortality variance,” they wrote. “In the current period, the normalisation of mortality claims experience contributed positively”. So, for once, it seems the scourge of high inflation and interest rates has yielded some good, with the life business’ earnings helped by “favourable movements in investment variances as a result of advantageous shifts in yield curves that reduced protection and traditional liabilities at longer durations”. BTW, this writer loved the simplicity (sic) of the underlined copy.
It was not all plain sailing for life insurers, and Metropolitan Life was unable to emulate the uptick at the Momentum Life business. Its normalised headline earnings decreased by 2% to ZAR389 million, “mainly due to a weak persistency experience which was primarily driven by a continued deterioration in the lapse experience on the protection business”. In other words, the insurer was struggling to retain clients. The thought that immediately springs to mind is that Metropolitan services the consumer segment that is first to feel the ‘gut punch’ of the country’s ongoing economic malaise. The group confirmed this, saying “the current economic conditions are placing pressure on Metropolitan Life’s customer base; the lapse experience is likely to remain under pressure”.
A tale of two short-term licences
Are short-term insurers feeling the pinch too? Momentum Metropolitan owns both Guardrisk and Momentum Insure, and these brands had very different nine-month trading experiences. Guardrisk’s normalised headline earnings increased by 8% to ZAR417 million supported by a 16% increase in Guardrisk General Insurance underwriting profits; solid growth in management fee income in Guardrisk Life; and a recovery in the volume and affinity business of Guardrisk Insurance. In contrast, Momentum Insure reported a loss of ZAR145 million over the period. For the short-term insurance pundits among you, the insurer reported that its claim ratio worsened from 69% in the prior year to 78%. PS, the claim ratio is claims paid expressed as a percentage of premium earned.
There followed a long list of ‘drags’ on short-term insurer profitability including the impact of prolonged inflationary pressures on the cost of claims; increased frequency of incidents due to power surges; higher motor accident and theft claim frequency; a continuation of adverse weather-related events; and a lag in premium increases following the policy renewal cycle. “An extraordinary proportion of claims that occurred during December 2022 were reported late, leading to the relative result of the third quarter being significantly worse than the second quarter,” they wrote. The insurer has already started taking corrective action, as evidenced by the slight uptick in gross written premium to ZAR2.309 billion for the nine-months under review.
Investments holding (somewhat) steady
Momentum Investments seemed to be in a bit of holding pattern with a small decrease in earnings, to ZAR705 million… Lifting the veil, the group confirmed a 12% decline in operating profit that was offset by strong growth in investment return resulting mainly from currency translation gains and higher interest rates. And that’s 2:0 for the group versus inflation and interest rates! Although the rand seems in a constant state of decline against the US dollar, banking on currency translation gains is not a long-term solution to operational hiccups. So, what went wrong? According to the investment business, “operating profit was mainly impacted by lower new business sales and higher outflows on the Momentum Wealth platform”. Despite this, the last nine-months saw reasonable growth in assets under management on both local and offshore investment platforms, up 8% to ZAR232 billion.
Momentum Corporate had a stellar nine-months too, with normalised earnings up 42% to ZAR877 million, bolstered by further improvements in underwriting results in group risk products. Not to be outdone, Momentum Metropolitan Health weighed in with a 45% jump in earnings to ZAR234 million compared to ZAR161 million in the nine-months to March 2022. “The overall membership growth of 3% is largely due to growth in the public sector and Health4Me membership,” they wrote. Finally, the group’s Africa business weighed in with ZAR122 million thanks to strong operating profit growth in Namibia and Botswana.
What does 2023-2024 have in store?
“Economic activity continues to be hampered by rising interest rates, high inflation and loadshedding,” the group said. “We are concerned about the pace of any potential economic recovery and the impact this will have on disposable income; [these factors] will place ongoing affordability pressure on new business volumes, particularly on long-term savings and on protection business, where we have already seen a decline in demand”. The final positive news is that the group will not allow itself to be defined by factors outside its control: “We will focus on what is under our control to add value to clients and stakeholders and contribute positively towards building a better South Africa for all”.
Writer’s thoughts:
The takeout from the Momentum Metropolitan media release was that financial services firms should focus on aspects they can control, rather than those they cannot. Although it sounds somewhat glib, there is little local businesses can do about crumbling infrastructure, monetary policy, municipal bungling and political uncertainty… Agree or disagree? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
