There is money to be made in the low income segment
MMI Holdings Limited (MMI), the diversified financial services group that includes Metropolitan and Momentum, released a solid set of half-year results to 31 December 2011 recently. The group announced a 4% improvement in core headline earnings, to R1.294
Kruger mentioned two highlights in the latest operating period. “The first is that we are on track with the merger and integration process – and with the projected savings we budgeted for over three years,” he said. “And the second is the impressive growth in the Metropolitan Retail unit, particularly at the lower end of the market.” The division chipped in an 18% improvement in recurring premium new business thanks to solid production from the traditional agency force and investments in the group scheme business. Satisfactory retention and good new business volumes boosted the in-force book to 2.9 million policies.
There is still room for growth
We asked Kruger if this was “as good as it gets” for this section of the business. “There is still some room to grow the business,” he said. “And we remain upbeat about natural growth prospect in the low income market segment.” There are a number of reasons for his positive outlook. One is the huge “gap” between local insured values and the cover theoretically required for South Africans to be adequately insured. Another is the number of lower and mid-income families that are improving their standard of living over time. Kruger emphasised that companies with large geographic footprints and strong brand recognition would benefit most from improved insurance market penetration.
Independent financial advisers will be more interested in the performance from Momentum Retail. This division stuttered through the last six months of 2011, posting an 11% decline in new business on an annual premium equivalent basis. The value of new business margin also came under pressure due to decreased production and a change in the business mix. All told the division chipped in 2% less to the bottom line with an operating profit of R377 million. Among the reasons given for this profit contraction was “experience profit” being below long-term expectations. What?
Kruger explains: “Experience profit, in simple terms, is the actual profit experience compared to our actuarial assumptions. So, for example, if we have more death claims in a six month period compared with what the actuaries expect over the longer term – our profit experience would be worse than expected.” Large life insurance companies can experience large deviations from actuarial assumption despite the size of their books! A number of factors contribute to such variances – though mortality is singled out in this case as the main contributor.
Broker distribution remains important
MMI Holdings remains committed to the broker distribution model. “Financial advice has always been critical in the [financial services] retail space,” said Kruger. “MMI has fully embraced financial advice and realise its worth given our target market, their needs and the complexity of modern products.” He dismissed the argument that clients could research their investment decisions on the Internet… Although there is plenty of advice available the layperson still requires a financial services professional to assist in choosing an appropriate investment or risk vehicle. MMI will continue to direct resource and effort at the independent financial adviser distribution channel, as well as its agency force.
As a major stakeholder in the domestic financial services space we asked Kruger to what extent regulation (with specific reference to the Regulatory Examinations) was hampering group operations. “The high cost of regulatory compliance is a feature of doing business in our industry at present,” he said. “We plan for these costs… At the same time we are aware how onerous compliance can be for financial planners and intermediaries.” With regards RE, MMI is supportive of any initiative to increase the standards in the domestic financial services space. However, Kruger was at pains to call for practical balance in the implementation of industry initiatives. He observed that an appropriate measure for the top end of the market might be impractical among low-income consumers and vice versa.
The group continues to interact with the regulators as opportunities arise. “A discussion document on the role of the intermediary and intermediary remuneration was published recently, and we will monitor and take part in the ensuing discussions through the appropriate structures,” he said. He expects the remuneration landscape will change going forward – forcing both provider and intermediary to find cost effective ways to conduct business.
A R4 billion war chest
The group – like most of the country’s life insurers – has reviewed the investment mandates for its shareholder capital. “We are in a strong position going into the new Solvency Assessment and Management (SAM) dispensation [from January 2014] with a capital buffer of R4 billion over and above our required economic capital,” said Kruger. “We would much rather go into that process with a buffer – though we realise over the longer-term we cannot just sit on the capital.” Who knows – perhaps shareholders can look forward to a special dividend when the full year results are announced six months hence.
MMI Holdings seems cautiously optimistic for the year ahead. They note that each division has implemented strategic plans and integration processes to identify and optimise structures, operations, target markets, distribution channels and product offerings. But they warn that new business volumes will depend on the economic environment. On the international stage all attention is focused on the ongoing Euro-zone financial crisis. Back home insurers are holding thumbs for improvements in employment and household net disposable income. The impact of National Health Insurance and National Social Security reforms on the individual and insurance company remain “wildcards” in the financial services profit equation.
Editor’s thoughts: South Africa’s National Health Insurance implementation could have a big impact on the likes of MMI Holdings. Metropolitan Health – which administers the 600, 000 family GEMS Medical Scheme – reported R58 million in operating profit in the latest half year. Kruger believes low cost administrators such as Metropolitan will play a role in the eventual NHI solution… Do you think government would be happy with a healthcare administrator generating R100 million per annum in operating profits as part of the NHI? Add your comment below, or send it to [email protected]
