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A decade of earnings growth

05 March 2008 Gareth Stokes

FirstRand reported their results for the six months to December 2007 in Johannesburg yesterday. The group includes First National Bank, Rand Merchant Bank, WesBank, Momentum (the life insurance company) and Discovery. FirstRand’s 57% stake in Discovery was unbundled in November 2007 – so this is the last time we’ll see it contribute to FirstRand results.

Analysts expressed disappointment that the banking group failed to achieve its target of CPI plus 10% growth in earnings. It was the first time in 10 years this target had been missed. There were also a number of questions about RMB equity trading division’s R750m trading loss for the half year. Despite these concerns the group posted an increase of 17% in headline earnings for the six months compared to the previous year.

FAnews Online took a closer look at FirstRand’s wholly owned subsidiary – Momentum – which reported its eight consecutive year of increased normalised earnings. In the half year to December 2007 Momentum reported a 19% increase in normalised earnings, contributing R913m and taking the total earned over the last year to R1.668bn.

R15bn in new business

Among the financial highlights for the latest reporting period is a 40% increase in new insurance business – to R15.459bn. The group revealed that new business was bolstered by “excellent growth in lump sum inflows” to its insurance operations and growth from its collaboration with FirstRand stable mate FNB. The main chunk of this R15.459bn was from a 41% increase in lump sums – an excellent achievement in volatile equity markets. The group reported that their share of the single premium lump sum market (according to the September 2007 Life Offices’ Association (LOA) statistics) now stands at 30%.

The factors mentioned above helped increase the profit from insurance operations by 25% to R643m. Of this amount, Momentum insurance contributed R533m and FNB insurance R110m. The group reports that “FNB insurance results were impacted positively by strong growth in embedded credit life products, and a turnaround in the losses generated by the middle market initiative.” It will be interesting to see whether the ongoing LOA investigation into practices in the credit life industry will impact on these results going forward.

A credit to Momentum is that these results helped it achieve FirstRand Group’s targets of “earnings growth of 10% above inflation” and a return on equity of 10% above the weighted average cost of capital.

Competition puts the squeeze on employee benefits

For the six months to December 2007 Momentum’s insurance operations achieved a 17% increase in new business recurring premiums. A quick breakdown of this number reveals that retail contributed the bulk (R638m – a 10% improvement) with the FNB collaboration (R199m – 78% better) and Employee Benefits (R130m – a 1% decline). The improvement in retail new business premiums was largely on the back of better than expected risk product sales. The group notes that sales of discretionary products were languishing as consumers grappled with less disposable income. Retirement savings products were less affected. It certainly appears there is room for further growth in the retail environment.

“Risk rates in the employee benefits recurring premium market have become increasingly competitive, resulting in pressure on new business volumes,” said the group. The group had managed to make up for the slowdown by securing significant growth from targeting small and emerging businesses. The group acknowledged the contribution from its successful broker distribution channel in assisting in this regard.

Volatile markets dampen second-half prospects

The volatility in local and international equity markets took its toll on Momentum’s asset management operations. Despite this, earnings in this division crept up 1% to R140m. While collective investment scheme assets increased to R35bn, institutional assets declined slightly to R170bn. The reason for this is investment growth was offset by client withdrawals.

The group expects “the increased volatility in equity markets together with some economic slowdown” will impact Momentum in the next six months. However “new business prospects combined with the new growth initiatives should continue to positively impact earnings.”

Editor’s thoughts:
Momentum’s new business growth proves that insurance product sales can prosper in difficult economic times. Do you think Momentum offers enough innovative products to continue this growth in the coming half year? Add your comments below, or send them to gareth@fanews.co.za

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