Fitch Affirms Momentum's Ratings
On 08 December 2006, Fitch Ratings affirmed Momentum Group Limited's ("Momentum") National Insurer Financial Strength ("IFS") rating at 'AA+(zaf)' and National Long-term rating at 'AA(zaf)'. The rating Outlooks are Stable. At the same time, the agency has affirmed the 'AA-(AA minus)(zaf)' rating on the company's ZAR1 billion issue of subordinated unsecured secondary capital callable bonds.
The ratings reflect Momentum's strong business position in South Africa, solid capital position and very strong operating performance. Partially offsetting these factors is the fact that the diversification outside of South Africa is currently limited and the challenge to defend its business position, amid a very competitive South African life insurance market.
Fitch views Momentum's capitalisation level as very strong; the published statutory capital adequacy requirement ("CAR") cover was 3.1x at YE06, up from 2.2x at YE05. Following the payment of dividends after the financial year-end, Fitch estimates that the CAR cover has reduced to 2.5x. Fitch expects the company to take measures over time to reduce its available capital from current levels to within its revised target range of 1.7x-1.9x. Momentum has recently reduced its targeted capitalisation level to reflect the more conservative investment mandate that has been adopted for the shareholders' funds. The company's capital structure includes ZAR1bn of subordinated unsecured secondary capital callable bonds that were issued in April 2006. This debt issue receives 100% credit for regulatory solvency purposes. Under Fitch's treatment of hybrid debt instruments, this issue receives 50% equity credit.
Momentum's recent operating performance has been very strong, with a return on embedded value of 31% in 2006, up from 27.9% in 2005. The headline return on equity ("ROE") amounted to 24.1% (before the impact of the agreement with National Treasury and pre-IFRS), compared with 24.5% in 2005.
Momentum is a wholly owned subsidiary of FirstRand Limited. FirstRand Limited also fully owns FirstRand Bank Limited (National Long-term rating: 'AA+(zaf)') and has a 63% ownership of Discovery Holdings Limited. Momentum's ratings reflect its position within this group as an integrated financial services provider.
Momentum has built a strong brand and its target customer base is the high end of the market. However, in recent years, the strategy has been expanded to target the middle and lower end through First National Bank Life ("FNB Life"), in a partnership with the wider FirstRand group. The FNB Life mass market credit life products are gaining good penetration into the bank's client base, while FNB and Momentum also launched a middle market product range comprising education savings and risk products under the FNB brand, using both the insurance and banking licences.
In the last 12 months, Momentum has sold its 34% stake in African Life and acquired African Life Health ("ALH"). The acquisition of ALH provides a firm base from which to expand the medical schemes administration business into the rest of Africa, with three additional countries (Tanzania, Ghana and Mauritius) currently being added to the five countries (Kenya, Botswana, Lesotho, Mozambique and Zambia) where ALH already operates.
Momentum was founded in 1965. Following various mergers and acquisitions, it is now firmly established as one of the top four life insurance companies in South Africa, both by new business market share and by assets under management. As at YE06, it had ZAR354bn of assets under management and shareholder funds of ZAR7.1bn.
