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Merged financial services giant off to a flying start

19 September 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The 14 September 2011 MMI Holdings results presentation was the first full-year update since the merger of Momentum and Metropolitan announced in August 2010… But shareholders will have to wait a while longer before the merger reflects fully on the bottom

The diversified financial services group used the annual results presentation as a showcase for its post-merger strategy… Chief executive officer, Nicolaas Kruger, said that the group had charted a way forward to maximise the benefits of bringing the two brands together. “As a group, we have identified four strategic pillars, being the areas in which we have to excel if we are to achieve our strategic objectives. These pillars – in-depth market knowledge, innovative solutions, effective distribution and an entrepreneurial culture – are the solid foundation on which MMI will build,” he said. To do this they will focus primarily on meeting client needs across divisions and geographies and by expanding into other African countries and selected international markets. Shareholders will no doubt be looking forward to the “superior shareholder returns” the strategy will produce.

The new group structure

Financial intermediaries should be familiar with the key retail brands in the MMI Holdings stable. Metropolitan – best known for its life product and healthcare administration capabilities – operates on a high volume / low cost basis to the low to middle income markets. Momentum, on the other hand, entices the middle to upper income market with a focus on product and service innovation and financial advice. Overall the merged group comprises six divisions – the two retail outfits already mentioned plus Metropolitan Health, Momentum Investments, Metropolitan International and Momentum Employee Benefits… The result is a ‘best of breed’ combination of the traditional strengths of each merged company.

Although volatility remains a threat, the group’s FY2011 result should be viewed against the backdrop of a significantly improved economic outlook. During the period under review the JSE All Share index held at levels 15% above the average for FY2010. A number of measures of confidence in the domestic economy have improved significantly too. The group reports that insurance industry stakeholders are more upbeat than before and that the economy – although missing analysts’ forecasts to the downside – is growing at a faster pace than immediately after the recession. The group’s retail operations will also be buoyed by early indications of increases in household disposable income and declining debt levels.

Both the FNB consumer confidence index and RMB business confidence index remain in upward trends, albeit under pressure in the latest quarters... On the negative side MMI Holdings lamented three of the ills impacting on our economy at present. It sites unemployment, regulatory changes and low levels of savings as serious obstacles to South Africa as a whole and to the financial services industry specifically. One of the main regulatory hurdles is the Financial Services Board’s Solvency Assessment and Management (SAM) regime which aims to bring the industry in line with Europe’s Solvency II. Until future economic and regulatory capital requirements are clarified the group will have to maintain a reasonable capital buffer. The group’s life insurance operations remain well capitalised – each boasting 2.3x the Statutory CAR amount. Metropolitan is sitting on a R5.4 billion statutory excess versus Momentum’s R9.0 billion.

Getting down to business

Has MMI Holdings delivered in its first full-year result as a merged entity? We’ll begin with the highlights and then drill down to some of the group’s divisions. Value of new business grew by 32% to R632 million while new business on an annual premium equivalent basis improved slightly to R5.848 billion. On the bottom line the group’s segmental core headline earnings improved 12% to R2.588 billion, which allowed management to declare a healthy 63c/share final dividend. The company now offers a forecast 6%-plus dividend yield for its 2012 financial year. And at the recent closing price of R16.40/share MMI holdings is trading at a reasonable 14% discount to its embedded value of R19.12.

Momentum Retail emerged as the star performer in the merged group. Total funds receive by this business topped R28.310 billion, a 12% improvement on the prior year while the value of new business topped R288 million. Its contribution to group operating profit after tax came in at R699 million, a 17% improvement over FY2010. Over the next year Momentum Retail will focus on brand awareness and the implementation of new sales and distribution strategies.

Metropolitan Retail had a roaring year too, with value of new business more than 100% better at R257 million. Its contribution to operating profit was 7% firmer at R394 million. Management was happy with persistency across product lines and applauded the division’s expense management, but was less impressed with the level of new business written. Big challenges faced in this division include the regulatory exams, specifically the difficulty in getting a large tied agent sales force to pass the exam. The division hopes to improve its call centre and review and rationalise its systems over the next 12 months.

Employee benefits hits a headwind

Momentum Employee Benefits posted disappointing results after reporting large once-off profits in FY2010. Total funds received actually contracted slightly to R8.187 billion, while value of new business slumped from R91m to just R62m! The contribution to total group profit (after tax) was R187 million. There has been a marked upturn in demand for umbrella funds and management hopes that ongoing efforts to grow sales through enhanced distribution partnerships and an improved mix of new business will pay dividends in future periods. Otherwise the usual ‘difficult trading environment’ strategies of lowering distribution costs and improving operational efficiencies will have to do the trick.

The balance of the group’s after tax operating profit came from Metropolitan International, which weighed in with R32 million after struggling with the high cost of its expanded operating footprint. Momentum Investments, which struggled due to net outflows and poor core equity and balanced fund performances, saw its profit decline by 21% to R131 million. The division’s collective investments business was singled out for praise. And finally, Metropolitan Health, which is still riding the wave of government employees joining GEMS, turned in an impressive R114 million. The group now administers 1 197 000 principal members! And they believe that government’s NHI will create new opportunities.

“The recent release of the National Health Insurance (NHI) green paper is a positive step forward in providing affordable healthcare for a greater proportion of the South African population. Metropolitan Health has a wealth of expertise and experience in servicing and managing risk for most of the country’s largest medical schemes at low cost and a proven track record of delivery, with a total client base of more than three million lives,” said Kruger. As the group beds down post-merger they continue to develop the processes and core values that will make them a leader in meeting the consumer’s financial services needs.

Editor’s thoughts: MMI Holdings has a tough task to balance two business cultures under one umbrella. They seem to have got the basics right – but the real test is in customer and distribution agent experience. Have you noticed a difference in your dealings with Momentum or Metropolitan post-merger? Please add your comment below, or send it to gareth@fanews.co.za

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