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Metropolitan hit by market turbulence in 2008

13 March 2009 Gareth Stokes

Metropolitan Holdings is the latest in a line of financial services companies to announce results for the year to 31 December 2008. The company mirrored insurance industry peers Sanlam and Old Mutual with a smattering of good news on the new business fron

Share buybacks boost core earnings

You have to strip equity performances from the numbers to get a fair picture of the business, says Speckmann. He claims Metropolitan “posted a good set of results” given the economic conditions. It’s a conclusion the layman struggles with. Like most listed companies Metropolitan publishes a disconcerting array of earnings numbers. You can choose from basic core headline earnings, basic headline earnings or basic earnings – or if you prefer, diluted core headline earnings, diluted headline earnings or diluted earnings. Which number provides the best assessment of the company’s overall performance? “The best reflection of the business is the diluted core headline earnings,” says Speckmann.

It’s the number we would have chosen if we were in his shoes. 2008 core earnings of R1.011bn were around 5% better than the 2007 number. The group admits that the growth in diluted core headline earnings per share is in part attributed to the buyback of shares during the year. When a listed company buys back its own shares – and cancels them – there are fewer shares to spread the earnings over. Most of the large insurers have bought their shares at prices substantially higher than the current market price. So we asked Speckmann how sensible it was to implement buyback strategies in falling markets. He says the strategy makes sense because Metropolitan’s share is undervalued. “Our policy has always been that we’ll buy up to embedded value,” he said. The company’s embedded value at 31 December 2008 was 1709c per share. Shares in the company closed at 1000c (up 4.93%) on results day, 11 March 2009.

Fantastic growth in insurance business

The great news for financial services intermediaries is that growth in the domestic retail insurance market remains robust. New insurance business across the group was 38% higher. Speckmann says the company has done a great deal of work to improve the business. “We’ve looked at the portfolio and looked at the value proposition of individual products,” he said. The company also made some tough decisions, taking unprofitable group schemes products out of the equation. This helped the business achieve better margins in 2008. There was plenty of praise for the work done by tied agents, personal financial advisers and brokers who account for the bulk of premium earned at Metropolitan. But getting sales right is only half the battle. It’s critical to maintain persistency levels during tough economic times. The distribution force has focused on “financial needs analysis and affordability tests, with special effort to streamline these processes where possible,” says Speckmann. The trick in this business is to sell the right product to the right person – and to make sure they can afford it!

Winning the contract to administer the Government Employee Medical Scheme (GEMS) is also paying off. The group improved its operating result in the health administration arena by 56% to R141m. GEMS grew from strength to strength and ended the year with 750 000 principle members and almost two million beneficiaries. Will this profit growth place the scheme under regulatory scrutiny? Speckmann says the “guideline from the Council for Medical Schemes is that administration costs don’t exceed 10% of gross premium…” And GEMS is well within that level. He notes that the contract is put out to open tender, which keeps the competition sharp.

What the future holds?

Metropolitan expects a difficult 2009; but the group is well prepared to meet whatever challenges the ‘gods of economy’ can throw at it. They note that “all the businesses within the group are well prepared for the threats and opportunities posed by ongoing changes in the highly regulated environments in which they operate.” And the company is well capitalised to boot. Metropolitan held R1bn more than required at year end – and its insurance operations reported a capital adequacy requirement (CAR) ratio of 3.1 times.

The company will keep a close watch on the domestic environment. “Food, fuel and transport inflation, together with unemployment levels, remain the biggest challenges to our core target market,” says Metropolitan. “Any further increases are likely to curtail new business prospects and threaten the persistency of the in-force book.”

Editor’s thoughts: Investment returns aside, Metropolitan had a good 2008. New insurance business is on the rise and the group’s venture into the medical schemes arena is already rewarding shareholders. What are your thoughts on the R141m earned by Metropolitan for administering the Government Employee Medical Schemes? Add your comments below, or send them to

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