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Two leading financial services brands come good!

14 March 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

On 1 December 2010 – eight months after announcing that two of South Africa’s strongest financial services brands would merge – MMI Holdings’ group chief executive Nicolaas Kruger blew the “kudu horn” to welcome the new listing to the JSE. Kruger describe

MMI Holdings has adopted 30 June as its year end, so the 9 March 2011 presentation was for the interim six month period ending December 2010. The group reported an embedded value (an insurance industry standard for valuing business based on group net assets plus the present value of future profits on in-force policies) of R31.1 billion. The group’s market capitalisation, calculated at 1650c/share, topped R24.778 billion. Shareholders will be pleased with the group’s statutory capital adequacy cover (CAR) of 2.5 times – and hope the decision to award a special interim dividend of 21c/share won’t be an isolated event. “The group remains appropriately capitalised, with a particularly strong balance sheet,” said Kruger.

Setting a benchmark for future reporting periods

One of the most important decisions taken during the merger talks was to keep the combined entities’ leading retail brands intact. “We decided to create six businesses, two retail business (Metropolitan and Momentum), plus an Asset Management, Employee Benefits, International and Health business,” observed MMI Holdings’ deputy chief executive, Wilhelm van Zyl. (FAnews spoke to Kruger and Van Zyl shortly after the MMI Holdings listing, and readers can request a copy of the full interview, which was published in the February 2011 issue of FAnews magazine). We took a peak at the group’s pro-forma income statement to see how each part of the business contributes to the whole…

Core headline earnings for the six months topped R1.228 billion, mainly from Metropolitan Retail (R218 million), Momentum Retail (R357 million) and Shareholder Capital (R332 million) – the latter being a non-operational performance from the group’s investing activities. The Employee Benefits (R124 million) and Investments (R125 million) division also weighed in with solid performances. Kruger said the 77c share “pro forma diluted core headline earnings” would serve as a benchmark for future periods.

The lifeblood of financial services companies

New business is the lifeblood of a financial services company. On a pro forma basis MMI Holdings posted total new business of R21.972 billion over the six months period, written at a profit margin of 1.6%. Metropolitan Retail was undoubtedly the star performer – from a profitability perspective – with new business for the latest 12 months of R5.602 billion (up 11%) with a PVP margin of some 4%! Momentum Retail could only manage a PVP margin of 1.3% from R14.167 billion worth of new business over the six months.

A closer scrutiny of the results presentation confirms the “infant” state of the combined entity. The different year ends resulted in some figures (from Metropolitan) being published and compared on a full year basis, with Momentum figures published and compared on the latest six months... And the group was unable to present unified figures under its Health and Employee Benefits divisions – preferring to present the Metropolitan and Momentum contributions to these divisions separately.

Are the brakes on in health?

The National Health Insurance (NHI) “cloud” hanging over the private healthcare sector seems to have impacted MMI Holdings’ Health division performance in the latest six months. Although Metropolitan continued signing new members to the Government Employee Medical Schemes (GEMS) platform – 112 000 new registered members through 2010 – there was a significant shift in the business mix. The Metropolitan side of the health business reported a decline in operating profit due to higher operational costs and incentive-based expenses, while Momentum Health suffered due to difficult conditions on the domestic employment market. The latter posted a 2% decline in members under administration. MMI Holdings’ health division contributed only R29 million (2%) to core headline earnings over the six months.

Although the group doesn’t believe an NHI implementation will significantly impact its health division there were those in the audience who disagreed… But given the contribution from individual businesses in the latest half-year the group seems well insulated from any meltdown in healthcare through its wide financial services diversification.

Merger savings

One of the more direct post-presentation questions centred on the cost savings the group hoped to achieve from its merger. Kruger observed that each of the six divisions had embarked on detailed strategic planning and integration processes in an attempt to optimise operating structures. Target markets, distribution channels and product offerings were being identified and various synergies would begin to show in the next two years. The sentiment at the results presentation was that the focus on existing distribution channels (the agency force at Metropolitan Retail and intermediary channel at Momentum) would intensify.

Kruger agreed that the total annual savings from the merger would come in close to the R750 million being bandied about by analysts, but warned the group was unlikely to see these cost savings in the short-term. A decision not to fight the Competition Commission, which ruled the group would not be allowed to make non-executive job cuts until two years after the merger, means head-count savings will have to flow from natural attrition and internal redeployments. Shareholders might wait up to seven years before they enjoy the full benefit of the proposed operational cost savings.

Editor’s thoughts: It’s always difficult to seamlessly integrate two business cultures. Going into the merger MMI Holdings said the group cultures were similar – and should bed down easily together. And they remain adamant the major retail offerings from Metropolitan and Momentum will remain largely unchanged. Have you noticed any changes in your day-to-day dealings with Metropolitan / Momentum post-merger? Add your comment below, or send it to

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