The birth of another insurance giant

Gareth Stokes, FAnews Online Editor

The newswires have been quiet since the March 2010 announcement that Momentum and Metropolitan would merge. But earlier this week, on 26 August 2010, the groups announced that they had reached agreement on the final terms of their deal. MMI Holdings will

We’re using market capitalisation as a proxy for embedded value, though in reality most South Africa life insurers trade at a steep discount to this measure. At the end of March 2010, Old Mutual traded at a discount of some 30% to its “theoretical” value, Liberty 12% and the standalone Metropolitan 20%...

What is “embedded value” anyway?

With thanks to Stuart Theobald of the Business Times, the following offers a simple explanation of the embedded value (EV) concept. “The measure is an indication of what the business is really worth, based on a range of complicated assumptions that keep teams of actuaries busy!” he writes. “Essentially, embedded value represents the future profits that the insurer is going to make out of the policies it has signed up, added to the assets it currently has.”

Insurers have thousands of policyholders paying premium each month. A portion of each of these premiums is “clean” profit in the insurers’ hands. Add up these monthly profits over the lifetime of each policy, and discount the values for time, and you end up with an EV for the insurers’ book. Of course nothing is this simple in the real world. Actuaries have to make adjustments to the EV sum based on what they expect policyholders to do. To accurately calculate the value, consideration is given to the number of policyholders likely to lapse or surrender their policies. This figure is known as “persistency” – an estimate of the period each policy will remain in force...

Is there any way for insurers to “candy coat” their EV? The obvious method is to write new business, with quality business carrying more weight. It’s not rocket science – more policies – more premiums – more profit – greater EV. A second tool insurers can use to underpin EV is to keep administration costs on policies to a minimum, thus improving the monthly profit on each premium collected.

Sorting things out at the top

EV will certainly be one of the performance measures for MMH Holdings’ leadership. The group announced that current Momentum chief executive, Nicolaas Kruger, will head up the merged entity. Metropolitan CEO, Wilhelm Van Zyl, will be the Deputy CEO. MMI also announced appointments to its board. Laurie Dippenaar will serve as chairman, and JJ Njeke as deputy chairman. Four executive directors and sixteen non-executive directors will be appointed.

It’s often difficult to bed down different cultures and products in a single stable. To this end MMH Holdings becomes a listed entity only, while the strong brands in Momentum and Metropolitan will continue as client-facing businesses. This is good news for the thousands of policyholders and financial intermediaries who have worked with each of these institutions over time. Both Metropolitan and Momentum have established strong and trusted legacies over the years.

Getting down to business

And now the hard work begins. MMH will have to leverage the unique opportunities each of its standalone businesses offers – leveraging synergies – and cross pollinating the best traits on offer at each business. Commenting, Kruger said “The management teams of Metropolitan and Momentum are confident of the potential of MMI Holdings. The combination of the two businesses, which have created powerful franchises in complementary market segments, represents a compelling growth story that provides all stakeholders with a wealth of exciting prospects.”

In a recent press release Kruger also hinted at the steps the new insurance company would take to generate the best possible value for shareholders. The focus in coming periods will be on generating economies of scale (probably by sharing of administrative platforms, office space and eliminating other duplication) and taking advantage of cross-selling opportunities (to determine whether Metropolitan clients are benefiting from what Momentum has to offer and vice versa). He also believes the merger will “ result in enhanced capital efficiencies and greater risk diversification.”

Of course for the merger to go ahead everyone needed to agree on what the different segments of the tie-up were worth. Metropolitan, Momentum and FirstRand described the negotiations as the most comprehensive due diligence processes in South African corporate history. They based the merger ratios using “consistently calculated embedded values” at each of the entities at 31 December 2009. When MMI Holdings lists, FirstRand shareholders will hold 59.3% and current Metropolitan shareholders 40.7% of the share capital of the merged entity. FirstRand shareholders can expect to receive 16.9 shares in the merged entity for every 100 ordinary shares held in FirstRand. Momentum was a wholly owned subsidiary of FirstRand at the time of the deal.

The way forward

We’ll leave it to MMI Holdings deputy chief executive to sum up: “I am very proud of the commitment shown by staff in finalising this complex transaction,” said Van Zyl. “My hopes for MMI Holdings are high as I do not doubt its capacity and capabilities to exceed stakeholder expectations through expanded product offerings in extended local and international target markets.” We look forward to the group’s first day on the JSE, which, subject to shareholder approval, will be 28 September 2010

Editor’s thoughts: Momentum and Metropolitan have been carving niches in the financial services industry for many years. They’ve developed separate cultures and offer value in different areas. Do you think the merger will enhance the product on offer at each of these businesses ? Add your comments below, or send them to gareth@fanews.co.za