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Operational Update for nine months ended 31 March 2017
MMI Holdings Limited
Incorporated in the Republic of South Africa
Registration Number: 2000/031756/06
JSE share code: MMI
NSX share code: MIM
ISIN: ZAE000149902
("MMI" or "the group")
OPERATIONAL UPDATE
For nine months ended 31 March 2017
Difficult economic conditions have continued to weigh on MMI Holdings’
financial performance in the nine months to 31 March 2017. Recurring premium
new business was up 8% while single premium new business was down 14%. Overall
new business volumes are down 6% on a present value of new business premiums
(PVNBP) basis. Overall covered value of new business (VNB) was R320m for the
period. Diluted embedded value per share was R26.25 on 31 March 2017.
Core earnings growth has improved somewhat from the -5% at interim stage to -3%
after nine months, mainly due to improved underwriting results. Average
level of the SA equity market is roughly unchanged year-on-year for the nine
months, and this puts significant pressure on revenue growth for many of our
businesses.
While the macro-economic picture is difficult, the group continues to make
progress with its key strategic initiatives. Our new operating model is also
enabling us to continue driving efficiency gains across the group. Group’s
surplus capital position remains satisfactory.
Momentum Retail
Momentum Retail new business volumes are down 4% year-on-year due to a 9%
decline in single premium volumes. Decline in single premiums has been driven
by lower sales of both guaranteed endowments and Momentum Wealth products.
Recurring premium new business is up 2% year-on-year with retirement annuity
new business showing the best growth at 8%. Risk sales are flat on last year
whereas discretionary savings sales are lower than in the prior year.
Value of new business is lower at R126m which represents a PVNBP margin of
0.7%. The margin has been hurt by negative new business mix effect (less
sales of guaranteed products), changes to modelling of loyalty bonuses on
Investo savings products and below inflation growth in new business volumes.
We expect margins to improve somewhat by year-end.
Sales in short-term insurance (MSTI) are roughly 30% higher than in the prior
year whereas for the open scheme (Momentum Health) the volumes are roughly
20% above those achieved in the same period for F2016.
Rm 3Q17 3Q16 Change %
Recurring premiums 944 923 2
Single premiums 12 302 13 479 -9
PVNBP 18 053 18 802 -4
Value of new business 126 190 -34
New business margin 0.7% 1.0% -0.3%
Momentum Retail’s earnings are broadly flat versus previous year. This is a
relatively pleasing result considering that the prior period included non-
recurring margin releases. This has had an R100m negative impact on earnings
growth. The two main positives for core earnings for the period relate to
mortality and expense variances; both contributed more than R50m to earnings
growth.
On non-covered sources of earnings we have MSTI tracking its business plans
for F2019 break-even (lower losses YTD) and Momentum Health benefiting from
growing membership. Earnings from Investments are lower than in the prior
year due to weak growth in average FUM.
Metropolitan Retail
Metropolitan Retail continues to show the benefits from its distribution
channel restructure. Recurring premium new business is up 17% with protection
business showing 23% growth. Single premium new business is down 12%
following relaxation of the annuitisation rules for smaller pension pots.
New business margin has declined year-on-year following the adoption of more
conservative assumptions on premium collection rates. New business
profitability is also hurt by the high proportion of new agents whose basic
salaries exceed the commissions they would earn on equivalent sales.
Rm 3Q17 3Q16 Change %
Recurring premiums 928 795 17
Single premiums 842 961 -12
PVNBP 3 862 3 685 5
Value of new business 118 126 -6
New business margin 3.1% 3.4% -0.3%
Metropolitan Retail’s earnings are roughly 10% ahead of the prior financial
year. Earnings have been aided by the growth in the expected margin releases
(i.e. book growth) following improved sales over the past 18 months.
Mortality and expense variances remain strong whereas lapse experience has
weakened further since the mid-year. Various corrective actions are being
taken to improve premium collection rates and these include leveraging more
off the success we have had over the past two years in opening up new worksite
marketing opportunities.
Corporate and Public Sector
New business for Corporate and Public Sector (CPS) is down 17% relative to
prior year. Single premium new business is down 33% with investment flows
particularly weak. Recurring premium new business is up 2% year-on-year.
Group risk market pricing remains competitive which places pressure on both
new business volumes and on margins that can be achieved on new business.
New business margins are sharply down on prior year and on the numbers
published in the interim results. After the year-end we have adjusted
downwards the VNB on some large group insurance schemes written during the
first six months of the year. This reflects both a downward review of the
product margins that we believe will be realised over time and an upward
adjustment to the distribution costs (with equal downward adjustment of
renewal costs) allocated to the VNB calculation.
We have also been forced to take corrective action in certain areas of the
institutional sales environment and in those areas sales have been minimal
while we rebuild capacity in the relevant distribution teams.
Rm 3Q17 3Q16 Change %
Recurring premiums 406 398 2
Single premiums 2 386 3 570 -33
PVNBP 6 064 7 284 -17
Value of new business 15 124 -88
New business margin 0.2% 1.7% -1.5%
While the new business performance in CPS has been very disappointing, the
story around core earnings is more positive. Earnings are roughly flat year-
on-year despite the 29% decline in health administration profits due to loss
of two major clients during the prior financial year. Earnings from the life
insurance operations are up slightly year-on-year with disability
underwriting results showing an improved result over the last three months.
Guardrisk and Eris Property both made solid earnings contributions in the
nine months. While health administration earnings are down 29% year-on-year,
the result is pleasing against the original budgets drawn after the client
losses mentioned earlier. The resizing activities are on track and the
business is expected to show improving financial performance in due course.
International
International’s new business is up 3% year-on-year. Recurring premium new
business is up 11%, single premium new business is down 17%. Value of new
business is up 30% to R61m for the nine months. Namibia has made the strongest
contribution year-to-date with volumes up 9% and new business value up 26%.
Lesotho and Botswana also made solid contributions with only Swaziland
showing decline in sales and VNB.
Rm 3Q17 3Q16 Change %
Recurring premiums 332 298 11
Single premiums 262 315 -17
PVNBP 1 944 1 895 3
Value of new business 61 47 30
New business margin 3.1% 2.5% 0.6%
Earnings at International are lower than in the previous year. Life insurance
earnings are below those achieved in F2016 due to the weak start to the
current year in Namibia (higher group risk claims). Profitability in the
Namibia life business has recovered to more normal levels since the weak
1Q17 result. Losses for our short-term insurance operations in Africa (mainly
Cannon) have continued tracking the run-rate observed at mid-year. Our health
insurance operations continue to show improved profitability following
premium rate increases on underperforming schemes.
We are making steady progress with rationalisation of our Africa portfolio
and this will also unlock scope to reduce the central expenses incurred to
support the in-country activities.
With our Indian healthcare joint venture now fully up and running, our share
of the start-up losses has increased substantially since December. Early
volume growth has exceeded our expectations and we remain excited about this
opportunity.
International segment also includes our mobile insurance JV with MTN (aYo)
and our UK asset management / wealth management activities. Start-up losses
are tracking budget but sales volumes have been lower than expected in the
early months. Profitability of our UK business remains ahead of budget and
we have seen net inflows from non-SA clients. We plan to strengthen our
distribution capability in SA to regain market share in the flows originating
from South Africa.
Shareholder Capital
Shareholder Capital segment reflects investment income on capital held to
support operations, earnings from start-up ventures not yet allocated to
other segments, and some costs not allocated to operating segments (e.g.
certain holding company expenses).
Earnings contribution from Shareholder Capital is broadly flat relative to
the prior period. Investment income is higher for the nine months, and in
line with the increase in investable assets. This has been offset by higher
expenses incurred in our disruptive innovation business unit (Exponential)
which is reported as part of the Shareholder Capital segment. We are pleased
that Exponential is providing MMI with an efficient vehicle through which we
are connected to the fast evolving fintech space.
Outlook
Operating environment remains difficult in South Africa and we do not believe
that the tough environment will improve meaningfully in the near term. This
means that we need to continue applying strong discipline in our capital
allocation decisions and to find increasingly efficient ways of doing
business in the absence of meaningful revenue growth in core operations. At
this stage we expect full year results to broadly reflect the trends visible
in the first nine months of the current financial year.
The information in this operational update has not been reviewed and reported
on by MMI’s external auditors.
Conference call
The executive management of MMI will be hosting a conference call for
shareholders, investors and analysts. The details of the conference call are
as follows:
Audio dial-in facility
A toll free dial-in facility will be available. We kindly request callers to
pre-register using the following link https://goo.gl/GW6O5G. A passcode and
pin will be generated following registration. We advise callers to dial in
5 minutes before the conference call starts at 14h00.
Access numbers for participants dialling live from their country:
South Africa 011 535 3500
UK 0 808 143 3720
Other Countries +27 11 535 3500
Recorded playback will be available for three days after the conference call.
Access Numbers for Recorded Playback:
South Africa 011 305 2030
UK 0 808 234 6771
USA and Canada 1 855 481 5363
Other Countries +27 11 305 2030
Access code for recorded playback: 13170#
6 June 2017
CENTURION
JSE Sponsor:
Merrill Lynch South Africa (Pty) Limited
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