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MMI HOLDINGS LIMITED - Operational Update for Three Months Ended 30 September 2017

Release Date: 23/11/2017 17:00
Code(s): MMI     PDF:  
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Operational Update for Three Months Ended 30 September 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")


23 November 2017


OPERATIONAL
UPDATE

For three months ended 30 September 2017


During the quarter, MMI Holdings has made further progress on its client-centric strategy and
continued to invest in transforming its core operations towards building a future ready business. We
believe that when the economic cycle turns positive we will reap material benefit from these
investments. Notwithstanding the challenging market environment we faced this quarter, we have
started to see some progress come through from the measures previously communicated.


Diluted core headline earnings are down 4% on 1Q17. Operating profit was flat despite significant
increase in spending on new initiatives in Momentum Retail and in Client Engagement Solutions. The
operating profit outcome was aided by much improved profits on our Corporate disability book.
Headline earnings, which include the full impact of market-related gains on our earnings, are up 54%
versus 1Q17. Basic earnings are up 51%.


Retail new business volumes are marginally up on 1Q17. In Corporate we have maintained pricing
discipline which has resulted in a decline in Corporate flows for the quarter. Overall this leaves new
business volumes 5% lower year-on-year.


Our capital position (on the SAM basis) has improved subsequent to 30 June 2017. Updated
technical specifications from the regulator, rising equity markets, expansion of our sub-ordinated
debt programme, and ongoing technical refinement of our SAM modelling are all contributing. Our
group SCR coverage ratio has improved from the middle to the upper end of our targeted range. Our
credit ratings were recently affirmed by Moody’s. MMI Group Limited maintained its Insurer
Financial Strength (IFS) rating of Aaa.za and its subordinated debt is rated Aa2.za.


Momentum Retail

Momentum Retail new business volumes are up 2% y-o-y. Single premium new business is up 3%
despite ongoing weak guaranteed endowment volumes. We launched our new guaranteed
endowment offering in November 2017 and this is expected to have a positive impact on single
premium volumes. Recurring premium new business is down y-o-y.


VNB declined to R30m, which represents a PVNBP margin of 0.5% (vs 0.8% in 1Q17). This was largely
driven by the new pricing introduced on our Momentum Wealth platform in April 2017. Some of our
investment into improving intermediary and client experience is also categorised as new business
related expenses. We believe that both the new platform pricing and the improved user experience
will improve sales in future periods.


 Rm                       1Q18      1Q17       ?%
 Recurring premiums        251       271        -7
 Single premiums          4 165    4 029         3
 PVNBP                    5 611    5 496         2
 Value of new business      30        44       -33
 New business margin      0.5%      0.8%     -0.3%


Momentum Retail’s covered earnings are significantly down y-o-y. Expenses in the core life business
are around R50m higher than in 1Q17 reflecting the higher investment into our client engagement
and technology initiatives. The level of Multiply discounts is also higher than in the prior period and
this is not fully offset by the actuarial assumptions for these policies. The weak equity markets in
F2016 and F2017 also means that profits from legacy products have run off somewhat quicker than
under more stable market conditions. This situation is expected to reverse if equity markets hold
onto the recent gains.


MSTI is performing well with losses narrowing in line with budget on the back of 20% growth in net
earned premiums while achieving a respectable 72% claims ratio. This was offset by substantial
increase in our Client Engagement Solutions (CES) expenses. Note that Momentum Retail carries the
bulk of CES costs eg those related to the new Money Management initiative and to expanded data
analytics capabilities.


Metropolitan Retail

Metropolitan Retail new business volumes are up 1%. Recurring premium volumes are up 3% while
single premium volumes are down 4%. Higher margin risk new business was up 4%, ie better than
other products, which partially explains the strong VNB in an otherwise muted sales quarter.
New business margin increased to 5.0% for the quarter (vs 4.1% for 1Q17). Besides the favourable
new business mix referred to above, the new business margin also benefited from recalibration in
some parts of our remuneration models used for sales staff.


 Rm                       1Q18     1Q17       ?%
 Recurring premiums        338       327        3
 Single premiums           284       294        -4
 PVNBP                   1 422     1 406        1
 Value of new business      71        58       22
 New business margin      5.0%      4.1%     0.9%


Metropolitan Retail’s earnings are down slightly year-on-year. The initial costs in setting up the
African Bank joint venture reduced earnings by around R7m for the quarter. Weaker persistency
experience also affected earnings negatively. While we are seeing improvements in the early
duration (months 0 to 6) lapses, the persistency in months 6 to 12 has weakened. Our mortality
variance was strong during the current quarter and this offset much of the negative persistency
variance.


Momentum Corporate

New business for Momentum Corporate is down 22% y-o-y. Single premium new business was
especially weak in the quarter with the R626m of new business representing roughly half of the
volumes achieved in 1Q17. Recurring premium new business was down 7% with the more stringent
pricing affecting sales. Our umbrella fund product (Funds At Work) continues to perform well in
terms of absolute sales volumes.


New business margins are down year-on-year to 0.5% (vs 0.8% in 1Q17). The main reason for the
decline is the operational gearing arising from distribution costs increasing by close to inflation
whereas volumes are down year-on-year. New business mix was positive during the quarter with
Funds At Work becoming a larger proportion of new business. Note also that we have adopted a
new approach to the VNB calculation on group risk to be more reflective of actual pricing achieved
at the point of sale rather than relying too much on the assumed long-term margin.


 Rm                       1Q18     1Q17       ?%
 Recurring premiums        163       175        -7
 Single premiums           626     1 199       -48
 PVNBP                   2 291     2 942       -22
 Value of new business      11        23       -51
 New business margin      0.5%      0.8%     -0.3%


While the new business environment for Momentum Corporate remains challenging, the earnings
recovery has been very pleasing. We have been able to adjust premium rates to restore our
corporate disability business back to break-even profitability. This together with good annuity
earnings for the quarter has resulted in overall life insurance earnings almost doubling relative to
1Q17. Overall Momentum Corporate earnings are also strongly up.


Best performing operations outside of the life insurance business were our pension administration
business (earnings roughly doubled), health administration (earnings also roughly doubled), and
Guardrisk (earnings aided by improved underwriting result).


International

International’s new business is down 4% year-on-year. Single premium volumes are up sharply but
the 12% decline in recurring premium new business offsets this at the PVNBP level. Namibia is the
largest contributor to our life insurance operations outside of SA and their sales were up 5% y-o-y.
Botswana new business volumes were also higher. These were offset by a substantial decline in
Lesotho volumes where 1Q17 included a few large Corporate new business wins that were not
repeated in the current period.


Value of new business is down by R10m. Margins in Namibia were down significantly due to higher
variable compensation expenses allowed for in the new business profit calculation. Botswana VNB
also did not track the volume growth achieved due to changes to assumed margins on the Funeral
Funder product sold in that market. We expect margins to improve in International in the
subsequent quarters as the non-recurring effect of Namibia bonus expense normalises.



 Rm                       1Q18      1Q17       ?%
 Recurring premiums        108       123       -12
 Single premiums           108        31       248
 PVNBP                     641       666        -4
 Value of new business      10        20       -50
 New business margin      1.6%      3.0%     -1.4%


Core headline earnings at International improved materially despite our share of losses on the India
joint venture increasing as the business expands its activities.


In the larger southern markets, we have seen profits increase by around R20m in Namibia and by
more than 10% in both Botswana and Lesotho. In Namibia there was no repeat of the high disability
claims evidenced in 1Q17 and the ‘expected profit’ in the life operation has grown in line with
decent new business growth over the past few years. Lesotho is benefiting from higher corporate
insurance profits than in the prior year.

We are making progress on exiting various African countries as announced in our year-end results.
We have also been able to reduce the central costs supporting the Africa operations now that the
footprint is becoming more focussed.


Our share of the losses for India has increased by around R20m but we are very pleased with the
top-line growth of Aditya Birla Health. We now have in excess of 600,000 insured lives in our India
business.


Shareholder Capital

The 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 (eg certain holding company expenses).


Earnings contribution from Shareholder Capital is down nearly R30m for the quarter. This is mainly
driven by a decline in average money market yields and the sale of a high-yielding property that was
held in the shareholder portfolio during 1Q17. The cash realised on the sale is being held in lower
yielding assets.



Outlook

Operating environment remains difficult in South Africa and we do not believe that the 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
while also investing sufficiently for the future.



23 November 2017
CENTURION


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 on 24 November 2017.

We kindly request callers to pre-register using the following link https://goo.gl/mUAufd . A passcode
and pin will be generated following registration. We advise callers to dial in 5 minutes before the
conference call starts at 12h30.

Access numbers for participants dialling live from their country:

South Africa                  011 535 3500
UK                          0 808 162 4060
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: 17040



JSE Sponsor:
Merrill Lynch South Africa (Pty) Limited

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