Is Metropolitan stumbling?

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Policy lapses hit Metropolitan profits

Full-year HEPS drop 7%.

Negative cash flow, billions in fund outflows and dropping new business margins.

JOHANNESBURG - On the face of it one can paint a negative picture of Metropolitan's (JSE:MET) results quite easily: negative operational cash flow for what is claimed as the first time ever, a few billion rands of funds snatched away and new business margins halved. Moneyweb delves into the fog.

Preston Speckmann, group financial director, dealt with all of these issues.

He says the group's operational cash flow was negative, to the tune of R475m for the year ended December 2009 versus a positive R1 455m in 2008, due to the loss of around R3bn of funds under management.

The R3bn is divided up into R2.2bn in "single premium" funds and a R889m "absolute return fund" that were removed from Metropolitan's management. Speckmann says the mandates were lost in the normal course of business, not due to any unhappiness.

This feeds into the operational cash flow because, Speckmann says, the financial services group banks the future profits upfront.

This means that profits that would've been earned from the date the mandate was cancelled have to paid over to the new managers, resulting in cash actually flowing out of the business. The converse is also true, that new funds under management have a positive cash flow impact due to the upfront banking of future profits.

The termination of the R3bn in mandates also resulted in what appears to be a shock plunge in "net funds from clients" of -65% and total claims for all businesses rising 74%. Normalising total claims, so removing the cancelled mandates, claims rose 2%.

Focus then turns to new business margins, seemingly collapsing from 16.4% to 8% for annual premium equivalents (APE) and present value of premiums (PVP) going from 2.8% to 1.6%. Speckmann identifies two ongoing problem areas that hit margins, namely Direct marketing and Odyssey.

Speckmann explains that those businesses have been dealt with as unprofitable products have been closed down. Excluding the below average businesses, margins are within the target range at 12.3%.

On the back of FirstRand's (JSE:FSR) Momentum results, it is noticeable that Metropolitan carries high levels of capital with its capital adequacy ratio at 3.7X versus Momentum at 2X. Speckmann explains that Momentum carries more cash as capital whilst Metropolitan has more market risk through its equity and other instrument exposure.

This carries the cost of having to carry much higher capital levels.

So all in all the concerning figures have clear reasons behind them and CEO Wilhelm van Zyl says he is optimistic going forward. Are executives ever not optimistic?

Write to Chris Blaine: chris@moneyweb.co.za