SIMON BROWN: I’m chatting now with Keith McLachlan – you’ll find him at Integral Asset Management. Keith, I appreciate the early morning time. A Momentum Metropolitan trading update [came out] yesterday … for the nine months ending March. We’ll touch on that in a sec, but I’m interested in their comment around floods in KZN. Now, of course those floods were in April. They fall outside the period, but they did have some points to make around it.
KEITH McLACHLAN: Certainly. Morning, Simon. Momentum unpacked their exposure, and the moment you chop out reinsurance, they have only about R50 million that they anticipate is going to knock their fourth quarter. More importantly, this quarterly trading update for the nine months includes the Omicron wave they came through as a life insurer – well, predominantly a life insurer because they have a complex business, and there is a lot more in the mix than just life insurance – whereas predominantly as a life insurer they were more exposed to the Covid excess mortality over the last about two, I don’t know, [how many] years. [Laughing]
SIMON BROWN: Yeah, two and a bit. Overall, this trading update is longer than some companies’ set of results, and that’s because insurance is complex and because Metropolitan itself is a complex beast.
But generally a good set of numbers. I appreciate this base effect because, although there was Covid here, obviously to March of 2021 there was a lot more of it as we went through some much worse waves. But still I thought not a bad update.
KEITH McLACHLAN: I quite like this statement. If you go have a look, they specifically have a segment on the impact of the Covid-19 pandemic on the group, and they say the direct impact on the group was muted. [Chuckling]
Now, you need to realise what life insurers are selling. What they really want is a very stable environment, everyone progressively getting healthier and living longer – that pushes out when you have to pay these claims – and they want steadily rising markets. We’ve literally had the opposite of that in the last two-odd years where, ignoring the markets being volatile and the like, we’ve had a period of excess risk. So in KZN we’ve had riots and floods, and Covid has created excess mortalities.
Everyone forgets Covid also created business interruption. So, from an insurance perspective, it’s been a nightmare two years. These are really good results and it shows that, coming out of the back end of it, particularly if you look quarter-on-quarter for the various claims. They started Q1 [ of F2022, paying out R4.6 billion] in gross mortality claims. Q2 was R2.5 billion; Q3 was R1.8 billion – that’s gross, so it’s not showing reinsurance.
If you dig a little bit deeper, they’re still sitting with about R693 million in terms of Covid provisions on their balance sheet for Q4. But you can see Covid receding, and it’s not the virus. It’s the excess mortality of the virus that’s the risk in a business like this.
SIMON BROWN: Yeah. They’re not going to need all of that. The headline earnings [per share] they say are going to be, for those three quarters, R1.58. The stock’s trading at R15.80. If they make nothing for the fourth quarter – and of course they will [make something] – it puts them on a forward PE of around 10. This a good price.
KEITH McLACHLAN: I would focus more on the embedded value in Momentum. For the listeners’ benefit, embedded value is effectively where the actuaries within Momentum go and present-value all the expenses and all the costs and all the revenues and all the premiums and expected claims. Basically they’re building an actuarial DCF [discounted cash flow] – that’s what embedded value is. Okay, it’s an overly simplistic view, and they would shoot me for saying that, but that’s what it is.
Now, if you go and have a look at Momentum’s share price tracking its embedded value, its 10-year historical average is about a 17% discount to that embedded value, so the market often trades it slightly below. If you have a look at Sanlam, Sanlam trades almost one-to-one with its embedded value. This is a very key metric, but [for] Momentum at this point, the embedded value grew over this period and is sitting at R28.77, versus a share price of R15.80 and some change. It’s a 44% discount to its embedded value. This stock is massively cheap, and yet it’s experiencing tailwinds as Covid recedes [CEO Hillie Meyer and financial director Risto Ketola] clean up the group and drive earnings and embedded value. Things are moving in its favour. This is, in my opinion, overly cheap.
SIMON BROWN: Yeah. I was looking at that, and I’m trying to find the chart for it. I’ll find it and I’ll tweet it later in the day. But certainly that embedded value discount does look somewhat extreme. Keith McLachlan of Integral Asset Management, I appreciate the early morning.
Here's the embedded value chart @keithmclachlan mentioned discussing Momentum Metropolitan
— Simon Brown (@SimonPB) May 31, 2022