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MMI refocuses on South Africa

Will it generate earnings momentum?

MMI Holdings is to home in on its South African operations as its exit from a number of African markets aided core earnings growth amid challenging trading conditions.

The insurance group reported no growth in diluted core headlines earnings of R3.2 billion for the financial year ended June 30 2017 as underwriting losses and weak investment market performance came to bear. However, an improvement in Corporate and Public Sector mortality profits as well as a decision to exit some countries provided some respite.   

Mary Vilakazi, deputy chief executive and group finance director, said the decision to exit Swaziland, Zambia, Mozambique and Mauritius came after two years of strategic deliberations. Over the period, the insurance group considered whether their rest of Africa businesses had a “right to win” in their respective markets as well as the effort required to run them.

“A lot of the businesses in the Africa portfolio were quite small and even if we did make a big success of them, it wouldn’t really move the dial in terms of MMI’s earnings. In South Africa, we are market leaders in certain aspects and there is room to grow in others. We took a decision to make an additional effort to focus on South Africa as we are more likely to make say R50 million in South Africa faster than elsewhere.”

The decision to renew the group’s focus on its home market, despite a deterioration in the consumer environment, is in anticipation of a turn in the economic cycle. “It is a through-the-cycle decision. If we don’t do it now, when the economic cycle turns we will be left behind,” she added.

She told Moneyweb that the decision to exit the unprofitable markets and subsequent restructuring of central support systems could result in cost savings of between R100 million to R200 million over the next two years. She said the restructuring is more likely to result in a reduction in the headcount of consultants on the ground in those countries rather than in South Africa. At present, around 30 South Africa-based employees fulfill support roles for the countries and the restructuring could see them redeployed to provide support services for MMI’s businesses in Botswana, Namibia and Lesotho, in which the group sees growth opportunities.   

The insurer is also betting big on India, where it reported good progress in its partnership with the Aditya Birla Group, the third largest private sector conglomerate in that country. From December 2016, when the venture began, to March 2017 it insured over 200 000 lives through 2 000 agents and gained access to 1 500 hospitals, chief executive Nicolaas Kruger said.

Read: Will MMI’s bet on India pay off?

The Aditya Birla business as well as aYo its 50-50 joint venture with MTN, both of which were included in the group’s annual results for the first time, incurred start-up losses of R90 million and contributed to MMIs losses from international operations increasing to R166 million. Vilakazi said the group would focus on upping Aditya Birla’s scale and penetration in India while aYo is still in the trial stage in Uganda.

Read: MMI, MTN JV not ‘highly capital intensive’ – MMI CEO

MMI is to pump the majority of its planned capital spend into Aditya Birla and its partnership with African Bank in South Africa. The Metropolitan @ African Bank branded partnership will see it involved in insurance, banking and lending in the domestic market.

Domestically, Momentum Retail earnings fell 15% to R12.7 billion. The segment, its largest South African business, reported a 9% decrease in new business to R228 million while the present value of new business premiums fell 3% to R22.8 billion.

Momentum Retail’s earnings decreased by 6% to R660 million. Its value of new business fell 7% to R178 million, however the present value of new business rose 5% to R5.2 billion.  

Momentum Corporate and Public Sector’s earnings increased by 23% to R835 million. But competitive pricing in the industry saw its value of new business fall to R68 million from R199 million while the present value of new business premiums decreased by 11% to R11.1 billion.

Overall new business fell 23% to R547 million.

The group’s embedded value dipped to R42.5 billion from R43 billion. As a result, its embedded value per share of R26.51 came in 1% lower than sell-side consensus. Its return on embedded value fell to 4.7% from 12.8%.

Listen: MMI: Tough economic conditions impact profits

MMI maintained its full year dividend at 157 cents per share, which remains above its cover range. Vilakazi said that while the group was now comfortable to declare a dividend beyond its coverage range, it cannot be sustained indefinitely.

Shares in MMI closed 1.96% lower at R20 per share, on a day when the financial index gave up 1.87%.  

Adrian Cloete, a portfolio manager at PSG Wealth, said MMI is trading at a 23% discount to its embedded value. He said the market has yet to give the share price the benefit of the doubt in terms of the progress being made in its short-term insurance venture and health  scheme, adding that the share price should increase as these results filter through to the bottom line.

Momentum Short-term Insurance sales increased 20% while its claims ratio improved to 73% from 82%. Momentum Health scheme grew its membership by 10.6% to 158 624 and is expected to generate more than R200 million in earnings in the next year.

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