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Momentous earnings drop for Momentum

All business units impacted by low economic growth and extraordinary operating environment.
The group says remove the effects of the pandemic, and it is performing well; earnings were however down 92% in the year to end-June. Image: Moneyweb

Momentum Metropolitan Holdings CEO Hillie Meyer tried his best to put a positive spin on the group’s results for the year to June 2020 when he addressed shareholders, analysts, employees and the media in a presentation broadcast online and on DStv on Wednesday morning.

It is, after all, an insurance company’s calling to step up when things go awry.

He referred to the severe drop in SA’s GDP number, which was published just before he started his presentation, saying that the economy obviously has a severe impact on an insurance company’s results.

This is particularly true in the case of the Momentum Metropolitan group whose interests span life insurance, investments, short-term insurance, medical schemes and banking.

The Covid-19 pandemic had impacted each of these businesses, with Meyer saying that everything was going well right up to the last few months of the financial year.

Perspective

As such Momentum focused on looking beyond the current crisis.

“We are in the protection business,” Meyer reminded his audience. “We can play a positive role and smooth out the impacts of the current crisis.”

He noted that the pandemic is a severe test that has had a major impact on the economy and has impacted equally severely on Momentum’s results, but that the results are “concrete evidence that the group’s strategy of ‘Reset and Grow’ is working”.

In essence, Meyer opted to look forward to the next financial year rather than dwell on the second half of the past year that delivered a huge loss.

Management says the group was on track to achieve its target of normalised headline earnings of between R3.6 billion and R4 billion for the financial year to June 2021, until the Covid-19 pandemic started to impact SA.

Interestingly, management notes that the first Covid-19 case in SA was reported on the exact day that Momentum released an excellent set of interim results for the six months to December 2019.

Then things changed quickly.

Rapid shift

People were not only impacted in terms of health, but also financially, by the severe volatility in investment markets and in their daily movements due to government restrictions.

Meyer warned that the effects are continuing. He believes that the country will take years to fully recover economically.

He is the first executive of a large listed group that reflected – and presented detailed statistics – on the devastating death toll of the pandemic.

Firstly, he referred to the huge increase in the excess weekly death rate in SA, noting that Momentum’s own life and health insurance statistics mirrored the general trend.

Secondly, he quoted statistics from Momentum’s client base with regards to several health issues, including an increase in life insurance. However, quoting figures from Momentum Health, he noted a sharp drop in general doctor visits during the last three months of the financial year.

Claims against health insurance and medical aid products show that visits to general practitioners dropped to 40% of the normal level, while visits to dentists (who had to close during lockdown) dropped to 25% of normal levels. “We are neglecting other health aspects,” says Meyer.

That which could worsen, did

Meanwhile, Momentum was impacted by the expected increase in claims, lower new business volumes, higher policy lapses and withdrawals, lower investment returns and additional operating costs. In short, everything that could worsen, did worsen.

All this happened within the last few months. Momentum posted a headline loss of R251 million in the second half of its financial year to drag down the good numbers from the first half.

Headline earnings of R1.5 billion were 51% lower than the R3.07 billion of the previous financial year, largely as a result of additional provisions of nearly R1 billion for claims that could arise due to the ongoing Covid-19 pandemic and losses relating to policy cancellations.

Management also says that investment markets did not recover fully from the severe losses of the last quarter of the financial year – totalling net losses of R975 million for the year as a whole.

Meyer says that excluding the impact of the additional provisions and the market losses, earnings from operational activities amount to nearly R3.5 billion, which “demonstrate a continuation of the group’s pre-Covid-19 momentum and robustness of the underlying results”.

Unfortunately, there was even more bad news in store for shareholders.

Big knock on the property front

The financial statements disclosed that Momentum took a big knock for moving into a new head office.

The new building in Sandton was revalued on completion on the basis of (suddenly lower) rental rates in Sandton and put to book at this market-related value rather than the development costs.

The difference was a massive R550 million.

This revaluation, as well as the write-down of intangible assets and goodwill in some businesses, led to a decline of 92% in earnings.

Some positives

Meyer listed a bunch of statistics to show that the group is performing well, except for the effects of the pandemic. These included growth in business volumes, an increase in its footprint in the market, growth in market share and winning two large contracts that have added thousands of clients to its books.

However, he warned that the effects of the pandemic and the weak economy will be seen in 2021 and 2022, saying that it would be speculative at this point to try to predict financial results for the new financial year.

“However, we will be disappointed if the group does not improve materially on this year’s results,” says Meyer.

Shareholders will be even more disappointed. Investors seem to expect a strong recovery in earnings – evident from the fact that the current share price of R15.82 represents a high price-to-earnings ratio of more than 22 times.

 

Momentum share price

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Well done Hillie, probably the first CEO to state how buggered the economy really is. This is a sobering reality check on just how deep in trouble we really are. In typical analysis paralysis the government continues with their ‘framework’ meetings, draft bill submissions etc etc.

Get the tender’s issued and approved and start the infrastructure build programs and we might just buy enough breathing space to survive. Stop discussing what needs to be done and DO IT.

End of comments.

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