Published Date: 2021-11-24 | Source: INCE|Community | Author: The Finance Ghost
Two of the major financial services groups in South Africa released operational updates yesterday, so I decided to cover them in a single article.
Both companies fell by around 2% yesterday, so the market didn't love either of the updates.
Momentum has released an update for the three months to September and it doesn't make for pleasant reading. Profitability metrics are down, with HEPS expected to be 41% lower at 38.6 cents for the quarter.
Normalised HEPS is down 32% at 47.4 cents.
The problem isn't at the revenue level. The present value of new business premiums (PVNBP) increased by 28% and the value of new business increased by 48%.
The financial challenge in this quarter has a sad undertone. Net mortality losses of R327 million (despite prior provisions) impacted the result. The pandemic continues to take its toll on our society.
If Momentum strips out the net mortality losses and fair value adjustments in underlying investments, then headline earnings would've been within the guided range. The nature of insurance is that unpredictable outcomes are part of the business model, so it's not quite as simple as just stripping out the volatility and focusing on a core result.
Momentum is aiming for a return on equity (ROE) of between 18% and 20% by FY24. There's a long way to go from the current level of 15%.
Old Mutual has also seen a strong top-line performance in recent months, based on an operational update for the period ended September. Value of new business has come in way above the prior period, with gross written premiums up 7%.
Funds under management have increased 9% year-on-year thanks to strong equity markets. Loans and advances are 10% lower as credit criteria were tightened.
The insurer measures "Net Client Cash Flow" which was negative in this period for all the wrong reasons: higher volumes of Covid mortality claims, client disinvestments in Personal Finance and Wealth Management and large client terminations in Corporate.
It seems to my untrained insurance eye that the insurance businesses in Old Mutual are faring a lot better than the investment businesses. Old Mutual is on track to deliver its R750 million cost savings target by the end of 2022, which should support profitability even in challenging times.