Rocky road to recovery

e chose Momentum Metropolitan Life (MML) as our hot stock for 2020 in the life sector. So it was with keen interest that I tuned in to its unusually detailed third-quarter update. MML has been improving steadily over the past three years under its reset and grow strategy.

Many financial advisers decided to support MML again on the day it was announced that the former CEO Hillie Meyer was coming back, with Jeanette Marais as deputy CEO.

Marais started the Momentum Wealth linked product operation, which is arguably the group’s core business. As soon as she came back, the fall in MML’S broker market share reversed.

The third member of the turnaround crew, finance director Risto Ketola, did not come up the ranks of group finance. Formerly a top analyst, he even relocated his SA life research operation to his native Finland for a while.

And his expertise in remote working has been helpful during the lockdown.

In an operational update, MML says profit in the March quarter increased on the previous quarter to R947m. Its lapse rate is still holding up well. Ketola says there was a 14% increase in retail sales.

To put that in context: competitor Liberty has shown growth of barely 4% over the same period.

There was a decline in Momentum Life’s sales of 3% but new investment business increased by 23%.

Corporate sales fell 70% — but a year earlier the business completed a R5bn single premium annuity sale to the Anglo American pension fund.

MML is also, finally, gaining some critical mass in short-term insurance. Guardrisk, in the corporate market, is still the main moneyspinner,

Wearning R264m in the quarter. The perennially lossmaking Momentum Short-term Insurance has now been joined by the profitable Alexander Forbes Insurance. They have a similar target market in personal lines, though Forbes is best known for all-risk products and Momentum for discrete motor and home policies.

First-quarter slump

But in the end, insurers aren’t supermarkets. Of course they make a margin on policies sold but in practice they are geared plays on investment markets. And once the first-quarter slump in equities and bonds is taken into account, MML made a loss of R284m.

Ketola tells me that the shareholders’ funds have been de-risked and now have no equities, but with a 20% fall in the stock market at the end of March, fees income has fallen on all equity unit trusts and life-wrapped products.

There is also a large smoothed bonus book, much of it inherited when Momentum bought Lifegro, Southern Life and Metropolitan. Reserves have had to be increased as markets fell.

There is also a disproportionate amount of smoothed bonus business in neighbouring countries including Botswana and Namibia.

And the increase in long-dated bond yields had an immediate impact on the profitability of the Namibian funeral book.

In fact, equity markets have had a far larger impact on results than Covid-19 infections directly. Up to May 17, MML had received only five death claims and seven income protection claims from those too sick to work.

But Covid will bite: Meyer expects that there will be a considerable increase in lapses.

The economy is expected to shrink by up to 10% this year, with devastating job losses.

With a 20% drop in the stock market at end-march, fees income has fallen on all equity unit trusts and life-wrapped products