Momentum Metropolitan : Trading update for the three months ended 30 September 2021

Quarterly Financial

Information

Operating update for the three months ended

30 September 2021

MOMENTUM METROPOLITAN HOLDINGS LIMITED Incorporated in the Republic of South Africa Registration number: 2000/031756/06

JSE share code: MTM

A2X share code: MTM

NSX share code: MMT

ISIN code: ZAE000269890 (Momentum Metropolitan or the Group)

MOMENTUM METROPOLITAN LIFE LIMITED Incorporated in the Republic of South Africa Registration number: 1904/002186/06 Company code: MMIG

(Momentum Metropolitan Life)

Operational update for the three months ended 30 September 2021

Summary of key metrics

Key metrics		1Q2022	Restated		Δ%
	1Q20211
Earnings per share (cents)		50.6		60.3	(16)%
Headline earnings per share (cents)		38.6		65.2	(41)%
Normalised headline earnings per share (cents)2		47.4		69.5	(32)%
Normalised headline earnings (R million)		711		1 042	(32)%
Operating profit (R million)3		338		915	(63)%
Investment return (R million)		373		127	>100%
New business volumes (PVNBP, R million)		17 247		13 425	28%
Value of new business (R million)		157		106	48%
New business margin		0.9%		0.8%
Diluted embedded value per share (Rand)		27.42		26.12	5%
Return on embedded value		7.3%		6.8%
Return on equity4		15%		22%

1. The Momentum Mozambique LDA business was no longer classified as held for sale at 30 September 2020, following the cancellation of its sale due to conditions precedent not being met by the agreed deadline. When the entity no longer met the IFRS 5 requirements to be classified as held for sale, the cumulative IFRS 5 impairment recognised in previous reporting periods was reversed to the income statement instead of being restated for. 30 September 2020 has been restated accordingly. This was correctly accounted for in the 30 December 2020 reporting period.
2. Normalised headline earnings adjust the JSE definition of headline earnings for the dilutive impact of finance costs related to preference shares that can be converted into ordinary shares of the Group, the impact of treasury shares held by policyholder funds and the iSabelo Trust, the amortisation of intangible assets arising from business combinations, B-BBEE costs and the amortisation of the discount at which the iSabelo Trust acquired the Momentum Metropolitan treasury shares.
3. Operating profit represents the profits (net of tax) that are generated from the Group's operational activities and reflects normalised headline earnings excluding the investment return on shareholder funds. Comparatives are reported for the first time.
4. Return on equity expresses normalised headline earnings as a percentage of net asset value, adjusted for the items outlined in footnote 3, as well as the adjusting items to determine headline earnings. Comparatives are reported for the first time.

Strong new business performance continues

The Group continued to record strong growth in new business, despite the challenging economic environment. The present value of new business premiums (PVNBP) increased to R17.2 billion, 28% higher than the prior period. This growth was driven by an excellent performance from Momentum Metropolitan Africa, Momentum Investments, Metropolitan Life and Metropolitan Corporate.

The Group's value of new business increased by 48% to R157 million, reflecting the strong new business volumes, an improved mix towards higher margin products, and good expense management. This resulted in new business margins of 0.9%, up from 0.8% in the comparative period.

The Group delivered R711 million of normalised headline earnings for the quarter, 32% lower than the comparative period in F2021. This is a satisfactory result given the significant impact of Covid-19 related mortality losses included in this quarterly result.

The 63% decline in operating profit from R915 million to R338 million was largely attributable to net mortality losses of R327 million (net of reinsurance and tax), after taking into account the release of R1 billion of existing Covid-19 provisions. Operating profit in Momentum Investments, Metropolitan Life, and Momentum Corporate was further impacted by negative investment variances which include the impact of changes in the real yield curve due to the increase in expected inflation, and the impact of higher implied volatilities on equities on the quantum of investment guarantee reserves held. Momentum Corporate and the Non-life Insurance business unit showed solid operational growth. Investment returns almost tripled and were supported by the recovery of investment markets and fair value gains from the revaluation of the Group's investment in venture capital funds.

When we exclude the net mortality losses and fair value gains that are by nature unpredictable, the Group delivered a result within our guided range of underlying quarterly normalised headline earnings of R800 million to R900 million.

Group embedded value per share was R27.42 on 30 September 2021. The return on embedded value per share was an annualised 7.3% for the three months to 30 September 2021, assisted by an improvement in investment markets and positive operating variances. Expense variances continued to be strongly positive across the group.

Return on equity (ROE) has been established as one of the key performance metrics for the Group. While the net negative mortality experience which significantly affected our life insurance operations, hurt performance during the quarter, the Group benefited from the diversification in its earnings base and achieved an annualised ROE of 15% for the first quarter of F2022. We continue to work towards achieving a ROE of 18 to 20% by F2024 as part of our Reinvent and Grow initiatives.

The Group remains well capitalised with a strong balance sheet. The regulatory solvency positions of all the Group's entities remain within the target ranges. For Momentum Metropolitan Life, the Group's main life insurance entity, the Solvency Capital Requirement (SCR) coverage increased from 1.73 times as at 30 June 2021 to 1.78 times SCR as at 30 September 2021. This is broadly in the middle of our 1.6 to 2.0 times target range for SCR cover. This improvement over the quarter is mainly attributable to good investment performance, strengthened funding levels of discretionary participation business and a reduction in the prescribed equity stresses, offset in part by higher-than-expected mortality claims for Momentum Life.

Consolidated Group financial performance

The normalised headline earnings of the Group declined by 32% to R711 million, and include a decline of 63% in operating profit, offset by investment return almost tripling.

										Restated5
					1Q2022					1Q2021
			Operating		Investment		Normalised		Operating	Investment	Normalised
					headline		headline
			(loss)/profit		return			profit/(loss)	return
R million				earnings		earnings
Momentum Life		(3)		25		22		284	31	315
Momentum Investments		173		22		195		262	(15)	247
Metropolitan Life		63		12		75		187	17	204
Momentum Corporate		134		22		156		85	11	96
Momentum Metropolitan Health		46		2		48		56	(3)	53
Non-life Insurance		181		67		248		141	6	147
Momentum Metropolitan Africa		(83)		50		(33)		69	96	165
Normalised headline earnings			511		200		711		1 084	143	1 227
from operating business units
									(109)
New Initiatives		(159)		1		(158)		(110)	1
Shareholders		(14)		172		158		(60)	(16)	(76)
Normalised headline earnings		338		373		711		914	128	1 042

	Δ%
Operating	Investment	Normalised
headline
profit	return
earnings
<(100)%	(19)%	(93)%
(34)%	>100%	(21)%
(66)%	(29)%	(63)%
58%	100%	63%
(18)%	>100%	(9)%
28%	>100%	69%
<(100)%	(48)%	<(100)%
(53)%	40%	(42)%
(45)%	0%	(45)%
77%	>100%	>100%
(63)%	>100%	(32)%

5 Normalised headline earnings for the first quarter of F2021 have been restated to reflect minor updates to the classification of the line items between operating profit and investment return. Normalised headline earnings were not impacted.

Operating profit

Operating profit declined by 63% year-on-year to R338 million, largely due to net mortality losses of R327 million (net of reinsurance and tax) in the life insurance businesses. Momentum Life and Momentum Metropolitan Africa were most severely impacted by Covid-19 related claims during the quarter and reported operating losses for the quarter. In addition, operating profit in Momentum Investments, Metropolitan Life, and Momentum Corporate was negatively affected by negative investment variances, resulting from yield curve movements due to the increase in market implied inflation and the impact of higher equity volatility assumptions on investment guarantee reserves. Momentum Corporate benefitted from strong improvement in morbidity profits. Non-life insurance benefited from excellent underlying operational growth from Guardrisk.

Investment return

Investment return improved from R127 million to R373 million year-on-year. This includes the impact from a recovery in investment markets as well as the recognition of the net asset value of a cell recently taken over by Guardrisk. In the Shareholders segment, investment return increased significantly due to fair value gains from the revaluation of the Group's investment in venture capital funds.

Impact of the Covid-19 pandemic on the Group

At the start of the reporting period, the third wave of the Covid-19 pandemic in South Africa was in full force reaching its peak during the reporting period in August 2021. In anticipation of the expected elevated claims during F2022, the Group increased its provision against Covid-19 related experience at 30 June 2021. Due to short contract boundaries, full year provisions were not established for some business lines (notably Corporate). The total provisions available at the start of this quarter amounted to R2 029 million (net of tax). During this quarter, the provision was reduced by R1 013 million, leaving R1 016 million to be released, the majority of which is expected to be released over the course of F2022.

The change in the specific Covid-19 provision (net of tax) is shown in the table below:

Impact of provision release		Normalised headline earnings
			Non-life
	Mortality	Morbidity	insurance	Terminations		Total
R million			claims
Provision at 30 June 2021	1 854	71	54	50		2 029
Release of provision	(962)	(18)	(27)	(6)	(1 013)
Momentum Life	(459)	(9)	-	-		(468)
Momentum Investments	13
Metropolitan Life	(87)	-	-	(6)	(93)
Momentum Corporate	(390)	(9)	-	-		(399)
Momentum Metropolitan Africa	(39)	-	-	-		(39)
Non-life Insurance	-	-	(27)	-		(27)
Provision at	892	53	27	44		1 016
30 September 2021

5