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A spike in short-term claims and increased spending at insurance companies OUTsurance and Discovery has knocked the earnings of holding company Rand Merchant Investments [JSE: RMI].
The financial services investment holding company on Thursday released its financial results for the six months ended 31 December 2019. The group reported a 14% decline in earnings to R1.8 billion, headline earnings per share was down from 124.9 cents to 106.8 cents. The dividend remained unchanged at 45 cents.
"This result is mainly attributable to the significant increase in spend on new strategic initiatives at Discovery [JSE: DSY] and OUTsurance and an increase in the claims ratio of the short-term insurance operations at OUTsurance following the Australian bushfires and also at Hastings," the group said.
However, it said that spikes in claims are inevitable in the short-term business and that it was "pleased" with its investments in Discovery and OUTsurance, which it said are "showing signs of market traction and success."
RMI has a 25% stake in Discovery, a 29.8% stake in UK-based insurer Hastings, a 27.3% stake in Momentum Metropolitan. It has a majority stake of 89.1% in OUTsurance.
'Devastating' bushfires
During the period OUTsurance's earnings, which include its stake in Hastings, decreased 12%. According to RMI the "devastating" bushfires in Australia severely impacted the claims ratio performance.
OUTsurance also expanded its offering and entered into a partnership arrangement with Shoprite [JSE: SHP] to distribute long-term and short-term insurance products to the retailer's client base. Funeral insurance products are expected to be rolled out during the second quarter of 2020, RMI said.
As for Discovery, the group believes it is well positioned for growth over the next few years. Discovery's normalised earnings declined 11% during the period, its subsidiary VitalityLife was negatively impacted by a decision to mitigate its exposure to interest rate declines in the UK. Discovery also dedicated more capital to its banking businesses.
RMI said it is a priority to execute on the plans for VitalityLife, which is expected to return to "robust profit" in 2021. Its new initiatives, namely Discovery Bank is also expected to gain significant traction.
UK-based digital insurance service provider Hastings earnings declined by half, with policy claims increasing on the back of increased policy volumes and claims inflation, RMI said. "The board and management of Hastings are confident in the group's profitable growth opportunities and its ability to deliver on its vision to become the best and biggest digital insurance provider, with growth in the right market conditions," RMI said. So far 2020 trading has been in line with expectations, RMI added. Hastings does not expect Brexit to have a material impact on its operations.
Closer to home, Momentum Metropolitan reported a 10% increase in earnings. "This growth was supported by a resilient performance in the core South African life insurance businesses, underpinned by disciplined expense management and steady underwriting results," RMI said. Its subsidiary Guardrisk also performed well, having sold its loss-making operations in the rest of Africa, RMI noted.
RMI however expects the Momentum's operational performance to be impacted by consumers facing increasing pressures in an uncertain economic environment.
Shareholder value
During 2019 the group's share price declined 15%, compared to 2018 when it declined 21%. In comparison, the life insurance index decreased 7% and the non-life insurance index declined 2%. However, RMI said it has managed to delver a compounded return of 16.9% to its shareholders since its listing on March 2011.
The RMI share price opened at R23.29 on Thursday. It reached a high of R23.35 by 10:00. After 13:00 it was trading 5.08% weaker at R22.81.
