Fitch Affirms South Africa's Momentum Group's IFS at 'AA+(zaf)'; Outlook Negative
Fitch Ratings-London/Johannesburg-04 December 2009: Fitch Ratings has today affirmed South African-based Momentum Group Ltd's (Momentum) ratings at National Insurer Financial Strength (IFS) 'AA+(zaf)', National Long-term 'AA(zaf)' and its subordinated debt at 'AA-(zaf)'. The Outlooks on IFS and National Long-term ratings are Negative.
The affirmation reflects Momentum's well-established and strong domestic franchise, diversified business position in South Africa, good capitalisation levels, its strong affiliation with FirstRand Bank Limited ('AA(zaf)'/Negative Outlook) and its strong and diversified distribution network. Partially offsetting factors include ongoing reform discussions in the contractual savings market, strong competitive pressures and a challenging operating environment in the near-term due to consumer, regulatory and competitive pressures.
The Negative Outlook reflects ongoing concern over the potential impacts of volatility in the equity markets and challenging economic conditions on Momentum's capitalisation and earnings.
Momentum's ratings take into consideration its position within the FirstRand group as an integrated financial services provider. Momentum is one of the five largest life insurers in South Africa and the company has taken measured steps to expand and diversify its business towards providing a broader wealth offering. Momentum's expansion of its health business, locally and into the rest of Africa, has been assisted by acquisitions. Fitch believes that Momentum's ability to leverage off the FirstRand group will help alleviate execution risk pressures in its strategic initiatives and, together with its track record of product innovation and the strength and diversity of its distribution network, will allow it to remain competitive.
Momentum's statutory CAR cover strengthened to 1.8x at 30 June 2009 (end-FY09) from a pro-forma CAR cover of 1.6x at end-FY08. Due to Momentum having a 30 June year end, its end-FY08 statutory CAR cover was not subject to the revised CAR formulae which came into effect on 31 December 2008; however, Momentum did apply the revised formulae to its FY08 numbers, resulting in a pro-forma CAR cover of 1.6x. The improvement in CAR cover was due to the larger proportional increase in FY09 in the statutory surplus (resulting from the positive contribution by Momentum's attributable earnings) to ZAR7,108m (FY08: ZAR6,114m) compared to the increase in statutory CAR to ZAR3,843m (FY08: ZAR3,775m on a pro-forma basis). The increase in statutory CAR stemmed from the negative impact that declining equity markets had on smoothed bonus reserves and minimum maturity guarantees. Momentum's CAR cover remains strong and above the upper-end of its targeted range of 1.4x to 1.6x. Fitch's expectation is that Momentum will manage its capital within this target range and this is consistent with the rating level.
Normalised earnings fell 18% to ZAR1,649m in FY09, due to volatile investment markets and a substantial combined withdrawal of ZAR30bn of asset management funds by two significant clients. As a result, return on equity (ROE) and return on embedded value (ROEV) reduced to 23% and 3%, respectively (FY08: 30% and 15%, respectively), although Fitch notes that such deterioration is reflective of an industry-wide trend. Total new business inflows were down 7% to ZAR60,470m and were attributable to lower retail recurring sales and lower inflows in the asset management business. Despite this, good sales growth was achieved in the employee benefits business and FNB Insurance business (Momentum cross-sells insurance products through FNB, the retail banking arm of the FirstRand group). New business margins on a present value of future premium basis reduced slightly to 2% in FY09 (FY08: 2.1%).
Contact: Nicole Gibb, Johannesburg, Tel: +27 11 380 0909; Harish Gohil, London, +44 (0) 20 7682 7264.
Media Relations: Hannah Warrington, London, Tel: +44 (0) 207 417 6298, Email: hannah.warrington@fitchratings.com.
Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(zaf)' for National ratings in South Africa. Specific letter grades are not therefore internationally comparable.
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