• Thu. Sep 21st, 2023

Fair Value Gains Boost First Mutual to ZWL$24 bln After Tax Profit in FY22

ByEconomic Times

May 3, 2023

By ETimes

Financial Performance Highlights

  • Listed financial services group First Mutual Holdings reported a ZWL$24 billion inflation adjusted profit after tax for its financial year ended 31 December 2022. The performance was a 110% rise from the 2021 comparative, with sizable fair value gains to the groups investment properties contributing ZWL$34 billion to the bottom line.
  • Growth in Total Income was more subdued at 32% to ZWL$97 billion, while Gross Premiums Written (GPW) were up 55% to ZWL$76.7 billion. The growth in GPW was attributed to consistent alignment of insurance policy values to exchange rate developments, and an increase in USD premiums which made up 55% of the premiums taken.
  • Total expenditures increased by 22% to ZWL$69.2 billion, and net claims and benefit payouts increased by 46% to ZWL$32.8 billion.
  • The groups operations generated a net cash flow of ZWL$18.1 billion which was an 840% rise. This supported capital expenditures of ZWL$9.1 billion.
  • Total assets stood at ZWL$167.5 billion, with cash holdings making up ZWL$16.7 billion, Investment properties at ZWL$111.4 billion and equity securities at ZWL$17.7 billion. Total liabilities stood at ZWL$99.7 billion, with life insurance contracts of ZWL$49.4 billion, short-term insurance contracts of ZWL$20.6 billion
  • The life insurance segment saw its profits climb 137% to ZWL$5.1 billion. GPW in the First Mutual Life operation increased by 26% to ZWL$7.9 billion. The growth was attributed to increased USD premiums, and the Group Life Assurance portfolio which benefited from increased employee salaries.
  • The health insurance segment saw its profits decline by 52% to ZWL$2.1 billion. Despite that, GPW increased by 31% to ZWL$30.2 billion. This was attributed to growth in foreign currency denominated policies. The claims ratio for the segment declined to 77.17% and membership growth was relatively static at 116,516. The slow growth was attributed to the declining disposable incomes, with the group pledging to invest in expanding its health care and pharmaceutical facilities to improve affordability.
  • Profit growth in the short term insurance segment was flat as the segment earned ZWL$2.1 billion. The NicozDiamond operation saw its GPW rise by 51% to ZWL$21.1 billion. Diamond Seguros – the groups Mozambique operation saw its GPW rise by 25% to ZWL$1.9 billion.
  • In the reinsurance operations, the First Mutual Reinsurance Company had a 128% rise in GPW to ZWL$7.8 billion due to increased demand for USD policies. The business incurred a loss of ZWL$675.8 million. The Botswana operation FMRE Property and Casualty had a 39% rise in GPW to ZWL$10.1 billion. The group reported improved business and confidence in the business despite the Botswana Pula losing 15.5% of its value during the financial year.
  • First Mutual Properties saw its rental income increase by 41% to ZWL$2.8 billion despite occupancies decreasing from 89.33% to 86.04%. Fair value gains to the property portfolio drove the segment to a ZWL$35 billion profit before tax.
  • The groups wealth management operation saw its investment management fees increase by 39% to ZWL$494.2 million as funds under management increased by 12% due to increased support from third party pension funds.
  • Going forward, the group will aim to continue pursuing avenues to diversify its business portfolio, expand its regional footprint and pursue strategic partnerships. The group reported that the forensic investigation into First Mutual Life Assurance Company instigated by the Insurance and Pensions Commission (IPEC) still pending finalization.
  • The group declared a final dividend of ZWL$280.2 million (made up of ZWL$146.3 million and US$146k) in addition to an interim of dividend of ZWL$73.2 million + US$109.8k.

Commentary and Analysis
The high bottomline growth was primarily due to the upward fair value adjustments of the groups investment properties. Otherwise, total income growth from core operations at 23% only marginally outpaced total expenditure growth at 22%. The rise in expenditures was largely driven by rising claims and benefits expenses while income growth was dragged by real losses worth ZWL$7.7 billion incurred from the groups listed equity holdings. Positively, the improvement in the Admin Costs to GPW ratio suggests the group was able to contain operating costs against the domestic and global inflationary pressures. Looking ahead, the short-term expectations for the group are mixed, with moderate economic growth expected to have a positive effect on consumer capacity while inflation will continue to erode disposable incomes – particularly in the civil service, a key customer base for groups health and life insurance products. The dollarisation of the groups premium takings would be expected to continue in FY23 which should offer some protection against operating cost inflation while another depressed year on ZSE stands to weigh on earnings again.

Although the groups merger with the CBZ Holdings group received regulatory approval from the Competition and Tariffs Commission, it was stipulated that acquirer and acquisition must remain as separate entities. So the extent to which operational synergies can be leveraged is unclear.
 But, looking at the long term trends, the groups gross premium takings have steadily climbed since the 2020 “peak” of the covid-19 pandemic business slump.

Perhaps unsurprisingly, its the group’s health insurance business that has been the core driver of growth in the post-pandemic environment. However, growth in the life insurance business has been noticeably subdued and remains below the pre-pandemic levels. In an environment of stretched incomes, and having witnessed the short-comings of the public health sector through the pandemic experience, it is possible that clients are prioritizing health over life insurance. Assuming its a permanent/long-term shift in behavior, it is sensible that the group is prioritizing strategic investments to broaden the range and affordability of its health insurance products. It might also be a signal for the group to realign its life insurance products to fit with the prevailing consumer attitudes.  

On the ZSE, since the start of 2022, the FMHL share has gained 4% in nominal terms and lost 31% in implied US dollar terms. The share is currently trading at a price to book ratio of 0.2x – Harare

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