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Mutual & Federal Financial results for the six months ended 30 June 2006

02 August 2006 Carol Dundas

MUTUAL & Federal today (Wednesday, August 2) announced the group results for the six-month period ended 30th June 2006.

Gross Premium Income amounted to R4.3 billion (2005: R4.0 billion) which is an increase of 8% over the previous year. The General Insurance Result declined from R387 million to R281 million as a result of a reduction in the underwriting surplus from 8,2% to 3,9% due to pressure on rates and an increase in the frequency and severity of claims.

The Operating earnings per share for the six-months reduced accordingly from 159 cents to 145 cents per share and Basic earnings per share from 232 cents, by 15% to 197 cents.

The company has declared an interim dividend of 40 cents per share payable on 11th September 2006. Following an ongoing review of the efficient use of capital, the board additionally announced the payment of a special dividend of 800 cents per share payable on the same day. This represents a return of capital to shareholders of R2,3 billion or 40% of the net asset value of the company.

Says Chairman J B Magwaza: Shareholders will be entitled to elect to receive fully paid ordinary shares in the company as a capitalisation award in respect of either the ordinary interim or the special dividend. Should the election by an individual shareholder cause the creation of fractions of shares these would be rounded down and the balancing figure paid in cash. The payment of the special dividend now brings the return of capital to shareholders to R24,50 per share since September 1999. MD Bruce Campbell commented: This is indicative of the ongoing focus on optimal capital levels and finding the right balance between return on capital and risk appetite.

Campbell said that although the growth in premium income was satisfactory, it reflected the softening market and the intense level of competition being experienced throughout the sector. He noted that in the light of the significantly benign claims environment experienced in 2004 and in 2005, a number of insurers were actively seeking to increase market share by offering sub-economic premium levels. The underwriting surplus reduced from R271m in the first six months of 2005 to R140m in the current period. The down turn in the cycle had been anticipated as had the return to more normal overall claims patterns. The result is still regarded as satisfactory taking into account current trading conditions, said Campbell. Mutual & Federal, he said, remained committed to responsible underwriting standards. Our business is that of paying claims and we should not be surprised when they occur, but it is also important that we price our products appropriately, said Campbell.

A number of factors had impacted trading conditions for the short term insurance industry in the first half of 2006. The general level of commercial and industrial fire claims had increased in frequency and severity and this had negatively influenced the commercial portfolio, said Campbell. The personal division had been impacted by adverse weather conditions and an increase in losses from violent crime. The motor account reflected an underwriting deficit and continued to be impacted by an escalation in the incidence of motor vehicle accidents and the increased costs in repairing imported motor vehicles in particular. More than 40% of new motor sales are imported vehicles, and this has brought a new cost dynamic into the motor results, says Campbell.

Referring to investment income, Campbell said that interest income had increased as a result of positive operational cash flows and higher levels of cash on hand. He said that equity disposals during April 2006 had locked in some of the growth in the value of listed equities and this had contributed to the growth in net asset value per share by 4,5% to 2 028 cents. After the payment of the special dividend the solvency margin would change from current levels of 70% to approximately 40% which is considered more than adequate to sustain ongoing operations as well as future growth expectations.

Looking ahead, Campbell says: Conditions within the short term insurance market and in the economy in general provides opportunities for business growth. We remain confident that corrective action in the second half of the year particularly related to motor business would ensure that the group continues to achieve modest underwriting profits. He cautioned that short term insurance results fluctuate and the results for the first six months were not necessarily indicative of the outturn for the remainder of the year.

In conclusion he thanked the groups clients, intermediaries and staff for their ongoing support.

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