Mutual & Federal Insurance Company Limited - Annual Results for the year ended 31 December 2006

08 February 2007 Clear Distinction

Mutual & Federal today (Thursday 08 February 2007) announced the results of the group for the year ended 31 December 2006.

Gross Premium Income amounted to R8,5 billion (2005: R8,0 billion) which was an increase of 7% over the previous year.  The General Insurance Result declined to R744 million from R832 million but the operating ratio of 93,9% (2005: 91,6%) is considered to be satisfactory.

Net income for the year has declined following the anticipated decrease in underwriting profits, reduced returns on listed equities and the payment of a special dividend which has reduced investable funds by R2bn and increased STC payable. Headline earnings accordingly declined by 39% from 592c to 361c whilst the basic earnings per share declined by 39% from 560c to 343c. Operating earnings per share declined by 13% from 345c to 301c.

The directors have declared a capitalisation award with a cash alternative of 135c, (2005:115c) an increase of 17% bringing the total normal distribution for the year to 175c (2005:155c) per share...

Comments on results

Commenting on the financial results, Managing Director Bruce Campbell said that the group had refined the estimation methods used in the calculation of technical reserves in the light of current business and accounting practices. This refinement has favourably impacted the underwriting surplus in 2006 by R215m. The 2006 results were nevertheless satisfactory following the record levels of underwriting profitability achieved during 2004 and 2005 and were in line with changes in the underwriting cycle and a return to normal claims patterns.

He noted that the decline in underwriting profitability was particularly noticeable in the Personal Division where intense competition hampered efforts to implement the required rate increases.  The motor account was severely impacted by an increase in the incidence of motor accidents and the continuing escalation in repair costs. In addition substantial weather related claims were experienced during the year.  In February 2006 Gauteng experienced particularly severe rain and hail and this was followed by significant storm damage in Namibia during March, in Kwazulu Natal during June, widespread flooding in the Eastern Cape in August and further storms during November in the summer rainfall areas. 

The Commercial Division experienced a satisfactory result in a year that was characterised by downward pressure on premium rates. A number of insurers were actively seeking to increase market share by offering sub-economic premium levels. Mutual & Federal, Campbell said, remain committed to maintaining responsible underwriting standards.  

High levels of competition within the market made growth difficult to achieve. Although Campbell would expect growth in excess of inflation plus GDP, the group did not pursue growth indiscriminately at the expense of profitability and the 7% growth in premium income to R8,5bn was satisfactory.

Despite the overall reduction in investments which was required to finance the payment of the special dividend, investment income of R1 306 million for the year was highly satisfactory. Iinterest income had increased as a result of positive operational cash flows and listed equities performed strongly during the period.

The payment of the special dividend of 800c per share in September 2006 substantially impacted the change in net asset value which declined by 31% from 1 943c to 1 342c. Notwithstanding this payment amounting to R2 billion, the group maintained a strong solvency position and the margin was in excess of 49% at year end. The payment additionally boosted shareholder returns and the return on the lower capital base was 27,5% (2005: 27,4%).

Referring to the final dividend of 135c, Campbell said that this reflected an effective increase of 59% taking account of the reduction in capital arising from the special dividend. The total ordinary dividend of 175c for the year reflects the resolve of the company to maintain the solvency margin at the target level of approximately 40%.

Looking to the year ahead, Campbell mentioned that there were indications of insurance rates firming following the sharp decline in 2005 and 2006 and it was anticipated that the underwriting margin would remain in line with the companys profitability objective. Growth will remain a challenge but is expected to be higher than the amount achieved in 2006. Investment performance for 2007 was expected to be more subdued relative to 2005 and 2006.

The company continues to enjoy exceptionally good relationships with intermediaries who conduct the overwhelming majority of insurance business within the sector.  Management is determined to maintain high levels of client service and accordingly remains confident of achieving real growth despite intense levels of competition.

In conclusion he thanked group clients, intermediaries, management and staff for their ongoing support.

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