Satisfactory performance by Mutual & Federal in a challenging year

08 February 2008 Mutual & Federal

Leading short-term insurer Mutual & Federal today (Friday 8 February 2008) announced group results for the year ended 31 December 2007.

Gross premium income increased by 9% to R9.3 billion (2006: R8.5 billion), in line with the company’s expectations. Claims at R5.2 billion were up 12% on 2006 (R4.7bn) and consequently the underwriting surplus for the period declined to R366 million (2007: R433 million) or a ratio of 4.6% to earned premiums (2007: 5.8%), which is above the group long-term objective of 4%.

The estimation methods used in providing for claims and other technical liabilities were further refined and this released R96 million (2006: R215 million) into the underwriting result. If these adjustments are excluded, the underwriting result improved over the previous year by R52 million.

The general insurance result for the year increased to R795 million (2006: R722 million) reflecting a satisfactory year-on-year growth of 10% and operating income increased by 22% from R1.1 billion to R1.3 billion. The rate at which investment income is attributed changed from 11.1% to 15.6% and this increased operating income by R262 million.

Investment income for the year declined by 35% to R850 million following the sale of investments to finance the payment, in December 2006, of a special dividend of R8 per share totaling R2 billion. The investment return was nevertheless satisfactory and is attributable to the performance of listed equities during the period which saw the JSE ALSI increasing by 19% following 38% in 2006.

The reductions in underwriting and investment income were largely offset by a lower tax charge in 2007 following a significant dividend tax and tax on equity gains in 2006.

Profit after tax for the year declined by 16% from R977 million to R817 million. As a result, headline earnings per share declined by 16% from 361 cents to 305 cents whilst basic earnings per share also declined by 16% from 343 cents to 287 cents.

As announced on 8 November 2007, Old Mutual plc, is in discussions with a community investment company, Royal Bafokeng Holdings (Proprietary) Limited (“RBH”), which may result in an offer being extended to all shareholders as a result of which, RBH would acquire a majority interest in Mutual & Federal. Negotiations are continuing in this regard and shareholders will be advised once further details are available.

In terms of the pending offer from RBH, the purchase price payable will escalate by 7%, but reduce by the amount of any dividend paid and the resultant tax charge. Shareholders who accept the offer will accordingly not benefit from the 7% escalation accruing in respect of the amount of such dividend (irrespective of the payment date) and the board therefore believes that it would not be in the interests of most shareholders to receive a dividend at this time. As the offer will be in respect of a majority shareholding, the board has decided to not declare a final dividend.

Commenting on the results, Managing Director Keith Kennedy said: “The financial results are satisfactory in the context of a highly competitive trading environment, and a gradual decline in the underwriting cycle following the record results achieved in 2004 and 2005.”

Gross premiums in Risk Finance grew by 7%, but the Personal and Commercial portfolios grew strongly by more than 10% during the year. This was achieved despite the cancellation of certain uneconomical blocks of business within the Personal division. The company has decided not to accept risks at sub-economic rates and has diligently followed prudent underwriting practices.

The results in the Commercial portfolio were adversely impacted by an increase in the severity and frequency of large claims, particularly industrial fires. The Commercial division nevertheless recorded a satisfactory result despite an ongoing deterioration of the motor account and aggressive competition. The management team was successful in maintaining responsible underwriting standards and did not pursue market growth indiscriminately at the expense of profitability.

In spite of strong rating adjustments and underwriting interventions, results in the Personal division continued to be negatively impacted by an increase in claims on the motor account emanating from high levels of accidents on South African roads.

Severe weather conditions experienced in the country negatively impacted both divisions in a year characterised by repeated instances of widespread storms and flooding. In Gauteng there was severe rain damage in January, and this was followed by widespread rain and tidal damage in Kwazulu-Natal in March. The Western Cape had floods in April and July, and towards the end of the year the Garden Route encountered torrential rainfall which resulted in substantial damage to property.

Looking at the prospects for 2008, Kennedy said: “Although the underwriting cycle has been declining steadily since the peak in 2004, there were signs of a hardening of rates and several insurers were increasing premiums in underrated sectors. Accordingly, the trading environment remains conducive to producing an improved underwriting profit in 2008 and although recent electricity load shedding has created substantial inconvenience to the company, it was unlikely to impact the underwriting account significantly.”

As a result of the deterioration in prospects in the world economy in 2008, Kennedy suggested that equity markets were expected to be exceptionally volatile during 2008 and the strong growth experienced during 2007 was unlikely to be repeated during 2008.

The group continues to receive strong support from intermediaries and more than 90% of the group business is conducted through the intermediary channel. Despite aggressive competition the group is confident of maintaining market share through providing high levels of client service.

With regard to the potential change in ownership, Kennedy said: “If successful, this transaction will have the enviable effect of creating the largest black-owned financial services company in South Africa. If not, then we will continue to benefit from the strong relationship that we have always enjoyed with Old Mutual”.

In conclusion Kennedy thanked staff and management for their contribution to the performance of the company during the year. He said that the company was indebted to clients for their ongoing support, and to the numerous intermediaries who continued to support Mutual & Federal during the year.

Click here to view the financial statement as at 31 December 2007 (PDF file 32kb)

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