Satisfactory underwriting performance in a turbulent year at Mutual & Federal
Mutual & Federal today announced its Annual Results, reporting that the company had maintained a strong position in the industry during the year. Keith Kennedy (pictured), Mutual & Federal Managing Director said: “Despite significant uncertainty in world financial markets, Mutual & Federal enters 2009 with a revised and streamlined operating structure that will enhance future growth and profitability.”
Gross premium income decreased by 2% to R9.2 billion (2007: R9.3 billion), with the commercial portfolio increasing by 6%, offset by a 10% decline in the personal portfolio. According to Kennedy, “This was not unexpected as we implemented various corrective measures during 2008. We disposed of underperforming business last year and underwent a substantial organisational restructure. This all forms part of our strategy to gear Mutual & Federal up for future growth, and we have already started to realise some of the outcomes of our strategies in the second half of 2008, where the results are significantly better than earlier in the year.”
Following corrective measures taken in the underperforming group schemes area, together with a more favourable claims environment, underwriting profit for the second half of the year improved significantly resulting in an overall final underwriting result of R299 million (2007: R366 million) representing 3.9% of earned premiums (2007: 4.6%). If the 2007 figure is adjusted for a R96m release from reserves which occurred in that year, the underwriting profit increased by 11%. The general insurance result decreased by 3% to R775 million and operating income similarly decreased by 3% to R1.2 billion.
Even though fire claims escalated during the first half of the year in both frequency and severity, the claims costs for the entire financial period decreased by 2% to R5.1 billion, a ratio of 67.1% (2007: 65.9%) of net earned premiums. There was an increase of 40% in claims over R5 million and an increase of 50% for claims over R0.5 million, mainly from commercial fires that negatively impacted the results.
“Overall, the insurance results are satisfactory, especially when one takes into consideration the increase in large fire claims. The Mutual & Federal management remains committed to producing good underwriting profits in 2009.” says Kennedy.
Group interest income for the year grew by 36% following a succession of interest rate increases and significantly higher cash balances. However, total investment income for the year declined by 117% to a loss of R146 million following the global economic downturn, which caused sharp declines in the value of listed equities. The decline in investment income includes losses on the realisation and revaluation of shares which amounted to R604 million in contrast to a R466m surplus in the prior year. Headline loss per share was 41 cents, a decline of 113%, primarily due to a reduction in the value of equities. As a result of the earnings risks posed by the ongoing uncertainty and volatility of the global financial markets, the board of directors has decided not to declare a final dividend.
The solvency margin (being the ratio of net assets to net premiums) calculated on an international basis declined marginally from 42% to 41% due to the reduction in the value of listed equities, but is above the target range of 35% to 40%. Consequently, Mutual & Federal retained its AA+ credit rating awarded by Global Credit Rating Company, meaning that customers and intermediaries can be assured of its continuing claims-paying ability.
Kennedy says that prevailing negative economic conditions are expected to further dampen levels of consumer spending in 2009 and will inevitably inhibit growth within the short-term insurance industry. “There is an increasing risk of commercial business failures, and we are unlikely to see meaningful growth in personal lines business.”
During the year Mutual & Federal changed to a new business model, moving from a decentralised to a regionalised operating model in order to achieve greater efficiencies. This entailed the roll-out of state-of-the art technology systems and a staff reduction of over 600 positions. As a result, once-off retrenchment costs were incurred. The retrenchment costs together with expenditure associated with the termination of a strategic project intended to generate growth from a number of different channels resulted in non-recurring write-offs of R200 million. The project was abandoned when it proved to be ill-timed in relation to the global economic downturn. Although the company took a full write-off in 2008, the intellectual property from the project will be put to good use at an appropriate time.
In November 2008, parent company Old Mutual terminated plans to sell Mutual & Federal. “Old Mutual has reaffirmed that we will remain an integral part of their group, ending a period of much uncertainty and speculation,” says Kennedy.
Mutual & Federal continues to pursue several strategic initiatives in order to maintain and improve its market position. The company will focus on the effective selection of risk through its data mining capabilities and business intelligence. Its operational restructuring and enhanced use of technology positions the group well to deliver sustainable growth in the future. In addition, there are also several initiatives in supply chain management aimed at cost containment of claims and high levels of service.
Kennedy thanked management and staff for their commitment during a challenging and turbulent year, and extended his appreciation to intermediaries and clients for their continued support.
In conclusion, Mutual & Federal announced that Mr. Robert Michael Head, a non-executive director of the board has resigned following his appointment as Regional Director, Old Mutual Europe and welcomed Mr Steffen Gilbert (FIA) who has been appointed in his stead. Kennedy also announced the appointment of Caroline da Silva as Executive General Manager – Business Development & Sales with effect from 01 May 2009. “Caroline is a well known insurance professional with extensive industry experience and we are delighted to have her on board”, said Kennedy.
