Short-term insurer positioned for a better second half

Gareth Stokes, FAnews Online Editor

Short-term insurer Mutual & Federal (M&F) made heavy going of the first six months of 2009. Challenging trading conditions aside, the group suffered a spate of large commercial claims in the first quarter, with the result that underwriting margins declined significantly. Net income decreased from R4 309 million (in the first half of 2008) to R3 913 million in 2009, while profit before taxation decreased to R135 million. Headline earnings per share fell to 48c from the previous 58c. Despite maintaining positive cash flows from operating activities, and sitting on reasonable cash balances, the board decided not to pay an interim dividend. “In light of the need to build solvency levels and conserve capital, an interim dividend has not been declared,” said the group.

A tough business environment

We interviewed M&F chief executive, Keith Kennedy, shortly after the group’s interim results presentation held in Rosebank on 29 July 2009. Kennedy admitted that the first six months of 2009 were extremely tough. “Gross premiums are down 7%, and we’ve seen reducing numbers on Allsure (our personal lines business) and in the commercial area, and there’s no doubt that consumers are feeling the pinch with job losses and soft pay increases,” said Kennedy. He also observed that a number of small commercial enterprises have shut their doors. Pressures in the general retail sector were forcing small businesses to streamline operations with resulting pressure in the commercial insurance space. “Lapse ratios have picked up a little bit on previous years, but not significantly in the personal lines business,” said Kennedy. He believes that insurers that differentiate by price – the low-price offerers – will probably be more susceptible to lapses on the personal lines side.

Claims ratio on the rise

The insurance claims ratio crept up over the period from 71.4% to 73%. We asked Kennedy whether this was cause for concern and what the optimal level would be. “We’d certainly like the claims ratio to be under 70%, in fact mid-60s would be lovely!” said Kennedy, adding that the claims ratio was the big driver of the results. One of the big problems is the fire section under the fire and perils category. There has been an alarming increase in the number of fire claims in excess of R5m. The rising trend started in 2007 and spiked even higher in the second half of 2008 and first half of 2009. It’s difficult to isolate reasons for the increase. Kennedy singles out ageing infrastructure and a lack of skills management in risk areas within large corporations. We’ve heard directors at other short-term insurers question the overall risk assessment process at the underwriting stage too.

The big disappointment for the half year was Credit Guarantee: “There business is absolutely linked to the economy,” said Kennedy. “They’ve been producing great results for a sustained period, but they took a big hit in the first quarter of 2009.” The division should return to profit in the second half after a significant second quarter turnaround.

The new buzzword – cautiously optimistic

In recent times financial services companies have suffered dismal performances on their investment accounts. “We weren’t happy with our investment performance last year – and as a result we’ve been far more conservative this time round,” said Kennedy. The group now faces the tough decision of when to channel its cash funds back into equity markets. “Greed can drive you to the market too early, or leave you in there too late,” said Kennedy, stressing that the group would remain conservative for the remainder of the year. “It’s our duty is to protect the shareholder and policy holder funds, and that’s what we’re doing,” he said.

Positioned for growth

The big challenge for all financial services business in the coming month remains the recessionary pressures on the economy. We asked Kennedy how the business would forge ahead against the backdrop of 270 000 job losses in the first quarter. “It’s worrying, because those are potential (or existing) clients without a job,” said Kennedy. The increase in retrenchments is one of the reasons the group is positioning cautiously for the next six months.

Kennedy is confident the second half of 2009 will show a marked improvement. He is happy with the turnaround on the motor account and says that the business is moving ahead with its new systems and business models. The recent restructuring has kept base costs under control, with a moderate 2% increase in the first half. This performance is unlikely to be repeated by any of the group’s peers. After recent high-level appointments the group will also have a full executive team from the first week in August 2009.

Editor’s thoughts:
M&F has experienced a moderate increase in lapses in the personal lines space. But there’s no doubt that tougher economic conditions will force consumers to reassess their monthly expenses. What impact will rising retrenchments have on new (and existing) business in the short-term space? Add your comments below, or send them to gareth@fanews.co.za