The penny drops at short-term insurer
On 8 May 2008 Mutual & Federal (JSE: MAF) issued a brief trading update for the first quarter. The statement was short and to the point; but not overly negative. M & F announced that gross premiums to March 2008 were up 6% (to R2.6bn) on the back of highe
The trading update coincided with an M & F decision to award a “late” capitalisation award for the 2007 financial year. A capitalisation award involves the issuing of additional shares to shareholders in lieu of a cash dividend. This concession came after heavy lobbying from shareholders who were incensed when the group failed to declare a final dividend for that year. M & F has since announced that the owners of more than 244 million of its shares had elected the capitalisation option with the balance preferring the cash alternative. The group paid out R67.531m and issued just more than 18m new shares.
In March, Shareholders were dealt another blow when the much anticipated takeover deal with Royal Bafokeng Holdings failed to materialise. M & F first issued a cautionary through the JSE SENS news system in November last year. They announced that Old Mutual was in talks to sell its controlling interest in M & F to an interested party. The cautionary was renewed in December 2007 and again in January 2008. But talks were called off when the parties couldn’t agree on a ‘reasonable’ price in light of the severe decline in the financial sector.
Around 600 jobs have to go
Aside from the dividend dispute and cancelled takeover talks it looked like ‘business as usual’ at one of the country’s largest short-term insurers. But looks can be deceiving... On Thursday, 3 July 2008 M & F announced that it would reduce its 2 724 (at December 2007) strong workforce by approximately 20%. And that means 544 (the media reports 600) of the company’s employees will have to seek employment elsewhere... The group has already indicated that staff will be offered early retirement or retrenchment packages as appropriate. There are also a number of existing ‘vacancies’ that will no longer be filled.
M & F chief executive Keith Kennedy claims these job cuts have nothing to do with financial pressures. Instead he says they’re part of a long-overdue restructuring which would result in a more efficient operation. There’s plenty of evidence to suggest that economic factors had more than a small part to play in the group’s decision. You cannot open a newspaper these days without reading an article about the struggling consumer. 10 interest rate hikes in the last two years have pushed the debt servicing ratio to 11.8%. Economists warn that when this ratio reaches 12% a ‘crisis’ exists.
As real disposable income falls, affordability becomes a major issue. That’s why Standard Bank’s latest house price index shows an 11% decline in the median house price for June 2008. And that’s why new vehicle sales were down 23% in May and another 21% in June. Bank repossessions are on the rise too… In January a survey of the country’s major vehicle financers suggested around 4 000 vehicle repossessions per month. Today the number is closer to 5 000!
Short-term insurers will share in consumers’ pain
When consumers are forced to cut expenditure one of the first things they sacrifice are the so-called ‘grudge’ purchases. If you’re forced to choose between your mortgage or hire purchase payment and your short-term insurance premium the choice is not that difficult to make. Likewise, you’re going to forego your insurance premium before you cut back on essential groceries. Declining vehicle sales and climbing repossessions will eventually hurt the short-term insurers too. Let’s do a quick calculation to determine just how serious the situation is. A quick look at the National Association of Automobile Manufacturers SA reveals total new passenger vehicle sales of 192 232 for the year to June 2008. This is 36 823 units less than in the preceding year – or 36 823 less opportunities to write new business!
As economic conditions tighten we expect more companies to follow M & F’s example in cutting their workforces. In fact many companies in the motor manufacturing industry have already started cutting down on their contract workforce hours… And there are some early indications that permanent staff retrenchments will soon follow.
Editor’s thoughts:One of the unpleasant results of recession is a decline in employment numbers. Mutual & Federal’s 600 job cuts may be explained away as a corporate restructure; but there’s little doubt the company was struggling with increasing claims cost and a dented underwriting margin. Do you think other insurers (short or long-term) will have to reduce their staff complement? Add your comment below, or send it to [email protected]
