If the special dividends that Mutual & Federal has paid out in the past five years are anything to go by, it is not difficult — as some analysts point out — to understand why London-listed South African financial services giant Old Mutual wants all of the short-term insurer.
Since September 1999, Mutual & Federal — the country’s second-biggest short-term insurer — has paid out almost R4-billion in special dividends.
It paid out an aggregate of R3-billion in three special dividends — in September 1999, December 2000 and November 2001 — and on Monday announced that it is returning about R860-million to shareholders in the form of a special dividend equating to R3,50 per share.
Managing director Bruce Campbell said the group’s solvency margin after the payment will remain strong at 43% — from 59% previously — and the board is satisfied that the capital position will be sufficient to support the current operations and facilitate further development of the business.
“We’re still comfortably above the statutory requirement of 25%,” he noted.
The special dividends reflect the strong liquidity of the short-term insurer in which Old Mutual has recently increased its stake from 50,5% to 88,1% through the purchase of Royal and Sun Alliance’s 37% shareholding after launching an assault to take out the minorities at what many — including the Mutual & Federal board — felt was an underpriced offer.
And Old Mutual is clearly not disappointed in its raised stake — especially after Mutual & Federal’s half-yearly results presented on Monday, which reflected a 19% leap in gross premium income to R3,6-billion and the company’s general insurance result improving from R213-million to R445-million as a result of the increase in underwriting surplus for the six-month period from R111-million in 2003 to R336-million in 2004.
This reflects an improvement in the operating ratio from 95,9% to 89,3%.
Commented Julian Roberts, group finance director of Old Mutual: “This is another good result, building on the strong second half of 2003 and reflecting the low claims environment over the last few months. There are indications that the general insurance cycle in South Africa is softening, and while I do not expect this level of profitability to be sustained, I remain optimistic about Mutual & Federal’s prospects for the second half.
“We are delighted with the return on our additional investment in Mutual & Federal and the synergies that are beginning to develop between our businesses in South Africa.”
The note of caution couched in Roberts’s otherwise glowing praise for the short-term insurer, which will eventually be delisted from the JSE Securities Exchange (JSE), was echoed by Campbell who was quick to point out that insurance results are cyclical by nature — and largely dependent on the weather!
He reflected that trading conditions for the period had been abnormal and characterised by lower claims volumes and in particular the absence of significant weather-related losses. He also stressed that the improvement in the value of the rand had reduced the cost of imported goods and moderated claims costs in some areas. These factors had resulted in an exceptionally positive underwriting environment that could not be expected to continue.
Nevertheless, he also pointed out that the 19% growth in premium income reflected new business acquired as well as corrective action and rating adjustments in unprofitable segments of the business.
He stated that the company had implemented certain strategic initiatives to manage supplier costs, particularly in the field of building, household goods and automotive services. These initiatives are expected to result in an improvement in the control of claims costs and ultimately the containment of the level of future premium increases.
“A specific focus of the company has been directed towards both the quality and speed of claims settlement,” commented Campbell, “and Mutual & Federal is substantially ahead of industry standards. Approximately 213 000 claims were processed during the six-month period at an average cost of R15-million per working day.”
Referring to investment income, Campbell said that interest income had declined because of the reduction in interest rates while dividend income from listed equities had increased. The value of listed equities had declined slightly during the period, in line with the JSE.
Looking ahead, Campbell indicated that the large corporate market is showing signs of rate reductions, which threatens to undermine profitability in the sector. He accordingly reaffirmed the group policy of maintaining responsible underwriting standards.
It is anticipated that market conditions in general will remain conducive to achieving a profitable underwriting result but he cautioned that short-term insurance results fluctuate and the results for the first six months are not necessarily indicative of the trend for the remainder of the year. — I-Net Bridge