M&F braces for first loss in six years

JOHANNESBURG – The South African short-term insurance industry has been hit hard by depressed equity markets, with Mutual & Federal (M&F) saying last week that it would report a loss for the first time in six years and analysts expecting Santam to also post bruised earnings for the past year.

A Cape Town-based insurance analyst, who did not want to be identified because of his company policy, said this was not unexpected, due to huge capital losses on the market.
‘I personally think that the trading update was positive due to a turnaround in underwriting results,’ he said.
M&F underwriting profit had improved in the second half, it said.
At the interim stage, M&F recorded an underwriting deficit of N$23 million. It said it had implemented several corrective measures, such as better risk selection and the elimination of poorly performing lines.
But substantial declines in the value of listed equities had resulted in investment income for last year sliding into deficit, said the company.
Like most listed short-term insurers, M&F had invested money from policyholders on the stock market. This was lost as the stock market failed to perform in the past year.
According to Bloomberg, the FTSE/JSE Africa all share index fell 26 per cent last year, after rising 16 per cent in 2007.
The M&F announcement shocked the market: the share price dropped by 15,03 per cent to N$13,51.
Bloomberg described the drop as the steepest intraday decline since September 2006. It added that the stock price had lost 43 per cent in the past 12 months, wiping billions of rands off the firm’s market capitalisation.
Keith Kennedy, the chief executive of M&F, said that falling equity values and persistent volatility had been evident in financial markets across the globe, and South Africa was no exception.
‘A significant portion of the investment losses for 2008 are unrealised, relating to equity stocks that we still hold, and the company would thus benefit from any recovery in prices,’ said Kennedy.
‘Also, these investments are in solid and reputable blue chip stocks.’
The company had also incurred retrenchment costs associated with the recent restructuring, as well as certain one-off expenses associated with a strategic initiative.
Kennedy added that these were non-recurring costs and a number of them represented an investment in the company’s future.
Staff structuring had now been streamlined and the move to a less decentralised operating model positioned the company well.
An analyst said that most listed short-term insurers would have to brace themselves for tough times ahead.
He added that Santam should also be expected to show weak International Financial Reporting Standard earnings, or even a loss, because of a depressed investment market.
Santam is currently in a closed period and will release its results next month.
Rajay Ambekar, a portfolio manager at Cadiz African Harvest Asset Management, predicted that bad news for Santam lay ahead, as the company had the same issues to deal with as M&F.
But Ambekar said South Africa’s short-term insurers were well-capitalised and would not go bankrupt.
Late last year Old Mutual decided to withdraw the sale of M&F, as it became difficult to find buyers because of the global economic downturn.
Royal Bafokeng Holdings (RBH) had wanted to buy M&F, but the parties would not agree on the price, with RBH saying that the insurance company had not been doing well.- Business Report