HomeBusinessAt the Market with Tetrad -Investment income ensures performance

At the Market with Tetrad -Investment income ensures performance

By Brian K Mugabe

THE stock market experienced a reversal of fortunes with the seemingly unstoppable plunge towards the 300 000 points mark being checked on Wednesday, last week.



NT face=”Verdana, Arial, Helvetica, sans-serif”>Successive minor gains have since been recorded such that the industrial index closed Wednesday at 347 708 points, reflecting a week-on-week gain of 4,7%.


Those market watchers who had discounted the effects of the monetary policy statement and had predicted a bull run, or at least a recovery in the first quarter, were proved wrong as the industrial index closed the quarter 13,4% lower than the opening position of 401 543 points.


The current investment climate is fraught with uncertainties. Outstanding issues pertaining to the registration of asset management firms have cast a shadow on the stock market, with only two having been granted licenses to-date.


In addition to the overhang of more banks and asset management boutiques under threat of being placed under curatorship or closure for the latter, the fact that the central bank has decided to let individuals manage their own investments, by opening the financial bills tender to the public has not helped the situation. The possible contagion effect and counterparty risk is now uppermost in many investors’ minds.


In the midst of all this uncertainty, corporate results have continued to flow into the market, some of them really good, some average and others downright disappointing.


A common feature on many board commentaries is the forecast for a gloomy and uncertain outlook. The current forex auction rate and regulations for predominantly export based operations combined with declining local demand have repeatedly been mentioned as serious cause for concern. As they say, “uncertainty is a deterrent to investment.”


Looking at the results, this week we focus on the year to December 31 financials published by reinsurance entity Sare and short-term insurers, NicozDiamond and Zimnat Lion, the former probably ranking as the country’s biggest short-term insurer by balance sheet size. The latter two have the distinction of being borne out of mergers.


Beginning with Zimnat, gross written premium grew by 423% to $30,3 billion, 15% of which came from new business from small to medium enterprises.

Zimnat’s relatively smaller balance sheet resulted in the company ceding 51% of the written business to reinsurers compared with 46% in 2003. On the back of the reduced retention ratio, net written premium increased by a mere 381% to $15 billion.


Underwriting profit increased by an impressive 1 665% to $1,9 billion as the claims ratio improved by five percentage points to 55%. The improvement was attributed to prudent underwriting, staff rationalisation and to some extent the use of the “averaging formula”, the basis on which 80% of the claims were paid.


Investment income of $3,5 billion, driven mostly by high investment interest rates, contributed 65% to profit before tax, 15 percentage points lower than the “normal” 80%, with the reduction being a result of the collapse of the stock market after December 18. Attributable earnings of $4 billion were achieved, 542% up on 2002.


NicozDiamond achieved growth in gross written premium at a slightly higher rate of 470% to $48,8 billion as the motor vehicle class recorded a 466% growth and accounted for 70% of written premium. With the retention ratio declining marginally from 66% to 65%, net written premiums grew by 461% to $31,8 billion.


Claims and other expenses increased five-fold to $28 billion. Claim costs were restricted to a 266% growth rate while management expenses growth at 581% was in line with inflation. The net effect was the realisation of an underwriting profit of $3,8 billion which translates to 801% growth.


The bottom line works out to $10 billion, up 847% on 2002, courtesy of $8,8 billion worth of investment income, again benefiting from the high interest rates, and a $1,2 billion fair value adjustment of properties.


The results from Sare reflect a remarkable improvement in performance. Net premiums written grew by 853% to $11,4 billion while claims and other expenses were restricted to a 336% increase to $4,5 billion. With no major claims in 2003, operating expenses of $2,9 billion contributed 65% to the outflows.


After providing for the unearned premium reserve of $5,3 billion an underwriting profit of $800 million was achieved compared with a $84 million loss in the prior year.


Investment income increased by 729% to $3,6 billion with exchange gains on the sterling balances contributing 60%, with property fair value adjustments, equities and money market investments adding 12%, 7% and 21%, respectively.


Additional income of $329 million from associate Eagle Insurance Company further boosted the bottom line to $3,2 billion representing a 1 601% growth on 2002.


The company is currently in negotiations with other parties, according to a cautionary statement published last month. It is widely believed that the negotiations are with a view to merging with First Bank and NDH. If the deal comes through it would be one of many expected in the banking and insurance sectors.


The turmoil and “flight to quality brands” that is being experienced in the banking sector has also affected the insurance industry, which, in 2003 alone saw over 15 new short-term insurance companies commence operations. The hiking of the minimum capital requirements from $10 million to $800 million for short-term insurance companies, is expected to force a number of small players to merge or cease operating.


So while the bankers’ woes are highly-publicised, insurers are effectively in the same boat as it were, some possibly without life jackets.

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