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At The Market With Tetrad

Investment income props up Zimnat

By Admire Mavolwane

WHEREAS their closest counterparts, the banking stocks, have since found favour with investors, the “pariah stock” tag appears to

have remained stuck on the insurance companies as investors continue to shun the sector, notwithstanding some impressive results.

Zimnat Lion and NicozDiamond, who released their half year results on the same day last week are the two short-term insurers of the sector whose financials we review in this week’s column.

Starting with Nicoz, gross written premium increased by 531% to $107 billion, driven mainly by the inflationary upward revision of covers and to a lesser extent, a 45% growth in new business. The reinsurance ratio was maintained at 29% which saw net premium written income growing by 526% to $76,1 billion.

Claims incurred and commissions, at $57 billion, experienced a 463% increase with the growth in commissions being in line with that of retained and new business as the company enjoyed good support from brokers.

Cost controls, especially rentals and personnel related expenses, proved to be a challenge, with the former increasing by as much as 2 000%. This saw operating expenses surging by 1 021%, wellahead of revenue growth.

Underwriting profit performance however remained strong, increasing by 693% to $9,3 billion, a commendable achievement in this environment.

Investment income was negatively affected by the bearish stock market and low interest rates obtaining in the money market, experiencing a 404% growth to $8,4 billion.

Accounting for income from the regional initiatives, in the form of management contracts of First Insurance Company of Uganda and United General Insurance of Malawi which were acquired from parent company ZimRe Holdings Ltd saw inflows of $118 million being recorded.

Attributable earnings of $14,1 billion were achieved up 528% on the prior year and comfortably ahead of inflation.

Gross written premium growth for Zimnat was a relatively disappointing 245% to $42,3 billion.

The sluggish growth was attributed to the softening of the insurance cycle as a result of the suspension of premium financing by finance houses, self insurance, under insurance and loss of business to competitors charging lower premiums, the latter as competitors “chased cashflows as opposed to profitable underwriting”.

The retention ratio weakened from 65% to 58% thus diluting the increase in net written premium to 208%, resulting in a figure of $24,7 billion.

An underwriting loss of $2,2 billion was recorded compared with a $288 million profit in the same period last year.

Conservative reserving and additional costs arising from the purchase of a new reinsurance treaty programme, among other factors, contributed to this loss.

Investment income increased by an impressive 743% to $9,3 billion. Whilst being affected by much the same factors as Nicoz, Zimnat benefited from the revaluation gains on unquoted equities of approximately $4,2 billion.

Attributable earnings grew by 438% to $5,9 billion courtesy of relatively better performance of investment income.

Both companies haveembarked on regional forays with NicozDiamond acquiring a 40% stake in First Insurance Company of Uganda as well as the management contract in Malawi.

Zimnat Lion on the other hand acquired the management contract of Botswana Insurance Company which is controlled by TA Holdings. The company also has a management contract in Uganda. So the race is on for the two both locally and regionally.

Econet recently published a cautionary statement, the subject of which is the agreement between the JSE-listed Allied Technologies and Econet Wireless Global and other parties.

Shareholders were advised that some of the conditions precedent have been fulfilled and the transaction now awaits approval from the Reserve Bank of South Africa among other aspects.

Of major interest to shareholders is the planned cash offer from Econet Wireless Global for the 14% of the issued shares of Mascom currently owned by T S Masiyiwa Holdings, a subsidiary of Econet Wireless Holdings.

This stake was acquired last year through the issue of shares to the majority shareholder which resulted in a significant dilution for minorities.

The rationale then was the fact that Mascom, being a foreign asset, could be leveraged upon in sourcing loans as well as assisting the group with foreign currency much needed for capital expenditure.

Details of the cash offer are yet to be announced and the disposal will be subject to exchange control, Reserve Bank of South Africa, ZSE and shareholders’ approvals. Should the cash offer be approved, many minorities will feel that they would have been done in twice. The benefits of the transaction which resulted in the significant dilution have hardly been realised yet the said asset is now seemingly for sale!

Shareholders obviously now await further information on the deal but already the transaction is being viewed with a lot of suspicion. This does not augur well for the reputation of the group and, ultimately the share price.

Still on suspicion, the recent cautionary from ZimRe Holdings conflicts with the sentiments expressed by the board at the AGM, when shareholders were assured that the problems affecting the non-performing ZimRe South Africa, among them non-compliance with the statutory solvency margins, were being resolved.

The board was actually optimistic that the provision of $6,3 billion that was booked in December 2003 would be written back in the second half of this year.

On the contrary, shareholders were advised in the latest cautionary that the company (ZimRe SA) has been placed under curatorship in an effort to “safeguard shareholders’ interests and preserve the business”.

A cash injection and shedding of non-core investments in SA are being considered to improve solvency.

In the meantime, an additional provision has been made and will be reflected in the half year results.

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