M&F stock plummets

Marcia Klein

Marcia Klein

Mutual & Federal's trading update, which indicates it will move into losses for the year to December, sent its share tumbling by more than 15percent in early trade yesterday.

The update alerted investors to a trend that should be expected in the results of many insurers - that they will have to account for the huge declines in value of their investment portfolios.

Mutual & Federal said yesterday that its investment income would drop by 100percent or more due to "substantial declines in the value of listed equities", which have "resulted in investment income for 2008 reducing by more than 120percent when compared with 2007".

The company has also incurred retrenchment costs associated with its recent restructure "and certain one-off expenses associated with a strategic initiative". Collectively, these will result in a possible headline loss (earnings down 100 percent to 120percent).

It did say, however, that "following the implementation of corrective action measures in the company, the underwriting results for the second half of 2008 are significantly better than those reported for the first half of the year".

Mutual & Federal had a tough year last year, with Old Mutual first negotiating to sell it and then deciding not to.

It also dropped 600 jobs, amounting to more than 20percent of its headcount. At the June half year earnings were already down by 68percent.

Keith Kennedy, Mutual & Federal's managing director, said yesterday that the trading update should have been predictable given the slump in stock markets.

The company has to account for the lower investment value as an unrealised loss on investment income.

But Kennedy said the restructure was complete and underwriting, which was disappointing at the half year, had improved. Operationally "the fruits of our labour have started coming through in the second half".

Jan Meintjies of Gryphon Financial services said investors needed to be careful that they did not only look at the headline figure.

"Short-term companies, and life companies for that matter, are taking the movement in their underlying investment portfolios through the income statement" and considering the current market, this is not unexpected.

Old Mutual put Mutual & Federal on the market last year, and it was widely expected that its controlling stake would be sold to Royal Bafokeng.

But Old Mutual announced in November that due to "increasingly difficult market conditions and following discussions with the shortlisted bidders, the sale process has now been terminated".

Kennedy said that the company had the full commitment of Old Mutual as its controlling shareholder.

He said that while the year ahead would be tough, the restructure was complete and uncertainty over the company's ownership was a thing of the past, leaving its management "fully focused on our core business".