Financial Reviews RESERVES' STEADY INCREASE

NZ Truth, Issue 1188, 6 September 1928, Page 16

Financial Reviews RESERVES' STEADY INCREASE

New Zealand Insurance Company's Sound Management SHARES ENJOY INVESTORS' SUPPORT

(By "Fiat Lux") The shares of the^Nem Zealand Insurance Company, Limited, have for many years past been held m high favor by the investing public. The published accounts have always provided proof that such confidence is rightly placed.

THE accounts for the year ended May 31, 1928, are no exception to the rule; m fact, the gross premium income for the period, at £1,150,232, established a new high-level record, of which, the management can he very proud iri these days of intense competition m the underwriting world. It has been stated— -by those m a position to know the facts — that it Is the company's business outside New Zealand which brings m the underwriting profits, more particularly the marine business between Britain, India and the Far Bast, and that New Zealand itself is nearer a liability than an asset on account of its admittedly high fire loss and expense ratio. ... Whilst this writer has no data upon which to base an opinion as to the obsplute accuracy of such a report, he cannot help wondering (if it is correct) how offices operating solely 'in New Zealnad have, been able, m a comparatively few years, to build up really big underwriting businesses and to accumulate enormous reserves, whilst working on exactly the same ratio as ihe company under review, Whatever the answer may be, the essential and outstanding fact, so far as investors are concerned, is that the New Zealand Insurance Company, Limited, is getting substantial profits from somewhere arid a reasonable proportion of such, earnings are finding their way into the pockets of, the shareholders by way of dividends and issues of bonuses from the reserves. Now let us examine the company's results for the year ended May 31, 1928. The gross premium income, after deducting reinsurances and return premiums, amounted to the record total of £1,150,232, . ■ against. £1,121,425

for 1927, an advance of £28,807. To meet losses which \ occurred dux-ing tne year, the

b c satisfactorily used for comparative purposes year by year. , Treating the •whole of the expenses as applies

Nsum of £694,344 was required (against I £664,684 m 1927), representing 60.3 per cent, of the net premium income. Last year the percentage was 59.2 per cent. Putting these figures m a slightly different way, <we get this result — whilst, m 1928, the premium income or gross undei'writing . receipts -were £28,807 more than m 1927, the whole pf this. gain, plus an- extra £853, was spent m meeting additional losses m 1928; thus the extra business done actually, cost thte company £853. The cost of doing business for the year, after deducting a sum of £1742, which was transferred to the credit of the investments fluctuation reserve, was £359,624, which represents 31.2 per cent, of the premium income and is a very fair' average cost. The relative 1927 figures were £338,587—30.3 per cent. ~ "Whilst on this subject of expense ratio, it is necessary- to point out that the company, m addition to its underwriting busirfess, also conducts a trust executor and agency business; whilst a trust balance-sheet is issued, it is. left to the presumption of the public that the expenses and profits from this branch of the company's activities are buried m the general profit and loss account. It has also to be pointed out that the company has an income from rents, interest, etc., averaging about £130,000 per annum and the expenses of collecting these monies must also be included m the general expenses. . Bearing these factors m mind, it is quite clear that for comparative purposes with other compan- ; ies' figures, this company's expense ratio for underwriting business cannot be accurately determined from the published account, since they must include the expenses of the trustee branch and the collection of rents and interest. The average figures can/ however,

able to the underwriting business, the net underwriting profit for' the year under review was £96,264, equal to 8.5 per cent. Of the underwriting revenue. Recapitulating, 'we get the following:— -. , per cent of net premium £ Income Losses ...-. '. 694,344 60.3 Expenses' ....... 359,624 31.2 ■ Net underwriting profit, 96,264 8.5 Net premium ...'-' Income for 1928 year ...... £1,150,232 100.0 In addition, the net underwi'iting profit of £96,264, shown above, there are the gross receipts' of- £130,272 arising from rents and interest on investments, which dim is £4914 better than m 1927. --. Hence,, adding these two totals gives us £226,536, which represents the company's total disclosed net earnings for the*year.. ..".'* ''/ Expressing these earnings as a percentage .of the shareholders' total funds of £2,400,000, shows that the company over all is earning approximately. £9 per cent, per annum .on. all its funds, which can be cohsidered quite a fair return and one which, moreover/should tend to improve slightly as the, volume of business increases and losses and expenses .ratios decrease. .--.-.' In addition to the underwriting profit and the income from rents and interest,' there . was a balance of £131,244 brought forward from 1927,

Premium Income i ■ ■■ ' y

Business Volume

I hence the , total disposable balance {amounted to £357,780, as follows: — Forward from 1927 131,244 Net underwriting profit j 96,264 Interest and rents 130,272 Total disposal balance £ 359,780 These funds were dealt with as under: — • Dividend 1/10 per share 137,500 Reserves General ..... .75,000 Investments . . 1742 Unexpired Risks 14,000 90,742 Carried forward to 1929 ' 129,538 £357,780 Now let us examine this matter of dividends, concerning which, to many people, there is. such a veil of mystery. The company's shares have a nominal value of £1, but they are .paid. up only to 16/- per share; therefore, a dividend' of 1/10 per share per annum is equal to approximately 11.4 per cent, on the amount paid up. . Yes, this is a fine return, but where can these shares be purchased for 16/---each — the market price is at least £2 each and the question is what return can one get when the shares are costing £2? , A simple calculation shows that a return of 1/10 per annum on an outlay of £'2 is only 4.5 per cent.; consequently, purchasers of these shares are receiving a very low annual return upon their outlay by way of annual dividend. But here is the explanation. For the year under review, the disclosed net profits were £226,536, but only £137,500 was distributed by way of dividend, the remaining. £89,036 being added to /the reserves. This procedure, with variations m the ' amount, has been followed for many years past, but every two years ■ ' . the directors credit I shareholders with

purposes, the annual dividend is 1/10, plus 1/- credited to share capital. Thus, we arrive at the position that shareholders are really receiving 2/10 per cent, per annum on their outlay of £2, which represents the market price of these shares. This represents 7 per cent, return, but, m addition the reserves are being built up steadily, notwithstanding this twoyearly bonus issue, which the directors have expressed their intention of keeping going until the whole of the shareholders' liability (4/-) is extinguished. So that by August, 1931, these shares should be fully paid up; then, to use a colloquialism, "there'll be something doing" m the shape of an increase of capital. Touching on this matter of reserves, their total at May 31, 1923, including taxation reserve of £ 60,000, was £1,187,312. At May 31, 1928, the total stood at £1,211,225, an increase for the period of £23,913, but m the interim bonuses declared from reserves amounted to £450,000; so that the gross accretions to reserves for the. five years amounted to £473,913 — nearly half a million sterling— and this m the face of heavy underwriting losses and bonuses to insurers m New Zealand of about 12% per- cent, off tariff rates. Yes,^ the investment is a good one, more particularly for permanent holding. The balance-sheet comparisons on this occasion have been made against the 1927 figures and show substantial increases, particularly m investments. The company's subscribed capital remains at £1,500,000 m £1 shares, but the amount paid up is £1,200,000, having been increased since the last balance by a 2/- per share bonus from reserves, amounting to £150,000. Another bonus distribution should be made m August, 1929, and a further and final one m August, 1931. The general reserve account shows a reduction of £75,000 and totals

2/- per share against the amount unpaid on the shares ; consequently, for practical

It has to be remembered that since the 1927 accounts were issued, £150,000 was distributed from this

account and ±:7&,u,uu nas gone Dacic from the 1928 profits, but this transfer was effected prior to the issue of the ; accounts. The reserve for unexpired risks has also increased by £14,000 and now stands at £575,000. Although this amount will have been arrived at as a definite, percentage of premium income, it has to be remembered that the company's loss for the year amounted to only £694,000. This critic is of the opinion, that this reserve is standing at a much higher amount than is reasonable or likely to be required. ■ Another little item which quite likely contains lots of "gravy" is the reserve for unascertained losses (£208,334). However, assuming this writer's opinion about both these items to be correct, that does not interest shareholders particularly,, since the surplus funds, if any, contained therein, are all earning good returns, and, m addition, sei-ve to strengthen the company's position very materially. The company's assets total £2,835,722 and nearly two millions of this is invested m bonds and debentures, as under :— £ Great Britain, Australia and New Zealand 1,514,234 South Africa 45,503 Canada ". ... 10,825 U.S.A; .......' 183,413 South America 63,478 Japan ...'..,.'-..... 19,294 Debentures, not Government or municipal 19,056 £1,855,803 .. Mortgages, shares, fixed deposits and premises bring the investments up to .£2,466,066, as shown m the balancesheet. . ■■<".' '■■ Are shares m this concern a good proposition at current market rates? "Fiat Lux" .believes* they are, more particularly for those who want a really permanent investment. The return is not sensational, but the reserves are steadily creeping up and the company is exceedingly well managed. ■■■''■