SHARES ARE VERY SOUND

NZ Truth, Issue 1208, 24 January 1929, Page 2

SHARES ARE VERY SOUND

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The National Insurance Company of

New Zealand, Limited

BALANCE-SHEET UNDER REVIEW

(By "Fiat Lux")

Although fire underwriting concerns have not been en^ jojdng very lucrative times for some years past, owing to very high fire losses, they still manage to pay substantial dividends, due principally to the income arising from the investment of their juge reserves. The Dunedin-controUed National Insurance Company is no exception to this rule.

THIS company's reserves at the end 1 of its last financial year amounted to £483,429— near1y half a million sterling— and rather more than this is invested in ': mortgages, New Zealand and Australian Government securities j^nd: .iVar Loans. These investments 'brought m. a gross revenue of £35,262 •for the year. Out of this sum, income-tax amounting to £3382 w^is paid, thus leaving a [ net lhcome,£rom this source of £81,880. ■ The company's ,12% ' per cent, dividend called for only, £37,5.00, so investorV will realize that the hulk of their dividend arose not from underwriting 'profits, but from investment income. . rt After ..making the necessary adjustSxteht m the 'figures to allow for premiums received m respect of risks unexpired, the company's net premium income' for the 1928 year amounted to £238,808 against £224 162 for 1927. The fire loss for 1928 was £135,875, an increase of £ 19,972 over 1927, so the percentage of fire •" • ■ ' ■ __ loss, to net pre- 1 mium income was 57. •■.,.,■• <. ■ .. - ' The grpss earn•ings from undei'- | ;- ' - writing amounted :."' ,■ " r-r— — — - ,tb., £102,983. These gross earnings were disposed of as . follows ;— Firstly the •working, expenses iaiv the period nbflorbed £80,553 Avhich was £3000 belpw the 1927 returns; Government taxes called for £4473 against £6957 m 1927 and bad debts required £ 260. The total of these expenses, which covered the head office as well as all branches was '£85,300, and represented 81.5 percent: of the firm's .total income including Underwriting, interests and rents.' , ; '-£8201 was trfl'nsferved into ■yavipus,; reserves, the general reserve Laccount benefiting by £5000; taxation and contingency account by £1780. and the investment fluctuation account by £1421; •..■■■■-■ .'■ . . : - ' As pointed out, the bulk of the year's dividend of £37,500 was^paid out from earnings on investments, and the • actual amount thus used was £311.886. This sum had to be augmented from the , underwriting profits

by £5620 to make up the full 12% per cent, dividend on the 6/- of paidup capital per shpre. The remaining balance of the year's earnings, amounting to £3826, was then added to the undivided balance of profits carried .. forward to 1929, and brought that item up to £36,429. To summarize the income and expenditure for the year, : it would appear as under;-r- --' } ; INCOME. . ".''■' ■. - : •••. '■ •• 'V .•• ". • & ■■■ Net premium income ; for ? year ' ■ . .'. ...-....,....;. V. . ' 238,808 V. Xiess flre losses .......... 135,875 Underwriting profit for. 1928 , 102,933 NeV income- • from investments after deduction of ' income tax .............. .31,880 Total income . .■;?■. .-. . . .* ... . £134,813 ; EXPENDITURE. Working expenses ' 80,553 Government 'taxes 4,473 Bad debts .',.... • 260 •Total expenses „ 85,286 Reserves ....• 8,201 Dividend 37,500 increase m carry forward of profit and loss account. ... ' 3,826 Total profits disposed 0f.... £134,813 Here, is an insurance company employing Over 'three-quarters of a million sterling of investors' funds, and using', only a very modest £5620 of the. year's underwriting profits to pay a 12% per cent, dividend. This writer felt it would be of interest to investors to learn just what the company's earning power has been for the year under review m relation to the total capital employed, and also what percentage the dividend bears to the shareholders' total funds. Now, the paid-up capital amounts to £300,000, and the total resei'ves at the .end of the year amounted to a further

£8201 to Reserves

£483,429, making the shareholders' funds £783,429. Upon this sum the company earned a net profit of £49,527 after payment of all expenses, but before providing any reserves or dividend. This represents £6.3 per cent, on the total- funds employed, which m these days of fierce competition for insurance business, combined with high fire loss, must be accounted a very good return indeed. Now, as to the second question — the shareholders' dividend of 9d. per share on a paid-up amount of 6/- per share is equal to 12% per cent., but expressed as a dividend upon- the shareholders' total funds of £ 783,429 the rate is equal to only £4,7 per cent. Of the £6.3 per cent, earned- by the company for the year shareholders received £4.7 per cent, and £1.6 was carried into reserve.

These results are so very far behind what was ruling- even three short years ugo that "Flat Lux" considers . a very solemn note o£ warning regarding: the ' earning

power of local m

surance companies must be sounded. Far instance, investors m this company are paying about 16/- per share on the open market for these 6/' paid-up shares upon which there is not much immediate prospect of a rise m the 9d. dividend. Thus they are investing 16/-- for a prospective annual return of 9c1., which jis equal to only slightly over 4% per cent, per annum. Four and a -half per cent, return is far below the true value of money today even when invested m, such a srlltbdged" concern as this. Counsel for the defence would perhaps claim that whilst investors m these shares at current market rates are admittedly receiving only 4% per cent, dividend m cash, a further sum equa l to an additional 1% i>er cent, is .HoirU' earned, but is being retained by the oamp'iny to augment reserves. This is undoubtedly so and does continue to add "financial strength to the concern. "Fiat L<ux" contends that the days

of huge profits m insurance m. New I Zeahmd have gone by; the creation of the State Insurance Office sounded the death knell of such and now, that the latter office, is m- such a handsome financial position it would appear to be highly probable that insurance premiums m the future will be reduced rather than remain at present levels. Consequently higher returns from investments m insurance concerns can be looked for only through the lowering of the very high fire loss •■rate. ■• ■ . '.•■-•■ Another direction m which insurance concerns might look to put their House m prder Js m the extraordinary number of branches and agencies which exist m this little Dominion. Every one is costing the insuring public real good money. i Insurance reforms and reductions are long overdue m New Zealand The writing is on the wall and now iS'the time for the local offices to get together and straighten matters out, '.:. So far as an investment m the National Insurance Company's shares is concerned, for those' who are prepared to accept the low return offering, the shares are as sound as can be found. No hesitation whatever need be felt on the score of safety of capital.

NATIONAL INSURANCE COMPANY OF NEW ZEALAND, LIMITED. Condensed Comparative Balance-Sheet, September 30, 1928. ':'■,'. ..■'' •■■':'. INABILITIES..,.. ASSETS. .Capital paid up . . 300 000 .. — Premises 149,380 *65, 516 ■Reserve fund ........ 335,000 *5000 Due on sale of pj-e-Ihvestment fluctuation 10.0Q0 *2000 mises 19,000 *i 9,000, 000 Pi'ofrt and loss . . 57,263 *2150 Mortgages ' 104J61 , t4300 f •:■' -1".. ■■ ■■■■■ ■■".. • — r • Debentures, etc. ..... 116,012 Tsooo' Shai-ehQlders' fun 6. a 702,263 *9160 War ]ouna 357,090 t25,600 Reinsucance.. reserve 102,000.' *10.000 Cash on deposit and ' Unpaid 'losses.. .' :'. 26,256 *1535 cash at bank 69R19 t11.862' Creditors .!...... 38.423*15,787 Accrued interest 9862 +217 Taxation reserve . ...» 5000. ' — Branch balances .... 47,098 *2Q58 , ;'■• , ' > Remittance m transitu 200 f3240 . £873,942*36,482 , £873,942*86,482 Ndte: ♦ Indicates increase and t deci'ease compared \vith the 1927 figures.