N.Z. Insurance Assists Some Market Recovery

Press, Volume CVIII, Issue 31731, 15 July 1968, Page 19

N.Z. Insurance Assists Some Market Recovery

After the strong reversal of the previous week, trading on New Zealand stock exchanges last week returned to more normal conditions, the market over-all being slightly easier on a much higher volume.

Good news by New Zealand Insurance, which raised its dividend from 12 to 14| per cent, sparked considerable interest in insurance and other leaders and this will affect the Reserve Bank share price index for the week to July 11. N.Z. Insurance rose 26c to -318 c and the attendant reaction by other leaders will militate against the excess of falls over price rises for the week.

Anticipation of what the Budget will contain when it is released this week has not been great. Most expect that it will hold little that will affect the sharemarket.

The increase in dividend by N.Z. Insurance is an indication of the windfall the three listed insurance companies have received from devaluation. National Insurance last week rose 20c to 380 c to give a yield of 3:4 per cent on the 13 per cent dividend, and the 400 e paid for South British on Friday gives a return of 3.8 per cent, assuming that the company pays a total dividend of 15 per cent. It raised Its interim from 5 to 6 per cent in April and paid 14 per cent last year. At 318 c, N.Z. Insurance’s yield is 4.8 per cent, which

• compares more than favourably with the other two com- ! panies. Dividend Cover However, in the previous year, while South British was able to cover its 14 per cent dividend 1.7 times, and National Insurance its 13 per cent dividend 2.5 times, N.Z. Insurance could only cover its 12} per cent dividend 1.5 times. Thus, to be able to afford a higher dividend, which on last year's results would be covered 1.2 times, N.Z. Insurance would need to return a

better performance in its latest year to May 31. Insurance companies receive their earnings from two basic sources, underwriting incotne and investment returns. One of the functions of the second source is that it is a buffer against a bad year in the underwriting field. Because of the uncertainty in this Held, no forecast can be made as to what the surplus will be for any one year. Last year the surplus for N.Z. Insurance was $956,258; in 1966 it was $870,162. South British’s underwriting surplus in 1967 fell $60,775 to $1,467,767, and that for National Insurance fell $9279 to $357,777. The investment income, with the exception of National Insurance in 1967, has shown

a steady increase for each company over the last few years.

In 1967 the percentage of this return matched against the total income before tax and depreciation for each company, wig National Insurance, 44.7; N.Z. Insurance, 64.8: South British, 61.0. Apart from National Insurance, the investment income represents the greater proportion of the total income, and it la this that is expected to rise this year. Devaluation Effect The main basis for this rise has been devaluation which has meant that the overseas earnings will, when expressed in New Zealand dollars, be shown tn the profit and loss account at higher figures than the year before. For South British, 40 per cent of its premium income was earned in Australia, and the other two companies also have large overseas business. The more interesting aspect of devaluation is its effects on the value of assets held overseas. South British’s net assets would have risen $7.2m at the August 31 balance-date on the post devaluation rate, the increase for N.Z. Insurance at May 31 would have been $6.5m, and that for National Insurance at August 31, sl.6m. Bonus Issues This will mean that in the current year these companies will have increased their capital reserves out of which bonus issues normally are made because they are exempt from income tax in the hands of shareholders. If the increased investment income is sufficient to offset any decline in underwriting profits and still leave ample for dividends of 14 per cent and upwards, then the alternative in future years is bonus issues. This would obviate the alternative of raising dividend levels- in line with increased profits, perhaps at the risk of demands for higher wages from employees and lower premiums by customers. Better Returns If a bonus issue were made, and the dividend reduced so that the payout was no greater, then the natural increase in the price of shares, plus the gradual raising of the subsequent dividends, would give shareholders far greater returns than just higher dividends, especially if the tax element is taken into account This bonus prospect is the main reason each of the insurance companies is priced at more than three times its par value. For uncertainty lies not so much in. the possibility of a bonus issue, but more on what terms this expected issue will be made. Herein lies the valuation of the shares on the stock market which shows a preference for South British, followed by National Insurance and N.Z. insurance. T. J. Edmonds The announcement of a one-for-eight bonus and a one-for-eight premium issue by T. J. Edmonds on Friday was not unexpected. The controlling interest in Graham Stewart and Company was paid in cash and although the company at its last balance date was comfortably liquid, this move was not anticipated in the chairman’s review which outlined substantial expansion for the current year. Edmonds eventually is likely to seek stock exchange listing but at present has an insufficient spread of shareholders to meet one of the listing requirements. The demand for the 100 c shares has always been high and last week there were no sellers meeting a buyers' quotation of 350 c. The bonus and the premium issues will allow any issue to outside shareholders possible which might meet listing requirements and at the same time have little effect on the control of the company.