Junior market listed company General Accident had a strong first quarter but only because higher investment income more than compensated for a decline in underwriting profit. Can we expect the same trend for the full year’s results? Based in the key factors contributing to the increase, the answer is no.

Profit | Net profit for the quarter was $97.6 million or $0.09 per share an increase of 65 percent over the prior year results. Last year, the reported profit was $59.3 million or $0.06 per share for the same period. The quarterly results have benefited from significant foreign exchange gains.

Premium income | Gross written premiums grew to $1.15 billion, an increase of 19 percent over the first quarter last year while net earned premiums grew by 5 percent to $257 million. Management stated, “The premium income growth was driven both by the organic growth of our core commercial property and motor businesses as well as a rise in large facultative transactions.”

Management further stated in their report, “Despite increasing our net earned premiums, our combined ratio worsened from 93 percent in the first quarter of last year to 96 percent in the first quarter of 2013. This was driven mainly by an increase in our loss ratio which deteriorated from 53 percent in the first quarter last year to 60 percent this year. As a result, our underwriting profit declined from $17.6 million to $10 million”.

Investment Performance | Investment income grew 96 percent to $92.4 million. Last year, the company made $47 million of investment income for the first quarter. The returns, the company says, “represent an annualized return on our average investment portfolio of 18 percent. When unrealized losses on our available for sale investments are included, our total annualized return was 14 percent. Increases in our investment income are the result of efforts to diversify our holdings. This decision also limited our losses in the National Debt Exchange to less than $2 million.”

During 2012, the company’s investments returns was 9.58 percent including foreign exchange gains. With the exchange rate of the local currency stabilizing, large scale gains from this area could be limited going forward.

A dividend of $50 million amounting to $0.0485 per share was paid in March this year. The company says it intends to maintain the dividend policy for the remainder of the year. The policy is set out in the prospectus that was published in 2011 and states that they  pay no less than 25 percent of distributable profits per year as dividends.

Book value | General Accident ended the quarter with a book value of $1.31 billion and generated a return on average equity for shareholders of 31 percent. The company also has cash and investments amounting to $1.74 billion plus loans receivables of $384 million. Amounts that was due to reinsurers and coinsurers amounted to $790 million but amounts that are due to this same group was $1.04 billion and for clients and brokers $41 billion. Insurance reserves stood at $2.4 billion at the end of March.

Stock outlook | Looking forward, the rate of return generated on investments is high in an environment when rates on investments were less than 10 percent on most short term instruments. What clearly took place is that a large portion of the gains came from foreign exchange rate movement. The big question is, will they be able to maintain such returns going forward and if not, will the insurance claim experience be better? Last year the company earned 28 cents per share for the full year. With 9 cents already in the bag it’s quite possible to exceed last year’s earnings. Fortunately the stock is now priced quite well. Even a little disappointment on the earnings front will still allow room for some more appreciation in the stock price.