• Substantial Fair Value Loss: Revaluation led to a $50 million loss, primarily due to discrepancies between local currency valuations and independent USD assessments
  • The Life and Health Cluster faced a 79% profit decline due to lower investment income and currency-related losses
  • Reinsurance Cluster also struggled with negative returns on local currency assets.
  • NicozDiamond Insurance, First Mutual Properties, showed revenue growth

Harare- First Mutual Holdings Limited (FMHL) concluded the first half of 2024 with a significant loss of $33.69 million, a contrast to the $56 million profit reported in the same period last year.

This downturn was largely attributed to non-cash accounting adjustments linked to the adoption of International Financial Reporting Standards (IFRS). A key factor in this loss was the revaluation of investment properties, which resulted in a substantial $50 million fair value loss.

This accounting adjustment, coupled with other IFRS-related distortions, masked the underlying growth in the company's insurance contract revenue, which saw an increase of 160% year-over-year.

“Major distortions to the Group’s performance were noted on investment property which was valued in the prior year in ZWL which when translated to USD, following IFRS guidelines, resulted in a valuation of $178 million on 31 December 2023 compared to the independent USD valuation of $128 million. This was the driver for the fair value loss on investment property of $ 50 million,” the group’s chairperson Amos Manzai said in a statement accompanying the half year financials.

In the previous year, properties were valued in Zimbabwean dollars (ZWL) and, when translated to USD under IFRS guidelines, resulted in a valuation of $178 million as of December 31, 2023. However, an independent USD valuation pegged the actual value at only $128 million, leading to the significant fair value loss.

Revaluing investment property refers to the process of reassessing the value of a property, typically due to changes in market conditions, accounting standards, or other factors. This can result in an increase (revaluation gain) or decrease (revaluation loss) in the property's carrying value on the balance sheet.

However, revaluing investment property is not organic profit. This refers to genuine, core business profits generated from normal operations, such as sales growth, improved margins, or cost reductions. Organic profits reflect the company's underlying financial performance.

Therefore, revaluation gains/losses affect net income. However, they do not reflect the company's actual cash flows or underlying business performance.

Despite these accounting challenges, FMHL experienced a 160% increase in insurance contract revenue. However, this growth was overshadowed by the substantial losses recorded across various units, particularly in the Life and Health Cluster.

First Mutual Life suffered a 79% decline in profit, primarily driven by lower investment income and exchange losses on local currency-denominated assets. The depreciation of the Zimbabwean dollar further exacerbated the financial strain on this segment.

The Reinsurance Cluster also faced significant hurdles, with First Mutual Reinsurance - Zimbabwe reporting a loss largely due to negative investment returns on local currency assets.

This was compounded by a strategic decision to limit exposure to certain classes of risk, resulting in a decline in insurance contract revenue to $6.6 million from $8 million in the prior year.

In contrast, FMRE Property and Casualty - Botswana reported a 7% increase in ICR, achieving a profit after tax of $1.4 million, showcasing the potential for positive outcomes within the reinsurance sector despite the challenges faced by other units.

On a more positive note, some segments within FMHL demonstrated revenue growth. The NicozDiamond Insurance unit experienced a 25% increase in insurance contract revenue, reaching $19.8 million, and recorded a profit after tax of $0.7 million, reflecting resilience in a tough market.

Moreover, First Mutual Properties Limited reported a 30% rise in rental income to $4 million, bolstered by increased rental rates and occupancy levels.

Therefore, while FMHL's overall performance in the first half of 2024 was marred by significant losses, particularly in the health and reinsurance sectors, there are indications of underlying growth potential in other areas.

The company must address the challenges faced by its underperforming units, focusing on enhancing investment income and improving claims management, to stabilize its financial position moving forward.

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