Short-term insurers face challenges head on

A great deal has been said about the pressure experienced by South Africa’s short-term insurers in recent months. Mutual & Federal, which has approximately 14% of the domestic market, released a very disappointing set of interim numbers recently. Last week it was the turn of South Africa’s largest short-term insurer – Santam – to release their interim results for the six months to June 2008. FAnews Online took a quick look to see what the results revealed.

The group confirms that tough conditions have eroded investment returns while spiralling claims have hurt its commercial insurance operations. But for the most part the short-term insurance operations remain robust. And despite feeling the heat over the last six months the company declared an unchanged interim dividend of 166c per share, keeping the majority of its shareholders happy.

A satisfactory underwriting profit

Management was happy with the group’s underwriting performance as South African operations achieved a slow growth in underwriting profit for the period. Gross written premiums were 8% higher and improved in most categories of the group’s insurance business. Santam achieved an overall net underwriting margin of 5.7%, an impressive feat in very difficult conditions. This contrasts with short-term insurance competitor Mutual & Federal, which declared an underwriting loss in the equivalent period.

Management reported that margins in personal lines, commercial and special lines exceeded expectations despite a series of catastrophic floods in KwaZulu-Natal. But rising costs and claims put pressure on the underwriting result which came in at only R326m as opposed to R469m last year.

Things were not so rosy in the corporate business category. Just like Mutual & Federal, Santam noticed a huge surge in large industrial accident and fire related claims. These claims had a negative impact on the corporate underwriting margins and profits.

Poor investment performance a drag

Unfortunately, like most insurers, Santam was unable to weather the economic storm that has resulted in millions of rand being wiped off equity investments over the past year. The big blow to Santam shareholders is the company’s high level of exposure to the financial and industrial sectors, which have performed pitifully over the last 12 months. Further pressure was placed on performance due to Santam’s aggressive share buyback programme. “The equity portfolio performed significantly below the exceptional performance in the first half of 2007, especially due to a severe reduction in the value of financial and industrial stocks,” said Santam.

Poor investment results saw headline earnings come in 89% lower than the corresponding 2007 period at R100m – and headline earnings per share were only 89c compared with the 809c achieved previously. Despite this the group maintained its interim dividend payment at 166c per share.

Weathering the storm

Short-term insurers expect the remainder of this year to be tough. Santam says that underwriting margins will probably remain under pressure as both the commercial and personal lines businesses remain soft in line with global economic conditions. They say their major concerns in the domestic market include: “the increased inflationary environment, reduction in disposable income of individuals and deteriorating public infrastructure.”

But Santam is well positioned to meet these challenges. The group expects their diversified businesses to pull them through. As for investment returns – they expect further pressure on capital returns and have indicated that there’s no choice but to maintain appropriate exposure to various asset classes. Cash-related investment returns will continue to perform well given the current high interest rates.

Editor’s thoughts:
Short-term insurers face similar challenges in today’s difficult markets. Apart from increasing new business premium they have to carefully monitor claims and expenses to ‘protect’ their underwriting margins. Should Santam be happy with its 5.7% net underwriting margin? Add your comments below, or send to gareth@fanews.co.za