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Excellent Santam financial results - improved underwriting and risk management

01 March 2011 Santam
Ian Kirk, Santam CE,

Ian Kirk, Santam CE,

Improved underwriting margins and a steady focus on risk management help Santam return excellent results for 2010

*­ 51% increase in headline earnings per share
* ­ Significant improvement in underwriting margin from 3.5% to 8.5%
*­ Return on weighted average shareholders’ funds of 37%
*­ Strong cash flows generated
* ­ Healthy solvency ratio of 45%
*­ Total dividend of 510 cents per share

SANTAM has returned excellent results for the year ended December 2010. Headline earnings were 51 percent up at R1,545 million. A final dividend of 325 cents per share has been declared.

Headline earnings per share increased to 1,367 cents against 906 cents in 2009. The company’s net underwriting margin improved to 8.5 percent (from 3.5 percent last year) culminating in a net insurance result of R1,146 million, 153 percent higher than 2009’s R453 million. Investment income was on par with 2009 and net earnings of R69 million from associated companies were up by R26 million. The return on weighted average shareholders’ funds was a pleasing 37%.

Operating cash flows were 17 percent higher at R2.1 billion against R1.8 billion in 2009.

Ian Kirk, Santam CE, says margins in all major classes were satisfactory with especially good turnaround in personal motor lines and property that were both negative in 2009. However, weather related claims put pressure on underwriting performance in the agriculture business.

The property portfolio showed good turnaround mainly due to fewer large industrial fire and accident claims. Underwriting margins were improved this year thanks to overall lower claim costs and Santam’s enduring focus on risk management and operating efficiencies.

Interest rate reductions, Kirk said, had a negative impact on returns on cash and money market instruments. However, it assisted bond returns. Equity markets rallied towards the end of the year, offsetting lackluster performance during the first half.

Santam acquired the remaining 33 percent holding in Centriq Insurance Company during the period. It also acquired all of the voting equity interest in Emerald Risk Transfer (Pty) Ltd to bring specialist underwriting skills in corporate property into the fold. The group increased its effective shareholding in Indwe Broker Holdings and MiWay Group Holdings to 100 percent. Both MiWay and Indwe will continue to be managed independently.

Based on interaction between SARS and Santam, it was deemed prudent to make a provision for an additional tax liability of R267 million. As the provision relates to the period up to and including 2008, it was made in the form of a prior year restatement to the opening consolidated statement of financial position of 2009.

Santam was well poised, Kirk said, to make the most of steady economic recovery. He expected low inflation and interest rates in the first half of this year, and GDP to be slightly higher than it was in 2010.

“However, premium increases in 2011 will probably be modest and growth will be a challenge.”

Moreover, he anticipated claim costs to come under pressure because of flooding in the summer rainfall region of the country. However, the group’s geographical diversification and reinsurance protection should contain losses. The value of the rand (especially in regard to motor vehicle claims where the cost of spare parts was especially vulnerable to currency fluctuation) would probably impact the cost of claims. However, Kirk said, diversified business lines at Santam would equip the group well to meet these challenges.

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