Leading short-term insurer maintains robust underwriting margin

08 March 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

There is no better way to gain insight into the domestic short-term insurance industry than to place Santam Limited’s (JSE: SNT) results under the microscope. Santam boasts 22% of the domestic short-term market thanks to its ongoing focus on corporate, co

The insurer’s earnings and dividend performance reveal little about the conditions in the domestic insurance market. To find out more we need to drill down into group revenue and underwriting performances – both areas in which Santam excelled last year. This year the insurer announced double-digit growth in gross written premium (12%) and an impressive 7.7% net underwriting margin. The net underwriting result of R1.131 billion was just 1% lower than FY2010 when the underwriting margin topped a staggering 8.5%! To provide some perspective: Santam chief executive Ian Kirk is on record that the insurer is “comfortable” with an underwriting margin better than 4%.

The motor book finally “fires”

Short-term insurers have struggled with their motor books in recent years. One of the highlights of Santam’s FY2011 results is the continued strength in this segment of the business. Margins across most of the group’s significant business classes remained strong too. “The underwriting profit realised by the crop business was favourable compared to the loss-making position of 2010,” noted Santam. “And the property book performed well due to a limited impact from large industrial and fire-related claims on the net underwriting account.” The business leveraged its lower average claims cost and continuous focus on risk management to improved the quality and diversity of the risk pool, impacting underwriting margins positively.

The big disappointed through 2011 was the subdued investment result. An 11% decline in headline earnings is almost entirely due to the low fair value adjustments on listed equities… This disappointing result was exacerbated by poor investment returns on insurance funds of just R388 million (down from R395 million in 2010) due to lower interest rates. Santam confirmed its solid capital adequacy position – an important factor given the looming Solvency Assessment and Management (SAM) regulation – thanks to a steady increase in its solvency margin, from 45% to 48%.

Insurance fundamentals improved through 2011. The excellent growth in gross written premium is attributed to the upbeat business environment coupled with the successful implementation of strategic growth initiatives within the group. Recent strategic initiatives centre on the group’s distribution channels, with diversification of channels at one front, and continued improvements in the support offered to existing channels at the other.

Ongoing focus on broker distribution

The biggest challenge for short-term insurers is to get their product to the market under increasingly competitive conditions. Santam has to remain on top of its game to ensure its current 22% market share is not eroded. And to do that the group has to spend more money on distribution! As a result the net acquisition cost ratio increased from 27.4% to 28.1%. Santam hopes to reduce this ratio to 26% over the medium to long-term. Much of the 2011 spend relates to ongoing investments in the direct insurance space through the MiWay subsidiary (Santam upped its stake in this venture to 100% in the 2010 financial year). The rest is due to strategic initiatives and re-engineering of operational processes.

The year ahead

There are numerous challenges facing financial services companies. Local insurers will have to adapt to a myriad new regulatory interventions over the next few years, not least of which SAM and the Treating Customers Fairly (TCF) initiative. They will also have to forge ahead against a rather disappointing economic backdrop. In his 2012 National Budget speech, Finance Minister Pravin Gordhan revised South Africa’s GDP growth forecast downward. To make matters worse the world is pencilled in for a miserly 3% through 2012.

The performance of the rand against the US dollar and other developed world currencies poses a threat too. Local short-term insurers are cognisant of the impact of a weaker rand as reflected by upward cost pressures on motor vehicle replacement parts. Insurers, with assistance from the South African Insurance Association (SAIA), are hard at work to keep these costs in check. The bottom line is that the “soft” global and domestic economic outlook coupled with cost pressures (due to the rand and high domestic consumer price inflation) will constrain the 2012 underwriting performance. Of course, this concern should be read in conjunction with Santam’s 4% is “still ok” position, stated earlier.

It seems then that the biggest obstacle to premium growth is increased competition. Each new entrant to the market nibbles at the larger players’ market share. And that’s why Santam concludes: “Competition in the market will continue putting pressure on premium rates and prevent across-the-board premium increases.”

Editor’s thoughts: Santam/s disappointing FY2011 headline earnings performance is attributed to poor investment returns. The struggling Euro-zone has taken its toll on both capital and interest returns generated from insurer funds. But insurance brokers can take heart from the 12% jump in new business premium and continued robust underwriting margins. Do you write business with Santam? If yes – do the latest results reflect your experience in dealing with the group? Add your comment below, or send it to

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