Santam, South Africa's largest short-term insurer, experienced an excellent first half, both from an underwriting and investment income perspective, generating an annualised return on weighted average shareholders funds of 27.4% compared to 21.6% for June 2006.
Its headline earnings of R927 million for the six months of this year were 59% higher than the same period last year, equating to headline earnings per share of 803 cents, 61% higher than the 498 cents in 2006. Net asset value per share increased from 5634 cents at the end of 2006 to 5894 cents at the end of June 2007.
During April the company reduced its share capital through a voluntary share buy-back of 5.88% of its issued shares at R102 per share. This resulted in a reduction in share capital of R713 million, translating into a 6% reduction in the solvency ratio at that time.
In May 2007, it issued unsecured subordinated callable notes to the value of R600 million on open tender as alternative capital in terms of its strategy to optimise its capital structure. In terms of regulatory approval, this subordinated debt is regarded as part of capital for solvency purposes. These changes in the capital structure, as well as the high profitability of the first half of the year, resulted in a solvency ratio of 64% at the end of June 2007, compared to the figure of 62% as at the end of 2006.
Santam has also formally bedded down its Broad Based Black Economic Empowerment (BBBEE) structures following the compulsory 10% share buy back announced in February 2007. The shares are now held by the special purpose company (BEE SPV Co) formed, with 26% held by the Santam Staff Trust, 25% by the Community Trust and 49% by the Business Partners Trust. This allows staff and black strategic business partners of Santam and the broader public at large to participate, at ownership level, in the future growth of Santam.
As the newly-created BEE entity is not controlled by Santam in terms of SIC 12 Special Purpose Entities, the entity is not consolidated into Santam's results and no charge in terms of IFRS 2 has been included in the income statement for the period as share allocations have still to be made to the individual beneficiaries by the respective BEE share trusts.
Ian Kirk, Santam's Chief Executive who took over the reigns of the company in June, says Santam experienced an excellent first half, both from an underwriting and investment income perspective.
Looking forward, he said Santam would continue to build on the strong base of healthy underwriting business and aims to continue to grow its market share without compromising sustainable profitability by maintaining higher margins than the long-term averages.
"Underwriting margins are expected to remain under pressure due to the softer market conditions both for commercial and personal lines. We are continuing to take corrective action in areas such as portfolio management, where profitability is not yet at acceptable levels. There is ongoing focus on optimising the return on capital generated by our international investments."
The company decided to revise its dividend policy with respect to the ratio of interim to final dividends to reflect profitability and cash generation trends. Consequently the level of the interim dividend has been increased. The final dividend will be considered taking due cognisance of profitability of the year.
Kirk says this is merely a change in the allocation of the total dividend between the interim and final dividend and an interim dividend of 166 cents per share (2006: 118 cents) has been declared.
He said significant progress had been made in the capital restructuring of the company in the six months to June and moves were afoot to improve capital efficiency even further in the second half of the year.
"In light of the recent volatility and uncertainty in worldwide equity markets, the South African market is being affected similarly; consequently, the achievement of capital growth during the second half is uncertain. However, anticipated higher interest-rate levels will have a favourable effect on cash-related investments."
He said despite ongoing competition and the growth momentum of 2006, Santam achieved a 13% increase in gross written premiums during the first six months of 2007. International premiums increased by 36%, largely due to significant inflows in Santam Europe, while Westminster Motor Insurance Association (WMIA) also experienced healthy double-digit growth.
"Underwriting performance in Southern Africa exceeded expectations with the overall net underwriting margin double that achieved during the first half of 2006."
Profitability varied in the specialist underwriting classes with a boost from the downward estimation of large corporate claims but the continued softening of premiums, large marine losses and high claims in the crop environment due to severe drought in the summer rainfall areas of South Africa affected profits negatively.
The combined effect of all insurance activities resulted in a net insurance margin of 10.4% for the first half of the year compared to 6.2% for the same period in 2006.
Investment return on insurance funds exceeded that of the previous year by 31%, mainly due to higher interest rates and average float levels (funds generated by insurance activities). The companys operating activities generated R947 million in cash during the first half of 2007, which was somewhat less than the R1007 million generated during the same period in 2006.
Benefiting significantly from the continued bullish performance of the local equity market during the first four months of the year, investment-related income (excluding the investment return on insurance funds) was 17% higher than the exceptional performance achieved during the first half of 2006. Earnings from associated companies for the first half of the year were in line with the same period in 2006, with very good results reported by Credit Guarantee Insurance Corporation of Africa Limited and NICO Holdings Malawi.
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