Santam feels investment cycle pinch
Santam, South Africa’s largest short-term insurer, experienced a challenging first six months of 2008. From an underwriting perspective, growth and profits were satisfactory, but overall earnings for the group fell sharply due to poor investment results.
Headline earnings were R100 million or 89 cents per share, 89% lower than the 803 cents per share for the same period in 2007. An interim dividend of 166 cents per share has been declared (2007: 166 cents).
Ian Kirk (pictured), Santam’s Chief Executive, says the period under review was tough and although Santam’s Southern African operations achieved an 8% increase in gross written premium, the net underwriting result for the continuing operations declined during the first half of the year from R469 million to R326 million.
While the overall net underwriting margin remained healthy at 5.7%, Santam, like others in the industry, incurred a number of large industrial accident- and fire-related claims during the period under review which adversely affected the underwriting margin in the corporate business unit, contributing to the negative property class performance.
However, the underwriting performance of the personal and commercial business, as well as the specialist classes, met or exceeded expectations in the first six months, despite several catastrophic flooding events in KwaZuluNatal. In the specialist classes, the liability and engineering businesses performed well while the crop business experienced a return to profitability.
Looking ahead, Kirk says underwriting margins are expected to remain under pressure due to the softer market conditions both for commercial and personal lines and the anticipated deterioration in global and domestic economic conditions. In addition, the increased inflationary environment, reduction of individual’s disposable incomes and deteriorating public infrastructure in some areas also pose challenges.
Mr Kirk says Santam has made good progress in disinvesting from its European insurance operations, which was announced last year. In total the discontinued operations showed an after tax loss of R63 million for the six months against a loss of R21 million for the equivalent period in 2007.
The ongoing business operations of Westminster Motor Insurance Association were sold for a profit of R17 million, net of goodwill write-off. In Santam Europe, the run-off business showed an underwriting loss for the period due to higher than expected claim levels as well as the necessity for additional reserving to facilitate the sale of the company. The company has been sold, subject to some suspensive conditions.
Despite the lower net earnings by the group, the solvency ratio of 40% was well within the long-term target, albeit slightly lower than the 42% reported at the end of 2007.
Commenting on the investment return on insurance funds during the period under review, Kirk said as a direct result of the special dividend payment of R2.5 billion at the end of 2007, the company’s float (funds generated by insurance activities) changed from only being invested in interest bearing instruments to also include an equity component. “The benefit from the higher interest rates and average float levels, were countered by the negative equity returns during the six months. Consequently the investment return on insurance funds of R129 million reduced from R144 million. Action was taken towards the end of the reporting period to eliminate the equity exposure in the float. “
He said the performance of the investment portfolio was under pressure since the last quarter of 2007.
“Although the higher interest rates had a positive impact on cash related investments, the equity portfolio performed significantly below the exceptional performance in the first half of 2007. As previously indicated the company’s equity portfolio is overweight in the underperforming financial and industrial sectors whilst underweight in resource shares. In addition, the investment portfolio reduced substantially due to the buy-back of shares and payment of the special dividend in 2007. “
The tax credit of R7 million for the first six months of 2008 was mainly due to the large dividend income as well as differences between accounting and capital gains tax losses on the bond investment portfolio.
