Santam’s earnings dip on tougher trading conditions

Santam, one of the country’s leading short-term insurers, announced its full-year results to 31 December 2007 yesterday. The highlight section leading in to the full report was void of the usual bullet points trumpeting massive increases in premiums earned, profits and earnings per share. These bullet points were replaced with less glamorous general comments, including: Core SA underwriting business performing well; strong cash flows generated; special dividend of 2 200 cents per share paid in December; capital restructuring completed and BBBEE transaction progressing as planned! Who can blame them – you’d hardly want to begin an annual results presentation with “Profits plummet 42%!”

Net premiums show a slight increase

Net insurance premiums for the 2007 year were 11% higher than previously. The total came in at R10.716bn. Despite the moderate improvement, increased insurance claims and benefit payments and higher administrative costs contributed to a large decline in profit. The group reported R1.076bn, 42% down on the 2006 number of R1.867bn and in line with the trading update issued earlier this year.

Gross written premium for the year came in at R13.173bn with four insurance classes accounting for the bulk of this total. They were Motor (R4.941bn), Property (R3.719bn), Alternative Risk (R1.780bn) and Liability (R1.068bn). It is interesting to note that Motor insurance accounted for 37% of the total – which is in line with the figures quoted for the insurance industry as a whole during a SAIA and Business Against Crime South Africa presentation we attended recently. These premiums can be further categorised as commercial insurance (R6.6bn), private insurance (R4.793) and alternative risk insurance (R1.780bn)

Santam believes the core South African underwriting business performed well. “In the Southern African operations, excluding cells, Santam achieved an 8% increase in gross written premiums. Given the soft market and the corrective action taken by Santam to retain and procure quality business this is a pleasing result.” Despite tough conditions, underwriting margins were in line with the previous financial year. Santam managed an overall underwriting margin of 6.2% (compared with 6.5% in 2006). The group notes that “the second half of the year proved to be more difficult than the first.” The main reasons for this were catastrophic events, specifically floods in the Southern Cape. Santam also received “a number of very large corporate industrial claims [which] adversely affected the property and engineering business classes.” In the comments to the financial results the group also mentions large losses in crop insurance due to drought and high incidences of hail in the summer rainfall areas.

Difficult trading conditions

Santam was not able to escape the sell-off in domestic equities during the last quarter of 2007. They acknowledge that “because of the group’s exposure to equity instruments, its investment results were negatively affected by the recent turmoil in financial markets.” However the group will not shift from the long-term equity investment strategy to the detriment of shareholders.

While the South African operations performed admirably in tough conditions, things went pear-shaped on the international front. Santam announced an after-tax loss from international operations of R168m for the year, compared to an R70m profit in 2006. The group’s UK outfit (Westminster Motor Insurance Association) struggled to make headway in an increasingly competitive UK motor insurance market. The result: After careful consideration of Santam’s long-term strategic objectives it was decided to divest from its European operations.” We are certain many Discovery shareholders wish that Adrian Gore had taken similar decisive action on Destiny Health, Discovery’s struggling US operation when it first showed signs of strain.

The year ahead

What does Santam expect in the 2008 year? It seems underwriting margins are foremost on the mind of all short-term insurance executives. Santam believes these will “remain under pressure due to the softer market, both in commercial and personal lines.” Furthermore the company is worried about the impact on margins of deteriorating economic conditions, both locally and abroad. And they picked up on something FAnews Online has covered extensively in recent times – the impact on personal disposable income of rising interest rates and cost price inflation.

The group warns that “the reduction in the disposable income of individuals, uncertainty in electricity power supply and deteriorating public infrastructure” will all have a negative effect in the next 12 months. Another concern is the impact of poorer equity performances on the capital growth in the group’s investment portfolio. The impact of this has already been demonstrated in the 2007 results.

How will the short-term insurance giant deal with these challenges? Santam believes the group’s diversification will see them through. They will also benefit from higher interest rates which “have a positive impact on [the group’s] cash-related investment returns.

Editor’s thoughts:
The short-term underwriting margin of 6.2% is certainly not the worst the industry has ever experienced. Do you think this margin will come under further pressure in 2008 – or have we seen the bottom of the curve? Send your comments to gareth@fanews.co.za, or add them below.