If the saying “you’re only as good as your latest performance” holds, then South Africa’s leading short-term insurer is very good indeed. The Santam executive team can afford a few moments of self-congratulation after the group posted an impressive financial result for the year to 31 December 2010. Highlights included a 51% improvement in headline earnings, strong cash flows, healthy solvency and a total dividend of 510c per share. The “old hands” in the short-term insurance industry will no doubt welcome the group’s impressive underwriting result too. Santam’s underwriting margin turned around from 3.5% in 2009 to 8.5% last year! Shareholders will no doubt be chuffed with the 37% return on weighted average shareholders’ funds.
Santam has dominated the domestic short-term insurance landscape for decades. At the beginning of 2011 the group’s 2 500 staff and 6 000 broker partners ensured the company held on to 22% of the domestic short-term insurance market. The group’s “yellow umbrella” stretches the length and breadth of South Africa – providing peace of mind to most of the Top 100 companies listed on the JSE, to small and emerging businesses, to farmers and to Joe and Jane average!
The nuts and bolts of Santam’s 2010 result
Financial services companies publish reams of data at their financial year end, but you can cut to the chase by turning immediately to the bottom line. In the latest 12 months Santam achieved an impressive 51% jump in headline earnings to R1.545 billion. And headline earnings per share increased to 1367 cents against the 906 cents achieved in 2009. The latest group result suggests the company is strongly back in the driving seat after a couple of extremely difficult reporting periods.
A measure of modern business success is how a company manages its cash. The group reported a strong 17% improvement in operating cash flows, up from R1.8 billion in 2009 to R2.1 billion last year. There was enough cash on hand to declare a final dividend of 325 cents per share.
Short-term insurance on the rebound...
It’s not difficult to pinpoint reasons for Santam’s impressive year. The company’s net underwriting margin – an indication of the profitability of a short-term insurer’s underwriting activities – improved to 8.5% from 3.5% last year. As a result the group’s net insurance result topped R1.146 billion, a whopping 153% improvement on the comparable period. Ian Kirk, Santam CE, says margins in all major classes were satisfactory, with especially good turnarounds in personal motor lines and property. Each of these categories was in the red for the previous period.
Kirk attributes the strong 2010 performance to lower claim costs and the group’s enduring focus on risk management and operating efficiencies. The underwriting performance from the agriculture book was less impressive due to large weather-related claims. As the first quarter of 2011 draws to a close we can’t help but wonder whether this performance can be repeated. Santam had heavy exposure to the farming and riverside communities so badly affected by the December 2010 / January 2011 flooding.
Investment income was on par with 2009 and net earnings from associated companies was up by R26 million. Analysts expect this “segment” of the business to perform strongly in future years… Santam recently acquired the remaining 33% of Centriq Insurance Company and now holds the voting equity interest in Emerald Risk Transfer (Pty) Ltd. The company also increased its shareholding in Indwe Broker Holdings and MiWay Group Holdings to 100%!
Potential for further profit, but...
The company could find it difficult to repeat its 2010 performance this year. Although the group is nicely positioned to benefit from the ongoing economic recovery, Kirk warns that premium increases will be modest through 2011, and new business difficult to come by. Kirk hopes the group’s geographical diversification and reinsurance protection will steer it through the challenges ahead.
Editor’s thoughts: Santam’s latest results suggest the short-term industry is on the front foot. The company has, however, warned against a possible contraction in underwriting margins through 2010 due to huge agriculture and personal lines claims in the wake of nationwide flooding, January 2011. Does the Santam result tie in with your experience of the short-term industry last year? Add your comment below, or send it to gareth@fanews.co.za
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