Short-term insurer set for slow but steady 2012

03 September 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

South Africa’s largest short-term insurer released its interim results for the six months to 30 June 2012 recently. Although Santam Limited announced a 29% decline in headline earnings per share the underlying business remains robust. Gross written premiu

Thanks to a solid investment performance Santam’s income before taxation of R927 million was 1% higher than the comparative period. But the group’s bottom line profit was eaten away by this “softer” underwriting result and heavier taxation. A R96 million Secondary Tax on Companies (STC) charge for the group’s 2011 interim special dividend saw the overall tax bill surge by some 84%. Santam also had to increase its provision for tax on the fair value movements of equities by some R59 million due to an increase in the capital gains tax (CGT) inclusion rate effective from 2013. Meanwhile, the drop in underwriting performance – from 8.4% to 6.1% – reflected in a 21% slide in the underwriting result from R594 million to just R471 million.

Fire and flooding eat into insurance margins

Santam said that the January 2012 Mpumalanga flooding and various large fire claims early in the year adversely affected the property book of both its personal lines and commercial business units. It seems the property book dragged down the overall performance for the period. “The motor book continued to perform well, although not at the exceptional levels reported in 2011,” notes Santam. “Margins in the specialist classes were satisfactory with the exception of the liability business in the specialist underwriting manager Stalker Hutchison Admiral (SHA) where we have seen continued deterioration in the net claims ratio”. Softer rating conditions, claims paid falling within Santam’s retention and consequent low reinsurance recoveries were blamed. (SHA has been in the news of late for its part in D Risk Insurance Consultants CC versus the FAIS Ombud and National Treasury).

Writing new business essential for long-term success

Santam is satisfied with the 10% improvement in gross written premium. This growth was achieved despite the prevailing economic uncertainty and continued pressure on consumers. The insurer attributed its success to strategic growth initiatives, most notably the diversification of distribution channels and improvements to existing channels. Positive growth was achieved across all significant insurance classes. And the group’s direct insurance outfit – MiWay – achieved its maiden profit.

The cost of doing business was marginally higher over the latest half year. Santam’s net acquisition cost ratio for the six months under review crept up to 27.8%. Management indicated that while these costs should decline in the medium to long term, some cost escalation was unavoidable due to regulatory pressures in the industry as well as the impact of investment in strategic change projects in the core Santam business.

The results afford us the opportunity to “unpack” Santam’s business. The bulk of the group’s R9050 million in gross written premium is made up of commercial insurance (R4389 million) and personal insurance (R3713 million), with the balance in the alternative risk category. If we segment the business by insurance category we find that motor (R4047 million) and property (R2 586 million) account for the bulk of its business.

Economic indicators point to subdued growth

Santam will be affected by the gloomy outlook for domestic GDP going forward. It is expected the economy will grow at less than 3% in 2012. With the rand expected to decline further against the dollar, headline inflation pencilled in at below 6% and interest rates at multi-decade lows the short-term insurance industry will struggle to match the already subdued first half performance over the full year. And when insurers struggle you can be sure the insurance premiums offered to your clients will go up! San tam admits this truth: “It is expected that while competitive forces may suppress premium rates in the short term, drivers of premium rates, being frequency, average claims cost, and reinsurance cost, will inevitably result in a hardened premium rate environment”.

Aside from passing selective risk-dependent rate increases to clients, Santam hopes to absorb certain cost increases through operational efficiencies. “Santam is firmly committed to South Africa and there is a great deal the company can still do locally,” said Kirk. Going forward the group hopes to expand its reach in the underserviced low income market and expand into Africa.

Editor’s thoughts: South Africa’s short-term insurance heavyweights seem over the moon with their direct insurance subsidiaries. Santam’s MiWay reported its first ever profit in the six months to June 2012, while Mutual & Federal’s iWYZE achieved “good revenue growth” over the same period. Are the direct insurers on track to dominate the short-term insurance personal lines space? Please add your comment below, or send it to

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