Solid performance for Santam's local operations, and European businesses discontinued

27 February 2008 Santam

Santam, South Africa’s largest short-term insurer, achieved a 9% increase in gross written premiums for the year ended 31 December 2007, but its international business disappointed whilst its investment income was hard hit by the recent turmoil in financial markets.

Although investment income for the year exceeded expectations, it ended well below the exceptional levels of 2006. The company successfully concluded its capital restructuring program during 2007. The STC charge on the special dividend amounted to R245 million, impacting on earnings. Headline earnings of R1 030 million were 42% lower than the previous year, equating to headline earnings per share of 906 cents compared to 1555 cents per share in 2006. A final dividend of 244 cents has been declared bringing the total dividend for the year to 410 cents, an increase of 8% from 2006.

Ian Kirk (pictured right), Santam Chief Executive, says the year under review was challenging and underwriting margins are expected to remain under pressure in the current year.

But, he says the uniquely diversified Santam is positioned well to face these challenges.

Strong action has been taken on Santam’s international operations which suffered an after tax loss of R168 million for the year.

Mr Kirk says that Santam Europe, the Dublin-based operation had not performed according to expectations and was consequently put into formal run off. Westminster Motor Insurance Association (WMIA) continued to operate in an increasingly competitive UK motor market with resultant pressure on premium rates and incurred substantial underwriting losses.

“After careful consideration of Santam’s long-term strategic objectives, it was decided to divest from its European operations.

“The process is well advanced and as a result of this, the operations of WMIA and Santam Europe are now treated as ‘Discontinued operations’, and reported as such in the group financial statements.

“From an underwriting perspective the group did very well in its core Southern African operations, showing an increase in both underwriting profit and net insurance result against 2006 and growth across most classes of business. The underwriting result of R664 million (2006: R627 million) translated into an overall net underwriting margin of 6.2% (6.5% for 2006).

“Underwriting margins for the year were in line with 2006, despite several catastrophe events, the largest of these was the floods in the Southern Cape, which impacted on profits in the second half of the year. In addition, a number of very large corporate industrial claims adversely affected the property and engineering classes of business, while the marine business incurred some large losses in the earlier part of the year. Crop insurance also suffered losses due to severe drought conditions and high incidences of hail in the summer rainfall areas.”

Investment return on insurance funds exceeded 2006 figures by 27%, mainly due to higher interest rates and average float levels (funds generated by insurance activities). The company’s operating activities generated R2.1 billion in cash during the year, which was slightly less than the R2.2 billion generated in the comparable period.

The continuing operations, excluding discontinued international businesses, achieved a net insurance margin of 9.2% for the year compared to 9.1% for 2006.

For the first ten months of the year, Santam’s investment performance benefited significantly from the strong local equity market, well ahead of 2006. However, the last two months saw a sharp decline in the value of local equities, inter alia impacted on by the negative global sentiment in the wake of the US sub-prime debt market crisis.

The result was that Santam incurred significant unrealised fair value losses during that period, reducing investment income against the exceptional levels of 2006.

During 2007, Santam distributed R3.67 billion to shareholders, in the form of normal dividends of R495.6 million, a special dividend of R2.46 billion, and the voluntary share buy back of R713 million. This is over and above the capital repayment of R1.16 billion and special divided of R760.6 million paid to shareholders during 2005 and 2006 respectively.

The voluntary share buy-back in April of 5.88% of its issued ordinary shares at R102 per share by the company, resulted in a reduction in share capital of R713 million, effectively lowering the solvency ratio by 6% at the time.

To optimise its capital structure, the company issued unsecured subordinated callable notes to the value of R600 million on open tender in May, which was followed by a further issue of R400 million in November. In terms of regulatory approval, the subordinated debt of R1 billion is regarded as part of capital for solvency purposes and has the benefit of substantially reducing the group’s weighted average cost of capital. The final phase of the optimisation process was the payment of a special dividend of 2200 cents per share in December.

The overall impact of these actions was a reduction in the group’s solvency from 62% at the end of 2006 to 42% at the end of 2007, within the target band of 35% to 45%. Net asset value per share decreased from 5634 cents at the end of 2006 to 3610 cents at the end of 2007, positioning the group to deliver increased returns on shareholders capital.

Santam’s Broad Based Black Economic Empowerment (BBBEE) structure was finalised in the past year and the first share unit allocations to its beneficiaries, who are black staff as members of the Staff Trust, were made during December 2007. The newly created BEE entity is not consolidated into Santam’s results for the year.

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