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South Africa’s largest short-term insurer reports another strong underwriting performance and a further special dividend despite volatile investment markets

28 February 2012 Santam

¬ Weighted average return on shareholders’ funds of 25% ¬ Net underwriting margin of 7.7% and net insurance margin of 10.4% ¬ Growth of 12% in gross written premiums ¬ Group solvency ratio at 48% ¬ Headline earnings per share of 1 216 cent

SANTAM, South Africa’s largest short-term insurer, today reported strong underwriting results for 2011 while also achieving a 12 percent growth in gross written premium. Underwriting results were almost on par with the outstanding results achieved in 2010. Investment results however were negatively impacted by challenging equity markets and a low interest rate environment, leading to a 11 percent drop in headline earnings at R1.376 million, or 1 216 cents per share.

The solvency margin increased to 48 percent, up from 45 percent in 2010, exceeding the long-term range of between 35 percent and 45 percent. A solid 25 percent return on average shareholders’ funds was also achieved.

The Santam board has declared a final dividend of 355 cents per share and a special dividend of 850 cents per share, the fifth special dividend paid by Santam since 2004.

“Santam turned in another strong underwriting performance thanks to continued discipline in assessing and pricing risk,” said Ian Kirk, Santam CEO. “Santam is determined to continue to focus on underwriting profitability to improve the quality of earnings. This will help offset any impact from reduced investment income tied to economic challenges that we do not control.”

The company’s net underwriting margin remained strong at 7.7 percent against 8.5 percent in 2010, culminating in a net insurance result of R1,131 million, 1 percent lower than 2010. Margins in most of the significant business classes were satisfactory with the motor book performing exceptionally well. The property book performed strongly due to a limited impact from large industrial and fire-related claims.

Underwriting profits of the liability class was on lower levels in 2011 than the very high levels achieved in 2010 mainly due to a revised approval to claim estimates during the year. The alternative risk transfer class suffered a loss due to a large single loss on medical cover business that was subsequently cancelled.

In general, lower average claims cost and a continuous focus on risk management improved the quality and diversity of the risk pool.

The net acquisition cost ration of 28.1 percent increased from 27.4 percent in 2010. The increase is tied to strategic investments, including the continued investment in MiWay and re-engineering activities.
Investment returns on insurance funds of R388 million decreased from R395 million a year earlier, due to lower interest rates.

The combined effect of insurance activities resulted in a net insurance income of R1,519 million or a 10.4 percent margin, compared to R1,542 million and a margin of 11.4 percent in 2010. Performance of the investment portfolio was under pressure due to equity market volatility. Dividend income was 27 percent higher than for 2010 while interest income was negatively affected by a reduced interest rate environment.

The weakening of the rand during the second half of 2011 had a positive impact of R90 million on the valuation of our foreign currency assets. Net earnings from associated companies was R85 million, a direct result of improved earnings of key associates Credit Guarantee Insurance Corporation of Africa Ltd and NICO Holdings Ltd in Malawi.

On 1 March 2011, Santam acquired 55 percent of the voting equity in Mirabilis Engineering Underwriting Managers (Pty) Ltd (Mirabilis) by merging its construction and engineering business into Mirabilis. The new merged entity is the leading engineering underwriting manager in the South African market. Following the increase in the shareholding in MiWay Group Holdings (Pty) Ltd to 100 percent from 31 percent in 2010, the deferred purchase consideration on this transaction was settled in cash during 2011.

Looking forward, the weakening of the rand is expected to put some upwards pressure on claims cost, most notably on the cost of motor vehicle repairs due to the increased cost of imported vehicle parts. However, Santam is optimistic that our continued efforts to reduce claims cost would offset some of the upwards cost pressure. It is expected though that the underwriting margin in 2012 may be lower than the levels achieved in 2011.

Finally, competition in the market will continue to put pressure on premium rates and prevent across the board premium increases. Nevertheless, Santam is positioned to manage increases selectively through our market and risk segmentation approach.
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