Strong second half helps Santam weather the storm

• 8% increase in gross written premiums
• Significant increase in underwriting profit and net insurance result
• Solvency ratio of 44%

Against the backdrop of the difficult economic climate, a strong performance from underwriting in the second half of the year has helped Santam, South Africa’s largest short-term insurer, to a satisfactory overall performance for the financial year to end 31 December 2008.

While the group’s South African operations did very well showing an 11% increase in underwriting profit and a 30% increase in net insurance result compared with the same period in 2007, overall earnings were lower, attributable largely to the lower investment returns as a result of the decline in equity markets. Headline earnings of R659 million were 35% lower than in 2007, with headline earnings per share of 586 cents, compared with 906 cents to end December 2007. A final dividend of 264 cents has been declared, bringing the total dividend for the year to 430 cents.

Santam Chief Executive, Ian Kirk (pictured), said the group’s Southern African operations achieved an 8% increase in gross written premiums, with growth coming from most classes of business.

“Given the softer market and the corrective action taken by Santam to procure and retain quality business, especially in the corporate business unit, we are very pleased with the operational results,” said Kirk.

Santam experienced a substantially better second half of the financial year, mainly due to fewer large industrial accident and fire-related claims in the corporate business unit. The personal and commercial business classes outperformed 2007, despite several catastrophic flooding events in KwaZulu Natal and Southern Cape. Of the specialist classes, the liability and engineering businesses performed well while the crop business experienced a return to profitability. The net acquisition cost ratio of 25.2% ended below the 25.7% for 2007 as focus on cost efficiencies continued.

The net underwriting result of R739 million for the continuing operations ended 11% higher than the R664 million for 2007, while the net underwriting margin of 6.4% improved slightly from 6.2% in 2007. In addition, investment returns from insurance funds of R540 million ended significantly higher than the R319 million for 2007, resulting in a net insurance result of R1.28 billion for the 2008 financial year.

During the year, Santam also managed to successfully dispose of its European operations – showing an after tax profit of R25 million for discontinued operations for the year, compared with a loss of R168 million for 2007.

Although performance of the investment portfolio remained under considerable pressure for the year, continuing the negative trend since the last quarter of 2007, some improvement was shown in the second half. Although higher interest rates had a positive impact on cash related investments, the equity portfolio performed significantly below the performance of 2007 largely due to the spill over effect the global financial and economic crisis had on the South African equity markets. However, the company did take some decisive steps to decrease its equity exposure by disposing of R1 billion of equities as well as hedging downside risk on a further effective R0.5 billion around midyear, steps which were very significant in preserving shareholder value. The company continued to generate strong cash flows, with R1.98 billion of cash being generated by continuing operations, in line with the R1.91 billion generated in 2007.

During 2008, Santam’s Broad Based Black Economic Empowerment Scheme was finalised with the initial bridging finance being refinanced and allocations made to strategic black business partners during the second half of the year. The next allocation to black staff is expected in 2009.

“Looking ahead, we expect underwriting margins to be under pressure in 2009 due to the softer market in both commercial and personal lines, and the continuing deterioration in global and domestic economic conditions,” said Kirk. “Economic growth is expected to be subdued, which will impact adversely on the industry. However, having the benefit of diversification, Santam is well positioned to face these challenges as clients look for insurers with sound financial standing,” he said.

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