Strong underwriting return suggests the short-term insurers are back

08 September 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

For some time South Africa’s short-term insurers have complained of tough underwriting conditions. The ratio of claims payouts to premiums collected was simply too high, especially for the personal lines: motor business. Over the past few reporting periods the likes of Santam Limited – South Africa’s largest short-term insurer – have taken steps to address this problem. The hard work is clearly paying off, as reflected in the title of the group’s interim results press release: “Outstanding underwriting returns drive excellent results for first half of 2011.” The group wastes little time before trumpeting its successes.

The bulk of the fanfare is reserved for the impressive 8.4% net underwriting margin which goes hand in hand with improvements in the motor (+90%) and property (+50%) underwriting results! “We are very pleased with our results. An outstanding underwriting return was the main driver for the favourable half year,” said Ian Kirk, Santam Chief Executive Officer. “Most of our business units and insurance classes performed well when compared to the period in 2010, influenced by the absence of large industrial accidents and fire-related claims in the commercial and corporate business units.” (The group reported an 8% margin for the 2010 financial year). Santam also reported a 16% increase in bottom-line headline earnings per share (to 593c). Management used some of this windfall to reward loyal shareholders with a 200c/share interim dividend.

You have to spend money to make money

What about new business? Santam’s gross written premiums were 7% up on the comparable period thanks to positive growth across their largest insurance classes, including motor and property. But the portfolio management business struggled due to the group’s continued focus on positive underwriting results. The improvement in gross written premium is commendable for a number of reasons. First, the group “wrote” this business without sacrificing underwriting discipline – and second – for making headway despite increased domestic competition. There has been significant activity in the direct short-term space of late.

The group – one of a handful of insurers committed to the traditional broker distribution business model – spent slightly more on acquisition costs for the period. Its net acquisition cost ratio topped 27.7% (versus 26.9% for the same period last year) due to timing differences on management expenses and pressure on fee structures of its outsourced business. The group says various investments in technology and processes contributed approximately 1% to acquisition costs. Half-year costs for the acquisition of insurance contracts topped R1.220 billion, with marketing & administration expenses soaking up another R910 million!

Santam achieved a solid operating performance with total cash flows over the six months a third better, up from R645 million to R924 million. Net earnings from associated companies were almost double when compared to 2010, mainly due to higher earnings from two key associates; Credit Guarantee Insurance Corporation (Africa) and NICO Holdings.

Tackling future challenges head on...

There are numerous risks and challenges that must be dealt with to ensure ongoing profitability in the insurance space. Investment returns remain under pressure due to weak equity markets – a situation that will probably persist through the remainder of the year. Investment returns on insurance funds slipped from R203 million to just R193 million in the six months to 30 June 2011 – and Kirk doesn’t expect this situation to improve in the second half. Kirk also notes that the strong rand has played into the insurer’s hands of late, by reducing claims costs on the motor book due to cheaper imported parts. If the rand reverses motor insurers will have to watch their margins closely…

And Santam wants to remain profitable. “Our focus looking forward is to keep optimising our profitability throughout the business by improving efficiencies, lowering claims costs and focusing on risk management.,” said Kirk. The group will focus on efficient claims service and attracting new customers that are in the market for solid, dependable insurance… The insurer reenergized its brand positioning in May this year, “to challenge the clutter in the market and [send a clearer] message around short-term insurance!”

Commenting on the next six months, Kirk said that although the global economy had slowed down during the second quarter of 2011, it was still expected that South African GDP growth would exceed 3% in 2011 with CPI averaging 4.9%. These metrics have traditionally influenced industry growth. And that means we can look forward to around 7% growth on gross written premium for the full year, with disappointing investment returns virtually guaranteed.

Editor’s thoughts: Just as South Africa’s business cycle swings between periods of “boom” and “bust”, so does the short-term insurers’ underwriting margin. On the results presented it appears insurers can generate profit regardless of (or despite) the various operating constraints. Given Santam’s impressive underwriting margin, are you surprised that short-term insurers are backing calls for mandatory third party insurance? Please add your comment below, or send it to

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