Top short-term insurer makes steady progress

Gareth Stokes, FAnews Online Editor

Three insurers dominate the domestic market for short-term insurance. They include Santam, Mutual & Federal and Zurich. The annual result of any of these companies not only serves as a proxy for the short-term insurance industry, but also provides valuable insight into the state of the domestic consumer. Last week (3 March 2010) Santam Limited (JSE: STN) published annual results for the year to 31 December 2009. In today’s newsletter we take a closer look at the results to see what Santam can teach us about prospects for industry stakeholders through 2010 and beyond.

The highlights for the period under review suggest business is booming. Santam reported a 55% increase in headline earnings per share and declared a total dividend of 466c/share for the 2009 year. Operating highlights included a solid underwriting performance, significant improvement in investment returns and strong cash flows. But the results carry the now familiar ‘given challenging market conditions’ disclaimer. The group would have performed better if the economy was firing on all cylinders.

An insurance and investment business

To gain a better understanding of Santam’s latest result we consider the group’s two core income activities and the way in which performance is measured for each. The first comprises insurance and underwriting activities, including commercial insurance, personal insurance and alternative risks. Santam’s executive committee uses a handful of measures to assess the performance under this heading. They look at gross written premium (to measure growth) and consider underwriting and net insurance results (for profitability). The second income activity encompasses all investment-related activities undertaken by the group. Santam reports this income category under headings such as net investment income and income from associated companies.

Gross written premium in the insurance category topped R15.026bn in the 12 months to 31 December 2009. The insurance underwriting result was R453m. Although this was significantly lower than the R739 earned in FY2008, it represents a huge improved on the R88m posted in the first half of 2009. Santam’s income before taxation topped R861m from insurance and R657m from investments. “In line with the industry as a whole, underwriting margins came under considerable pressure, particularly in the first six months,” said Santam. “Investment returns improved on firmer equity markets, especially when viewed against the poor performance in 2008.” At 31 December 2009 Santam managed R10.547bn insurance assets and R6.535bn investment assets.

The complex world of short-term insurance

Santam’s annual report reveals the mix of short-term business it conducts in South Africa. The R15.026bn gross written premium is split across commercial insurance (R7.489bn), personal insurance (R5.899bn) and alternative risk (R1.638bn). We can drill down even further by considering the contribution to gross written premium from each class of insurance. Santam’s insurance business for the latest 12 months is carved up under the following insurance headings: accident and health (R382m), alternative risk R1.638bn, crop (R472m), engineering (R562m), guarantee (R16m), liability (R1.126bn), miscellaneous R19m, motor (R6.147bn), property (R4.266bn) and transportation (R398m). This confirms the dependence of South Africa’s short-term insurers on motor vehicle and property. These covers accounted for 70% of Santam’s gross written premium in FY2009!

A quick look at the net underwriting result for each of these insurance lines reveals why the short-term insurers are giving brokers such a hard time when it comes to claims experiences. Santam reported an underwriting loss of R29m from its motor book, and topped that with another R321m underwriting loss from property! The blame for the poor motor performance falls squarely on the shoulders of personal motor covers, while the property class was knocked by large commercial claims.

A pleasing overall performance

Management was happy with group performance given the tough economic and poor underwriting conditions. They felt the 6% improvement in gross written premium compared favourably with the rest of the industry, but cautioned that achieving appropriate rates for risks insured remained a challenge. The group’s overall net underwriting rate was a disappointing 3.5% due to continued subdued underwriting performance from both motor and property classes. South Africa’s struggling insurance consumers are claiming more frequently and at higher costs. Santam chief executive Ian Kirk also singled out large industrial accident and fire claims as cause for concern.

What will 2010 bring? Santam hopes to improve on its net insurance margin of 6.8% (10.9% in 2008) and will want to reveres the disappointing underwriting result in its commercial properties and personal lines motor categories. They expect industry volumes to improve in line with the global economy, helped domestically by positive sentiment from the 2010 FIFA World Cup ™. But they warn: “The economic recovery is likely to be gradual and we remain concerned about the low levels of disposable income among individuals and earnings pressure on businesses, which will continue to make it difficult to achieve the appropriate rates for risks insured!” The group has learnt its lesson from the 2008 equity market collapse and has “hedged R2 billion of its equity exposure (in June 2009) using a one-year derivative fence structure...”

Should you consider an investment in Santam? R107.50/share may sound steep, but Santam is trading at a forward price-to-earnings ratio of just 11.66 times, and boasts a dividend yield of 4.66%. If you can wait out the domestic crisis in consumer confidence then Santam is well worth a look!

Editor’s thoughts: Apart from massive commercial property claims the short-term insurers seem at odds with their private motor books. Problems include escalating repair costs, alarming road accident statistics and the poor state of South Africa’s roads. How would you go about improving underwriting results in personal lines motor businesses? Add your comments below, or send them to gareth@fanews.co.za