Tough underwriting pays off for insurer
The latest half-year numbers published by South Africa’s largest non-life insurer, Santam Limited, suggest that all is well on the domestic risk transfer front, but the 35% lift in headline earnings per share masks a significant shift in exposure from insurer to insured. More on this observation in a moment; first let us unpack the insurer’s interim financial statements for the six-months to end-June 2024.
A pleasing result
“Santam Group delivered an improved performance with pleasing underwriting results,” the JSE SENS statement leads. “Despite the operating environment in our primary market remaining difficult, progress with our 2030 strategy and our diversification across market segments, insurance classes and geographies enabled a resilient performance in the first half”. This performance exhibited as a 10% improvement in group insurance revenue, up to R26.634 billion, and a 35% increase in headline earnings per share (HEPS), to R15.78.
Santam reports its revenue under a few business segments including conventional insurance; alternative risk transfer (ART); and international business. Most FAnews readers ‘play’ in the conventional insurance space, as brokers introducing business under the insurer’s Broker Solutions division.
The insurer’s net earned premium (NEP) from conventional insurance came in at R15.4 billion, or 7% better than the comparable period in 2023. Gross claims paid, totalling R14.2 billion, meant the insurer could improve its underwriting margin in this segment from 3.8.% to 6.5%, the latter being well inside the 5-10% target for this measure. PS, the underwriting margin is calculated by NEP less claims as a percentage of NEP.
Those who enjoy unpacking short-term insurer results need to know the difference between NEP and gross written premium (GWP). The concepts were clearly explained by the insurer, who wrote that “GWP indicates the size of the business written by the group’s distribution channels before allowing for reinsurance premiums paid.” NEP is an indicator of the size of the business or risk retained by the group and is equal to GWP less any premium paid to reinsurers.
Pragmatic approach to SA prospects
The executive summary in the 2024 Reviewed Interim Report was fairly pragmatic re prospects in the South African market. The insurer welcomed the “progress [made] in addressing the structural constraints to economic growth in South Africa, including electricity supply” but bemoaned the slower than anticipated pace of these improvements. Constrained domestic GDP growth and ongoing high unemployment were held up as limiting factors for short-term premium growth in traditional insurance markets. “These segments are closely coupled to the performance of the economy and employment levels,” Santam said.
Although not giving up on its traditional intermediated businesses, the insurer admitted to making renewed efforts in the direct channel, where its market share is underrepresented. Other focus areas include non-traditional segments, where overall penetration is limited; and the myriad excellent opportunities on offer from international markets. A mere 18% of total GWP currently comes from outside the country, growing from R3 billion in the first half of 2023 to R3.4 billion in the latest half-year. “The partnership with Sanlam Allianz, focusing on specialist business across Africa, continued to deliver positive results with excellent GWP growth of 33% to R379 million,” Santam said.
Claims-related headwinds
The report confirmed significant claims-related ‘headwinds’ for the general insurance industry. “The frequency and severity of losses from inclement weather conditions have increased substantially over the past decade, including in South Africa, which has traditionally been seen as a benign catastrophe environment,” they said. A total of R607 million in weather-related losses was ‘offset’ by the insurer in the first half. And despite its ongoing improvements in risk selection, the insurer conceded that weather-related and other large losses had left it with a R203 million underwriting loss on the property class.
“Improved risk selection and underwriting in response to the roll-out of geo-coding prevented losses in excess of R150 million from these events,” Santam said, offering an opening for your writer’s “more on this observation in a moment” promise. The truth is these improved results have come on the back of a somewhat aggressive approach to underwriting in both the personal lines and commercial property portfolios. Your writer recently fielded a phone-call from his broker to inform him that his home had no cover for damage caused by sinkholes. And an off-the-record chat with a nearby business confirmed it is nigh impossible to find commercial cover for this peril in the area, regardless of insurance partner.
It seems the ‘you are no longer on cover’ or ‘there is no longer cover for this’ trend is gaining momentum. Santam said it “remained steadfast in implementing several underwriting actions in response to the elevated claims frequency, severity and inflation experienced over the past few years.” This includes recent measures to address power surge losses and improve the profitability of the motor book; and extends to the accelerated roll-out of geo-coding to enhance risk selection and rating, among other initiatives. In many cases, the response has been to limit exposure by excluding perils from cover.
So, those complaining about the ‘three trackers in a Hilux’ requirement; or battling to explain the sprinkler system plus water pumping solution to mitigate fire risks to their clients; or struggling to place risk for a range of unpopular perils, will have to accept tougher underwriting as the new normal in domestic non-life insurance.
A single yacht could sink most SA insurers
Another line from the report resonated with your writer in light of a recent widely publicised loss event. Santam wrote that its “transportation profits declined from R60 million in 2023 to a loss of R16 million in 2024; [and that] a solid contribution from heavy haulage was offset by several large claims in marine.” How large can such claims be? Although not a Santam concern, Reuters.com recently headlined an article on the tragic sinking of the Bayesian superyacht off the Italian coast as follows: ‘Sunk superyacht likely to cost insurers at least USD150 million, experts say’. That’s around R2.7 billion on a single boat!
It is always interesting to slice-and-dice conventional business premium into the various non-life insurance classes. In this half-year, Santam reported R8.190 billion (42.9% of the R19.084 billion total GWP) from the motor class and R7.407 billion (38.8%) from the property class. The engineering and lability classes both topped R1 billion in GWP, or R1.143 (6%) and R1.091 billion (5.7%) respectively. The remainder of the premium is shared by the transportation class (R770 million); accident and health (R347 million); crop (R82 million); guarantee (R23 million); and miscellaneous (R48 million).
Getting creative with ART
Brokers are increasingly considering ART solutions for high risk commercial clients. No surprise then, that Santam reported another surge in this segment, with profits jumping from R200 million in 2023 to R326 million this year. “Good growth was experienced across all main ART income lines including fee income; investment margin; and underwriting margins, supported by increased business under administration,” they said. All that was left was for the group executive to reflect on future prospects.
“Investor and business sentiment appears to be positive following the general elections in South Africa and an improvement in Eskom’s electricity availability factor,” Santam wrote. There are, however, no signs of a significant turnaround in the trading environment due to subdued economic growth and the country’s many, well-documented structural deficits. There are also concerns that the La Niña weather phenomenon could contribute to higher-than-anticipated rainfall and hailstorms in the latter part of the year. Santam has warned that such disruptions would introduce volatility to the full-year underwriting margin.
Writer’s thoughts:
As insurers introduce tougher underwriting criteria, many businesses and households have no choice but to proceed without cover against certain risks. Are brokers at risk for not adequately informing their clients of gaps in cover due to new exclusions or risk mitigation requirements? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.
