Santam shares plunge on trading update
Shares in listed short-term insurance giant Santam fell yesterday after the group issued a less than rosy trading update. Investors watched as the company bled 4.37% of its value to close at 8461c. The company has now lost a quarter of its value since its December 2007 high of 11389cps – although that analysis excludes the R22 special dividend paid back to shareholders.
Santam is South Africa’s leading short-term insurer with approximately 20% market share. It provides short-term insurance products to the corporate commercial and personal markets – and has been doing so for more than 87 years. Santam owns Aegis Insurance Company, Sentinel Insurance Corporation and Guardian National Insurance and also has a 66.6% share of Centriq Insurance Holdings. The group entered the UK market in 2003 by purchasing Westminster Motor Insurance Association (taxi and rental car insurance) and acquiring 47.5% of Bluesure (a UK personal lines business).
The group’s trading update confirms that even the traditionally defensive insurance stocks have been unable to weather the market turmoil over the past few months.
Tough market conditions
Like other insurance giants, Santam earns a big slice of income from the interest, dividends and capital returns on its invested portfolio. In 2006 the “total income, realised and fair value gains” amounted to R1.804bn. The group recorded investment income of R540m (including R192m from dividends and R333m from interest). With world stock markets under severe pressure in the last quarter of 2007 investment returns across the board have been severely curtailed.
The result is that Santam has warned shareholders not to expect more of the same. In their update the group says: “Investment results for the year were negatively affected by the turmoil in financial markets during November and December and ended well below the exceptional levels of 2006.”
Significant underwriting losses
Poor investment returns are not the only problem. It seems Santam’s short-term underwriting business has suffered too. The trading update reveals that although the domestic underwriting results were acceptable across most classes, “the last two months’ results were adversely affected by floods and large industrial claims.” The update does not provide more detail about the nature of the industrial claims – but since the period referred to ends December 2007 these claims will not include possible losses incurred during January this year due to Eskom’s power problems.
It seems the group’s European operations also incurred substantial underwriting losses. Santam also incurred a heavy Secondary Tax on Companies (STC) charge when it paid a special dividend of R22 per share late last year.
Earnings down 40%
“Accordingly, Santam is expecting headline and basic earnings per share for the full year ended 31 December 2007 to be between 40% and 45% below the levels of the correspondingpriorperiod,” continues the update. Santam posted headline earnings of R1.82bn for the 2006 year – and HEPS of 1555c. Investors will have to wait until 26 February 2008 to discover the full impact of the difficult trading conditions.
But, if we knock 40% off these values the group should report R1.092bn in headline earnings and HEPS around 933cps. Considering this information, and yesterday’s closing price we put Santam on a PE of around 9 times. Which means – we hope – that Santam’s share price has fallen far enough.
Editor’s thoughts:
Although the local equity market has recovered some ground in the first half of February 2008 there is little chance for insurance companies to escape the sell-off that occurred in the last quarter of 2007. Will the large life companies suffer similar reductions in earnings? Send your thoughts to [email protected] or add them below.
