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Santam weathers weakening insurance cycle

24 August 2006 Lange Strategic Communications

Santams underwriting performance came under pressure during the first half of 2006 due to the continued softening of the insurance cycle as well as an escalation in the average claims cost, equating to headline earnings per share for the six months to end June 2006 of 498 cents against 599 cents in 2005.

Headline earnings totalled R583 million, 16% lower than the comparable 2005 level. The group generated a 21.6% annualised return on weighted average shareholders funds, compared to 27.6% in June 2005. This was predominantly due to excellent investment returns on the back of firmer equity markets during the period.

Santam has declared an interim dividend of 118 cents per share, 9% higher than last years 108c per share.

Santam Chief Executive Steffen Gilbert said the results were in line with the groups expectations in light of the continuing normalisation of the insurance cycle, which resulted in a sharp increase in claims in both the personal and commercial lines businesses and put underwriting margins under pressure.

The net underwriting margin for the six months fell to 3.6% versus 9.3% in the equivalent period in 2005. The net insurance margin, which includes funds generated by insurance activities, was 6.2% compared to 12.2% previously.

"Following on the growth momentum of 2005, we were able to achieve a 17% increase in gross written premiums during the first six months of the year, a significant accomplishment in an already challenging market," says Gilbert.

"In the local market, growth was achieved across most classes of business. Growth in net written premiums was up 16% compared to year-earlier levels. International premiums increased by 19%, with both Westminster Motor Insurance Association and Santam Europe achieving similar growth in sterling (GBP) terms."

The groups net claims ratio of 71.7% was 7% higher compared to the first half of 2005.

"Commercial property and personal line insurance classes were negatively affected by adverse weather conditions, floods in Namibia, theft and a high number of commercial and private property fire incidents," elaborated Gilbert. "In addition, the profitability of the motor insurance class experienced pressure arising from increased motor vehicle accidents, higher repair costs- particularly on imported vehicles and an increased cost due to car theft and hijackings."

"On the other hand, specialist underwriting classes experienced more favourable claims ratios. We are implementing steps to stabilise underwriting margins and address unprofitable business."

Continued initiatives to improve efficiencies, timing, and the increased level of activity contributed towards a reduction in the groups acquisition cost ratio from 26% to 24.7%.

"During the first quarter of the year, Santam launched its new MultiHome insurance product directed at insuring low-cost houses in previously disadvantaged communities. To date business volumes are still low with a favourable claims experience", he said.

On the international front, Gilbert reported that the underwriting performance of Westminster Motor Insurance Association in the UK was disappointing, as it incurred an underwriting loss due to increases in the actuarial estimates of a few large liability claims incurred in prior years. The company continued to experience increased competition in its market sector from new entrants, which put pricing under pressure and eroded margins.

Santam Europe increased its business activity, although volumes are still below expectations. A decision was taken to wind down the Bluesure joint venture and the business was absorbed by a strategic partner to improve utilisation of resources.

Investment return on insurance funds was 6% above that of a year earlier, due to a 10% higher average float level (funds generated by insurance activities). This was primarily attributable to a continued focus on cash and working capital management and the impact of the refinements made to the company's reinsurance programme.

A total of R1.0 billion of cash was generated from operations during the first six months of 2006, 25% less than 2005 due to the overall lower underwriting profitability to date.

Investment-related income, excluding the investment return on insurance funds, was 40% year-on-year higher in the first six months of 2006, despite Santams R 1.0 billion dividend payment in April 2006, which reduced its capital base. This performance was due to the stronger equity markets during the period. Earnings from associated companies were higher than the comparable period mainly due to the very good results of Credit Guarantee Insurance Corporation of Africa Limited and Lion of Africa Insurance Company Limited.

The group's solvency level is currently a sound 54%, a reduction from 61% at the end of 2005 due to the R1.0 billion in dividends paid. In line with this, the companys net asset value per share decreased from 4927 cents at the end of 2005 to 4645 cents at the end of the first six months of 2006.

Gilbert concludes: "Looking ahead, we anticipate that underwriting margins will continue to come under pressure due to the softer market and the further deterioration of claims. Recent floods in the southern and Eastern Cape will put further pressure on underwriting margins.

"Santam will concentrate on growing its market share without compromising sustainable profitability. Growth will be slower for the remainder of the year as there will be increased focus on managing the profitability of certain lines of business.

"Our international businesses will remain focused on achieving a balance between growth and profitability to ensure that operations return to profit. It is expected that Westminster Motor Insurance Association will return to positive underwriting margins, whilst Santam Europe should achieve break-even during the second half.

"In line with market expectations, we anticipate that higher interest rates during the remainder of the year will have a positive effect on cash-related investments, while equity markets will remain volatile in the short-term with an overall sideways movement."

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