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Category:
Insurance
News /
Short Term
Insurance /
Santam
/ August 2006
Santam weathers weakening Insurance Cycle
Santam’s 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 year’s 108c per share.
Santam Chief Executive Steffen Gilbert said the results were in line
with the group’s 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
group’s 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
group’s 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 Santam’s 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 company’s 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.”
Source: ITInews – Insurance
Times and Investments Online
www.itinews.co.za
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