A CHALLENGING ENVIRONMENT FOR
INSURANCE AND INVESTMENT
The 2011 financial year was a challenging one for all
players in the short-term insurance industry. South Africa remained
exposed to the wide-ranging impact of the ongoing global economic
uncertainty. While the country experienced localised natural
disasters, including floods early in 2011, these were minor
compared to the devastation of earthquakes and floods in Japan, New
Zealand, the USA, China, Burma, Pakistan and Turkey.
These tragic events acted as a stark reminder
that climate change is causing an increase in the intensity and
frequency of natural disasters around the globe.
Santam's continued and sustainable success has
been, and will continue to be, determined by our ability to further
adjust to change and address a dynamic systemic risk landscape.
Santam has been able to continually reposition itself in the
changing business environment, to provide a relevant offering to
its clients and to optimise our internal systems to drive
efficiencies. This is at the core of our business proposition. Our
business partners have recognised our leadership position with
Santam being ranked as the best commercial and corporate insurer
for three consecutive years by the Financial Intermediary
Association (FIA). Santam was also named Insurer of the Year by the
South African Motor Body Repairers Association (SAMBRA), reflecting
our commitment to the supply chain.
We believe that insurance can play an active
role in promoting pragmatic and collaborative systemic risk
management in society and the economy. As a business, we know that
we do not operate in a vacuum, and we acknowledge as the industry
leader that systemic events can have a significant impact on our
operations. Therefore, during 2011 we continued to work with a wide
variety of stakeholders on this, including our peers in the
short-term industry, numerous government partners and academic
leaders, to ensure the sustainability of our industry.
An example of this is our continued
collaboration (with the CSIR and University of Cape Town) in the
ground-breaking Eden project in the southern Cape. On a macro
level, this project will allow us to better understand the system
dynamics between risk and resilience in a socio-ecological
landscape and the role of the insurance industry in shaping
societal behaviour. On a microlevel, it will eventually impact
certain decisions that we make in terms of underwriting and risk
exposure.
Santam's investment decisions are equally
crucial to the company's performance. The multiple challenges posed
by the economic and political demands for a European solution
-which on a daily basis seems to highlight a new country in crisis
- and the tight financial linkages of globalised financial markets
(which exposes the US in particular) will continue to impact and
direct Santam's investment decisions next year and in the medium
term, or at least until such time as the global economy begins to
stabilise again.
Santam is a future-focused company - the
business is financially and operationally in better shape than ever
before and is well positioned to expand its offering, its footprint
and its brand.
ANOTHER SOLID PERFORMANCE IN A
CHALLENGING YEAR
As mentioned in last year's report, we did not believe
that the stellar performance we achieved in 2010 on both the
insurance and investment activities was sustainable. This was in
line with our expectations for the tougher trading environment
experienced in 2011. The market proved to be as challenging as
anticipated; therefore, it is a privilege to present yet another
year of solid growth for Santam in 2011.
Underwriting margins exceeded expectations with
a result of R1 131 million (2010: R1 146 million) and
premium growth recovered with an increase of 12% compared to 6% in
2010 reflecting further market share gains. However, volatility in
South Africa impacted our investment performance, reflecting the
global turmoil in the investment markets, including persistent
growth concerns in the USA and austerity measures in Europe.
Santam's headline earnings declined by 11%, essentially because of
lower investment income in 2011 when compared to 2010.
In general, our performance for 2011
demonstrates Santam's superior management of the factors under our
control, despite our investment performance being impacted by the
vagaries of the market.
Santam's acquisition cost ratio on net earned
premium was above the 27% target that we set for ourselves. This
was due to investments in strategic initiatives such as MiWay and
other transformation and optimisation projects. We are confident
that we can reduce our acquisition cost ratio over time to meet our
medium-term target of 26% while continuing to invest in growth for
the longer term. Our net claims margin of 64.2% compared well with
the 64.1% reported in 2010.
On an absolute basis, Santam's return on
insurance funds generally remained stable, although the lower
interest rate environment had a negative impact. As a percentage of
the net earned premium, the float income has decreased by
approximately 0.2% on the previous year and was marginally lower
than planned for.
OUR STRATEGIC INTENT FOR ENDURING
LEADERSHIP IN THE SHORT-TERM INSURANCE SECTOR
We have made solid progress on our strategy to continually
extend our leadership position in the general insurance segment in
South Africa and selected emerging markets. This will remain our
focus for the foreseeable future.
In South Africa our objective is to maintain
our market share as the largest player in the commercial,
specialist, agriculture and personal lines and to sustainably
deliver superior financial returns to shareholders. We believe that
our brand positioning, strong intermediated offering and our
multiple distribution channel capability as reported on last year
ensure our relevance in the market.
We aim to build our reputation as Africa's
leading general insurance group through our expansion into Africa,
India and Southeast Asia. This will provide geographic
diversification benefits, including the distribution of risk, while
deploying our intellectual capital beyond our borders to deliver
growth.
We also continued to make solid progress with
our strategic initiatives to deliver enhanced returns as we deliver
premium growth, operational efficiencies and sustain our
medium-term underwriting margin within our target range of 5% to
7%.
Santam's business is managed around two
disciplines - insurance and investment. The different insurance
business units reported on constitute personal lines, incorporating
MiWay as well, commercial lines, agriculture, and specialist
businesses. Together with the risk management, incorporating Santam
Re as well, and claims services business units who support the
business, they form the insurance segment. Insurance contributed
20% of the return on shareholders' funds while investments
contributed 5%. Santam's gross premium income in 2011 of R17.7
billion showed an improvement of 12% on last year. Among the
different insurance classes, motor and property again contributed
the highest gross written premium, contributing to 43% and 28% each
of total premium.
ONGOING FOCUS ON IMPROVING
EFFICIENCY
In line with our policy to invest 1% of net earned premium
income in strategic projects, we have been involved in a number of
exciting initiatives as part of our forward-looking programme to
position Santam for future longevity:
-
The collaborative Eden Project, as
mentioned earlier in my report
-
Optimisation of our commercial and
personal lines contact centres
-
The focused upskilling of our
relationship managers to ensure improved service levels to our
intermediaries
-
Various initiatives in the claims
services business unit aimed to improve client service while
reducing costs
-
The Coastal project which began in
2010, with the aim to identify and manage flooding risks in coastal
areas
-
A project initiated during the year
which will be looking at transforming our product management and
rating capability from an IT perspective
-
The implementation of the first phases
of the e-Biz project
"We aim to build our reputation as
Africa's leading general insurance group"
EMBEDDING A NEW BUSINESSES GROWTH
CULTURE THROUGHOUT THE GROUP
Despite the challenging domestic market, we made good
progress with our local strategic objectives during 2011. The key
strategic acquisitions that were concluded in 2010 - Emerald
Underwriting Managers, MiWay Group Holdings and Indwe Broker
Holdings - were bedded down and performed well.
MiWay grew significantly in support of Santam's
multiple distribution channel strategy. Furthermore, it was ranked
as the top short-term insurance company of the Ask Afrika Orange
Index Service Excellence Benchmark and achieved first place in the
Deloitte 2011 Best Company To Work for Awards. MiWay continues to
make significant investments to meet its growth potential and its
claims ratio is under control benefiting from segmentation and risk
models especially designed for the direct channel. From a group
perspective, I am pleased to be able to report that only marginally
more than 2% of MiWay clients previously had Santam policies. This
demonstrates the validity, and the ability to co-exist, of both the
intermediated and direct business models.
Our proprietary segmentation and risk
management models provided the group with the ability to further
improve the quality of our book during the year. In addition, a
number of initiatives which came to fruition during 2011 enabled us
to minimise premium increases while also offering premium
reductions to lower-risk clients. This enabled us to both defend
and take market share despite significant competitive pressures,
particularly in commercial and personal motor insurance. Completion
of efficiency projects in the claims environment and various
procurement initiatives, together with the positive impact of the
strength of the rand for most part of the year, contributed to a
reduction in average claims cost. Efficiency and effectiveness
initiatives in the commercial and personal lines contact centres
contributed to profitable growth through increased conversion rates
and reduced churn rates.
GROWTH OPPORTUNITIES: BRAND AND
NEW MARKETS
Santam's brand position of "Insurance, good and proper"
launched during 2011, entrenches the concept that Santam's value
proposition extends beyond simply price. We do insurance properly,
with integrity, excellence, single-minded focus, certainty and
stature - a core characteristic of our intermediary partners.
Early results of the brand repositioning are
being tracked through social media channels. These have indicated
improved penetration of previously untapped market segments outside
Santam's traditional client base. In addition, traffic to the call
centre and internet channels has increased. The proposition to
clients is being entrenched with the introduction of mobile
applications, comprising vouchers and benefits, a first in the
insurance industry. We hope that this will increase the loyalty of
policyholders and work toward tying them to our brand.
Our developing market
presence
Santam has a well-articulated strategy to increase its
presence in Africa and India over time - both attractive growth
regions for short-term insurance. We have a three-way approach to
these territories, through:
-
Santam Re, a division of Santam focused
on writing inwards reinsurance;
-
our specialist underwriters who
underwrite individual risks especially in Africa; or
-
investing in partners either directly
or indirectly via participation arrangements where Sanlam invests
in a corporate financial services group with Santam acting as the
short-term insurance technical partner.
A COMMITMENT TO RISK
MANAGEMENT
Underpinning our ability to manage the risks of our
clients is our disciplined approach to managing our own specific
internal business risks. Therefore, we have extensive risk
management systems entrenched in every aspect of the business, with
processes to identify the risks facing the business. Some of the
top risks facing Santam can be defined as our ability to:
-
retain or increase market share profitably
while achieving an appropriate rate for risk;
-
manage the impact of change initiatives
on operational capabilities and business continuity;
-
effectively manage transition to
multichannel distribution;
-
protect Santam's brand and reputation,
both externally and internally; and
-
ensure investment
performance.
Why these risks impact Santam and how we are
dealing with them, and other information on the risks that we deal
with, are detailed in our Risk report on page 90.
Santam is taking proactive steps to ensure the
long-term sustainability of its underwriting margins. As such, our
Risk Services business unit has continued to enhance its rating
approach, especially in commercial and personal lines. Our
particular focus during 2011 was on understanding the drivers of
the propensity to claim and to cancel policies. Additional
initiatives included modifying certain aspects of the cover which
is provided, and the possible withdrawal of certain aspects of
cover in high-risk areas. Underpinning all underwriting decisions
is the appropriate pricing of all risks that are taken onto our
book.
In line with our proactive approach to
mitigating the possible impacts of climate change, Santam continued
its collaboration on the Eden project which began in 2010. Please
see our Sustainability Report for more detail on this project. To
implement the recommendations of the Eden review, it is our
intention to work more closely with local authorities to encourage
improved planning to prepare for the possible impacts of climate
change.
Examples include avoiding new developments in
areas of higher risk as a result of climate change. In future, we
intend to expand the project into other areas as we expand our
specific knowledge in this field. Santam's long-term benefits from
this project are expected to far outweigh the project costs, as a
result of lower cost ratios, reduced cost of insurance and improved
accessibility to products.
During the year we also adopted a more
proactive approach to minimising fraudulent claims, both
independently and in conjunction with industry bodies such as the
South African Insurance Association (SAIA). We implemented a new
process and system during the year which has enabled sophisticated
analyses of fraudulent claims. This has resulted in Santam being
better equipped to repudiating such claims, ensuring our ability to
sustainably pay out legitimate claims from our clients.
ACKNOWLEDGING OUR PEOPLE
As we have mentioned before, at the heart of our business
are our people. To support the delivery on our strategic
objectives, the group recruited a number of talented individuals
into the company, at management and specialist levels of the
company.
Santam continues growing its status as an
employer of choice in the industry and is accordingly finding it
easier to attract and retain key skills. We continue to focus on
training, developing and retaining talent. We are maintaining the
highly successful development programmes such as the senior
leadership development programme that is conducted in conjunction
with Gordon Institute of Business Science (GIBS). The format
entails interventions during the quarterly operational and
strategic feedback meeting of senior managers of the group. This
enhances the learning experience through application to specific
business issues. A number of the management and executive team
members were also exposed to international training at INSEAD, The
Business School for the World. Various leadership programmes for
middle and junior management level are also conducted in
conjunction with Stellenbosch Business School.
The group is growing its pool of talent for the
next generation through a number of programmes, including the
highly successful graduate programme. This initiative exposes
recent graduates to all aspects of the business during a 12-month
term. It prioritises the imperative of attracting future black
leaders - the majority of whom have been permanently employed by
the group after completion of the programme in the past.
Santam continues to make solid progress with
its transformation agenda and we have retained our status as a
level 3 contributor in the face of increasingly stringent BBBEE
criteria.
PRIORITIES AND OUTLOOK
Our focus for 2012 will remain to steadfastly focus
on:
-
achieving operational and capital
efficiencies;
-
balancing growth and profit;
-
developing our distribution
models;
-
diversifying the business outside the
borders of South Africa;
-
continually and consistently enhancing
our risk management capabilities;
-
focusing on our people; and
-
strengthening the brand to extend
market share.
The executive team will drive their efforts to
maintain the momentum of these initiatives throughout the business
to ensure that they deliver the anticipated benefits.
These strategic objectives are integrally
linked to our financial targets. Our targets have been set for our
current strategic planning cycle up to 2014, but several
initiatives have been launched to ensure sustainability of
performance in the longer term beyond 2014:
-
Achieving an underwriting margin of 5%
to 7%
-
Limiting the acquisition cost ratio to
26% over the medium to long term
-
Growing our market share in the South
African short-term insurance market
-
Continuously enhancing the intrinsic
value of the Santam share
Our success will ultimately be measured on our
ability to continually increase the size, quality and
diversification of our risk pool.
The regulatory environment
The regulatory environment remains very challenging.
Santam continues to monitor developments and dynamically position
the business, not only to comply with changes, but to turn them to
our advantage to service our clients' needs while delivering value
for all stakeholders. In particular, the group is reviewing its
capital requirements under the new solvency regulations which are
planned to come into effect in 2014, leveraging our extensive
capital resources to participate in new opportunities.
Outlook
The uncertain European outlook and continued pressure on
domestic consumers suggest that challenging market conditions will
persist. However, with our diversified business, strong leadership
position and the continued success of our strategic initiatives to
improve our ability to price optimally, manage risks and ensure
claims efficiency, we believe that Santam is well positioned to
ensure sustainability and outperform our peers.
At the low end of the market, emerging
consumers who may have considered taking up short-term insurance in
phases of high economic growth are now more likely to postpone such
decisions. Santam's traditional focus has been outside of the
emerging market. However, with our Affinity partners and our direct
sales model, we are equipped to create new opportunities in this
segment.
Santam's intermediated offering is also
positioned to capture new entrants to short-term insurance. This is
enhanced and supported by the new brand positioning - "Insurance,
good and proper" - which is, as always, underpinned by the solid
advice provided by our intermediaries to clients.
Across all of its products and services, Santam
will continue to focus on providing innovative products, supported
by its leading distribution model.
There is an expectation that motor ratings
could turn as a result of the weaker rand impacting car parts
pricing in the year ahead. In addition, the reinsurance industry,
which was severely impacted by catastrophic events in 2011, will
impose higher reinsurance premiums.
The market is set to remain challenging due to
these systemic challenges and pressure from new competitors.
Notwithstanding these factors, Santam's business is well positioned
and will continue to adapt quickly to changes to further entrench
its leadership position.
THANK YOU
As always, I thank our people and our intermediaries who
helped to make 2011 a successful year despite challenging times -
without your commitment, dedication, loyalty and hard work, none of
it would be possible.
I also thank Vusi Khanyile for his contribution
in his first year as chairman of the board of Santam - it has been
a pleasure for us getting to know and to work with Vusi. We look
forward to building an even greater company with Vusi during his
tenure as chairman of the board.
Finally, thank you to my team of executives,
suppliers and business partners - your support has shown that no
insurance company works in a vacuum. We are all working together to
create a business that we can all continue to be proud to be
associated with.
IM Kirk
Chief Executive Officer
Top of page
