The Santam group achieved excellent underwriting results in
2011, while also achieving double-digit growth in gross written
premium of 12%. Underwriting results were almost on par with the
outstanding results achieved in 2010. However, compared to 2010,
investment results were negatively impacted by the low fair value
movements on listed equities. This resulted in headline earnings
decreasing by 11% compared to 2010. Cash flow from operations was
significantly higher than 2010 while the solvency margin increased
to 48% (2010: 45%). A solid 25% return on average shareholders'
funds was achieved.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The group consolidated financial statements for the year
ended 31 December 2011 are prepared in accordance with
International Financial Reporting Standards (IFRS) and the
interpretations issued by the International Accounting Standards
Board (IASB) in compliance with the JSE Listings Requirements.
The accounting policies that have been applied
during the reporting period are consistent with those applied in
2010. The financial statements provide comprehensive information
regarding the assets, liabilities, income and expenditure of the
group and the company. Detailed background is also provided
regarding the recognition and measurement of insurance contracts
and insurance and financial risks.
The following amendments to published standards
are mandatory for the accounting periods beginning on or after 1
IAS 24 (amended) - Related party
This amendment provides partial relief from the
requirement for government related entities to disclose details of
all transactions with the government and other government-related
entities. It also clarifies and simplifies the definition of a
This is a collection of amendments to various IFRSs and is the
result of conclusions reached by the IASB on proposals made in its
annual improvements projects. These amendments were considered but
did not have a significant impact on the preparation of the
An abridged set of financial statements have
been printed with the Integrated Report for 2011 in accordance with
IAS 34. The full annual financial results are available on our
website, www.santam.co.za, or in printed format on request from the
company secretary. Cross references to notes in this report are
made with reference to the full set of financial accounts.
The salient financial statistics are set out on page
The local economy showed signs of a slow
recovery in 2011 but was impacted by the economic uncertainty in
the developed economies of Europe and the United States of America.
Santam's net underwriting result was marginally below the 2010
result. However, income from investment activities was 26% down on
2011 performance as a result of fair value movements in listed
equities, bond and money market instruments. As a result, headline
earnings for the group of R1 372 million declined by 11% and
headline earnings per share of 1 216 cents (2010: 1 376) showed a
similar reduction when compared to 2010.
The South African insurance industry's underwriting
results are inherently cyclical. The "typical" short-term insurers
in South Africa traditionally generated an average underwriting
margin of between 4% and 6% through the cycles. With direct
insurers and bank insurers becoming more prominent over the last
decade, margins have progressively shown an increase.
Santam's underwriting result compared to the
"typical" insurers is shown in the following graph. Santam's
results have been closely correlated with the industry and in
general the group has outperformed or matched the underwriting
margin of its peer group.
In light of industry developments, and our own
concerted efforts to improve our underwriting performance, we have
revised our targeted underwriting margin upwards from the current
4% to 6% to between 5% and 7% over our current strategic planning
cycle up to 2014. We are confident that this target is achievable
over the next few years given our expectations of market
conditions. Furthermore, we have initiated several strategic
initiatives with the aim to make the higher target sustainable
through the cycles over the long term.
The 2011 net underwriting result of R1 131
million was 1% less than the excellent result achieved in 2010. The
overall net underwriting margin of 7.7% compared to 8.5% in 2010
and outperformed our newly defined 5% to 7% target.
Margins in most of the significant business
classes were satisfactory.
The crop business was turned around
from a loss-making situation in 2010 to generate a positive
underwriting result in 2011.
The motor book performed exceptionally
well and made the largest contribution to the net underwriting
profit. The improvement was due to several factors, most notably
the focused reduction in the cost of claims through improved
processes and sourcing practices, the continued use of our client
segmentation model, and external factors such as the improvement of
roads during 2010 in anticipation of the FIFA World Cup.
The property book performed well due to
a limited impact from large industrial and fire-related claims for
our net underwriting account.
The alternative risk transfer class
suffered a loss due to a single large claim estimate increase on
medical cover insurance business that was subsequently
Underwriting profit of the liability
class was on lower levels in 2011 than in 2010 due to a few large
claim estimate increases during the year, but performance was still
well above the required risk-adjusted return target for the
The portfolio management business
continued to perform well under the improved management practices
introduced in 2010.
In general, lower average claims cost and our
continuous focus on risk management improved the quality and
diversity of the risk pool. This impacted underwriting margins
positively. On a segmented basis, commercial business continued to
generate the bulk of the underwriting profits with a contribution
of over 80%. When considering the business class perspective,
property follows the 41% contribution from motor with a
contribution of 22%, while 12% of underwriting profits arise from
the liability class of the company.
A concerted effort to drive profitable growth
and the successful implementation of strategic growth initiatives
such as the diversification of distribution channels and continued
improvements to support existing channels, resulted in the
achievement of excellent growth of 12% in gross written premium.
Gross written premium in the South African insurance industry is
historically linked to GDP growth plus inflation with a margin of
up to 2%. We are pleased with the growth that we achieved given
that it outperformed this historical benchmark of GDP growth plus
CPI by close to 3%.
Given our strategic objective of retaining our
leadership position, one of the components that we measure is our
market share of gross written premium. We aim to increase our
market share by growing in excess of the market. The formal
measurement of our performance against this target is only
available in the second half of the year, once the Financial
Services Board (FSB) publishes the relevant industry data for the
previous financial year. The interim measures available only
provide for net written premium comparisons which are distorted by
reinsurance arrangements. Based on the 2010 FSB data the gross
written premium of the industry grew by 5% (vs. net written premium
growth of 9%) compared to Santam's growth in gross written premium
of 6% in 2010. The Santam group's market share was 22.8%, based on
the 2010 data. Santam's net written premium growth of 8.5% for 2011
compared to an industry growth of 8.2%.
Positive growth was achieved across all
significant insurance classes. The top performing insurance class
from a growth percentage perspective was the crop business that
benefited from the increase in commodity prices. The engineering
book of business grew by over 24% following the acquisition of 55%
of the voting equity in Mirabilis Engineering Underwriting Managers
on 1 March 2011. The growth in the motor book of business of 14%
was supported by the growth in our direct insurance business,
The net acquisition cost ratio of 28.1%
increased from 27.4% in 2010. The increase can be ascribed to the
increase in spend on strategic initiatives, including the continued
investment in MiWay and re-engineering activities as described in
more detail in the operational review. The aim is to manage the
acquisition cost ratio down to around 27% in 2012 while continuing
to spend on key strategic initiatives required for long-term
sustainability. In the medium to long term our aim is to further
reduce our acquisition cost to 26%. However, we continue to
consider the appropriate level for acquisition cost taking
cognisance of our business composition and structural changes in
Our aim is to maintain optimum retention levels
within acceptable risk profiles. The level of reinsurance earned
premium as a percentage of gross earned premium increased from
14.9% in 2010 to 16.1% in 2011. The bulk of this increase, 0.8%, is
attributable to the effect of cell business which is inherently
bulky and volatile in respect of premium volumes.
Santam's diversified business lines position it
well to face the challenges of the insurance market. We will also
continue our efforts to optimise profitability across the business
with a strong focus on risk management and operating
Net insurance result
Investment returns on insurance funds of R388 million
decreased from the R395 million earned in 2010. These lower returns
resulted mainly from lower interest rates.
The combined effect of insurance activities
resulted in a net insurance income of R1 519 million or a 10.4%
margin, compared to R1 542 million and a margin of 11.4% in
Investment income comprises interest, dividends, realised
and unrealised investment gains and foreign exchange differences.
The reduction in interest rates affected interest income received
adversely. Dividend income was 27% higher than 2010 levels.
Equity markets were very volatile during 2011
resulting in significantly lower income from fair value movements
in 2011 of R77 million compared to the R510 million generated in
2010. The fair value movements in bonds and money market
instruments of R53 million in 2011 compared unfavourably to the R96
million reported in 2010. The derivative fence structures entered
into during September and October 2010 were unwound during July and
August at no cost to the company. Reported investment results
benefited from the fence structures which generated a credit of R80
million for the year. The fair value movement on debt securities
was R40 million compared to the R85 million of 2010. Santam's
investment portfolio performance compared favourably to the
benchmarks set in the investment mandates.
The weakening of the rand during 2011 had a
positive impact on the valuations of our foreign currency assets
held by our local operations of R90 million.
Net earnings from associated companies of R85
million increased from R69 million in 2009. This was as a direct
result of improved earnings by key associates. The main
contributors were Credit Guarantee Insurance Corporation of Africa
Ltd and NICO Holdings Ltd in Malawi.
The group's operations generated R2.5 billion in cash for
the year compared to R2.1 billion in 2010 due to improvements in
The company paid an interim dividend of 200 cents per
share which was 8% higher than the 185 cents per share in 2010.
Santam declared a final dividend of 355 cents per share for 2011
(2010: 325 cents per share), resulting in a total dividend of 555
cents per share for the year (2010: 510 cents per share). This
represents an increase of 8.8%.
Dividend payments are made in context of the
company's capital management policy. The approach followed with
payment of interim and final dividends is conservative and supports
the company's aim not to skip or reduce ordinary dividend payments.
When special dividends are being considered, we take into account
capital levels (as informed by the solvency margin targets of 35%
to 45%) and potential investment opportunities.
Given our strong solvency margin of 48% at the
end of December 2011 and the stabilisation of the investment
markets, the board decided to declare a special dividend of R8.50
per share. This will be the fifth special dividend paid by Santam
since 2004 and will bring the total special dividend per share
declared over this period to R52.
Santam follows a policy of managing its investment
portfolios in a diversified manner. We invest in all the major
classes of financial instruments ranging from listed equities to
cash-related investments. Our aim is to optimise investment income
within the approved risk appetite profile. Detail on risk
management practices can be found in note 3 to the full annual
financial results published on our website at www.santam.co.za or
available on request from the company secretary.
The asset allocation is also managed and
monitored from an asset/liability perspective. This ensures that
there are sufficient liquid funds available to meet Santam's
insurance liabilities, to ensure that the subordinated debt
obligations are adequately covered by matching interest-bearing
instruments and that the shareholders' funds are not unduly exposed
to investment risk.
The investment strategy, including return
objectives, asset allocation, portfolio construction and asset
manager selection, has been formulated and approved by the board of
directors and any variations have to be approved by the board. The
board has delegated some of its responsibility to the investment
committee which operates as a subcommittee of the board as
described in more detail in the corporate governance report.
For years Santam has followed a consistent
approach where the management of the bulk of its investments is
outsourced to independent external fund managers under
predetermined mandates. The overall performance of the fund
managers against their mandates, derived from Santam's investment
strategy, is monitored and tracked by an independent multimanager,
who reports back to the Santam investment committee on a quarterly
basis. The mandate guidelines include performance objectives,
market risk limitations such as tracking error and duration, asset
allocation, credit and exposure limitations, the use of derivative
structures and compliance with relevant FSB regulations. At the end
of 2011 approximately R11.7 billion of the total group investments
were managed by external investment managers. Their mandates
consist of a combination of various benchmarks; inter alia,
different JSE indices, SWIX and SteFi.
Refer to page 110 for a detailed analysis of
the investments. In short, the composition of Santam's total
investments was as follows as at 31 December 2011:
Santam's capital management philosophy is to maximise the
return on shareholders' capital within an appropriate risk
framework. The aim is to increase shareholder wealth by assisting
management to make informed, strategic business decisions around
The amount and sources of capital in
This is also linked to the current and future regulatory capital
requirements in terms of the existing and the newly formulated
solvency assessment and management (SAM) requirements.
The allocation of capital between
The appetite, level and type of risk
within the company
Issue of shares
The company did not issue any new shares during the year.
The total number of shares in issue was 119 346 at a capital of
R107 million. The total authorised number of ordinary shares is 150
million shares of no par value and 12 million non-redeemable,
non-participating, non-cumulative, no par value preference shares.
All issued shares are fully paid. Subject to the restrictions
imposed by the Companies Act, the authorised and unissued shares
are under the control of the directors until the forthcoming annual
general meeting. Until the next annual general meeting the
directors are authorised to issue 10 million of the unissued shares
for any purpose and in accordance with such rules and conditions as
they see fit.
Following on the large voluntary share buyback in 2007,
the group held a total of 7 087 168 of Santam shares, classified as
treasury shares. During 2011, the group bought back 288 892 shares
in the open market at a cost of R37 million. A total of 528 663
shares were reissued in terms of the employee share incentive
programme. The total number of treasury shares held at the end of
2011 was 6 086 185. The company has the right to reissue these
shares at a later date subject to approval by the JSE and the
Fitch Ratings affirmed Santam's Insurer Financial Strength
rating of AA+ (double A plus) and rating on Santam's subordinated
debt of R1 billion issued in 2007 at A+ (A plus). The outlook
remains stable. The affirmation reflects Santam core status within
the Sanlam group, its strong position as the largest non-life
insurer in South Africa, its good and robust capital position and
its improved and resilient financial performance, despite the
prevailing tough economic conditions.
Global Credit Ratings Company ("GCR") affirmed
Santam's domestic rand currency claims paying ability rating of AAA
(triple A) and domestic rand currency long-term subordinated debt
rating of AA- (double A minus) during July 2011. This is the
highest rating that can be attained by an insurance company. This
is indicative of very high credit quality and strong protection
Discretionary capital and
Santam's board of directors has targeted a solvency level
in the range of 35% to 45% of net written premium for the group.
From a pure economic risk capital perspective, the current solvency
requirement is between 20% and 25%. The excess is maintained for
the following reasons:
As a buffer over regulatory capital
requirements which was at 25% up to the end of 2011 and
approximately 33% under the interim SAM arrangements if our
internal model is not used or approved as calculated as input into
the QIS1 process. This is discussed in more detail under regulatory
capital and solvency requirements later in the report.
To fund new business growth
To maintain Santam's insurer financial
strength credit rating
To allow for any potential investment
The group solvency ratio of 48% at 31 December
2011 was higher than the maximum of 45% of the targeted solvency
range. Net asset value per share increased from 4 535 cents at the
end of 2010 to 5 336 cents at the end of 2011. Given the high
solvency level it was decided to declare a special dividend as
reported. We will continue to monitor our solvency levels and
required solvency range in light of industry changes and regulatory
requirements. We remain committed to efficient capital management
and consider it to be ingrained in our DNA.
BROAD-BASED BLACK ECONOMIC
The Santam BBBEE scheme is hosted in a special-purpose
company (BEE SPV) and consists of three components:
The Emthunzini BEE Staff Trust
The Emthunzini BEE Business Partners
The Emthunzini BBBEE Community
The value in the scheme is proportionally
allocated to these three trusts. Within the trusts, allocations are
made to beneficiaries according to the specific rules in the
respective trust deeds. The total value in the scheme at 31
December 2011 was approximately R555 million. During 2011 the
dividend income received by the structure housing the scheme was
sufficient to fully service the senior debt facility and make a
proportional payment towards servicing of the mezzanine debt.
The scheme also made another unit allocation to
new black employees that joined the Santam group during 2011 and to
black employees that were promoted since the previous allocation. A
second round of allocations was also made to qualifying
In total, 25% of the value in the scheme will
be allocated to specific projects within previously disadvantaged
communities. Cash distributions of approximately R5.5 million were
allocated to the scheme for distribution to identified
beneficiaries during 2011. More information on the scheme can be
found in our Sustainability Report on our website at www.santam.co.za.
Of the current value of R555 million in the
scheme, 49% (R274 million) is attributable to the Business Partners
Trust, 26% (R145 million) to the Staff Trust and 25% (R136 million)
to the Community Trust. To date, more than 80% of the value in the
scheme has been allocated to participants and we intend to continue
with allocations to participants in all three trusts during
The following significant corporate transaction was
completed during the year ended 31 December 2011:
The corporate actions reported on in 2010 are
starting to bear fruit. The acquisition of Emerald Risk Transfer
(Pty) Ltd enhanced our specialist underwriting skill in the
corporate property environment as demonstrated by the turnaround
from a loss-making situation in 2009 to double-digit underwriting
margins in 2010 and 2011. The acquisition of MiWay Group Holdings
(Pty) Ltd contributed significantly to the growth target set for
diversifying our distribution channels while the acquisition of
Indwe Broker Holding (Pty) Ltd served its purpose of protecting
Santam's premium income from this source.
Full details of the company's holdings in
subsidiaries and associated companies are contained in note 44 to
the full annual financial results published on our website at www.santam.co.za or available on request from the
REGULATORY SOLVENCY AND CAPITAL
The FSB is in the process of developing a new solvency
regime for the South African long-term and short-term insurance
industries to be in line with international standards. This will be
done under the Solvency Assessment Management (SAM) banner.
The basis of the SAM regime will be the
principles of the Solvency II Directive as adopted by the European
Parliament. But this will be adapted to South African specific
circumstances where necessary.
The implementation date of interim measures
relating mainly to changes to the calculation of incurred but not
reported claims (IBNR) and the calculation of capital adequacy was
1 January 2012. The overall financial impact on Santam will not be
material. Amendments to legislation to provide the regulator with a
mechanism to manage insurance groups and also to introduce new
requirements for risk management, governance and outsourcing are
expected to come into effect during 2012. We have assessed our
readiness to comply with these requirements and are confident that
they will have a minimal impact on the group. The target date for
implementation of the final requirements under the new regime,
including the internal model approach for short-term insurers, is
As previously reported, Santam developed an
internal dynamic financial analysis model of the business in line
with best practice to assist management with risk quantification
and decision-making. More detail on the model can be found in the
Operational Review: Risk Services. Santam intends to use this
internal model for determining its capital requirements once SAM
has been enacted by the FSB. We expect that capital requirements
for Santam under this approach will not be higher than the current
25% solvency requirement.
More information about our participation in the
FSB's quantitative impact study (QIS1) and a readiness assessment
carried out during 2011 can be found in the Operational Review:
A hive of activity in the regulatory environment is and
will continue to impact the company. Impact assessments and the
implementation of requirements are impacting resources and results
in additional cost of running the company. However, Santam is
determined to ensure that, where possible, we derive benefits from
the implementation of requirements as opposed to an approach of
merely performing cosmetic exercises without business or governance
value. Our approach to legal compliance and the philosophy that we
adopted in this regard are discussed in detail in the Corporate
Governance report. There were several regulatory developments in
2011 which are summarised below:
Companies Act 71 of 2008
The new Companies Act came into effect during the 2011
financial reporting year. Santam's response to the Act is set out
in the Corporate Governance report.
Insurance regulation and
FSB directive 156.A.i (ST)
Pursuant to the FSB's attempt to ensure consistency in the
application of the STIA, and in particular, section 45 which deals
with the handling and receipt of policy premiums by intermediaries,
it released directive 156.A.i (ST) on 16 August 2011. This
directive provides guidelines on how insurers and independent
intermediaries are to apply section 45. Santam's response to the
directive is set out in detail in the Corporate Governance
Financial Advisory and
Intermediary Services Act, Act No 37 of 2002 ("the FAIS Act")
In terms of the General Code of Conduct for authorised
financial services providers and representatives, authorised
financial services providers, such as Santam, were required to put
in place a conflict of interest management policy which was aimed
at avoid conflict of interests and, where this is not possible, to
mitigate conflict of interest between itself and policyholders when
rendering financial services to policyholders. The Santam board
approved Santam's conflict of interest management policy in April
2011 and the policy has been implemented. Further relevant actions
taken are described in the Corporate Governance report.
Upcoming regulatory changes
A number of regulatory changes will impact Santam in
future, most notably:
Amendments to section 48,
introduction of 48A of the Short-term Insurance Act, Act No 53 of
1998 ("the STIA") and the introduction of regulation 6 issued in
terms of the STIA from 1 January 2012
Section 48 regulates remuneration paid by insurers to
intermediaries, section 48A lays down requirements under which
insurers may conclude binder agreements with third parties and
regulation 6 introduces new definitions and prescribes
requirements, limitations and prohibitions relating to binder
agreements, consideration that may be offered or provided to binder
holders, and any participation by binder holders in profits
attributable to the policies referred to in binder agreements and
for certain exemptions. Insurance Laws Amendment Bill 2011 ("the
In August 2011, the FSB released the Bill as
part of the SAM II Project. The Bill is aimed at introducing
interim measures relating to the governance of insurers, risk
management, internal controls, group supervision, and outsourcing
of functions. A further aim is to address the existing regulatory
gaps and introduce technical amendments to insurance
The Micro-insurance White Paper provides that insurers
will, in future, have an option of either selling micro-insurance
products using their current licences, albeit with limitations, or
ringfencing their micro-insurance business under a micro-insurance
licence. The capital and some governance requirements for
micro-insurers will be relaxed.
Treating clients fairly
TCF is aimed at introducing a framework to ensure that clients in
the financial services industry receive fair treatment when
engaging with regulated entities.
Developments in taxation
The new dividends taxation will come into effect on 1
April 2012 and will replace the current secondary tax on companies.
It is an indirect tax in terms of which taxation on dividends of
10% will be withheld from specified shareholders as determined by
the Income Tax Act.
The South African Revenue Service (SARS) is
currently reviewing value-added tax (VAT) for insurance contracts.
SAIA has formed a tax task group to engage with SARS and
communication from SARS on any changes to the VAT treatment for
insurance contracts is expected by March 2012. Santam is
represented on this task group and has provided input into the
The Minister of Finance in his budget speech of
22 February 2012 announced that the capital gains tax (CGT)
inclusion rate for companies will be increased from 50% to 66.6%
(effective CGT rate from 14% to 18.6%). The change in the CGT rate
will apply in respect of capital gains during years of assessment
commencing on or after 1 March 2012. The increase will have an
impact on the taxation of Santam's gains and losses on financial
assets, effectively increasing the tax rate.
Santam is exposed to several financial and other risks
namely market risk, credit risk, insurance risk, liquidity risk,
operational risk, legal risks and risks associated with the
management of capital. The potential impact and management of these
risks are discussed in detail in note 3 of the full annual
financial results published on our website at www.santam.co.za or
available on request from the company secretary.
It is expected that the South African economy would grow
by somewhat less than the forecasted 3% worldwide growth in gross
domestic product in 2012. Headline inflation will be impacted by
the changes in food prices while core inflation is expected to
continue to rise in the first half of the year following the
increases in commodity prices and the weakening of the rand in the
second half of 2011. It is expected that headline inflation will
average around 6% for 2011 and some increase in insurance inflation
is likely. This should improve average premium levels somewhat.
However, competition in the market will continue to put pressure on
premium rates and prevent across-the-board premium increases.
Santam is positioned to manage increases selectively through our
market and risk segmentation approach.
The weakening of the rand during the course of
2011 is expected to put some upwards pressure on claims cost, most
notably on the cost of motor vehicle repairs due to the increased
cost of imported vehicle parts. However, we are optimistic that our
continued efforts to reduce claims cost as described in more detail
in our operational review: claims would offset some of the impact
of the upwards cost pressure. It is expected though that the
underwriting margin in 2012 will be lower than the levels achieved
Nominal interest rates are expected to remain
on current levels during 2012 if the rand remains around its
current level. Therefore, interest received is not expected to be
higher in 2012 implying a flat return on insurance funds for 2012
compared to 2011. Uncertainty remains in the investment markets due
to the impact of the instability in Europe. On the back of the
assumption that the European economy will not disintegrate but
faces a very slow and long-term recovery, it is expected that
investment markets should be more stable in 2012 compared to 2011.
This should support an improvement in fair value gains in 2012.
In this report we make certain statements that are not
historical facts and relate to analyses and other information based
on forecasts of future results not yet determinable, relating,
among others, to gross premium growth levels, underwriting margins
and investment returns. These are forward-looking statements as
defined in the United States Private Securities Litigation Reform
Act of 1995. Words such as "believe", "anticipate", "intend",
"seek", "will", "plan", "could", "may", "endeavour" and "project"
and similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of
identifying such statements.
Forward-looking statements involve inherent
risks and uncertainties and, if one or more of these risks
materialise, or should the underlying assumptions prove incorrect,
actual results may be very different from those anticipated.
Forward-looking statements apply only as of the date on which they
are made, and Santam does not undertake any obligation to update or
revise any of them, whether as a result of new information, future
events or otherwise.
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