Santam interim results: diversification lessens impact of catastrophe events
Key highlights for the six months ended 30 June 2017
- Growth of 14% in gross written premium
- Conventional insurance net underwriting margin of 4.2% (target range of 4% to 8%)
- Paid R8.8 billion in claims
- Acquisition of 100% of the shareholding in RMB-Structured Insurance
- Return on capital of 20.4% (annualised)
- MiWay gross written premium up 15% to R1.1 billion
- Group solvency ratio at 151% (normalised)
- Headline earnings per share of 593 cents, 6% below the prior year
- Interim dividend of 336 cents per share, up 8%
In the wake of the biggest catastrophe event in the history of the South African insurance industry, the country’s largest general insurer, Santam today said that its solid diversification strategy meant that it was in a good position to settle claims worth R8.8 billion in the six months to June 2017.
The company reported lower underwriting results for the interim period compared to 2016 in a significantly challenging claims environment, the majority of which can be attributed to catastrophe events and a number of large property claims. Headline earnings per share dropped 6% to 593 cents per share while a conventional insurance net underwriting margin of 4.2% - at the bottom end of its target range of between 4% and 8% - was achieved.
Santam chief executive officer Lizé Lambrechts said the combination of the severe storm in Cape Town and surrounding areas and the devastating fires in the Southern Cape in early June resulted in claims of R800 million. “Given the increasing amount of risks facing South African communities, businesses and individuals, short-term insurance has become an even more critical protection mechanism against material and financial loss. Assisting our clients in mitigating these risks goes hand in hand with our commitment to being there for them when they need us most.”
The catastrophe event in June alone had a material net impact of R234 million on the business. Said Lambrechts: “Our strong diversification strategy across insurance lines helped to cushion the effect on our financial results. In the period under review, the underwriting performance of the commercial and corporate property class came under pressure after an increase in large property claims. “During tough economic times claims often arise as maintenance and safety standards are compromised. This challenge is receiving strategic focus by expanding capacity in the areas of risk management and surveying, implementing premium rate increases, reducing exposure to certain types of risks and increasing the level of risk sharing and risk management collaboration with our clients.”
While underwriting profit was the key driver of a 6% drop in headline earnings per share, it is pleasing to note that despite challenging trading conditions, Santam’s insurance book had real policy growth in the interim period. MiWay had its best six months of trading in the history of its existence, making a strong contribution to the underwriting margin and a 15% growth in gross written premium up to R1.1 billion.
In the period under review, the Santam group acquired a shareholding of 100%, with an economic interest of 90%, in RMB Structured Insurance (rebranded as Santam Structured Insurance or SSI). Santam’s overall alternative risk transfer (ART) business, which consists of the risk finance, affinity, underwriting management and structuring businesses of Centriq Insurance and SSI, reported growth of 28%. Centriq reported no gross written premium growth due to refunds of risk finance premiums. This was enhanced by the acquisition of the SSI book of business. The ART business reported acceptable operating results before tax of R35 million (2016: R41 million).
Santam’s share of the gross written premiums of the SEM (Sanlam Emerging Markets) businesses in Africa (excluding South Africa), Malaysia and India, increased by 43% to R1 257 million (2016: R880 million). This follows the inclusion of the Saham Finances results for the full 6 month period (2016: 4 months), the additional investment in India’s Shriram General Insurance Company Limited (SGI) during the second half of 2016 and good growth achieved across the businesses in the portfolio, with the exception of Malaysia’s Pacific & Orient Insurance Co (P&O). The company’s share of the net insurance result of these businesses increased to R101 million compared to R76 million in 2016. The portfolio of businesses achieved a net insurance margin of 11,6% compared to the 12.8% reported in 2016. The performance of Saham Finances and SGI were in line with the business plans; however P&O continues to experience negative growth in competitive market conditions whilst maintaining an acceptable underwriting margin.
Santam’s investment income during the period was R918 million, this is significantly higher than the previous period (2016: R555 million) and was mainly due to foreign currency gains on the winding up of Santam International, increased interest income following the growth in interest-bearing assets and the positive fair value adjustments on the listed and unlisted investment portfolios. The South African investment portfolio outperformed the market-related benchmarks for the various asset classes.
PROSPECTS FOR THE REST OF 2017
Real annual GDP contracted by a further 0.7% in the first quarter of 2017, following a contraction in the economy in the fourth quarter of 2016, with inflation (average CPI) of 5.1%. The repo rate was lowered by 25 basis points in July 2017, following the 75 basis points increase in 2016. Looking ahead to the rest of the year, Lambrechts anticipates a tough trading period, as the continued lack of economic growth inevitably leads to people choosing not to acquire new insurable assets.
“Our underwriting and risk management actions will continue to be focused on the commercial and corporate property classes of business. We are also continuing the optimisation of our non-motor claims channel” said Lambrechts.
Santam’s philosophy of delivering insurance good and proper is further augmented by its collaboration with provincial and district municipalities which has given the company the opportunity to contribute to mitigating “on the ground” insurable risks in vulnerable communities across the country. These contributions have included the resourcing of local fire stations with equipment such as fire hoses and protective gear, and the enabling of geographical information systems aimed at improving emergency response and disaster management capabilities. “We have helped to greatly improve the provision of disaster management services across several municipalities. The expansion of our existing programme stands to benefit more than five million people between now and 2020,” said Lambrechts.
“Our focus furthermore remains on growing profitably in South Africa and to increase our international diversification through the Santam Specialist Business and Santam Re divisions. International diversification is supported by close collaboration with the SEM general insurance businesses, which utilises the extensive emerging markets footprint to source new business opportunities. We will continue our focus on supporting the development of the SEM general insurance businesses by allocating appropriate technical resources.”
Lambrechts said Santam would maintain its focus on cost efficiencies to improve the management expense ratio over the medium term. “The investment market is likely to remain uncertain. Continued high volatility is expected on interest-bearing instruments. The increased exposure to non-rand-denominated business further increases foreign exchange volatility for the group.”
Santam’s board declared an interim dividend of 336 cents per share.