Santam remains steady amid tough economic climate and high claims
Key highlights of Santam’s results to 31 December 2016:
- Growth of 7% in gross written premiums
- Net underwriting margin of 6.4% (target range 4% - 8%)
- Paid R16.1 billion in claims
- Return on capital of 15.9% (normalised 18.5%)
- MiWay gross written premium up 19% to R2.1 billion (2015: R1.7 billion)
- Economic capital coverage ratio at 155% (target range 130% - 170%)
- Headline earnings per share decreased by 41%
- Final dividend of 570 cents per share
Santam, South Africa’s largest general insurer, today reported solid underwriting results and acceptable growth for the year ended December 2016. In a low-growth economic environment, the group reported gross written premium growth of 7% and a net underwriting margin of 6.4% (2015: 9.6%, which was exceptional) – well within the target range of 4% to 8%.
In announcing the results, Santam noted that the group paid out R16.1 billion in claims over the period, including more than R500 million in claims for catastrophic events such as flash floods and hail storms.
Santam chief executive Lizé Lambrechts said the group’s underwriting results – which remained on par with the 10-year average of 6% – were achieved in highly competitive market conditions. “The prolonged tough economic conditions and low GDP growth continue to provide challenges, but the business is resilient and has maintained its growth trajectory.”
Investment income, inclusive of fair value movements on financial instruments, of R832 million was significantly lower compared to R1 445 million in 2015. The South African investment portfolio performed better than the market. Foreign currency exchange losses, however, had a negative impact on investment returns following the relative strengthening of the rand since December 2015. In addition, the value of the Sanlam Emerging Markets (SEM) general insurance business portfolio showed negative unrealised fair value movements following tough trading conditions in certain emerging markets.
The lower underwriting profits and significantly lower investment results reduced headline earnings per share by 41% compared to December 2015. An annualised return on capital of 15.9% was achieved. Normalising the results for the impact of the foreign currency gains and losses in 2015 and 2016, headline earnings per share would have decreased by 14%, while return on capital would have improved to 18.5%. The economic capital coverage ratio was 155%, close to the midpoint of the target range of 130% to 170%.
The motor class of business was positively impacted by continued disciplined underwriting, including a significant improvement in the underwriting results from business on outsourced platforms. The impact of the catastrophic hail events and flash floods during 2016 was significantly reduced by recoveries from the catastrophe and sideways reinsurance programmes.
The property class achieved strong growth of 11% on the back of increased corporate property business written in the rest of Africa and Asia and good growth achieved by the Santam Re property portfolio. The motor class benefitted from the 19% growth reported by MiWay (gross written premium of R2 101 million; 2015: R1 771 million). MiWay reported a claims ratio of 63.6%, up from 60.9% in 2015, mainly due to the impact of new business growth and an increase in motor parts cost following the weakening of the rand in 2015. MiWay contributed an underwriting profit of R160 million (2015: R163 million).
Lambrechts said following the severe drought conditions during the 2015 / 2016 crop season which resulted in lower production, the crop insurance business showed significant growth of 17%. Gross drought claims of R231 million were incurred during 2016. The crop business achieved a net underwriting profit of R69 million (2015: R131 million). “This was as a result of disciplined underwriting and fewer hail-related claims during the crop season due to the drought.”
Santam’s focus on international diversification continued to reflect positive growth results with gross written premium from the rest of Africa, India, South-East Asia and China written on the Santam Ltd licence of R1 431 million for the period (2015: R1 354 million). Santam Namibia reported gross written premium of R1 118 million (2015: R1 056 million), resulting in total gross written premium from outside South Africa increasing to R2 549 million (2015: R2 410 million). In addition, Santam’s portion of the gross written premium from SEM insurance businesses increased to R1 939 million (2015: R675 million).
Commenting on the investment income for the period under review, Lambrechts said the South African investment portfolio achieved good returns in 2016. However, the investment results were negatively impacted by foreign currency losses and the performance of the SEM investments. The relative strengthening of the rand during 2016 from December 2015 levels resulted in significant foreign currency losses of R372 million (including the SEM investment portfolio) compared to gains of R467 million in 2015 included in investment income.
Negative fair value movements (excluding foreign currency losses) of R67 million (2015: positive movement of R47 million) in Santam’s interest in SEM’s general insurance businesses in Africa, India and South-East Asia had a further negative impact on the investment performance.
The key drivers of the fair value movements were a downward adjustment to the value of the Pacific & Orient Insurance Co. Berhad business in Malaysia of R88 million due to lower premium growth in competitive market conditions, and a reduction in the value of the investment in SORAS Assurance Générales Ltd in Rwanda of R47 million following financial irregularities relating to prior years identified during 2016.. Corrective measures were taken to address these irregularities.
On a positive note, the value of Shriram General Insurance Company Ltd (SGI) increased by R51 million following good growth achieved in the Indian insurance market. Santam increased its participatory interest in SGI during the second half of 2016 by 8% to 15% at a cost of R251 million. At 31 December 2016, the SEM investments had a fair value of R1 127 million (2015: R1 005 million).
Lambrechts said as a result of Standard &Poor (S&P) lowering its local currency rating on South Africa to BBB from BBB+, Santam’s international counterparty credit and insurer financial strength rating was also lowered to BBB from BBB+. Santam has entered into an agreement with an international reinsurer in terms of which selected Santam business units will be able to use the reinsurer’s S&P AA- credit rating. This will enable Santam to profitably grow its business flows from territories outside South Africa in situations where an international credit rating of A- or better is required.
Looking ahead, Lambrechts said the group’s focus remains on balancing profitable growth with a continued efficiency drive to optimise cost ratio – both in South Africa and emerging markets. “A strategic focus area will be to work together with the Sanlam Group to unlock value in SEM general insurance partners and to increase our international diversification through the Santam specialist lines and Santam re.
“We will continue to implement our strategy whereby Santam will maintain its focus on profitable growth and cost efficiencies, whilst also driving new business diversification through Santam Direct, MiWay’s business insurance and broker-direct offerings, as well as the MiWay Life insurance initiative in conjunction with Sanlam Life. ” she concluded.
The Santam board has declared a final dividend of 570 cents per share.