Santam reports growth of 9% in gross written premiums (excluding cell insurance business) exceeding R20 billion for the first time ever
Highlights of Santam's results to 31 December 2013:
- Growth of 9% in gross written premiums (excluding cell insurance business).
- 4% headline earnings growth.
- Headline earnings per share of 1033 cents vs. 995 cents for the prior year
- Final dividend of 433 cents per share
- Cash generated by operations R1.6-billion (compared to R2.4 billion in 2012).
- Group solvency ratio at 42%, within the 35% to 45% target range, S&P International Rating A-
- Return on capital of 20%.
- Net underwriting margin of 2.8% and net insurance margin of 5.0% in challenging underwriting year.
- Net acquisition cost ratio of 27.9% (up from 27.7% in 2012 on technology investments).
- MiWay gross written premiums up 22%.
- Paid over R13 billion in claims.
- Geographic diversification into emerging markets
CAPE TOWN, 26 February 2014 - Santam, South Africa's largest short-term insurer, today reported a 9% increase in annual gross written premiums (excluding cell insurance business) in the year to end-December, in spite of continued tough underwriting conditions, characterised by several significant adverse weather events exacerbated by the sharp decline in the Rand-Dollar exchange rate. The rand dollar exchange rate depreciated by 24% over the year. This placed significant strain on the motor insurance book as the weaker rand directly affects the cost of claims.
In announcing its results, Santam noted that the combination of poor GDP growth and historically low interest rates were the additional adverse factors in a tough trading environment in 2013.
For the second consecutive year, weather-related claims had a substantial negative effect on insurers and policyholders. The most notable events in 2013 were the January floods in Limpopo followed by floods in the Western Cape and two significant hailstorms in Gauteng, in November, the second being one of the most severe catastrophe events experienced in South Africa to date, with total claims for the short term insurance industry exceeding R1.6 billion. Total gross claims from these catastrophe events for the Santam group exceeded R400 million, the second consecutive year to surpass that threshold.
Says Ian Kirk, Santam CEO: "Following the weak underwriting performance of the Group's core intermediated business during the six month period to June 2013, due to the weather and rand factors, various underwriting measures, such as segregated premium increases on policy renewal and risk reviews have been put in place. The positive impact of these actions was evident in the results during the second half of 2013. We will work actively with clients to help them manage their risks as their risk profile in turn influence premiums." He says Santam paid more than R13 billion in claims in 2013.
The underwriting results were negatively affected by a net underwriting loss of R142 million in crop insurance compared to a profit of R38 million in 2012. These losses occurred mainly in the first half of the year following hail damage to summer crops in the eastern region of South Africa, and drought-related input losses in the central and western regions.
Headline earnings increased by 4% compared to 2012. Cash generated from operations amounted to R1.6 billion, while the solvency margin of 42% remains within Santam's long-term target range of 35% to 45%. Return on capital of 20% compared to 22.6% in 2012 was a reasonable outcome in view of the adverse underwriting conditions.
Santam's net claims ratio was 69.3%, compared to 68.3% in 2012. The changes in claims ratio were driven mainly by the increase in weather-related claims and the rand pressure on the cost of motor vehicle repairs relative to premium increases. The claims from weather related events in 2013 reduced the group's net underwriting margin by 2.5%. Combined with rand pressure, the net underwriting margin remained below the medium-term target of 5% to 7%.
"Our biggest challenge in 2014will be to balance growth and profitability and return to the target margin. We expect sluggish economic growth and continued rand weakness for the 2014 financial year and uncertain investment returns, driving even more focus on the improvement of underwriting margins," says Kirk.
MiWay supported the positive growth in the motor insurance class, with an increase in gross written premiums of 22%. MiWay achieved profitable underwriting results in spite of the impact of claims due the Gauteng hail storms in November.
Investment returns on insurance funds of R374 million decreased from the R415 million earned in 2012, mainly because of continued low interest rates, the negative performance of the bond market and reduced float margins in the alternative risk transfer business. The combined effect of insurance activities resulted in a net insurance income of R851 million or a 5.0% margin, compared to R1, 038 billion and a margin of 6.6% in 2012.
The income tax charge decreased by 52% compared to 2012. The 2012 tax charge was significantly affected by a non-recurring secondary tax on companies (STC) charge and the effect of the increase in the capital gains tax (GCT) inclusion rate.
Kirk adds: "Santam investment portfolio performed in line with the positive market movements, although the performance was limited by the downside protection over equities introduced in March 2013. The investment results were supported by a preference dividend of R51 million received on the Sanlam Emerging Markets (SEM) preference share linked to the Shriram General Insurance (SGIC) business in India, and foreign exchange gains totalling R91 million compared to R14 million in 2012."
Santam entered into an important series of transactions with SEM in December 2013, in terms of which Santam acquired participation interests in SEM's emerging markets short-term insurance investments in India, Malaysia, Botswana, Malawi, Zambia, Tanzania and Uganda. The Santam group will provide technical services to the SEM short-term insurance partner companies. The transaction enables Santam to share in the economic interest of the short-term insurance expansion by SEM in these markets.
In June 2013 Santam concluded the acquisition of a 100% interest in Travel Insurance Consultants (TIC) for R95 million, enabling TIC to continue building its leadership position through its relationships in the travel market and by leveraging Santam's support.
Santam also acquired a 40% interest in Western Group Holdings Ltd, a short-term insurance business, from PSG Konsult for R88 million in September 2013.
"Looking ahead, the reality of the depreciating rand, increasing fuel, energy and food prices coupled to the need for us to increase premiums continues to make it a tough environment for the South African consumer and for our business," says CEO Kirk. "However, despite the financial strain on clients, we are positioned to manage these premium increases selectively through our market and risk segmentation approach."
"There is also increased risk on the ground at the municipality level and insurers face rigorous regulatory pressures. However, we remain confident in our ability to execute our strategy through continued diversification, effective underwriting and investment management," concludes Kirk.
The Santam board has declared a final dividend of 433 cents per share, up 5.6% on 2013.