Tough conditions impact Santam’s half-year results
Indicators for the six months ended 30 June 2020
- 7% growth in group gross written premium
- 4% growth in Conventional insurance gross written premium
- Net underwriting margin of 4.3% (2019: 5.3%) for conventional insurance
- Net Operating Results of R830 million (2019: R963 million)
- Return on capital of 11.6%
- Cash generated from operations increased to R3.9 billion
- No interim dividend declared
Santam, South Africa’s largest short-term insurer, has despite a severely constrained economic environment achieved solid operational results that saw gross written premium (GWP) growth of 4% on its conventional insurance book and a net underwriting margin of 4.3% (2019: 5.3%), which is at the lower end of the group’s 4%-to-8% target range.
The operating environment in South Africa has deteriorated substantially since February 2020, as the government implemented strict measures to control the spread of the COVID-19 pandemic, resulting in a significant slowdown in economic activity. Global and South African growth estimates were revised down sharply. This, together with persistent uncertainty around the eventual impact of COVID-19, drove significant volatility in equity, interest rate and currency markets.
Lizé Lambrechts, Santam Group CEO, said these conditions continue to impact on the group’s results in 2020.
“Although we experienced a relatively subdued claims environment during the first three months of 2020, the second quarter was significantly impacted by the effects of the national lockdown and the resultant COVID-19-related claims for events cancellation, travel insurance and contingent business interruption cover,” she said.
Lambrechts added that the conventional insurance business reported a net underwriting margin of 4.3% compared to 5.3% in 2019. The underwriting results in the current period were negatively impacted by a provision for contingent business interruption (CBI) claims. This was set-off to some extent by a benign claims environment following the COVID-19 lockdown.
The Commercial and Personal intermediated business was impacted by COVID-19, resulting in less new business signed. The Santam Specialist business grew its corporate property and engineering sectors, while MiWay achieved a solid growth of 8%, after providing COVID-19 premium relief of R40-million to its policyholders. Santam Re achieved strong growth in its third-party business, positively impacted by the weakening rand.
The property class reported growth of 12% on the back of strong growth in the specialist property business. The motor class reported GWP in line with 2019. Growth of 4% was achieved, excluding premium relief to policyholders. The engineering class benefited from strong growth in Specialist business, but was negatively impacted by a reduction from Santam Re. The liability class continued to focus on improved profitability in a competitive market, resulting in 2% negative growth. The accident and health class reported growth of 10%, with the significant pressure experienced in the travel insurance business offset by the strong growth reported by Santam Re.
Gross written premiums from outside South Africa written on the Santam Ltd and Santam Namibia licences amounted to R2 324 million (2019: R1 834 million), equating to a healthy 27% growth. Strong growth was achieved by the Santam Specialist Business (corporate property and engineering) and Santam Re in Africa, Southeast Asia, India and the Middle East.
The Alternative Risk Transfer business reported operating results of R54 million (2019: R72 million). Investment margins were negatively impacted by the volatile financial market conditions. Satisfactory fee income and underwriting results were achieved despite the difficult operating conditions.
Most of the markets where Sanlam Emerging Markets (SEM) operates were subject to a form of COVID-19 lockdown or curfew, which inhibited new business sales similar to South Africa. Santam’s share of SEM gross written premiums increased by 16% in rand terms. All regions achieved solid growth despite COVID-19 restrictions and the deliberate non-renewal of a number of loss-making schemes aimed at improving the quality of the book, particularly in North and West Africa. The Saham business achieved gross written premium growth of 2.5% in constant currencies (17% in Rand).
INVESTMENT AND CAPITAL PERFORMANCE
Net investment income attributable to shareholders, inclusive of the investment return on insurance funds of R582 million (2019: R800 million) was reported as a result of fair value losses on financial assets which contributed to the weaker performance. Significant foreign currency gains of R647 million were recognised in 2020, compared to a loss of R25 million (2019).
Equity-accounted losses from associates amounted to R747 million (2019: profit of R45 million) and were negatively impacted by negative investment returns on insurance funds in the key Saham territories and an impairment of intangible assets of R690 million recorded by SAN JV, the investment holding company of Saham. The carrying value of Saham was adversely affected by the COVID-19-related downturn in financial markets and deteriorating economic conditions in the territories where Saham operates. The impact on the group’s net asset value was however limited to R158 million due to foreign currency translation gains relating to the Saham investment of R532 million recognised directly against equity.
Cash generated from operations increased to R3.9 billion (2019: R1.6 billion), mainly due to lower claims settlement during this period. The lower operating results and reduced investment income impacted on headline earnings which decreased to 663c per share (2019: 990c per share).
A return on capital (ROC) of 11.6% was achieved, below the ROC threshold of 24%, impacted mainly by the lower insurance and investment results, as well as the impairment relating to Saham. The balance sheet remained robust with the economic capital coverage ratio at 150% which is at the lower end of the target range of 150% to 170%.
CONTINGENT BUSINESSS INTERRUPTION AND RELIEF PAYMENTS
The business announced post the reporting period that it would provide up to R1 billion of relief payments to support mainly small and medium-sized commercial policyholders in the hospitality, leisure and non-essential retail services industries who have the CBI extension to their policies and suffered a loss due to the national lockdown.
Santam has made provision for R1 290 million on the last day of the interim period, estimating the exposure relating to policies with CBI extensions, despite significant uncertainty regarding the size of these claims. R950 million of the allocated R1 billion relief had by 2 September 2020 already been paid to more than 2 400 small and medium-sized businesses.
A number of legal cases are in progress worldwide. Santam’s Ma-Afrika case was heard in the Western Cape High Court on 1 September 2020.
“Our reinsurance program will only respond to claims covered under the terms of our policies. In order to formulate a reinsurance claim under a different interpretation of the policy wording to our own, such interpretation would have to be definitively decided by the South African courts. We want to resolve this matter and get clarity as soon as possible,” Lambrechts said.
Commenting on the next six months, Lambrechts said economic activity will, in the medium-term, be significantly constrained by weak consumer spending due to the impact of COVID-19, as well as the likelihood of further load shedding.
“Following the outbreak of COVID-19, we have re-assessed our FutureFit strategy and remain assured that it provides the building blocks for success. Building technology as an enabler and driver of efficiency and innovation, is a core pillar of our future strategy. Our focus during 2020 will remain on achieving profitable growth and taking advantage of opportunities presented by the current operating environment. We will focus on continued operational effectiveness, tight cost management and customer service,“ Lambrechts concluded.