The country’s biggest short-term insurer, Santam, on Wednesday reported a 16% decline in headline earnings to R583-million for the six months to the end of June. This equates to headline earnings per share of 498 cents against 599 cents for the previous comparable half-year.
The group declared an interim dividend of 118 cents per share compared with 108 cents per share in the first of 2005.
The group’s underwriting performance came under pressure during the half-year due to the continued softening of the insurance cycle as well as an escalation in the average claims cost.
Despite this, the group generated an annualised return on weighted average shareholders’ funds of 21,6% compared with 27,6% in June 2005. This was predominantly due to excellent investment return on the back of firmer equity markets during the period.
Following on the growth momentum of 2005, Santam achieved a 17% increase in gross written premiums during the period. On the local front, growth was achieved across most classes of business. At group level, growth in net written premium was 16% up.
International premiums increased by 19%, with both Westminster Motor Insurance Association and Santam Europe achieving similar growth in sterling (British pound) terms.
Santam said the short-term insurance environment in South Africa continued to normalise, with the company experiencing a sharp increase in claims in the personal and commercial lines of business, placing underwriting margins under pressure.
The group’s net claims ratio of 71,7% was 7% higher compared with the first half of 2005. Commercial property and personal line-insurance classes were negatively affected by adverse weather conditions, floods in Namibia, theft and a high number of commercial and private property fire incidents.
“In addition, the profitability of the motor-insurance class came under pressure due to increased motor-vehicle accidents; higher repair costs, particularly on imported vehicles; as well as increased cost due to car theft and hijackings. On the other hand, specialist underwriting classes experienced more favourable claims ratios.
“Steps are being implemented to stabilise underwriting margins and address unprofitable business. As part of Santam’s ongoing assessment of insurance liabilities in terms of claims experience, the incurred but not reported reserve was reduced by R45-million during the period.
“Continued initiatives to improve efficiencies, timing, and the increased level of activity contributed towards the reduction in the acquisition cost ratio from 26% to 24,7%,” the group said.
The combined effect of all insurance activities resulted in a net insurance margin of 6,2% compared with 12,2% in 2005.
Although R1-billion in cash was generated from operations during the first six months of 2006, this was 25% less than 2005 due to the overall lower underwriting profitability to date.
Investment-related income, excluding the investment return on insurance funds, was 40% higher in the first six months of 2006 compared with the equivalent period in 2005, despite Santam’s R1-billion dividend payment in April 2006, which reduced its capital base. This performance was due to the stronger equity markets during the period under review.
Earnings from associated companies were higher than the comparable period mainly due to the very good results of Credit Guarantee Insurance Corporation of Africa and Lion of Africa Insurance Company.
The group’s solvency level is currently a sound 54%, a reduction from 61% at the end of 2005, due to the R1-billion in dividends paid to shareholders earlier in the year. In line with this, the net asset value per share decreased from 4 927 cents at the end of 2005 to 4 645 cents at the end of the first six months of 2006.
Looking ahead, Santam said it is anticipated that underwriting margins will continue to come under pressure due to the softer market, and the further deterioration of claims.
Recent floods in the southern and Eastern Cape will put further pressure on underwriting margins.
“Santam will concentrate on growing its market share without compromising sustainable profitability. Growth will be slower for the remainder of the year as there will be increased focus on managing the profitability of certain lines of business.
“International businesses will remain focused on achieving a balance between growth and profitability to ensure that operations return to profit. It is expected that Westminster Motor Insurance Association will return to positive underwriting margins, whilst Santam Europe should achieve break-even during the second half.
“In line with market expectations, it is anticipated that higher interest rates during the remainder of the year will have a positive effect on cash-related investments, while equity markets will remain volatile in the short-term with an overall sideways movement,” Santam said. — I-Net Bridge