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Thursday, October 1, 2009
Success against pressure

Along with all industry players, Santam says it faced a challenging first six months of the year for the interim period to 30th June, 2009. Acknowledging underwriting margins had been under pressure, it notes that investment returns had “improved on the back of slightly firmer equity markets, resulting in overall earnings showing a significant improvement.” Headline earnings per share were therefore 219% higher at 284 cents (2008:89 cents). An interim dividend of 166 cents per share was declared (2008 166 cents).

“Growth of 7% in gross written premiums was a credible achievement in the current suppressed economic conditions, comparing favourably with industry experience,” says CE Ian Kirk.
“Although this positive growth was achieved across most of the business, ensuring an appropriate rate for the risk insured is a challenge in the current economic environment.”
The net underwriting result reduced to R88 million (2008: R326 million), while the overall net underwriting margin was lower at 1.4%, mainly impacted by negative margins in the property and motor classes.
He adds that the personal and non-specialist commercial business were under pressure as a result of increased claims and associated costs. “Although the margins in commercial motor remained satisfactory, personal lines motor experienced negative underwriting margins. In addition, we did not escape the large number of industrial accident and fire-related claims which were felt throughout the industry, evidenced by the negative return of the property class. On the positive side, the liability, engineering and crop business units continued to perform well.”
The net acquisition cost ratio of 25.7% increased slightly from the 25.1% for the same period in 2008 due to a higher net commission percentage as a result of reduced reinsurance commission earned.
The investment return on insurance funds of R218 million was higher than the R129 million for the comparable period in 2008. The increased returns were mainly as a result of higher float balances, good returns from interest bearing instruments and the float balance no longer containing a listed equity component. The group’s operating activities generated healthy cash flows of R958 million during the reporting period.
The combined effect of the insurance activities resulted in a net insurance margin of 5% for the past six months compared to 8% for the comparable period in 2008.
The group solvency ratio, as at 30th June 2009, was a healthy 42%, slightly less than the 44% as at 31 December 2008.
Performance of the investment portfolio improved significantly during the reporting period in line with the slight strengthening of equity markets coupled with the impact of the group’s hedging strategy. This was in contrast to the negative fair value returns on equities during the first half of 2008 when the investment markets were severely depressed. The company continues with its strategy of proactive hedging its equity investments to minimise capital losses in the event of lower market levels. Despite a reduction in interest rates during the six months, the interest earnings were higher in comparison to the first six months of 2008 due to higher levels of interest bearing instruments.
Kirk continues, “For the second half of the year, underwriting margins are expected to remain under pressure, although the likelihood of a repeat of the high value property fire claims during the first half of the year is considered to be low. It is anticipated that the market will remain soft for both commercial and personal lines business as the recovery of the domestic economy is not expected before 2010. Against this background, the low level of disposable income for individuals and pressure on business increasingly hinder achievement of an appropriate rate for the risk insured.
“We have taken additional pro-active steps to reduce its downside exposure to equity markets, while retaining meaningful upside potential. This was done using appropriate derivative structures. In addition, Santam has followed a prudent approach to expense management to counter the effects of the economic downturn on the company.”
Santam has recently made an offer to purchase the entire shareholding of Emerald Underwriting Managers and Emerald Insurance Company. These transactions are currently subject to regulatory and shareholder approval which is expected by the end of the third quarter.
 

Copyright © Insurance Times and Investments® Vol:22.10 1st October, 2009
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