Santam underwriting performance holds up in catastrophic year

Insurer Santam weathered significant catastrophe-related claims in 2017 to deliver a solid underwriting performance.

The group reported an underwriting margin of 6% for the year to December 31 2017, with the underwriting margin for its conventional insurance also coming in 6% from 6.5% previously. Its underwriting performance appears supported by a solid recovery in the second half, after falling to 4.2% in a first half marred by a catastrophic weather-related event.

The event – a severe storm and devastating fires that battered Cape Town and razed parts of the southern Cape, including Knysna – in June was referred to as the worst catastrophe event in South African insurance history. It saw Santam incur gross claims of R823 million and R 174 million on a net basis after reinsurance reinstatement premiums. Added to that were severe storms in Gauteng and KwaZulu-Natal, which saw the group’s conventional insurance business register gross claims to the tune of R1.1 billion, with a net impact of R186 million.

Excluding the two catastrophe events, the group would have reported a normalised net underwriting margin of 7.7%, which would have fallen within its 4%-8% target band.

Adrian Cloete, a portfolio manager at PSG Wealth, said the group’s re-insurance treaties were of great benefit during the year in that they lessened the value of claims paid out by the insurer itself.

The losses incurred by the reinsurance market in 2017, saw Santam’s attachment point – or point at which reinsurance coverage takes effect – increase to R150 million per catastrophe event for the 2018 financial year, up from R100 million previously.

In general, reinsurance rates also increased in 2018. According to Santam chief executive Lizé Lambrechts, the group would work to better manage its claims and expenses to cover the increased costs rather than pass it onto policyholders. “Reinsurance is not such a big expense for us [such that] I can say that it will have a direct impact on the pricing of policies,” she told Moneyweb.

For her, Santam’s relatively good performance under difficult circumstances is reflective of its diverse business model.

Within its conventional insurance business, MiWay was the standout performer delivering an underwriting profit of R317 million, up from R178 million in 2016.

Its emerging market businesses, Saham Finances in Morocco and Shriram General Insurance in India, are said to be performing in line with expectations but have yet to generate positive underwriting results. “Both these businesses behave differently to the insurance business in South Africa. Both have very long tails so that means it takes quite a while before the insurance claims are settled so they are will to price almost for break-even or a slight loss on the underwriting margin because they make up the profit on the interest that they earn on the float,” Lambrechts explained.

Santam reported a significant increase in investment income from R832 million to R1.37 billion. “The increase was mainly due to the positive fair value adjustments on the investment portfolios and the release of foreign currency gains on the winding up of Santam International,” it said in a statement.

This in part contributed to an increase in cash generated from operations to R3.3 billion from R2.2 billion.

The increase in investment income also drove a 31% increase in headline earnings to R14.25 per share.

The group delivered a 23.6% return on capital and lifted the dividend by 8% to R6.16 per share.

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