San­tam still go­ing strong

Finweek English Edition - - PRO PICK - BY SARINE BARNARD An­a­lyst at Investec As­set Man­age­ment

In its 97th year of oper­a­tions, South Africa’s old­est short-term in­sur­ance com­pany San­tam still has a lot of po­ten­tia l t hat s hould e xc i t e in­vestors. One of the rea­sons be­hind San­tam’s suc­cess over the years has been its diver­si­fi­ca­tion strat­egy that started with the ac­qui­si­tion of Guardian Na­tional In­sur­ance in 1999. This ac­qui­si­tion in­creased the com­pany’s mar­ket share sub­stan­tially and strength­ened its po­si­tion in the cor­po­rate and com­mer­cial in­sur­ance mar­kets.

Apart from prod­uct diver­si­fi­ca­tion, San­tam also made ef­forts to di­ver­sify its dis­tri­bu­tion and to­day 17% of gross writ­ten premi­ums are gen­er­ated from out­side of the tra­di­tional, core in­ter­me­di­ated net­work. One of the ma­jor de­vel­op­ments in this re­gard was the pur­chase of MiWay, a di­rect writer, from par­ent com­pany San­lam. This fo­cus on chan­nel diver­si­fi­ca­tion helped San­tam to main­tain mar­ket share over the past five years, while its in­ter­me­di­ated peers have lost sig­nif­i­cant share to di­rect writ­ers such as OUT­surance and Te­lesure. San­tam’s 23% mar­ket share – more than dou­ble that of the clos­est com­peti­tor – gives the busi­ness sig­nif­i­cant scale ben­e­fits, as in­sur­ance busi­nesses typ­i­cally have large amounts of fixed costs.

Fi­nan­cially, the busi­ness is in a healthy po­si­tion: its un­der­writ­ing mar­gins com­pare favourably to that of the in­dus­try and the busi­ness is well cap­i­talised ahead of the im­ple­men­ta­tion of the new sol­vency regime. These new reg­u­la­tions will, in fact, pro­vide San­tam with an op­por­tu­nity to grow its book by help­ing smaller in­sur­ers that might be pe­nalised un­der the new cap­i­tal re­quire­ments. While MiWay cur­rently only con­trib­utes around 7% of gross premi­ums, it is grow­ing strongly (the most re­cent re­sults in­di­cated a 17% growth in gross premi­ums).

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R26.3bn MiWay’s un­der­writ­ing mar­gin is al­ready close to 10% af­ter only seven years in op­er­a­tion, and we be­lieve there is am­ple room for prof­itabil­ity to in­crease fur­ther.

San­tam has also looked for growth be­yond SA’s borders and i nvests, along­side San­lam, in SEM – the group’s emerg­ing mar­kets busi­ness. It has short-term in­sur­ance in­ter­ests in In­dia, Malaysia, Nige­ria, Botswana and Ghana, among oth­ers. While it is still small, it of­fers some at­trac­tive op­por­tu­ni­ties in the long run.

San­tam’s share­hold­ers have greatly ben­e­fit­ted from the group’s re­lent­less fo­cus on cap­i­tal man­age­ment. Its re­turn on cap­i­tal over the past 10 years has av­er­aged more than 25% and it has grown its div­i­dend by 9% in the same pe­riod. It does not be­lieve in hoard­ing cap­i­tal – any cap­i­tal in ex­cess of its needs is paid to share­hold­ers in the form of spe­cial div­i­dends (of which there were five over the past decade).

All of these fac­tors make San­tam a high-qual­ity busi­ness, with a very good man­age­ment team, that of­fers in­vestors rea­son­able value at cur­rent lev­els. The cur­rent price-to-book ra­tio of 3.7 times is jus­tif ied by the high re­turns on cap­i­tal. Although un­der­writ­ing mar­gins are t y pi­cally volatile, we be­lieve San­tam can con­tinue to de­liver un­der­writ­ing mar­gins over time at the high end of their own tar­gets, aided by in­creased un­der­writ­ing mar­gins of MiWay, which could ex­ceed in­vestors’ ex­pec­ta­tions. The cur­rent nor­malised price-to-earn­ings ra­tio of 13.5 times com­pares favourably to the mar­ket av­er­age of ap­prox­i­mately 17 times. The div­i­dend yield is 3.6% and we an­tic­i­pate this to in­crease by ap­prox­i­mately 8% to 10% over time. In ad­di­tion to the nor­mal div­i­dend, share­hold­ers will get spe­cial div­i­dends as the busi­ness builds up ex­cess cap­i­tal.

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