Santam still going strong
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.