San­tam’s edge

South Africa’s big­gest short-term in­surer is well-po­si­tioned to ben­e­fit from new reg­u­la­tions that are ex­pected to in­crease the cap­i­tal re­quire­ments of its smaller com­peti­tors.

Finweek English Edition - - Contents - By Justin Floor

the Suid-Afrikaanse Na­sion­ale Trust en As­sur­an­sie Maatskappy Beperk (San­tam) was es­tab­lished in Cape Town in 1918. Just shy of 100 years on, it is the largest short-term in­sur­ance com­pany in South Africa, with a mar­ket share of 22% (roughly dou­ble that of its near­est com­peti­tor) and a R28bn mar­ket value.

Com­pe­ti­tion within the South African short­term in­sur­ance mar­ket is stiff, and cur­rent lo­cal eco­nomic head­winds and sig­nif­i­cant reg­u­la­tory re­forms place fur­ther pres­sure on the sec­tor. We be­lieve that San­tam’s scale, di­ver­si­fied risk ex­po­sures and port­fo­lio of high-qual­ity spe­cial­ist busi­nesses po­si­tion the com­pany to nav­i­gate these chal­lenges well and con­tinue to achieve growth.

Un­der the um­brella

The San­tam Group is 60%-owned by re­spected fi­nan­cial ser­vices con­glom­er­ate San­lam and ben­e­fits from a strong part­ner­ship with its par­ent com­pany. San­tam com­prises an un­ri­valled port­fo­lio of di­verse in­sur­ance busi­nesses of­fer­ing prod­ucts broadly grouped into mo­tor, prop­erty and spe­cial­ist lines.

The San­tam Com­mer­cial and Per­sonal di­vi­sion pro­vides ve­hi­cle and prop­erty cover to in­di­vid­u­als and in­sti­tu­tions through a na­tional net­work of more than 2 700 in­ter­me­di­aries. The San­tam brand is well-known in these mar­kets and at­tracts loyal cus­tomers. Whol­ly­owned sub­sidiary MiWay pri­mar­ily of­fers ve­hi­cle and prop­erty cover to in­di­vid­u­als. The busi­ness gives San­tam ex­po­sure to the fast­grow­ing “di­rect” in­sur­ance mar­ket.

In­cluded un­der the San­tam Spe­cial­ist di­vi­sion are a va­ri­ety of highly ef­fi­cient un­der­writ­ing man­age­ment agen­cies. These are spe­cialised in­sur­ance busi­nesses with the deep tech­ni­cal ex­per­tise to un­der­write niche risks. Whether it’s the engi­neer­ing on the con­struc­tion of a com­plex in­fra­struc­ture project, a fleet of heavy com­mer­cial ve­hi­cles or the in­dem­nity cover for a med­i­cal pro­fes­sional, there’s a team within the San­tam fold equipped to in­sure the risk.

These high-qual­ity busi­nesses have con­trib­uted dis­pro­por­tion­ately to San­tam’s prof­itabil­ity over time. They have demon­strated sus­tain­able, su­pe­rior prof­itabil­ity in the form of higher and more con­sis­tent mar­gins than any other di­vi­sion of the busi­ness. Rel­a­tively low com­pe­ti­tion in these spe­cial­ist niches, and the crit­i­cal im­por­tance of data and risk eval­u­a­tion and pric­ing skills, re­sults in ex­cel­lent pric­ing power for the di­vi­sion.

At­trac­tive char­ac­ter­is­tics*

The San­tam busi­ness of­fers a num­ber of key pos­i­tive at­tributes that strengthen its com­pet­i­tive po­si­tion:

Scale: Scale is crit­i­cal for in­sur­ance com­pa­nies, pro­vid­ing in­creased ac­cess to data (en­abling im­proved risk anal­y­sis to in­form ac­cu­rate pric­ing) and an abil­ity to di­ver­sify across dif­fer­ent risks. In ad­di­tion, economies of scale on fixed over­head costs re­sult in higher mar­gins. Di­ver­si­fi­ca­tion: San­tam in­sures risks that are di­ver­si­fied across type, cus­tomer and ge­og­ra­phy. This di­ver­si­fi­ca­tion en­ables the group port­fo­lio to con­sis­tently de­liver sta­ble, pos­i­tive mar­gins, de­spite the cy­cles and volatil­ity of dif­fer­ent busi­nesses and risks over time.

Sta­ble and high re­turns on cap­i­tal: These strong re­turns over time high­light that this is a qual­ity busi­ness with a ro­bust busi­ness model which has demon­stra­ble pric­ing power. Con­sis­tent prof­itabil­ity and free cash flow growth: This is ev­i­denced in the div­i­dend that was con­sis­tently paid out, of­fer­ing share­hold­ers a 12% com­pounded an­nual growth rate in the div­i­dend per share since 2002, in­clud­ing spe­cial div­i­dends.

Share­holder-cen­tric phi­los­o­phy: San­tam has con­sis­tently man­aged the com­pany with share­hold­ers in mind. Its div­i­dend growth il­lus­trates cap­i­tal al­lo­ca­tion de­ci­sions over time, and it is ev­i­dent that most cash flows find their way to share­hold­ers, with min­i­mal amounts of debt is­suance along the way.

Reg­u­la­tory changes

SA has in­tro­duced Sol­vency As­sess­ment and Man­age­ment (SAM), due for im­ple­men­ta­tion in 2018. SAM is aimed at pro­tect­ing pol­i­cy­hold­ers by en­sur­ing that in­sur­ers are able to meet their fi­nan­cial obli­ga­tions and in­tro­duces a “riskbased” ap­proach to cap­i­tal man­age­ment. Pre­vi­ous reg­u­la­tion re­quired short-term in­sur­ers to hold a fixed per­cent­age of all pre­mium in­come as cap­i­tal. SAM will now re­quire that cap­i­tal re­quire­ments be cal­cu­lated ac­cord­ing to a stan­dard for­mula, or in­ter­nal model, which takes into ac­count the risk­i­ness of the un­der­ly­ing li­a­bil­i­ties, na­ture of the back­ing as­sets and di­ver­si­fi­ca­tion of the en­tity. For many lo­cal com­peti­tors, the change is likely to mean a sub­stan­tial in­crease in the amount of cap­i­tal they are re­quired to hold. For San­tam, how­ever, we ex­pect the change to be neg­li­gi­ble as the group’s size and di­ver­si­fied port­fo­lio will sig­nif­i­cantly re­duce its risk. The ef­fect of this dif­fer­en­tial in cap­i­tal re­quire­ments will ben­e­fit San­tam. As com­peti­tors’ busi­nesses be­come more cap­i­tal in­ten­sive, they will be forced to in­crease their pric­ing to earn an ad­e­quate re­turn on cap­i­tal, or, ul­ti­mately, will have to close or dis­pose of their busi­nesses. This is an op­por­tu­nity for San­tam, which has cap­i­tal to make ac­qui­si­tions and can use its scale and lower cost of cap­i­tal to run these busi­nesses more prof­itably.

Con­clu­sion

As in­di­cated in its lat­est fi­nan­cial re­sults, San­tam re­mained re­silient de­spite the cat­a­strophic fires in the Cape this year. This is tes­ta­ment to its di­ver­si­fied busi­ness model, and the strength of the un­der­ly­ing core fran­chise.

San­tam is in an ex­tremely strong com­pet­i­tive po­si­tion with its scale, di­ver­si­fied port­fo­lio and cost ef­fi­ciency al­low­ing it to be a net ben­e­fi­ciary of up­com­ing reg­u­la­tory changes. As com­peti­tors ex­pe­ri­ence an in­creased cost bur­den, this com­pany is well-placed to prof­itably de­ploy cap­i­tal into highly ac­cre­tive con­sol­i­da­tion ac­tiv­ity in the years ahead. ■ ed­i­to­rial@fin­week.co.za

Justin Floor is a port­fo­lio man­ager at Kag­iso As­set Man­age­ment. *Source: Com­pany re­ports

San­tam’s of­fices in Sand­ton

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