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.
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.
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.
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.
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. ■ firstname.lastname@example.org
Justin Floor is a portfolio manager at Kagiso Asset Management. *Source: Company reports
Santam’s offices in Sandton