Still one for the portfolio
Its dreadful treatment of clients over Covid aside, Santam remains one of the JSE’s most solid picks, say analysts
Despite rotten weather, fire damage and the aftermath of Covid-related business interruption claims, short-term insurer Santam and its shareholders are sitting pretty.
It’s a welcome and possibly surprising farewell gift from Lizé Lambrechts, who will retire soon as CEO after almost eight years at the helm, given Santam’s reluctance to stump up for clients during the pandemic.
The company, which is majority owned by life insurer Sanlam, rewarded shareholders with a final dividend of 790c and a special dividend of 800c a share. Taking the interim payout of 432c, Santam shareholders pocketed a total of R20.22 a share (before tax) in cash for the year ended December.
It was certainly helped by the R450m reduction in provisions for contingent business interruption claims. Santam raised provisions worth R2bn during 2020 to settle expected business interruption claims, and had paid a total of R3.2bn by the end of last year.
This was a considerable lift to its underwriting performance, says Sarine Barnard, analyst at Ninety One. The underwriting margin in its conventional insurance business (which includes motor, property, business and specialist insurance together with MiWay and the reinsurance unit) rose to 8% from 2.5% a year earlier, despite shelling out R24.5bn worth of claims.
Santam’s nonintermediated business, MiWay, had 8.6% growth in gross written premiums to
R3.2bn, driven by price increases as the number of clients remained largely unchanged at 346,000 during the year. The underwriting result, however, took a 41% plunge due to adverse weather effects. “It will be interesting to see how quickly MiWay reprices its risk to return to its previous underwriting margin,” says Barnard. It meant margins almost halved, to 8.9% from 16.5% in 2020.
The insurer has managed to contain expenses, which increased 4% in 2021 compared with gross written premium growth of 10%.
Given that “Santam is a big player in a mature market”, according to Wallie van der Walt, an investment manager at Abax
Investments, the question arises where growth for the insurer will originate.
Van der Walt mentions that cyber insurance and climate change may bring opportunities for Santam. With cyber insurance not yet a large market in SA, it’s worth considering what is happening in the US. Global insurer Marsh, in a report detailing the state of the US cyber insurance market last year, detailed how “cyber carriers” (jargon for cyber insurers) are hardening their stance when assessing cyberattack claims and how insurers have doubled the price of insurance premiums.
Santam has been writing cyber business through a specialist liability division on a selective basis in the corporate sector for the past five years, Lambrechts says. “In this sector we conduct a thorough analysis of the security posture of each client. Take-up is quite limited. The majority of larger businesses often do not meet our strict security requirements and we frequently have to turn down new business opportunities.”
On the other hand, Santam is piloting cyber insurance for small and medium enterprises where, surprisingly, “the experience is significantly better”, she says.
On climate change, one of the world’s largest reinsurers, Swiss Re, has estimated that global insured loss due to natural catastrophes totalled $105bn (equal to almost a third of SA’s GDP) in 2021. This was the fourth-highest value since 1970, it said.
“Hurricane Ida was the main loss-making event, but once again more than half of the global losses came from secondary perils,” it said.
Against this background, Santam stands to gain if it can offer well-priced cyber risk insurance and get it reinsured at good prices.
Lambrechts tells the FM the company will focus on growing its international business, especially companies in a joint venture with holding company Sanlam, its reinsurance unit and MiWay’s “strong business”.
But should one buy the share? With a dividend yield of just over 4% and an almost 20% price gain over the past six months, some analysts reckon Santam still holds opportunity for future returns.
“We believe Santam is one of the most solid performers on the JSE,” says Van der Walt. “It is very well capitalised, it’s got scale and it’s a big cash generator.” Santam’s current valuation, at a p:e of just under 12 times, is not expensive yet, he says. “Given the guidance on growth opportunities ahead, one can still buy Santam.”
Lambrechts will hand over the baton to Tavaziva (Tava) Madzinga on July 1, who joins the company from Kenyan-listed life, shortterm and microinsurer Britam Holdings.