It has been the best of times and the worst of times for the short-term insurance sector. The three listed short-term insurance underwriters, Santam, Mutual & Federal and SA Eagle, continue to hit new highs. Their underwriting ratios (what's left over from premium income after claims and management expenses have been paid) have reached unprecedented levels, with the 9,5% for SA Eagle and 10,5% for M&F trumped by Santam's astonishing 16,5%. This can partly be attributed to more efficient pricing and a clamp- down on fraud, but a lot of it was also "luck" in the form of few weather-related or arson claims.
But shareholders are smiling, as all three underwriters have paid a special dividend over the past six months.
In contrast, the two big listed insurance brokers, Alexander Forbes and Glenrand MIB, have been among the worst performers on the financial boards of the JSE. Glenrand's misfortunes are quite recent, as the share price plummeted only after a fall of almost 50% in interim attributable profit to R15,2m. Though the underwriters are still making hay, Glenrand blamed its poor results on "competitive pressures and excess capacity in the corporate commercial and individual markets".
Glenrand CEO Dave Harpur said some property accounts have been renewed at rates nearly one-third lower than the previous year. M&F MD Bruce Campbell agrees that the cycle has peaked - he expects the industry underwriting margin to fall from 12% to 5% for calendar 2005.
Santam CE Steffen Gilbert says growth in the corporate market (insuring big companies) has come under pressure because there was increased capacity at significantly reduced rates.
Alexander Forbes's share price has been lacklustre for far longer, and it was the only big financial share to show a negative return in 2004.
Its domestic insurance broking continues to increase profit - Forbes has suffered most from its international Risk Services business. Forbes CE Rael Gordon attributes this to soft insurance markets, a weak dollar (as the costs of this business are in sterling, which has been considerably stronger) and cost pressures.
Forbes looked smart when Gordon's predecessors Paul Heinamann and Graeme Kerrigan expanded internationally from 1997 to 2001, but the 40% of revenues derived outside SA is now something of a millstone. In spite of the problems at Risk Services, most of the international acquisitions have been good businesses, including a leading second-tier actuarial consultancy Lane Clark & Peacock.
Santam has gone through a rather different capital optimisation exercise. It is retaining more premium income for its own account, rather than passing it on to reinsurers. The level of premiums reinsured fell to 19,4% from 26,2% in 2003 - itself well down on Santam's historic average of more than 40%. Because of the strong underwriting results, the solvency ratios (capital as a percentage of net premiums) had increased to more than 50% for all of the Big Three. Santam gave a special dividend of R10/share.
SA Eagle gave back R23. MD Nick Beyers says the insurer has a stated policy of having sustainable or increasing normal dividends, while maintaining solvency in the 40%-50% range. M&F also gave away R860m in a special dividend in September 2004.
As in all financial services businesses, empowerment was an important theme for the short-term insurers. Santam had the benefit of the Ubuntu-Botho shareholding through parent company Sanlam. And in April both M&F and SA Eagle announced their empowerment deals.
On April 13 Eagle announced that Royal Bafokeng Finance (RBF) had acquired a 10% interest in the issued share capital from parent Zurich Financial Services, with an option to increase this. Unlike most empowerment companies, RBF was able to pay cash for its holding. RBF was formed in 2004 to help the 300 000-strong Bafokeng community in North West to diversify from their economic dependence on the mining industry.
A week later M&F announced its empowerment deal as part of the greater Old Mutual transaction. The main black business partners will be Wiphold and the Mtha consortium, led by Bulelani Ngcuka and Sipho Pityana. M&F is also setting up a trust to help black intermediaries come into the market. Campbell says M&F is committed to an intermediary-based distribution strategy and there is considerable potential to increase this distribution in previously disadvantaged communities.
Ngcuka and Wiphold CEO Louisa Mojela have joined the M&F board.
Unlisted Telesure Holdings, headed by former Sanlam boss Leon Vermaak, set up a new 49% black-owned business Unity Insurance and injected R30m of start-up capital into the business.
The most significant empowerment challenge for the short-term industry, however, is in procurement. It has more than 11 000 suppliers and most of these are small family-owned businesses such as panel beaters, plumbers and builders. The accreditation of these businesses is being undertaken on an industry-wide basis by SAIA Approved, a subsidiary of the SA Insurance Association (SAIA).
SAIA Approved CEO Haydn Marchant says a database was established from the lists supplied by the SAIA members. Of the 11 000 suppliers contacted, there were positive replies from 4 000 businesses - but Marchant says that there is still a lot of fear and misunderstanding about empowerment. "Many people, particularly in remote areas, are scared that we are trying to take their businesses away."
It is a long process because fewer than 10% of suppliers are classified as black-influenced, the entry level to qualify as an empowerment company (5%-25% black shareholding).
Marchant says these businesses would score better under a broad-based empowerment scorecard, incorporating skills development, employment equity and mentorship.
