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CYCLE TURNS: Benign conditions are over for insurers and Santam CE Steffen Gilbert is expected to announce a decline in underwriting profit of more than 50% since last year

RESULTS from insurers are expected to show an increase in vehicle theft, car hijackings and crime in general.

Investors are primed to expect a deterioration in Santam’s underwriting margin when chief executive Steffen Gilbert delivers his short-term insurer’s June interim results on Thursday.

But they will take some consolation from decent investment income, helped by early-year JSE buoyancy.

As the claims cycle returns to more normal levels after a three-year halcyon period of benign underwriting conditions, investors will seek reassurance that Santam, which accounts for more than a third of the local short-term market, is not letting mounting competition prevent it pricing properly for risk — by charging higher premiums for more expensive imported vehicles, for example.

Recent interim results from second-largest insurer Mutual & Federal set the tone for the industry reporting season, tempering expectations for Santam.

Mutual & Federal managing director Bruce Campbell pointed to the consistent deterioration in his motor account caused by poor driving, congested roads, poor law enforcement and broken traffic lights. On an annualised basis, one in four vehicles in Mutual & Federal’s portfolio was the subject of a claim, compared with one in five in 1999.

The main adverse factors were a KwaZulu-Natal hailstorm in May, heavy rains in Gauteng and rising crime.

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Mutual & Federal reported a reversal of the downward trend in hijacked vehicles. In the quarter to end June, 233 vehicles in its portfolio were hijacked — a return to the level last seen in March 2004. Stolen vehicles, which account for about 25% of the insurer’s motor claims, also resumed an upward trend in the June quarter, reaching 1683.

When Campbell gave details of the high repair cost of imported vehicles, analysts were disappointed there was no mention of Mutual & Federal levying higher premiums on them to reflect the repair cost.

They will look to Gilbert for reassurance that Santam is pricing accurately for this risk in its motor book.

On top of a surge in motor claims, Santam, like Mutual & Federal, is likely to report increased fire and weather-related claims.

The insurer started the year with a generous capital management gesture, paying a R6.50 a share special dividend, making Mutual & Federal look uncommonly snoep. At the half-year stage, Mutual & Federal made amends, declaring an R8 special dividend.

No one expects a further special dividend from Santam at the half-year stage. But the turning underwriting cycle could inhibit interim dividend largesse.

The Eastern and Southern Cape floods that accompanied Mutual & Federal’s interims have set a more cautious tone for the second half.

Mutual & Federal’s underwriting margin declined to 3.9% — or closer to 2.5% if its investment in Credit Guarantee Insurance Company is stripped out.

A year ago, Mutual & Federal’s underwriting margin was 8.2%.

Analysts expect an underwriting margin of about 4% to become the industry norm in the current cycle.

Santam is unlikely to be much different. One insurance analyst said: “If Santam reports a 4% underwriting profit it will have done well.” A year ago its margin was 10%.

Investors will try to gauge the likelihood of a minority buyout offer from parent company Sanlam. The savings group has made giant strides in its capital management thinking since selling its Absa stake to Barclays, acquiring African Life and returning R4-billion to shareholders, and has long harboured a desire to buy out Santam minorities.

It said it might revisit the idea when the underwriting cycle turned. It now has.

Gilbert will say any decision lies with Sanlam. The savings group is thought to be mulling over at least two capital deployment options: either to extend its footprint by bidding for Metropolitan Holdings or buying out Santam minorities.

An insurance analyst said: “With its current capital surplus, Sanlam has a once-in-a-lifetime chance to bid for Metropolitan. There’s no rush with Santam because it’ll always be there.”

Sanlam is committed to returning excess capital — estimated at R4-billion — to shareholders by next March if it does not find an appropriate acquisition or earnings-enhancing use for it.

Some analysts, though treating Sanlam Life’s recent R2-billion of debt issues as a sign that it is refining its capital mix, also wonder whether it presages a major transaction by the “Bellville Boys”. Sanlam certainly has enough cash to hand to buy out Santam minorities.

Conveniently, the short-term insurer switched to quarterly reporting earlier this year. As a result, if Sanlam does make a move, Santam shareholders are in a better position to make an informed decision on whether to sell their stake to Sanlam because financial trends should be fully built into the share price.

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