Santam is the largest listed short-term insurance company in SA. It had a bumper year last year, helped considerably by good luck. This shouldn't be seen as a disparaging remark - all insurance companies need luck, whether it be benign weather patterns or reduced incidences of fire damage. These all move in cycles and chances are the cycle will reverse.
To highlight the impact of luck, one need look no further than the severe hailstorm that affected parts of Johannesburg in April 2005. The first point to make is that hail is very uncommon in Johannesburg in April, so it was bad luck that it happened at that time of year.
But the good luck - for individuals and insurance companies alike - was that the storm struck at night, a Sunday night, when motor vehicle traffic was relatively light.
If it had struck 21 hours later, it would have caused havoc on the roads, and the damage to vehicles and property could have been catastrophic.
But by the same token, the prospect of hail tends to concentrate the minds of farmers, making them consider taking crop insurance more seriously. This, of course, is good for insurance companies.
Around the world, there's an ever-increasing concentration of wealth in urban areas, so when weather catastrophes hit, the impact is greater.
Having said that, Santam's success was also due to its rigorous and disciplined approach to enhancing the core elements of its business.
According to Santam CEO Steffen Gilbert, four other factors, apart from luck, have aided Santam's strong performance in recent years.
The first is the economy. It's been strong for a while and indications are that this trend is not only continuing but gaining momentum. Fewer claims occur during times of relative economic prosperity, for a variety of reasons.
The second is the impact of the strong equities market. The JSE has been hitting new highs during the past couple of years and this has helped investment returns, an essential component of overall returns.
Insurance companies can often be regarded as proxies for the equity market because they hold large and diversified portfolios of shares.
This is more acute in the case of long-term assurers compared with short-term insurers such as Santam, but nevertheless, strong equity markets are good for insurance companies generally.
Third, the underwriting cycle is strong and has been for some time. The last time the market was "soft" was the mid-1990s, as far as insurance companies were concerned. With consolidation in the short-term insurance industry since then, there are now fewer significant players in the insurance market in SA. Underwriting cycles appear to be getting shorter and have less amplitude than previously.
The last factor is a historical one. "Historically, Santam has consistently outperformed its peers irrespective of where the market finds itself in the cycle," says Gilbert.
"This has earned us the reputation as the best underwriter in SA. The positive underwriting environment during the past two years has enabled us to keep our leading position while building the requisite capacity to continue delivering positive results even in tougher times."
Santam's business split is healthy and diverse. About one-third of total business comes from personal lines, or from individuals' premiums.
Commercial lines - a host of small- and medium-sized commercial enterprises - accounts for about half the business and about 15% comes from large corporate business.
Geographically, the company has been diversifying in recent years. Though by far the bulk of Santam's business comes from SA, the overseas component is growing.
Up until the late 1990s, Santam could have been viewed as geographically and culturally challenged. It was a largely Afrikaans organisation - part of Sanlam - and predominantly based in the western Cape.
With the acquisition of Guardian National (Guardian) in 1999, that all changed. Guardian's business was mainly corporate, whereas Santam's was largely personal and commercial. Guardian was also more concentrated in Gauteng and had a broader demographic spread of business. It was thus a great acquisition.
Santam is still 53% owned by parent company Sanlam.
And though the Guardian acquisition has resulted in Santam's corporate business expanding significantly, there's still a lot more room for improvement.
"Our share of the corporate market is far too small for a company of Santam's standing in the insurance market," says Gilbert.
Most client-facing business units are stationed in Gauteng, which explains why, though Santam's head office is still in Bellville, Cape Town, it has a large office in Johannesburg. One-third of the entire staff complement is now in Johannesburg.
Staff in the corporate division concentrate predominantly on two areas - national and multinational brokers. Then they target the sectors and accounts where Santam can add value. "Size and track record counts," says Gilbert.
Santam may have been doing this type of business for only six years since the Guardian acquisition, but it has certainly paid off.
A recent broker perception survey placed Santam in joint first place. "We want to offer corporates a one-stop shop," says Gilbert.
Corporates tend to be more cost-conscious than individuals when it comes to insurance premiums, but much still depends on their appetite for risk.
Corporates buy insurance for a variety of reasons, many of them far more complex than an individual's requirements. Corporates with a high-risk appetite will tend to pay less for their insurance premiums, and vice versa.
In recent years, direct selling of insurance to the public has become popular. By bypassing brokers and their commissions, these companies purport to pass the cost savings on to customers in the form of lower premiums.
This is fine in situations where the customer knows exactly what he or she wants from an insurance policy and where the products on offer are relatively straightforward.
But where complexity arises, it's often difficult to bypass brokers. "We believe that brokers add value - especially in the corporate world," says Gilbert. "There's a limit to the direct market - you can't sell anything but simple products to this market."
To a limited extent, Santam is playing in this market with its Multibonus product. If after two years a client hasn't claimed, a part of the premium is repaid. It's a delicate balance for Santam because about 97% of its business comes through brokers. It does not want to alienate its brokers by competing with them.
Gilbert identifies two key areas that Santam or any other successful short-term insurer should concentrate on. The first is maintaining maturity and sense in underwriting - trying to maintain margins. "Try to sharpen the pencil, don't break it," he suggests.
The second ingredient for success is managing capital wisely. Santam has already returned R1,15bn in excess capital to its shareholders through a special R10/share dividend this year. "We earn more than R10bn in premiums every year. Just managing that gives a great return," says Gilbert.
Santam's solvency ratio - capital as a percentage of premiums - is regarded as too high, at 54%. The optimum level for a listed company is about 45%. Gilbert believes this optimum level may be further reduced.
"We'll manage the margin in the range of 40%- 50%," he says.
Cash management is performed in-house. "We don't pay outsiders to manage what is an intrinsic part of our business," says Gilbert.
But investment funds are managed by a triumvirate of Sanlam Investment management, Stanlib and Investec.
Gilbert views the local traditional insurance market as nearing saturation. There are four main insurance companies in this market today and it largely moves in line with GDP growth. It is a market characterised by high accident rates and high crime rates. This is the main reason that Santam wants to diversify its future income stream.
Gilbert identifies four main areas that will drive growth in future - personal and commercial lines, corporate and alternative risk transfer, the emerging economy, and international.
As far as the emerging market is concerned, there are three parts to the challenge. The first is selling traditional insurance products to this segment, then, second, creating new products for them and, finally, creating new distribution channels to get these products into the hands of consumers.
Selling traditional products to the emerging market will occur naturally as the burgeoning black middle-income class demands insurance products for its assets. Beyond this group, the dynamics change significantly.
"We could offer cover for as little as R20/ month," says Gilbert, "but it would cover only fixed perils such as the total destruction of an informal home through fire or flooding and would not cover all risks."
Santam is looking at a variety of methods for accessing and serv ing this market but, given its diverse nature, it is challenging. It would probably require forging relationships with lower-end building suppliers, who would be able to meet clients' needs quickly and efficiently.
Diversity also means the distribution model - not only for informing clients about products, but ultimately charging them as well - will have to be different. The company is examining the possibility of using cellphone technology in this regard, as well as using the existing installed base of potential distributors in the form of retailers, stokvels and churches.
Gilbert is bullish about Santam's offshore operations, centred in the UK and Ireland. "Our tyres have hit the road, they've been spinning for a while but now they're hitting tar."
One of the main reasons for this optimism is that the UK and most of Europe is a little backward in its approach to insurance, being hidebound by traditional thinking.
There are now four businesses in Europe - Westminster, Beazley, Santam Europe and Bluesure.
Westminster is a UK "hire for reward" motor underwriter and Beazley is a Lloyd's of London syndicate. Santam Europe is a Dublin-based underwriter and Bluesure is a distribution channel in the UK. Westminster and Beazley are fully operational businesses, while Santam Europe and Bluesure are still in various stages of their start-up phases.
Santam's Multiplex product in the UK is akin to what Discovery Health is doing in the US with its Destiny Health product. It's taking a product that is well-known and successful in SA and adapting it to foreign conditions.
In the UK, for example, it is uncommon to offer Multiplex-type products. For decades, UK consumers have tended to have their house and car(s) insured separately, often with different insurance companies.
The UK population, after many years of robust economic growth, is asset-rich and time poor. It's thus perfectly suited to the advantages associated with products such as Multiplex: "Pay us a single premium and we'll look after all your insurance needs," says Gilbert.
But it's not just as simple as convincing potential policyholders about the advantages of Multiplex-type policies. The whole value chain, especially the brokers, has to be convinced.
Generally speaking, UK brokers appear to like Multiplex but UK legislation requires Santam - and by definition its broker network - to unpack all the products in a Multiplex package for the client. This has proved to be time-consuming and a stumbling block, but is slowly being overcome.
The other problem with which Santam has had to contend in the UK is the preponderance of strong and well-established insurance brands.
There is a lot of inertia in this market, which will take time to overcome.
But Gilbert does not want to wait too long because he knows that competitors will try to steal Santam's thunder. "We have two years to make a name for ourselves," he says.
Santam will stick to personal and commercial lines in the UK and Europe, preferring to leave the corporate market alone for the time being. Too much capital is needed to enter the UK corporate market now, but that, too, is on the long-term radar screen.
