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Santam Limited - Reviewed Interim Report for the six months ended 30 June 2005
Santam Limited
Registration number 1918/001680/06
ISIN ZAE000006854
JSE share code: SNT
NSX share code: SNM
Reviewed Interim Report for the six months ended 30 June 2005
Highlights
* Return on capital of 27%
* Gross written premium increased by 14%
* Net insurance result of R532 m
* 16% increase in headline earnings per share
* R1,4 billion cash generated by operations
CONSOLIDATED BALANCE SHEETS
Restated
Restated Audited
Reviewed Reviewed At
At 30 June At 30 June 31 December
Notes 2005 2004 2004
R million R million R million
Assets
Non-Current Assets
Property and 51 69 55
equipment
Goodwill 86 88 87
Deferred income tax 16 17 10
Investments in 228 173 230
associates
Financial assets
Equity securities:
- at fair value 3 3 837 2 774 3 574
through income
Debt securities:
- at fair value 3 1 209 883 1 613
through income
Current assets
Reinsurance 1 704 1 812 1 833
contracts
Deferred 160 129 146
acquisition costs
Loans and 1 159 944 1 098
receivables
including insurance
receivables
Cash and cash 3 984 3 843 3 927
equivalents
Total assets 12 434 10 732 12 573
Equity
Capital and
reserves
attributable to the
company`s
equity holders
Share capital 37 1 161 1 171
Other reserves 731 593 636
Distributable 4 072 2 630 3 642
reserves
4 840 4 384 5 449
Minority interest 63 43 60
Total equity 4 903 4 427 5 509
Liabilities
Non-Current
liabilities
Cell owners` 86 - 47
interest
Deferred income tax 196 55 160
Current liabilities
Insurance contracts 5 549 4 873 5 083
Deferred 83 90 115
reinsurance
acquisition revenue
Financial
liabilities
- At fair value - - 4
through income
Provisions for 141 46 113
other liabilities
and charges
Trade and other 1 296 904 1 161
payables
Current income tax 180 337 381
liabilities
Total liabilities 7 531 6 305 7 064
Total shareholders` 12 434 10 732 12 573
equity and
liabilities
CONSOLIDATED INCOME STATEMENTS
Restated Restated
Reviewed Reviewed Audited
Six months Six months Year
ended
ended 30 ended 30 % 31
June June December
Notes 2005 2004 Change 2004
R million R million R million
Gross written 5 034 4 414 14 9 735
premium
Less: 703 724 1 892
reinsurance
premium
Net premium 4 331 3 690 17 7 843
Less: change in
unearned premium
Gross amount 7 (90) (102)
Reinsurers` (185) (184) (226)
share
Net insurance 4 139 3 596 15 7 719
premium revenue
Investment 4 256 220 16 477
income
Income from 190 245 487
reinsurance
contracts ceded
Net realised 151 77 202
gains on
financial assets
Net fair value
gains on assets
at fair
value through 92 (35) 596
income
Other operating 17 7 5
income
Net income 4 845 4 110 18 9 486
Insurance claims 2 980 2 251 5 015
and loss
adjustment
expenses
Insurance claims
and loss
adjustment
expenses (316) (254) (618)
recovered from
reinsurers
Net insurance 2 664 1 997 33 4 397
benefits and
claims
Expenses for the 749 680 1 429
acquisition of
insurance
contracts
Expenses for 504 590 1 222
marketing and
administration
Expenses for 16 21 41
asset management
services
rendered
Goodwill - 1 2
impairment
Expenses 3 933 3 289 20 7 091
Results of 912 821 2 395
operating
activities
Finance costs (14) - (14)
Share of 44 (17) 37
profit/(loss) of
associates
Cell owners` (23) - (25)
interest
Profit before 919 804 14 2 393
tax
Income tax 5 (213) (230) (615)
expense
Profit for the 706 574 23 1 778
year
Attributable to:
- equity holders 694 569 1 754
of the Company
- minority 12 5 24
interest
706 574 1 778
Earnings
attributable to
equity
shareholders cents cents % cents
change
Earnings per 6
share
Basic earnings 599 497 21 1 531
per share
Diluted earnings 586 490 20 1 509
per share
Headline 599 514 17 1 549
earnings per
share
Diluted headline 586 507 16 1 528
earnings per
share
Weighted average
number of
shares - 115.8 114.6 114.6
millions
CONSOLIDATED STATEMENT OF CHANGES
Attributable to equity holders
of the Company
Share Other Distribu- Minority
table
Capital reserves reserves interest Total
IN EQUITY R million R million R million R million R million
Balance at 1 130 577 2 267 53 4 027
1 January
2004 -
restated
Share issue 41 41
Retained 1 754 24 1 778
income for
the period
Transfer to 109 (109) -
reserves
Share-based 8 8
payments
Currency (50) (50)
translation
differences
Dividends (278) (18) (296)
paid
Additional 1 1
interest
acquired by
minorities
Balance as 1 171 636 3 642 60 5 509
at 31
December
2004 -
restated
Share issue 22 22
Return of (1 156) (1 156)
surplus
capital
Retained 694 12 706
income for
the period
Transfer to 41 (41) -
reserves
Share-based 5 5
payments
Currency 54 54
translation
differences
Dividends (228) (9) (237)
paid
Balance as 37 731 4 072 63 4 903
at 30 June
2005
Balance at 1 130 577 2 267 53 4 027
1 January
2004 -
restated
Share issue 31 31
Retained 569 5 574
income for
the period
Transfer to 41 (43) (2)
reserves
Share-based 6 6
payments
Currency (25) (25)
translation
differences
Dividends (169) (15) (184)
paid
Balance as 1 161 593 2 630 43 4 427
at 30 June
2004 -
restated
CONSOLIDATED CASH FLOW STATEMENTS
Restated Restated
Reviewed Reviewed Audited
Six months Six months Year ended
ended ended 31 December
30 June 30 June
2005 2004 2004
Notes
R million R million R million
Cash generated from 1 399 940 2 139
operations
Interest paid (14) - (8)
Income tax paid (384) (144) (372)
Net cash from 1 001 796 1 759
operating activities
Cash flows from
investing activities
Cash utilised in 364 62 (714)
investment activities
Purchases of property, - (9) (21)
plant and equipment
Proceeds from sale of 3 - 9
property, plant and
equipment
Acquisition of - (9) (37)
associated companies
Proceeds from sale of 5 - 8
associated companies
Proceeds from sale of - - 9
subsidiary
Net cash from 372 44 (746)
investing activities
Cash flows from
financing activities
Proceeds from issuance 22 31 41
of ordinary shares
Return of surplus (1 156) - -
capital to
shareholders
Proceeds from 17 - -
preference shares
issued to cell owners
Dividends paid to (237) (177) (296)
Company`s shareholders
Net cash used in (1 354) (146) (255)
financing activities
Net increase in cash 19 694 758
and cash equivalents
Cash and cash 3 927 3 203 3 203
equivalents at
beginning of period
Exchange 38 (54) (34)
gains/(losses) on cash
and cash equivalents
Cash and cash 3 984 3 843 3 927
equivalents at end of
period
Notes to the consolidated financial statements
1. Basis of presentation and accounting policies
The financial statements for the six months ended 30 June 2005 were prepared in
accordance with International Financial Reporting Standards (`IFRS`) IAS 34 -
Interim Financial Reporting and in compliance with the Listing Requirements of
the JSE Limited. These are the group`s first IFRS condensed interim financial
statements for part of the period for which annual financial statements will be
prepared in terms of IFRS. IFRS 1 - First-time Adoption of International
Financial Reporting Standards has been applied and for detail on the
adjustments, refer to the separate Transitional Report. The condensed interim
financial statements do not include all of the information required by IFRS for
full annual financial statements.
The first time application of IFRS 4 - Insurance contracts, did not have any
significant impact on the recognition and measurement of assets and liabilities
in respect of insurance contracts at 30 June 2005, but a summary split of the
underwriting and investment activities are reflected in the segment report. The
group`s comprehensive consolidated financial statements for the year ending 31
December 2005 will present the additional disclosure required by IFRS 4.
The principal policies used in the preparation of the results for the period
ended 30 June 2005 are consistent with those applied for the year ended 31
December 2004 and for the results for the six months ended 30 June 2004 in terms
of IFRS.
The group operates an insurance subsidiary, which offers cell captive facilities
to clients. The cell activity, which is not material, is consolidated on a line-
by-line basis in the Balance sheets and Income statements, but excluded from
group earnings and capital and reserves attributable to equity holders.
Currently the short-term insurance industry is in discussion with SAICA on the
accounting treatment of cell activity in the insurers records. Until the issue
has been clarified, Santam will continue with its current accounting policy on
cell activity.
The historical accounting and interpretation in South Africa of AC105/IAS17 -
Operating Lease costs, has not been in line with international interpretation
and application. Interpretive guidance by the Accounting Practice Committee of
the South African Institute of Chartered Accountants - Circular 7/2005 issued on
2 August 2005, required minimum lease payments, which are subject to a fixed
rate escalation, to be spread over the life of the lease, with the escalation
not to be accounted for in the year of occurrence. Santam is in the process of
assessing the materiality of any adjustment in terms of this requirement, and
does not expect this adjustment to materially affect the current reported
results. The impact on opening shareholders` equity is presently being assessed
and, should this be material, the group will inform the market.
2. Segmental
report
Prepared in Gross Underwriting Total Total
accordance with written
IFRS
premium result assets liabilities
For the six R million R million R million R million
months ended 30
June 2005
2.1 Insurance
class
Accident and 153 14 37 110
health
Alternative risk 264 41 134 868
Crop 87 27 50 60
Engineering 202 33 234 332
Guarantee 39 13 99 103
Liability 327 46 632 955
Miscellaneous 44 2 83 128
Motor 2 215 177 111 1 531
Property 1 564 26 434 1 396
Transportation 139 33 51 149
Unallocated 10 569 1 899
TOTAL 5 034 412 12 434 7 531
2.2 Geographical
Southern Africa 4 790 431 10 859 6 652
UK & Europe 244 ( 19) 1 575 879
TOTAL 5 034 412 12 434 7 531
2.3 Business Insurance Investment
activity
activities activities Total
R million R million R million
Gross written 5 034 5 034
premium
Net written 4 331 4 331
premium
Net earned 4 139 4 139
premium
Claims incurred 2 664 2 664
Net commission 559 559
Management 504 504
expenses
Underwriting 412 - 412
result
Investment return 120 120
on insurance
funds
Net insurance 532 - 532
result
Investment income 366 366
net of management
fee
Income from 44 44
associates
Cell owners (23) (23)
interest
Income before 509 410 919
taxation
Total assets 7 074 5 360 12 434
Total liabilities 7 531 - 7 531
For the six Gross Underwriting Total Total
months ended written
30 June 2004
premium result assets liabilities
R million R million R million R million
2.1 Insurance
class
Accident and 133 5 40 104
health
Alternative 205 2 235 944
risk
Crop 59 22 106 132
Engineering 172 36 118 194
Guarantee 36 6 82 82
Liability 304 65 656 890
Miscellaneous 44 3 82 119
Motor 1 987 257 135 1 241
Property 1 347 170 413 1 092
Transportation 127 12 72 164
Unallocated (4) 8 793 1 343
TOTAL 4 414 574 10 732 6 305
2.2
Geographical
Southern Africa 4 233 562 9 709 5 697
UK & Europe 181 12 1 023 608
TOTAL 4 414 574 10 732 6 305
2.3 Business Insurance Investment
activity
activities activities Total
R million R million R million
Gross written 4 414 4 414
premium
Net written 3 690 3 690
premium
Net earned 3 596 3 596
premium
Claims incurred 1 997 1 997
Net commission 435 435
Management 590 590
expenses
Underwriting 574 - 574
result
Investment 89 89
return on
insurance funds
Net insurance 663 - 663
result
Investment 159 159
income net of
management fee
Income from (17) (17)
associates
Goodwill (1) (1)
impairment
Income before 663 141 804
taxation
Total assets 6 814 3 918 10 732
Total 6 305 - 6 305
liabilities
For the year Gross Underwriting Total Total
ended 31 written
December 2004
premium result assets liabilities
R million R million R million R million
2.1 Insurance
class
Accident and 282 1 39 100
health
Alternative 475 38 115 802
risk
Crop 380 20 238 312
Engineering 380 86 242 321
Guarantee 91 11 97 96
Liability 633 122 630 905
Miscellaneous 132 34 90 133
Motor 4 085 498 110 1 266
Property 3 022 309 375 1 131
Transportation 255 47 46 132
Unallocated (8) 10 591 1 866
TOTAL 9 735 1 158 12 573 7 064
2.2
Geographical
Southern Africa 9 171 1 132 11 259 6 371
UK & Europe 564 26 1 314 693
TOTAL 9 735 1 158 12 573 7 064
2.3 Business
activity
Insurance Investment
activities activities Total
R million R million R million
Gross written 9 735 9 735
premium
Net written 7 843 7 843
premium
Net earned 7 719 7 719
premium
Claims incurred 4 397 4 397
Net commission 942 942
Management 1 222 1 222
expenses
Underwriting 1 158 - 1 158
result
Investment 203 203
return on
insurance funds
Net insurance 1 361 - 1 361
result
Investment 1 022 1 022
income net of
management fee
Income from 37 37
associates
Goodwill (2) (2)
impairment
Cell owners (25) (25)
interest
Income before 1 336 1 057 2 393
taxation
Total assets 7 069 5 504 12 573
Total 7 064 - 7 064
liabilities
Restated
Restated Audited
Reviewed Reviewed At
At 30 June At 30 June 31 December
2005 2004 2004
R million R million R million
3. Financial assets
The Group`s financial
assets are summarised
below by measurement
category.
Fair value through income 5 046 3 657 5 187
Loans and receivables 1 159 944 1 098
Total financial assets 6 205 4 601 6 285
Financial assets at fair
value through income
Equity securities:
- listed 3 312 2 222 3 004
- unlisted 525 552 570
3 837 2 774 3 574
Debt securities - fixed
interest rate:
- government bonds 1 114 801 1 537
- unlisted 95 82 76
1 209 883 1 613
Total financial assets at 5 046 3 657 5 187
fair value through income
4. Investment income
At fair value through
income
- dividend income 97 83 167
- interest income 159 137 310
256 220 477
5. Income tax expense
South African normal
taxation
Current year 168 302 505
Current 142 289 486
Other taxes 26 13 19
Prior year 2 (1) 61
Foreign taxation
Current year 16 11 22
Prior year 2 - (2)
Income taxation for the 188 312 586
year
Deferred taxation 25 (82) 29
Current year 29 (82) 88
Prior year (4) - (59)
Total taxation as per the 213 230 615
Income Statement
Restated Restated
Reviewed Reviewed Audited
Six months Six months Year ended
ended ended 31 December
30 June 2005 30 June 2004 2004
6. Earnings per share
Basic earnings per share
Profit attributable to 694 569 1 754
the Company`s equity
holders (R million)
Weighted average number 115.8 114.6 114.6
of ordinary shares in
issue (million)
Earnings per share 599 497 1 531
(cents)
Diluted earnings per
share
Profit attributable to 694 569 1 754
the Company`s equity
holders (R million)
Weighted average number 115.8 114.6 114.6
of ordinary shares in
issue (million)
Adjusted for 2.6 1.6 1.6
share-options
Weighted average number
of ordinary shares for
diluted earnings per 118.4 116.2 116.2
share (million)
Diluted basic earnings 586 490 1 509
per share (cents)
Headline earnings per
share
Profit attributable to 694 569 1 754
the Company`s equity
holders (R million)
Adjust for:
Impairment of goodwill in - 1 2
subsidiaries
Impairment of goodwill in - 19 20
associates
Headline earnings (R 694 589 1 776
million)
Weighted average number 115.8 114.6 114.6
of ordinary shares in
issue (million)
Headline earnings per 599 514 1 549
share (cents)
Diluted headline earnings
per share
Headline earnings (R 694 589 1 776
million)
Weighted average number
of ordinary shares for
diluted earnings per 118.4 116.2 116.2
share (million)
Diluted headline earnings 586 507 1 528
per share (cents)
Comments
Santam continued to achieve very pleasing underwriting results in a short-term
insurance environment that normalised considerably during the first half of
2005. Headline earnings for the six months increased by 17.8 percent to R694
million, whilst headline earnings per share improved by 16.5 percent to 599 cps,
predominantly due to the company`s strong investment results on the back of firm
equity markets.
Growing market share without compromising profitability was set as a target in
2005. The group exceeded expectations for the first six months of the year by
achieving 14 percent growth in gross premiums, whilst still achieving margins
that were above the industry average. On the local front, positive growth was
experienced across all classes of business. On a net written premium level, the
growth was even higher at 17 percent as the benefits of the refinement of
Santam`s reinsurance programme continued to have an effect. International
premiums were 34 percent up as Santam Europe commenced business. Westminster
managed 8 percent premium growth in GBP terms.
The company experienced a sharp increase in claims in the personal and
commercial lines of business. The group`s net claims ratio of 64 percent was 9
percentage points higher compared to the first half of 2004, mainly due to
adverse weather conditions, higher than normal fire-related incidents and man-
made disasters. This was evident mostly in the property, motor and personal
line classes. Generally, the specialist underwriting business classes
experienced a very good six months.
In line with the company`s ongoing strategy of retaining more business at
acceptable risk profiles, the level of reinsurance premiums declined to 14
percent of gross written premiums against the 16.3 percent for the equivalent
period in 2004. Optimising reinsurance spend remains a focus area for the
future.
On the international front, Westminster Motor Insurance Association is still
profitable but is experiencing increased competition in its market sector from
new entrants, resulting in pressure on pricing and the erosion of margins.
Santam Europe commenced business at the end of 2004 and business inflow is still
fairly limited, mainly due to the slower-than-expected pick up at Bluesure.
The combined effect of all insurance activities resulted in a net insurance
margin of 12.8 percent against 18.5 percent for the corresponding period in
2004.
Despite lower interest rates during the first half of the year, the investment
return on insurance funds exceeded those of the previous year by 33 percent.
This was primarily attributable to a continued focus on cash and working capital
management that resulted in the 35 percent higher average float level (funds
generated by insurance activities) year on year. Cash generated from operations
of R1.4 billion was 49 percent higher than the amount achieved for the
equivalent period in 2004.The group solvency level is currently 57 percent.
After the return of R1.15 billion of surplus capital to shareholders in April
this year the solvency level reduced to 53 percent, compared to 69 percent at
the end of 2004. The annualised return on shareholders` funds amounted to a very
healthy 27 percent for the period under review.
The strong performance of the local equity market during the second quarter
contributed towards the 130 percent increase in investment income (excluding the
investment return on insurance funds). Earnings from associated companies were
also significantly higher than the comparable period in 2004 mainly due to the
very good results of Credit Guarantee Insurance Corporation of Africa Ltd.
The acquisition of the structured risk solution provider, Nova Group Holdings
Ltd, was completed subsequent to the end of the reporting period. As part of
this transaction, Santam is in the process of completing the disposal of a third
of its interest in the newly formed Nova group, which incorporates Santam Risk
Finance, to Kagiso Treasury Services.
The board would like to extend its thanks to Santam`s management, staff,
brokers, and other business partners for their efforts and contributions during
the past six months.
PROSPECTS
It is anticipated that the insurance industry trend experienced in the first
half of 2005 will continue for the remainder of the year with further moderate
pressure on underwriting margins due to a softer market, keener pricing and the
continued normalisation of claims.
The international businesses will remain focused on achieving sufficient growth
to ensure that operations yield profitable results and the required return on
the invested capital.
We anticipate low interest rates for the remainder of 2005, which will continue
to have an adverse effect on cash portfolio investment returns. There is
uncertainty over the continuation of the strong equity market.
With a firm first half performance as a base, the board remains cautiously
optimistic regarding overall prospects for the remainder of the year. However,
it is unlikely that the results of the previous year will be repeated.
DECLARATION OF DIVIDEND (NUMBER 102)
Notice is hereby given that the board has declared an interim dividend of 108
cents a share (2004: 95 cents). Shareholders are advised that the last day to
trade `cum dividend` will be Friday, 9 September 2005. The shares will trade `ex
dividend` from the commencement of business on Monday, 12 September 2005. The
record date will be Friday, 16 September 2005, and the payment date will be
Monday, 19 September 2005. Shareholders may not dematerialise or rematerialise
their shares between Monday, 12 September 2005, and Friday, 16 September 2005,
both dates inclusive.
REVIEW BY AUDITORS
The company`s external auditors, PricewaterhouseCoopers Inc., have reviewed the
abridged financial report. A copy of their unqualified opinion is available on
request at the company`s registered office.
On behalf of the board
DK Smith SC Gilbert
Chairman Chief Executive
23 August 2005
Non-executive Directors
JJ Geldenhuys, JG Le Roux, NM Magau, AR Martin, EA Moolla,
JE Newbury,P de V Rademeyer, GE Rudman,
DK Smith (Chairman), J van Zyl, BP Vundla
Executive Directors
SC Gilbert (Chief executive), MJ Reyneke
Sponsor
Investec Bank Limited
Transfer secretaries
Computershare Investor Services 2004 (Pty) Limited, 70 Marshall Street,
Johannesburg 2001, PO Box 61051, Marshalltown 2107
Tel (011) 370 7700, Fax (011) 688 7721
http://www.computershare.com
Company secretary
Sana-Ullah Bray
Head office and registered address
1 Sportica Crescent, Tyger Valley, Bellville 7530
PO Box 3881, Tyger Valley 7536
Tel (021) 915 7000, Fax (021) 914 0700
http://www.santam.co.za
Registration number 1918/001680/06
ISIN ZAE000006854
JSE share code: SNT
NSX share code: SNM
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