MANAGING DIRECTOR'S REPORT

looking forward to the challenge

 
 
 
 
 
MARKET OVERVIEW
 

September 11, together with the decline in global equity markets, continued to have a profound impact on the global insurance industry throughout 2002. The hardening trend in global markets that was already evident in South Africa since 2001 was fast tracked by the events in the US. The World Trade Centre disaster was "far worse than the worst case scenario" built into the global insurance industry's calculations.

 
The claims which some estimates put as high as US$75 billion, have had long term repercussions as insurers around the world increased the cost of cover to reflect new risk circumstances. In many instances large insurers and reinsurers have also chosen to withdraw from or reduce their risk in certain sectors. In line with global trends 2002 brought the highest premium increases seen in over a decade in South Africa.
 
The rocketing cost of global reinsurance has meant that insurance companies were forced to pass on the added costs to the consumer. A negative rating outlook has been provided for the global reinsurance industry and poor conditions are expected to continue for the next year to 18 months. The impact of the higher premiums was felt most acutely by the commercial and corporate sectors and this was exacerbated by insurers and reinsurers "cherry picking" new business.
 
To maintain global reinsurance support there has been a strong focus on revised policy wordings and stricter underwriting. Other critical aspects that the industry has focused on over the past year have included internal risk management, improvement in cost efficiencies and the problematic loss ratio of the motor account. Remedial measures that have been put in place are being closely monitored for results.
 

In South Africa, the 37 percent plunge in the value of the rand against the dollar in late 2001 and subsequent higher inflation also had the effect of increasing the cost of imported motor parts. Industry figures estimate that as a result, motor repair costs increased by between 22 and 25 percent.

 
GROUP RESULTS
 
Underwriting results improved during the first half of 2002 as remedial actions put in place in 2001 took effect.
 

Higher rates, together with new business gained as a result of market consolidations and inflationary increases in sums insured, enabled the Company to post an underwriting profit of R4,9 million in the first half.

 
Unfortunately this improvement was short lived. During the second half of the year, motor claims escalated. Storms in the Eastern Cape in July and August and a number of fires towards the end of the year caused the underwriting account to end the year with a loss of R21,3 million.
 
The storms and fires resulted in net claims of R25 million. A major problem, however, remains the high cost of motor repairs and the increasing incidence of motor accidents as evidenced by the carnage on our roads over the festive season.
 

Repair costs increased by more than 20 percent in the last 12 months, resulting in record motor claims for the year.

 
Investment income declined by 17,3 percent to R129,2 million (2001: R156,2 million). Income in the previous year was however boosted by once-off special dividends and the proceeds of successful litigation against NBS. The combined benefit was around R33 million. Taking these abnormal items into account, investment income was in line with expectations.
 
The equity disposal programme continued, resulting in a surplus on these disposals of R54,8 million (2001: R114,8 million).
 
The Company also incurred costs of R14 million on the cancellation of software licences and IT outsourcing agreements, in respect of its e-commerce initiatives. A more cost-effective long-term solution has been sourced for the future.
 
Tax in 2002 declined to R20,673 million (2001: R82,311 million). There was however, a once-off tax charge on previously deductible contingency reserves in 2001.
 

The Company's solvency margin is 43,3 percent compared to 53,9 percent in 2001. This resulted from substantial premium growth, the declining equity market and the disappointing underwriting result.

 
Taking all of the above, as well as the special dividends paid in 2000, into account, the Board declared a final dividend of 150 cents per share (2001: 450 cents per share).
 
REGULATORY
 
The industry climate in 2002 continued to be strongly characterised by legislative enactments. The focus of current and upcoming legislation has sought increasingly to empower and protect the consumer.
 

The Financial Advisory and Intermediary Services (FAIS) legislation is aimed at regulating the intermediary environment in a number of areas and places stricter emphasis on broker accreditation. Brokers will have to ready themselves for compliance and despite an increased administrative component consumers will ultimately benefit from a more skilled and professional advisory service. This will clearly impact the manner in which insurance portfolios are managed, and brokers are perceived, by members of the public.

 

Discussions have also commenced in the financial services industry regarding empowerment initiatives and a Financial Services Charter. Representative working groups have been set up from the ranks of banks, short term insurance and life insurance. The short term insurance industry is committed to and proactively involved in this process by engaging with relevant stakeholders in order to arrive at a meaningful outcome in the best interests of the industry.

 
SOCIAL RESPONSIBILITY
 
Conservation – SA Eagle Cross Country 4x4 Club
In order to spread the conservation message and support projects that address environmental issues, SA Eagle and Cross Country Insurance Consultants have partnered the Raptor Conservation Group (a working group of the Endangered Wildlife Trust) to form the SA Eagle Cross Country 4x4 Club.
 
The purpose of forming the club is to combine resources, energies and expertise with a view to becoming practically involved in selected conservation issues.
 

The sustainability and development of our natural resources continues to be a challenge we will face into the future and the SA Eagle Cross Country 4x4 Club provides an opportunity for the organisation to make a meaningful contribution to South Africa's rich natural heritage.

 

Education – SA Eagle Bursary Fund

The SA Eagle Bursary Fund was launched in 2002, to offer educational assistance to disadvantaged students, who were awarded bursaries according to the criteria of financial need as well as academic performance. In line with key national educational priorities, we decided that our current focus of educational assistance would be the teaching of maths and science at South African schools.

 

We decided to focus our educational assistance on tertiary students who were studying towards a BTech – Education Science degree with majors in mathematics and physical science. In 2002 we assisted eight students who were studying at Peninsula Technikon in the Cape. The combined value of the SA Eagle Bursary Fund was R100 000 and these funds were disbursed in respect of fees, accommodation and books for each of the selected students.

 
SA Eagle has contracted the South African Institute of Race Relations (SAIRR) to administer this bursary fund on behalf of the organisation. The SAIRR's bursary programme is designed to enable corporates, like ourselves, to offer educational assistance in an impactful yet cost-effective way.
 
LOOKING FORWARD – THE YEAR AHEAD
 
Completion of Aquila Rex

At the end of February 2003 the last branches were incorporated into the Aquila Rex structure, signifying the completion of the business transformation project that had its origins in the McKinsey review at the beginning of 2000, and which has been with us for the last three years.

 
It has been a long and arduous journey. Although the transformation took longer to complete than originally expected we are now in a position where we have established Central Processing Units in the three main locations of Johannesburg, Durban and Cape Town. All processing activities have been moved across to these units. The technology at the core of our transformation will enable us to exercise greater control over our underwriting and claims activities. This will allow us to streamline processes, reduce costs and improve our overall production. Quality control procedures are being built into our processes and will be monitored on an ongoing basis to improve efficiencies. The Central Processing Units in particular, represent our commitment to innovation and to the practical process of turning ideas into profitable business models.
 
An extensive sales office network throughout the country means we will be placing greater emphasis on the service and support of our brokers. The sales office structures now represent our critical customer interface. Sales staff have been released from a restrictive administrative workload and will focus exclusively on building successful business partnerships, by understanding, anticipating and managing the needs of our customers.
 

Although the introduction of workflow, imaging and document management systems proved unstable in the initial pilot implementation, all systems are now fully operational and functional. We are committed to fully restoring service levels during 2003.

 
Since the launch of this project we have experienced growth in the business of approximately 76 percent. As a result we have had to recruit, assess and employ skilled staff who have also been extensively trained in the usage of the new systems.
 
2003 will find us continuing to revise our rates and addressing areas of unprofitable business. The motor account in particular will continue to come under close scrutiny, with the stronger rand and lower inflation hopefully reducing the increased cost of imported vehicle parts, thereby positively impacting motor repair expenses.
 
During 2002 we also initiated the split of our Personal Lines portfolio from our Commercial portfolio and centralised the personal lines business in a Customer Service Centre in Johannesburg. The portfolio is managed through a fully operational call centre equipped with leading edge technology. A reviewed and more cost effective version of our Golden Eagle online interactive processing facility for brokers has been implemented to support this initiative. This facility will be further developed during 2003.
 
Our business transformation has afforded us the opportunity to create a more streamlined and focused organisation. As we move into 2003 we will be presented with additional opportunities to realise the significant cost and service benefits as a result of this transformation.
 
We look forward to the challenge!
 
ACKNOWLEDGEMENTS
 
I thank our staff, brokers and policyholders for their continued loyalty, support and commitment to the Company.
 
To Patrick O'Sullivan, our Chairman who is moving on to new responsibilities within the Zurich Group, I would like to say thank you for the support, assistance and guidance provided during his time with us. We wish him every success in his new position.
 
On behalf of the team we warmly welcome Geoff Riddell as our new Chairman and we look forward to working together in the year ahead.
 
 

Nick Beyers

MANAGING DIRECTOR