Market overview
The exceptional results experienced in the first half of the year continued into the second half with the industry benefiting from firmer market conditions. In addition, benign weather patterns resulted in fewer natural catastrophes and this has also contributed to the positive result achieved.
Reinsurance capacity remained expensive and is likely to continue to generate pressure on premiums during 2005. However, despite the difficult market internationally there are indications that reinsurance rates are beginning to stabilise. The stabilisation of rates could enable insurers to secure terms allowing for additional capacity and greater flexibility as the need for more sophisticated risk analysis and coverage continues to increase.
Industry consolidation driven by market maturity, pricing pressures and technology has tapered off in the last two years with the benefits of scale being realised. A resurgence of such activity is not expected in the near future. Instead the Financial Sector Charter is expected to foster a focus on joint venture strategies.
Group results
Our excellent underwriting results continued during the second half of 2004 with a full year underwriting profit of R235.8 million, an increase of 85%. Gross written premiums were marginally up at R3,191 million (2003: R3,189 million) reflecting the competitive market conditions during the period.
The increased cash flow as a result of the positive underwriting performance resulted in investment income improving to R169.0 million (2003: R152.8 million) despite the decline in interest rates. The growth in equity values during the year also contributed to the excellent investment performance.
The Company continued its equity disposal programme during the year realising gains of R70.1 million (2003: R49.9 million).
Headline earnings increased by 45.1% to 2,140.8 cents per share (2003: 1,475.5 cents per share) and the solvency margin improved significantly to 57.9% compared to 47.1% at the end of 2003.
A pension fund valuation adjustment of R10 million has been provided for to cater for an expected additional Company contribution as a result of the promulgation of the Pension Funds Second Amendment Act and the Company’s pension fund surplus apportionment exercise.
The Directors declared a special dividend of 2,300 cents per share and a final dividend of 470 cents per share (2003: 300 cents per share) bringing the total normal dividend for the year to 650 cents per share (2003: 450 cents per share). These dividends are in line with our policy of having a sustainable or increasing normal dividend payment whilst maintaining solvency in the 40% to 50% range.
Regulatory
Legislative and regulatory change continues to impact the industry.
A significant driver of change will be the Financial Sector Charter and Black Economic Empowerment initiatives. Initial targets set by the Charter are being reviewed and have yet to be finalised. Recruitment and selection, talent management and training and development will be key focus areas in order to meet Charter requirements. In addition BEE driven claims procurement will be another area that will be highlighted. The industry has a huge spend on replacement items and repair costs in the claims area and is thus in a position to extend empowerment into areas that have yet to be transformed. To this end SA Eagle is participating in the South African Insurance Association (SAIA) Approved BEE rating of insurance industry suppliers. It is believed that an industry-driven process would be the best way forward to achieve the targets specified in the Financial Sector Charter scorecard. Charter initiatives will also have to address the demographic profile of emerging policyholders with a greater focus being placed on sales to historically uninsured markets.
In terms of the Financial Advisory and Intermediary Services (FAIS) Act, SA Eagle is an authorised financial services provider. FAIS levies will be payable for those representatives within organisations who perform FAIS functions. The main intention of the legislation continues to be to improve the quality of advice and information offered to insurance consumers. The compliance and governance costs attached to this are significant and will impact on small and medium intermediaries. As a result it is expected that there will be a degree of consolidation in the broker market. Intermediaries who are able to add value to clients by providing them with a professional, skilled service and the best risk advice will be successful going forward.The proposed decapping of commission which was planned for October 2004 has been put on hold indefinitely, primarily as a result of the industry-wide investigations in the United States. The outcome of these investigations could have a significant impact on the issue of broker remuneration globally. The Financial Services Board has decided to delay decapping until a full enquiry into all the implications thereof has been undertaken. To this end the South African Insurance Association together with broker associations have set up a forum to investigate all issues around broker remuneration. Strong emphasis will be placed on full disclosure, as well as an ongoing commitment to transparency in the interests of the consumer.
In order to protect the consumer the Financial Services Ombudschemes Act was introduced to create a statutory ombud who will have jurisdiction over those institutions that have not been participating in a voluntary scheme. The most significant implication for the Ombudsman for Short Term Insurance is that the Act will bring certain elements of commercial policies into the domain of ombud schemes. The implications of these developments will have to be considered.
Looking forward – the year ahead
2005 will take us into our third year of operation with the new business model that was created and implemented during our organisational transformation.
In light of the cyclical nature of our business, significant challenges remain. Our main task will be to create a solid platform for growth. Our key focus will be on underwriting discipline. After having reaped the benefits of our strict adherence to underwriting principles, appropriate pricing and rigorous risk assessment, we endeavour to make an underwriting profit throughout the market cycle. It will be imperative for us to further refine all aspects of the underwriting process to maintain and further improve our performance. We will focus on attracting business from the broker market by improving relationships and service levels.
We will continue to focus on technology as the means to facilitate business efficiency. Our established and integrated systems accompanied by a modest cost structure will afford us significant opportunities in the future. As part of our commitment to continuous improvement, we are currently upgrading and enhancing our workflow capabilities.
Demand is anticipated for simplified or commodity personal products for both emerging and existing markets. There will be an opportunity for us to package our products and services to fill a perceived gap in the market. Customer demand will grow due to the effects of demographic change, increasing wealth and other socio-economic factors. We must develop a capacity to respond to customer expectations for real-time service at low cost.
Initiatives to combat claims leakage will continue to be a priority. The Claims Performance Development Team, which is tasked with this responsibility, now reports into Internal Audit thus allowing for vigilant monitoring of this process. As part of our motor improvement efforts, we will continue to communicate the benefits of using our assessment facilities to both brokers and staff. We aim to build on improved service levels in the Customer Service Centre and this will be facilitated by the fact that sales will now be handled by our specialised sales team who are based country wide.
During 2005 we will continue to foster a culture of performance management within the organisation. Performance cycles are now well established and additional training in this regard is planned. We remain committed to the development and upskilling of our staff. Training programmes in 2005 will focus on building technical knowledge, skill levels and leadership competencies within the organisation. During the course of 2003 and 2004 a total of 358 employees were granted bursaries towards Insurance Institute studies and 267 passes were recorded.
Our learnership programme will be operational during 2005. All candidate learners have been drawn from previously disadvantaged communities. We are hoping to put 45 learners through this programme by 2008. Succession planning will be a priority. A pool of potential successors has been selected and assessments will take place in due course. Supporting technology in the form of Employee Self Service and a Manager’s Desk Top solution will be rolled out in 2005. This technology will serve to enhance control mechanisms by improving management access to staff information.
Going forward our main focus will be to sustain our underwriting performance and deliver consistent operating results to the satisfaction of all our stakeholders. We will also seek to leverage the benefits of being a member of the Zurich Group in the local context. Coupled with a focus on developing our abilities in selected areas of competitive advantage, we aim to grow from strength to strength in the year ahead, and we endeavour to translate our efforts into improved profitability and shareholder returns.
Acknowledgements
We offer our very special thank you to our dedicated staff for their sterling efforts towards achieving this excellent result, which we believe to be one of the best results in recent years. Thank you also, to brokers and clients for their support over the year and to our Board for their ongoing guidance and advice. As we move into the year ahead, we would like to extend a warm welcome to Martin South as a member of our Board.
Geoff Riddell
Chairman
Nick Beyers
Managing Director