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Chairman's and Managing Director's Report
Insurance Market Overview
The past year has seen the short term market starting to return to normality. This comes on the back of a profitable period. However, in overall terms, 2006 was not an easy year for insurers. This was due to an increase in claims as a result of fire and adverse weather conditions such as hailstorms in KwaZulu-Natal, heavy rains in Gauteng and a series of powerful storms in the Eastern and Western Cape.
Apart from the above-mentioned regional weather aberrations, South Africa in general experienced benign weather conditions with associated minimal losses in recent times. Internationally, memories of Hurricane Katrina and the Tsunami still remain top-of-mind factors, the ramifications of which must be taken into consideration. Global climate change remains a significant factor in the risk industry due to increasing concern about rapidly changing climatic patterns and increased risks of natural disasters.
The reinsurance industry continues to be confronted with increased volatility, more complex risks and increased demand for capacity. Risk factors include environmental, technological and socio-political trends. Despite the absence of large catastrophe events locally, the loss burden of huge catastrophes on reinsurers worldwide has meant that the local market has not escaped rate increases. While local insurers have increased retention levels in the last few years resulting in a shrinking of the local reinsurance market, reinsurers have committed themselves to maintaining a technical underwriting approach in the search for premium growth.
JPG de Rauville
Acting Chairman
NV Beyers
Mananging Director
The higher claims costs experienced by insurers have been exacerbated by an increase in the number of motor vehicle accidents caused by deteriorating roads and an increase in the volume of vehicles on these roads. Currency fluctuations, rate hikes and increases in the oil price contributed to market volatility impacting the motor book in particular. A deteriorating Rand has meant an increase in repair costs, particularly in relation to purchasing imported parts for the increasing number of imported vehicles on South African roads.
2007 will be a challenging year. While the industry is expected to benefit from general economic growth, underwriting discipline and appropriate pricing models will be key to remaining competitive in a difficult market.
Group Results
The financial results declined in line with market expectations, mainly as a result of weakened underwriting performance. Earnings per share decreased by 17.6% based on the attributable profit to the shareholders of R320.6 million (2005: R389.1 million). Headline earnings per share is calculated after the adjustment of R58.5 million (2005: R153.6 million) for realised gains on investments and property and equipment resulting in an 11.3% increase from R235.5 million in 2005 to R262.0 million. The headline earnings per share includes the income on the net pension fund surplus of R98 million and the tax effect thereon of R28 million. If these amounts were excluded the headline earnings per share would decrease by 18.3%.
The underwriting result has been significantly influenced by an increase in the number of claims and the escalation in the claims value across all classes of business. The result has been further influenced by adverse weather conditions, especially in the Eastern and Western Cape.
The motor account, in particular, has been negatively impacted by an increase in the incidence of vehicle accidents and hijackings. Motor repair costs continue to escalate largely as a result of the increasing number of imported vehicles. Continuous corrective action is being taken to address the profitability of this account, including the implementation of a new rating formula resulting in better risk selection and more appropriate pricing.
Insurance premium revenue grew by 11.4% despite a competitive market. The Group continues to focus on selective growth whilst managing overall profitability.
Investment returns for the year were highly satisfactory. Dividend income increased as a result of special dividends from listed equities. Investment income also increased in line with higher interest rates and improved cash flow.
The solvency margin improved to 55.8%, which is above the Group’s target range of between 40% and 50%.
The net asset value per share increased by 16.3% to 14,441.8 cents per share.
The Directors have declared a final dividend of 430 cents per share bringing the total normal dividend for the year to 650 cents per share.
Given the current difficult underwriting climate, the Group will continue to implement corrective actions such as strict underwriting principles and strong claims management in order to deliver a satisfactory result going forward.
Regulatory Developments
The Financial Advisory and Intermediary Services (FAIS) Act continues to significantly influence the industry environment with the FAIS ombud ensuring that compliance remains a priority for financial services providers. Intermediaries are focusing on the recruitment of qualified and accredited staff and planning for the second stage of the accreditation programme. The cost of compliance continues to be a challenge that will influence consolidation in the broker market.
Requirements under the Financial Sector Charter continue to be a key area of focus for short term insurers. The challenge of sourcing BEE accredited suppliers will continue to be addressed as part of procurement strategies going forward. Insurers have also been actively developing low cost insurance products in response to the need to create access to financial services for historically disadvantaged groups in the LSM 1–5 category. Insurers also contribute to industry-wide consumer education initiatives that are being co-ordinated by the South African Insurance Association to increase the financial literacy and awareness of consumers.
Looking Forward – The Year Ahead
2007 will see the business continuing its drive for profitable growth, as we build on our core strengths to achieve our strategic objectives. Market activities will focus on leveraging product offerings and the technological platforms that we have developed. As an emerging market we will be looking to innovate in terms of product development for personal as well as commercial lines.
In response to the Financial Sector Charter and the onus on financial services providers to provide access to a low cost insurance product, we are expecting to roll out such a product by the second half of the year. The product will be piloted in the Bafokeng community of our BEE partner Royal Bafokeng Holdings.
As part of our refocus on personal lines business we will concentrate on product development and pricing as well as investigating additional white-labelling opportunities. We will also continue to grow our global corporate business by optimising the global corporate and International Businesses (IB) joint marketing development strategy. This will include supporting corporate customers using the global corporate value proposition.
In addition, we plan to develop our life business as one of our key growth initiatives. This will involve identifying capabilities and resourcing gaps, creating the appropriate organisational structure and initially developing simple risk products aimed at the lower income market.
As part of our commitment to operational excellence we are continually assessing and improving our core processes and service levels. The upgrade of our workflow capabilities continues to ensure that our technology remains a key competitive edge. In this regard the construction component of the Claims and Recovery & Salvage applications has been successfully completed.
The SAP Finance System has also been successfully launched and has strategically positioned our finance division to deliver on current and future business expectations by meeting both local financial reporting standards as well as Zurich’s reporting requirements.
People Management continues to focus on an integration of its key activities and closer alignment with HR initiatives emanating from Zurich Financial Services. Leadership assessments were completed in 2006 with a view to creating succession plans. Comprehensive job profiling was also conducted. The Zurich Global Performance Management System has been launched and the local performance management process will now be aligned with global best practice.
South Africa is also hosting the Global Associate Programme (GAP) for the International Businesses of Zurich. Ten associates from the four technical areas of Claims, Finance, Risk Engineering and Underwriting joined the first programme, which was launched in Johannesburg in September 2006. Associates from Australia, Taiwan, China, Hong Kong, Latin America and South Africa are participating.
Operational excellence and underwriting discipline continue to be fundamental strengths, which need to be leveraged to achieve our growth targets in a challenging market. Combined with our focus areas of customer excellence, product and distribution we are well positioned to move from strength to strength in the year ahead.
Renaming and Rebranding
As part of the one Zurich global brand programme, a proposal is being put to shareholders, which will result in SA Eagle being renamed Zurich Insurance Company South Africa Limited. This will indicate to the market the financial strength and international capability behind the South African operation.
Acknowledgements
We express our appreciation to our employees for their dedicated effort and hard work towards achieving our goals. Thank you also to our customers and business partners for their continued support and our Board for their guidance.
Martin South, Chairman of the Board, resigned in December and we would like to thank him for his support and guidance.
We bid a fond farewell to Non-Executive Director Peter Martin who retired from the Board. Peter has had a long and illustrious association with SA Eagle commencing employment with the Company in 1973. During his tenure he served as Chief Accountant, Company Secretary and Investment Manager, General Manager – Finance & Administration before taking on the role of Managing Director. After his retirement Peter continued serving the Company as a Director. We would like to extend to Peter our sincere thank you for his unstinting and dedicated service to the Company and the valuable contribution that he has made during his time with us.
Gerard de Rauville
Acting Chairman
Nick Beyers
Managing Director
23 March 2007
