I am pleased to present the financial report for 2011. The year under review was both a challenging and rewarding one. Reward came from the fact that we made significant progress towards our vision “to be the leading empowered insurer in our chosen markets”. Improved service delivery to our brokers and customers; the refinement of our book of business into a profitable, sustainable solid base on which we can build; and additional empowerment of our greatest asset, our employees, clearly demonstrate our progress. In addition, our financial statements show that our reinsurers and shareholders have gained significantly as a result of improved long-term loss ratios – 2011 showing the lowest loss ratio in 10 years – and careful management of business.
Globally, the short-term insurance industry faced many challenges and the South African industry as part of the global village was certainly affected.
Economic growth worldwide was influenced by the ongoing challenges Europe faced as a result of over-extended resources and indebtedness. No easy solutions are being found and, inevitably, the South African Minister of Finance alluded to the impact that lack of global growth gives to South Africa's growth prospects. Economists in general are cautious about the recovery of global growth in 2012. Interest rates are at an all-time low and economists and central bankers are saying they will remain at these levels for extended periods of time. Stock market returns have also been volatile and overall investment income has decreased in various markets. This presents a particular challenge to insurers who earn a significant portion of their income from investments. Our results for 2011 were affected by lower interest rates and flat equity market performance. We anticipate interest earnings remaining at low levels for some time. There is thus a need for an enhanced underwriting performance which has become a key feature of our strategy going forward.
The period leading up to the financial crisis, saw regulators worldwide focusing on the most appropriate way to ensure that financial services companies remained sustainable. All were in agreement that this was through risk-based capital requirements that measured the risk accepted by an institution and responded accordingly. Corporate governance requirements were strengthened worldwide and, in South Africa, the Financial Services Board also refocused its plans. Our holding company is at the forefront of the industry worldwide in preparation for these new requirements and, from a local perspective, we have benefited immensely from their expertise and knowledge. The work done in 2011 will stand us in good stead as we prepare for the South African go-live date of 2015.
In the current volatile environment it becomes extremely important to deliver ongoing accurate and meaningful financial information. The prompt delivery of this information, with full and clear disclosure, assists users of financial information to make informed decisions. I am therefore pleased to report that Zurich is among the first of the financial services companies to release its financial results each year.
We also recognise that the increasing volume and complexity of the financial information that is provided makes it difficult for users to easily gain an understanding of the results, and every effort is made to provide analyses and summaries which assist in this regard.
The annual financial statements provide comprehensive information regarding the assets, liabilities, income and expenditure of the Group and the Company. In addition, detailed background is provided with regard to the recognition and measurement of policy contracts as well as insurance and financial risk. Due to the specialised nature of the business, further quantitative information is provided with regard to insurance contract provisions, as well as a detailed analysis of the processes used to determine significant assumptions.
The statutory financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and, subject to the impact of note 1.3 to the financial statements, the policies adopted remain unchanged.
Earnings for the period were down by 14%, mainly as a result of the 16% decline in gross written premium. The result was also influenced by a sharp curtailment of expenses and an increase in the average tax rate of the Group.
Stock markets, which were slightly subdued compared to last year, did not materially impact earnings as these are not taken through income. Unrealised gains, however, contributed R25.7 million (2010: R94.1 million) to shareholders' equity. Interest earnings were down due to continued low interest rates across the world including South Africa.
|Financial results (Rm)|
|General insurance result||142.8||190.2||(25%)|
|Key ratios (%)|
|Management expense ratio||16.7||12.4|
|Performance objectives (%)|
|Combined ratio to earned premium1||95.0||97.9||97.4||104.4|
|Return on shareholders funds2||18.6||7.4||12.7||(10.0)|
|2||Inclusive of unrealised gains|
The statement of financial performance, that forms part of the annual financial statements, complies with IFRS. However, to assist readers in understanding our insurance activities, we have included a supplementary income statement which separates, for ease of explanation and suitable benchmarking and comparison, insurance from investment activities. The supplementary income statement is shown on page 45 together with a full explanation of the construction and layout.
The generation of a positive, growing underwriting surplus remains a primary objective. The R62.3 million earned in 2011 represents a ratio of 2.1% to net earned premiums. Although this is lower than the long-term average objective of 5.0% and lower than the 2.6% earned in 2010, it was nevertheless most encouraging following the R11.6 million deficit, at a combined ratio of 100.7%, incurred in the first six months of the year.
The expense ratio, at 16.7%, is 4.3% points higher than last year and was influenced by the lower earned premiums.
An analysis of the surplus by class of insurance illustrates that the property class, while reflecting an improvement, was adversely affected by a number of large commercial losses. The motor account which is a high-volume, low-margin insurance line, was negatively impacted by the high expense ratio. Each of the insurance classes, however, performed satisfactorily.
In addition to the generation of an underwriting surplus, the underwriting activities of the Group also yield investment income. This arises from the timing difference between the receipt of premiums and the ultimate payment of the claim. The “insurance funds” which arise as a result, generate an investment return (“attributable investment income”). This is added to the underwriting surplus to produce the general insurance result. In 2011, attributable investment income was a most satisfactory 2.7% of earned premiums (2010: 2.6%) and the general insurance result 4.8% of earned premiums (2010: 5.1%) indicating the true full quantum of the return generated and the diligent cash flow management by the Group in a declining interest rate environment.
The most significant element of the non-technical account is the investment income earned on shareholders' funds. Investment income comprises dividends and interest but excludes investment gains and losses, the latter reflecting only in the statement of other comprehensive income.
Interest income was negatively impacted by a declining interest rate environment and this reflects in the overall return. Investment income of R127.7 million represents a return of 6.5% on average shareholders' funds, compared to the R130.1 million, which is a return of 7.4%. When realised and unrealised gains are added, the yields improve to 7.9% in 2011 and 12.7% in 2010, a reflection of the fact that the ALSI gained 0.4% in 2011 but more than 16% in 2010.
The composition of the investment income, inclusive of attributable investment income, is shown in the table below.
The most significant other non-technical items impacting the year under review are the costs of the license agreement with the majority shareholder (in 2011 and 2010) and the costs in 2010 associated with the transformation programme referred to in the overview. The release of a pension fund surplus in 2010 impacted the prior year result.
During the year, an interim dividend of 100 cents per share was paid (2010: Nil). A final dividend of 200 cents per share was declared in respect of 2011 (2010: Nil) bringing the full year dividend to 300 cents per share.
At 31 December 2011, the net asset value per share was R165.44 (2010: R154.67) and the solvency margin (being the ratio of net assets to net premiums) remained strong at 67.7% (2010: 51.6%). This remains a source of comfort to customers and shareholders particularly during the current uncertain economic times.
The Group continues to monitor developments at the Financial Services Board regarding the implementation of a risk-based approach to determining capital requirements. It is understood that the proposed implementation date is 1 January 2015. I am pleased to report that Zurich remains confident of being able to utilise either the “internal model” or the “standard model” approach to determine capital requirements and it is further expected that capital requirements under either approach will not differ significantly from the Registrar's present requirements or from the capital currently available within the Group.
Chief Financial Officer
|% of net||% of net|
|earned||Year ended||earned||Year ended|
|Rand thousands||premiums||31 Dec 2011||premiums||31 Dec 2010||% change|
|Gross written insurance premium||3,890,028||4,632,362|
|Insurance premium ceded to reinsurers||(912,495)||(978,900)|
|Net written insurance premium||2,977,533||3,653,462||(19%)|
|Net insurance premium earned||3,001,609||3,713,765|
|Net insurance claims||65.9%||(1,977,622)||69.4%||(2,576,852)|
|Net commission incurred||15.3%||(460,319)||15.6%||(579,134)|
|Administrative and other operating expenses||16.7%||(501,374)||12.5%||(462,956)|
|Net underwriting result||97.9%||62,294||97.5%||94,823||(34%)|
|Attributable investment income||2.7%||80,549||2.6%||95,418|
|General insurance result||95.2%||142,843||94.9%||190,241||(25%)|
|Impairment of available-for-sale financial assets||(7,395)||(11,998)|
|Employee benefits surplus||||105,552|
|Other investment income||127,748||130,059|
|Net realised gains on disposal of investments||14,210||6,809|
|Profit before tax||193,796||192,399||1%|
|Income tax expense||(69,231)||(47,982)|
|Profit for the year||124,565||144,417||(14%)|
Value added is a measure of the wealth the Group has been able to create. The following statement shows how this wealth has been created and distributed:
|Gross written insurance premiums||3,890,028||4,632,362|
|Insurance premium ceded to reinsurance||(912,495)||(978,900)|
|Claims paid, reserve movements and costs of other services||(2,638,972)||(3,380,476)|
|Investment income, including associates||220,316||238,988|
|Total value created||558,877||511,974|
|Black business partners||3,057|||
|Providers of finance||37,322||13,511|
| Current taxation||33,477||6,019|
| Secondary taxation||||(1,120)|
| Foreign taxation/withholding tax||(5,226)||(8,828)|
| Depreciation and amortisation||36,127||31,696|
| Impairment losses||7,395||11,998|
| Deferred taxation||40,980||51,911|
|Value retained for investment and future support of business||144,417|
|Gross written insurance premium||3,890,028||4,632,362||3,488,463||4,212,214|
|Change in unearned premium||79,602||73,738||50,057||118,063|
|Administrative and other operating expenses||(501,374)||(462,956)||(489,516)||(458,464)|
|Gross underwriting surplus/(deficit)||693,178||(10,682)||501,578||100,581|
|Insurance premium ceded to reinsurers||(912,495)||(978,900)||(667,713)||(737,736)|
|Change in unearned premium||(55,526)||(13,435)||(41,788)||(30,710)|
|Reinsurance underwriting (surplus)/deficit||(630,884)||105,505||(476,808)||(39,020)|
|Net underwriting surplus||62,294||94,823||24,770||61,561|