Santam, Discovery growth paths cross

For the first time these two blue chips are in direct competition, as Discovery Insure opened for business in May. Santam CEO Ian Kirk says he takes the threat from Discovery "very seriously" though he will fight vigorously to keep his share of the business.

There were hints that trading is tough in short-term insurance from the Zurich Insurance results (Money & Investing July 29), which included an underwriting loss of R11,6m, mainly because of a R10,2m underwriting loss on the motor business.

Santam, however, increased its underwriting margin from 8,0% to 8,4%.

Kirk attributes the consistency of the business to its diversity between sectors. Just R105m of the R594m in underwriting profit is attributable to personal lines - the only area in which Discovery competes - and R500m was derived from commercial insurance. Santam now has a market share of 22% overall, compared with a combined share of 25% for the three next largest insurers, Mutual & Federal, Hollard and Zurich.

Kirk says Santam has been ahead of its competitors in the development of underwriting agencies, which write specialist business. Two years ago, it moved its property underwriting into Emerald; this year it bought 55% of engineering specialist Mirabilis and combined it with its construction and engineering team.

Property brought in more underwriting income (R115m) than liability (R113m). It is usually the best performer as Santam's agency Stalker Hutchison Admiral is the dominant player in this sector.

Santam has fully consolidated MiWay, the direct insurer, so it now covers the whole market. But with premium income of R700m, compared with R16bn for the whole Santam Group, it remains small.

Discovery Insure has increased its sales to R1,2m/day- its sales in the coming year should be about half those of MiWay. But Discovery is a master of guerrilla tactics, not the frontal assault. The most likely converts to Discovery Insure will be existing Discovery clients. Group CEO Adrian Gore says that more than 80% of Insure's clients are members of Discovery Health and more than 60% have a Discovery card.

In the year to June 2011, a third of new business in the Discovery stable was accounted for by the emerging businesses, including Discovery Invest, as well as its UK businesses, Pruhealth and Pruprotect, all of which are now profitable. Discovery had its own flop with Destiny Health in the US (closed after more than six years of losses), but it has salvaged the Vitality programme from this, which it now offers to US corporates in conjunction with the giant health insurer Humana.

Discovery has leveraged its dominant position in medical aid - in which there are now 2,5m covered lives. Churn is endemic to medical aid yet the lapse rate at Discovery is just 4,07%. Using the medical aid client base, Discovery has built a life business which now has a higher operating profit than the original health business. New business in life, however, is now slowing down and grew just 5% to R1,62bn. At health, new business fell by 13% to R3,9bn. But there is a strong pipeline to replace this, not least its 20% holding in Ping An Health in China. It already has 300000 members, all in the prosperous coastal areas, and it is developing a "Chinacentric" version of the Vitality programme.

Santam is planning a lower profile push in Africa, India and Southeast Asia. Two different strategies for two contrasting blue chips.

Source: Financial Mail