Good afternoon, everyone, and thank you very much for joining our call. I'm joined by Wicus, our Group CFO, and Thabiso, our Head of Strategy and Investor Relations. You will have seen the SENS that we issued this morning. We have received in-principle approval from the Council of Lloyd's to launch the Santam Syndicate 1918 from later on in the year with an inception start date of January 1, 2026. We thought we'd take some time this afternoon to give you some context and the rationale behind this initiative. Maybe just starting with our strategy, and anchoring the initiative within our broader strategy.
We have clearly defined our strategy to 2030 around three key growth vectors, primarily focused on strengthening our leadership position in South Africa, scaling our ecosystems, working with the broader Santam Group, and partnerships here in South Africa. Our focus this afternoon is really talking to you about the drive towards our international, and diversification of our business. The strategy at a very high level is underpinned by very clear financial, and non-financial metrics that we aim to achieve by the year 2030. These take into account growth, profitability, capital dividends and non-financial metrics around customer metrics, and also staff initiatives, and also focus on ESG. I do believe, as we shared with you early on in the year, that we are making measured progress across all these key initiatives towards our journey to 2030.
Now, turning specifically to Lloyd's, and to give some context around the initiatives and our focus, and the rationale why we've gone with this platform towards driving our international expansion. We do believe that the Lloyd's market, is a key hub within the specialty global space, with a significant reach across the world, giving access to close to 80, 85 licenses and over 200 territories across the world. This is supported, by a very strong A rating, from S&P and AM Best and Fitch, which is absolutely critical as we start to think about diversifying, and taking our business into the international space. We've also looked at the performance of Lloyd's as a market, and I think what we find is that the market has a very strong record of performance, strong underwriting discipline.
I think this becomes particularly important as the market goes through the ups and downs of soft and hard markets. You find that you have a very good balance between growth, underwriting, risk selection, all of which is underpinned by very efficient underlying capital structure. From a Lloyd's perspective, we do think that the market does offer a very attractive entry point for us at Santam looking to expand into the international space. It does also allow for a very wide range of flexible capital funding structures, which we also find attractive. Wicus, I don't know if you wanna say anything more on this.
I think maybe just to add 1 or 2 points, Tava. I think it's just to mention that the intent is not to write all of the classes of business that gets written in the London market, but very much focused on the specific classes that we've got skills and experience in. Also from a, if you look at the sheer size of the market as well, this initiative can really be transformative for the Group, even if we write a small share of the overall business in the market.
Maybe just moving on and just talking through just the specifics of the initiative. I think today, as we've mentioned, we've announced that we have received in-principle approval from the Lloyd's Council to begin the journey with our Lloyd's syndicate based in London. We do intend to launch this more start underwriting from later on in the year. We do this off the back of a very tried, and tested competency that we have here in South Africa that's been largely very successful in South Africa and across the rest of Africa, which is our specialist capability for the business that we write in South Africa and with SanlamAllianz in the rest of Africa.
We start to extend this capability into the international space, and we do this, what we believe is a very credible platform, which is the Lloyd's marketplace. It has a track record of over 300 years. I think for us, as a 107-year-old company, that gives us a sense of confidence that we are partnering with a very credible platform. We also work in this process with trusted partners that we've used for distribution in South Africa, and in the rest of Africa, our distribution partners on the broking side. We also introduce a new partner, Asta, which is a tried and tested turnkey solution that we can work with in the UK. The Lloyd's opportunity for us is very exciting.
It does accelerate our ambitions in the international space. We do believe that the access to the geographical licenses, and the spread across the world does give the initiative significant upside in time to come. Our specialty capability here in South Africa, again, working with SanlamAllianz, is a very strong underpin that we then drive into the international space. Lloyd's itself, as I've mentioned, strong A-rated paper, also brings to the fore a very deep market of talent that we're then able to tap into as we start to build out our syndicate. Of course, Lloyd's, very strong governance principles, which is very attractive to our board from a governance perspective.
I think, because in terms of just what we expect, from an impact perspective, obviously I do think that the initiative will allow us to exceed our initial ambitions around the contribution of international, to the entire Santam Group from a gross written premium perspective. Just a little bit more on that.
I think from a top-line perspective, we have set a target that we want international business to exceed 20% of overall GWP by 2030. We're currently sitting at about 18%, this initiative should take us well beyond the 20% target. From an earnings perspective, in the very short term, it will be dilutive. This is not due to us running big investments or deep expense J curve, it's purely due to the delayed recognition of the premiums that we write in the first year in terms of IFRS. With the syndicate being accretive over the kind of medium to long term, and the ability to contribute significantly to the group's earnings by 2030.
We expect the syndicate to earn on a writing margin in excess of 10%, and that's due to the fact that we will be focusing on specialist lines of business that typically generate higher margins. This is also in line with our objective of accelerating top-line growth in classes of business that can deliver margins above top end of our target range, and thereby, over time, effectively shifting the profile of the group more towards the upper end of our 5%-10% target range. Of course, return on capital is one of our key performance metrics. The syndicate will be able to deliver in line with our 25.4% target. This will of course, be in hard currency terms.
Maybe just from a portfolio mix perspective, as mentioned, the focus will be on specialist lines of business that we really understand, making it really a relatively low risk expansion strategy. It will give us access to new geographies and markets, as Thabo also mentioned. This will really be complementary to what we're doing in Santam Re and Specialist Solutions today, and not be a direct competition to the current operations. We will be introducing some of our existing specialist business into the syndicate from day one to make sure that we give it immediate scale and relevance within the London market, which will make our syndicate much more attractive from a new business perspective.
In year one, we are planning for GWP of about GBP 300 million-GBP 400 million, of which about 60% will be the existing business. Over time, of course, as we accelerate the incremental new business, it will gravitate more towards the new international business. From a funding perspective, we did disclose in our 2024 annual results that we are running at the top end of our 145%-165% capital target range, cover target range. We also intend to issue a additional ZAR 1 billion of subordinated debt.
This will ensure that we not only maintain our regulatory cover ratios in South Africa, but it will also ensure that we continue to operate well within our target range, which then of course implies that this initiative will not have an impact on our ordinary dividend expectations in the coming years.
Thanks, Wicus. Maybe just to comment further on the portfolio mix. We will look to give the syndicate immediate scale by ceding part of our specialty portfolio that we currently write in South Africa and rest of Africa. That gives that syndicate immediate scale. But a further point is that we do see just close to GBP 1 billion of specialty business across the continent, both in South Africa and in rest of Africa, that is making its way into the London market. To a large extent, part of this syndicate will be defensive in allowing us access to part of that business and also providing A-rated paper in terms of being able to channel some of that business into our own syndicate.
There is also a defensive element of launching this syndicate for business that we already see coming out of South Africa and rest of Africa that is moving into the London Lloyd's market. Just moving the execution on the people side. With the syndicates now approved, we have appointed the first key members of the team that will be based in London. We will continue to build out this team and to continue to strengthen it further. We will have a very strong focus, particularly on underwriting and distribution experience, and we believe that this will be complementary to our South African-based specialty team, where we do have very deep expertise in the specialty space.
We do also think that, by utilizing our shared services in South Africa, particularly around IT, actuarial functions, capital management, we should be able to run the syndicate at a much more competitive expense ratio relative to the Lloyd's average expense ratio. That should give us some competitive edge in terms of writing business in the international space off a lower cost base, in South Africa, where we do believe that the resources that we have here, allow us to leverage into our Lloyd's syndicate. We do see the Lloyd's syndicate as an extension of our South African business. It's going to be very important for us that the syndicate carries the culture that we have here in Santam. This is also a key attraction and selling point for the Lloyd's Corporation in London.
Looking at the governance aspects, as we've said, Lloyd's does provide a very robust governance framework. I think it provides a very similar regulatory environment to what we're used to seeing here, in South Africa. We partnered with Asta, who's the leading turnkey, provider managing agent based in the U.K. As far as our board is concerned, we do look to continue to strengthen the skill set within our Santam board with directors that do have international experience that can provide support to our board and also to our syndicate in the U.K. Wicus, anything else to add here?
I think maybe just to make a point from whenever you talk about expansion, then typically people will ask about, "Okay, what's the risk attached to the expansion?" I've mentioned that we'll be growing in lines of business that we really understand. From a governance perspective, our current risk appetite will apply to the syndicate. Having worked with Lloyd's over the last year, come to appreciate that market is really operating under world-class oversight and governance, which will be very much complementary to our own approach from a Santam Group perspective. Which also gives, should give, our shareholders also comfort that this operation will also be very well governed.
Maybe, in closing, we do believe that the launch of the syndicate will enhance our growth potential and accelerate our international strategy, again, off the back of a tried and tested competency where we believe we've been very successful here in South Africa and in the rest of Africa, which is our specialty capability. I think the time has come and is right for us to then look to go further afield than the rest of the African continent. As we said from a risk appetite perspective, I think this will again be largely underpinned by our current risk appetite, underpinned by the quality and the skills that we're then able to, you know, bring within the Lloyd's syndicate to complement, again, our specialty team that's based here in South Africa.
I think when you look at it from an expansion point of view, we do believe that this is a very cost-effective, efficient way for us to scale our specialty business into the rest of the world. The access to skills and talent, the London market has a very deep, fluid, experienced skills base, and we look to tap into this. As I've said, we've been able to appoint the first members of this team, and will continue to strengthen this team. Last but not least, I think we're fairly conservative in our approach to how we look to then grow the syndicate, taking into account, you know, where the cycle is in terms of performance of global specialty.
And we do believe overall that this initiative will be creative to Santam in the long run, particularly around the key metrics that we focus on, underwriting margin, return on capital, and taking into account that this is all happening in hard currency. I think with that context and insights into the Lloyd's syndicate that we plan to launch, we'll now be happy to take any questions. Thabiso?
Thank you, Tava, and thank you, Wicas. I just want to remind our participant on the webinar that we do have Q&A on the Zoom platform. So far, Tava, I've got two questions. The first one is from anonymous. In the past, Santam Re has run into unfortunate risk participation. Can you expand any learnings from earlier difficulties and why this approach might be better?
Thank you very much for that question. I think from a strategic perspective, we've been very clear that we will drive our Santam Re expansion off the back of our specialty capability and off the back of Santam Re. I think we've also been very clear around remedial actions that we've taken in Santam Re, particularly to exit territories where we're uncomfortable with the underwriting margins. I think we now are in a position where we have a more really successful Santam Re that's contributing effectively towards the group's both growth and underwriting profitability and actual operating profit of the group. I think we'll be in a position possibly to talk a little bit more about that, you know, once we're outside the close period towards the end of August.
I think joining the whole international strategy more holistically, the focus of the syndicate is really an extension of our specialty capability here in South Africa. We focus the syndicate largely on specialty business. We will continue to run the reinsurance part of the business separate from the syndicate. It's a different set of skill sets that's required to run reinsurance and the specialty capability. We look to run those two businesses separately. We do believe that the focus areas of these two businesses is complementary, so reinsurance separately and specialty business, running that and then obviously extending that with the Lloyd's initiatives. From a learning perspective, I think it's quite clear that getting the right skill sets within the underlying business is very, very important.
That's why we tap into the London market where we believe that we can bring, the requisite skill sets to bear to complement our skill sets here in South Africa as we start to expand the business further afield.
Thank you, Tava. Question from Cornette van Zyl from Sanlam Investments. Santam is a small insurer in the context of global players in this market. Are there any examples of smaller, perhaps emerging markets players that have successfully done this? Any business examples you can cite?
Yes. We can actually cite, but I wouldn't wish to talk about competitors and players on this platform. I think in the run-up to launching this business, working with our partners, in London and our advisors, is that we have looked extensively across the world at particularly at emerging market players that have entered the London market, primarily in search of A-rated paper and specialist skills. I think you find a whole range of players, right from small players to established emerging markets players also tapping into the specialist capability as a way of extending their specialist capability. For us in an emerging market player, being an emerging market player, I think the access to the A rating is absolutely important for us.
The capital structures we absolutely like, and the ability to look at the different funding options makes it very, very efficient for us. I think it's a space where we have expertise here in South Africa, operating, as we say, into the rest of the continent, this is an extension of that capability. Obviously, very happy to share more insights at particular cases that we've looked at. We have cases from Asia that have tapped into this.
I think it's also important to say that while it's a first, I think, for South Africa and for the African continent, is the depth of skills, particularly around capital management and underwriting skills that is required for Lloyd's to accept you into this platform, I think traditionally will put it out of the reach of similar peers from emerging markets. I think it's testament to the capabilities that we have in Santam that Lloyd's believes that we're a credible partner for them on the African continent as we start to think about further expansion.
Just maybe, Tava, a follow-up from Cornette. She's asking the question quite differently. Why is there an opportunity for small SA insurance company? Why is it not taken up by big players that have diversified?
I think there's two ways of thinking about this. The nature of the London market is that it is a subscription market, right? Risks typically come into the London market, and you have about 100, 105 syndicates that then share in those underlying risks. What the Lloyd's Corporation is typically trying to do is that the people they bring on board, you know, must have a track record, credibility in underwriting and capital management for them to have access to the subscription markets on the Lloyd's platform. We're not entering a foreign market, you know, in terms of just setting up Santam on its own. We're leveraging off the back of the Lloyd's platform.
The skills that we're able to bring to bear, again, that's been tried and tested, and we're very comfortable because I think if Lloyd's was uncomfortable with the combined ratios at which we are currently writing our specialty business, they would not have allowed us to come onto this platform. It's off the back of that confidence, where our combined ratios are typically running in our specialty business ahead, and better than Lloyd's. That's been an attractive pull for Lloyd's to bring Santam into the Lloyd's market. It's not unusual for Lloyd's to be constantly seeking top players in the specialty space to join the Lloyd's, you know, market environment.
While it may seem strange that, you know, an emerging market player like us can actually enter Lloyd's, I think it does speak to the capability that we have within our specialty business.
Thank you, Tava. Wicas, I'll give you these two questions. I'll start with one at a time. Is this a syndicate in a box or a full syndicate? Is there a limit on the amount of premiums you can write annually?
Yes, this is a full syndicate. It's not a Syndicate in a box. It will also be a fully aligned syndicate on day one, where we will provide the kind of the full capital requirement for the business. As part of the Lloyd's markets, you must submit a annual plan, which includes the lines of business that you're planning to write, the capacity that you want, which get approved by Lloyd's. They won't allow you to set unrealistic new business targets for yourself. The number that we've quoted, the GBP 300 million-GBP 400 million, that is aligned with what Lloyd's will allow us to write.
Just to recognize, that question was from Thapelo Mokonyane. The following question is from Yasser, which is on capital. Are you able to share any specific rand amount on the initial seed capital? Wicas?
Not at this stage. I think the important point to make is firstly that we can absorb it within our current capital position in combination with the additional ZAR 1 billion of subordinated debt that we plan to issue. What's also important to note is the kind of the availability of capital within Lloyd's is also a key feature of the market that should, over time, we've got opportunities to grow significantly where we need additional capital. One source of capital is actually to get third-party capital providers from the Lloyd's market to participate in our syndicate, but that's not the intent initially.
Question from anonymous. Is Santam the only company in the syndicate? I think anonymous has to answer that. Yes, it is. A question from Ross Anderson. If possible, to share what technologies from Santam in SA will you be leveraging to be more competitive from an expense ratio point of view, versus those which Asta typically provide to new syndicates?
I think, I think what we look to leverage is our lower cost, you know, employee or people base that we run out of South Africa. I think typically you will find that the London market is a higher cost base. I think what we'll look to do is hire key resources, particularly around underwriting and distribution, that must be housed and placed within London. In terms of the rest of the functions, we'll look to actually house those functions and share the services that we have in South Africa. Lloyd's is very comfortable with that setup and that and that approach. I think that's also off the back that the internal capital model that we run has been tried and tested. I think the regulator in this environment is very comfortable with it.
Consequently, Lloyd's, having put us through a very thorough vetting process, is also comfortable with the capital, internal capital model that we run out from South Africa, and something that we intend to use as we run the Lloyd's syndicate off in due course, an internal capital model. Lloyd's is very comfortable with that approach. That's ultimately what gives us an edge from a cost perspective of being able to use resources out of South Africa.
The next question I think it is from two people, but they speak roughly around the same topic. James Stark says, "You make quite a good compelling case, right, with A-rated paper, access to skill, international market, but none of these are new to Lloyd's. The question is, why now? If so, if it's so compelling, why not make this move earlier?" I think that's just James. I think I must acknowledge Asanda Notshe, who has also given the same sentiment, where she's or he's or he or she is saying, "This has been looked at previously. Why is it now considered at this point?" He or she ends the same, "All the best." I think the main question is why now?
I think, we have shared the Santam FutureFit 2030 strategy, and we've always positioned that international expansion is a very critical aspect of driving our growth. What is important for us is that it's not international expansion simply for the sake of international expansion. It has to be off the back of a competency and capability that we believe, that we have within the group. The specialty aspect of our business, I think, is at a level of maturity, now that we believe that we can take into the international space. Secondly, the performance of the underlying book now has a significant track record that we've been able to evidence to Lloyd's, and as I've said, it's running at combined ratios that are better than what Lloyd's currently believes.
Having that track record, brings us to a point that is now, that says, you know, Lloyd's is comfortable to partner with us into the international space. I think there is also the reality of where we find ourselves as a group from a growth perspective. Part of the search for ongoing growth for us, must be driving into the international space. I think we get the added benefit of obviously of diversification away from the current territories that we currently operate, and underwrite. The last point is around, it's also partly defensive, is that we are seeing international capacity start to come into our traditional market in the form of Lloyd's, there is business Looking for A-rated paper, moving into the international space across South Africa and into the rest of Africa.
We estimate close to GBP 1 billion on the last numbers that we've seen. The last point is really around being partly defensive. We do believe that we have a, an intersection of capability. I think market forces, you know, that make it necessary for us to think about international growth, and then the capability also being at the right level of maturity.
Thanks, Tava. Just to note to Asanda Notche, the two questions that you have asked in addition to that have been answered, which is what is the total amount of capital that will be invested in this expansion? Did touch on it, and your other question around any specialty classes that you want to be offered through the syndicate. I think we have given a view, I'll also give Thabiso Vickers to proffer an answer there. What you've said is that this will be written through, we'll write the business that we understand in a way that where we understand and where we have strong expertise in our specialty lines. Do you have any other comments there that you may want to add?
Yeah. I think just to add. I think where we are in terms of the initiative and now having received Council approval is when we're in what's called the making it happen phase. We are in the process of operationalizing the business. That means strengthening the team, you know, working through the plumbing and the piping that allows us to write, actually, write business, looking to then, you know, bring our specialty teams on board and aligning with the syndicate.
As I said, from a, from a class of business that we will cede part of our specialty portfolio to give the syndicate scale, and then we'll then look to write further international business in classes that are similar to what we currently write, within our existing specialty business as a way of extending that expertise. Again, strengthening the team with particular expertise that will sit in London in underwriting and in, and in distribution.
Tava, Thapelo Mokonyane is back with two questions. Is there a reinsurance arrangement in place? How does all that work in case of very large claims?
Yes. From a reinsurance perspective, the approach will be similar to what we follow today. If I look at the kind of combined portfolio, the level of reinsurance will be very much linked to the specific insurance class. From a retention perspective, we're planning to retain between 80% and 90% of the business. Of course, a lot of the reinsurance cover will be for natural catastrophes, et cetera.
Yeah. Thapelo has a question. What is the incentive for Lloyd's to take on Santam? What is Santam solving for Lloyd's? Go on.
Yes, and I think that's a fundamental question. I think it does speak largely to the attractiveness of the business that we currently write in South Africa and in rest of Africa. That is attractive to Lloyd's. As we've said, it is business that has a very strong track record, very strong performance, very high return on capital. When Lloyd's looks through to the business, I think that is certainly attractive and is I think testament to the capability that we're sitting that a world-class platform such as Lloyd's finds the business we do and the skill sets that we have here in South Africa very attractive for them to partner with us.
It also allows Lloyd's obviously to expand, you know, the business that they write, away from their traditional markets and extend their footprint across Africa. I think, what we have is a, is a truly a creative, partnership that brings, you know, African specialty business to Lloyd's, I think allows us to tap into the Lloyd's, you know, platform with all its benefits and capabilities, to defend our existing business in South Africa and rest of Africa, also look further afield, towards expanding further than that.
Thanks, Tava. I've got this question for you and possibly the next two questions for you. At first from Ashish T, "What is the break-even timeline for the syndicate in terms of profitability? And is there a risk of capital drag for the syndicate in the early years? And how will that be managed?
I think from an earnings perspective, we should be able to reach break-even within the first two years. As I mentioned, the initial J curve is purely linked to kind of premium recognition profile. From a capital perspective, the Lloyd's approach is to set the capital requirement kind of upfront for the business that you plan to write. If we don't exceed the level of new business in the plan, then there shouldn't be a capital drag.
Thank you. This from Pedro Tlala: "Would the more than 10% underwriting margin target potentially dilute the current specialty underwriting margins? Will the profitability of the lines you will participate in be more or less the same as the current specialty book?
It's not a direct comparison between what we plan to write from a new business perspective versus our current business. It will be similar classes of business, but we may participate in different layers. Then of course, also from a geo-geographic perspective, we will be writing in different markets than what we do today. You do see a difference in the margins that's attainable from different markets. For us, most important aspect is actually to make sure that this new business will be accretive from an overall margin perspective to the group, and that will be the focus for us.
The next two questions I think are tied together. One is from anonymous attendee and Marius Strydom. Marius, first of all, thanks to you, the leadership team, for sharing this very interesting initiative. I'd like to understand the bridge between your underwriting margin target. Well, Marius, you said of 11%, but our underwriting margin target is between 5% and 10%. An ROE of estimate 25%. We do state that we have a hurdle rate of 24%. Your question is: Do you have an idea of what % of your capacity will be tied in a low yield and funds at Lloyd's? Will this not be well below 50% to deliver such a high ROE?
Yeah. Maybe I can answer the first part of that. I think we've alluded to the underlying funding requirements and structuring that will underpin the Lloyd's initiative. I think Wicus has talked about that we'll issue ZAR 1 billion of subordinated debt in South Africa towards the SCR. I think if you look further to what Lloyd's actually allows from a funding perspective, it is quite flexible in terms of how you then fund the underlying capital. You can use letters of credit up to about 50% of the required funding for the Lloyd's initiative. That actually makes it quite attractive, right? You're not having to put direct cash in order to fund the underlying capital requirements.
I think we can go in another forum into a bit more detail around just, you know, the mechanics of the capital fluidity and fungibility, as well as the structures that Lloyd's allows that make this very, very attractive. I think it's also important to say that I think Lloyd's typically gets more requests for entrance into Lloyd's than they actually accept. It's simply because it is such an attractive, you know, market on all metrics, business coming into Lloyd's, the capital structures. For us to be able to enter the Lloyd's platform, we then benefit from a lot of those advantages that the underlying platform brings, not just in terms of top line, but in terms of how they look at the capital structuring underlying your capital requirements.
I think there is an expectation that as syndicates mature, that they then move on to their own internal economic model. I think for Santam already having our own internal economic model gives us tremendous advantage as we start to move into this Lloyd's initiative.
I think maybe just to add to that, Thabiso, is also within the Lloyd's requirements, you're not forced to hold your capital in cash. You can hold it in a balanced portfolio. That's kind of what's allowable within their requirements. It's very much aligned with our current approach and asset mix that we in any event in investing. We definitely won't be forced to invest in lower yielding assets.
Maybe, Wicus, a follow-up to that. Do we have any specific targets for the syndicate, e.g., underwriting margin or return on capital?
I think we've mentioned in the presentation that we are targeting a margin about 10%. That the syndicate should wash its face from our return on capital target perspective of 24%.
Question from Varun Goma. Please elaborate on how your existing partnerships, particularly one from SanlamAllianz, will be integrated into operations of the syndicate. Basically he's asking: Will the relationship we have with Allianz be integrated in the operations of this syndicate? Thabiso?
I think what we'll say is that we currently. I think we did share this, I think at one of the earlier presentations, when we disinvested from the SanlamAllianz JV, that we do continue with our distribution agreement with SanlamAllianz, where we share within the specialty lines of business on our first right of refusal. That's been quite attractive for us that we do still have access to the underlying specialty business across the African continent. We will continue with that arrangement with SanlamAllianz. Where opportunities then present themselves, particularly where superior A-rated paper is required, we do intend to continue to work with our partners in SanlamAllianz, in terms of specialty business across the continent.
Maybe, Wicus, this is for you. Yes, sir. Again, maybe two questions. I'll take one at a time. How confident are you to be able to achieve the GWP target for the syndicate in 2026? What are those factors that increase your confidence?
We are very confident in achieving those specific targets. If you look at it from a, if you take the 40% of the GBP 300 million-GBP 400 million that I mentioned, and the total size of the market is really an extremely small market share that we're talking about. I think, as Tava mentioned, the focus will be on appointing some of the best skills in the market from not only an underwriting perspective, but also a distribution perspective.
People that's got the relationships in place with cedants. Kind of lastly as well is if you look at the big brokers operating within the London market, it's the same brokers that we've got relationships with for many, many years that's in place, and we'll leverage those relationships as well to attract new business into our syndicate.
Okay. Just a second question from Yasser was: In a rare case of major negative surprises, e.g., large CAT, how do we think about the recourse with the Santam balance sheet?
I think, Yasser, typically, you know, our CAT modeling, and the reinsurance program that we've put in place does take that into account. We simply extend the reinsurance protection that Santam, the Santam Group has enjoyed, we extend that, almost taking the syndicate as a clear subsidiary of the Santam Group. We extend the fence of reinsurance around the entire Santam Group, irrespective of geography and where it's sitting. You know, from a CAT perspective, typically what you'll see is you may get volatility at the lower layers, but that's not inconsistent with what you already see within the South African environment. We don't expect that as we start to branch out within the syndicate, that we have any excess volatility beyond our current risk appetite, within our current reinsurance program.
We've worked with our partners, with our reinsurance partners, to ensure that the fence of reinsurance that we currently have around the Santam Group extends to the syndicate, as part of the Santam Group. It doesn't operate outside of the reinsurance protection that the Santam Group buys more holistically.
Thanks, Tava. I think, Ricus, I'll give you this one. It's from Jared. Is there a capital benefit from the syndicate in terms of diversification of risk for the group?
Nothing initially. From day one, we'll be applying effectively our internal model to the existing business that goes into syndicate. That benefit we will continue to extract. For the new business, as Tava also mentioned, the expectation is that we will move over to a internal model on that part of the business as well, which will yield a capital efficiency benefit for us. Over time, we can look at from a currency perspective, that there should actually be a diversification benefit that we can look at incorporating within our internal model as well. The current business plan and return targets is not based on any of those.
We've taken a very conservative approach by not taking into account diversification benefits early on from the onset.
James Stark is back again, with one question: Did you approach Lloyd's or did Lloyd's approach you? Maybe, Tava, you wanna take it?
I think, we've approached Lloyd's. We've been in discussions with Lloyd's, you know, for quite some time, I think largely, mostly through 2024. As I've said, we've been through a journey of mutual discovery. We've been through quite an extensive, you know, vetting process, particularly around Lloyd's understanding our processes, our structures, our underwriting, our capital model. I think we are, we're at a point where there is a level of comfort, you know, that Santam does meet the criteria to enter the Lloyd's platform.
Thapelo is asking: How big is the addressable market for the lines you are going for in Lloyd's market? What kind of share are you looking for?
I think it's, I think it's early days, I think, for us, you know, to be talking about, you know, percentage of the addressable market at this stage. I think for us, these are very humble beginnings, as we start to move into this international space. I think the numbers that we've indicated in the presentation is that, you know, you look at a London market, or London written market, that's between GBP 90 billion-GBP 110 billion. Lloyd's on its own is GBP 50 billion, GBP 60 billion. You're looking at, entering a market that has ZAR 1 trillion, you know, worth of business. I think, as I say, you know, very humble beginnings for us, where we will look to grow the capability over the years to come.
We'll continue, in that sense, to remain a small player within that bigger context. While we, you know, while we command a market share of 22%, 24% here in South Africa, I think realistically, within that bigger global context, we will remain a very small player. We're comfortable with that. I think our objective here is to grow slowly, to grow in a way that creates value, you know, for our shareholders, and to make sure that we adhere to the financial and underwriting targets that we have historically set, so that this initiative is accretive over the long term. We're not chasing international market share. I think we're chasing modest growth and accretive underwriting margins that ultimately drive then the return on capital.
Thank you, Tavaa. On softening of the Lloyd's market, which has followed an extended period of high premium rate increases, how will this impact your purchase of capacity and options, and what is your targeted return on capital, and how low are you willing to, for this to go during the upcoming downturn in the cycle?
I think it's important to say that, you know, matters to do with the softening or hardening of the cycle, won't be unique to us or, you know, these are not issues that we come across for the first time as we start to enter Lloyd's. I think our current existing business, in South Africa within our reinsurance buying, capabilities, and these are, you know, factors that we typically take into account in terms of how we deploy our underwriting capacity in our existing business. Those disciplines will extend to the Lloyd's initiative. From a market entry perspective, I think if you look over the last 20 years, I think typically entrants into Lloyd's have entered, pretty much across the cycle, both in soft and in hard cycles.
I think fundamentally, what's important is that, you balance both growth, and underwriting, to ensure that, you know, your underwriting requirements are met, whether the market is hardening or softening. If you look at the volatility of underwriting or combined ratios, across the cycle over the last 20 years, is that it does range from combined ratios as low as, you know, 40%, 50% to 120% in hard and soft cycles. I think it then speaks to a point Lucas made, which is, you know, where are you writing business, in what classes and in what geographies, that make you then successful. Our objective, is to ensure that, the initiative is accretive overall and in line with our group targets.
Thanks, Savi. Maybe a point to add is that I think if you look at the Lloyd's market itself, there is a strong focus on underwriting discipline, and that is key, and that aligns with our ethos as well.
Exactly. Exactly right. I think that creates an added layer, or guard, set of guardrails that the Lloyd's Corporation itself has clearly articulated that, you know, that syndicates must meet, you know, certain minimum underwriting criteria. I think for us that is something that we are very comfortable with, in the sense that it does create an extra set of, you know, guardrails that, you know, within which we must perform, whether we are in a hard or soft market.
Okay. Got three more questions then I think I'll be able to let you rest a bit. From Adrian Klute. How does Lloyd's benefit, think, say, in brackets, share profits in the business that Santam writes in the syndicate?
I think you need to think of Lloyd's as a marketplace, right? With license across the world. I think we've articulated what we bring to Lloyd's and what makes us attractive. I think we probably haven't articulated enough, you know, how the capital structure in Lloyd's works and what makes that attractive. Their whole Chain of Security and how that works and protects the whole corporation, including syndicates that are playing in this space. I think, you know, what Lloyd's does is, as I've said, it is a marketplace.
It's made up of, your 100 or 105 syndicates, your coverholders, your brokers, your managing agents, and then the whole ecosystem of lawyers and the contracting that goes around the market itself. I think one needs to think of Lloyd's as what it is. It's actually a marketplace that we're entering.
Maybe because you may take this from James. How do the capital and operational expectations of Lloyd's syndicate members compare to capital and operational expectations of P&C insurers generally? Maybe put it differently. Does this require you to up your game on increased capital or operational intensity in certain areas? If so, which areas, apart from international and syndicate experience, will your syndicate have to operate at a higher standard than non-syndicated business?
Maybe I'll start, and Lucas, you can complement. I think it's also important to say that while there will be learnings for the Santam Group in terms of upping our game in particular respects as we enter the Lloyd's market, I think we can't also underestimate the level of expertise that we are also bringing to Lloyd's. That's what makes Lloyd's comfortable with Santam entering into this space, particularly around our capital management, where we've been running an internal capital model for years, right? That's a beacon of excellence that Lloyd's is very comfortable with. Lucas.
No, I agree with that comment. I think from a return on capital perspective, we don't believe in a philosophy of subsidization between different business units. We measure all of our businesses against a 24% return on capital target, and the same will apply to the syndicate as well. Over time, as Tava alluded to, I think there will be learnings from both sides. Of us operating in London market, we'll pick up on practices that's actually good that we can apply in South Africa and vice versa as well. The intent is also from a staffing perspective to actually give people opportunity to work in London and for London-based people to come and work in South Africa as well.
I think through that in itself, it will also enable us to effectively seamlessly implement the good practices across the Group and lifting the whole game for the Group over time.
Yeah. Thank you all for the questions you have put it through. We've got two questions, Ricus, given the time that we have. These, Ricus, I'll give it to you. One, from Bradley, can you share any information on what reporting on the syndicate performance will be available?
Yeah. The we'll follow our current approach, where we don't specifically attribute the results to specific insurance classes and business units from a disclosure perspective. That practice will continue going forward. Of course, in the commentary, as we always do, we will share information on what the performance is of the specific business unit compared to targets, for example.
Okay. Ricus, one more last question. How do you deal with the three-year accounting when it comes to Santam's financials?
Yes. I think the three-year accounting that Lloyd's applies is Lloyd's works very much on a writing year basis, and the release of profits is linked to kind of the three-year period. From a Santam results perspective, we need to report the syndicate on IFRS. You're effectively working with two accounting bases, and the cash flow release from the earnings in the syndicate will just be linked to kind of the Lloyd's cash profit release profile.
Thank you, Ricus. Just wanna thank you in closing for all of those on the call for the questions. Obviously, I'll give Tava one last closing remarks, and then maybe before Tava does, we do look forward to engage with you, shareholders and investors and the analyst community in a month's time when we do our half year results. Tava, any closing remarks?
No, thanks, Sabi. Thank you very much for joining us this afternoon. Thank you very much for your very insightful questions and your interest in this, you know, exciting initiatives as we start to, you know, broaden our reach into the international space. Just maybe just to reiterate that, you know, we are quite excited about this initiative. We are driving now our international, you know, strategy off the back of what's been a very successful tried and tested competency here in South Africa. We're doing that with very credible partners in the international space. The Lloyd's platform, we believe, is a very solid and robust, tried and tested route towards international e-expansion. These are humble beginnings for us that we expect to be accretive over a period of time.
Thank you again for joining us this afternoon. Looking forward to seeing you at the end of the month when we talk about the half year results. Good afternoon. Thanks, everyone.