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South Africa Insurance Report Q4 2010
Business Monitor International, Oct 2010, Pages: 58
The South Africa Insurance Report provides industry professionals and strategists, corporate analysts, insurance associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on South Africa's insurance industry.
‘Resilient’ is a word that has appeared frequently in corporate reports published by South African insurers, whether they operate mainly in the non-life or life segments. The economic slowdown has contributed to downwards pricing pressure in many lines within the non-life segment, while in the life segment a lack of financial security has inhibited customers from committing to long-term savings products. Nevertheless, published results indicate that 2009 was far from disastrous for South Africa’s insurers.
Although none mention it, it is possible that the structure of the market has helped participants to maintain prices and margins. Both the life and non-life segments continue to be dominated by companies from South Africa’s large domestic financial services groups. In the life segment, the largest players are Old Mutual (among much else, the owner of Nedbank) and Sanlam. In the non-life segment Mutual & Federal, Santam and the local operations of Zurich account for nearly 40% of total premiums. Absa has non-life and life subsidiaries. FirstRand Group is represented by Momentum Group (life insurance) and OUTsurance (non-life). Standard Bank owns Liberty Group, a major life player. Nevertheless, there are several substantial independent companies, including Discovery, which focuses on health insurance, Metropolitan and Hollard, a private company expanding into Australia and elsewhere. A key development in the life segment has been the announcement – at the end of March 2010 – of the proposed merger of Metropolitan with Momentum. Metropolitan will make an all-share purchase of Momentum. FirstRand will then distribute its shares in Metropolitan/Momentum to its own shareholders, who will dominate the share register of the combined company. The deal will create a new and large listed life insurer out of two broadly complementary businesses, with an embedded value of around ZAR30bn. Metropolitan has traditionally focused on the low-to-middle income segment of the retail market, while Momentum has concentrated its activities in the upper-income segment. This transaction, which should ‘unlock’ the value of the investment in Momentum held by FirstRand’s shareholders and give them a controlling interest in a stronger business, is scheduled to be completed by the end of 2010. The responses to a challenging year vary. However, in general, the impact of the downturn on profits was softened by at least one of: lower claims; lower administrative costs; corporate restructuring to emphasise more profitable lines and businesses; restructuring to reduce volatility of earnings; growth in healthcare products (thanks in part to the Government Employees Medical Scheme, or GEMS); foreign expansion (usually into embryonic markets elsewhere in Sub-Saharan Africa, but also in Australia’s non-life segment) and, perhaps most importantly, higher investment earnings.
Of the insurers that emphasise niche businesses, it is possible that the one affected least by the downturn was Guardrisk, an element of Alexander Forbes (a broker of short-term insurance and provider of various risk management solutions). Guardrisk is one of the world’s leading providers of captive cell solutions to its clients. Guardrisk grew by virtually all measures in the year to the end of March 2009, as its customers sought the advantages of underwriting their own risks through captives. A theme that runs through virtually all corporate reports is that the South African insurers’ levels of capital are well in excess of statutory requirements. Whether by retaining earnings within their businesses, or by tapping into funds from shareholders or global capital markets in the good times prior to 2007, South African insurers ensured that their balance sheets were in good shape before the slowdown. The comments made by leading insurance companies in the H110 reporting season suggest that the second half of this year will remain fairly challenging, even for the major players. In the non-life segment, the comments of Santam’s Chairman and CEO, which were published on September 1, 2010, are particularly significant: ‘General consensus is that economic growth is expected to be fairly flat for the remainder of the year, with domestic insurance industry premium growth most likely below the nominal growth of the economy. It is anticipated that the market will continue to be soft, both for commercial and personal lines business, as the recovery of the domestic economy is slower than anticipated. We remain concerned over the low levels of disposable income of individuals, and earnings pressure on businesses, which make achievement of an appropriate risk rate challenging.’ This is one of the clearest explanations of why non-life penetration is likely to continue to fall over the short-term. Another contributing factor is the tendency of the largest non-life insurers to abandon low profitability business – even if this results in a diminution in premiums in the short term.
Nor have there been significant changes to the challenges within the life segment that were listed by Old Mutual in its 2009 Annual Report. Job losses have led to a reduction in disposable incomes. While a strong regulatory regime has boosted consumer confidence in insurance and long-term savings products, it has (since the beginning of last year) forced brokers to book a part of the commission that they own over the life of policies – rather than booking all commission upfront. Insurance products are in competition with non-financial alternatives such as real estate. Rising unemployment and high levels of household debt have constrained the ability of ‘mass market’ customers to buy life insurance and other long-term savings products. At the top end of the market, retiring Baby Boomers have begun to run down their accumulated savings. However, sales to ‘retail affluent’ customers (middle-income black South Africans) have been booming.
At the time of writing, in September 2010, we have been able to ensure that this report includes actual data for 2009. We have also been able to use data published in relation to H110 to adjust our estimates for the year as a whole. Total premiums in 2009 amounted to ZAR246,036mn. This includes non-life premiums of ZAR62,418mn and life premiums of ZAR183,618mn. In 2014, the corresponding figures should be ZAR322,300mn, ZAR99,352mn and ZAR222,948mn. In terms of the drivers that underpin our forecasts, we are looking for non-life penetration to fall from 2.61% of GDP in 2009 to 2.38% in 2010, before rising slowly to 2.65% in 2014. We are looking for life density to rise from US$445 per capita in 2009 to US$560 in 2014. BMI’s proprietary Insurance Business Environment Rating (IBER) for South Africa is 67.1 out of 100.
Issues To Watch
Overseas Expansion
Although a number of niches are unquestionably growing rapidly, the South African insurance sector as a whole is fairly mature, particularly in relation to GDP per capita. The structure of the industry is such that players cannot look to expand by way of mega-mergers. An obvious solution for the South African insurers is to draw on their strong balance sheets in order to expand outside the country.
Claims Costs
The South African Insurance Association (SAIA), the trade association for the non-life insurers, has emphasised the need to reduce the number of deaths on the road. Further initiatives by the industry to lower the incidence of accidents could be beneficial.
Lapses And Surrenders
ahe Association for Savings and Investment South Africa (ASISA), the trade association for life insurers and investment managers, show that lapses of life insurance policies fell from ZAR38bn in 2008 to ZAR32bn in 2009, a little over the level of 2007. This is another sign of the overall resilience of the industry in 2009, although lapses and surrenders in 2008 and 2007 may have been inflated by one-off value enhancements. Continuing slippage in the level of lapses and surrenders of life policies would be a positive sign.
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