Flooding sinks insurer profits

If you ask the world’s most talked about artificial intelligence (AI), Chat GPT, to write an introduction to Santam Limited’s 2022 fully year results in the style of Charles Dickens, you might find the title of his most recognised work forever altered. This writer reckons that the AI would title this 2022 insurers results novella ‘A Tale of One City’ rather than the original ‘A tale of Two Cities’. The opening paragraph might read: “It was the worst of times; an age of climate change and an epoch of drought and flood … analysts called it the season of squeezed underwriting margins and told investors to forget winter and prepare for a calendar year of despair”. 

The fun is done with, now on to more serious matters

That, dear reader, is about as much fun as you will have with an insurer’s 2022 annual financial statements (AFS). This newsletter will delve deeper into a 12-month period that saw an 8% increase in conventional insurance gross written premium (GWP); an underwriting margin decline from 8% in 2021 to just 5.1% this period; and a significant decline in both headline earnings per share and return on capital. To its credit, Santam’s 2022 AFS was not all doom and gloom. In the director’s report, the country’s largest insurer noted: “The 2022 financial year was one of the most challenging underwriting periods in our history, combined with a turbulent investment market environment; despite these headwinds, we reported strong GWP growth and acceptable net insurance results”. 

Viewed through an insurance claims lens, 2022 was best described as an annus hornbills, with a toxic mix of crime, flood, inflation and load shedding causing all manner of pain. The April 2022 KwaZulu-Natal (KZN) floods stand out at the top of this list, with Santam offering a best estimate of gross claims following the weather catastrophe at ZAR4.4 billion. This translates into a net loss of ZAR567 million, inclusive of reinstatement premiums of ZAR381 million. PS, the April 2022 KZN floods are now officially the most significant natural catastrophe in Santam’s history. Loadshedding, which contributed to an increase in power surge claims; large fires, which saw a big rise in commercial fire claims; and motor theft were singled out for special mention, as was the negative impact of inflation exceeding average premium increases during the period. 

Intermediaries give the direct guys a hiding

Santam reports its insurance activities under three distinct divisions, namely conventional insurance; alternative risk transfer; and general insurance partnerships with Sanlam Emerging Markets (SEM). Since most of our readers are involved in financial and risk advice, we focus on the first division which encapsulates Santam Commercial and Personal; Santam Specialist and direct insurer MiWay. “The group’s conventional insurance business achieved gross written premium growth of 8%, to ZAR35.418 billion and a net underwriting margin of 5.1%, which is at the bottom end of the group’s target range of 5% to 10%,” they said. It is worth unpacking this result further, to get a feel for the traditional versus direct side of the industry. 

The Commercial and Personal business reported solid growth in gross written premiums compared to 2021, especially in commercial lines. “The Specialist business achieved overall strong growth with the crop, travel, liability, marine and corporate property insurance businesses as the main contributors, though the growth in the crop business was mainly due to increased commodity prices,” they said. But MiWay, which has often outperformed the intermediated business, managed only a subdued 2% growth in GWP. This result was in part due to a focus on profitability over new business and the legacy impact of low premium increases in 2021 and increased premium defaults in 2022. 

Retaining premium my way…

This writer is in awe of the profitability of direct insurers, with MiWay reporting a loss ratio of 58.6% in 2022 versus 60.9% in 2021, after factoring in its catastrophe reinsurance recoveries. This means the insurer paid out just under 60c in claims for each rand of premium collected over the period. This division’s ZAR285 million underwriting profit was secured thanks to tough underwriting actions taken mid-year, including improved claims efficiencies; segmented premium increases; and adjusted risk covers. Something that insurance brokers and policyholders seldom appreciate is the dynamism and responsiveness required from both direct and traditional insurers to protect their margins form constantly changing underwriting conditions. 

We have already discussed some of the steps taken by the direct insurer… It turns out that the Commercial and Personal division had to take similar steps in response to a tough claims environment. The business implemented a range of focused underwriting actions, some of which we described in our reporting on its 10-month trading update, titled ‘Crime, flood and power surge claims could KO non-life insurers’. The traditional insurance business also benefitted from freeing up another portion of its COVID-19 related contingent business interruption (CBI) claims provisions, which helped the bottom line. On 31 December 2022, Santam reduced its net provision for CBI claims by a further R317 million, adjusting the estimate of its gross liability for open CBI claims to ZAR1 billion, less a reinsurance asset of ZAR900 million. 

SA still the Sub-Saharan Africa powerhouse

South Africa remains the cornerstone of Santam’s conventional insurance business, contributing 85% of GWP, with business written on Santam Namibia licences contributing the balance. As for insurance classes, the insurer reported an 8% increase in GWP in its property class and a 5% increase from its motor class. “The liability class continued to achieve strong growth, supported by firmer premium rates, growth in cyber product uptake and increased market share across the independent broker market segment,” they said. “And the accident and health class reported excellent growth as the travel insurance business benefitted from increased local and international travel trends and increased business activity post-COVID”. On the flipside, GWP in the engineering class achieved subdued growth of 2% due to a slowdown in business flows from outside South Africa.

 Massive catastrophe losses notwithstanding, South Africa’s largest insurer remains adequately capitalised. Group capital at year end amounted to ZAR13.5 billion versus the ZAR8.6 billion group economic requirement indicated by its internal model, for a capital coverage ratio of 1.56 times. “In November 2022, the Prudential Authority removed the remaining 10% capital add-on that applied to Santam’s approved partial regulatory internal model; although this increases our regulatory capital coverage ratio [our] targeted economic capital coverage ratio band of 145% to 165% has remained unchanged,” Santam concluded. 

Writer’s thoughts:
Each year, risk and financial advisers have to explain inflation-plus increases in short-term premiums to their clients. In the past, these increases could be offset by the client taking on more risk through higher excesses or agreeing to expensive risk mitigation steps; but this year there may be little wriggle room. How do you intend breaking the 2023 insurance premium increase news to your short-term insurance clients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.