Is your brokerage charging as hard as this insurer?

The latest trading statement issued by South Africa’s largest non-life insurer suggests ‘business as usual’ during the second year of the coronavirus pandemic; but there could be more hiding in the brief update than meets the eye. In a JSE SENS announcement issued recently, the insurer updated shareholders on the expected range of earnings and headline earnings per share for the year to 31 December 2021. It said that headline earnings per share (HEPS) would come in at almost three times what the business achieved for 2020. Shareholders will have to wait until early March for the official results, but this update will be quite close to the mark.

A healthy underwriting performance

According to Santam, its HEPS will come in at between R22.46 and R27.44 compared to R9.05 in the prior year. “The increase in HEPS was driven by improved underwriting results and increased investment income attributable to shareholders,” the group explains. There should be no surprises there, as local investors have also benefited from a stronger than expected performance on the equity markets, with the JSE All Share Index 24% higher over the 12-months to 31 December 2021. Bonds, especially in the long duration space, chipped in with excellent yields too… Remember, dear reader, that non-life insurers manage billions of rand of insurance premium to assist in achieving their protection function. 

It should also be noted that one of the insurer’s stated operating objectives is to maintain a net underwriting margin of between 4% and 8% of its near earned premium. The insurer struggled in 2020, reporting a net underwriting margin on conventional insurance of just 2.5%, but it expects to bounce back to nearer to the top-end of this range for 2021. Can insurers, insurance brokers and policyholders breathe a collective sigh of relief? And can we view this strong 2021 as a return to normal for the current year, at least in terms of writing business in commercial and personal lines non-life insurance? 

Not yet, apparently. The insurer admitted that its conventional insurance premium growth remained “strained in the current economic climate”. This revelation should not surprise regular readers. We have, after all frequently reported on the fragile state of the domestic economy… And a recent economic outlook presentation, Isaah Mhlanga, suggested South Africa could be trapped in sub-2% annual GDP growth for the foreseeable future. Non-life insurer’s business prospects are closely linked to general economic prospects because, all else being equal, they rely on economic growth to drive premium growth higher. 

So, how did this insurer shoot the lights out through 2021?

Against this backdrop, you may be wondering how Santam delivered such fantastic 2021 results. An obvious starting point is that 2020 was a horrific year and that it would be quite difficult to produce worse numbers than those achieved during the height of lockdown. In other words, the 2021 result is off the proverbial low base. The insurer is also emerging from one of its worst claims experiences on record due to its pandemic-related contingent business interruption (CBI) exposures. “Gross CBI claim payments of more than R2.1 billion have been made to date, inclusive of the relief payments of R1 billion made in August 2020,” noted the insurer in an October 2021 update. 

That update also acknowledged the then-significant Supreme Court of Appeals ruling on the indemnity period on such policies. The SCA had ruled that the 18-month indemnity period referred to in the main business interruption section of the complainant’s policy also applied to the contagious and infectious diseases extension of the contract. The judgment impacted certain policies issued by the Hospitality & Leisure division of Santam, comprising about a third of the insurer’s 3200 notified CBI claims. “Based on the CBI claims settled and the expected reinsurance recoveries, no adjustment to the net CBI claims estimate of R1.7 billion as at 30 June 2021 is expected; the first reinsurance recovery was made in September 2021,” wrote the insurer. The provision for COVID-19 related CBI claims was made in the 2020 financial year. 

Impairments for rest of Africa

Another drag on the group’s 2020 earnings came courtesy an impairment of the insurer’s investment in Saham, totalling R690 million. Saham, in which Santam has an effective 10% interest, operates in 26 countries in Africa and the Middle East, including Angola, Ivory Coast, Mauritius and Morocco. 

Removing the pandemic and Saham impairments gives an immediate ‘lift’ for the 2021 result. But there is another factor that boosted the insurer’s latest period. The weaker rand exchange rate against most currencies contributed to “fair value gains on equities” which became a key contributor to its investment income outperformance for the year. Rand weakness is a bit of a double-edged sword in the world of insurance because it bolsters investment performance on the one hand, but increases claims costs on the other. Thankfully, for 2021 the net impact seems skewed to the income rather than expense side. 

Is your brokerage powering ahead?

As we skimmed through Santam’s SENS announcement, we wondered whether short-term insurance brokers were making as much headway. If an insurer that aspires to be “the best intermediary enabler” in South Africa is shooting the lights out, then so should its broker partners, surely. And that means, at the very least, that you should have benefited from around 5% growth in gross written premium in conventional insurance business last year. At least that’s what Santam expected to achieve when its executive presented on the half-year numbers. 

Writer’s thoughts:
South Africa’s non-life insurers endured a torrid 2020 as the extent of pandemic-related losses became clear, but they have since emerged from this tough period with all valid claims paid and their balance sheets intact. Are you surprised to learn that Santam’s 2021 HEPS could be 3x its 2020 experience? And are you experiencing a similar rebound in your business? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.