Soaring catastrophe claims takes Spring out of insurer’s half-year
As us ordinary folk celebrated the start of Spring with awesome weather, braai and the first away-from-home Springbok rugby victory over Australia in nine years, shareholders in South Africa’s largest non-life insurer were left contemplating the financial consequences of the April 2022 KwaZulu-Natal (KZN) floods on the business. JSE-listed Santam’s published its reviewed, condensed and consolidated interim financial results for the six months ended 30 June 2022 on 1 September 2022, reflecting a solid improvement in gross written premium (GWP) offset by a spike in claims paid and serious erosion to the group’s underwriting margin.
Cost of KZN floods soars
The insurer’s latest SENS announcement confirmed that its half-year GWP had increased by 23% compared to the first half of 2021, to ZAR24.743 billion and that it would hike its interim dividend by 7% to 462c per share. Unfortunately, the insurer’s headline earnings per share more than halved, from 863c to 409c per share, as gross claims paid surged to around ZAR14.2 billion, including R4.4 billion to meet claims following the KZN floods. Fortunately, the insurer’s reinsurance programme has provided effective protection against the natural catastrophe, limiting the net impact to just ZAR566 million, including reinsurance reinstatement premiums.
“The first half of 2022 was one of the most challenging underwriting periods in our history, compounded by a turbulent investment market environment,” noted Santam, in its SENS statement. “The net underwriting margin on conventional insurance fell to just 2.3%, well below our target range of 5-10%”. The latest erosion of underwriting margin is illustrative of the impact that the rising frequency and severity of natural catastrophe loss events is having on global non-life insurers’ profitability. In its half-year presentation to analysts, the insurer shared a slide showing a 21-year history of gross natural catastrophe claims under perils such as fire, flood/storm, hail, infectious disease and other…
The stand-out years are 2012 and 2013, during which the flood/storm and hail categories contributed to more than ZAR1.5 billion in gross claims against the insurer in each year; 2017, with the Knysna fires and flood/storm causing close to ZAR3 billion in gross insured losses; 2020, during which the pandemic-related contingent business interruption (CBI) claims pushed the gross claims total north of ZAR5 billion; and 2022, with flood/storm related losses pushing the gross claims to almost ZAR5 billion in just six months. Alas, the insurer’s underwriting challenges go beyond catastrophe to include claims inflation in excess of premium increases; large insured losses; power surge claims and an increase in motor theft.
Down but not out: celebrating solvency
“We experienced a turbulent market environment during the first half of 2022, and our expectation is that economic activity will, in the short to medium term, be constrained by weak consumer spending,” said Tavaziva Madzinga, Santam’s Group CEO, in a media release covering the results. “The high inflation environment also puts pressure on claims costs, while load shedding in the first half resulted in increased power surge claims”. Non-life insurers and their policyholders can expect premium increases as reinsurers adjust premiums higher to reflect the impact of large catastrophe events, globally and locally. The insurer described the half-year performance as “acceptable” under the circumstances and took care to reassure the market and shareholders that its economic capital coverage ratio (on 31 December 2021) was 157%, well within its 145% to 165% target range.
Santam expects the second half to be better. “Despite these headwinds, we are confident that the corrective actions we have implemented will start to show a positive impact towards the latter part of 2022; these are primarily in the form of underwriting actions to address the impact of increased claims costs and reinsurance rates [and extend to] procurement efficiencies, segmented premium increases and higher claim excesses,” said Madzinga. These promises are good news for shareholders, but bad news for policyholders and insurance brokers. The key message here is that ordinary insureds, especially in personal lines motor, can expect significant premium hikes… Additionally, insureds might end up taking a greater share of the risk through higher excesses.
Conventional insurance under the microscope
The group’s conventional insurance, being the commercial and personal lines covers that most of our readers are familiar with, showed reasonable growth over the half-year, climbing 7% from ZAR15.498 billion to ZAR16.543 billion. It is always interesting to slice-and-dice these numbers to learn more about the market. Our first observation is that the conventional insurance portfolio is split into 57% commercial and 43% personal lines business. And our second comment, is that the bulk of the insurer’s conventional insurance business, or 82%, is written in South Africa. The rest of Africa contributes 7%; Southeast Asia, India and Middle East contributes 10%; and other countries just 1%.
It is also interesting to consider how the insurer reports on the various insurance classes as defined in Schedule 2, Table 2 of the Insurance Act. The Motor and Property classes account for the bulk of conventional insurance premium, with the former coming in at ZAR7.633 billion in premium for the six months under review, and the latter at ZAR6.206 billion. Santam also reported ZAR349 million in Accident & Health premium; ZAR560 million under Transportation; ZAR785 million under Liability; and ZAR857 million under Engineering. The Crop, Guarantee and Miscellaneous classes all brought in less than ZAR100 million in premium. The impact of catastrophe on the net underwriting result under these insurance classes was clear, with Property reflecting a ZAR328 million loss and Motor falling from ZAR620 million to just ZAR109 million in profit.
Winding the clocks forward
Modern day non-life insurers must set premiums and manage risks to ensure their long-term resilience and sustainability. “While we continue to steadfastly drive our 2025 Future Fit strategy, it is important that we continuously and objectively examine the robustness of our strategy, operating model, organisational culture and whether these appropriately position us for the future; we need to ensure we run an efficient, nimble business which is digitally enabled,” Madzinga said. The group noted that trading conditions remained very competitive, and acknowledged the impact of higher interest rates and inflation on consumers, especially insofar as the impact on households’ disposable incomes.
As for future premium growth, the group hopes to rely on markets beyond South Africa. “We will continue to access new markets, to strengthen ecosystems and partnerships with non-traditional players, as we have identified these as key growth opportunities,” concluded Madzinga. “We also continue to partner with Sanlam and other industry innovators to unlock cross-selling opportunities and to meet our clients’ evolving needs”.
Writer’s thoughts:
The SENS announcements, interim reports, final reports and analysts presentations published by the country’s listed non-life insurers are full of useful facts and figures; but it can be a bit of a nightmare to stay up to date with all insurer results. Do you have time to look at the half-year results and analysts presentations, or are you too busy servicing clients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
