SA’s insurers post solid results amidst challenging market conditions: PwC Insurance Analysis

South Africa’s major insurers posted a solid financial performance for the year ended 31 December 2014. The results are indicative of continued growth initiatives and operational improvement in the industry, despite tough market conditions and economic uncertainty.

Dewald van den Berg, PwC Director, Financial Services Division, says: “The outlook for the insurance industry remains positive despite difficult operating conditions experienced in the past year, heightened by labour disputes and inflationary pressures on consumers. In addition, insurers have to contend with a host of regulatory changes, as well as proposed amendments to tax legislation.

“Most insurers have made significant investment in preparing for the implementation of the new solvency regime, with the Solvency Assessment and Management (SAM) comprehensive parallel run currently underway, and ensuring business practices are ready for treating customers fairly (TCF) and the retail distribution review (RDR).”

“Client centricity also remains top of the agenda for many insurers. Companies are seeking opportunities and new initiatives to better understand the needs of their clients, in order to provide fit-for-purpose products,” adds van den Berg.

These are some of the highlights of the fourth edition of PwC’s Insurance Industry Analysis. The survey analyses the results of South Africa’s major insurers for the year ended 31 December 2014. The survey identifies common trends, issues and challenges that are shaping the industry, as well as trends in the rest of Africa.

Overview of the long-term insurance sector

The financial results of the top five players (Discovery, Liberty, MMI, Old Mutual and Sanlam) were included in the survey.

These long-term insurers recorded combined group IFRS earnings of R28.4 billion, up 17% on 2013. Victor Muguto, PwC Long-Term Insurance Leader for Africa, says: “The JSE All Share Index closed 7.6% higher than in 2013. The combined invested assets of the long-term insurers grew by 10.4% from R1.77 trillion in 2013 to R1.95 trillion. Total investment income earned amounted to R186.7 billion representing a return on average investments of 10%. This is reflective of subdued equity market performance in 2014 compared to 2013.”

Insurers had to deal with the ongoing volatility in interest rates, particularly in the second half of the year, and emerging market currency fluctuations. The combined group embedded value earnings were close to those of the 2013 levels (2014: R39.4m; 2013: R39.2m). “This result reflects the robust operating performances by most South African operations in 2014,” adds Muguto.

Despite a challenging environment, the combined new business volumes reflect solid results. The 20% year-on-year increase is well in excess of CPI of 5.3%.

However, the competitive environment took its toll on the embedded value profit margins achieved on the new business written. The value of new business (VNB) margin of 2.9% reduced by 7% compared to 2013. The combination of strong growth in new business written with a marginal decrease in margins resulted in the overall VNB written increasing by 12%.

The industry as a whole managed actual expenses within the range of the projected actuarial assumptions set at the end of 2013. As in the prior year, insurers also profited from better-than-expected mortality and morbidity experience, which contributed about 6% to 2014 embedded value earnings.

The VNB for all the insurers is more sensitive to changes in lapse rates. “This may be due to most insurers writing age-rated, increasing premium business compared to level-premium policies written in the past,” explains Muguto. It is not surprising that insurers are also paying more attention to consumerism. Client centricity is a common theme among most companies.

Acquisition costs incurred by the businesses of the long-term insurers also increased by 17% to R16.9 billion in 2014. The Financial Services Board (FSB) is in the process of implementing RDR to achieve better outcomes for insurance customers. It is expected that the key proposals for RDR will support the broader objectives of ensuring that distribution models support the TCF outcomes and are applied consistently across all financial subsectors.

Overview of the short-term insurance sector

The results of the following four short-term insurance companies were considered in the survey: Mutual & Federal, OUTsurance Holdings, Santam and Zurich Insurance Company South Africa.

Van den Berg says: “After experiencing a difficult year in 2013, insurance companies improved their performance considerably in 2014. One of the key factors contributing to the much-improved results has been the absence of major catastrophe events. The only catastrophe event of note during the 2014 year related to the earthquake felt in the Gauteng region. Catastrophe events of the past few years have led insurers to restructure and optimise their reinsurance arrangements.

Companies’ claims ratios have improved significantly (decreasing from 68% in 2013 to 63% in 2014). The combined IFRS earning for the year of R3.1 billion increased by 23% on 2013. This was largely due to the improved underwriting margins. The underwriting margins increased from 4.6% to 7.6% in 2014 as a result of the reduced claims experience.

Gross written premiums increased by 11% from 2013 to R50.2 billion in 2014. This was mainly due to insurers continuing to effect selective rate increases in order to mitigate rising insurance costs as well as to counter the effects of the previous lean years.

Growth across the rest of the African continent

Insurers are increasingly looking for growth opportunities outside of South Africa. Insurers view Africa as a growth market, organically as well as through mergers and acquisitions.
The contribution to the VNB for life insurers from other African countries has increased significantly over the past several years. Overall, the VNB of the rest of African business as a percentage of the value of new business for South Africa ranged between 3% to 22% for the long-term insurers, and 10% on a combined basis.

Looking forward

Muguto concludes: “The industry realises that it needs to proactively look for new, innovative opportunities to facilitate growth and deliver strong financial performance. The approaches of the various insurers range from new alternative lines of business to achieve growth, geographical diversification, driving efficiencies, cost-cutting and optimisation of reinsurance arrangements.”

Insurance Industry Analysis 2015 PDF.