South African insurers can expect clouds and silver linings, Says report
S&P Global Ratings today published its report "South African Insurers: Clouds And Silver Linings For The Rainbow Nation," on RatingsDirect.
Most South African life and property/casualty (P/C) insurers that we rate have entered 2017 with sound balance sheets and resilient operating performance despite a difficult operating environment. We forecast GDP growth in 2017 to improve to a still modest 1.4% from 0.5% in 2016. This assumes that household spending will remain restrained amid rising inflation and interest rates and investment spending by South African corporates will remain weak. As a result, we anticipate growth in insurance premiums to remain muted. Overall, we expect premium growth to trend in line with nominal GDP in 2017 and 2018.
Against this unsupportive backdrop, we expect profitability for P/C insurers to moderate due to weaker underwriting performance primarily caused by increasing competition, slower growth in insurable risks, and weaker currency relative to long-term historical levels. However, overall profitability should remain robust with annual return on equity of around 15%-20%. Although adjusting for the cost of capital in South Africa ROE levels look less impressive, profitability for the large rated insurers is nevertheless expected to remain well above their respective hurdle rates, on average. This is primarily due to continued support from lower but still strong investment returns.
Similarly for life insurers, weaker economic prospects, increasing competition, higher lapse rates, and increased capital market volatility is dampening sales and profitability with compression of new business margins evident in 2016. That said, the major life insurers are reasonably positioned to navigate these conditions with their strong market position, broad product offering, extensive distribution networks, and significant risk-sharing mechanisms within investment products.
"South African Insurers: Clouds And Silver Linings For The Rainbow Nation,"
