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Short-term insurers get a short-term breather

Underwriting windfall unlikely to last – PwC.

JOHANNESBURG – South Africa’s major short-term insurers grew earnings 23% in the year to December 2014 from the prior year due to fewer catastrophe claims, but this earnings growth is unlikely to be sustainable, says PwC. 

The combined IFRS earnings of Santam, Outsurance and Zurich rose 23% to R3.1 billion last year, boosted by fewer large claims after a relatively benign year on the natural catastrophe front.

In contrast to 2013, when one Gauteng hailstorm cost insurers more than R1.6 billion and they were hit by flooding in Limpopo and the Western Cape, there were no major catastrophe claims last year.

Unsurprisingly then, Santam, Outsurance, Zurich and Mutual & Federal (M&F) collectively lifted their underwriting margin to 7.6% in 2014 from 4.6% the previous year. This indicates a higher level of profitability as the insurers paid out less in claims than they collected in premiums.

“Growth in underwriting contributions in the short-term insurance market in my mind may not be sustainable. To a large extent what we saw in terms of reductions in catastrophe claims is an element of luck,” Victor Muguto, PwC South Africa’s long-term insurance leader, told journalists on Monday.

Santam and Outsurance made significant contributions to the improved underwriting figure.

South Africa’s largest short-term insurer by market share, Santam, achieved a net underwriting margin of 8.7% in 2014 compared with 2.3% in 2013. This was largely due a to significant turnaround in its crop insurance business and a R100 million reduction in net catastrophe claims.

Outsurance, meanwhile, recorded an underwriting margin of 17.8% in 2014, significantly higher than its peers.

Gross written premiums (GWPs) vs underwriting margin

Screen Shot 2015-03-30 at 5.14.40 PM

 

Source: PwC analysis

PwC said that the re-rating of unprofitable business and greater focus on more profitable commercial lines (over personal lines) also helped improve short-term insurers’ claims ratios and profitability.

Premium growth hard to come by

The four insurance companies grew gross written premiums (GWP) 11% to R50.2 billion in 2014, lifted by a 66% jump in GWP written by Youi, the Australian subsidiary of Outsurance.

When excluding Youi from Outsurance’s results, industry GWP grew 7% last year.

“This confirms to some extent that the local industry is not really growing by much more than CPI,” PwC says in its latest insurance industry analysis.

Muguto said there is potential for strong growth in non-life insurance business in the rest of Africa, as African populations become more affluent and urbanise rapidly.

The challenge, Muguto said, is to encourage the local placement of insurance contracts. Particularly when it comes to large construction and engineering projects, insurance cover is often placed offshore, either in primary or reinsurance markets in foreign jurisdictions.

In the year under review, Santam grew GWP 10% to R22.7 billion, followed by M&F, which grew premiums 8% to R12.2 billion.

Boosted by Youi, Outsurance grew GWP roughly 20% to R11.6 billion in 2014 (this falls to 6% when excluding Youi).

Although not included in PwC’s results since it is not a public company, Hollard grew premiums in its short-term insurance business by 21% to R9 billion. The purple company, which in 2014 acquired its own spin-off Etana, grew group GWP (including its life business) by 3% to R15.1 billion.

Zurich’s GWP fell nearly 10% to R3.7 billion in 2014, as prior year rate increases “resulted in a portion of the book moving to other insurance companies,” PwC said.

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