South African Insurers: Sustained Capital Resilience, Amid Grey Clouds - Trevor Barsdorf Simran Parmar Ali Karakuyu Liesl Saldanha - S&P Global
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South African Insurers: Trevor Barsdorf
Simran Parmar
Sustained Capital Resilience, Amid Grey Clouds Ali Karakuyu
Liesl Saldanha
March 16, 2021Key Takeaways
– South
South African
African insurers
insurers have
have demonstrated
demonstrated resilient
resilient creditworthiness
creditworthiness based
based on
on their
their strong
strong capital
capital metrics,
metrics, despite
despite
aa weak
weak operating
operating environment
environment and
and the
the ongoing
ongoing pandemic.
pandemic.Although
Although earnings
earnings generation
generation has
has weakened,
weakened,wewe see
see the
the
pandemic
pandemic asas an
an earnings
earnings event.
event.
– Economic
Economic recovery
recovery prospects
prospects and
and debt
debt consolidation
consolidation over
over the
the medium
medium term
term depend
depend on
on macroeconomic
macroeconomic conditions.
conditions.
These
These affect
affect the
the overall
overall operating
operating environment
environment and
and asset
asset quality
quality within
within the
the sector.
sector.
– Weak
Weak economic
economic growth
growth prospects
prospects and
and the
the risk
risk of
of aa slower
slower recovery
recovery will
will depress
impact the
thesector’s
sector’sperformance
performancein in2021.
2021.
We
We expect
expect GDP
GDP growth
growth will
will rebound
rebound to
to 3.6%
3.6% in
in 2021
2021 after
after aa sharp
sharp recession
recession estimated
estimated at at 7.0%
7.0% in
in 2020.
2020.The
The
technical
technical recovery
recovery within
within the
the insurance
insurance sector
sector is
is likely
likely to
to be
be similar,
similar,but
but growth
growth is
is likely
likely to
to trend
trend below
below nominal
nominal GDP.
GDP.
– IfIf there
there are
are new
new waves
waves of
of COVID-19
COVID-19 cases,
cases, 2021
2021 performance
earnings could could
be affected.
be affected,
An uptick
but weinstill
morbidity
see theand
pandemic
mortality
as an
earnings
claims couldevent.cause
An uptick
lossesinfor
morbidity
life players.
and Claims
mortality
in 2021
claimswill
could
largely
causes
depend
losses
on the
for life
efficiency
players.ofClaims
the vaccination
in 2021 will
largely
program. depend
Property/casualty
on the efficiency
(P/C)ofunderwriting
the vaccination
income
program.
took aProperty/casualty
one-off hit from business
(P/C) underwriting
interruptionincome
claims
took
in 2020.
a
one-off
Reinsurancehit from
cover
business
materially
interruption
protected claims
primary
in 2020.
insurers.
Reinsurance cover protected primary insurers.South Africa Insurance | Credit Overview
– Higher economic and country risks constrain the sector ratings. For example, we took rating actions on insurers after downgrading South Africa in
April 2020.
– Insurers’ investment portfolios have an average credit quality within our 'BB' range because of concentrations in bank deposits in local banks and local
currency sovereign bonds.
– If economic conditions fail to recover, broader growth will suffer. This would increase the pressure on earnings.
Ratings Are Distributed In A Cluster Around The Sovereign Stable Outlooks Mirror That On The Sovereign
2021 2020 Negative
45 13%
40
35
30
25
%
20
15
10
5
0
AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- Stable
87%
Data as of Feb. 28, 2021. Includes entities with guarantee and group support, excludes entities with Source: S&P Global Ratings. Excludes entities with national scale ratings only.
national scale ratings only.
Source: S&P Global Ratings.
3Economic Growth And Fiscal Consolidation Stalled During 2020
− Strict lockdown measures in 2020 triggered a sharp economic contraction. The government has focused on managing the spread of the
virus; it has yet to finish formulating its vaccination plans.
− Signs of recovery emerged in third-quarter 2020 and we expect a moderate rebound in 2021, sufficient to support slow fiscal
consolidation in 2021-2023.
− Real GDP will return to pre-pandemic levels only in 2023 and we expect longer-term structural growth challenges.
Real GDP Will Not Return To Pre-Pandemic Levels Until 2023
Weak macroeconomic growth backdrop will weigh on insurance industry
9,000 6
Real GDP per capita
8,000
4
Real GDP growth
7,000
2
6,000
Percentage change
5,000 0
Bil. $
4,000 (2)
3,000
(4)
2,000
(6)
1,000
0 (8)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2020f 2021f 2022f 2023f
e--Estimate. f--Forecast. Source: S&P Global Ratings.
4Fragile Recovery Constrains Insurance Premium Volumes
– Fears of a weaker-than-expected recovery are affecting household and business confidence.
– Investor’s growth expectations remain subdued, eroding life insurance volumes.
– Nominal GDP could recover by about 5% in 2021, from a low base, and normalize further in 2022 and 2023, but gross premium growth likely to
trend below nominal GDP.
Property/Casualty Premium Growth Tracks South African GDP Investor Returns Show Soft Market Growth Expectations
Real GDP growth Nominal GDP growth P/C GWP growth JSE ALSI y/y return (12 month moving average) GDP y/y growth (right scale)
30 15
15
10
20
12
5
9 10
6 0
0
%
%
3
%
(5)
0 (10)
(10)
(3)
(20)
(15)
(6)
(9) (30) (20)
2014 2015 2016 2017 2018 2019 2020 2021
e--Estimated. f--Forecast. P/C--Property/casualty. GWP--Gross written premium. Source: S&P Global y/y--Year on year. Source: S&P Global Ratings, South African Reserve Bank.
Ratings, South African Reserve Bank.
5The Number Of New Cases Started To Fall In February 2021
– The risk of potential additional COVID-19 waves and the implementation of a vaccination program will be key to determining the overall
materiality of insurance claims in South Africa.
– At the start of February, the number of new daily cases was starting to fall in most emerging markets. That said, few of these countries had
managed to force new daily cases much below their all-time highs.
New Daily Reported COVID-19 Cases Per Million Are Starting To Moderate
500
450 Sep-20
400
Cases per million
350 Oct-20
300
Nov-20
250
200 Dec-20
150
Jan-21
100
50 Feb-21
0
Note: Figures are seven-day moving averages at the end of the month. February is as of the 8th. Source: OWD.
6Still Navigating The Pandemic’s Effects
Provisions Affected By Lack Of Clarity On Pandemic Effects
– Many life players have set up provisions to
Significant uncertainty exists surrounding provisions amid the risk of additional waves
cover pandemic-related excess mortality and
morbidity losses. If cases rise again, they
10000
may need to create additional provisions in
9000 2021.
8000
– Legal proceedings regarding business
interruption (BI) claims are still ongoing, but
7000 some courts have ruled in favor of
6000 policyholders’ coverage, clarifying P/C
insurers’ gross exposure. We assume that
Mil. ZAR
5000 reinsurers may end up covering much of this
4000 exposure.
3000
2000
1000
0
Life Business interuption
Data as at year end 2020. ZAR--South African rand. Source: S&P Global Ratings, audited financial statements.
7Life Assurance Profitability Under Pressure
– Volatility in South Africa’s financial markets has squeezed the sector’s profit margins. Insurers’ asset management activities bring in lower
investment income and therefore fewer related investment fees.
– There has been an uptick in policy lapses as economic pressures affect persistency. In addition, higher one-off remote working costs inhibited new
business margins in 2020.
– Many life players are setting aside reserves or other provisions against the risk of excess mortality and morbidity losses. If new variants trigger a
new wave of cases, additional provisions may be needed in 2021.
South Africa Equity, Bond, And Property Market Returns (2010- Value of new business margins under pressure
2021) Challenging profitability environment in 2020
Not all asset classes have recovered
S&P Glo South Africa Composite (Equity) S&P South Africa Sovereign Bond 2017 2018 2019 2020*
S&P South Africa Composite Property
60% 4.0%
3.5%
40%
3.0%
20%
2.5%
0% 2.0%
1.5%
(20%)
1.0%
(40%)
0.5%
(60%) 0.0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sanlam Old Mutual Liberty MMI Mean
Source: S&P Global Ratings, S&P Dow Jones Indices. *Based on results as of first half 2020/2021 or year-end 2020. Source: S&P Global Ratings, audited
financial statements.
8P/C Insurers Focus On Underwriting Discipline
P/C Underwriting Income Drives Profitability – Low real investment yields depress
profitability, encouraging insurers to focus on
Underwriting income Investment income
underwriting profitability.
Underwriting margin (right scale) Investment yield (right scale)
– The biggest beneficiary of lockdown has been
14,000 12 the motor business line. A sharp drop in the
frequency and severity of claims has
12,000 10
supported profitability, despite the need to
10,000 8 offer premium rebates. While social
distancing measures persist, claims
Bil. ZAR
8,000 6 frequency is likely to remain low.
%
6,000 4 – Although P/C insurers saw losses from
pandemic-related BI claims, these were
4,000 2 limited by use of reinsurance, and offset by
2,000 0
better performance in the motor portfolio in
2020.
0 (2)
– Underwriting income is expected to remain
P/C insurers’ largest contributor to earnings
in 2021 and 2022. We expect reported
*Change to industry reporting statistics. P/C--Property/casualty. Underwriting margin: The ratio of the difference between premiums
underwriting results to remain resilient, and
earned less the sum of loss expense, loss adjustment expense, and Operating expenses divided by premium earned. All elements are net of that combined ratios will be 95%- 98%.
ceded reinsurance. We may use net premium written in the denominator where net premium earned is not available or where expenses are
not deferred in the accounting system the insurer uses (e.g., U.S. statutory accounting). Source: SARB Regulatory Industry Data; S&P
Global Ratings.
9Recovery Expectations Will Affect Return On Equity
Technical Recovery Expected In 2021
– We expect return on equity (ROE) to show
Average life ROE Average P/C ROE recovery in 2021, after the low growth
25 conditions and lower profitability in 2020.
The pandemic affected both claims and
financial markets.
20 – Profitability is constrained by higher
mortality and higher lapses. New business
margins are narrowing because of soft GDP
15 growth and costs that we expect to abate.
– ROE for P/C insurers should continue to
%
outpace that in the life sector, supported by
10 low investment returns and focus on
underwriting discipline.
5
0
2014 2015 2016 2017 2018 2019 2020f 2021f 2022f 2023f
ROE--Return on equity. P/C--Property/casualty. f--Forecast. Source: S&P Global Ratings, audited financial statements.
10South African Insurers Remain Well Capitalized
– We still expect the pandemic to be an earnings event, rather than a capital event, despite weaker underwriting results in 2020 that could carry
over into 2021 and the effect of investment market volatility.
– Most insurers in South Africa have demonstrated capital strength under our capital analysis, due to large policyholder and capital buffers.
These policyholder liabilities provide a buffer against financial market volatility and lowers the accompanying risk.
Top-Tier South African Life Insurance Solvency Capital Most Rated South African Insurers Exhibit Significant Capital
Requirement Coverage Ratios Resilience Under Our Risk-Based Capital Model
Capital buffers above minimum regulatory requirements
SCR cover Minimum target range
Maximum target range Regular requirement
2.75
2.50
2.25 BBB
2.00 (17%)
AAA
1.75
1.50 (33%)
%
1.25 A
1.00 (17%)
0.75
0.50
0.25
0.00
AA
2018
2019
2020
2018
2019
2020
2018
2019
2018
2019
2020
2018
2019
2020
2020*
2021*
(33%)
Liberty Group Sanlam Life§ OMLACSA Discovery Life MML
Ltd
Data as of Dec. 31, 2020. *1H 2020/21. §Sanlam Life Insurance Ltd. (Stated target range only available Source: S&P Global Ratings. Based on stand-alone rated universe, excluding guaranteed entities.
for Sanlam Life covered business excluding strategic participations, discretionary capital and other
capital not allocated to covered business); Old Mutual Life Assurance Co. (South Africa) Ltd.; Momentum
Metropolitan Holdings Ltd. SCR—Solvency capital requirement. Source: S&P Global Ratings, Audited
Financial Statements.
11Rating list
ICR / FSR National scale rating Outlook
AIG Life South Africa Ltd. BB zaAAA Stable
AIG South Africa Ltd. BB zaAAA Stable
Allianz Global Corporate and Speciality South Africa Ltd. BB+ zaAAA Stable
Liberty Group Ltd. zaAAA/zaA-1+
Old Mutual Life Assurance Co. (South Africa) Ltd. BB zaAAA/zaA-1+ Stable
Old Mutual Ltd. zaA+/zaA-1
Sanlam Capital Markets Proprietary Ltd. zaAA/zaA-1+
Sanlam Life Insurance Ltd. zaAAA
Sanlam Ltd. zaA+
Santam Ltd. BB zaAAA Stable
Santam Structured Insurance Ltd. BB- zaAA Stable
Santam Structured Reinsurance Ltd. PCC BB- Stable
GIC Re South Africa Ltd. BB+ zaAAA Negative
African Reinsurance Corporation (South Africa) Ltd. A- Stable
General Reinsurance Africa Ltd. AA+ Stable
Hannover Life Reassurance Africa Ltd AA- Stable
Hannover Reinsurance Africa Ltd AA- Stable
Munich Reinsurance Co. of Africa Ltd AA- Stable
SCOR Africa Ltd AA- Stable
Swiss Re Africa Ltd AA- Negative
ICR--Issuer Credit Rating. FSR --Financial Strength Rating. Data as of Feb 28, 2021. Source: S&P Global Ratings. Note: Includes entities with guarantee and group support, national scales do not carry outlooks.
12Related Research
– S&P Global Ratings COVID-19 Research Page
– No Tantrum Yet As Global Growth Gains Momentum, Mar. 11, 2021
– Sanlam's Capitalization Still Intact Despite Hit On Earnings From Pandemic-Related Volatility, Mar. 11, 2021
– Liberty Group Ltd. South Africa Scale Rating Affirmed At 'zaAAA', Mar 10, 2021
– Santam Has Enough Capital To Absorb COVID-19-Related Business Interruption Claims, March 4, 2021
– Emerging Markets Monthly Highlights: Despite Vaccines, Normality Still Elusive, Feb. 17, 2021
– South Africa's Fiscal Problems Are Not Yet External Problems, Given Latest Data, Dec. 15, 2020
– South Africa Long-Term Foreign And Local Currency Ratings Affirmed; Outlook Stable, Nov. 20, 2020
– EMEA Insurance Outlook 2021 –Choppy Waters Ahead, Nov. 17, 2020
– Insurance Industry And Country Risk Assessment: South Africa Property/Casualty, Nov. 4, 2020
– Insurance Industry And Country Risk Assessment: South Africa Life, Nov. 4, 2020
13Analytical Contacts
Trevor Barsdorf Simran Parmar
Associate Director, Insurance Ratings Africa Associate Director, UK insurance Ratings
Johannesburg, +27 11 214 4852 London, +44 207 176 3579
Trevor.barsdorf@spglobal.com Simran,parmar@spglobal.com
Ali Karakuyu Liesl Saldanha
Senior Director, Analytical Manager,
Director, and Lead Analyst Insurance Ratings
Insurance Ratings
London, +44 207 176 7031 London, +44 207 176 0489
Ali.karakuyu@spglobal.com Liesl.Saldanha@spglobal.com
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