A “concerted set of underwriting actions” were under way to reprice Santam’s book, to take account of the inflationary and other pressures that were pushing up the cost of claims, Sanlam’s chief executive, Paul Hanratty, said during the group’s interim results presentation last week.
Sanlam’s general insurance line of business comprises Santam (its stake is almost 59%) and businesses in its Emerging Markets cluster.
A 57% slump in net operational earnings from general insurance (to R592 million) dragged down Sanlam’s net operational earnings by 7%, to R4.353 billion, in the half-year to 30 June, in what Hanratty described as “an otherwise excellent set of results”.
The significantly weaker performance from Sanlam’s general insurance operations offset the strong performances from the group’s life insurance, investment management, and credit and structuring operations. As a result, Sanlam’s earnings increased by only 1%, to R4.557bn.
“Santam, in line with other South African general insurers, is actively reviewing policy conditions and premium rates on renewal. This reflects the much higher claims costs being experienced as a result of the inflation already experienced and the significant deterioration in the infrastructure and environment,” Sanlam said its interim financial and operational review.
Hanratty said the effects of the “concerted underwriting actions” to reprice the book will take time to have an impact on Santam’s bottom line, because these changes take effect only when policies are renewed.
In an interview with Bloomberg, Hanratty said the growing risks to insurers globally and in South African could push up premiums by as much as 5%, depending on the type of cover.
“[It] doesn’t sound like a lot, but remember, when you’re already facing big inflationary increases and you have to add that on top, it can be quite debilitating for consumers,” Hanratty was quoted as saying.
Santam’s recently appointed chief executive, Tavaziva Madzinga, told Business Day last week that Santam had to take a measured approach to premium increases, given the competitiveness of the South African market and economic pressure on consumers.
“It’s also important that we work with suppliers, through our procurement, to ensure that the availability of parts, the availability of rental cars … does not put undue inflation pressure on our claims,” he was quoted as saying.
During his presentation, Hanratty said Sanlam was concerned about the reinsurance environment, because reinsurance was likely to become significantly more expensive, particularly in South Africa.
Globally, the appetite for reinsurers to provide cover for catastrophic events has declined on the back of increased claims and the war in Ukraine. In South Africa, this reticence has been exacerbated by deteriorating infrastructure and instability, as evident by the unrest in July last year.
Bloomberg quoted Hanratty as saying: “None of 30 reinsurers that Sanlam works with have pulled out, but the biggest and most important ones have indicated that they are not going to provide as much cover to us, and some have indicated as much as a 50% reduction in the cover that they will provide to South Africa.”
‘Perfect storm’
During his presentation, Hanratty said the country’s short-term insurance industry experienced “a perfect storm” in the first six months of the year.
Santam’s higher claims experience was due to the floods in KwaZulu-Natal in April, other severe weather-related claims, and surging inflation, with the cost of claims escalating “well ahead” of premium increases.
Another factor was the increase in claims related to loadshedding. Hanratty said these claims now exceed claims for the theft of household contents.
Madzinga told Business Day that Santam has also experienced an increase in the theft of high-end motor vehicles, particularly Toyotas.
Sanlam said the higher claims were off-set, to some extent, by a reduction in its Covid-related contingent business interruption claims provision.
Santam’s conventional insurance business produced a net underwriting margin of 2.3% (30 June 2021: 6.7%), which was below its target range of 5% to 10%.
Hanratty said Sanlam was “hopeful” that the planned underwriting interventions will result in Santam returning to its targeted underwriting margin levels in the second half of the year.
Lower investment returns
Santam’s claims experience was not the only factor to undermine the performance by Sanlam’s general insurance business.
The investment return on insurance funds was severely impacted by higher bond rates, which resulted in losses in the global bond portfolio held as part of the float to support the risk underwritten by Santam.
Sanlam Pan-Africa General Insurance (SPA GI) was significantly impacted by lower investment returns on insurance funds due to the 10% decline in the Moroccan equity markets. Unrealised losses on equities of R262m (net of tax and non-controlling interests) were recorded to 30 June this year, compared to gains of R227m in the comparative period. This contributed to SPA GI recording an investment return on insurance funds of -1.5%.
