South Africa’s property and casualty insurers face an even tougher year than expected after Cape Town experienced its worst storm in 30 years and dozens of fires engulfed the region around the town of Knysna this week.
The insurers, including Santam Ltd., Old Mutual Plc’s Mutual & Federal and Rand Merchant Investment Holdings Ltd.’s OUTsurance unit, are already being battered by an economy that slipped into a recession in the first quarter, the country’s credit rating downgrade to junk status, continued political turmoil and unemployment at a 14-year high.
“Profit will be under pressure,” said Richard Hasson, an analyst at Electus Fund Managers in Cape Town. “In a weak economic environment, such as low gross domestic product growth and increasing unemployment, claims typically pick up, which will not be good for them. The recent fires and storms will affect the companies.”
The storm in Cape Town claimed at least nine lives, blew roofs off houses, flooded buildings, downed power lines and forced schools to close on Wednesday. About a five-hour drive to the east, around the wealthy towns of Knysna and Plettenberg Bay, more than 26 fires broke out late Wednesday, with “severe devastation” in at least 12 suburbs, according to local government officials.
The expected influx of claims may not push the bigger property and casualty insurers into losses for the year, but companies like Zurich Insurance Co. South Africa Ltd. and Auto & General Insurance Ltd. may struggle, Adrian Cloete, analyst at PSG Wealth, said by phone from Cape Town. The reinsurance programs will help to absorb the impact, although underwriting margins are likely to contract, he said.
Stocks Drop
Santam, which on May 31 said underwriting results are under pressure, dropped as much as 2.9 percent to its lowest level on a closing basis in almost four months. Old Mutual declined as much as 1.1 percent and RMI fell more than 2 percent.
“Due to Santam’s size and diversification from a line of business and geographic perspective it is best positioned to contain the losses, but theoretically it is the most exposed and the impact on earnings will still be material,” said Warwick Bam, analyst at Avior Capital Markets. “Mutual & Federal’s underwriting margin has been under significant pressure in recent years. I expect it will struggle to make an underwriting profit in 2017 given these events.”
That said, there are some events that may help the insurers this year. The rand has strengthened almost 7 percent against the dollar, meaning that any imported goods for repairs will be cheaper than they were last year. While the equity market has been subdued, bonds have gained and insurers’ investment returns may be at historic levels, according to Bam. The likes of Santam and OUTsurance have also expanded outside of South Africa in their search for growth.
Golf Balls
“I expect 2017 to be a tough but not catastrophic year,” Hasson said. “Generally they have reinsurance structures in place that limit their losses normally to around 50 million rand to 100 million rand ($7.8 million) per event. And in aggregate the outlook for farming in 2017 for South Africa is better than 2016, which should also provide some relief.”
Still, with only half the year gone the risk of hail stones as big as golf balls damaging cars and property later in the year remains, PSG’s Cloete said. While the claims environment has been relatively benign in the past few years, a repeat of the summer storms in and around Johannesburg in 2012 and 2013 would significantly impact underwriting margins, he said.
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