Global insurers are still reeling from the prospect of huge underwriting losses and the post-September 11 2001 world of insurance, but SA companies are bucking the trend.
According to the Financial Services Board (FSB) special report on the industry's results, the short-term insurers selling to the public made a combined R377m underwriting profit in 2002, compared with R199m in 2001 and a loss of R171m in 2000. Industry underwriting ratios improved from 1% to 2%.
After passing on premium increases of 7%-9%/year from 1998 to 2000, the industry increased premiums by 11% in 2001 and 16% in 2002. That tougher line on policyholders has continued this year.
Mutual & Federal raised its underwriting profit by 36% to R116m. MD Bruce Campbell says there was an improvement from the commercial and personal lines underwriting as premium costs were increased to reflected the expected claims levels.
But in corporate business, the increased cost of reinsurance (mostly done by global giants, which have bumped up costs since September 11) led to underwriting losses in fire and marine books.
Campbell says there has been a poor experience in major industrial risks, not only because of the exposure to material damage but also because of costs such as business interruption and professional indemnity, a result of the new world order after Enron and the war on terrorism.
The SA short-term industry is in a better position than its counterparts internationally as it has negligible exposure to long-tail liability risks such as asbestosis, which has been placed in offshore markets such as Lloyd's of London.
But SA insurers also had to face weak equity markets, damaging the asset side of the balance sheet, though not as badly as the international majors.
Santam had a particularly good year, with underwriting surplus up 47% to R142m. A turnaround in its crop insurance business was an important factor, but there was a large volume of weather-related claims with four weather-related catastrophes during the year, compared with the average of one a year previously.
Of the big three insurers, only SA Eagle made an underwriting loss. MD Nick Beyers says that in the first half of the year, Eagle was able to show an underwriting profit of R4,9m, because of the increase in sums insured and because of the consolidation in the industry.
But despite the more benevolent operating environment, SA Eagle showed an underwriting loss in the second half. One of the principal causes was the 22% escalation in the cost of motor repair , because of the increased cost of imported components after the plunge in the rand in late 2001. Unfortunately the strengthening of the rand has not unwound those price increases.
SA Eagle also suffered net claims of R25m from storms and fires, primarily in the Eastern Cape.
Over the past three years there have been significant takeovers in the SA industry, the most important being Santam's purchase of Guardian National and Mutual & Federal's purchase of CGU.
Santam acting CEO Hannes Wilken says there has been some decline in competition in the corporate sector, but in the personal lines market competition remains fierce because of specialists such as FirstRand's direct operation, Outsurance, and Auto & General, which operates both directly and through brokers. Direct insurers cut out the middle man, selling to consumers by telephone orInternet.
Santam, Mutual & Federal and SA Eagle are all intermediary-based businesses.
Campbell says SA remains predominantly a broker-served market, and under the Financial Advisory & Intermediary Services Act, the weaker brokers who are no more than order takers will be weeded out , leaving the ones who add value for their clients .
Campbell says it is difficult to provide direct services unless it is the main sales strategy - it is difficult to portray yourself as the friend of the intermediary if you compete directly against him.
He says direct distribution is not necessarily cheaper. There needs to be continuous visibility through advertising as churn is notoriously high.
There has been a clear improvement in efficiency of the industry, with management expenses and commissions falling to 26% of net written premiums from 28% in 2001 and 30% in 1998.
Campbell says it is critical to get claims out of the system as quickly as possible - it's a misconception that insurers aim to sit on claims and earn interest on them for as long as possible.
He says the consolidation of the industry has allowed bigger players such as Mutual & Federal and Santam to improve efficiencies as they are running much larger books with only a marginal increase in administrative staff.
SA Eagle has upgraded its entire administrative platform with project Aquila Rex, initiated after a McKinsey report in 2000. It has centralised into three processing units in Johannesburg, Cape Town and Durban. Its new technology gives it greater control over underwriting and claims activities and frees up sales staff from administrative tasks to focus on the customer.
Insurers can also improve efficiencies through control of the supply chain. For years, they have operated with an approved list of panelbeaters, jewellers and electrical goods suppliers that charge negotiated rates. Recently Mutual & Federal has established an alliance with First Tow, which will be the preferred tow-truck service in greater Johannesburg.
But however well short-term insurers perform operationally, investors' net asset value is closely linked to the equity market. Short-term insurers are sometimes called investment trusts with tax benefits.
This is not quite as true as it was, as companies have shed excess capital - in particular Mutual & Federal, which has reduced its solvency ratio (assets as a percentage of premium) from more than 150% to 60% over the past five years through special dividends.
But it is not surprising that the share prices of the short-term companies have been falling in line with the underlying NAV.
Mutual & Federal's share price of R11,85 is 36% below its 12-month high of R18,40. M&F's net worth was R12,07/share at the end of December and is less than R11 now. But investors are paying just a rand or so for M&F's insurance business, putting it on a p:e of about 0,5.
It has been difficult for M&F to get strong institutional support because of its small free float, as Old Mutual holds 51% and Royal & Sun Alliance of the UK 38%. There has been speculation that R&SA might be a seller, as it has financial difficulties of its own, but a buyout of minorities seems more likely.
M&F has been the most bullish of the insurers on equities, which still make up 85% of its shareholders' investment portfolio.
Some of its top holdings, such as Anglo American (15,2% of equities), Nedcor (8,6%), Sasol (6,8%) and Sanlam (6,7%), have underperformed this year.
Campbell says he is confident that an equity bias is correct for the long term, but it does mean that there were R700m in unrealised losses in 2002 .
Santam's Wilken says the company's NAV has been protected as it restructured its portfolio along more defensive lines in 2001. Equities now account for only 35% of the portfolio, whose market value still fell by R22m. It would have been worse with an equity-dominated portfolio.
Santam has held up better than M&F, helped by better tradability, and at R31 it is "only" 26% below its 12-month high.
SA Eagle, too, is 26% below its high - which is surprisingly strong, given its poorer operating result. It has also been reducing its equity exposure in favour of bonds, and is now 30% in bonds, 5% in property and 65% in equities.
