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Opportunity knocksInsurance industry analysis

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Analysis of major South African insurers’ results for the year ended 31 December 2013

March 2014

About this publication

We are pleased to present the third edition of PwC’s analysis of major insurers’ results, covering the year ended 31 December 2013. The results are a positive reflection of the financial health of the South African industry in a very challenging operating environment. For the first time, we have also looked at the progress made by some of the insurers in their expansion into sub-Sahara Africa.

Insurance groups analysed in this publication include:

Long-term insurers• Discovery Holdings Limited (Discovery)

• Liberty Holdings Limited (Liberty)

• MMI Holdings Limited (MMI)

• Old Mutual plc (Old Mutual)

• Sanlam Limited (Sanlam)

Short-term insurers • Absa Insurance Company Limited (Absa)

• Mutual & Federal Limited (M&F)

• OUTsurance Holdings Limited (OUTsurance)

• Santam Limited (Santam)

• Zurich Insurance Company South Africa Limited (Zurich)

Due to some differences in reporting periods and changes in presentation and accounting policies, the information is not always comparable across insurers. Areas where there are differences are highlighted in Section 8.

PwC

Contents

1. Overview of industry results 2

2. Long-term insurance 5

3. Short-term insurance 10

4. Investment performance 13

5. Capital and solvency 16

6. Growth in sub-Saharan Africa 18

7. Key industry statistics 27

8. Basis of information provided 30

9. Contacts 31

Insurance industry analysis – Opportunity knocks 2

1. Overview of industry results

Long-term insurance

Key indicatorsGroup IFRS earnings up 29%

Group return on average equity of 21%

Group embedded value profits up 1%

Value of new business written up 12%

Margin on new business decreases slightly to 3.1%

Economic growth rates remain strong in sub-Saharan Africa (SSA). However, growth in South Africa (SA), the largest economy in the region remained weak at 1.9%. Economic growth in SA was hampered by reduced exports following the recession in Europe and the protracted strikes in the mining and metalworking industries. Globally, confidence and growth is starting to return to the UK and European economies, albeit at a slow pace. This should assist the sluggish South African GDP growth rate, which the International Monetary Fund expects to recover to 2.8% for 2014.

Local investment markets experienced mixed fortunes. The JSE All Share Index closed 18% higher than in 2012. This followed on the 23% growth experienced in 2012. However, the All Bond Index only yielded a 2% (2012: 16%) return. The increase in the 10-year bond yield curve negatively impacted on the fair values of fixed-rate instruments. Long-term insurers write a significant proportion of business that provides for a contractual link where the investment returns generated on assets are passed on to policyholders. As a result of the strong market performance, insurers benefited from the higher average assets under management during 2013.

The combined group IFRS earnings of the long-term insurers included in this publication increased by 29%. For the second year in a row, the insurers achieved varying levels of success. Sanlam and Old Mutual reported growth in IFRS earnings of more than of 40%.

The increase in long-term interest rates in 2013 was the opposite of 2012 when rates reduced significantly. Risk discount rates increased by more than 100 basis points due to the increase in ten-year interest rates. Although this increase in interest rates had a favourable impact on the valuation of investment guarantees provided to policyholders, it also reduced the insurers’ embedded value of in-force business and the embedded value of new business written during the year.

The insurers reported strong new business growth of 13%. This was achieved while maintaining profit margin at 3.1%. As a result, embedded value of new business written in total increased by 12% to R5.3 billion in 2013.

Operational efficiencies achieved were evident. The majority of insurers managed their businesses to within the assumptions that were set for 2013. Other than Old Mutual, which experienced higher than expected expenses and policy terminations, the insurers benefited from better-than-expected experience. Cognisant of the pressures on consumers, Discovery and Old Mutual have strengthened their lapse assumptions.

While long-term insurers have benefited from strong investment market performance over the past two years, the outlook remains challenging. High levels of unemployment, low GDP growth rates, increasing inflation, the recent interest rate hike and possibility of more hikes to come, continued rand deterioration, industrial action and regulatory changes, all continue to weigh down on insurers.

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Short-term insurance

Key indicatorsGroup IFRS earnings down 12%

Gross written premiums up 12%

Claims ratio deteriorated further to 68%

Underwriting margin reduced to 2.7%

Return on average equity down to 16%

International solvency margin reduce to 40%

It was a tough year, not only for consumers, but also for most local short-term insurers. On the demand side, consumers continue to feel pressure on their disposable income. Increasing interest rates, energy costs and the introduction of urban tolls in Gauteng add to these pressures.

On the supply side, significant weather-related losses from hail and drought were experienced in 2013. The depreciation of the rand significantly added to motor repair costs. The soft market, especially for motor business, continues to affect the profitability of this line of business. Conservative investment strategies also resulted in reduced investment performance compared to 2012. The combined result was a reduction in IFRS earnings to shareholders of 12%.

Local insurance players have started to re-rate premiums in excess of CPI. Given the disappointing combined ratio achieved for 2013, it is likely that certain higher risk categories could again see pricing increases above inflation in 2014. It will, however, be difficult to achieve rate increases without causing churn and migration of existing good quality customers. Competition in personal lines remains strong. The increase in technology and ease of obtaining direct quotes from insurers has empowered consumers to compare quotes quickly and move to cheaper carriers.

The combined ratio (sum of acquisition costs, expenses and claims as a percentage of premiums) deteriorated to levels last seen in 2009. Following large catastrophe losses in 2012, some insurers had reassessed their reinsurance programmes to reduce their net exposures to these events. Although this shielded some of the impact of the higher catastrophe losses, the effect could not be avoided altogether.

Figure 1.1

Industry combined ratio

Source: PwC analysis

The industry’s overall claims ratio increased for the third year running from 62% in 2011, 66% in 2012 up to 68% in 2013. The increase related to the significant weather-related claims (which include the record-breaking Gauteng hail damage of November 2013). Weakening of the rand, in the second half of the year, severely affected the cost of motor claims. Between 65% and 70% of motor repair costs relate to parts, of which a significant component are imported.

Insurers have now started to look at innovative solutions to contain these increases by, for example, making use of SABS-approved used parts and weather alerts. Weather alerts utilise smart devices to warn policyholders in urban areas of pending inclement weather. This is fast becoming the norm. Insurers noted that they have started to see a marked difference in the claims outcome for portfolios where predictive technologies are actively used.

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Insurers also have to become smarter in the way they underwrite risks. Improvements in catastrophe modelling are required to more appropriately assess and price for hail, flood and fire risks. This would also help in determining the appropriate and effective levels of reinsurance of catastrophe risks. Some insurers have also started collaborating with local authorities to reduce systemic risk. St Francis Bay now has a fire station following the devastating fire losses suffered in 2012. This has resulted in significant benefits with losses limited to a large extent in 2013. A fire that broke out in similar conditions to the catastrophe of 2012 was promptly extinguished in 2013.

Globally, reinsured losses for 2013 are expected to be well below the 10-year average. This benign catastrophe year will result in reinsurers’ capital levels rising further above the 2012 record levels. Aon Benfield reported average global price increases in excess of 6% in 2013. As a result, overall global underwriting profitability improved during 2013. This is positive for local market players as it should result in competitive reinsurance rates when they negotiate pricing to lay off catastrophe risks to the global reinsurance market for 2014.

Despite the 12% growth in gross written premiums (GWP), acquisition costs and management expenses as a percentage of GWP remained constant at 29.3%. This indicates the higher costs of doing business, given the many regulatory changes being implemented, which include SAM, TCF and Binder regulations. The decrease in the acquisition cost ratio once again indicates the continued increase in business written through direct marketing channels. This ratio decreased by 0.2% to 11.3% in 2013. Start-up and emerging direct writers had strong growth during 2013.

Looking forward

Given the low SA GDP growth rate experienced in 2013 and weak prospects for improvements in the short term, insurers need to become more innovative to grow market share. Strife in the SA mining sector, depreciation of the rand, a slowdown in consumer spending, electricity shortages and rising inflation may continue for the foreseeable future.

Financial risk management remains critical with possible further interest rate hikes and volatile equity markets. While the rand is probably undervalued, many expect it to remain weak for the next financial year. This will continue to impact on equity markets.

Most insurers are currently working on the compulsory SAM Quantitative Impact Study (QIS) 3 submissions, which are due by the end of April 2014 and are planning for the light SAM parallel run that will commence in the second half of the year. They also need to get their business practices to comply with Treating Customers Fairly regulations.

Insurers expanding into the African continent need to continue to optimise their structures, contain costs and deploy resources in the various businesses. The current low penetration rates and potential for high growth rates present attractive opportunities for focused insurers.

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2. Long-term insurance

Group IFRS earnings

Group IFRS earnings

Combined results

2013 Rm

2012 Rm

2011 Rm

2013 vs 2012

Total comprehensive income

24 405 18 917 19 136 29%

Return on average equity

21% 17% 20 %

Combined group embedded value earnings were strong in 2013, despite the impact of higher long-term market interest rates on valuations. This result reflects the strong operating performances by their South African operations in 2013, as well as the benefit of strong equity markets. Overall, the insurers recorded positive experience variances. Mortality and morbidity experience, as well as investment variances were positive contributors, offset to an extent by the negative impact of the increased discount rates on valuations.

Embedded value of South African new business

Value of new business

Combined results

2013 Rm

2012 Rm

2011 Rm

2013 vs 2012

Present value of new business premiums (PVNBP)

172 650 152 228 150 358 13%

Embedded value of new business (VNB)

5 318 4 752 4 071 12%

Value of new business margin

3.1% 3.1% 2.7% 0%

Average payback period

5.9 years 5.9 years 6.2 years 0%

Combined present value of new business premiums (PVNBP) written by the long-term insurers reflects a very good result in challenging times. The 13% year-on-year increase is well in excess of CPI of 5.8%. Given the impact of higher market discount rates, which reduce this value, new business performance was quite strong.

The embedded value margin on new business written remained about the same as in 2012 at 3.1%. Insurers are not only chasing new business but also focusing on quality. It appears that the intermediary exams of 2012 and 2013 are now paying dividends. Focus on paying ‘as-and-when’ commission should also result in better quality new business. The combination of strong growth in PVNBP written without compromising margins resulted in the VNB written increasing by 12%.

The combined average payback period remained at 5.9 years. This is a calculated crude measure to determine the period over which the majority of the VNB will be earned (PVNBP divided by annual premium equivalent).

Combined IFRS earnings of R24.4 billion were up 29% on 2012. The results benefited from strong equity market performance, particularly in the second half of the year, with markets closing 18% higher than in 2012.

Higher values of assets under management earn higher asset-based fees. In 2013, the JSE All Share Index was on average 20% higher than in 2012, resulting in strong asset-based fee growth.

Insurers also had to deal with volatility in interest rates and emerging market currencies. Long-term insurers have over the past couple of years significantly strengthened their capability to manage market risk exposures within predetermined ranges. This was evident in the consistently good earnings of the last three years. Most have migrated their shareholder investment portfolios to fairly low risk and balanced mandates, eliminating volatility. As a result, executives have been able to focus more on operational excellence and writing good quality business.

Liberty posted a 24% return on average equity, followed by Sanlam at 23% and Old Mutual Emerging Markets and Discovery at 22%, while MMI was at 13%.

Group embedded value

Embedded value

Combined results

2013 Rm

2012 Rm

2011 Rm

2013 vs 2012

Embedded value 249 117 220 344 191 165 13%

Embedded value earnings

39 215 38 941 25 389 1%

Return on embedded value

18% 20% 15%


Figure 2.1

Industry value of new business (VNB) and value of new business margin


Figure 2.2

Value of new business (VNB) and VNB margin


DiscoveryDiscovery grew its PVNBP by 17% to R16.4 billion. This is a good result compared to the decline in 2012. The value of new business margin decreased slightly to 6.3%. This was to be expected given 26% growth achieved in lower-margin Discovery Invest business, compared to only 11% growth in new business annual premium equivalent (APE) for the higher-margin Discovery Life business.

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MMI VNB Value of new business margin

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The changing product mix characterised by a higher contribution of lower-margin investment business should see the average VNB margin reduce further in future. Discovery highlighted the impact that policyholder engagement via the Vitality loyalty programme has on experience and has seen consistent outperformance against lapse and claims assumptions over the past four years. Discovery’s expected payback period is eight years, compared to the industry average of 5.9 years.

LibertyLiberty’s product innovation continued to be a key driver of sales growth. The group’s new brand campaign improved its visibility in SA. Its new generation Evolve product sold R4.5 billionofnewbusinessin2013.PVNBPgrewby13%to R37.8 billion. Increased business volumes and improved product mix over the past three years has seen new business margin increasing to 2.1% in 2013. Overall, the group embedded value of new business increased by 22% to R806 million. Liberty’s expected payback period is 5.4 years.

MMIMMI’s PVNBP grew by 16% to R37.7 billion. Embedded value of new business margin achieved at 1.8% was similar to that in 2012. As a result, the embedded value of new business written increased by 15% to R691 million. Momentum Retail and Employee Benefits segments saw strong new business growth in the latter half of the year. However, Metropolitan Retail, which focuses the lower to middle-income market, only grew its new business volumes by 2%, while maintaining its VNB margin at 4.3%. Following changes in the contractual arrangements with FNB Life, this business is no longer included in their embedded value information. MMI’s expected payback period is 7.4 years.

Old MutualFor the second year running, Old Mutual increased its PVNBP by 14%, to R46.3 billion. This accounts for 27% of the combined PVNBP of all the insurers included in this analysis. Its VNB margin decreased slightly from 3.9% to 3.8%. As a result, the value of new business increased by 10% to R1.7 billion in 2013. Through focus on the fast-growing Mass Foundation market in South Africa, the group gained 280 000newcustomers.Thissuccessfulperformancewasunderpinned by a focus on understanding and meeting customers’ needs. New product offerings, such as the Old Mutual Wealth proposition and the new XtraMAX product also contributed to new business sales. Old Mutual’s expected payback period is 6.9 years.

Old Mutual is targeting growth to at least nine million customers by 2015.

SanlamSanlam’s PVNBP grew by 10% to R34.5 billion in 2013. However, VNB margin achieved reduced slightly from 3.2% to 3.0%. The VNB margin would have been approximately 0.3% higher were it not for the increase in risk discount rates. This may be indicative of writing new business with profits expected to be realised at later durations. More focus was put on information technology upgrades during 2013. Product innovation, particularly on recurring premium business and quality of new business will be the focus for 2014. Sanlam’s expected payback period is 4.0 years.

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Operating experience variances

Experience variances 2013

Discovery Rm

Liberty Rm

MMI Rm

Old Mutual Rm

Sanlam Rm

Combined Rm

Expenses 3 - 87 -257 165 -2

Lapses and surrenders 328 195 129 -136 211 727

Mortality/morbidity 94 155 302 604 645 1 800

The industry as a whole managed actual expenses according to what had been projected in their actuarial assumptions at the end of 2012, with a mere combined R2 million above expectations. Discovery and Liberty were very close to expectations. MMI and Sanlam achieved some efficiencies. It would seem that Old Mutual incurred some expenses that are not expected to recur. This is because, in spite of the expense loss experienced, the expense assumption changes for the future show a profit (see below).

Most of the insurers made profits against lapse and surrender assumptions, adding R727 million to embedded value earnings. Old Mutual experienced worse than expected lapses and surrenders, attributed mostly to its Mass Foundation cluster.

Insurers profited from better-than-expected mortality and morbidity experience across the board, which contributed approximately 5% to 2013 embedded value earnings. Old Mutual and Sanlam benefited most from these experience variances.

Assumption changes

Assumption changes 2013

Discovery Rm

Liberty Rm

MMI Rm

Old Mutual Rm

Sanlam Rm

Combined Rm

Expenses -34 -217 276 436 0 461

Lapses and surrenders -312 0 126 -436 13 -609

Mortality/morbidity 0 60 245 52 655 1 012

Both Discovery and Liberty have strengthened their expense assumptions in 2013. This is not surprising given inflationary pressures in the economy. MMI has capitalised expected expense savings amounting to R276 million, in line with its communicated expectation of realising synergies following the merger of Momentum and Metropolitan. Old Mutual is expecting lower future expenses, which is in contrast to the current-year expense experience variances that showed a loss coming through for the immediate past period.

Discovery strengthened its lapse assumptions to reflect uncertainty around longer duration experience. Old Mutual strengthened the persistency assumptions in the Mass Foundation Cluster, which reduced the expected value of new business margin on this business.

Following the significant mortality and morbidity experience profits of 2013, the combined industry capitalised expected profits of R1 billion in 2013. MMI and Sanlam account for the bulk of this.


Sensitivity of value of in-force and value of new business written

Figure 2.4

Value of new business (VNB) sensitivity

Note: Old Mutual does not provide a comparable sensitivity for the change in risk discount rates as part of its market consisted embedded value (MCEV) information.


In contrast to VIF sensitivity, the value of new business (VNB) for all the insurers (Sanlam to a lesser extent) is far more sensitive to changes in lapse rates. This may be due to most insurers now writing age-rated, increasing premium business compared to level-premium policies written in the past.

It is not surprising that insurers are now paying more attention to client centricity. It is in their interests to ensure that clients remain with them for as long as possible due to the expected profits to be realised at later durations.

As part of this strategy, Discovery continues to integrate and drive increased interaction via Vitality. Liberty implemented its ‘Own Your Life’ rewards programme. MMI introduced its financial wellness index and is also changing existing reward programmes to be more customer focused rather than product based.

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Discovery Liberty MMI SanlamOld Mutual

Figure 2.3

Value of in-force (VIF) sensitivity

Note: Old Mutual does not provide a comparable sensitivity for the change in risk discount rates as part of its market consisted embedded value (MCEV) information.


Discovery’s, and to a lesser extent Sanlam’s, embedded value of in-force business are sensitive to changes in risk discount rates. This could be indicative of writing more age-rated, increasing premium business, with the consequence that more profit is expected to be realised at later durations compared to the more immediate future. A change in risk discount rates may therefore have a more significant impact on the value of this kind of business.

Liberty, and to a lesser extent MMI, are less sensitive to a decrease in long-term interest rates. Liberty, through LibFin Markets (managing market risk exposures and credit portfolio) and LibFin Investments (shareholder investment portfolio) as well as MMI’s Balance Sheet Management (BSM) function, manages their strategic balance sheet risks, including asset-liability matching and market risk exposures. These functions seem to reduce the groups’ sensitivity to changes in interest rates.

MMI, Old Mutual and Sanlam’s VIF are less sensitive to lapse risk. This may be indicative of a larger proportion of older in-force level premium policies which are, as a whole, less sensitive to changes in lapse rates in either direction. Discovery, on the other hand, writes predominantly age-rated, increasing premium business (and unlike its main competitors, does not have an existing legacy book of level premium business), which makes the business as whole more sensitive to lapse assumption changes.

Discovery is less sensitive to changes in expense inflation. Although all insurers are sensitive to changes in mortality and morbidity experience, this is a more stable input than the other assumptions.

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Acquisition costs

Costs

Combined results

2013 Rm

2012 Rm

2011 Rm

2013 vs 2012

Acquisition costs 14 314 12 828 11 826 12%

General marketing and administration costs

31 596 27 848 25 582 13%

Annual premium equivalent (APE)

29 457 25 662 24 430 15%

Acquisition costs increased in line with new business volumes. General marketing and administration costs increased by 13%, well above CPI of 5.8%, and continues the trend of life office expenses outpacing inflation since 2010.

Figure 2.5 reflects both the monetary value of acquisition costs paid by the long-term insurers for the years 2011 to 2013 and the ratio of acquisition costs incurred relative to the APE of new business written for the respective years.

Figure 2.5

Acquisition cost and acquisition cost to annual premium equivalent (APE) ratio


A Retail Distribution Review (RDR) was introduced by the Financial Conduct Authority in the United Kingdom on 1 January2013.ItisanticipatedthattheFinancialServicesBoard (FSB) will implement similar regulation to achieve better outcomes for investment product customers. It is expected that the key FSB proposals for RDR will support the broader objectives of ensuring that distribution models support the Treating Customers Fairly outcomes and are applied consistently across all financial subsectors. One of the key proposals is to address ‘conflicted’ remuneration, to ensure that intermediary incentives do not introduce bias in product advice and do not interfere with intermediaries’ primary duty to act in the best interests of the customer.

Some insurers’ new-generation investment products have been designed with RDR in mind. The acquisition costs to APE ratio has reduced for most companies in 2013. The exception is Old Mutual, which saw strong growth in risk products sales in its Mass Foundation Cluster. Risk products attract higher commission rates.

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3. Short-term insurance

Group IFRS earnings

Group IFRS earnings

Combined results

2013 Rm

2012 Rm

2011 Rm

2013 vs 2012

Total comprehensive income1

2 354 2 666 3 141 -12%

Return on average equity1

16% 18% 24%

¹ The information excludes Absa as the information is not available.

Combined IFRS earnings of R2.4 billion decreased 12% on 2012. This follows the depressed IFRS earnings of 2012 and is 25% lower than in 2011. The key reason for the decrease in IFRS earnings is the reduced underwriting margins that were achieved in 2012 and 2013. OUTsurance posted a strong 38% return on average equity, followed by Santam at 22%. M&F and Zurich posted a negative return of 5%.

Gross written premiums

Gross written premiums

Combined results

R millions 2013 2012 2011 2013 vs.

2012

Gross written premiums 50 186 44 827 40 825 12%

Net earned premiums 39 918 36 039 33 653 11%

Figure 3.1

Industry gross written premuims (GWP) vs underwriting margin


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Gross written premiums (GWP) increased by 12% to just over R50 billion. This growth is well in excess of the CPI of 5.8%. The industry result again benefited from strong growth achieved in OUTsurance’s Australian business (Youi), which grew GWP by 74%. If the impact of this business is eliminated, the industry GWP grew more than 9%. This shows that the industry started to push premium increases through to consumers in 2013 following the tough underwriting conditions experienced in 2012.

Figure 3.2

Gross written premiums (GWP) vs underwriting margin


Absa Although Absa’s GWP grew by a healthy 13% to R4.9 billion, the insurer reduced its appetite for crop insurance cover. It also discontinued various non-core product lines.

M&FM&F grew its GWP by 17% to R11.3 billion. Much of the growth was due to inward reinsurance business in corporate and niche business lines. Personal lines only grew by 5.9%, with the insurer highlighting the continued soft market, especially motor. iWYZE, M&F’s direct channel, grew GWP by 10.8%. iWYZE is expected to be driven further in 2014 through more collaboration with Old Mutual. It will also pay attention to improving broker distribution capabilities through key account management.

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OUTsuranceOUTsurance posted 21% growth in GWP to R9.3 billion. This is inclusive of Youi, OUTsurance’s direct personal lines growth business in Australia, launched in 2008. Youi’s GWP grew by 74% to R3.2 billion. This was positively affected by currency translation differences due to rand weakness. In line with 2012, OUTsurance grew its South African business by 4%.

SantamSantam posted a 6% increase in GWP to R20.6 billion, only slightly ahead of CPI. The soft market was evident in the motor book, with Santam growing this line of business by

only 6.3%. This is despite the continued strong growth achieved in MiWay. MiWay grew its total GWP by 22% to R1.3 billion. Like M&F, Santam saw the strongest growth in commercial lines, growing by 10.7% compared to 5% in personal lines.

ZurichFollowing three years of decline, Zurich reported growth in GWP of 8%, driven by rate increases and new business. The company’s strategy of investing in systems and people in high-potential growth segments seems to be paying dividends. Growth and retention strategies are also starting to make a difference.

Key insurance ratios

Key ratios

Combined results

2013 2012 2011

Claims ratio 68.0% 66.2% 61.9%

Acquisition cost ratio 11.3% 11.5% 11.6%

Expense ratio 18.0% 17.9% 17.2%

Combined ratio 97.3% 95.6% 90.7%

Underwriting margin 2.7% 4.4% 9.3%

Total 100.0% 100.0% 100.0%

South African short-term insurers experienced another tough underwriting year in 2013. All insurers experienced further worsening in claims experience. Their loss ratios increased by between one and four percent and combined by 1.8%. Santam and Aon Benfield reported industry catastrophe events approaching R2.5 billion were experienced in 2013, compared to R2 billion in 2012. The bulk of the 2013 catastrophe events occurred in November 2013. These include:

• Limpopo floods in January;

• Western Cape floods in November (R400 million); and

• Gauteng hail storms in November (in excess of R2 billion).

The Gauteng hail storm of 27 November accounts for R1.6 billionindamagescomparedtotheEdenvalehailstorm of 2012 which approached R1 billion. It was the single worst insurance event in South Africa’s history. Aon Benfield indicated that the 2013 hail storm had 4 tracks covering a distanceof350 km,withaveragehailstonesof5cm.Thiscompares to one track covering a distance of 150 km and with average hail stones of 4cm in 2012.

The impact in 2013 included:

• Absa: Significant weather events in the fourth quarter which negatively impacted personal and crop product lines (crop insurance reporting a claims ratio of 145%).

• M&F: Increase in both claims frequency and severity. R176 millionofnetlossesfromfloodingintheWesternCape and Gauteng hail storms.

• OUTsurance: R239 million in gross claims (R174 million on a net basis) from SA weather-related catastrophes in the second half of the year. The net exposure in South AfricaamountedtoR84millioncomparedtoR59 millionin 2012. Youi incurred R90 million claims from natural catastrophes, which included hail, flood and fires events.

• Santam: In excess of R500 million in catastrophe claims in 2013 compared to approximately R630 million in 2012. As in 2012, hail and flood damage were the biggest contributors. Last year we noted that Santam’s catastrophe cover kicked in at relatively high levels. This year Santam’s net retention amounts to approximately R280 million or ±55%, compared to R500 million or ± 80% in 2012.

It is interesting to note that Santam reported that the proportion of damage to motor versus property has shifted towards property in 2013 compared to 2012. It would seem that the increased use of smart device technology (together with the weather service) alerts and responsible customer behaviour, has assisted to reduce motor claims. Discovery Insure also highlighted the use of technology to provide policyholders with smart weather alerts to limit claims in key hail effected areas.


Smarter and more innovative underwriting practices by insurers are becoming more important. Increased focus on location-based underwriting and effective utilisation of data and systems will make a big difference to ultimate losses. Insurers that are able to analyse concentration risk and accumulation of exposures will be better able to mitigate risks against what are now fast becoming business as usual catastrophes. Santam highlighted improvements to its risk modelling in the underwriting process, which ultimately leads to more appropriate pricing.

As if the recurrence of catastrophe losses were not enough, insurers have also had to deal with challenges on the motor book which accounts for approximately 44% of the South African short-term insurance market. Competition in this market segment is fierce. The 20% devaluation of the rand in 2013 made things worse, as a significant component of the claims cost for insurers relates to imported motor parts.

M&F and Zurich experienced the highest deterioration in claims ratios, increasing by 2.9% and 3.9% respectively. Santam seems to have managed its exposure relatively well. Its claims ratio increased by only 1%. More catastrophe losses were ceded to re-insurers. Absa and OUTsurance reported increases of 1.4% and 1.7% respectively.

The combined acquisition cost and expense ratios were the same as in 2012 at 29.3%. There was a slight decline in the acquisition cost ratio to 11.3% in 2013, but this was not nearly as pronounced as during the previous four years when it decreased from 15.6% to 11.5% in 2012.

Most insurers continue to focus on operational efficiencies. M&F’s expense ratio improved by 1% due to a combination of GWP growth and a continued focus on expense management. OUTsurance benefited from economies of scale realised in Youi, together with cost containment and realisation of operational efficiencies in South Africa. Santam indicated that it took the experience of the 2012 catastrophes to improve its catastrophe claims processes. This included specialised training for assessors to understand best practice in paintless dent repair technology an intelligent write-off model and an improved communication platform with intermediaries. Santam continues to invest in a number of other strategic projects to improve efficiency and service delivery. These include, for example, a new underwriting and product management system. Zurich’s expense ratio remained constant despite investing in systems and people during 2013.

13PwC

4. Investment performance

Market performance

Global markets started to show signs of a possible slow recovery in 2013. South Africa continued to experience a difficult environment.

When analysing market performance and its impact on insurers, it is important to consider the JSE All Share Index and All Bond Index. The JSE All Share Index increased by 18%. This was mainly due to the recovery of equity markets in the second half of 2013. The All Bond Index total return index yield closed at 8.3% on 31 December 2013 after opening

at 7.05% at the beginning of the year. The All Bond Index experienced significant volatility, yielding a mere positive average of 0.6%. The lacklustre performance of the All Bond Index unfortunately offset the equity market’s performance to an extent.

Further, large movements in the long-term bond yield would have negatively impacted the return on group embedded value as well as the value of new business as insurers would have discounted these at the higher rates.

Figure 4.1

JSE All Share Index

Source: McGregor BFA

Figure 4.2

All Bond Index yield

Source: McGregor BFA

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Industry investment performance

Long-term insurers

Combined results

2013 Rm

2012 Rm

2011 Rm

2013 vs 2012

Total invested assets1 1 763 532 1 526 713 1 283 491 16%

Income on invested assets 245 424 214 944 88 094 14%

Return on average invested assets 14.9% 15.3% 7.0%

Adjusted net worth per embedded value report2 80 959 72 497 53 483 12%

Income on adjusted net worth2 9 495 6 730 2 550 41%

Return on average adjusted net worth2 12.4% 10.7% 5.1%


Short-term insurers

Combined results

2013 Rm

2012 Rm

2011 Rm

2013 vs 2012

Total invested assets1 30 964 29 002 28 632 7%

Income on invested assets 2 310 2 431 1 741 -5%

Return on average invested assets 7.5% 8.4% 6.2%


¹ Invested assets comprise the group financial assets, investment property as well as the cash and cash equivalents of the insurers (for Old Mutual the Emerging Market segment information has been used). This includes all policyholder and shareholder assets.

2 This information has been taken from the group embedded value reports of the long-term insurers, but excludes MMI in 2011 as insufficient information was available to calculate the return on average adjusted net worth for the newly-formed group.

The combined invested assets of the long-term insurers grew by15.5%fromR1.53trillionin2012toR1.76 trillion.Totalinvestment income earned amounted to R245.4 billion, representing an average return of 14.9%. Combined adjusted net worth (ANW) grew by 11.7% from R72.5 billion to R81.0 billion.AverageincomeonANWtotalledR9.5 billion.This represents a return of 12.4%.

Figure 4.3

Return on invested assets and return on average adjusted net worth: long-term insurers


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DiscoveryDiscovery grew invested assets by 36% to R39 billion (2012: R28billion).Discoveryattributedthisgrowthininvested assets to product receptivity and positive market returns. Discovery’s ANW grew by 49.9% to R5.4 billion (2012: R3.6 billion).

LibertyLiberty’s invested assets grew by 13.5% to R338 billion (2012: R298billion).TheANWgrewby14.4%toR18billion(2012: R15.7 billion). This was due to a 33% exposure to equities (local and foreign) in the Liberty Shareholder Investment Portfolio. Other significant categories include cash at 24% and bonds at 22%.

MMIMMI’s invested assets grew to R361 billion (2012: R315 billion).Thisrepresentsa14.6%growthininvested assets. MMI’s ANW grew by 2.4% to R13.5 billion in 2013 (2102: R13.2 billion). This is mainly due to the 9.4% exposure to equities, 20.6% debt securities, 10% properties, 30% cash and 29.3% intangible assets. Investment income on shareholder capital was impacted by the R1.0 billion special dividend paid in October 2012.

15PwC

Old MutualOld Mutual’s Emerging Markets invested assets grew by 14.2% to R540 billion (2012: R473 billion). Old Mutual’s ANW grew by 12.9% to R28.3 billion.

SanlamSanlam’s invested assets grew by 17.8% to R486 billion (2012: R413 billion). Sanlam’s ANW grew by 5.7% to R15.8 billionin(2012:R14.9billion).

Figure 4.4

Return on invested assets: short-term insurers


1Absa is excluded due to insufficient information being available

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Combined invested assets of the short-term insurers increased from R29 billion to R31 billion which represents 6.8% growth. Zurich posted a 12.1% growth (2012: 12.1%), followed by Santam at 8.5% (2012: 9.8%), OUTsurance at 6% (2012: 6.1%) and M&F at 5.5% (2012: 5.9%).

All the short-term insurers’ returns remained relatively constant from 2012 to 2013, except for Santam. Santam implemented a fence structure on R2.0 billion of its equities in March and May 2013. The fence structure provides 10% downside protection and a 9.6% participation in the upside market movements on those equities. This caused Santam’s actual return of 18.5% to drop down to an effective 8.3% return on those equities.

Macro-economic factors will play a more significant role in 2014. These include a weaker rand and continued labour unrest. Sanlam stated that the equity market was over-valued at the end of 2013 and that another year of strong returns may be unlikely for 2014.

Balance sheet management will remain a key focus area in 2014.


5. Capital and solvency

Long-term insurance

Capital adequacy requirement cover 2013 2012 2011 2013 vs. 2012

Discovery 3.9 3.9 4.4 0%

Liberty 2.6 2.7 2.9 -6%

MMI 2.6 2.4 2.3 8%

Old Mutual South Africa 3.3 4.0 4.0 -18%

Sanlam 4.5 4.3 3.7 5%

DiscoveryDiscovery Life’s capital adequacy requirement (CAR) remained constant at 3.9 times.

LibertyLiberty’s CAR reduced marginally to 2.6 times covered in 2013 (2012: 2.7 times covered). This is after taking into account the rationalisation of transferring three of its South African long-term insurance licences into the main Liberty Group Limited licence with the effect from 1 September 2013. This rationalisation will result in improved capital efficiency under SAM and simplify its operational requirements.

MMIAfter paying R1 billion on strategic initiatives, R0.9 billion on an interim dividend and earmarking R1.6 billion to acquire Guardrisk, MMI reduced its capital buffer from R3.8 billiontoR3.5billion.MMIintendstoissueR1.5billionof unsubordinated debt during March 2014.

Old MutualThe Old Mutual plc group made further payments of £176 millionviaopenmarkettendertocompleteitsdebtreduction to the targeted level of £1.7 billion. It has no plans to reduce this further in the immediate future. Old Mutual South Africa remains well capitalised with a CAR cover of 3.3 at31December2013,eventhoughthishasdecreasedby18% from 2012.

SanlamSanlam utilised discretionary capital in 2013 mainly on investments in India and South East Asia of R1.3 billion andwellasinvestmentsintherestofAfricaofR0.5 billion.Capital was further reduced by the special dividend ofR1.1 billionpaidin2013.SanlamheldR4billionofdiscretionary capital at year end. Sanlam remains focused on utilising this available discretionary capital on value-accretive investments.

17PwC


International solvency margin 2013 2012 2011 2013 vs 2012

Combined solvency margin 40% 43% 49% -5%

Individual companies M&F OUTsurance Santam Zurich

2013 35% 40% 42% 58%

2012 47% 47% 41% 69%

2011 52% 47% 48% 68%

Note: Absa is excluded due to insufficient information being available

The industry as a whole has experienced decreasing solvency margins due to the increase in claims experienced in 2012 and 2013.

M&FM&F’s solvency decreased from 47% in 2012 to 35% in 2013. Management’s primary focus for 2014 is on restoring profitability rather than growth. Management’s longer-term focus is to improve the return on equity to 15-20% by 2016 through the management of claims costs, capital management and underwriting margin improvements.

OUTsuranceOUTsurance repurchased the remainder of the outstanding perpetual preference shares issued by Rand Merchant Insurance Holdings for R201 million. This was funded from operational cash flows. The group also earmarked R450 milliontogrowtheYouibusiness.Theadditionalcapital will fund growth in Australia as well as planned expansion of Youi into New Zealand.

SantamSantam’s solvency margin, which has been calculated including its subordinated debt amounting to R997 million, has marginally increased to 42% in 2013. This is within the company’s target solvency range of 35%-45%, which has not changed from the prior year.

ZurichThe decrease in Zurich’s solvency margin is primarily the result of the increase in underwritten losses experienced in 2013. Although the solvency margin has declined, this is still in excess of the group’s target solvency levels of 45% to 50%.


6. Growth in sub-Saharan Africa

The increasing attractiveness of the emerging markets, combined with uncertain growth and stricter regulatory guidelines in the developed world have made insurers re-evaluate their strategic goals in developing countries. Price transparency and direct insurance channels are also leading to greater commoditisation of personal lines insurance in developed markets. In the immediate term, there may be opportunities to move into emerging markets where margins are still relatively high. Newfound wealth and relatively high GDP growth rates in these markets, driven by oil and other resource discoveries, together with increasing infrastructure development, will drive up demand for insurance.

Expanding into Africa

The African continent is made up of more than 50 countries, manydiversecultures,2 000languagesandmorethan1.1 billionpeople.Thiscanmakeexpandingintotherestof Africa daunting. Insurers expanding into Africa need to appreciate cultural differences and understand that predetermined one-size-fits-all solutions may not work. Partnering with players who have expertise and understand the local markets may be essential for successful expansion.

Starting small and growing organically can be slow and time consuming. Some insurers are buying into existing local insurance companies, and then scaling up operations. Others are collaborating with banks to sell insurance through existing banking channels. These bancassurance arrangements offer quicker access to existing bank customers, without replicating expensive infrastructure and systems.

Insurance market penetration in Africa

Insurance penetration: Premiums as a % of GDP in 2012

Country World ranking Total business Life business Non-life business

South Africa 2 14.16 11.56 2.60

Namibia 15 8.00 5.50 2.50

Mauritius 23 5.94 4.00 1.93

Kenya 45 3.05 1.03 2.02

Morocco 47 2.95 0.96 1.99

Tunisia 63 1.80 0.27 1.53

Angola 78 0.99 0.05 0.94

Egypt 81 0.73 0.31 0.41

Nigeria 84 0.68 0.18 0.51

Algeria 85 0.67 0.05 0.62

Source: Swiss Re

19PwC

“Insurance penetration in Africa is exceptionally low, indicating significant growth runway. Regulatory barriers are generally fewer and regulations less onerous, but there are a few exceptions. The African population’s health is improving, as is longevity. Africa also has a vast young population. One cannot, however, ignore the potential downside risks of doing business in Africa. This does not seem to outweigh positive factors, but political instability, corruption, poor infrastructure, red tape, bureaucracy and inaction all remain real risks.” NicolaasKruger,GroupCEOofMMIHoldings,SouthAfrica

Infrastructure, development and urbanisation

Infrastructure is a critical enabler of economic growth. Inadequate infrastructure undermines productivity, raises production and transaction costs, hinders economic growth and slows down the rate of growth of insurers.

Factors driving demand for infrastructureA number of factors have started to drive increased demand for infrastructure on the continent. These include oil, gas, and mineral discoveries, political change and the opening up of economies as well as increasing global interest in Africa’s growth potential. In West Africa, Nigeria’s economy, with its oil wealth and large well-educated population, continues to grow and could soon overtake SA as Africa’s largest economy. Further discoveries of natural resources in Mozambique, Namibia and Botswana are also driving up regional and corridor-type infrastructure developments.

We see similar developments in East Africa, where most of the economies are enjoying growth rates of more than 6% per annum.

Positive prospectsSince its launch in 2001, the Africa Union (AU) and the New Partnership for Africa’s Development (NEPAD) have developed and agreed numerous policies and programmes. Recently, the Programme for Infrastructure Development in Africa (PIDA) was initiated by the AU, NEPAD and the African Development Bank. More than 50 significant regional projects have been identified to deal with the projected 8-14 foldincreaseindemandforroadandrailtransportby 2040 from 265 million tonnes up to two trillion tonnes through the ports.

Electricity demand is expected to increase from 128Gw to 700Gw over this period. Similar growth is also expected in the urban, ICT and water sectors. With the continued use of relatively cheap fossil fuel, pollution could become a health issue, threatening the well-being of populations in fast-developing countries. Health insurers will need to monitor trends in atmospheric pollution in order to assess risk in different regions accurately.

Corridor and other multi-country programmes for infrastructure development will provide the basis for the industrial, manufacturing, agriculture and financial services sectors to fulfil their potential and contribute to economic growth. Government infrastructure investment, population growth, new businesses and wealth creation are driving growth in the construction, land development, energy and transportation sectors, all of which are creating a greater need for insurance.

Along with infrastructure development will come urbanisation as the people move into cities in greater numbers. Demographic shifts will have various implications and provide opportunities for insurers. For example, social changes will occur with growth in the middle class as well as a change in family structures with reduced inter-generational support. Along with the move to the cities, the risk of urban diseases will also increase, resulting in an increased need for health insurance.

Consumer behaviour is also changing because of easier access to social media and technology. Consumers will be able to perform their own research and make informed decisions without always having to rely on brokers. This creates an opportunity for innovation with the expected exponential growth of smartphones and tablets for insurers who can adapt to these changes.

Ultimately, the actions that insurers choose to take will depend on their strategic intent, core capabilities, availability of talent, capital and organisational culture.

Changing regulatory environmentRegulatory change is a significant challenge currently facing insurers globally, in South Africa and the rest of Africa. Insurers in South Africa are preparing for the implementation of Solvency, Assessment and Management (SAM), in 2016. We are also seeing similar regulatory changes in other parts of Africa. In Kenya, the Insurance Regulatory Authority has introduced far-reaching proposals which will affect insurers in the areas of risk management, governance and reporting as well as new capital requirements. We are seeing evidence of other African countries adopting similar risk based regulatory changes.

These developments will assist in aligning the regulatory environment and practices across Africa and should result in a more stable regional financial services sector.


A common financial languageIFRS has also now been adopted in a number of African countries, including SA, Kenya, Ghana and Nigeria with others set to follow.

Figure 6.1

IFRS adoption in Africa

Shifts in distribution channelsVarious distribution channels have been utilised by South African insurers when expanding into Africa. A common model appears to be the bancassurance model, in which an insurer partners with a bank to distribute products to banking clients. Other insurers in Africa still rely heavily on intermediary-driven distribution channels. Broker domination is starting to reduce as technology and smart devices increase the opportunity for direct channels. Africa has large rural populations, that need to access insurance through non-traditional channels. Money transfer innovations have been encouraging examples, which can be copied for insurance distribution.

Algeria

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21PwC

“Creating access to appropriate products is critical to growing insurance penetration across the African continent. In most African countries, the short- and long-term insurance markets have largely developed on the back of institutional business, and while this will continue to be an important and growing segment of the market in the future, growing wealth and increased urbanisation will also create a retail insurance market opportunity. As with other emerging markets, bancassurance will be an important channel to provide customers with appropriate product at an affordable price. As such, the Liberty Group’s strategic partnership with the Standard Bank Group provides a strong foundation for our insurance initiatives across the continent. However, many opportunities do exist in both the institutional and retail market segments, and we believe that a multi-channel approach, with a mix of both traditional and non-traditional distribution channels, will be key to realising the full potential of the African markets that we operate in.” StuartWenman,HeadofAfrica,LibertyHoldingsLtd

The big four banks in South Africa (Barclays Africa, Standard, Nedbank and FirstRand) all own or are owned by insurers. It is expected that their bancassurance arrangements would be replicated across Africa. Liberty’s goal this year is to grow through leveraging its bancassurance relationship with Standard Bank in Southern and Eastern Africa, and to complete the footprint by expanding into West Africa.

The recently rebranded Barclays Africa group’s ‘One Bank in Africa’ strategy includes efforts to replicate its bancassurance model in East Africa during the last two quarters of this year. It is developing a simple bancassurance solution that matches the needs and expectations of customers in the rest of Africa.

Figure 6.2

Mobile subscriber penetration rates 2012

Source: GSMA Intelligence

34.5%Angola

49.8%Ghana

31%Kenya

30%Tanzania

45%Côte

d’Ivoire

29.5%Nigeria

20%Niger

65.7%SouthAfrica

47.6%Senegal

Will internet, mobility and social networking change the game over the next decade? Will a new generation of customers who demand simplicity, speed and convenience in their interactions come to the fore? These trends have accelerated in developed markets, leading to a situation

where more and more customers will be willing to ‘buy direct’ using their online and offline ‘trusted’ networks of friends and family to guide their choice. This could also result in a fundamental redefinition of the role of advice in the rest of Africa insurance value chain.


Driving growth through mergers and acquisitions

Most of the larger South African insurers have been making acquisitions in the rest of Africa to take advantage of the low penetration rates.

Sanlam/SantamSanlam concluded five acquisitions totalling R2.5 billion. This included the Pacific & Orient Insurance Co. Berhard (P&O) transaction in Malaysia for R817 million. A further R1.3 billionisearmarkedforIndiaandSouthEastAsiaand R551 million for Africa. Sanlam also increased its shareholding in Capricorn Investment Holdings (Namibia).

Sanlam Emerging Markets (SEM) and Santam have agreed to participate on a 65/35 basis in all the Sanlam Group’s general insurance business in emerging markets. Santam will provide strategic and technical support to Sanlam and its partners. Santam, through SantamRe, its specialist business and partnerships with SEM, concluded the following SEM participation structures during 2013:

• Botswana Insurance Holdings Limited – 18.6%; and

• NICO short-term insurance (Malawi, Zambia, Tanzania, Uganda) – 8.7%.

SEM also acquired the following:

• 25.1% stake in NICO Holdings (Malawi); and

• 37.4% participation interest in Santam Namibia.

Sanlam will also explore bolt-on transactions/deepening existing partnerships in Africa, India and Malaysia in 2014. It has R4 billion discretionary capital available for this purpose.

DiscoveryDiscovery will not expand into Africa for now. It is developing the PruHealth and PruProtect businesses in the UK as well as Ping An Health in China. It also launched the new Vitality Optimiser product, which leverages the Discovery Life integrator methodology in the UK as well as the Comprehensive Health Protector 2.0 in China in the second half of 2013.

“Old Mutual has four strategic priorities: expanding in Africa; developing our business in fast-growing South African markets; building our Wealth business; and growing US Asset Management. We are making excellent progress against our strategic objectives. We are growing in South Africa, with more than 750 000 new Old Mutual and Nedbank customers. We have taken significant steps in our goal of becoming Africa’s financial services champion, with new business in East and West Africa and nearly 600 000 customers. We have a clear strategy and clear priorities, which we are focused on achieving. While the external environment is likely to remain uncertain, and in particular the impact of the movement of the rand on our results, we believe that the long-term structural growth trends in Africa and strong demand for banking, protection and savings products remain intact and will continue to drive sustainable and profitable growth for Old Mutual.”Julian Roberts, Group Chief Executive, Old Mutual plc

Liberty After the acquisition of CfC life in Kenya in 2011, 2013 was a year of consolidation. The focus moved to Nigeria, while remaining committed to bancassurance partners across the rest of Africa.

MMIMMI acquired a significant majority stake in Kenyan short-term insurer Cannon Assurance Ltd for approximately R300 million.TheshareholdersofCannonwillinturnacquire a minority stake in Metropolitan Life Kenya. The transaction will enable a consolidation of the separate licences into one life company and a separate short-term insurance business.

MMI still has R200 million for further expansion on the continent. MMI’s target is for its rest of Africa operations to generate 10%-15% of group profit over the next five years. The rest of Africa contributed 4% to group operating profit in June 2013.

Old MutualIn 2013 Old Mutual announced that it was committed to investing up to R5 billion in the rest of Africa. To date it has committed or funded acquisitions of approximately R700 million.Itisalsoexpandingitsoperationsthroughorganic growth in Kenya, increasing its agent force to 600 in 2013.

It’s other acquisitions included:

• Oceanic Life Business in Nigeria;

• Oceanic General Insurance Nigeria (part of Ecobank Transnational);

• Provident Life Assurance Company Limited in Ghana; and

• Faulu Kenya DTM LTD, a microfinance company.

23PwC

Opportunity vs risk

Looking at the countries where South African insurance companies have entered, it is evident that the choice of countries entered relates in many instances to their proximity to South Africa, their expected GDP growth and the size of the population that can be penetrated for insurance and not specifically to the overall risk of the country.

The benefits and opportunities of investing and obtaining an attractive return in some countries outweigh the threats and risks of doing business in those countries.

Figure 6.3

South African insurers’ footprint in Africa vs overall country risk

Source: Aon 2014 terrorism and political violence map and PwC analysis

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Progressing into Africa

Insurers’ growing footprint in AfricaSouth African insurers have historically targeted neighbouring SADC countries (Namibia, Botswana, Swaziland, Lesotho and Mozambique) due to their close proximity. Recently, insurers have also invested in countries where there is strong economic growth, like Nigeria, Ghana, Kenya and Zambia. In countries such as Tanzania, Malawi, Uganda and Mauritius, some insurers have capitalised on bancassurance models and possibly favourable tax regimes.

Figure 6.4

South African long-term insurers’ footprint in Africa

Source: PwC Analysis

Figure 6.5

South African short-term insurers’ footprint in Africa


Note: Absa is excluded due to limited information being available

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Rest of Africa’s contribution

Long-term insuranceFigure 6.6

Rest of Africa VNB vs South Africa VNB


The contribution to value of new business written from other African countries has increased over the past three years. Increased product offerings, higher new business volumes and cost controls have helped.

Overall VNB of African business as a percentage of the value of new business for South Africa ranged between 4% and 35% for the long-term insurers and 18% on a combined basis.

Figure 6.7

Rest of Africa VNB margin vs South Africa VNB margin


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2011

2012

2013

2011

2012

2013

The VNB margins at which new business is being written in the rest of Africa is greater than the average margin achieved in South Africa. This is primarily due to differences in product mix. The types of risk products sold in the rest of Africa, like funeral policies, attract higher margins. South African VNB margins include significant proportions of savings products which attract much lower margins.


Figure 6.8

Rest of Africa total premium vs South Africa total premium

Note: Comparatives for 2011 have been excluded due to limited information.

The significance of business written in other African countries to SA results is evident in the above graph for the short-term insurers. Overall, business from the rest of Africa contributed between 2% and 8% as a percentage of South African business and 5% to total combined business.

Absa M&F Zurich20

12

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25PwC

African economic outlook ByDrRoelofBotha,EconomicAdvisortoPwC

According to the World Bank’s latest economic outlook, the sub-Saharan African (SSA) region is expected to outperform most other global regions by a healthy margin this year.

After a disappointing GDP growth rate of 3.5% in 2012, the regional economy of SSA strengthened to an estimated growth rate of 4.7% in 2013, mainly as a result of relatively high levels of capital formation and higher retail sales.

Unfortunately, the region’s largest economy, South Africa, continued to experience growth constraints, especially in the areas of infrastructure (most notably electricity supply) and an unstable labour market.

In the latest global competitiveness rankings published by the World Economic Forum, South Africa is ranked last (out of 148 countries) for the indicator titled ‘cooperation in labour/employer relations’ and the further development and diversification of the SSA region’s economy is being hampered by sub-optimal growth in its traditional economic powerhouse.

Excluding South Africa, GDP growth for the rest of the region averaged an estimated 6% last year, with more than a third of the countries recording growth above this level.

The prospects for 2014 have been enhanced by the economic recovery of Europe and the higher growth being forecast for the world’s biggest economy, the US. The World Bank expects an improved export performance to boost the SSA region’s growth performance to 5.3% in 2014, rising further to 5.5% by 2016.

Key threats to this rosy outlook include the usual concerns over volatile weather patterns, inadequate infrastructure, a protracted downward phase of the commodity price cycle and socio-political unrest in certain countries.

Key drivers of insurance sector activityIn the welcome process of a fully-fledged recovery from recession, a number of key drivers of economic activity in the insurance industry have been re-activated, most notably rising real levels of per-capita income.

The global recession did not impact as negatively on the SSA region as on the advanced economies, but the extended economic decline in Europe has delayed the further development of both the long-term and short-term insurance industries on the continent.

In addition, the long-term insurance industry traditionally lags an economic recovery by several quarters due to its close correlation with formal-sector employment. Consumption expenditure on durables and private sector capital formation often also suffer a recovery lag, which directly affects short-term insurance business.

Fortunately, the economic tide seems to have turned for good, with a growing number of economies in the SSA region starting to exhibit the kind of characteristics that are required for substantial investment in the insurance sector.

Apart from South Africa, which conforms to international best practice in the area of financial market sophistication and profitability, another nine countries in SSA may be regarded as possessing exceptionally strong growth potential. The data sets in the accompanying table have been ranked according to per-capita GDP and also include the sizes of the respective populations and economies. For the purposes of determining which countries are likely to attract the future attention of investors in the insurance sectors, the initial selection included the 20 largest economies in SSA.

Aminimumper-capitaGDPof$1 000andaminimumpopulation of 10 million were then also introduced as two of the criteria that could indicate a combination of a potentially large enough insurance market and one where a critical mass of affordability for insurance products was likely to be present or to develop quite soon.

Sub-Saharan African countries with high potential for insurance sector growth

Population millions

GDP $ billions

Per capita GDP $

South Africa 51.7 353.9 6 847

Angola 20.8 124 5 955

Ghana 25.6 45.5 1 781

Nigeria 169.3 292 1 725

Zambia 14.5 22.2 1 529

Cameroon 22.0 27.9 1 267

Chad 11.0 13.6 1 234

Côte d’Ivoire 24.1 28.3 1 175

Senegal 13.5 15.4 1 140

Kenya 43.3 45.3 1 045

Source: IMF

When viewed against the background of the lucrative insurance industry in South Africa, the prospects for fast-tracking its development in other African countries are tantalising.


Bright future forecastLife insurance penetration in most African countries remains low by high-income country standards, but the market is growing rapidly. Scrutiny of available research and financial reports of insurance companies operating in African countries reveals a high level of optimism over the future prospects for the insurance sector, with double-digit premium growth rates being forecast for several countries.

It is not surprising, therefore, that a number of large South African insurance companies have ventured north, often setting up joint ventures with local firms. Some global players have also shown interest. One example is American International Group (AIG), which is currently operating in four African countries.

High and sustained per-capita income growth over the next decade (in real terms) is virtually guaranteed across the SSA region, which will inevitably lead to improved growth rates for household consumption expenditure on durables, especially motor vehicles and furniture.

In the event of progress being made with improved public-sector corporate governance and infrastructure provision, particularly electricity supply, the future of the region’s insurance sector seems bright indeed.

27PwC

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18.0

%

Inte

rnat

iona

l sol

venc

y m

argi

n n

/a

n/a

n

/a

35%

47%

52%

40%

47%

47%

42%

41%

48%

58%

69%

68%

40%

43%


8. Basis of information provided

The aim of this publication is to consider the results of the South African insurance businesses of the companies listed in Section 7 for the calendar year ended 31 December 2013. Where companies have 30 June year ends, the financial information has been reconstituted to reflect the calendar year ended 31 December where possible.

Due to the implementation of IFRS 10 and 11 effective 1 January 2013 all the insurers with a December 2013 year end have had restatements. The 2012 figures have therefore been restated. For entities that have a June year end (i.e. OUTsurance, MMI and Discovery) the 2012 and 2011 comparative numbers have not been restated. Most restatements have been immaterial.

To make the Sanlam results comparative with the other insurers, the Employee Benefit information included in its Sanlam Investment segment has been combined with the Sanlam Personal Finance segment.

Other pertinent matters to note regarding the information presented:

• Information for Old Mutual relates to the Emerging Market segment, which primarily includes Old Mutual South Africa, but also developing markets in Asia and Latin America (for which separate information is not available). The embedded value new business information included in this publication relates to South African business only. Old Mutual is the only company in this publication that follows the Market Consistent Embedded Value (MCEV) principles as published by the European CFO Forum. The other companies apply the principles set out in APN107 as published by the Actuarial Society of South Africa.

• Return on average equity has been calculated as total comprehensive income attributable to the equity holders of the parent divided by the average shareholders’ equity (opening equity plus closing equity divide by two).

• The embedded value information for Discovery represents the Discovery Life and Invest segments and excludes the Health, Vitality, PruHealth and PruProtect segments, which do not represent South African life insurance operations.

• The return on average invested assets has been calculated from the information provided by the insurers as follows: income on invested assets divided by the average total invested assets.

• The return on average adjusted net worth has been calculated from the information provided by the insurers as follows: income on adjusted net worth divided by the average adjusted net worth.

• Where companies have classified some of their financial assets as ‘available for sale financial assets’, the fair value gains and losses recognised in ‘other comprehensive income’ have been reclassified in the income statement for companies to be comparable with their peers.

The international solvency margin has been calculated from the information provided by the short-term insurers as follows: shareholders’ equity divided by gross written premium net of reinsurance. The only exception is Santam where they include their long-term debt as part of share capital for the purposes of this calculation.

31PwC

9. Contacts

Dewald van den BergInsurance Technical Director +27 11 797 5828 [email protected]

Tom WinterboerFinancial Services Leader, Southern Africa and Africa +27 11 797 5407 [email protected]

Victor MugutoLong-term Insurance Leader +27 11 797 5372 [email protected]

Other contributor

Lisa du Plessis

© 2014 PricewaterhouseCoopers (“PwC”), a South African firm, PwC is part of the PricewaterhouseCoopers International Limited (“PwCIL”) network that consists of separate and independent legal entities that do not act as agents of PwCIL or any other member firm, nor is PwCIL or the separate firms responsible or liable for the acts or omissions of each other in any way. No portion of this document may be reproduced by any process without the written permission of PwC. (14-14722)

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