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Why insurance firms’ earnings are down

Insurance companies have felt the brunt of Covid-19, which squeezed the country’s production capabilities and resulted in South Africa’s gross domestic product contracting by 16.4% in the second quarter of 2020. The lacklustre economy has affected the big insurance companies, according to financial results statements for the six months ended June 2020, which indicate an increase in claims and a decline in business.

According to statistics by the Association for Savings and Investment South Africa (Asisa) released this week — showing the half-yearly long-term insurance numbers — there has been a slight decrease in individuals holding insurance products. 

At the end of June 2020, there were 41.3-million individual recurring premium policies in force, compared to 42.5-million at the end of December 2019 — a marginal decline of 2.85%. 

While the fall is slight, Asisa said there was a 3.59% drop in individual recurring premium savings policies, which include endowments and retirement annuities, from 6.5-million to 6.3-million in the same period. 

Discovery said that its profit for the year to June 30 decreased by 97% to R176-million, due to policy claims and lapses because of Covid-19. 

Sanlam’s financial statements showed that its net earnings from financial services decreased by 22%, to R3.9-billion, and its net operating earnings decreased by 39%, to R3.51‑billion. Sanlam said life insurance was hard hit, with monthly sales volumes falling by between 50% and 90% in April, May and June. 

The chief financial officer of Sanlam, Paul Hanratty, described the trading environment as “probably the most challenging in the group’s more than 100-year history, [due to] adjusting to a very difficult social and working environment”. Sanlam said that Covid-19 impacted on investment market returns, credit spreads, doubtful debt provisions and relief offered to clients and intermediaries.

Hennie de Villiers, deputy chair of the Asisa life and risk board committee, said that while 282 467 new policies were sold during the six month studied, 364 887 policies were surrendered. This happens when the policyholder stops paying premiums and withdraws the fund value before maturity.

“While this is concerning, it did not come as a surprise, given the impact of the Covid-19 lockdown on the earning ability of thousands of South Africans,” he said.

“When times are tough consumers are less likely to take out new savings policies. At the same time, more policyholders surrender their savings policies to access their savings due to financial hardship.”

Last month, Liberty Insurance said that the first six months of 2020 were “unprecedented in Liberty’s 62-year history”. The company incurred a normalised operating loss for the six-month period ended 30 June of R1‌.5-billion compared to normalised operating earnings of R1.09-billion for the same period last year. 

Old Mutual’s headline earnings plummeted by 67% to R1.7-billion compared to R5.2-billion in the same period the previous year. The loss was attributed to Covid-19 claims.

Lee Bromfield, chief executive of FNB Life, said for a life company, a pandemic is the biggest shock it can get. The introduction of the lockdown by the government to save lives has resulted in a “severe” impact on jobs while other employees experienced salary cuts. 

“Most life companies had to face a big drop in their investments, big increase in mortality and retrenchment claims and potentially massive numbers of customers dropping products,” he said.  

Bromfield added that companies with mostly face-to-face sales saw a significant drop while insurers with a digital presence saw great sales out of their digital platforms.  

Conversely, he said many customers realised why they need life cover — especially comprehensive cover that also covers retrenchments. 

Mmapula Mokoena, head of marketing at Yalu, a credit life insurance and debt protection company, said though the adverse economic climate has highlighted the importance of  insurance cover, whether consumers will be able to afford it was questionable, considering that many people may be unemployed and unable to pay insurance premiums. 

Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian

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