Old Mutual earnings jump 21%
Insurer reports clients are struggling with premium payments
Despite reporting a 21% jump in full-year earnings to December last year, South African insurer Old Mutual said it also took a R500m knock as clients failed to keep up with insurance premiums, particularly in its lower- to middle-income segment.
But the company which has operations in South Africa, Africa and China expects an improvement as the tough economic environment eases.
“Consumers are under a lot of strain, and we have seen some pressure on lapses primarily for that reason, but it is getting better,” said CEO Iain Williamson.
The insurer saw a R500m negative impact on the value of its in-force book of business as a consequence of persistency the percentage fall-off in people continuing to pay their premiums being worse than expected.
“The economic impact of the worse persistency is about R500m, so it’s material. It’s not a small number.”
Shaun Murison, senior market analyst at IG, said the impact was worsened by the establishment of an economic recovery reserve within the company’s lower- to middle-income mass and foundation cluster in June last year.
“A strong persistency ratio is important to insurers, as it relates to renewed business and in some ways can reflect positive sentiment towards products and services rendered,” Murison said.
Old Mutual posted headline earnings of more than R7.3bn, up over a quarter from a year earlier. Its adjusted headline earnings, which excludes Zimbabwean operations, jumped 21% to over R5.8bn.
Though persistency improved from negative R521m in embedded value from a year earlier, it remained negative, driven by losses in the lower- to middle-income market segment, which focuses largely on life insurance and lending, and is one of the business’s biggest books.
This segment saw a worsening persistency experience across all products owing to the poor economic environment, the company said, but persistency in its life inforce book improved during the second half of the year.
Williamson said Old Mutual saw some “green shoots” in persistency levels in the fourth quarter of last year, which have continued into the first quarter of this one.
“On a forward-looking basis, I would expect further improvement, essentially driven by the prospect of the rate cycle now turning, and hopefully that will happen around the middle of the year.”
But persistency levels remain a real concern in this segment over the medium term.
These are cyclical in nature, and consumers have faced multiple economic headwinds, with sticky inflation and high interest rates eroding their disposable income and ability to afford product offerings like insurance.
In an economy with high interest rates and low growth, policy lapses tend to increase and persistency worsens, Williamson said.
Annual consumer inflation rose to 5.6% in February from 5.3% in January, but still within the Reserve Bank’s target range of 3% to 6%.
To combat persistent inflation, the Bank raised its main lending rate at 10 consecutive meetings since November 2021, before holding the current repo rate of 8.25% at its last five meetings including the most recent one on Wednesday.
Some market watchers have been forecasting interest rate cuts from July, which could provide some respite to consumers. The current prime lending rate is 11.75%.
Despite the possibility of interest rates coming down in the second half of the year, the insurer foresees it may take some time for the benefits of lower rates to filter through the system.
“We expect a gradual easing of the burden of high costs of living as inflation continues its downward trajectory and a likely downward interest rate cycle starts from the middle of 2024,” Old Mutual said in the results presentation.
Murison said: “It will take some time for lower interest rates to provide a positive input to the group’s persistency, as initial cuts are expected to be marginal and appear less likely to come to fruition before June 2024.”
Old Mutual expects disposable income of customers in the lower- to middle-income group to take two years to recover and has “raised an economic recovery reserve to reflect this”.
“We monitor [persistency] very, very closely, and we look monthly at our success rates in terms of premium collection what’s happening [and] whether the actions that we’re taking are having any impact,” Williamson said.
The company said it remained focused on its management interventions, which are yielding positive results, but added that an easing of cost-of-living pressure and improved economic growth were needed to aid the “improvements captured in the economic recovery reserves”.
Old Mutual’s personal finance segment also saw a worsening of persistency, but its corporate arm provided some relief.
In addition to the pressure on consumers’ disposable income, Old Mutual has also seen higher borrowing costs in its mass and foundation cluster, a division of Old Mutual Emerging Markets. This has raised the company’s credit-loss ratio by 240 basis points to 7.2%, from 4.8% a year earlier.
The company said it continued to grow its lending book responsibly, with its loans and advances for the cluster growing 6% to R16.3bn. Despite poor persistency in the mass and foundation cluster, it managed 14% growth in its volume of new life insurance business in this segment.
The segment’s net client cash flow rose 12% as a result of growth in recurring premium flows, but was somewhat “offset by higher surrenders as more customers continue to choose to access their savings to support them during these difficult financial times”.
Total dividends for the year amounted to 81c per share, up 7% on the comparative period.