Offshore exposure shields SA insurers

FITCH Ratings says South African insurers’ ratings are not affected by the recent rand weakness, largely because the domestic stock market’s significant offshore exposure provides insurers with a partial rand hedge, supporting equity returns during times when the rand depreciates.

In a note yesterday, Fitch, which has given notice that it is exiting the South African market, said insurers’ domestic capital positions remained strong and largely immune to short-term currency movements. “Further geographical diversification could be ratings positive for South African insurers in the long-term, provided it is executed successfully and profitably.”

The rand has weakened against major developed market currencies, with year-todate losses of about 19 percent against the US dollar and 16 percent against the pound.

Solvency positions

“Their predominantly rand liabilities are typically matched by rand-denominated assets. Moreover, local capital markets continue to provide insurers with ample liquid investments, as well as reliable capital supply through well-developed local debt and equity markets,” the ratings agency said.

Avior Capital Markets analyst WJ de Vries agreed and said local insurers had geared up their solvency positions as part of the Solvency Assessment and Management (SAM) regulations, which were due to start in 2016.

“Local insurers are quite adequately covered; they hold enough capital to cover against risk. They have been preparing their books for SAM, which protects policyholders in extreme market events, including interest rate and currency movements,” de Vries said.

He said there was no issue for debt holders to worry about because insurers’ investments were in line with rand-based liabilities.

Fitch said many of the large constituents of the JSE derived a substantial portion of their profits from outside South Africa. “Moreover, many insurers invest a portion of shareholder funds in offshore equities. Equity returns have a significant impact on insurers’ return on shareholder assets and life insurers’ overall assets under management.”

It said rand weakness particularly hurt non-life insurers’ profitability, because of the increased cost of imported spare parts for motor repairs.

However, non-life insurers have managed rand weakness well in recent years, partly through various initiatives, such as greater use of alternative spare parts rather than original manufacturer parts.

Expansion plans

“Fitch, therefore, believes that the recent rand weakness will not significantly depress nonlife insurers’ 2015 underwriting margins. However, new vehicle prices may rise as a result of the weak rand. This may have a second order effect on motor insurance sales growth,” it said.

De Vries said debt made up a small proportion of funding for non-life insurers due to the uncertain and volatile nature of claims.

The rand has recently strengthened against some emerging market currencies, including many in sub-Saharan Africa.

Fitch said although this move had weakened the rand results that insurers derived from these markets, it supported their expansion plans.

It said large insurers with strong emerging market strategies were actively considering further opportunities to deploy capital in sub-Saharan Africa, with specific developments in the near term anticipated in Uganda, Angola and Nigeria.

“Conversely, the ability of South African insurers to expand into developed markets would likely be hurt by a sustained weak rand,” Fitch said.

Conversely, the ability of SA insurers to expand… might be hurt by sustained rand weakness.