Traditional life assurance growth is constrained in South Africa (SA) as companies increasingly rely on non-traditional SA and non-SA businesses for inflation-beating growth.
Listed companies (eg Sanlam, Discovery, Old Mutual and MMH) should benefit from non-core SA growth (eg non-life insurance, investment management, health administration and lending), growth from non‑SA (eg insurance in Africa, UK, etc, lending in India and wellness in Asia Pacific), and from j-curve earnings (eg MMH in Indian health insurance and Discovery in SA banking and Asia Pacific wellness). Traditional SA life assurance businesses (50–80% of earnings) suffer from a lack of policy growth and need cost cutting and consolidation to protect margins and recover growth potential.
The SA economy is under pressure with low GDP growth and high unemployment in the face of high interest rates and a sustained rise in bond yields to pre-COVID-19 levels. SA equity markets have underperformed their developed counterparts over the past decade, although they have delivered a comparable post-COVID-19 recovery. Valuations are depressed with price earnings multiples well below developed markets and historic levels.
Static policy count and low premium growth has impacted earnings.
SA life assurance has been struggling with a static to declining policy count since 2019 (savings business book shrinking by a quarter, while the risk business portfolio only managing to remain flat). The middle-to-affluent individual market has seen significant pressure on new business policies since COVID-19 lockdowns and is struggling with an average replacement ratio of only 102%. The entry-level market has seen better new business volumes, but high lapses due to churn are limiting book growth.
Industry (entry-level, middle-to-affluent and corporate) organic growth has been struggling since 2019 with recurring premiums delivering annual compound growth of 5.8%, hardly beating inflation. Single premiums have fared even worse with compound growth of 4.9% to June 2023. While a recovery in investment markets could support single premiums, the outlook for recurring premiums is for inflationary growth at best, in our opinion.
Listed SA life assurance earnings have been under pressure for over a decade with compound growth in headline earnings ranging between 5.4% and 9.0% since FY11. Valuations have failed to recover to pre‑COVID-19 levels as weak embedded value (EV) growth (and returns) and even weaker share price performances resulted in a sector average of only 0.82x EV. Only Sanlam trades at a premium to EV.
Corporate activity needed on top of expense efficiencies
While some operational efficiencies have been delivered and further cost-savings exercises are underway, at best these have served to counter margin declines. Increased churn in the entry-level market and rises in bond yields have put pressure on earnings and on new business profit, in particular.
Companies have responded with distribution and new business drives but, in a zero-sum-game environment (especially for the middle-to-affluent segment), this risks compressing industry margins as a whole through higher distribution costs per policy and more policy lapses.
Acquisitive growth has emerged as a strategy, with Sanlam leading the field through transactions and joint ventures bolstering investment management, health administration, non-SA businesses and distribution in the middle-to-affluent segment. Old Mutual has also taken acquisitive steps aimed at bolstering distribution in its entry-level business as well as its non-life insurance business. MMH’s recent focus has been in investment management after a large non-life insurance ramp-up in 2018.
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