Insurer Old Mutual, rocked by weak new business volumes and hefty business interruption payouts as a result of the Covid-19 pandemic, said it expects to swing into a loss for the first half of the financial year.
The group expects a loss of R5.62bn-R6.74bn in the six months to end-June, from profit of R5.81bn previously, saying in a trading update it will write down some of its investments due to a deteriorating economic environment.
SA insurers are feeling the pain of the coronavirus, with Liberty having reported a R2.2bn interim loss. SA’s largest insurer, Sanlam, wasn’t spared, saying that earnings have been adversely affected. It announced the impairments of some of its operations because of their depreciating valuations, which is costing the group a combined R7.8bn.
Old Mutual, the 175-year-old insurer, said the deterioration in the operating environment has hit half-year earnings compared with the year before.
Old Mutual saw an increase in business interruption claims in its short-term insurance business — Old Mutual Insure — during the second quarter. It also decided to offer commercial settlements to certain qualifying small to medium businesses.
Last month it joined other insurers and said it would spend more than R650m in settlements to small and medium enterprises whose businesses had been affected by the lockdown. Santam pledged R1bn.
Old Mutual also said it has raised short-term provisions as it braces for a spike in mortality and disease in the latter part of 2020. “These reserves are intended to allow for expected short-term variances to our long-term assumptions,” the company said.
Its close rival, Liberty Life, set aside R3bn to cover death-related claims in anticipation of a surge in deaths.
The half-year financial performance is expected to be published in September, which will be the maiden set of results for newly instated CEO Iain Williamson, who was hired permanently at the beginning of July to replace Peter Moyo. Moyo was axed on grounds of conflict of interest and took the insurer to court over his dismissal.
The Covid-19 reserves highlight concerns about the hit to earnings that insurers may have to take and coincides with SA Medical Research Council data showing that there are almost 60% more deaths from natural causes than would have been expected.
Dudu Tembo, portfolio manager at Argon Asset Managers, said that while insurers may take a short-term shock, they’ll be able to recover if the market normalises.
“The insurance companies are fortunate because they have policies on their books with contractual terms that generally last a long time,” Tembo said.
“They’re very well capitalised so, barring any major shock, there is no possibility of any of the listed insurers becoming insolvent,” she said.
New insurance sales were negatively affected as advisers and clients were tied to their homes because of the lockdown restrictions to combat the spread of the coronavirus.
“Though lockdown restrictions have been eased and economic activity has somewhat resumed, sales levels remain below prior year levels,” the company said.
Tembo said another market shock and further lockdown would affect the returns on shareholder portfolios as well as earnings.
“If we have scenarios that are supported by the kind of outlooks that we’re seeing, (significant GDP declines in 2020 and some recovery next year) if that does pan out, the insurers should be able to recover and we should probably see normalisation towards the end of next year or into 2022.”
Tembo said that while all the insurers are accelerating their digitisation in a bid to enhance delivery of their products and support agents who can’t meet clients face to face, it is particularly difficult for insurers who do worksite marketing, which most of the corporate businesses do.
“It’s difficult because if businesses are not operating there’s no easy way to get to the end client. Now that businesses are reopening, they’ll be able to address that to a certain extent,” said Tembo.
Old Mutual’s share price closed 1.82% up at R12.87 on Monday.
With Karl Gernetzky
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