Sanlam sprang a nasty surprise on small and medium business owners in October last year when it increased retirement fund members’ life insurance premiums by 30%.
This increase was targeted at member employers with fewer than 400 staff because increases for larger employers had already been passed earlier in the year.
The unprecedented hike was in response to a jump in excess death claims due to Covid — or rather those claims that exceed Sanlam’s assumptions in a nonpandemic year.
Paul Hanratty, CEO of the group, bemoaned the way in which group risk, as it is called, is priced and how responses to extraordinary events, such as a pandemic, are allowed to be dealt with.
Hanratty’s frustration with the way group risk is priced is understandable, given that Sanlam Corporate — the division affected by the hike — was a major drag on the life insurer’s results in 2021.
This division delivered a net operating loss of R1.5bn for the year compared with a profit of R488m the year before, according to a presentation delivered after the release of Sanlam’s annual financial statements.
The problem arises when a life insurer tries to reinsure the risk of death. "If you try to reinsure, you’re going to struggle," Hanratty says.
That necessitated the large increase in death premiums, but it seems it happened too late in its financial year to improve its earnings.
"The coronavirus caught the world off-guard — a tsunami on a global scale," says Neelash Hansjee, portfolio manager at Old Mutual Equities. Given that the previous pandemic was more than 100 years ago, "insurers globally hadn’t priced for the risk as it hadn’t been on their radar for that long and they were hit with claims due to the sheer number of people that passed [on]", he says.
Now insurers have a better understanding of the risks and the mortality risk they must price for, Hansjee explains. Reinsurers are also repricing mortality risk on a global scale and passing it on to life insurers, he says.
"Pricing and [life insurance] premiums will increase industry-wide at a local level as well as based on what we know today to ensure people are appropriately covered," Hansjee says. "What price would you put on your life in a world where Covid is a reality?"
Despite a 43% jump in new business to R13bn, excess mortality claims worth R2.4bn stymied the unit last year. In 2020, excess mortality claims totalled just R69m.
But Sanlam’s frustration is probably easily topped by workers who are part of group risk schemes.
A salaried employee pays 7.5%, for example, to their pension or provident fund, with employers contributing another 7.5%. Of this 15%, a share goes to group risk (life insurance, disability, funeral) and admin fees. The balance is then invested in the provident/pension funds — but because the risk part is now more expensive, there is less money left to go to retirement savings. Yet Sanlam Corporate still managed "to gain market share" in 2021, says Hanratty.
Liberty Holdings, which was bought out and delisted by Standard Bank, had a similar performance at its group benefits unit. Liberty Corporate’s after-tax loss widened to R737m in 2021 from R123m a year earlier, according to its financial statements.
Excess mortality claims rose to R464m last year from R266m in 2020, its financial statements show. Liberty Life’s newly appointed CEO, Yuresh Maharaj, tells the FM: "We started implementing reviews and risk-pricing adjustments since mid-2021 on a scheme-by-scheme basis in line with the industry. We will see the full effect of this on Liberty’s results within 12 months of implementation."
Still, both Sanlam and Liberty reported stronger results for the 2021 book year.
Sanlam’s headline earnings rose to R9.04bn from R7.1bn a year earlier.
Though 2021’s profit was higher than that of 2019, before the pandemic struck, it lags 2018’s headline earnings of R9.16bn.
This happened on the back of a 14% rise in new business volumes to R355.8bn and a 44% jump in new covered business to R2.76bn.
Liberty, though not out of the red yet, cut its headline loss to R56m last year from a whopping R1.5bn a year earlier.
In the meantime, Momentum Metropolitan released its half-year financials showing a higher than 62% jump in headline earnings as the insurer wrote back previous impairments. The company fared better in its group benefits division, having taken the hit a year earlier.
For the six months ended December 31, Momentum Corporate posted headline earnings of R370m against a R212m loss for the comparable period a year earlier. What proved to be a drag on the company’s results was its Africa division.
Whereas Momentum Metropolitan Africa contributed R340m to headline earnings in the six months to end-December 2020, this time it eked out a profit of only R7m. This was mainly due to higher mortality and morbidity claims in Namibia and Botswana.
Unlike Sanlam and Liberty, which are large players in the rest-of-Africa insurance landscape, Momentum only has operations in Ghana, Kenya, Mozambique, Namibia, Lesotho and Botswana.
And it’s unlikely the company will expand further on the continent due to an oversaturated market. In Ghana, says Momentum Metropolitan CEO Hillie Meyer, "there are about 30 life insurers in a market that is smaller than Namibia. If you’re not in first, second or third spot for market share, it will be tough."
Despite their Covid wobbles, both Sanlam and Momentum Metropolitan are regarded as "buys" by the market, along with Old Mutual, where price targets are considerably ahead of where the stocks trade now.
Momentum and Old Mutual have had a rocky start to the year, however, with their shares down 9.5% and 1% respectively. Sanlam has gained more than 11% since January, outpacing both the financial 15 index and the wider all share index.
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