Insurer Outsurance, which saw a flat bottom line for the six months to December partly due to higher retained natural perils in its Australia business, said weather patterns have tended back towards the norm but warned that climate change will remain a feature.
The group posted normalised earnings of R1.4bn for the period, up only 0.5% from one year earlier.
Gross written premiums for its short-term or property and casualty operations amounted to R16.1bn, up 22.5%, while its Australia business, Youi, saw a more than R10bn jump in its gross written premiums — the total amount of money collected from clients in return for policies — up 31.5%.
The lower increase in normalised earnings relative to premium growth is partly the result of retained natural perils, CEO Marthinus Visser said during the group’s media briefing for its half-year results to December 31.
“The Youi Group delivered impressive operational growth for the period under review. Profitability was, however, lower on account of higher natural perils claims following multiple large storm events during December 2023,” the company said.
The six months to December 2022 saw more benign weather conditions in the Australia business, but with the resumption of more normalised weather patterns, Youi racked up R678m more in net retained natural perils losses in the period under review.
The R678m increase in net retained natural perils losses was a significant driver in bottom line growth not performing as strongly as top line growth, Visser said.
Retained natural perils claims for the reported period represented just more than 15% of net earned premium, while natural perils losses only represented 8.5% of net earned premiums for the same period one year earlier for the Youi business.
In Australia, where many people live in proximity to water, urbanisation and climate change have resulted in a change in weather events, such as storms and flooding.
“With urbanisation and climate change a lot of the time you see what used to be the 100-year flood line now becomes the 20-year or the 10-year flood line, and really if you have to rebuild the same property once every 10 years it’s simply not economical,” Visser said.
The Youi Group delivered impressive operational growth for the period under review. Profitability was, however, lower on account of higher natural perils claims following multiple large storm events during December 2023.
— Outsurance
The Youi operations saw five natural perils events from November to December 2023, only one of which went into the reinsurance programme. The majority of natural perils claims were retained by the company.
Important in the evaluation of the natural perils are the changes in reinsurance structures that have taken place over the past few years, with retention levels increasing significantly.
“Over a short period our results can be more volatile because of this, but in the long run we see it as a positive as it is driving real growth in the short-term insurance industry,” Visser said, after elaborating on climate change trends, the Australia business and changes in reinsurance structures.
Historically, claims inflation was closely linked to consumer inflation, but over the past few years the company has seen a sort of “dislocation”, Visser said.
One of the factors driving this was a notable trend in claims frequency, where there was an increase in natural perils claims as a result of climate change and more urbanisation. This has caused real growth, with claims inflation above CPI inflation.
High premium inflation, linked to increased claims inflation, has been a driver of higher premium income, the company said.
In the long-run, insurance claims are likely to grow faster than CPI, feeding into premiums; but in the short-term, there can be periods where premiums have not fully caught up, suppressing margins, Visser said.
We are guiding investors that the results of a business like ours will be more volatile into the future as we’re retaining more risk linked to climate change.
— CFO Jan Hofmeyr
Once premiums have fully caught up, margins should normalise and be on a bigger base as a result of the real growth.
“The reinsurance part of that real growth, I think, that is in the base now ... [but] the climate change, it’s a slow trend, but it’s one that’s expected to continue. That’s why we think insurance’s share of GDP is likely to continue to grow, our challenge is just to get to pricing adequacy,” Visser told TimesLIVE Premium.
The company warned that the risks associated with climate change may pose volatility to its results.
“We are guiding investors that the results of a business like ours will be more volatile into the future as we’re retaining more risk linked to climate change. Volatility is one of just the key features that investors need to have appreciation for as they look at our results,” CFO Jan Hofmeyr said.
But the company, which has operations in South Africa (38% of premiums) and Australia (62% of premiums), is expecting more earnings diversification with its venture into the Irish market.
The Irish venture is capitalised at €100m and the company plans its official launch before the end of its 2024 financial year in June.
Though the Irish venture was chosen due to its potential for profitable growth, it is a bonus that natural perils tend to be lower in Ireland, Visser told TimesLIVE Premium.
“I think adding Ireland in over time and as that business becomes more scalable also gives us more earnings diversification given that you have a northern hemisphere climate exposure versus having two southern hemisphere climate exposures which I think will help the volatility story of the group,” Hofmeyr said.
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