Income strain weighs on financial sector
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Downward trajectory: As consumers and businesses reel from tough conditions, insurers have expressed uncertainty over whether there is room for growth
GDP data released by Statistics South Africa last week signalled the potential depth of the economic crunch that lies ahead this year, a year that is expected to endure the lowest growth since 2020’s pandemic-induced downturn.
Like the fourth quarter of last year, which saw the economy shrink by 1.3%, load-shedding will continue to weigh down growth, hampering any prospect of bringing down the country’s ultra-high unemployment rate.
Meanwhile, consumers have been left reeling from elevated inflation and higher interest rates.
One interesting characteristic of the GDP data was the revelation that financial services — the country’s largest economic sector — endured its deepest contraction since the second quarter of 2020. The sector, which shrunk 2.3%, was also the biggest drag on growth in the fourth quarter of last year, mainly on the back of lower economic activity in financial intermediation, pension funding and insurance.
Points of weakness in the sector expose the extent of the strain on businesses and consumers amid recent recessionary headwinds, which threaten to claw at the incomes of its strained clientele.
This week, Old Mutual became the latest insurer to flag the effects of a prolonged period of meagre growth and elevated inflation on its business.
Old Mutual’s headline earnings rose 10% to R7.9 billion for the year ended December 2022, according to the group’s financial results, released on Tuesday. But chief executive Iain Williamson pointed to tough economic conditions bearing down on its customers and the industry’s potential to grow.
He outlined the many knocks the economy has endured since the Covid-19 pandemic hit, including the 2021 civil unrest, last year’s devastating floods in KwaZulu-Natal, elevated inflation, higher interest rates and severe load-shedding. These factors, including slow job recovery, have negatively affected real income growth, he noted.
“This downward pressure on disposable income growth, combined with depressed confidence, made it difficult for customers to maintain or increase their contributions to protection, savings and investment products.
“Our corporate customers’ growth and liquidity levels were also negatively impacted,” Williamson said.
Old Mutual’s personal finance and wealth management segment was seemingly worst affected, seeing the value of its new business plummet 47% last year compared to 2021.
“The continued effect of the macro-economic environment on our customers’ ability to maintain or increase protection, savings and investment products will remain a challenge in 2023,” Old Mutual’s results note. “We will continue to drive sales activity and the right mix in personal finance to accelerate market share growth.
“However, there is considerable uncertainty over whether the overall industry market will grow in the current economic environment.”
This statement by Old Mutual comes a week after Momentum Metropolitan’s interim results, which contained similar concerns about its ability to expand amid heavy economic headwinds.
The insurer reported a 46% jump in normalised headline earnings to R2.2 billion for the six months ended 31 December 2022 and its profit doubled to R1.9 billion during the period.
But the group’s growth was impaired by weakness in its investments and non-life-insurance businesses. Momentum Investments, according to the results, reported lower operating earnings, mainly because of reduced revenue on its Momentum Wealth platform, driven by lower new business volumes and weak market performance.
The group further reported the present value of new business premiums decreased to R33.3 billion, 10% lower than the prior period. Momentum Investments saw a 17% decline in its present value of new business premiums amid lower new business volumes on both its local and international wealth platforms.
“As a general trend, tough economic conditions seem to be impacting sales volumes negatively,” the results noted.
Recent pressure on sales volumes is a concern, the company added.
“Disposable income remains under pressure due to rising interest rates and high inflation, as well as the lack of economic growth in South Africa. This is likely to put ongoing affordability pressure on new business volumes, particularly on long-term savings and on protection business.”
Momentum Metropolitan chief executive Hillie Meyer signalled this crunch in the group’s integrated results last year, saying: “I am concerned about the socio-political situation facing the country and it will become increasingly difficult to further grow revenue in the absence of meaningful economic growth.”
It is difficult to reconcile the fourth quarter GDP numbers with the generally strong financial results reported by companies in the financial services sector, noted Patrice Rassou, chief investment officer at Ashburton Investments.
“So they are still growing … But where we see some strain is in the lower end of the market, the mass market. There are some signs of strain emerging, that’s quite clear. If you look at the insurers, the corporate sector has recovered and the upper end has recovered, which you can see in Discovery’s numbers,” Rassou said.
Discovery, which caters to the upper end of the market, reported a 15% jump in new business in the six months to 31 December.
“So, it is not uniform. You have to look at the segments to see what is really going on.”
The headwinds in the insurance industry are complex and include ongoing volatility in the investment market on the back of Russia’s war in Ukraine, said Nishen Bikhani, a partner at KPMG South Africa. Moreover, surging inflation and high energy prices have had a negative effect on already strained consumers.
Bikhani said there is a huge gap in South Africa between those who can afford protection insurance and those who cannot.
Recent data has shown the extent of the pressure on consumers amid tighter financial conditions. The so-called mass segment, according to Eighty20’s credit stress report for the fourth quarter of last year, saw their credit card balance balloon by R2.5 billion last year — indicating increasing reliance on credit for everyday purchases.
This segment’s average loan instalments took up more than a third of monthly incomes.
The middle class also faces increased pressure. The segment’s total average loan instalment-to-income ratio has increased by 7.4% over the last year and is now at 69.4%. This means more than two-thirds of the average middle-class salary goes to servicing debt, the data analytics firm noted.
KPMG’s Insurance CEO Outlook highlighted that insurers are actively strategising to respond to the pressures faced by consumers, according to Bikhani.
“Insurance CEOs are readying themselves and their organisations to weather the current economic and geopolitical challenges while exploring how they can mitigate recessionary impacts,” he said. For this reason, Bikhani believes that insurer performance will rally, although it could continue to see a hit in the short to medium term.
In November, the South African Reserve Bank flagged slow and inequitable economic growth as a risk to financial stability, noting that unemployment and low income dampen the demand for financial services, credit and access to finance.
Limited progress on implementing structural reforms leaves the economy vulnerable to an extended period of weak, inequitable growth, the Reserve Bank’s financial stability review noted.
In January, the Reserve Bank delivered a grim view of the country’s growth trajectory, forecasting growth of just 0.3% this year. Though the treasury’s forecast was slightly better, it still only forecasts 0.9% growth this year.
Inequitable growth also raises “the risk of populist policies and social instability, which in turn may have a negative impact on investor confidence, funding costs, insurance claims and operational costs”, the Reserve Bank said.