Fitch: Rand Weakness Not a Threat to South African Insurers' Ratings

Fitch Ratings says that South African insurers' ratings are not affected by the recent rand weakness. The rand has weakened significantly against major developed market currencies, with year to date losses of around 19% against the US dollar and 17% against sterling.

Insurers' domestic capital positions remain strong and largely immune to short-term currency movements. Their predominantly rand liabilities are typically matched by rand-denominated assets. Moreover, local capital markets continue to provide insurers with ample liquid investments as well as reliable capital supply through well-developed local debt and equity markets.

The domestic stock market's significant offshore exposure provides insurers with a partial rand hedge, supporting equity returns during times when the rand depreciates. Many of the large constituents of the Johannesburg Stock Exchange derive a substantial portion of their profits from outside South Africa. Moreover, many insurers invest a portion of shareholder funds in offshore equities. Equity returns have a significant impact on insurers' return on shareholder assets and life insurers' overall assets under management.

Rand weakness particularly hurts non-life insurers' profitability, because of the increased cost of imported spare parts for motor repairs. However, non-life insurers have managed rand weakness well in recent years, partly through various initiatives, such as greater use of alternative spare parts rather than original manufacturer parts. Fitch therefore believes that the recent rand weakness will not significantly depress non-life insurers' 2015 underwriting margins. However, new vehicle prices may rise as a result of the weak rand. This may have a second order effect on motor insurance sales growth.

The rand has recently strengthened against some emerging market (EM) currencies, including many in sub-Saharan Africa (SSA). Although this move has weakened the rand results that insurers derive from these markets, it supports their expansion plans. All large insurers with strong EM strategies are actively considering further opportunities to deploy capital in SSA, with specific developments in the near term anticipated in Uganda (MMI, National IFS rating of main operating entity 'AA+(zaf)'/Stable), Angola (Sanlam, 'AA+(zaf)'/Stable) and Nigeria (Liberty, 'AA(zaf)'/Stable). Conversely, the ability of South African insurers to expand into developed markets would likely be hurt by a sustained weak rand.

Further geographical diversification could be ratings positive for South African Insurers in the long-term, provided it is executed successfully and profitably.