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<p><strong>By: S&P Global Ratings</strong></p>

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<ul><li>South African insurers have been operating in a weakening economy. Further deterioration could place additional pressure on the sector's asset quality.</li><li>Life insurers' profitability is being eroded by low real investment returns, increasing competition, and rising lapse rates, while the country's property/casualty (P/C) sector depends on resilient underwriting results as prospects for growth are muted.</li><li>Larger players have retained their robust capital levels, and extended their lead over smaller, less-diversified competitors.</li></ul>

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<p>Over the past few years, macroeconomic risks have chipped away at South African insurers' creditworthiness. In a report published today, S&P Global Ratings said that insurers' operating environment could suffer if the South African economy deteriorated further (see "South Africa's Insurers Rely On Capital Strength In A Sagging Economy"). This could occur because of the sustained soft economic conditions, low disposable incomes, risk of rising lapse rates and high unemployment rates (29%).</p>

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<p>We expect South African insurers' growth prospects to remain muted. Large players, which benefit from economies of scale and business portfolios diversified by product and geography, are better positioned to navigate the weak economic conditions. Overall, we forecast that the P/C and life sectors will both grow broadly in line with nominal GDP of 6.5% in 2020 and 6.6% in 2021.</p>

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<p>Real investment yields remain low, with the risk of volatility increasing pressure on earnings. We therefore forecast that the life sector's return on equity (ROE) will be 13%-15% in 2020 and 2021. For the P/C sector, we forecast combined ratios of about 93%. (Lower combined ratios indicate better profitability. A combined ratio of greater than 100% signifies an underwriting loss.)</p>

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<p>Our rating actions over the past three years have aligned our views on the sector so that they broadly reflect the difficult operating environment, bearing in mind that South African insurers write a significant proportion of their business domestically, and hold most of their assets locally. Further deterioration in macroeconomic conditions could trigger negative rating actions.</p>

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<p>This report does not constitute a rating action.</p>

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