Operations
Renasa Insurance Company Limited (“Renasa”) was
incorporated and granted an unrestricted short term
insurance license in 1998, as a wholly owned subsidiary
of European based Reliance National Insurance
Company (Europe) Limited (“Reliance Europe”). In
2001 Renasa Europe went into run-off, forcing Renasa
to run-off its book in South Africa. Thereafter, in
January 2002, the insurer was sold to a consortium of
shareholders and underwriting activity resumed in
September 2002.
From mid 2003, Renasa’s business consisted largely of
premiums garnered and serviced through Underwriting
Managers & Administrators (“UMAs”), as well as
delegated administrators and brokers. However, with
historically entrenched poor underwriting and
management controls, the insurer began to record
underwriting losses. Within 6 months it became
apparent that severe corrective action was necessary,
which was implemented extensively throughout
Renasa’s reconstruction process. Although losses have
persisted to date, they have declined significantly in
F06, with markedly improved prospects going forward.
It is noted that the current underwriting losses are a
function of the high management costs relative to
earned premium (with the operating infrastructure
having been maintained despite the cancellation of
much of the book), which should be alleviated as the
insurer gains scale.
Following the resumption of underwriting activity in
September 2002, a conflict regarding ownership
emerged amongst the shareholders, which was resolved
through the eventual consolidation of Renasa’s
shareholding into a holding company. The holding
company is ultimately backed by an individual
shareholder of significant financial strength. In this
regard, since gaining full control of the business, the
controlling shareholder has displayed a readiness and
ability to provide additional capital – injecting almost
R14m over the past two years. Moreover, the
shareholder has provided a letter committing to provide
further capital as and when Renasa requires it. The
resolution of the shareholding issues has been
accompanied by significant developments such as:
• The restructuring of the insurer’s Board and
Executive. New management and key personnel,
with experience and knowledge of the domestic
industry, have been acquired.
• The development of its infrastructure. The focus has
been on the consolidation and “clean out” of the
book, the development of systems and the
implementation of a new business model.
Management
Renasa’a staff complement consists of mostly qualified
professionals with a variety of financial and commercial
experience. This includes more that 70 years of short
term insurance experience amongst the directors, which
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Competitive Positioning
The South African short term insurance industry
experienced a fifth consecutive improvement in its
underwriting performance in 2004, to its highest level
in more than a decade. As such, the industry reported an
overall underwriting surplus of around 12% of earned
premiums. However, a normalisation of claims trends
(associated with higher weather related and fire claims)
and an increase in competitive pressures manifested in
2005, and the industry’s underwriting ratio declined to
8.6%.
The preceding table compares key financial indicators
to other insurers of comparable size and business mix.
As reflected, Renasa’s underwriting performance
compares unfavourably relative to all of its peers, albeit
a function of its high management cost structure relative
to its premium base. In addition, it is of relevance to
note that the insurer’s earned loss ratio is in line with
that of its peers (which are all profitable). Although it
remains the best capitalised in terms of international
solvency, this is expected to decline going forward,
given robust growth expectations.
Risk diversification
Renasa garners its premiums through a mix of direct
brokers (24%), administrators (69%) and UMAs (7%),
with gross premiums largely derived from the central
region (50%) and Kwazulu-Natal (27%). In F06, 56%
of GPI was garnered from personal lines.
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Reinsurance
A core aspect of the re-engineering of Renasa has been
the conservative use of reinsurance, with a high
proportion of GPI ceded via quota share arrangements.
Accordingly, Renasa has ceded net underwriting profits
exceeding R11m to reinsurers over the past 2 reporting
periods. Moreover the insurer has additionally paid
almost R8m over the same period under profit share
agreements with reinsurance counterparties.
Renasa remains conservative in its underwriting
activities, with a high 66% of premiums ceded to
reinsurers. To this end, Renasa has established a
technical partnership with Aon Re South Africa (“Aon
Re”), under which Aon Re provides broad support to
Renasa’s processes, including the development of
Renasa’s risk-based solvency model. Consistent with its
business model, the insurer has been able to secure
lower commission rates from Aon Re, in exchange for
profit share on these activities.
The insurer’s reinsurance programme is placed solely
with investment grade counterparties. Munich Re is the
lead on all quota share and surplus treaties, whilst other
reinsurers utilised are Africa Re, Labuan Re, Swiss Re
and Arig Re. The excess of loss programme (“XOL”) is
also led by Munich Re and includes the above
reinsurers, as well as Best Re, Malaysia Re and Kuwait
Re. The reinsurance programme, post the 2006
renewals, is reflected above. A key feature of the
programme is the extensive usage of quota share
treaties, whilst under the XOL programme maximum
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Renasa reported 27% lower GPI of R102m in F06, with
a sizeable chunk of unprofitable business having been
cancelled. However, following higher retention of 34%
(F05: 26%), NPI was reported 5% lower at R35m,
whilst similarly earned premiums declined by 6% to
R34m.
Net claims paid declined markedly in F06, falling by
19% to R22m. Accordingly, the insurer reported a
much improved earned loss ratio of 65% in F06 (F05:
76%), which is indicative of the improvements
achieved under restructuring. Furthermore, net
commission costs remained very low at R2m in F06,
equating to a low 5.3% of earned premium (F05: 4.6%).
In contrast to claims and commissions, management
expenses have risen considerably over the past two
periods, with significant costs pertaining to the business
re-engineering incurred. In this regard, actual
management expenses rose to R25m in F05, from just
R5m in F03, amounting to a much higher 46% of
earned premiums (F03: 21%). In F06, management
expenses declined by an annualised 26% to R12m,
translating to an improved, albeit relatively high, 36%
of earned premium. It is noted that in F05 and F06
management expenses contain both administration
income and Renasa’s share of reinsurers’ losses, which
on a net basis have negatively affected management
costs.
Overall, the underwriting loss contracted to R2.3m, as
efforts to control the loss and management cost ratios
started to take effect. As such, the underwriting loss has
improved to 6.8% of earned premiums in F06, from
27% previously. Following lower interest income of
R0.9m (F05: R2.2m), the insurer reported a
significantly reduced net loss of R1.5m in F06 (F05:
R12.5m).
Future prospects
Renasa is budgeting for a significantly improved
underwriting performance in F07. This would follow
113% higher GPI of R217m, although significantly
lower retention of 19% (F06: 34%) would result in NPI
increasing by a lesser 17% to R41m. Although
aggressive, management believe the GPI target to be
achievable, given current growth trends. Assuming that
the insurer meets the budgeted loss ratio and
commission and reinsurance is the same proportion of
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is complemented by a further 120 years amongst
executives. In this regard, Renasa has actively pursued
experienced individuals, who have brought seasoned
knowledge to the business, as well as industry
relationships. A key focus of the re-engineering of the
business has been the implementation of transparency,
corporate governance and systems of accountability.
Systems and infrastructure
The current management essentially inherited a book
with a legacy of poor management and systems. It has
been management’s imperative to reduce the earned
loss ratio and improve underwriting profitability. The
core success factor of the business model is the ability
to attract and retain profitable books of business,
underpinned by stringent systems and controls. Brokers
and administrators are monitored closely, with specific
focus placed on underwriting profitability. To this end,
management’s policies are geared towards
(contractually) aligning the interests of all stakeholders,
which is being pursued through a number of strategies.
Renasa’s distribution channels take 3 forms, namely:
• Administrators. Through this channel conventional
domestic and commercial lines are written by
orthodox delegations of authority to direct brokers
and administrators. Some of these administrators are
partially owned by Renasa.
• Portfolio Managers. This channel uses risk and
reward structures to incentivise the positive selection
of business. Under this structure, distributors are
incentivised to handpick “good” risks to pass on to
Renasa and empowerment opportunities are easily
accommodated.
• UMAs. This channel provides specialised products
and policy administration services to short term
insurance brokers and administrators. Each UMA
focuses on specific lines, which allows the UMA to
specialise and gain class-specific expertise. This
channel’s underwritten risks currently consist mainly
of construction performance guarantees; contractors
all-risks business; and marine business.
The insurer has comprehensive systems in place for the
monitoring of administrators, with detailed reports on
the individual performance of administrators and
brokers. Furthermore, management spends a significant
amount of time on one-on-one contact with
intermediaries. Through this process of active
monitoring, poor performing counterparties can quickly
be identified and corrective actions implemented.
Agreements can also be contractually terminated where
necessary. The improved controls have begun to yield
improvements, with significant reductions in loss ratios
recorded over the past two years. Although the legacy
(run-off) of the previous book remains evident in the
results to date, new business is profitable. The
following graph evidences the significant improvement
in the motor quota share loss ratios.
The insurer earned the majority of gross premiums from
the motor class (63%) in F06, with the remainder of
gross premiums derived largely from property and
miscellaneous lines. The insurer retains a low 34% of
gross premiums, with retention fairly evenly spread
amongst the written classes.
Renasa reported overall claims experience in line with
that of its peers in F06, with an earned loss ratio of
65%. Given the insurer’s high exposure to the motor
class, the company’s earned loss ratio is driven by the
performance of this class. The motor book reported
earned loss ratios of 103% and 90% in F05 and F06
respectively, while the remaining classes have
concurrently reported favourable loss ratios relative to
industry norms. In this respect, the overall improvement
in the earned loss ratio in F06 was almost entirely
driven by the improved claims experience in the motor
class. This is expected to continue to drive a decline in
the loss ratio going forward.
Despite the considerable improvements witnessed in the
loss ratio, Renasa continues to report underwriting
losses, which are directly attributable to the insurer’s
high delivery cost structure (following the loss of scale
associated with the cleanup of the book). As such, the
implementation of the new business model has driven
the increased management expense ratio over recent
years, which has been exacerbated by the increased
levels of reinsurance over the same period. Economies
of scale are, however, expected to accompany growth
going forward.
Underwriting result
Renasa has recorded a considerable improvement in its
overall underwriting performance, with the
underwriting loss of R2.3m equating to a much lower
7% of earned premiums in F06. As reflected above, the
primary driver of the deficit is the motor book.
net retention is limited to R0.8m (or a low 0.4% of
shareholders interest).
Solvency
Notwithstanding the erosion of capital by underwriting
deficits, Renasa has remained adequately capitalised.
In this regard, the primary shareholder has provided
considerable support over the past two years, injecting
R5.5m and R8m in F05 and F06 respectively.
Accordingly, international solvency remained
comfortable at 53% in F06 (F05: 32%), whilst statutory
solvency was reported at a sound 44% (F05: 20%).
Asset management
Given the underwriting difficulties and business
restructuring of recent years, management has elected to
maintain investment assets in cash, with the asset base
comprised as follows:
Given the substantial cash holdings, the insurer has
maintained adequate liquidity over the review period.
Having dipped to an annualised 9.8 months in F05,
claims cash coverage rose to a strong 15 months in F06
– buoyed by the fresh capital injection during the year.
In light of the declining interest rate environment of
recent years, and coupled with its fluctuating cash
holdings, the insurer reported a low investment yield of
3.4% in F06 (F05: 4.4%), down from a peak of 15.1%
in F01. In the longer term, as underwriting profitability
is established, it is management’s intention to engage in
more aggressive asset management.
Financial performance
A five-period financial synopsis of the company’s
results is reflected at the end of this report. The
following commentary refers to annualised figures for
the 18-month F05 period, unless stated otherwise.
Back
to top
premiums, the company would need to generate R148m
in GPI to break even on an underwriting level in F07.
Given anticipated GPI of R217m, an underwriting
profit of R5m is expected. Although the loss ratios
appear aggressive in light of the downward turn in the
underwriting cycle, the projections appear plausible,
given the new structures in place.
Given the positive operational changes that have
occurred over the past 3 years, as well as the adoption
of a clear strategy, Renasa appears to be strongly placed
to attract new business. Certain aspects of the business
model remain critical, including:
• The close management of the earned loss ratio. In
this regard, the insurer’s relationships with key
counterparties remain of paramount importance.
• The uptake of risk/profit sharing agreements with
these parties is essential to profitability and to
achieving critical mass.
• Although the business plan calls for an eventual
listing or private equity investment, the continued
support of the insurer’s sole shareholder remains
crucial to the success of the business.
• Appropriate management of the growth of the
business from an operational point of view.
The insurer remains subject to key challenges that are
facing the industry, including:
• The introduction of risk based capital models,
although Renasa is at an advanced stage of its
preparations.
• The intensification of competition and its impact on
rates.
• A likely hardening of reinsurance rates going
forward, with the effect of recent global disasters
filtering through into the South African market. In
this regard, Renasa is seeking to establish long term
business partnerships with its reinsurance
counterparties, in accord with its overall strategy of
aligning interests.
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