Operating environment
The overall underwriting return of the market indicates
a buoyant trend. This is primarily underpinned by a
record number of new policies issued on the back of
new vehicle sales (and more recently commercial
vehicles) and the continued upward revision of
property values (reflective of current building cost
inflation), albeit the rate of growth has slowed. The
market, however, is in the throws of rate pressure
stemming from the introduction of competition, both
existing and new. However, the overall fall in
underwriting performances are not expected to
significantly unlock market shares for the top tier of
the market, which have secured their distribution
channels. Moreover, consolidation in the broker
market as a consequence of the implementation of
FAIS, will reinforce this trend.
Fundamentals
In 2001, a consortium of investors acquired Renasa (a
subsidiary of Reliance National USA, then in run off)
and from 2002 to 2004 the company faced the
challenges of poor business, brought to book by
uncontrolled growth. By mid 2004, the assumption of
control by the current controlling shareholder was
concluded and the reconstruction of the company
commenced. This entailed the curtailment of business
on the book with annualised premium falling to
R102m in 2006.
The insurer writes a range of business classes and
distributes its products through 3 distinct channels,
namely:
• Brokers – Through this channel, the company has
established relationships with brokers with
regional concentrations.
• Portfolio Managers/administrators – these are
system driven broker portfolio outsourcing
companies. The company has made a commercial
investment in such entities, in order to entice a
larger share of broker participation and release
pricing efficiencies.
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assessing and auditing resource, the renegotiation
of procurement panels and the securing of towing
services, to which end an intensive education
initiative for the insureds to use the service has
been implemented.
Competitive positioning
Primarily driven by the poor performance of the motor
book, Renasa’s earned loss ratio in F07 evidenced a
substantial increase to 83% (F06: 65%), above the
average of approximately 71% at 1H07 reported by
industry leaders. Given that industry loss ratios in the
motor class are not expected to improve materially in
the short to medium term, Renasa has restructured the
business to ensure achieving critical mass, but not at
the expense of profitability. The restructuring should
improve risk selection, enforce correct pricing, and
manage claims costs (supported by a 100% audit of
motor collision claims) going forward.
As indicated in Table 1, based on a comparison of
other insurers of similar business mix, Renasa
compares unfavourably in some respects. This is
primarily a function of the insurer’s elevated expenses
relative to premium earned, together with a
comparatively high loss ratio, resulting in an impaired
underwriting performance in F07. This
notwithstanding, in terms of top line growth, Renasa’s
growth was 4 times that of the peer average.
Considering this, and the corrective steps taken and to
be taken on this book, the R6m cost to capital
evidenced in F07 is deemed more palatable.
Risk diversification
As previously mentioned, Renasa secures business
through 3 distinct channels, namely: brokers (25%),
administrators (68%) and UMAs (7%), with the
majority of premiums written emanating from the
Gauteng region. As reflected below, the majority of
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Solvency
Ascribed to successive underwriting deficits recorded
to date, the company’s capital base has been
significantly eroded. This notwithstanding, the
company’s primary shareholder continued to show its
financial support of the insurer by injecting a further
R7m prior to the insurer’s year end, in addition to the
cumulative R14m provided between F05 and F06.
Accordingly, both the international and statutory
solvency margins remained unchanged at 53% and
43% respectively.
Asset management
As a consequence of the historic poor underwriting
result, together with successive years of
recapitalisation, the necessity to manage a liquid and
conservative investment mix is recognised, and duly
noted. In this regard, liquidity levels have remained
comfortable over the review period. This
notwithstanding, cognisance was taken of the decline
in claims cash coverage from 15 months to 13 months
in F07, which can be attributed to the 31% jump in
claims (itself attributable to book building), which
outpaced the 18% growth evidenced in liquid assets.
Given that the majority of the company’s asset mix
comprises cash and call deposits, investment returns
Page 5
Despite the effects of corrective action taken on the
motor book throughout the year (in addressing average
claims cost), which led to a significant improvement in
the underwriting performance for the months March to
June 2007, the overall underwriting result was
negative. Accordingly, the deficit widened by a further
R5.9m to amount to R8.2m, resulting in the
underwriting loss as a percentage of earned premiums
increasing to 23% from the 7% previously recorded.
Cognisance is taken of the fact that on a gross basis
(before reinsurance), the company reported an
underwriting profit of R1.9m (versus a reinsurance
profit of R10.1m). After accounting for the two fold
increase in interest income to R1.9m, the shortfall
widened by 320% to report a R6.3m loss.
Future prospects
Renasa is anticipating premium growth of 65% (which
includes a risk consistent portfolio-wide increase on 1
November 2007) to R320m. Cession is anticipated to
further increase to 88%, in order to enable Renasa to
cope with the capital requirements associated with the
growth trajectory. On the back of the significant
increase in net commissions received to R17m (partly
reflective of rate uplift); management are forecasting a
significant turn around in underwriting profitability,
reporting a profit margin of 24% (F06: -23%), a first
in the review period.
The company has expanded its organisational
infrastructure (at a measured cost) to meet capacity
demand. To this end the insurer has resourced suitable
candidates and ‘in sourced’ significant external skills
in motor pricing and general data profiling. In view of
winning over broker support, the company continues
to build on its insurance management software tools
and resources allocation advancement in the delivery
channel.
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• UMAs - This channel’s underwritten risks
currently consist mainly of construction
performance guarantees; contractors all-risks
business; and marine business. However, the
company has resourced a division to secure more
UMA mandated and/or equity participation.
Commercial business remains the core focus of
Renasa’s business, and accounted for 42% (F06: 46%)
of gross premiums. However, in order for the
company to achieve critical mass, and thereby reduce
unit costs, growth has been targeted at the personal
lines segment of the market (F07: 58%). Although
sound progress has been made in this regard -
evidenced in gross premium growth of 90% - growth
has come at a cost to the company, given the
uneconomical rates currently being offered in this
segment (principally motor, which comprises 72% of
the personal lines book). In this regard, the
“cleansing” of the new business exerted considerable
pressure on underwriting margins in F07.
Currently, the personal motor class for the industry has
been significantly impacted by soft rates and adverse
claims experience. The overall deterioration in the
claims environment can be ascribed to the increased
congestion on South African roads, as the rise in
vehicle population is not met by a comparable
improvement in road infrastructure. This has been
compounded by an overall deterioration in the
standard of driving, exacerbated by the number of
unlicensed and inexperienced drivers on the road.
Furthermore, the increase in severity can also be
attributed to the technological advancements of
vehicles leading to the repair cost of accidental
damage to more modern vehicles amounting to a
greater proportion of the sum insured than in the case
of older vehicles. In light of the aforementioned, and
in order to compete profitability in this segment of the
market, Renasa have implemented the following
initiatives:
• A business intelligence system has been
established – this system consolidates the output
of disparate lines of business operated by
outsource partners that distribute Renasa products.
The system permits keen analysis of the
consolidated experience on the basis of reliable
data flows and raises efficiency of corrective
strategies. The company is confident that 60% of
its book can be re-priced on a portfolio consistent
basis, with re-pricing having already commenced.
Moreover, implementation, which has been
historically difficult, given the increasing
“distance” between broker and client insured
(through the growing role of the portfolio
administrator), seems less problematic.
• A project has been instituted to achieve reductions
in average claims costs. Incorporating an in-house
net premium written comprises the motor class, with
the balance derived largely from the property and
miscellaneous classes respectively.
The large losses reported in the motor book were
partly offset by the solid profitability evidenced in the
guarantee class.
Reinsurance
During the year under review Renasa ceded 82% (F06:
66%) of gross premium income to reinsurers in terms
of proportional arrangements. The increased cession
assisted the insurer in meeting increased capital
requirements associated with the robust growth
evidenced in F07. With effect from 1 July 2007, the
company secured three-year treaty arrangements with
its lead reinsurers Munich Re, Africa Re and Swiss
Re, thereby securing capacity to grow the book.
Renasa has established a technical partnership with
Aon Re South Africa (“Aon Re”), under which Aon
Re provides broad support to Renasa’s processes.
Consistent with its business model, the insurer has
been able to secure lower commission rates from tiedin
agents, in exchange for profit share on these
activities.
are subject to the fluctuation of interest rates.
Accordingly, in light of the climbing interest rate
environment experienced over the past year, the
insurer reported an increased cash investment yield of
6.2% from the 3.4% previously.
Financial performance
A five-year financial synopsis of the company’s
results is reflected at the end of this report and brief
commentary follows hereafter.
Despite slightly under performing initial premium
projections, Renasa reported robust growth of 90%,
(F06: 27% decrease) amounting to R194m in F07. The
strong growth can primarily be attributed to an
expanded marketing campaign, the use of additional
administrators and brokers, as well as the
establishment of additional UMA lines. However,
following considerably lower retention of 18.5% (F06:
34%), NPI evidenced far less pronounced growth of
3%, to amount to R36m.
Net claims incurred increased in F07, rising by 31%
(F05: 19% decline) to R29m (F06: R22m), which was
chiefly attributed to book building. The
aforementioned was exacerbated by the adverse claims
environment experienced within the motor class,
resulting in the earned loss ratio evidencing a notable
increase from 65% to 83% in F07. Management
expenses rose by R2.7m to R15.1m, which resulted in
the expense ratio increasing to 42% (F06: 36%). This
notwithstanding, when management expenses are
evaluated against total premium written, the ratio
improved to 8% (F06: 12%), which was reflective of
greater economies of scale achieved in F07.
Furthermore, total commissions recorded a net inflow
of R0.7m, which when combined with management
expenses of R15.1m, facilitated in the delivery cost
ratio slightly improving to 40% (F06: 42%).
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Going forward, Renasa will look to derive a large
portion of its premium income from the commercial
and industrial and specialist classes. However, to
achieve economies of scale and increase market
penetration, the company remains committed to
writing business derived from the unprofitable
personal lines. Although this will provide scale, given
the current soft market, the effectiveness of
management’s ability to ‘cleanse’ the book will be
tested. The company has participatory arrangements
with distribution partners and reinsurers alike.
The following risks have been identified:
• To reinforce control over outsource relationships
using participatory arrangements and term deals
with incentive and penalty provisions (and where
appropriate acquiring ownership interests in these
partners). However, the ability of the insurer to
appraise the risk of the book and react accordingly
is significantly impaired by the current soft rate
cycle. Notwithstanding this, the new business
structure should mitigate this.
• The intensification of competition within the short
term market.
• The general deterioration in the performance of
the industry motor book, with no immediate
correction anticipated in the short term.
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