Old Mutual, SA’s second-largest insurer, is bracing for a surge in claims related to the new coronavirus as it forecast a double-digit hit in the six months to end June.  

Old Mutual, which flagged a 20% decline in half-year profit on Thursday, is among a host of companies with downbeat profit guidance in an economy facing one of its steepest downturns and with an unemployment rate forecast by some to reach 50%.

“The risk of rising infection rates may adversely impact mortality experience,” the company said, referring to an expected increase in claims related to Covid-19, a respiratory disease that has infected more than 20,000 South Africans.

“Other Covid-19 related claims such as business interruption claims could also negatively impact underwriting experience. We have seen an increase in business interruption incidents in April and May. However, we expect to be able to rely on our existing reinsurance programme.”

The lockdowns imposed by governments to curb the spread in regions in which it operates have prevented some of its staff from selling products, resulting in slower disbursements of loans and lower volumes in new business. Funeral savings and credit life sales were also negatively impacted, it said.

Market turmoil in March, which sent equities to historic lows on worries about a prolonged global economic downturn, resulted in the erosion of investment returns from its portfolios, including one for staff.

Speaking of the insurer’s profit decline, Warwick Bam, head of equity research at Avior Capital Markets, said the company was affected because its distribution model included more salary-based agents and branches compared with its peers.

“The inability to use tied agents in a face-to-face sales model or to fully staff branches means that Old Mutual is potentially more impacted by the lockdown. Old Mutual’s higher fixed costs may reduce earnings more than peers with commission-based agents” he said.

An advantage for Old Mutual was its strong balance sheet, despite the coronavirus challenges it is faced with. “The balance sheet is strong and the earnings are diversified, so it’s the bellwether of the SA economy,” Bam said.

Current performance is “an indication of the weakness in the consumers and the potential deterioration that we might be heading into for the rest of the year”, he said.

Old Mutual’s share price closed trade on Thursday 5.15% weaker at R12.33. Its biggest rival, Sanlam, closed 1.44% higher.


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