Actuarial news and views from Cape Town and beyond

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Weak Rand poses a threat to premiums and South African insurance industry

Anees Vazeer, chief financial officer at Lion of Africa Insurance recently published an article on Moneyweb expressing his concern over the weak Rand on the South African insurance industry.

Anees suggests that the sustained deterioration of the Rand could “catapult” our insurance industry into a struggling third-world industry. Foreign dis-investment, low capacity for reinsurance, and increasing premiums are major contributors to the claim.

If South Africa were to see a significant decrease — or worse yet a close — in investments from large international reinsurance players, local insurers could suffer. Reinsurance forms a critical part in allowing South African insurers to reduce capital requirements, diversify risk, and ultimately branch out and accept more business. Anees highlights poor results already announced by foreign owned insurance companies. One can wonder if insurers are already looking towards alternative risk transfer techniques for solutions.

Another threat the weak Rand poses is a forced increase in insurance premiums due to the increased cost of importing replacement assets. (Anees claims between 80% and 90% of all consumer goods, including cars, technological devices, electronics and most household appliances, are imported). SARB just recently revised the 2016 GDP growth down (again) 0.2% to 0.6%, and the 2017 and 2018 GDP growth forecasts down 0.1% each. With the burden of an already contracting economy and increasing inflation (also revised up by SARB from 6.6% to 6.7% in 2016), consumers may be forced to cancel their insurance contracts. This would have a ripple effect on the economy. One can wonder if insurers have already revised their lapse rate and persistency rate assumptions.

Anees also points out that short-term South African insurers, in particular motor insurers, are already under pressure with weakening results and extremely thin profit margins. He goes on to say that insurance plays a critical part in assisting municipalities to maintain infrastructure, and that the huge strain of foreign infrastructure imports could lead to deteriorating infrastructure, lower standards of living, and ultimately a “brain drain” in the long term. The solution? Innovation and diversification, as opposed to relying on a sustained appreciation of the Rand.



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Capital Management can be a trap for boards

This article talks about using buybacks (repurchase of the company’s own shares) in order to boost company returns.  Around February this year, three companies (Qantas, Caltex, Seven Group Holdings) announced buybacks of $500 million, $270 million and $80 million respectively.  The author points out that buybacks are dangerous, since they are often pro-cyclical.  This means companies use cash generated in peaks of the cycle to repurchase shares when they are expensive.  Often, these shares end up being written down at the bottom of the cycle.  Rio Tinto and BHP Billiton are recent examples of companies which encounter problems in such acquisitions.

The author goes on to quote more examples of buybacks he suspects in future.

Clearly, some companies are falling into this trap and buybacks are happening without too much foresight going into it.  Using debt to fund buybacks should be done with extreme caution, as liquidity problems (among others) can easily arise if unfavourable scenarios play out.

The full article can be read here

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One of the world’s largest insurers assists client companies to violate accounting principles

AIG, considered one of the world’s largest insurers, was involved in an accounting scandal that has since been considered as one of the 10 largest accounting scandals across all industries.

AIG facilitated the transfer of $762 million in loans and investments onto its books from PNC (a large financial services company). This was done in an attempt to help PNC record higher profits than what they had actually earned. This is an example of the violation of accounting principles, not simply within a company, but between companies.

AIG was further accused of entering into contracts with companies that could be reported as insurance contracts, but in which no risk transfer took place. This is a further example of violation of accounting standards through agreements between companies.

The article can be found here:





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American Sports company fails to properly disclose perks for Executives

Most countries in the world, including South Africa, are subject to the International Financial Reporting Standards(IFRS); whereas the United States has the U.S. Generally Accepted Accounting Principles(GAAP). There are differences in which these standards require companies to report their financial positions, however the idea behind disclosing significant financial movements is consistent.

MusclePharm Corporation was investigated by the U.S. Securities and Exchange Commission(SEC), and it was discovered that MusclePharm understated nearly $500million rewarded to its executives. Read more about this in the article attached.

The failure to correctly disclose information such as this, as well as the other questionable accounting practices that the company adopted, is not only an financial issue but a Corporate Governance one as well. By understating liabilities, the company is able to boost profit figures and make the company stock seem more attractive.

Moreover, it is generally the case that directors’ remuneration needs to be approved by shareholders — the actions of MusclePharm suggest that shareholders where not consulted regarding the rewards that executives enjoy (which is at the expense of the shareholders considering that they also have a share in the profits). This is unethical and illegal. The board of directors needs to act in the best interests of shareholders, it is a fiduciary duty (acting in good faith).

Furthermore, auditors must be cognisant of fraud if it does exist. Auditors have an obligation to look for fraud.

Side: Relatively, South Africa hardly ever has cases of accounting fraud due to the fact that the application of accounting standards (IFRS) in South Africa is one of the best in the world. 

Click here to read full article