Although Botswana Insurance Holdings Limited was profitable in the past year, contraction of Botswana’s economy in 2020 is evident in its numbers. Profit after tax of P538 million grew by 19 percent over the prior year, showing resilience of core operating business and much-improved performance from associate businesses.
BIHL’s core business encompasses underwriting all classes of long-term insurance, administering deposit administration schemes, managing investments and administering life and pension funds. Under its associated entities, the company stretches its operations to funeral services, legal insurance, short-term insurance and micro-lending.
During 2020, the company’s new business written declined by 18.32 percent to P128.8 million (Full Year 2019: P157.7 million), under pressure due to low new business volumes. New business represents future income for the business.
Moving into 2021, playing at the back of the minds of the company’s executives will be the pronouncements of the Minister of Finance and Economic Development that the government is to abolish 50 percent of vacant positions in an attempt to downsize the wage bill of the public service. In addition, a Statistics Botswana survey that seeks to capture the impact of COVID-19 on jobs and businesses in Botswana has shown that the total number of persons who lost jobs or businesses due to COVID-19 in 2020 reached an estimated 67,132 while only 19, 112 who gained employment because of COVID-19.
Considering that the unemployment rate is already on the rise (it rose to 24.5 percent in Q4 20 from 23.2 percent in Q1 20), an analyst at Imara Capital has warned that the company may be set for a year similar to 2020 in terms of new business written. “We therefore anticipate an increase in the occurrence of surrender events on the company’s insurance policies and premium collection is also expected to become more challenging as consumers’ income is more constrained with the increase in taxes and levies,” says Kaone Kebonang.
The scenario painted by Kebonang is not new to the group. A few years ago, BIHL had to experience cancellations of policies as household disposable incomes shrank. As a result, the company says a large education drive to help people understand that insurance is not a luxury but a necessity, particularly during periods of crisis, will become an integral part of its business strategy.
Despite this concern, the CEO of BIHL Catherine Lesetedi has warned that claims may increase going forward, given the challenges associated with pandemic. In the past year, BIHL paid out P1.6 billion in benefits and claims despite tough economic conditions.
COVID-19 has proved to be the catalyst for many businesses to accelerate their digital innovation and transformation agendas. While BIHL had already started its digital and innovation journey, they were not fully ready to implement digital selling, especially as its sales platform was still in progress at the time the virus hit Botswana. The lockdown severely impacted the ability to sell on the retail side, which relies on face-to-face engagement. As a result, this stream of revenue completely ceased for two to three months. BIHL spent significant time and investment on establishing new ways of working. “BIHL’s digital strategy, which has been fast-tracked due to social distancing protocols put in place due to COVID-19 in place of the fractured traditional face-to-face business model, may augment business reach and growth when considering the fact that Botswana’s digitisation is improving,” Kebonang opines.
According to BOCRA, mobile broadband subscriptions reached 101 subscriptions per 100 head and household access to broadband was 63 percent with mobile broadband access the most prevalent. Given this scenario, Kebonang argues that there is a readily available market for digital adoption led by mobile access. “Although the insurance market in Botswana seems vastly untapped with a penetration ratio of 2.87 percent (Life Insurance 2.15 percent, General Insurance 0.72 percent) as at 2018, according to statistics from the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), it is one of the more developed insurance markets in Africa,” she says.
The average insurance penetration ratio in Africa was 2.77 percent as at 2016, and about 2.2 percent in the Emerging Middle East and Africa region in 2020 according to Swiss Re Institute, according to PwC. Against the backdrop of the current economic landscape, Kebonang says the assumption that there is a considerably large market to facilitate future growth for the company’s core business is arguable. Moreover, given that income inequality remains a concern in Botswana, she says the scope for growth in the insurance industry is, to a certain extent, limited. The last known metric of Botswana’s wealth distribution was a GINI coefficient of 0.65 in 2017, which worsened from the 0.53 reported in 2015. The World Inequality Database gave Botswana a score of 0.8 out of 20 on the 2020 Inequality Transparency Index, suggesting that information on distribution of wealth in the country still remains relatively unknown, given that the last known metric was issued in 2017, says Kebonang.
Speaking to the company’s financial assets, downward pressure continues to weigh down capital gains of domestic equities. Volatility in the international markets is gradually tapering off from the extreme highs of March 2020 due to the COVID-19 induced sell-offs with volatility indicators returning to normal levels. Kebonang says this could indicate an improvement in Return on Investment (ROI), particularly for the company’s offshore equity portfolio. “The restoration towards stability coincided with vaccine developments, significant financial stimulus programmes launched worldwide and favourable political events such as the US presidential election results and the completion of the Brexit deal,” she says.
Moving into 2021, the pace and efficiency of the vaccine rollout will heavily influence global stock market returns. According to the IMF April 2021 World Economic Outlook, the global economy is projected to grow by 6.0 percent in 2021 and 4.4 percent in 2022. The 2021 forecast shows a 0.5 percentage point improvement relative to the January 2021 forecast, which Kebonang argues reflects expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies. Sub-Saharan Africa is expected to grow by 3.4 percent and 4.0 percent in 2021 and 2022, respectively, showing an upwards revision from the respective 3.2 percent and 3.9 percent forecasts from the January 2021 World Economic Outlook.
Kebonang says low interest rates in Botswana will, however, present a challenge to the insurance industry as increasing pressure will begin to appear on bond yields. Given the low interest rate environment, muted investment yields and limited top-line growth, she says insurers must continue to focus on cost efficiency – BIHL’s digitisation journey is likely to result in greater long-term efficiency, innovation and cost control. The impact of the performance of BIHL’s associate and joint ventures on the company’s bottom line cannot be ignored. The counter’s share of profits in its associates and joint ventures increased by 80.88 percent to P 257.3m (FY 19: P 142.2m) and anchored its pre-tax bottom line, accounting for 38.62 percent of PBT. “With a generally positive outlook on the counter’s associates, we expect their contribution to continue to support BIHL’s bottom line moving forward,” Kebonang says.