OREANDA-NEWS. Fitch Ratings says in a new report that it expects the weak economic growth in South Africa to put pressure on life insurers' financial performance.

The persistently weak growth trajectory is reflected in the Negative Outlook on the South African sovereign. However, the Outlooks on most life insurers' national scale ratings are Stable. This reflects the resilience of the industry to the difficult operating environment, and the stability of individual insurers' relative creditworthiness, driven by strong solvency positions, profitability and the maintenance of market share.

Life insurers saw a decline in recurring premium growth in 2013 and 1H14, weighed down by the weak economic growth, a factor likely to continue in 2015. Slowing premium growth affects the ability of insurers to meet fixed expenses, which typically escalate in line with inflation. Single premium sales have been more robust, due to, among other factors, the "wealth effect" from strong equity market performance.

The South African equity market posted strong positive returns in 2013 and 2014, continuing its recovery since the global financial crisis, with a compound total return of 127% for 2010-2014. This boosted insurers' earnings, but a potential downturn in equity markets represents a significant risk to earnings in 2015 and beyond.

Large insurers' growth strategies outside South Africa are gaining momentum. Fitch believes that the diversification benefit from expansion into different markets is ratings positive for insurers in the long term, provided the expansion is successful and profitable. However, the benefits are partly offset by risks associated with operating in sub-investment grade countries.

In the near term, Fitch considers the various proposed regulatory developments to be neutral from a credit perspective, as positive and negative factors are likely to broadly offset one another. However, over the medium to long term, the relative ability of individual insurers to differentiate themselves in adapting to regulatory change may become a significant credit consideration.

The special report "South African Life Insurance" is available at www.fitchratings.com or by clicking on the link above.