(Bloomberg) -- South Africa’s property and casualtyinsurers face an even tougher year than expected after Cape Townexperienced its worst storm in 30 years and dozens of fires engulfed the region around thetown of Knysna this week.

Profits under pressure

The insurers, including Santam Ltd., OldMutual Plc’s Mutual & Federal and Rand Merchant InvestmentHoldings Ltd.’s OUTsuranceunit, are already being battered by an economy that slipped into arecession in the first quarter, the country’s credit ratingdowngrade to junk status, continued political turmoil andunemployment at a 14-year high.

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“Profit will be under pressure,” said Richard Hasson, an analystat Electus Fund Managers in Cape Town. “In a weak economicenvironment, such as low gross domestic product growth andincreasing unemployment, claims typically pick up, which will notbe good for them. The recent fires and storms will affect thecompanies.”

'Severe devastation'

The storm in Cape Town claimed at least nine lives, blew roofs offhouses, flooded buildings, downed power lines and forced schools toclose on Wednesday. About a five-hour drive to the east, around thewealthy towns of Knysna and Plettenberg Bay, more than 26 firesbroke out late Wednesday, with “severe devastation” in at least 12suburbs, according to local government officials.

The expected influx of claims may not push the bigger propertyand casualty insurers into losses for the year, but companieslike Bryte Insurance Co. Ltd., which was formerly ZurichInsurance Co. South Africa Ltd., and Auto & GeneralInsurance Ltd. may struggle, Adrian Cloete, analyst at PSGWealth, said by phone from Cape Town. The reinsurance programs willhelp to absorb the impact, although underwriting margins are likelyto contract, he said.

Santam, which on May 31 said underwriting results are underpressure, dropped as much as 4% to its lowest level on a closingbasis in almost four months. Old Mutual declined as much as 1.2%and RMI fell more than 2%.

Struggle to make underwriting profit in 2017

“Due to Santam’s size and diversification from a line of businessand geographic perspective it is best positioned to contain thelosses, but theoretically it is the most exposed and the impact onearnings will still be material,” said Warwick Bam, analyst atAvior Capital Markets. “Mutual & Federal’s underwriting marginhas been under significant pressure in recent years. I expect itwill struggle to make an underwriting profit in 2017 given theseevents.”

That said, there are some events that may help the insurers thisyear. The rand has strengthened almost 7 percent against thedollar, meaning that any imported goods for repairs will be cheaperthan they were last year. While the equity market has been subdued,bonds have gained and insurers’ investment returns may be athistoric levels, according to Bam. The likes of Santam andOUTsurance have also expanded outside of South Africa in theirsearch for growth.

“I expect 2017 to be a tough but not catastrophic year,” Hassonsaid. “Generally they have reinsurance structures in place thatlimit their losses normally to around 50 million rand to 100million rand ($7.8 million) per event. And in aggregate the outlookfor farming in 2017 for South Africa is better than 2016, whichshould also provide some relief.”

Hailstorm risk

Still, with only half the year gone the risk of hail stones asbig as golf balls damaging cars and property later in the yearremains, PSG’s Cloete said. While the claims environment has beenrelatively benign in the past few years, a repeat of the summer storms in and aroundJohannesburg in 2012 and 2013 would significantly impactunderwriting margins, he said.

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