Angola - the future in diversification

Angola has nearly 21 million inhabitants, 55% of whom cluster in and around urban centers. The country navigates turbulent and post-independence waters while seeking recovery from social and economic stresses. The past 10 years have borne witness to rapid growth: On average, GDP increased over 13% per year.

The post-Lehman Brothers financial crisis brought new distresses and caused an income downturn, but the country would soon go back to its initial status - one of the fastest-growing sub-regional powers and a serious contender for economic leadership in the south of Africa.

Led by executives trained in Europe, USA and Russia, Angola has established world-class companies such as Sonangol (oil) and Unitel (telecommunications.)

But the country – still owing half of its economic growth to the oil industry – is more than just a source of "black gold.” It boasts other energy resources, mineral riches, agricultural potential and a blossoming tourism industry. The Angolan government seeks to promote such diversification with a variety of approaches such as developing an inclusive society, prioritizing the launch of new processing industries, opening credit lines such as the funding program Angola Investe, or providing incentives to agricultural and livestock industries.

The government believes these primary-sector industries constitute an essential opportunity to free Angola from its dependency on basic and imported consumer goods. In 2013, the Minister of Economy launched a committee to accelerate the implementation of industrial development hubs. The goal was to bring in renewed work dynamics and prevent zoning conflicts when city building programs overlap industrial construction projects.

The policies in place favor new job-creation initiatives at the local level that can improve the current trend of informal employment in the domestic market. Tourism is booming as new hotels are springing up all over the country, leveraging local flora and fauna as attractions.

Major events, such as the Africa Cup of Nations, or Benedict XVI’s visit in 2009, have shed the spotlight on a country that finds itself on the road to progress but still lacks basic hospitality and transportation infrastructures. As a result, the government focused its eff ort on rebuilding the country’s roadway network within and around the cities along with the central, north-to-south transportation axes. Dozens of hotels have been built and new tourism projects have emerged, such as the future cruise ship landing in Luanda. Angola’s target is to reach a level of 4.6 million visits by 2020. Main tourist destinations include Cape Ledo, in Luanda, Kalandula Falls and the Okavango River.

The inclusion of women is a matter the Angolan government takes very seriously. The crucial role of women in the war for independence has not been forgotten. Organizations such as OMA, Organização da Mulher Angolana (Organization for the Advancement of Angolan Women), play an active role in the country’s economic life.

The national urban development program, Programa Nacional de Urbanismo, with a goal to improve living conditions among those in need, is another noteworthy initiative for the country. The upcoming population census planned for this year will provide a more accurate view of the general needs.

The 2013 economic growth forecast is expected to be around 7%. Few international agencies expect to outperform the government. Inflation should stay below 10%, on a sustained and permanent basis. The Angolan Central Bank (BNA) estimates a value of approximately 9%.

Diversification of economic activities is a guiding light for the President and the government. The oil sector’s contribution was 56% of the economic growth 10 years ago. By 2012, it had dwindled to 38%. The strategy is to sustain growth primarily with industrial, agricultural and transformative activities that bring added value while addressing social concerns.

The national budget is currently over-reliant on oil revenues; the 2013 budget has been structured around oil activities (almost half of the total income), while non-oil activities yield 17% of the income, internal funding 15%, and external funding 11% of the total needs at the level of public revenues.

Angola Investe is creating opportunities for micro-and SMEs attempting to establish themselves in the primary sector (agriculture, livestock, and fisheries) and the secondary sector (small transformative/processing industries). There will be added strain to subsidized credit lines, public guarantee funds and risk capital in 2013.

There are major investments in Health and Housing; new policies for social inclusion and gender protection, including protection for women, have also been implemented. Tourism, which will generate long-term employment, is the focus of new incentives. The government supports the development of the tourism hub at Futungo de Belas (Polo de Desenvolvimento Turístico do Futungo de Belas) along with the Kalandula tourist development hub, the Cape Ledo and the Okavango Basin hubs. Beyond these initiatives, Angola has bigger ambitions: The creation of a transnational ecological preserve and eco-tourism site involving Zambia, Zimbabwe and Namíbia along with the Okavango-Zambeze project.

The PIP, Angola’s public investment program, will support the growth of public-funded infrastructure, which will absorb 24% of public revenue. Spending on the civil service will represent 19.4% of Angolan public spending in 2013. In 2012, the country established a sovereign $5M USD fund to invest on power, water, rail and road, seaports, airports and telecommunication. This infrastructure development program relies on the construction of three connecting lanes between the Luanda, Lobito and Namibe seaports and the railways in Malange, Benguela and Namibe, as well as the refurbishment of these seaports.

On average, Angola has grown faster than any country in Sub- Saharan Africa over the past six years, although it grew in fits and starts. Growth levels cling to the international crude oil price swings, due to the country’s significant exposure to price fluctuations for this commodity. This correlation between GDP evolution and crude oil prices echoes throughout the country’s performance over the past four years (post-Lehman Brothers.) This correlation is not so readily apparent in countries that compete with Angola in this sub-region, such as Nigeria.

The country’s economic and financial stability has created the conditions necessary to make the kwanza (AOA) a strong currency, valued at 80 to 90 AOA to the US dollar. The government, per national central bank dispositions, has provided major oil companies with precise guidelines requiring transactions that were previously carried out in USD to be carried out in AOA.

The import/export balance accounts indicate that 42% of imports originate from the European Union, while China is the leading export destination accounting for 49% of Angolan exports, with oil as the main contributor.

One interesting insight pointed out by Moody’s is the fact that Angola is the only country that has been given a speculative rating. Its’ public accounts have been deemed solid, due to debt dynamics. The ratio of Angolan public debt to GDP for total State revenue is the lowest in the group of countries that share the same rating.

Angola competes with Nigeria for leadership of oil production. On estimate, the country produces over two million barrels daily, although the 2013 national budget indicates a production goal of about 974 million barrels at a projected average transaction value of 96 USD per barrel.

Where extraction is concerned, all major oil companies operate in the country. Pre-salt discoveries in 2011 led to new partnerships and the assignment of new exploitation blocks, where state-owned Sonangol holds a 30% to 50% stake. According to OPEP (Organization of Petroleum Exporting Countries), proven petroleum deposits in Angola will yield an estimated 9.5 billion barrels and, according to the EIA (Environmental Investigation Agency), proven natural gas deposits are 9.6 TCF (trillion cubic feet.) This is the second largest natural gas deposit in Sub-Saharan Africa. The country has been working on a natural gas-to-GPL conversion project, and Angola has been a world-class energy resource provider for several years now.

But the country has a lot more to offer than oil. There are other resources such as diamonds, iron, copper, manganese, phosphates, salt, mica, lead, tin, gold, silver, platinum and uranium.

Processing industries include oil seed, cereal, meat, cotton, sugar, concrete and timber industries. At the agricultural level, cotton, sugar cane and rubber get a new lease on life.

At the service level, the penetration of banking services in the general market is still low, which represents a growth opportunity for financial institutions. The launch of new insurance, brokerage, investment funds and financial products constitutes an once-in-a-lifetime opportunity.

The past decade could be described as "The Angolan Decade.” The country has embarked on a remarkable journey of economic growth, which has been acknowledged by international institutions such as the International Monetary Fund (IMF) and the World Bank (WB).
The end of the civil war in 2002 led the country into a strong economic and social growth. Oil revenues increased and significant public investments in the creation or rebuilding of social and productive infrastructures took place, as well as the return of 4 million people displaced along with hundreds of thousands of war refugees. Over the past few years, Angola was among the fastest-growing economy in the world with 11.1% growth in 2010. Inflation dropped by a digit and a noticeable macroeconomic balance was achieved.

We feel that Angola plays a positive role with the UN. Once the state of war ended, during which our political and diplomatic actions were devoted to design effective strategies to achieve peace and after reconciliation and national rebuilding, the country adopted a more active participating role within the UN system addressing fundamental matters of international interest, just as world peace and security, sustainable development, food security and gender health.

Since 2002, Angola served as vice-president of the General Assembly, non-permanent member of the Security Council, member of the Economic and Social Council, the Human Rights Council, the Commission on Population and Development, board member of the UN Women, and as fi rst president of the United Nations Peacebuilding Commission.

Without a doubt, I can say that the compelling factors for foreign investors are political, military and economic stability, in addition to clear economic guidance to make the country safer and more dynamic. Following the war, the Angolan government made important decisions to reorganize the country and improve the macroeconomic environment, define better incentives and ensure greater protection of foreign investments. The participation of investors from Portuguese-speaking countries has been and will always be welcome in Angola. The establishment of mutually beneficial partnerships is a decisive factor. A common language is useful although not critical.

In your opinion, what social and economic path should Angola take and what areas require greater attention?

As I see it, Angola needs to industrialize faster and to diversify its economy even further, giving priority to agriculture and livestock, as well as mining.

One major challenge for Angola is to increase and improve educational opportunities and quality of life for young people. We must also grow the employment market and improve health services available to the general population. Sustained environmental protection matters when it comes to guaranteeing sustainable growth and general welfare.

Overall, maintaining economic growth and establish more equitable wealth distribution policies will help Angola to develop its economy and will make the Angolan people excited about their future.

Angola, the fastest-growing economy in Africa, could find itself driving the continent, especially considering its investment in infrastructures that unlock significant resources in southern Africa, namely the railway network, the Lobito and Namib sea harbor and, more recently, the Angolan participation in the building of Inga Dam that may change energy balance in southcentral Africa.

Angola may increase its production of oil, LNG (Liquefied Natural Gas) or refinery products and play a positive role in maintaining peace and security across the Gulf of Guinea and South Atlantic regions, while ensuring reliable sea lanes for the shipping of resources.

Africa is the cradle of mankind and keeps growing before our eyes. The continent will surely play a bigger role in the world economy, and Angola will take center stage in that ongoing process.

Overall, Angolan development relies on our capability to ensure a supply of quality water and energy in sufficient amount. The sector faces significant challenges, we are renovating infrastructure even though demand substantially rises across all national provinces.

The investment made in both subsectors (water and energy) is estimated at 25 billion dollars. The greatest challenge of all is to ensure simultaneous supplies of water and energy to cities and rural areas in an equitable and sustainable manner. Several projects have begun and will overhaul the country’s power matrix and water sourcing capabilities. For their sheer size and potential output, I would single out: The construction of the 2nd Cambambe plant, with 960 MW total output; the construction of a combined cycle power plant in Soyo, with 750 MW total output; the construction of a hydroelectric sourcing plant in Laúca, with 2067 MW total output; the construction, in Luanda, of water sourcing and treatment plants, which will process 500.000.m3 of water per day, at Bita and Quilonga Grande, which will double our current supply capabilities; finally, we’re renovating the water supply networks across 130 municipalities.

Angola has put in place a legal framework that allows the participation of private investors in the water and energy sector.

Considering the level of investment the Angolan government has undertaken, I would say investors will find a broad range of opportunities, as long as they’re willing to consider middle and long term timeframe for their participation to the country’s development.

Time playing in our favor while importing most of the consumer goods we lack, I see a country boasting agricultural and industrial capabilities. That, of course, requires an environment where water and power supplies are of quality and more abundant.

What are the tourist destinations or activities you would recommend to those who wish to visit Angola?

Angola is a dazzling country. We’ve been blessed with unusual charms, from rainforests to deserts and it is difficult to name only one destination. Every single province offers cultural uniqueness and remarkable natural beauties such as immaculate beaches, shining rivers, breathtaking mountain views, you name it. However, I would mention a few sites, and let water and energy serve as inspiration. One should go to Kalandula Falls or to the Namib desert and watch the Leba mountain chain as the sun sets.

With the development of the first Insurance and Pension funds study in Angola, we sought to include both our opinion on the performance of this Sector from 2008 to 2010, as well as a brief description of the trends and the main challenges facing the Insurance Companies and the Pension Fund Managers over the coming years, as a result of their evolution and maturity.

This study on the Insurance and Pension Fund Sector results from a compilation of public information made available by the Instituto de Supervisão de Seguros de Angola (ISS) on the Insurance Companies and Pension Fund Managers operating in Angola, as well as of data obtained from other national and international bodies, namely the Angolan Ministry of the Economy, the International Monetary Fund, the Instituto de Seguros de Portugal (ISP), Swiss Re and Fenaseg, relating to the african, european, american and asian markets.

The year 2010 marked the return of the rhythm of economic growth in Angola. As a result of this growth and of some regulatory changes, the Insurance and Pension Fund Sector has presented a solid growth since the liberalization in 2000, however still facing important challenges, both at the strategic and operational level.

The strong economic development of the last few years, combined with an improvement in regulation, has contributed strongly to the development and attractiveness of this Sector. In only two years, Direct Insurance Premiums have more than doubled, particularly for the Non-Life Insurance, namely: Accident, Health and Travel and Motor. The increase in motor as a result of the mandatory insurance coverage for third party liability.

In relative terms, the Non-Life Insurance has increased its relative weight, representing over 90% of production.

In Non-Life Insurance, the introduction of Decree Law nº. 35/09, relating to the compulsory Motor General Liability Insurance, boosted the growth of this product, which became the most important in the market, with a market share of 27.9%, followed closely by the Accident, health and Travel Insurance line of business with 26.4%.

The Life Insurance, despite the important growth achieved during the last two years (+27.8%), has been losing relative importance, representing less than 5% of the total. With the growth of the Angolan economy, the changes introduced in the tax and fiscal regims and the expected development of the capital market (stock exchange) an inversion of this trend is to be expected, primarily due to the increase in the products consumption in the financial sector and the increase in savings capacity, in line with the main international markets.

The analysis of the Sector evolution also reveals the diminishing weight of the Petrochemical Insurance, given the direct correlation between this type of Insurance and the largest Sector of the Angolan economy. This factor reveals not only the greater maturity of the Sector, but also its capacity to offer products that can serve and assure the various Sectors and activities of the Angolan economy.

Regarding claims, despite the increase of 17,1% in claims paid, the strong growth in the total Premium volume contributed to the reduction of the claims ratio, which, in 2010, was around 20%.

This trend should invert as the Insurance policy holders gain greater knowledge of their rights. This increase in the claims ratio associated with an increase in the expenses that represented around 16% of total premiums, should imply a growing pressure over the technical results of the market, that have experience growth over the last years.

Regarding the Reinsurance Premium volume, it can be observed that, despite its continued growth, it has not kept pace with the Issued Premiums growth volume. The average cession rate is 50.3% of the total Premiums Issued.

The continued decrease in the cession rate, aligning it to the rates observed in the more mature markets, is to be expected.

The Insurance penetration rates(1) in the Angolan Sector have been increasing, although they still represent reduced amounts in the order of 1.0%.

This amount is evidence of the high potential presented by the market, particularly in an economy with such a high growth potential.

An analysis of markets with different levels of maturity confirms this reality and trend. Note that Insurance have grown normally, but the ratio of premiums/GDP has fluctuated due to the exponential growth of GDP. At the Insurance density rate(1), an increase in total Premiums per inhabitant, representing, in 2010, to 49.6 USD per person, can be observed. This indicator reinforces the growth and development potential of the market.

Geographically, it can be observed that Insurance companies are currently in a process of expansion, leaving Luanda and positioning themselves in the country’s main cities, particularly in the various provincial capitals.

Amongst these, their presence in Benguela (the country’s second largest city) and in Huila, where the generality of the operators now operate, should be highlighted. In this phase of rapid growth in the Insurance Sector, there are still many Provinces in which the number of branches is extremely reduced, and it will be most interesting to follow/ study the expansion methods that will be adopted. Emphasis should be placed on the provinces of Kwanza Norte, Malanje and Moxico, with some half a million inhabitants being served by branch, a fact highlighting the tremendous opportunities available for the implementation of new channels.

The need to rapidly reach greater numbers of people, at controlled costs, should boost the development of new channels, such as offering Insurance through banking channels (bancassurance). The prospect is that over the coming years the diversification of the distribution channels and the development of products to respond to the needs of these populations, that generally have, lower income levels and different consumption profiles, will grow.

The year 2010 represented yet another year of growth for the Pension Fund market, with more funds, participants, pensioners and assets being managed. During 2010 five entities were managing Pension Funds, one of them being an Insurance company. These companies managed Open and Closed Funds, that amounted to 37,753 Million AOA.

Regarding contributions to Pension Funds are concerned, their evolution has had a more modest behavior, with growths in the order of 4.0% in 2009 and 5.9% in 2010.

The profitability of the assets invested recorded a heterogeneous behavior, with open funds recording an increase and Closed Funds a decrease. As is to be expected, the comparison of the profitability by fund recorded an equivalent behavior. The increasing competition and the development of the capital market will be important factors in increasing the levels of real profitability (adjusted by the inflation rate) and the consequent greater expansion of the Sector, particularly in the Open Funds component.

Regarding the market penetration rate(1) (value of the funds/GDP) in 2010, it remained relatively low and at a level identical to that observed in 2009, not having exceeded 0.5% of GDP.

These amounts reflect the reduced dimension of the Sector in the Angolan economy, which can be explained by the fact that it is either not a priority for the majority of the population or their economic power does not grant them access to these products. Yet again, it is to be expected that the progressive economic cycle lived by the country may result in a larger portion of the population having access to these products, thereby increasing their weight in the economy.

Finally, and in respect of the assets being managed, these once again grew in 2010, to 41,626 Million AOA, reflecting a growth of 28.7% on 2009.

The Insurance and Pension Fund Sector has evolved significantly over the last few years. To understand the context and the challenges facing the Insurance and Pension Fund Sector in Angola, the different forces in play must be analyzed.

The last few years have seen a progressive improvement in the human resource qualification levels at the Insurance Companies and Pension Funds operating in Angola. Even so, the average level of skills, particularly in technical areas such as Actuarial Analysis, Risk Management, Strategic and Operational Marketing, amongst others, needs to be reinforced, despite the progress that has recently been achieved.

The Angolan market has experienced a phase of significant growth. The Insurance and Pension Fund Sector has also experienced this trend over the last few years, recording an average growth in excess of 10% in the Insurance Sector, and in excess of 20% in the Pension Fund Sector.

In this market liberalization and growth context, the last few years saw the appearance of various new players, and various licensing requests are under preparation.

Despite this positive evolution, both in terms of growth and competition, market penetration continues low when compared to that in other economies where this Sector has achieved a greater level of maturity.

Despite the high growth rate recorded over the last few years, the penetration level of Insurance as a function of GDP is still reduced, when compared to that recorded in other economies where this Sector presents a higher level of maturity.

From a regulatory perspective, there has been a gradual strengthening of the legal system and the rule of supervision. After an initial phase, subsequently the market liberalization in 2001, where the priority was given to the creation and adoption of legal framework in force, a second phase of the evolution as followed with the emergence, after 2005, of new market participants.

In the third phase, currently underway, the main objective is to strengthen the presence in the market with the launch of the first inspection and the strengthening of its role in the expansion of the Insurance and pension funds culture to the public, becoming an organization modern, professional, active and efficient. The growth of the Sector should involve a greater regulatory intensity and a reinforcement of the supervisory practices, promoting the use of practices and tools to ensure the financial soundness of the operators, and strengthening governance structures and mechanisms, with special attention on compliance with market conduct principles and the reporting associated with it.

The constant evolution in this Sector presents, without a doubt, numerous opportunities for growth but also some challenges. In this first study, we sought to share our understanding regarding some of main challenges the Insurance Sector is facing, or will face in the coming years, and which we firmly believe the Institutions should reflect upon and assertively address, namely:

1. Reinforce the client’s knowledge level and develop new products, distribution channels and partnerships;

2. Improve operational efficiency and the information Systems’ Coverage;

3. Strengthen training and improve the mechanisms to retain talent;

4. Adequate the Governance model to the new market and regulatory challenges (Audit, Risk and Compliance).

The constant evolution in this Sector presents, without a doubt, numerous opportunities for growth but also some challenges. In this first study, we sought to share our understanding regarding some of main challenges the Insurance Sector is facing, or will face in the coming years, and which we firmly believe the Institutions should reflect upon and assertively address, namely:

1. Promote awareness in the market to a culture of savings and to an appreciation of the value of protection;

2. Diversify the offer and progressively improve its level of sophistication and profitability;

3. Reinforce technical skills and increase the efficiency level of the Sector.

Conclusions

The Insurance and Pension Fund Sector in Angola grew strongly, at rates exceeding those of the economy. Despite this strong growth, the penetration level is still reduced when compared to that existing in other economies in which this Sector is more mature, clearly displaying the local opportunities for growth and development.

We foresee that this Sector, in Angola, will continue to present a high dynamic although it must overcome and adapt to the challenges and emerging trends.

The insurance sector in Angola grows at a slightly faster annual rate than the economy does, which is around 10%. The future looks bright. At least it is what the leaders of the main insurance companies operating in this market say.

According to KPMG’s survey, "O Setor Segurador e de Fundos de Pensões em Angola” ("The Insurance and Pension Fund Sector in Angola”), the insurance market has experienced steady growth since the market has been deregulated in 2000 and it currently boasts a great potential for a faster growth that makes it even more compelling.

During the years 2000 until 2010, new insurers have emerged. Brokerage and mediation markets have also grown, comprising 21 authorized operators and 11 companies awaiting their license today.

Numbers reflect growth. "Between 2008 and 2010, the market grew by 100%. We estimate that the non-life market was worth around 900 million dollars in 2011.” Such impressive growth, according to Jorge Magalhães Correia, Chairman of the Board at Angolan insurer Universal, indicates that the market is still in its infancy, "But the outlook is promising. We anticipate that these high growth rates will be the norm.”

The belief in an economic turnaround along with – the population growth, the increased purchasing power and the growing awareness among people and companies that insurance is necessary - is crucial to the near future of the Angolan insurance sector.

"We see new insurance companies operating in the market, mediation and brokerage markets evolving, product portfolios diversifying and commercial networks and new distribution channels appearing,” says Rui Costa Campos, CEO of Global Seguros.

We’re taking bigger, faster strides towards development. Both companies and private citizens in their day-to-day activities come to realize that insurance is a fundamental tool in personal and property protection.

Awareness of personal insurance is growing and the need for individual protection has led to increased demand for health insurance and retirement funds. Jorge Magalhães Correia believes that personal lines, and life insurance in particular, will become "increasingly important” and "incentives to home loans, or mortgage loans, will be a decisive growth factor.”

Another critical factor is making civil liability insurance for drivers mandatory. Michael Lewis, Chairman of the Board at GA Angola Seguros, points out regarding this topic that "a significant shift” is underway with respect to national culture.

The current situation requires that customer awareness be raised, operations become more efficient, information systems adapt to local circumstance, training to be in place and local regulations observed in the areas of audit, risk and compliance.

"The major challenge the Angolan insurance market is currently facing, lies in its transition from an early stage of development to a pre-mature stage of adoption”as the CEO of Global Seguros put it. As for the Head of Universal, he mentions his short and midterm priority for the industry: "Multi-channel distribution underpinned by high level of customer relationship, customer satisfaction and customer loyalty.”
 

Change is happening fast and according to the GA chairman, "strict enforcement of rules is fundamental” and any insurer who wishes to remain competitive must promote innovation.

Artur Duarte, of Tranquilidade, Corporação Angolana de Seguros, reveals the company’s ambition: "Reconciling growth with quality client service and make the reputation of the sector as a critical success factor in its long-term development, especially when private citizens are concerned.”

In Angola, the future of insurance starts every day.