[South Africa] Sanlam reports satisfactory performance in four-month operational update
Sanlam reported a satisfactory operational performance in the four months to 30 April 2019, despite persisting headwinds in South Africa, the Group’s largest market, and international political and economic turmoil affecting emerging markets in general.
Notwithstanding the challenging operating conditions, the Group delivered some worthwhile accomplishments. This included the recent SAHAM Finances acquisition complementing pleasing organic growth by contributing to 10% growth in the value of new covered business (VNB) written, 30% rise in net fund inflows, and a 9% increase in net result from financial services. The Group is satisfied about its progress on bedding down the SAHAM Finances acquisition.
In addition, as announced in March 2019, the Group concluded the 5% share issuance to the new Broad-Based Black Economic Empowerment (B-BBEE) entity, approved by Sanlam shareholders in December 2018. The transaction positions Sanlam as the foremost-empowered insurance and investment management group in South Africa.
The Group issued the shares at a price of R70 per share, representing a discount of some 10% to the three-day volume-weighted average price (VWAP) at the time. The issuance restored the discretionary capital portfolio to an appropriate level.
Sanlam Group Chief Executive Officer, Mr Ian Kirk commented: “We are satisfied with our performance achieved under challenging operating conditions. Our continued prudent implementation of our diversification strategy, together with our focus on implementing the strategy again, supported the delivery of resilient results. We will remain focused on the SAHAM integration: delivering shareholder value, while at the same time controlling our costs given pressure on revenues, and executing future growth strategies.”
The salient features of the Group’s performance were:
1. New business volumes of R72 billion, up 7%
(a) Overall new business volumes at Sanlam Personal Finance (SPF) declined by 9% due to lower demand at Glacier. Sanlam Sky experienced strong growth of 90%. Sales through the traditional individual life intermediated channel increased by 12%, augmented by good growth at Group Benefits and Safrican as well as an exceptional performance of the Capitec Bank funeral product. Investor confidence in Glacier’s target market remained under pressure, in line with trends observed since the second quarter of 2018. This contributed to a 12% decline in Glacier’s new business volumes from the high base in the first quarter of 2018.
(b) Sanlam Emerging Markets (SEM) recorded overall new business growth of 34%. The Pan Africa and other emerging markets portfolios grew by 36% and 21% respectively. The business achieved good growth in most countries and lines of business except the investment businesses in Namibia and Kenya. Excluding these, as well as SAHAM Finances, new business volumes in the Pan Africa portfolio increased by 16% in constant currency. SAHAM Finances’ new business contribution increased by 173%, supported by the structural activity in 2018. The year-to-date performance reflected a pleasing outperformance of targets. The Indian and Malaysian businesses achieved double-digit growth, with the Malaysian life business finding particularly satisfactory traction.
(c) New business volumes at Sanlam Investments Group (SIG) increased by 8%, a strong performance under difficult conditions. The value of new mandates awarded to the South African investment management and international businesses increased by 7% and 11% respectively. Growth at Sanlam Private Wealth was subdued, reflecting investor caution in the high net worth market.
(d) At Santam, the conventional insurance business achieved acceptable growth in gross written premiums, while the alternative risk transfer business recorded strong growth, specifically relating to the risk financing lines of business.
(e) Sanlam Corporate had a strong start to the year, more than doubling its new business contribution. Both recurring and single premium sales achieved exemplary growth.
(f) Net VNB increased by 10% with all clusters contributing good growth. Overall net VNB margins improved by some 27 basis points on a constant economic basis on the comparable 2018 period.
(g) Overall net fund inflows of R15.9 billion were 30% higher than the R12.2 billion achieved in the comparable four-month period in 2018. SIG attracted strong net inflows of R8.4 billion compared to R3.5 billion in the comparable period. Net fund inflows at SPF declined due to the lower single premium inflows at Glacier.
(h) Persistency trends remained in line with the second half of 2018.
2. Net result from financial services increased by 9% in the first four months of the 2018 financial year
(a) SPF’s net result from financial services increased by 17%, supported by strong earnings growth at Glacier and Sanlam Sky. The improved relative investment market performance in 2019 compared to the first four months of 2018 benefited fee income from Glacier’s participating products. Sanlam Sky’s contribution reflects higher profit releases from the growing in-force book, as well as positive mortality experience and improved investment variances.
(b) SEM’s net result from financial services increased by 51%. The Pan Africa and other emerging markets portfolios grew their net operating earnings by 62% and 37% respectively. SAHAM Finances’ net result from financial services was below target due to persisting high motor claims experience in Morocco, fire claims in Ivory Coast and some exposure to the cyclone damage in Mozambique, which resulted in an overall underwriting margin at the lower end of its 5% to 9% target range. The Indian operations are the largest contributor to the other emerging markets portfolio. Indian net result from financial services increased by some 40%, supported by strong growth in the credit and general insurance businesses.
(c) SIG’s contribution to net result from financial services decreased by 15%. The South African asset management and wealth management businesses achieved 1% growth in net result from financial services despite the 8% lower average equity markets in the period that suppressed fee income. Investor caution also negatively affected brokerage income. Provisions in respect of credit exposures in Sanlam Specialised Finance and the International businesses had a negative impact of some R70 million gross of tax.
(d) The claims experience weakened at Santam following a benign claims environment in 2018. The first four months of 2019 were characterised by a number of significant catastrophe events, including fires in the Betty’s Bay area in January, hail damage in Newcastle in March, and the storm and flood damage in Kwazulu-Natal during April. These events negatively affected the net underwriting margin of the conventional insurance business, which ended slightly below the bottom end of Santam’s target range of 4% to 8% of net earned premiums. Growth in net income from clients, along with solid contributions from Centriq and Santam Structured Insurance, contributed positively to operating results of the alternative risk transfer business.
(e) Claims experience at Sanlam Employee Benefits weakened compared to the first four months of 2018, in particular lump sum disability claims. This had an adverse impact on profitability at Sanlam Group Risk, contributing to an overall decline in Sanlam Corporate’s net result from financial services.
3. Diluted headline earnings per share increased by 9% per share excluding the once-off B-BBEE IFRS 2 charge
Headline earnings reflected the combined effect of the following:
(a) The 9% increase in net result from financial services;
(b) A 79% improvement in net investment return earned on the capital portfolios in line with the relatively stronger investment market performance in the first four months of 2019 compared to the same period in 2018;
(c) A once-off accounting cost of R1.7 billion recognised in terms of IFRS 2 regarding the B-BBEE share issuance, in line with the financial effects disclosed to shareholders in the 2018 circular;
(d) A 5% increase in the weighted number of shares in issue following the share issuances in 2018 and 2019.
The Group’s operations remain well capitalised. The Sanlam Group Solvency Capital Requirement (SCR) cover ratio amounted to 2.3 times on 31 March 2019 (Sanlam Life Insurance Limited: 2.5 times).
Sanlam ended April with R1.3 billion discretionary capital. This included the capital raised from the B-BBEE issuance, excess dividend cover in respect of the 2018 dividend paid in 2019 and excess investment return earned on the Sanlam Life covered business operations.
The Group does not expect a major recovery in the economic conditions in South Africa and Namibia for the remainder of 2019. The business therefore anticipates that new business growth potential will remain under pressure. Management also expects investment market volatility to persist, aggravated by increased tensions in the trade war between the United States and China.
Mr. Kirk concluded that the Group remains focused on delivering results from the SAHAM Finances acquisition as well as delivering value from the package of B-BBEE transactions approved in December 2018, once implemented.