Wrap Text
Operational Update: COVID-19 Pandemic
Sanlam Limited Group
Incorporated in the Republic of South Africa
(Registration number 1959/001562/06)
"Sanlam", "Sanlam Group", or "the Company"
JSE Share code (Primary listing): SLM
A2X share code: SLM
NSX share code: SLA
ISIN: ZAE000070660
Operational update: COVID-19 pandemic
COVID-19 has spread at an alarming rate since its outbreak, being declared a global
pandemic by the World Health Organisation. Government and central bank responses
globally have been unprecedented to limit the impact of the virus on public health and to
stem the unavoidable consequences for economic growth. These events contributed to
investment market turmoil not seen since the global financial crisis.
The JSE recently issued guidance in South Africa, requesting that shareholders and other
stakeholders be informed of the impact of COVID-19 on the operations of listed
companies. In line with this guidance and our transparent communication approach, this
update provides information in respect of Sanlam’s financial performance for the first two
months of the 2020 financial year as well as the possible impact of COVID-19 on Sanlam’s
operations and financial position.
RESULTS FOR THE TWO MONTHS ENDED 29 FEBRUARY 2020
Consistent with performance trends in the second half of 2019, the Group had a pleasing
start to the 2020 financial year, with strong growth in most key performance indicators
compared to the first two months of 2019:
• Net result from financial services increased by more than 10%.
o All clusters contributed strong growth, apart from Sanlam Personal Finance whose
operating earnings were impacted by increased new business strain and lower
earnings at Glacier. The decline in investment markets in the first two months of
2020 had a negative effect on Glacier’s market-related earnings from products in
which it shares in the actual investment return earned on the underlying portfolio.
o The widening of credit spreads related to the COVID-19 outbreak detracted from
Sanlam Investment Group’s earnings; the overall cluster however still achieved
solid growth.
o The underwriting margin of the former Saham general insurance portfolio showed
pleasing improvement compared to the 2019 full-year results, augmented by higher
return on insurance funds.
• New business volumes increased by more than 30%. All lines of business reflect strong
double-digit growth.
o All clusters achieved very strong growth, with a welcome improvement in
investment business flows at Sanlam Emerging Markets and Sanlam Investment
Group’s international business.
o Apart from Lebanon, the former Saham portfolio continued to perform in line with
expectations.
• The net value of new covered business (VNB) written increased by some 5% on 2019.
o Sanlam Personal Finance achieved strong growth, which was partly offset by lower
contributions from Namibia, Cote d’Ivoire and Morocco (change in mix of business
and lower margins) and Sanlam Corporate (slower start to the year than 2019 in
recurring premium life business).
COVID-19 OPERATIONAL IMPACT
The operating environment deteriorated substantially since the end of February 2020 as
governments implemented strict measures to control the spread of the virus. Global growth
estimates were revised down sharply (a global recession is now predicted by most
economists), driving the significant downturn in global investment markets.
The impact on Sanlam’s operations is summarised below, based on investment market
indicators as at close of business 25 March 2020. Sanlam remains well capitalised and
resilient despite the volatile conditions we are facing. This is an outcome of our prudent
reserving basis and capital management philosophy, well-embedded and appropriate risk
management processes, as well as our diversification across geographies, market
segments and lines of business. Shareholders are reminded that conditions remain fluid
and uncertain. The financial position reflected in this announcement will consequently
change over time.
Business continuity
States of disaster and emergency have been implemented in a number of countries,
involving limitations on people movement, with a number of countries imposing lockdowns.
South Africa, Namibia, Morocco, Cote d’Ivoire, Lebanon, Malaysia, India and the United
Kingdom are some of the markets where Sanlam operates that are currently under some
form of lockdown.
The majority of business units within the Sanlam Group have completed their pandemic
response plans, aimed at protecting the health and safety of all staff. The main focus of
these plans includes:
• Compliance with regulatory restrictions on the movement of people;
• Emphasis on personal hygiene;
• Employee distancing techniques in work environments;
• Limitations around international and domestic travel;
• Maximum use of remote working;
• Self-isolation where staff have travelled or might have been exposed to the virus;
• Access control measures dealing with visitors to worksites; and
• Continuous communication to staff, clients and other stakeholders.
Most of Sanlam’s operations in South Africa, including Santam, has been classified as
essential services. During the lockdown period, the Group will operate on a limited staff
basis, with only core critical staff on site. We should therefore be able to service our
clients, albeit not at the usual levels of service. Sanlam Emerging Markets’ operations are
also operating at limited capacity where restrictions on movement is in place. The ability to
write new business is affected, as elaborated on in the Outlook section below.
Financial indicators
The following table reflects year-to-date movements in the key market indicators that has
an impact on Sanlam’s financial position.
Indicator 31 Dec 2019 25 Mar 2020 Movement
Rand exchange rates
United States Dollar 13.98 17.41 24.5%
British Pound 18.52 20.48 10.6%
Botswana Pula 1.34 1.50 11.9%
Moroccan Dirham 1.49 1.77 18.8%
Angolan Kwanza 0.029 0.032 10.3%
Malaysian Ringgit 3.44 3.96 15.1%
Indian Rupee 0.197 0.229 16.2%
Equity markets
South Africa All Share 57 084 43 278 -24%
South Africa Swix 12 037 8 909 -35%
MSCI World (in US$) 2 358 1 786 -32%
Botswana All Share 7 495 7 550 1%
Morocco All Share 12 172 9 892 -19%
Cote d’Ivoire All Share 3 227 2 455 -24%
United Kingdom Top100 7 542 5 688 -25%
Interest rates – Sanlam reference
government bond yield
South Africa 9-year 9.3% 12.6%
Namibia 8.6% 11.4%
Botswana 6.5% 6.5%
Morocco 2.8% 2.7%
Cote d’Ivoire 6.5% 6.5%
India 6.8% 6.4%
Malaysia 3.3% 3.6%
United Kingdom 1.2% 0.8%
The market movements experienced in March are similar to the economic shock scenario
disclosed in Sanlam’s annual financial statements for solvency sensitivity analyses. The
shock scenario includes a 30% decline in equities, a 25% increase in interest rates and a
20% devaluation of emerging market currencies against developed market currencies.
Solvency
Sanlam Life Insurance Limited (Sanlam Life) is the largest life insurance company in the
Group and the most significant contributor to Group solvency.
The capital portfolio backing Sanlam Life’s R8 billion required capital is invested in zero
cost collars. The investment market volatility therefore did not have a significant impact on
the value of the portfolio. Pricing to roll the derivatives has, however, deteriorated
significantly. As a result, maturing tranches are currently being rolled into cash, which will
continue in the near term.
The decline in investment markets had a muted impact on Sanlam Life’s Solvency Capital
Requirement (SCR) cover ratio. This is attributable to the protection provided by the zero
cost collars in the capital portfolio as well as the change in the equity symmetrical
adjustment allowed for in the SCR calculation, which dampens the impact of severe
investment market volatility. This is in particular the case for the solo entity (regulatory)
SCR cover, where the Sanlam Life participations (investments in subsidiaries and
associates) provide stability to the solvency ratio. The Sanlam Life solo solvency cover is
estimated at 258% on 25 March 2020 compared to 253% at 31 December 2019. The
estimate is based on the year-end sensitivity analysis.
The Sanlam Life internal view is used for management purposes, as it represents Sanlam
Life’s contribution to Group Solvency. It is based on the R8 billion of required capital
allocated to the Sanlam Life covered business and excludes the value of participations,
any excess capital held on the Sanlam Life balance sheet as well as cash held for dividend
payments. A target SCR cover ratio of 170% to 210% has been set for the internal view. At
the lower end of the target range (170%), Sanlam Life can withstand at least two economic
shocks (refer key features of economic shock above) without breaching the minimum SCR
cover ratio of 100%. The internal view SCR cover ratio amounted to 206% at 31 December
2019, at the upper end of the target range. It is estimated at 188% on 25 March 2020, well
within the target range. The estimate is based on the year-end sensitivity analysis.
Solvency levels within the other Group subsidiaries remained at appropriate levels, given
the relatively larger exposure to cash and fixed-interest securities within these businesses.
Portfolio funding levels
Sanlam Life has the most material exposure to products that provide financial guarantees
to policyholders, which include the following main lines of business:
• Fixed-term guarantee plans
Fixed-term guarantee plans are matched with appropriate fixed-interest instruments on
a cash-flow duration basis. As both the assets and liabilities are valued on a consistent
basis, movements in interest rates do not result in mismatch profits or losses. Credit
risk is the main financial risk assumed by Sanlam under these contracts.
• Smoothed bonus portfolios
These products aim to provide a smoothed return to policyholders over time through
the bonus declaration philosophy. The main smoothed bonus portfolios include
(policyholder liabilities as at 31 December 2019) the Individual Life Stable Bonus
Portfolio (R27 billion), the Group Stable Bonus Portfolio (R11 billion), the Monthly
Bonus Fund (R7 billion) and With-Profit Annuities (R5 billion). The funding levels of
these portfolios were between 80% and 90% on 25 March 2020 compared to close to
100% funding levels at 31 December 2019. Should future investment returns earned on
the portfolios be in line with the long-term investment return assumptions disclosed in
the Group’s 2019 annual financial statements, the funding levels of these portfolios can
be restored to 100% through the declaration of lower bonuses in the next three years.
Should markets deteriorate further or underperform for an extended period, other
management actions are available to manage the funding levels in combination with
shareholder capital injections. These include the cancellation of non-vested bonuses,
except for With-Profit Annuities or fully vesting smoothed bonus portfolios. The
balanced mandates of these portfolios from an asset class perspective, together with
foreign exposure of some 30%, provide a buffer to funding levels.
Products offering financial guarantees to policyholders within the Sanlam Emerging
Markets portfolio are mostly matched by interest-bearing securities. No material
mismatch profits or losses have occurred in these portfolios.
Investment-related earnings
• Sanlam Investment Group
Credit spreads on listed debt have widened to historic high levels. This contributed to
negative unrealised marked-to-market losses year-to-date of some R470 million after
tax at Sanlam Specialised Finance (Sanfin) as at 25 March 2020. In the absence of any
actual defaults, these unrealised losses will reverse in future as the higher spreads
unwind to maturity, i.e. it simply causes timing differences in earnings recognition. Any
narrowing of spreads going forward, will accelerate this reversal. The current
circumstances are likely to lead to an increase in credit counterparties experiencing
distress. These exposures will be proactively managed with an emphasis on obtaining
security where possible, and maximising recovery should any defaults actually occur.
All required margins/collateral have to date been received as required in respect of the
equity-backed lending business.
Derivative structures (including interest rate, equity and currency derivatives) are
requiring an increased need for margins/collateral to be posted by Sanfin. The Group
has a well-established liquidity risk management framework to ensure sufficient liquidity
during stressed market conditions such as those currently being experienced. All
margin/collateral requirements have been and are projected to be met from internal
resources, and will continue to be prudently and proactively managed within the
liquidity risk management limits of the Group.
• Sanlam Personal Finance
As highlighted in the 2019 annual results financial review and referred to above,
Glacier’s product offering includes a line of business where it participates in the actual
investment return earned on the underlying portfolio. This product contributed some
R200 million to Glacier’s net result from financial services for the 2019 full year. As at
25 March 2020, earnings from this line of business amounted to a loss of some R90
million after tax.
• Sanlam Emerging Markets
The weaker equity markets in Namibia, India, Morocco and Cote d’Ivoire have a
negative impact on investment variances in the life portfolios. Return on insurance
funds held in the Morocco and Cote d’Ivoire general insurance portfolios are also
negatively affected given the equity exposure within the asset mix.
COVID-19 is likely to result in a further deterioration of economic conditions in
Lebanon, aggravated by the sovereign debt defaults in March 2020, which may require
credit provisioning to be recognised in terms of IFRS 9 in finalising the Group’s interim
results for the six months to 30 June 2020, in addition to the provisions recognised in
the Group’s 2019 annual results.
Claims and persistency experience
To date we have not been exposed to any major change in claims and persistency
experience.
• Life insurance business
The development of claims experience will be dependent on, among others, the
infection rate in the markets where we provide cover, the ability of the local healthcare
infrastructure to cope with the number of individuals requiring hospitalisation and the
eventual mortality rate. The swift action taken by many governments, in particular
lockdowns, should limit infection rates and mortality experience.
The Group’s policy liabilities at 31 December 2019 included a pandemic reserve of
R760 million that was created specifically for an event of this nature a number of years
ago. This reserve is available to cover increased mortality experience emanating from
COVID-19.
Sanlam’s geographic diversification also provides resilience.
• General insurance business
Santam
Santam is in the process of reviewing all relevant policy wordings in order to assess
potential insurance exposure relating to the COVID-19 pandemic and to determine how
Santam’s policies may respond to any claims made.
Sanlam Emerging Markets
The impact of COVID-19 on general insurance claims is, among others, dependent on
governments’ response to the pandemic. Some governments are considering
requirements for insurers to pay medical costs even if this is not covered under the
policy contracts, or to contribute voluntarily to relief funds. Despite limited contractual
exposure in many instances, measures implemented by governments may therefore
still have an impact.
Business Interruption (BI) Insurance
The vast majority of property policies are written on a named perils basis and do not
provide cover for BI. Where BI cover is provided, it is generally restricted to direct
business interruption as a consequence to damage to property (usually fire or
machinery breakdown only).
Health Insurance
Exposure to COVID-19 claims is dependent on policy conditions, which vary between
countries. These conditions in general exclude pandemics and/or pandemics where
quarantine is implemented.
Outlook
Economic growth in all of the Sanlam markets will be lower than anticipated, with some
expected to enter recessions, including South Africa. This poses risk to growth in new
business volumes as well as persistency experience. Increased pressure on corporate
earnings will also heighten credit risk. New business volumes are furthermore restricted by
the lockdowns in a number of markets, limiting advisors’ ability to conduct business. We
do have a number of digital sales channels across the Group, which includes digital
enablement of advisors. Sales through these channels will provide some relief.
Equity, interest rate and currency markets are expected to remain volatile in the
foreseeable future. Moody’s downgrade of South Africa’s sovereign rating to below
investment grade on 27 March 2020 is expected to add to volatility in the South African
markets. Average investment market levels, the relative strength of the Rand exchange
rate and the level of long-term interest rates are key factors that may have an impact on
the growth in net result from financial services, operational earnings and Group Equity
Value to be reported for the six months to 30 June 2020 and the year to 31 December
2020.
Sanlam is well positioned to weather the current conditions - we have a solid balance
sheet, strong operational processes and some of the best expertise available in the
market.
The final 2019 ordinary dividend of 334 cents per share that was declared on 11 March
2020 will be paid on Monday 20 April 2020.
The information contained in this announcement has not been reviewed and reported on
by Sanlam's external auditors. Shareholders are further advised that this is not a trading
statement as per paragraph 3.4(b) of the JSE Limited Listings Requirements.
Forward-looking statements and estimates
In this announcement we make certain statements that are not historical facts and relate to
analyses and other information based on estimates and/or forecasts of future results not yet
determinable, relating, amongst others, to new business volumes, investment returns (including
exchange rate fluctuations), solvency ratios, GEV and actuarial assumptions. These statements
may also relate to our future prospects, developments and business strategies. These are forward-
looking statements as defined in the United States Private Securities Litigation Reform Act of 1995.
Words such as “believe”, “anticipate”, “intend”, “seek”, “will”, “plan”, “could”, “may”,
“endeavour” and “project” and similar expressions are intended to identify such forward-looking
statements, but are not the exclusive means of identifying such statements. Forward-looking
statements involve inherent risks and uncertainties and, if one or more of these risks materialise, or
should underlying assumptions prove incorrect, actual results may be very different from those
anticipated. Forward-looking statements apply only as of the date on which they are made, and
Sanlam does not undertake any obligation to update or revise any of them, whether as a result of
new information, future events or otherwise. Any forward-looking information contained in this
announcement has not been reviewed and reported on by Sanlam’s external auditors.
CONFERENCE CALL
A conference call for analysts, investors and the media will take place at 17h00 (South
African time) today. Investors and media who wish to participate in the conference call
should register as indicated below.
Audio dial-in facility
A dial-in facility will be available. Please register at www.diamondpass.net/4514082 for the
call. Registered participants will receive their dial-in number upon registration. For
assistance, please contact Sanlam Investor Relations at +2721 947 8455.
Recorded playback will be available after the conference call until 2 April 2020.
Access Numbers for Recorded Playback:
Access code for recorded playback: 32228
South Africa 010 500 4108
USA and Canada 1 412 317 0088
UK 0 203 608 8021
Australia 073 911 1378
Other Countries +27 10 500 4108
For further information on Sanlam, please visit our website at www.sanlam.com
Bellville
30 March 2020
Sponsor
The Standard Bank of South Africa Limited
Date: 30-03-2020 09:00:00
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