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Operational Update – June 2017
Sanlam Limited
(Incorporated in the Republic of South Africa)
Registration number 1959/001562/06
JSE share code: SLM
NSX share code: SLA
ISIN: ZAE000070660
(“Sanlam” or “the Group”)
Operational Update – June 2017
The Group maintained a resilient operational performance for the first four months of
the 2017 financial year. The key trends emerging during the 2016 financial year
persisted into 2017.
Strong growth in the more profitable recurring premium risk business in South Africa
supported sterling growth in the value of new life business at a higher overall margin.
Embedding client centricity and a stringent focus on new business quality in Sanlam’s
culture over many years has been a key driver of the Group’s new business
performance and is also supporting persistency levels. Satisfactory growth was
achieved in net result from financial services despite a marked increase in new
business strain recognised pursuant to the increase in new risk business, as well as the
negative impact of a stronger average Rand exchange rate against the major
currencies where the Group operates. The operational performance of Saham
Finances, the major new acquisition concluded during 2016, remained in line with the
business plan.
The first four months of 2017 was a very eventful period for South Africa. An
unexpected cabinet reshuffle and removal of the Minister of Finance at the end of
March were followed by downgrades of South Africa’s foreign currency rating to below
investment grade by two rating agencies, with one also downgrading the local currency
rating to below investment grade. Investment market reaction to these events were not
as adverse as anticipated, as it coincided with renewed emerging market interest from
global investors, providing support to the Rand, equity markets and long-term interest
rates. The renewed political and policy uncertainties were, however, detrimental to
investor, business and consumer confidence, which impacted on the Group’s new
business growth in the mass affluent and high net worth segments, and will also delay
any meaningful improvement in economic and employment conditions. The South
African operating environment therefore remained particularly challenging for our
businesses.
Economic conditions in Namibia continue to be impacted by liquidity constraints
emanating from its twin deficit, while the economies and currencies of Nigeria and
Angola remained under pressure from low oil prices. The economic outlook in the other
Africa regions where the Group operates is slowly improving. Economic conditions in
India and Malaysia remain robust, with the short-term impact of demonetisation in India
negatively impacting on the results of the Shriram credit businesses, as anticipated.
Despite volatility in the Rand exchange rate during the four-month period to 30 April
2017, the average exchange rate of the Rand against the major currencies where the
Group operates was significantly stronger during the first four months of 2017
compared to 2016. This had a major negative effect on the translated Rand results of
Sanlam Emerging Markets as well as Sanlam Investments’ international operations.
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Globally, investor concern around geopolitical risk subsided somewhat following the
Dutch and French election results, supported by anticipated stimulative economic
measures in the United States and improving leading economic indicators in China and
Europe. This drove a rally in global equities and a return of demand for emerging
market investments. These conditions provided some support to the South African
investment markets as highlighted above, and commensurately investment return
earned on the Group’s capital portfolio.
Results
The constant currency information included in this operational update has been
presented to illustrate the impact of changes in currency exchange rates and is the
responsibility of the Group’s board of directors. It is presented for illustrative purposes
only and because of its nature may not fairly present the company’s financial position,
changes in equity, result of operations or cash flows. All references to constant
currency information are based on the translation of foreign currency results for the four
months to 30 April 2017 at the weighted average exchange rate for the four months to
30 April 2016, which is also applied for the translation of comparative information. The
major currencies contributing to the exchange rate movements are the British Pound,
Indian Rupee, Botswana Pula and the Nigerian Naira.
The salient features of the Group’s performance for the four months to 30 April 2017
are:
- New business volumes of R71 billion, down 4% on the first four months of the
2016 financial year (down 3% in constant currency and 4% lower in constant
currency and excluding the impact of structural growth), largely due to lower lump-
sum inflows at Glacier, Sanlam Investments Retail and Sanlam Private Wealth.
o Sanlam Personal Finance achieved strong growth in the more profitable
recurring premium risk business lines. This was, however, more than offset by a
decline in discretionary single premium business in the mass affluent market, as
investor risk aversion remain elevated in the uncertain political and economic
environment. Overall new business sales at Sanlam Personal Finance declined
by 10% as a result.
Sanlam Sky new business sales increased by an exemplary 27% on the
comparable 2016 period. The change in mix towards risk business continued to
yield positive results, contributing to 18% growth in Sanlam Sky’s individual life
risk business sales. Sales of savings products declined by 49%, with overall
individual life new recurring business increasing by 5%. A large new scheme
written by Safrican in the first four months of 2017 supported a more than
doubling in new Group recurring premium business at Sanlam Sky.
New business volumes in the middle-income market increased by 4%. Solid
demand for products providing an investment guarantee supported growth of 4%
in new life insurance single premium sales. New recurring premium life business
increased by 7%. Lower demand for traditional recurring premium endowments
was more than offset by solid growth in retirement annuities and tax free savings
products, as well as a 16% increase in new recurring premium risk business.
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As highlighted above, Glacier new business volumes remained under pressure
and declined by a disappointing 14%.
o Sanlam Emerging Markets recorded overall new business growth of 20%, with
structural growth more than offsetting the negative impact of a stronger average
Rand exchange rate. In constant currency, new business volumes increased by
29% (up 2% in constant currency and excluding structural growth). Economic
conditions in Namibia are placing pressure on new business performance, with
overall new business volumes in line with 2016. Namibia also experienced a
change in mix from individual life business to the less profitable group life line of
business. Annuity sales in Botswana declined significantly during the period, the
combined effect of a reduction in the value of retirement funds becoming
available as well as competitive pressures. This contributed to a 2% decline in
Botswana new business volumes in constant currency (8% decline at actual
exchange rates).
Excluding Saham Finances, Rest of Africa new business volumes increased by
6% in constant currency (10% lower at actual exchange rates). Most regions
contributed to the growth in constant currency, apart from Tanzania, Nigeria,
Zimbabwe and Zambia, which had slow starts to the year. Saham Finances’ new
business production was in line with the business plan, with the Angola
operations in particular holding up well in a difficult environment.
The Indian operations delivered strong growth, more than doubling its new
business contribution in constant currency and at actual exchange rates. In
Malaysia, delayed new product launches at both the life and general insurance
businesses contributed to a disappointing 23% decline in constant currency new
business sales. A number of new products are planned to be launched during
2017, subject to regulatory approval, which should support an improved
performance over the medium term.
o Sanlam Investments achieved good growth in institutional fund inflows. The
uncertain political and economic environment, however, had a severe impact on
demand for implemented consulting and Sanlam Private Wealth solutions. This
was aggravated by lacklustre demand in the United Kingdom, contributing to a
2% decline in overall new business volumes in constant currency (down 3% at
actual exchange rate).
o Sanlam Employee Benefits achieved a pleasing threefold increase in new
recurring premium business. The more volatile single premium new business
declined from a high base in the first four months of 2016.
o Net value of new life business (“VNB”) on a consistent economic basis increased
by 24% on the comparable period in 2016 (28% on constant economic and
currency basis). VNB margins have been largely maintained on a per product
basis with changes in mix towards the more profitable lines of business
supporting an overall increase in margins. Sanlam Personal Finance’s VNB
increased by more than 20% on a consistent economic basis, with the overall
VNB margin improving on 2016. This performance is primarily attributable to the
substantial growth in Individual Life risk and Sanlam Sky new business. The
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decline in Glacier single premium new business had a muted overall effect given
the lower margin of this line of business. Sanlam Emerging Markets’ net VNB
grew by a moderate 7% on a consistent economic and currency basis. A lower
VNB contribution from Namibia, Botswana and Malaysia partly offset strong
performances from the other regions. Sanlam Employee Benefits also achieved
a much improved performance, supported by the growth in recurring premium
Group Risk business.
o Overall net fund inflows of R12 billion were down on the R16 billion achieved in
the comparable four-month period in 2016, largely due to the decline in Sanlam
Personal Finance single premium new business. Despite the pressure on
Sanlam Investments new business inflows, retention of funds under
management was well managed with the cluster’s net inflows increasing
marginally on 2016.
o Persistency is under pressure in some lines of business, but overall persistency
experience remained broadly in line with actuarial assumptions.
- Net result from financial services up 5% on the first four months of the 2016
financial year in constant currency (up 3% at actual exchange rates). Excluding the
rise in new business strain at Sanlam Personal Finance, net result from financial
services increased by 10% in constant currency.
o The strong growth in risk business at Sanlam Sky and Individual Life generated a
significant increase in the new business strain recognised in terms of the Group’s
prudent accounting policies. This limited growth in Sanlam Personal Finance’s
net result from financial services to 3%. Excluding the increase in new business
strain, Sanlam Personal Finance achieved commendable growth of 11% on the
first four months of 2016. Mortality claims experience remained within the
actuarial assumption base.
o Sanlam Emerging Markets’ net result from financial services declined by 11%,
with a stronger average Rand exchange rate, the impact of demonetisation in
India and a decline in profitability in Namibia and Botswana offsetting the positive
impact of structural growth. In constant currency, net result from financial
services declined by 1% (down 16% in constant currency and excluding
structural growth). Saham Finances’ operating earnings were in line with the
business plan. As anticipated, demonetisation in India in the latter half of 2016
had a negative impact on the arrears position of the Shriram credit businesses,
requiring an increase in provisioning in terms of International Financial Reporting
Standards of some R110 million after tax and allowing for Sanlam Emerging
Markets’ effective shareholding. This impact is temporary in nature, with
improvements in performance already evident. Excluding the impact of
demonetisation, Sanlam Emerging Markets’ net result from financial services
increased by 10% on a comparable basis (constant currency and excluding
structural growth).
Profitability is under pressure in Namibia, Botswana, Kenya and Malaysia, with a
solid performance from the other regions. In Namibia, higher group life claims
experience and the difficult economic environment were the main detractors.
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Botswana earnings were significantly affected by the decline in new annuity
business and credit-related provisioning in the annuity portfolio, partly offset by
good growth in investment management earnings. High claims experience, lower
property sales and negative expense variances are impacting on the Kenya
results. General insurance earnings in Malaysia remained depressed due to a
decline in net earned premiums, offsetting a good performance by the life
business.
o Sanlam Investments’ contribution to net result from financial services increased
by 1% (up 6% in constant currency). The South African asset and wealth
management businesses did well to record only a marginal decline in operating
earnings despite no real growth in assets under management due to lacklustre
investment return on the foreign exposure in the portfolios and net outflows from
the South African life and discretionary capital asset base managed by the
cluster. The restructuring of the Sanlam UK business during 2016 is delivering
cost efficiency, supporting a 38% increase in the international operations’ net
earnings in constant currency. Capital management earnings declined marginally
from a high comparative base in 2016.
o Santam’s net underwriting margin for the four-month period was within the target
range of 4% to 8%, but below the midpoint. The personal and commercial
business was impacted by fire related losses and an increase in the frequency of
claims. The Specialist business was in turn impacted by a number of large
corporate property claims. Other specialist insurance classes, in particular
Agriculture, reported solid results. MiWay also reported excellent underwriting
results, with Santam Re achieving an acceptable performance.
o Sanlam Employee Benefits and Sanlam Healthcare achieved strong growth in
net result from financial services, supporting overall growth of more than 30% for
the Sanlam Corporate Cluster. Risk claims experience at Sanlam Employee
Benefits remained higher than historic levels, but improved on 2016.
- Normalised headline earnings per share increased by 9% compared to the first four
months of the 2016 financial year. A relatively stronger investment market
performance in 2017 supported investment return earned on the capital base.
- Diluted headline earnings per share, which include fund transfers recognised in
respect of Sanlam shares held in policyholder portfolios, increased by 15%
compared to the first four months of the 2016 financial year.
Capital
All of the Group operations remain well capitalised. Sanlam Life Insurance’s statutory
capital covered its Capital Adequacy Requirements under the current solvency regime
5.4 times on 31 March 2017 after allowing for the annual dividend payment to Sanlam
Limited. Under the new Solvency Assessment and Management regime being
implemented in South Africa, Sanlam Life Insurance’s Solvency Capital Requirement
cover ratio amounted to 297% on 31 March 2017 after the dividend payment to Sanlam
Limited.
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The Group had excess capital of R550 million available for redeployment at the end of
December 2016, after allowing for US$200 million of the US$340 million consideration
for the acquisition of an additional 16.6% stake in Saham Finances, and R700 million
for the acquisition of a 53% stake in BrightRock in South Africa. The Saham Finances
transaction concluded in May 2017 (refer below), while the BrightRock acquisition is still
subject to conditions precedent.
Utilisation of discretionary capital since 31 December 2016 to date included the
following:
- The Saham Finances transaction concluded with an effective date of 10 May
2017. The full acquisition price was funded from discretionary capital. Allowing
for the US$200 million already provided in the opening balance of discretionary
capital, the transaction effectively utilised additional discretionary capital of
US$140 million during the period. In line with previous communication, the
introduction of gearing of up to US$140 million to fund a portion of the
transaction value is currently under consideration.
- The only new acquisition in the first four months of 2017, was a 75% stake in the
PineBridge asset management operations in Kenya. This investment will enable
the Group to establish a regional asset manager of scale. The transaction is still
subject to conditions precedent.
The following added to available discretionary capital:
- As indicated in the Group’s 2016 annual results announcement in March 2017,
the capital allocated to the covered business operations on the Sanlam Life
licence will be reduced to R8 billion over the next four years. R783 million was
released during the first four months of 2017, comprising of the first R500 million
base capital release as well as net investment return of R283 million earned on
the portfolio up to the end of April 2017 that is not required to be reinvested. The
portfolio is effectively rebalanced to R9.5 billion compared to R10 billion as at 31
December 2016. The investment return component is subject to investment
market returns up to the end of June, when the actual rebalancing of the
portfolio occurs.
- The establishment of the Central Credit Manager included the transfer of
corporate credit exposure from the Sanlam Capital Markets balance sheet to
Sanlam Life Insurance Limited. These transfers resulted in a R350 million
reduction in Sanlam Capital Markets’ capital requirement from R600 million to
R250 million.
- The excess cash cover included in the 2017 dividend declaration and
investment return earned on the discretionary capital portfolio of some R800
million in total.
Once the envisaged gearing is introduced for the Saham Finances transaction,
available discretionary capital will amount to some R2 billion post payment of the
BrightRock and PineBridge transactions. This is considered sufficient for the Group’s
immediate needs and the Group will continue to look for value-enhancing growth
opportunities.
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Outlook
We expect that the economic and operating environment will remain challenging for the
remainder of 2017 with a resulting impact on the Group’s key operational performance
indicators. Persistent investor risk aversion, 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,
normalised headline earnings and Group Equity Value to be reported for the first half of
the 2017 financial year. The Group is, however, well-positioned to weather the current
headwinds and to continue delivering value for our shareholders and other
stakeholders.
The information in this operational update has not been reviewed and reported on by
Sanlam's external auditors. Sanlam’s interim financial results for the six months ending
30 June 2017 are due to be released on 6 September 2017. Shareholders are advised
that this is not a trading statement as per paragraph 3.4(b) of the JSE Limited Listings
Requirements.
Conference call
A conference call for analysts, investors and the media will take place at 17h30 (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 toll free dial-in facility will be available. Please register at
http://services.choruscall.za.com/DiamondPassRegistration/register?confirmationNumb
er=6417382&linkSecurityString=12d083412 for the call. For assistance, please contact
Sanlam Investors Relations at +2721 947 8455.
Recorded playback will be available for three days after the conference call.
Access Numbers for Recorded Playback:
Access code for recorded playback: 13616#
South Africa Toll 011 305 2030
USA and Canada Toll-free 1 855 481 5363
UK Toll-free 0 808 234 6771
Other Countries Toll +27 11 305 2030
For further information on Sanlam, please visit our website at www.sanlam.com
Cape Town
7 June 2017
Sponsor
Deutsche Securities (SA) Proprietary Limited
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