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SANLAM LIMITED - Trading Statement 2020 Interim Results

Release Date: 19/08/2020 15:00
Code(s): SLM     PDF:  
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Trading Statement – 2020 Interim Results

Sanlam Limited
(Incorporated in the Republic of South Africa)
Registration number 1959/001562/06
JSE share code: SLM
A2X share code: SLM
NSX share code: SLA
ISIN: ZAE000070660
(“Sanlam” or “the Group”)

Trading Statement – 2020 Interim Results

Shareholders are advised that Sanlam is currently compiling its interim results for the
six months ended 30 June 2020. This trading statement provides an indication of a
range for headline earnings per ordinary share (HEPS) and earnings attributable to
equity holders of the Group per ordinary share (EPS) in terms of paragraph 3.4(b) of the
JSE Limited Listings Requirements. Sanlam's interim results will be released on the
Stock Exchange News Service of the JSE Limited (SENS) on Thursday, 10 September

As communicated to shareholders in the Group’s operational update released on
Wednesday, 10 June 2020, the operating environment across the Group’s footprint
deteriorated substantially since the end of February 2020 as governments implemented
strict measures to control the spread of Covid-19. These included the declaration of
states of disaster and emergency in a number of countries where we operate, involving
severe limitations on people movement and economic activity. Global growth estimates
were revised down sharply, including for all of the Group’s key markets. This, together
with persistent uncertainty around the eventual impact of Covid-19, drove significant
volatility in equity, interest rate and currency markets. These conditions continue to
impact on the Group’s results for 2020.

Despite the adverse impact of Covid-19 on the Group’s earnings for the six months to
30 June 2020 as outlined in this trading statement, the Group’s operations remained
resilient and the Group sustained its strong capital position. The Group solvency cover
ratio exceeded 180% at 30 June 2020 with the ratio remaining well within our target
range throughout the worst of the recent market turbulence. Sanlam Life Insurance
Limited’s solvency cover ratio at 30 June 2020 was well in excess of the 253% ratio
reported at 31 December 2019. Funding levels of the participating policyholder
portfolios also remain sound.

Net operational earnings for the six months to 30 June 2020 were adversely impacted
by the following:

•   Lower investment-related fee income at Sanlam Investment Group and Sanlam
    Personal Finance as a result of negative investment market returns in the first half of
    2020, which depressed average assets under management and participating fee
•   Marked-to-market losses at Sanlam Specialised Finance due to a widening in
    corporate credit spreads, which, in the absence of defaults, will reverse in future
    reporting periods.                                                                                  
•   Increased doubtful debt provisioning at Sanlam Specialised Finance and the
    Group’s retail credit businesses, attributable to the deteriorating economic
    environment, continued restrictions on economic activity and pressure on clients’
    disposable income.
•   Negative investment return earned on insurance funds held by the Sanlam
    Emerging Markets general insurance businesses, in line with the downturn in equity
•   Support of some R1 billion provided by Santam to clients with contingent business
    interruption cover.
•   Negative net investment return earned on the capital portfolio reflects the weaker
    equity market performance and additional expected credit losses recognised in
    terms of International Financial Reporting Standards (IFRS) 9 in respect of rising
    sovereign credit risk in Lebanon.

Net operational earnings are therefore expected to decline by between 35% and 45%.
Unrealised losses due to fair value changes and increases in doubtful debt provisions
account for a major part of this reduction in earnings. Some of this may reverse over

Despite the decline in net operational earnings, HEPS are expected to increase by
between 5% and 15% compared to the first six months of 2019, supported by the

•   The one-off IFRS 2 charge of R1.7 billion recognised in 2019 in respect of the share
    issuance to the Broad-Based Black Economic Empowerment special purpose
    vehicle (B-BBEE SPV).
•   A turnaround in fund transfers relating to the treatment of Sanlam shares held in
    policyholder portfolios as treasury shares, the consolidation of the Sanlam
    Foundation and B-BBEE SPV, and the recognition of deferred tax assets in respect
    of assessed losses in policyholder funds, from a net loss in 2019 to a net profit in the
    first half of 2020.

These items recognised in terms of IFRS represent non-economical profits and losses
for the shareholders’ fund, which are excluded from net operational earnings but
included in headline earnings.

Given the significant uncertainty around the eventual outcome of Covid-19 and the
trajectory of economic recovery, a prudent approach was applied in valuing the Group
operations at 30 June 2020. This resulted in generally lower valuations and
necessitated an impairment of the carrying values of certain operations. In addition to
the HEPS impact highlighted above, earnings attributable to equity holders of the
company for the six months ended 30 June 2020 will therefore also be affected by
these impairment charges. The following key assumptions were adjusted:

•   Non-life businesses
    o Economic assumptions were revised downwards in the current uncertain
      environment, in respect of both economic growth forecasts and future investment
      returns. This affected the valuations of the investment management,
      administration and SEM general insurance operations.
    o Top-line growth was reduced across the board for non-life operations, through
      lower net fund inflow assumptions for investment management businesses and
      lower premium/fee income growth at other businesses.                                                                                 
  o The valuation of the non-life operations in Lebanon was reduced to zero as a
      meaningful economic recovery, as well the potential to repatriate profits, is not
      expected in the foreseeable future.
  o Most of the premium paid for synergies as part of the Saham Finances
      acquisition has been written off. Realisation of the synergies will take longer than
      originally anticipated due to the slowdown in economic growth across the Saham
      Finances footprint as a result of Covid-19. We remain confident that the
      synergies can be realised, but decided to rather allow these to emerge as
      positive future experience variances.
  o The valuation of Shriram Capital in India was reduced in line with the lower listed
      share prices of Shriram Transport Finance Company and Shriram City Union
• Life insurance business
  o Persistency assumptions were strengthened at 30 June 2020. Despite no
      noticeably poorer persistency experience in the first half of 2020, it is anticipated
      that rising unemployment and increasing pressure on disposable income in
      South Africa may result in adverse persistency in future periods.
  o The valuation of the life insurance business in Lebanon was reduced to zero in
      line with the non-life operations.

The lower valuations resulted in an impairment of intangible assets recognised in
respect of the Saham Finances acquisition (circa R5.8 billion) and the equity-accounted
carrying value of Shriram Capital (circa R1.8 billion). These contributed the bulk of total
impairments of circa R7.8 billion to be recognised in the six months to 30 June 2020.
Foreign currency translation gains in respect of these investments, which are
recognised directly against equity, however limited the overall reduction in net asset
value to circa R1.5 billion.

Impairment charges are excluded from HEPS and only affect EPS. EPS are
commensurately expected to decline by more than 100% compared to the first six
months of 2019. Impairment charges do not impact on cash earnings and therefore the
Group’s dividend payment capability.

Shareholders are advised that the Group expects HEPS and EPS for the six months
ended 30 June 2020 to fall within the following ranges:

                            6 months to           6 months to            6 months to
                           30 June 2020          30 June 2020           30 June 2019
                             Expected           Expected range           Prior period
                         increase on prior      cents per share        cents per share
                                 5% to 15%          179.2 to 196.3                  170.7
                                  5% to 15%         177.5 to 194.4                  169.0
 Diluted HEPS
                                                  -166.2 to -182.8                  166.2
                                                  -164.5 to -180.9                  164.5
 Diluted EPS

The financial information in this trading statement is the responsibility of the Sanlam
Board of Directors and has not been reviewed or reported on by the Group’s external

Cape Town
19 August 2020

The Standard Bank of South Africa Limited


Date: 19-08-2020 03:00:00
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