The world is changing fast and to keep up you need local knowledge with global context.
By Roxanne Henderson
- Net operational earnings fell 39% in the six months through June to 3.51 billion rand ($211 million), the Cape Town-based financial services company said in a statement on Thursday. New business volumes rose 40% in the period, while net fund flows increased by 44%, it said.
- “The impact of Covid-19 on claims and persistency experience in our life businesses was muted” in the first half, Sanlam said. “But this situation is expected to deteriorate in the second half of 2020” as already evident in the weakening claims experience since the end of June.
- Profit declined due to lower investment-related income in some units and increased provisioning to cover doubtful debts in Sanlam’s specialized-finance business.
- Sanlam also supported its property and casualty subsidiary to pay almost 1 billion rand in relief to clients whose businesses were interrupted by a lockdown to curb the spread of Covid-19. Insurers are awaiting the outcome of a court case brought by customers after business-interruption claims were rejected.
- The 102-year-old insurer has revamped its South African operations to create a new life and savings cluster, which will include its offerings aimed at the mass market, the affluent segment and its corporate division.
- The reorganization was ushered in by new Chief Executive Officer Paul Hanratty, who took over from Ian Kirk in July, and follows an acquisition drive that placed Sanlam in 33 African countries and 12 others from the U.S. to India.
- “My expectation is that things will gradually improve,” Hanratty said by phone. “It is going to take a very long time for the African and South African economies to get back to where they were” before the onset of the virus.
- “I would imagine it could be two to three years of a slow grind to recover,” he said.
- Sanlam pays an annual dividend from earnings and has not altered its policy. It’s too early to give further guidance on its dividend, Hanratty said.
- Shares in Sanlam slumped 2.4% as of 9:09 a.m. in Johannesburg, the worst performer in the five-member FTSE/JSE Africa Life Assurance Index.
Sanlam achieves resilient underlying operational performance amid Covid-19 operating environment, pledges R4.5 billion relief aid in response to Coronavirus pandemic
Announcing its interim results for the six months ended 30 June 2020, Sanlam today reported a resilient underlying operational performance and a healthy solvency position amidst the most challenging period faced by the Group in many decades, caused by the global coronavirus (Covid-19) pandemic.
The resilient performance was attributed to the quality of Sanlam’s client and other stakeholder relationships, a superior strategic positioning, highly skilled and motivated employees, and a prudent approach to managing capital.
Highlights and lowlights for the six months include:
|New business volumes and net fund inflows increased by 40% and 44% respectively||Covid-19 impact on performance:|
· RoGEV and adjusted RoGEV per share underperform against hurdle rate
· 29% decline in VNB
· Growth in net result from financial services reduced from 18% to -22%
· Recognition of R7.4 billion of impairments in respect of Shriram Capital and Saham
|Value through partnerships: New Capitec Bank funeral business sold increased by 9% despite Covid-19 lockdowns|
|Strong recovery in underwriting margin of Sanlam Pan Africa general insurance to within the target range|
|Quality of earnings: Continued positive experience variances and resilient persistency despite difficult operating conditions|
Sanlam has delivered these results while providing nearly R4.5 billion to help clients, communities, and to rejuvenate the economy. This support ranged from pledges, client relief efforts, and a R2.25bn of capital to seed three impact funds to protect jobs and back South African businesses impacted by the pandemic.
The Group commenced the 2020 financial year from a solid base, with growth accelerating for most businesses in the second half of 2019. While the Group recognised that it would continue to face headwinds in some of its key markets in 2020 due to subdued economic growth, management remained confident in the business’ ability to deliver solid growth on key performance indicators.
However, the global coronavirus pandemic outbreak, followed by the declaration of states of disaster and emergency in several countries where we operate, abruptly transformed the operating environment into one of the most challenging periods faced by the Group and its stakeholders.
As indicated in previous Covid-19 operational updates, Sanlam responded rapidly to the lockdowns and curfews implemented in most of its markets, with no significant disruption in back office operations.
General restrictions on face-to-face sales had a severe impact on new life (covered) business sales and the value of new covered business written (VNB). The impact on new business was particularly severe at the outset of the restrictions, but there has been a continued recovery as digital technology was rapidly adopted to allow for new business to be written.
Sanlam Group Chief Executive Officer Paul Hanratty said, “Amidst the challenging operating environment, we are satisfied with the resilience reflected in our underlying operational performance. This is testimony to our dedicated employees and prudent approach to managing our business. Further, our prudent approach to capital management served us well during the turbulent times, with a Group solvency cover ratio of 187% at 30 June 2020 and with the ratio remaining resilient throughout the worst of the market turbulence. This positions us favourably to take advantage of opportunities that may emerge from the current challenging environment.”
New Business Volumes
Sanlam’s intermediated distribution channels were generally not regarded as essential services in those countries that imposed lockdowns to prevent the spread of the coronavirus, severely hampering the Group’s sales forces reliant on face-to-face client interactions.
Life insurance sales were most severely impacted, with monthly sales volumes lagging targets by between 50% and 90% across many lines of business in the months of April, May and June 2020.
Digital and direct businesses, such as Sanlam Indie, MiWayLife and Sanlam Direct, and digital sales tools available to certain retail distribution channels provided some relief, but could not mitigate against markedly lower sales from the other traditional channels
Requests for new business quotes at Sanlam Corporate stalled in the second quarter, despite the business being able to support clients remotely through the peak of the South African lockdown.
Sanlam Investment Group (SIG) bucked the trend and received sizable new mandates in the second quarter of 2020, surpassing its first quarter performance. Excluding SIG, overall new business written in the second quarter of 2020 reduced by 16% compared to the first quarter of 2020.
Net Result from Financial Services
Net result from financial services declined by 22% as a direct consequence of deteriorating economic prospects and investment market volatility since the end of February 2020, caused by the Covid-19 pandemic. This resulted in several negative operating result impacts, which total more than R 3 billion when compared to the first half of 2019:
- Provisions for doubtful debt were increased in Shriram Capital’s credit businesses, our SA retail credit book as well as in Lebanon
- Widening credit spreads in our corporate credit book in South Africa caused negative marked-to-market losses and a default was also experienced in respect of a foreign counter party
- Santam raised more than R1 billion in Covid-19 related provisions
- Large marked-to-market losses were experienced from poor investment returns on the Saham float.
Excluding the earnings components most significantly impacted by Covid-19, net result from financial services increased by 18%.
The Sanlam Board reviewed the Group strategy in August 2020 under the leadership of the new Group Chief Executive, Paul Hanratty. The strategic intent of sustainable value creation for all stakeholders remains firmly in place. Sanlam’s commitment to Africa is the cornerstone of the Group’s strategic positioning with a vision to become the most admired financial services player in Africa – by clients, staff, partners, peers, and society in general. Key focus areas also include strengthening Sanlam’s position where it operates outside of Africa as valuable diversifiers for the Group, as well as enhancing focus in the developed market business on expanding the client value propositions for the African client base.
The announcement in August 2020 on the agreement reached with African Rainbow Capital Financial Services (ARC FS) to acquire a 25% stake in SIG’s 3rd party asset management business in South Africa is a major step in positioning SIG for future growth. The enhanced Broad-based Black Economic Empowerment (B-BBEE) credentials will transform the business into the largest black-owned investment manager in South Africa, creating substantial opportunities to improve institutional market share and to partner with other asset managers.
The following structural and executive changes have been implemented to support strategic execution (all changes effective 1 September 2020 unless otherwise indicated):
- To facilitate a better focus on specific important client segments and strong co-operation between different parts of the business in serving Sanlam’s South African clients, the current SPF business cluster has been split into two business sub-clusters: SA Retail Mass, which consists of Sanlam Sky, Safrican and African Rainbow Life; and SA Retail Affluent.
- Jurie Strydom, currently the Chief Executive Officer (CEO) of SPF, has been appointed CEO of the newly established Life and Savings cluster, which incorporates Sanlam Corporate, SA Retail Mass and SA Retail Affluent;
- Kanyisa Mkhize has been appointed CEO of Sanlam Corporate;
- Bongani Madikiza, former CEO of African Rainbow Life, has been appointed CEO of SA Retail Mass;
- Anton Gildenhuys, current Chief Risk Officer and Chief Actuary, has been appointed CEO: SA Retail Affluent with effect from 14 September 2020;
- Mlondolozi Mahlangeni has been appointed Chief Risk Officer and Chief Actuary with effect from 14 September 2020;
- Karl Socikwa, former CEO of Sanlam Sky, has been appointed Group Executive: Market Development to take over from Temba Mvusi who retires at the end of the year; and
- Wikus Olivier, currently the acting Chief Financial Officer (CFO), has been appointed Group Executive: Strategy from 01 October 2020.
All of Sanlam’s key markets are currently experiencing a period of contraction, with a recovery to 2019 levels of economic activity only expected in the medium term.
The operating environment will therefore remain challenging for the rest of 2020, with the eventual outcome of Covid-19 a significant uncertainty. Pressure on new business volumes is persisting as varying restrictions on the movement of people remain in force. This is aggravated by deteriorating economic conditions and rising unemployment in South Africa, materially eroding personal disposable income and the affordability of Sanlam’s offerings. These conditions also dampen client investor confidence. Growth in new business volumes is therefore expected to reduce towards the end of the year. Average investment market levels, the relative strength of the Rand exchange rate and the level of long-term interest rates and corporate credit spreads are other key factors that may have an impact on the growth in net result from financial services, net operational earnings, and Group Equity Value to be reported for the year ended 31 December 2020.
“Our focus will remain on strategic execution and utilising the strength of Sanlam’s balance sheet to pursue value-enhancing opportunities. We have the necessary depth of talent to continue delivering value to our shareholders and other stakeholders despite the current headwinds,” said Mr. Hanratty.
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