It takes creative genius to spruce up life insurance results these days

11 March 2009 Gareth Stokes

There’s been so much on the go in the financial services industry in recent weeks that local insurance giant Sanlam Limited’s results almost slipped by unnoticed. The company released results for the full-year to 31 December 2008 on 4 March 2009. Once you sift through the usual life assurance fanfare, you’ll discover steep declines in normalised headline earnings per share (down 59%) and diluted headline earnings per share (down 40%).

The executive review includes some fantastic descriptions of one of the toughest trading years on record. Here’s Sanlam’s take on 2008: “A worldwide confidence crisis caused by major capital write-offs in the financial services sector culminated in a general melt-down in international investment markets, impacting on the operating environment in which the Sanlam group operates.” In short – shares tumbled on stock exchanges around the world – and investment returns were shocking. Luckily for Sanlam its long-term diversification strategy offered some protection. “Strong operational performances” in the short-term and life businesses get special mention.

Business volumes slightly softer

Sanlam’s total new business volumes were 2% lower, down to R100bn for 2008. A closer analysis of this number reveals the good and bad business areas. New business volume improvements were recorded at Sanlam Personal Finance (up 17% to R31.070bn), Santam (volumes grew 7% to R12.165bn) and Sanlam UK (which surged 82% off a low base). On the negative side Sanlam Developing Markets contracted 28% to R2.594bn, the Institutional Cluster fell 9% to R45.476bn and White Label attracted 28% less business, down to R6.481bn.

It’s worth noting that the South African new business volumes – 18% higher than in 2007 – were due to big increases in single premium business. “Total single premium life sales were up 24% on 2007,” said the group, adding that “the Glacier life insurance solution range accelerated during the year to achieve an increase of 46% in inflows…” Total fund inflows only grew by 1% (to R109.5bn) over 2007. But if you want your business to sound a bit healthier you can strip out the white label operations to reveal that “net inflows for the year amounted to R10.6 billion – 11% up on the R9.6 billion in the corresponding period in 2007.”

There’s simply too much information about group operations to cover in a single newsletter. But we do have space for a quick peak at some of the lines inn the Group Income Statement. The glaring number from that page is the swing under the “investment surplus” heading, from a surplus of R15.885bn in 2007 to a ‘loss’ of R24.672bn in the latest year. Profit for the year tumbled, falling from R6.379bn to a mere R2.937bn. And the bottom line – basic earnings per share – fell 51% to 125c. Delving a bit deeper we can draw some operational conclusions from the report too.

Big discretionary capital spend in 2008

At 31 December 2007 Sanlam held R6.1bn in their discretionary capital account. The group used this money on a range of activities to strengthen shareholders’ positions and further diversify the group through 2008. The bulk of this capital (R2.2bn) was used to buy back Sanlam shares on the open market. We did the math and conclude that the group paid 1880c per share for the 117 million shares purchased. Was that really a great use of capital considering the counter trades at around R15 today?

The balance of the expenditure gives a good indication of where Sanlam hopes to find value going forward. It committed R110m in start-up capital for its 55% interest in direct financial services company MiWay Finance. Of course Sanlam gets a second bite of this cherry through its 57% effective stake in short-term insurer Santam (which in turn owns 25% of MiWay). Incidentally, Sanlam’s effective holding in Santam only reached that level after the group spent R200m to acquire 2.5 million Santam shares during the year. These expenditures confirm the importance of short-term insurance in the group’s future plan.

Emerging markets are next on the list. Sanlam has extended its joint venture with India’s Shriram group (Shriram Life) by creating a new General Insurance venture. “Sanlam obtained a 26% interest in the new joint venture for a total consideration of R115 million.” And Sanlam is intent on extending its market share where South African life insurance is concerned. The company announced earlier this year that it would acquire PSG Group’s 34.6% interest in Channel Life for R197m – subject to regulatory approval!

What can shareholders expect in 2009?

Sanlam provided plenty of forward looking information in their 2008 Annual Report. The most important observation is that the group’s long-term strategy remains intact. Financial crisis or not the group’s main concern is “maximising shareholder value.” In 2008 this required management to focus on “optimal capital utilisation, earnings growth, costs and efficiencies, diversification and transformation.” We guess shareholders will hold thumbs that the group utilises the R2.1bn discretionary capital (all that remains at 31 December 2008) to their best advantage. Sanlam claims they will do so in the most efficient manner – adding that further buybacks of Sanlam shares at current market prices would be sensible. Shareholders would probably prefer this surplus to be returned to them by way of special dividends. Time will tell; but in the short-term we expect companies in the broad financial services sector to hang on to their cash for as long as possible.

But the overarching theme is that the global financial conditions that damaged results through 2008 will remain. There is no quick fix for the damage done to banks and financial services companies by the credit crisis. Sanlam perhaps understates the residue which will haunt investors in 2009, concluding “some slowdown in new business flows can be expected.”

Editor’s thoughts: Financial services company annual results make for heavy reading. But a quick look at the ‘headline’ numbers circulated by the media doesn’t give the whole picture. When was the last time you pored over a full-length insurance company annual report? Add your comments below, or send them to

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