Life assurance giant expects a tough second half
Until late Friday afternoon local investors probably thought that the worst of the recent stock market volatility was behind them. That was until job data from the US revealed that gross payrolls had declined for the first time in four years. Coming on top of concerns about the sub-prime credit debacle, the jobs data caused a big dip in US and global markets.
Emerging markets like the JSE were also hard hit. South Africa's Top 40 Index plummeted 2.1% in the final hour of trade on Friday as investors dumped shares, fearing that the US was closer to a full-blown recession than previously believed. The resulting market instability combined with tough inflationary pressures make for a very demanding local business environment.
Apart from the obvious challenge of doing business in a high inflation environment, many local companies in the financial services arena are experiencing difficulties as they enter a period of slower equity market growth. They can no longer bank on 30% per annum growth on their invested funds. This problem is particularly relevant to companies in the retirement and collective investment space. A number of these companies have already warned that their second half results for 2007 will not mirror the first.
At least the life business is soaring
Sanlam is no exception. The group recently conceded that while it was satisfied with its performance in the first six months of 2007, volatile markets would prevent a similar performance in the remainder of the year. With earnings already under pressure, Sanlam has resorted to satisfying investors by focussing on improvements in its new life business.
The first bit of positive news was growth of 17% in individual life business for the half year. Growth in this category is encouraging in light of the tough competition in this segment of the market. At the same time, the value of new life business soared to R260 million, an increase of 51% over the comparable 2006 period. At the same time, the new life business margin improved from 1.8% to 2.3%. Sanlam attributed growth in this area to the "sterling performance by Sanlam Developing Markets." Sanlam Developing Markets includes African Life, Channel Life and group operations in Botswana and India.
Shriram Life, the group's Indian life insurance operation now has 11, 000 agents and looks poised for big things in coming years. Considering the near 20% increase in number of agents, the sales increase of R44 million to R53 million is hardly unexpected.
New accounting standard causes headache
A major concern raised by Sanlam in its interims was that of the new generally accepted accounting standard, IFRS. The group pointed out that this accounting standard was being applied to all industries "without exemption for any unique industry or country specific circumstances."
Sanlam's major concern is with the reflection of policyholder's investments IFRS requires that policyholder's shares in Sanlam or group subsidiaries are deducted in full from equity on consolidation (in respect of Sanlam shares) or shown at net asset value (in the case of group subsidiaries). The result, says Sanlam, is a mismatch between policyholder investments and policyholder liabilities.
The IFRS question is hardly unique to Sanlam though, and in our experience company auditors will always find a way to ensure that company results are reflected in the best light within generally accepted accounting principals. Sanlam's answer to the problem is to disclose normalised diluted earnings per share to exclude the IFRS impact. The result will probably be that investors will have to exercise even more care when reading financial statements.
Focus on enhancing shareholder value
Despite positive news in some sectors of the business, Sanlam's headline earnings declined some 12% to R2.745 billion for the first six months of 2007. Given the outlook for investment performance in the second half of the year, Sanlam will be hard pressed to repeat the 2006 fully year earnings of R6.838 billion.
Pressures aside, Sanlam remains focused on improving value. The interim results underline this intention: "We will remain focussed on further enhancing value, not only for shareholders, but for all stakeholders."
Editor's thoughts:
After a quick look at Sanlam's interim results you would be excused for believing that everything is going extremely well at the group. Like most companies, Sanlam focuses on the positives from its financials, and glosses over the negatives. A closer look reveals that headline earnings declined by 12% for the period under review. With tougher times ahead this trend will probably extend into the second half, and thus the full year. Are companies too obsessed with presenting their financial results favourably? Send your comments to [email protected]
