Reaping the rewards of financial services diversification
One of the country’s top life insurers, Sanlam Limited, continues to reap the benefits of its diversification strategy. The group has expanded its product offering from its traditional life book to include investments, asset management, employee benefits and short-term insurance among others. Sanlam is also carving a foothold in one of the world’s most populous regions – India. What will the financial services giant achieve in the current year? Last week Wednesday the company published a trading update for the first four months of 2010
The update begins rather ominously with a paragraph on the challenging business environment. It’s nothing you haven’t already heard. They warn the global economic recovery remains fragile, mired by the sovereign debt crisis ravaging much of the European Union. As investors question the sustainability of the recent economic turnaround markets have exhibited increasing levels of volatility, and European risk margins have gone through the roof.
South Africa cannot escape the pain
Local equities gained just 3.5% in the year to 30 April 2010, as reflected by the FTSE/JSE All Share index. Although this compares favourably with the 4% loss suffered over the similar period in 2009 – most index trackers are already 5% down on the best levels experienced between October and December last year. Prospects for the domestic recovery vest with South Africa’s stressed consumer. Sanlam notes: “Pressure on consumers’ disposable income and discretionary spending remains.” This has contributed to declining deal flows and business activity at a number of Sanlam’s institutional businesses.
Of greater concern is the apparent economic lag in commodity-rich African countries. These economies are only now feeling the full impact of the global slowdown. An unnaturally high rand isn’t helping matters. “The reported results from most of our international businesses are also negatively impacted by the relative strengthening of the South African rand,” observes Sanlam. Analysts say the rand should be trading at around R8.50/$ on purchasing price parity (PPP) measures. The final drag for domestic insurers is the sharp reduction in short-term interest rates. Interest earned on working capital and investment income on shareholder funds have come under pressure as the Reserve Bank repeatedly cut rates. The prime interest rate is 550 basis points softer than the 15.5% prevailing at 1 December 2008.
Small victories in life space
Has Sanlam risen to the challenge? The group says its new life insurance business volumes increased by 21% at sustained margins, while overall net business inflows amounted to R6.8 billion. But a strong performance from its life business wasn’t enough to rescue the period under review. Instead, total new business volumes were 6% lower than for the first four months of FY2009.
Sanlam understandably focuses on the impressive new life business number. Volumes were driven by Sanlam Personal Finance’s 15% increase in new life business sales, with both the Glacier and Topaz South African showing a strong improvement over 2009 results. “Growth was achieved consistently in both new recurring and single premium volumes,” says Sanlam. We briefly mentioned Sanlam’s foray into India in the opening paragraphs. The group reports strong activity at its Shriram Life operation and also achieved 39% increase in its UK-based new life business volumes. Both persistency and life net flows remain within acceptable levels...
Risk underwriting business was up 17% while the Sanlam Developing Markets division reported 10% growth in new business, including an excellent 27% improvement in new business premiums from the combined Sanlam Sky / Channel Life South African operations. Sanlam Employee Benefits leveraged its small base to record a threefold increase, with new single premium flows of R277 million and a 15% spike. But Africa disappointed. “New business volumes reported by the African operations are 12% down on 2009.”
Investments taking strain
Gross investment business inflows are 11% lower than in 2009, reports Sanlam. There was a 3% reduction at Sanlam Personal Finance’s new investment business, offset by strong unit trust sales in Namibia. But gross investment flows to Sanlam Investments were down 17%! Net investment inflows of some R4.5 billion (excluding white label) for the four months, versus R260 million in 2009, are however particularly satisfactory in the current environment.
Sanlam remains well capitalised, with identified discretionary capital of some R3.5 billion at the end of December 2009. The group utilised excess capital to invest in value adding growth opportunities (some R100m year-to-date 30 April) and to buy back Sanlam shares on the open market (some R460m to acquire 19.2 million Sanlam shares at around R24/share). What will the first half of FY2011 deliver for shareholders? The group’s half year audited results (to 30 June 2010) will only be released on 9 September 2010; but the four-month trading update points to a conservative 12% improvement in the net result and an 8% improvement in core earnings per share. Management will have its work cut out to maintain this performance given the gloomy outlook for the global (and South African) economy.
Editor’s thoughts: Sanlam’s trading update confirms the tough trading environment facing financial services companies. Although it’s possible to write new business life companies cannot prosper until the consumer recovers. There’s not enough discretionary money left once all the monthly bills are paid. Can South Africans save more given the constant erosion of their real disposable income? Add your comment below, or send it to [email protected]
