Dr Johan van Zyl, Sanlams Group Chief Executive
Dr Johan van Zyl, Sanlams Group Chief Executive, said that he was confident about Sanlams future prospects. He commented as follows:
The challenging conditions of the latter part of 2008 have certainly continued into 2009 and the impact of the global financial market crisis was evident in the declines and significant volatility in global markets in the first four months of this year. It was also evident in the deteriorating general business environment worldwide with widespread negative earnings reports. The recent economic data confirming that South Africa is now officially in a recession, also bears out the weakening local outlook.
Against this background of the macro environment in which we operated and compared to the subsequent performances of the financial services industry in general, the Sanlam Group achieved a satisfactory performance in the first four months of 2009.
I am particularly pleased that our strategy of diversification is continuing to provide us with the resilience that is again a distinguishing factor of the Groups performance amidst these tight and turbulent market conditions.
This is the result of the successful implementation of our five-pronged strategy since 2003. While we expect the challenging financial and economic environment to continue for the remainder of the year and into 2010 an environment that is likely to impact on growth in the Groups key operational performance indicators our Groups strategy for 2009 remains unchanged.
"We will therefore continue to apply our resources to optimise our capital structure, implement growth opportunities through acquisitions and collaboration, maintain our tight grip on costs, persist with our transformation initiatives to build a world-class financial services group, and explore further opportunities for diversification through a wider range of financial solutions and geographic expansion, van Zyl said.
The diversification of the Group into different market segments and solutions offerings is reflected in resilient new business levels (+2% excluding white label), new business margins being maintained at similar levels to 2008 and continued Group net inflows (including net life inflows) for the four months to 30 April 2009. These results were achieved amidst extremely challenging financial and economic conditions.
Challenging business environment
Despite a slight recent recovery in global equity markets, the financial and economic impact of the global financial market crisis continued unabated during the first four months of 2009, as evidenced by negative earnings reports being the order of the day. The slowdown in the world’s largest economies has resulted in lower demand for resources, and hence negatively impacting on the growth of the commodity based economies in which the Group operates. The South African economy is no exception and a general slowdown in economic growth and pressure on consumers’ disposable income is evident in consumer spending statistics. The interest rate cuts announced by the South African Reserve Bank over the last few months should provide some relief to consumers, but it is likely to take some time before this will be evident in increased consumer demand.
Highlights
Total new business volumes (excluding low margin white label business) increased by 2% compared to the first four months of the 2008 financial year. The pressure on consumer spending is most evident in the retail middle-income market, with Sanlam Personal Finance, Sanlam Private Investments and our businesses in the United Kingdom experiencing a slowdown in respect of savings and investment-related business volumes. Risk underwriting and institutional new business volumes are proving to be more resilient and recorded a satisfactory performance in the current environment. Core earnings per share for the four months to 30 April 2009 are 6% lower than the comparable period in 2008. Normalised headline earnings per share are down 23%, reflecting a continuation of the negative investment market performance in 2009. The FTSE/JSE All Share Index lost 4% of its value (excluding dividends) for the four months to 30 April 2009, compared to an increase of 6% in the first four months of the 2008 financial year.
Capital
As indicated in the Group’s 2008 annual report, a more cautious approach is being followed in the application of the Group’s discretionary capital in the current financial and economic environment. In line with this, the share buy-back programme was suspended during 2008. Significant utilisation of discretionary capital for corporate activity during 2009 was limited to the acquisition of the minority interests in Channel Life for some R200 million. A total of 30 million Sanlam shares held as treasury shares were cancelled during March 2009, reducing Sanlam’s issued share capital to 2 160 million shares. All of the Group’s operations remain well capitalised. Sanlam Life Insurance Limited’s statutory capital covered its Capital Adequacy Requirements by 2,4 times as at 31 March 2009, after allowing for the dividend payable to Sanlam Limited in respect of the 2008 financial year. The Group remains well positioned to take advantage of growth opportunities.
Salient features of the Group’s performance for the four months to 30 April 2009 are:
New Business volumes
· Overall new business volumes, excluding white label, are up 2% on the comparable period in 2008, with a strong contribution from institutional and non-South African fund flows.
· New life business volumes decreased by 5% compared to the first four months of 2008.
- Sanlam Personal Finance recorded a 15% decrease in new life business sales, with both Glacier and Topaz South African business negatively impacted by the pressure on consumers’ disposable income. Risk underwriting business is more resilient in the current environment and recorded an 8% increase compared to the first four months of 2008.
- Sanlam Developing Markets reported growth of 5% in its new business volumes for the first four months of 2009. This growth has been impacted by the discontinued new single premium business in Sanlam Sky Solutions. Excluding these, Sanlam Developing Markets recorded an 11% growth in new business sales. South African recurring premiums increased by only 2%, in particular due to the deliberate scaling down of low margin direct sales. New business volumes of the African operations are up more than 30% on 2008, with recurring premiums increasing by more than 50%. The slowdown in economic growth in Africa is expected to impact negatively on the continuation of these growth trends. The Indian market is also not escaping the impact of the economic downturn and Shriram Life’s new business flows for the four months are 16% lower than in 2008.
The economic environment in the United Kingdom continued to weaken during 2009, with investors remaining cautious. This contributed to a 53% decrease in Sanlam UK’s new life business volumes.
Sanlam Employee Benefits continues to be adversely impacted by the extremely competitive environment and recorded a decrease in new business sales. This is, however, attributable to lower single premium business, which is more volatile in nature. Recurring premium business is up on 2008.
Overall, the average life new business margin for the four months has been retained at levels similar to the first half of 2008.
Persistency in the middle market is continuing to show some strain, as expected in the current environment, but remains within acceptable levels. In this regard, there have been no material basis changes required to the valuation basis.
· Gross investment business inflows are 4% higher than in 2008.
The strain on disposable income is also evident in Sanlam Personal Finance’s new investment business in South Africa. This was, however, offset by strong unit trust sales in Namibia, with an overall 2% decline in new business.
Gross investment flows in Sanlam Investments increased by 4%, supported by an increase in the equity mandate of the Public Investment Corporation. Sanlam Collective Investments also recorded satisfactory growth, the combined effect of a slight decrease in retail business and strong wholesale volumes. SIM’s assets under management amounted to R408 billion on 30 April 2009.
· Net fund inflows of some R2,7 billion (excluding white label) are particularly satisfactory in the current environment. This includes outflows of R4,5 billion relating to low margin custody business at Sanlam Private Investments, which will have a negligible effect on the fee base. Excluding this specific transaction, net fund inflows increased from R6,6 billion in 2008 to R7,2 billion in 2009. Life net fund flows remain positive.
Earnings
· Net result from financial services for the four months is down 7% on 2008.
Sanlam Personal Finance, Sanlam Developing Markets and Sanlam Capital Markets achieved solid performances.
Santam has been impacted by large commercial claims during the first few months of 2009, a general trend experienced in the industry. This had a negative impact on Santam’s underwriting result.
As expected, volatile equity markets, overall lower market levels and a reduction in performance fees earned continue to have an adverse impact on Sanlam Investment’s results, with net operating profit decreasing in line with the overall lower average level of assets under management.
· Core earnings per share are 6% lower than 2008.
· Normalised headline earnings per share are down 23%, primarily due to the negative investment market performance.
· Share buy-backs during 2008 resulted in a 6% reduction in the comparable adjusted weighted average number of shares in issue (net of treasury shares).
Outlook
The challenging financial and economic environments are expected to continue for the remainder of the year and into 2010, and are likely to impact on growth in the Group’s key operational performance indicators. Shareholders need to be aware of the impact of financial market volatility on Group earnings and Group Equity Value. Relative market movements may have a major impact on the growth in Group earnings to be reported for the full 2009 financial year.
The information in this operational update has not been reviewed or reported on by Sanlam's auditors. Sanlam’s interim results for the six months ended 30 June 2009 are due to be released on 3 September 2009. Shareholders are advised that this is not a trading statement as per section 3.4 of the JSE Listings Requirements.
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