Life insurer update suggests the recession cloud has lifted – just!

Gareth Stokes, FAnews Online Editor

It is sometimes difficult to reconcile macroeconomic indicators with real world business activity. At a recent conference we remember chatting to a guest about South Africa’s slow exit from recession – an argument he countered with: “But Q1 2011 GDP growt

But large life companies such as Sanlam, Liberty, Old Mutual and Momentum seem to be on the front foot again. This assessment was confirmed when Sanlam Group reported a satisfactory trading result for the first four months of 2011. New life insurance business volumes were up 12% compared to the same period in 2010 with total new business volumes up 11%! And cash is flowing into the company once more. Overall net fund inflows topped R8.6 billion over the four months, up 27% on a year ago. This fund inflow went some way to improving the net result from the financial services division, which improved 15% over the comparable period. So, whether the overall economy is recovering sluggishly, or powering ahead – at least the financial services industry is showing signs of renewed vigour.

Powering ahead despite growing uncertainty

In their press release the company says it performed satisfactorily despite the generally slow recovery in the South African economy. “We are satisfied with the strong operational performance achieved for the period under review and remain confident that, notwithstanding a challenging economic environment, an ongoing focus on our strategy to maximise profitable growth and capital efficiency will continue to yield positive value for our shareholders,” said Sanlam Group CEO, Dr Johan van Zyl. The group released its trading update a couple of weeks prior to the ANC Youth League’s elective conference held at Gallagher Estate mid-June, so there was no need for Van Zyl to address concerns around issues of land expropriation and nationalisation. The youth league has made the nationalisation of South Africa’s mining and banking assets one of its policies.

His message to shareholders was encouraging, though those hoping for further dividend windfalls by way of special capital distributions will be disappointed. Optimal capital utilisation is a priority for Sanlam and prudence remains an important consideration in the application of the group’s discretionary capital of some R3 billion. “As previously indicated, our preferred utilisation of excess capital is an investment in value adding growth opportunities. We are well positioned to take advantage of growth opportunities and we are currently pursuing a number of strategic ventures. We will inform the market accordingly in line with JSE requirements as developments progress in this area,” Dr Van Zyl said. The group has spent almost R1 billion on share buy backs year to date May 2011, acquiring 26.9 million Sanlam shares at an average price of R27.18 per share.

Consumer debt concerns seem to be moderating

Sanlam relies heavily on local consumers for its success. The group says that relatively high salary increases and a low interest rate environment have allowed consumers to reduce some of their debt, though household debt levels remain high. Consumers are also struggling with sharp cost of living increases. The difficult consumer environment has filtered through to new retail business volumes for the period.

Low interest rates also impact on capital flows to the country’s financial institutions. Sanlam laments the slow demand for its guaranteed and money market solutions as well as the impact of lower interest rates on the group’s interest earnings. Higher resource prices provide support for the African resources-based economies, although some territories are still experiencing recessionary conditions. There is little doubt the group’s international operations have been negatively impacted by the strong rand and ongoing market uncertainty. Political unrest in North Africa and the Middle East and the natural disaster in Japan have been compounded by continued sovereign debt concerns in the Euro-zone.

Yet another cautiously optimistic executive team

Sanlam is the latest Top 40 listed company to use the phrase “cautiously optimistic” in their outlook for the financial services environment in 2011. They are concerned over ongoing market volatility and the strong comparative performance from equities in the latter part of 2010. These issues could have a negative impact on the level of growth achieved by the group, as measured by their key performance indicators, for the remainder of the year.

Editor’s thoughts: Although Sanlam seems comfortable with levels of domestic economic activity their trading update was brimming with warnings about the impact of volatile markets on investment returns. Perhaps investors will be in for a surprise come year end... Do you share Sanlam’s ‘cautious optimism’ for the remainder of 2011? Please add your comment below, or send it to gareth@fanews.co.za