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Sanlam to be tested by economic curveball

06 June 2008 Gareth Stokes

One of South Africa’s life assurance giants, Sanlam Limited, presented an operational update in Johannesburg earlier this week. The update covers the four months to April 2008 and the group went to great lengths to explain that these results were un-audit

Life insurance the big surprise in new business numbers

As with any life assurance company the first focus is on business volumes. Sanlam was happy to report a 9% growth in new business volumes over the same period in 2007. In the context of the tough economic conditions mentioned earlier this result is indeed impressive. What caught our attention is the 30% growth recorded in the life insurance new business volumes. This was in part due to a 43% improvement in single life premiums recorded by Sanlam Personal Finance (SPF).

SA new recurring risk premium was down some 2% with Sanlam Developing Markets (SDM) weighing in with a 16% increase in the same category. Non-SA new recurring risk premium was up 28%. But there are some early warning signs for the life business. The first is that “average life new business margin for the four months (based on the present value of new business premiums net of minorities) is marginally lower than that achieved in the 2007 financial year.” And the second is that “life business persistency levels deteriorated somewhat from the levels experienced in 2007.” Lower margins and declining persistency will inevitably feed through to the bottom line.

According to Sanlam the investment business in the first four months of 2008 performed in line with 2007. Although institutional inflows were slightly lower than expected, this was compensated for by an increase in retail inflows. SPF once again emerged as the star performer attracting 30% more investment business while gross inflows to Sanlam Investment Management (SIM) showed a 7% decline. At 30 April 2008 SIM managed R451bn which is marginally down on the December 2007 total. The group summed up the situation for business volumes saying: “Net fund inflows of R3.4 billion are the result of positive net flows in both life insurance and investment business!”

Earnings weighed down by market outlook

It comes as little surprise that operating income from the group’s financial services has came in lower than the corresponding 2007 period. Sanlam revealed that “net of IFRS related adjustments, headline earnings are down 16%.” It’s a trend that won’t please investors if it persists through the half-year.

Sanlam was happy with the operational performances from SPF and Sanlam Employee Benefits (SEB). The also noted that underwriting results for the period were satisfactory. So the problems mainly came from the investment side. SIM struggled with reduced performance fees due to the extremely volatile investment markets. For reasons mentioned in the opening paragraph it’s been extremely difficult to achieve good results with a diversified portfolio. It doesn’t matter how well your resource counters perform if the balance of your portfolio pulls you down! And then there’s the new “direct” financial services offering MiWay. Sanlam launched this business unit in 2008 and is happy with progress, although the venture “will only start to make a positive profit contribution once critical mass in business volumes has been achieved.”

Overall core earnings per share were marginally better than in 2007. But “normalised headline earnings per share are down 47% to date, substantially due to lower investment returns as well as a lower capital base!” Sanlam reports that investment returns suffered due to poor stock market performance and underweight shareholder funds in the strongly performing resources sector.

Inflationary pressures will hamper the industry

There’s not much to look forward to for the remainder of the year. All the usual suspects are in play, including challenging macro-economic conditions (they mean inflation) and volatile financial markets (still that US sub-prime thing causing problems). These factors will “impact on growth in the group’s key operational performance indicators” for the remainder of the year.

Sanlam also warned that major market movements toward the reporting period deadlines (end of June and December 2008) could significantly impact on the level of earnings reported. With an investment book of Sanlam’s size the company is pretty much at the mercy of the markets!

Editors’ thoughts:
Although the life insurance new business volumes seem to have picked up, Sanlam is probably concerned about the declining margin from this business. Do you think margins in the life industry will come under pressure this year? Add your comments below, or send them to

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