Confusing signals? Sanlam earnings down 86% despite satisfactory operating result

Earlier this week Sanlam released a trading update for the 10 months to October 2008. In an attempt to remain upbeat the statement begins: “Notwithstanding the challenging financial market and economic conditions, the group achieved satisfactory operating

New business volumes begin to flag

The group’s disappointing earnings performance coincides with the first signs of a slowdown in business volumes. Although Sanlam points out that total new business volumes are 4% higher for the period (7% if they strip out white label operations) this growth fails to keep pace with inflation. The company had to rely on a 15% increase in new life insurance business premiums to underpin this result. And the expectation is for the final two months of the financial period to squeeze growth further. Given the outlook for the consumer market in 2009 we doubt volumes will pick up much from current levels. Results at Sanlam Employee Benefits also came under pressure during the review period, resulting in an overall net outflow of cash in the life business.

Fortunately there was some good news. Sanlam welcomed the 35% growth in South Africa single premiums achieved at its Sanlam Personal Finance division. They attribute the success of the unit to “the strong demand for Glacier retirement and Topaz guaranteed plan and contractual preservation fund solutions.” Consumer confidence in these products resulted in net fund inflows top R10.4 billion for the period. The group doesn’t provide a breakdown of the fund inflows; but we assume much of it went to defensive ‘cash’ products rather than equities. Sanlam Developing markets weighed in with a 30% increase in new business volumes and Sanlam UK new business sales were 19% higher despite the UK bracing for a deep recession.

What can we learn from these experiences? A company can bolster sales through tough economic conditions with innovative products and top class distribution channels. And it helps to diversify across product and geographic region.

2009 is about dodging bullets

Try as they might Sanlam doesn’t inspire much confidence for the next 12 to 24 months. The say that “the challenging financial and economic conditions are not expected to abate for the remainder of the year, and are likely to impact on growth in the group’s key operational performance indicators.” As we already know South Africa won’t escape the fallout that’s scarred international financial markets. “The local economy with its liquid currency and open investment markets is not impervious to these international events, says Sanlam. And “shareholders need to be aware of the impact of financial market volatility on group earnings and group equity value.” There are concerns that the recent petrol price decrease and the expected interest rates cuts in 2009 will help consumers stay afloat rather than increase their consumption expenditure. We’re going to have to wait for the impact of these changes to filter through to the all sectors of the market before things improve – and that can take between six and 18 months.

Sanlam shares were trading at R16.60 at the time of writing. This represents a significant discount to the group equity value mentioned above. But there’s a reason. Threats of recession, high interest rates, high inflation and the serious knock in consumer disposable income have placed the group under tremendous strain. The market is discounting these shares for a reason – it believes things will get a little worse before they get better

Editor’s thoughts:
We’ve been impressed with the resilience of new business volumes from most of the large players in the domestic insurance industry. Some say that long-term insurance sales have been rushed through ahead of possible changes to commission structures – others believe it’s due to an expanding consumer market. What we want to know is whether the life insurance companies will be able to maintain new business volume growth in 2009? Add your comments below, or send them to gareth@fanews.co.za