There aren’t many giants in the South African long-term insurance environment. The undisputed leader is Old Mutual (with a market capitalisation of R55.526bn), followed by Sanlam (R36.914bn) and Liberty Life (R16.760bn). Discovery has also crept up the chart, though much of its value vests in its healthcare business. After recent market developments (and the much publicised trouble at Old Mutual) analysts view Sanlam as a proxy for the industry. In other words, the best way to get a feel for the long-term insurance business environment is to pore over Sanlam’s trading update for the four months to 30 April 2009.
Surviving the worst of times
In a rather familiar refrain, Sanlam kicked off its trading update with a discussion of the challenging economic environment. Group chief executive, Dr Johan van Zyl, said the deteriorating business environment already reflected in the growing number of negative earnings reports issued by companies worldwide. Van Zyl noted that “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.” And he quickly reminded shareholders that South Africa’s technical recession – defined as two successive quarters of negative growth – had been confirmed.
Although equities have rebounded significantly in recent weeks it’s too soon to declare an economic recovery. Slowing (and in many cases declining) growth in most of the world’s economies will impact demand for manufactured goods and mining output for some time to come. This is a major challenge to Sanlam which operates in mostly commodity dependent markets. Although South Africa avoided the worst of the so-called financial contagion it looks like the country will get caught in the turbulence as it passes. To make matters worse, local consumers remain under significant pressure, as evidenced by retail sales numbers, motor vehicle statistics and house prices. It’s a tough ask writing new business in these conditions. “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,” said Sanlam.
What about new business?
Results across Sanlam’s diverse divisions and geographic regions were mixed. Sanlam reported a 2% increase in new business volumes (excluding white label) over the comparable period. New life business volumes decreased 5%. “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,” said Sanlam. In contrast, the group’s risk underwriting business improved 8% over the comparable period. But there was a real shock from the UK as Sanlam’s new life business in that market showed a 53% decline.
Sanlam said India was unable to escape the “impact of the economic downturn” either. Shriram Life experienced a 16% decline in new business flows for the period. Overall, Sanlam Developing Markets reported new business volume growth of 5% in the first four months of 2009. Growth was impeded by the discontinued new single premium business in Sanlam Sky Solutions. The jewel in the group’s crown – admittedly off a low base – was the African operation. Sanlam says new business volumes in the region were 30% higher with an impressive 50% increase in recurring premiums. The group doesn’t expect this trend to persist in the remainder of the year.
Sanlam Employee Benefits endured a tough four months. The competitive nature of the industry resulted in a slight decrease in new business sales, largely due to worse than expected single premium business. Recurring premium business was slightly up on 2008. “Gross investment flows in Sanlam Investments increased by 4%, supported by an increase in the equity mandate of the Public Investment Corporation,” said Sanlam. The Collective Investments operation reported net fund inflows of some R2.7bn to bring the total assets managed by Sanlam Investment Managers to R408bn at 30 April 2009. Against this backdrop the bottom line 23% decline in normalised headline earnings per share came as no surprise.
The great diversification payoff
“I am particularly pleased that our strategy of diversification is continuing to provide us with the resilience that is a distinguishing factor of the group’s performance amidst these tight and turbulent market conditions,” said van Zyl. He added that the implementation of the group’s five-pronged strategy (going back to 2003) would remain unchanged through 2009. “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 group’s key operational performance indicators – our strategy for 2009 remains unchanged.”
Van Zyl said Sanlam would apply its resources to optimise the group’s capital structure, implement growth opportunities through acquisitions and collaboration, maintain a tight grip on costs, persist with 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. He also cautioned that “shareholders [would have to] be aware of the impact of financial market volatility on group earnings and group equity value” going forward.
Was van Zyl disappointed with the bottom line? “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,” he said.
Article provided by: FAnews