Sanlam expects improvement despite headwinds

Sanlam management has promised investors better results going forward, noting that the Covid-19 pandemic seems to be under control, recent acquisitions are starting the contribute handsomely, and new acquisitions and joint ventures are progressing steadily through processes to get approval from relevant authorities.

Group CEO Paul Hanratty remarked during a presentation of Sanlam’s interim results for the six months to end-June that financial markets are starting to look better too: “It looks like lower stock market levels during the first six months of 2022 have begun to reverse.”

Chief financial officer Abigail Mukhuba told Moneyweb that markets are still low and volatile, but that investment portfolios have been recovering lately.

“Markets are still lower than last year, but volatility has decreased. We have seen a reversal of unrealised losses,” she said.

“The Russia-Ukraine conflict has not been resolved, but markets seemed to have adjusted to this uncertainty. While we won’t try to predicts markets over the next few months, things are looking better.”

Santam

Mukhuba said Sanlam is also hoping that its general insurance interests – mainly its investment in Santam – will perform better during the second half of the financial year too. Sanlam owns nearly 59% of Santam.

She told investors during a discussion of the results that Sanlam delivered a good performance in difficult circumstances, saying its main businesses all did well.

“Excluding items that we believe have had a once-off impact on Sanlam’s results, such as high mortality rates due to Covid and the effect of recent floods on Santam, the group’s operating earnings would have been 10% higher than a year ago,” she said.

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Adverse weather conditions and the catastrophic floods in KwaZulu-Natal, together with the fall in share prices in Morocco, resulted in a decline in earnings in the general insurance operations.

However, Hanratty pointed out that the diversification of the group meant that overall operating results were still robust, despite the pressure on general insurance earnings. In addition, rising interest rates had a significant negative impact on the valuation of the group’s operations and the value of new life business, as a higher discount rate lowers the present value of existing and new business.

Sanlam announced that the net result from life insurance was up 23%, investment management was up 25% and credit operations grew by 22%, offset by the 57% decline in general insurance operations.

Hanratty said the fact that net operational earnings of R4.4 billion were only 7% lower in the six months to June compared with the first half of the previous financial year shows the resilience of Sanlam during the difficult period.

“Lower mortality claims relative to the first six months of 2021 contributed to a rebound in life insurance earnings, as a result of the impacts of Covid-19 coming under control. The group’s investment management operations reported strong earnings growth despite lower returns in global markets, benefiting from strong recent net inflows, performance and fund establishment fees, as well as growth in brokerage income.

“Credit and structuring earnings also recorded good growth, driven by improved performances in South Africa and India,” he added.

“The extremely difficult global macro conditions – which have seen the far-reaching impacts of the Russian-Ukraine conflict, surging inflation and energy prices, supply chain disruptions and hardship for consumers – has created a difficult backdrop for the group.”

Hanratty described the problems at Santam as “a perfect storm of events”.

“Adverse weather conditions including the KwaZulu-Natal floods, rising claims from Eskom load shedding impacts, steeply rising claims costs brought about by a combination of the inflationary surge and heightened crime were worsened by lower investment return on insurance funds,” he said.

Mukhuba came across a bit more cheerful in her chat with Moneyweb, saying that corrective actions were taken to improve problematic areas. In essence, premiums and excess payments had to be increased to ensure sustainability.

Read: Insurance prices to rise as risks bite, Sanlam says

Life operations

The difficult economic environment continues to affect life insurance operations.

Sanlam reported that new business volumes decreased marginally in the first six months of its financial year compared with the first six months of 2021 when excluding UK life disposals.

Robust growth from most life insurance businesses was offset by weaker single premium sales in the SA retail business, albeit exceeding pre-pandemic levels.

Net fund inflows in the investment management operations declined, but remained strongly positive as the exceptionally high base of 2021 and significant market volatility impacted the allocation of new mandates over the period. “The 2022 result was more than acceptable,” said Hanratty.

“The strong operating performance of the group, despite the environment, has reinforced Sanlam’s purpose, which is to help our clients live with confidence by empowering them to be financially confident, secure and prosperous.

“We serve all market segments across Africa and India with a broad set of products that are accessible and backed by a strong advice offering to protect and grow our clients’ wealth.

“Our purpose is embedded in the group’s strategy which aims to improve our offering to clients by increasing our reach and scale through partnerships and use of digital technology,” he said.

Outlook

Sanlam noted that its joint venture with cellphone operator MTN is progressing through regulatory approvals. The platform targeted by the joint venture has over four million active policies and Sanlam sees it as key to improve financial penetration across Africa.

Read:
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Management noted that inflationary pressures continue to raise concerns around the erosion of real personal disposable income, especially among low-income earners in SA.

“The volatile market environment, weakened GDP outlook in SA and contracting consumer savings resulted in a moderation in new business levels from very strong growth in the comparative period, particularly for investment and complex risk products.

“Although economic activity is expected to recover in the second half of 2022, moderate average real GDP growth of 2% is expected in SA for 2022.

“Given global headwinds, growth in Africa outside of SA is also expected to slow,” said Hanratty.

“Consumer pressure from elevated inflation, market uncertainty and a high comparative base is likely to result in muted levels of new business growth over the remainder of the year, largely impacting investment business.

“In the medium term, we expect that consumers will be able to review their life insurance and general insurance coverage to adjust to higher nominal price levels, supporting medium-term growth in volumes in these areas.

“Although persistency experience, especially in lower-income market segments, is likely to remain under pressure, the group continues to attract robust levels of client inflows and remains a trusted partner for clients in a challenging economic and market environment,” noted Hanratty.

Mukhuba said that cost control is currently of particular importance.

Investors still seem to be cautious about insurance companies and perhaps not as confident that Covid is under control and that markets will recover.

Listen: Abigail Mukhuba, CFO of Sanlam,

At the current R54, Sanlam’s share price is uncomfortably close to its low of just below R48 in March 2020 when Covid-19 sent markets reeling – and quite far from its high of above R72 in March 2022.