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SANLAM LIMITED - Operational update - 2019

Release Date: 05/06/2019 13:50
Code(s): SLM     PDF:  
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Operational update - 2019

Sanlam Limited
(Incorporated in the Republic of South Africa)
Registration number 1959/001562/06
JSE share code: SLM
A2X share code: SLM
NSX share code: SLA
ISIN: ZAE000070660
(“Sanlam” or “the Group”)


Operational Update – June 2019

The Group achieved a satisfactory operational performance in the four months to 30
April 2019, despite persisting headwinds in South Africa, our largest market, and
international political and economic turmoil affecting emerging markets in general.
Pleasing organic growth was augmented by the impact of the Saham Finances
acquisition in the second half of 2018, contributing to 10% growth in the value of new
covered business (VNB) written (17% on a constant economic basis), 30% rise in net
fund inflows and a 9% increase in net result from financial services. There is continued
progress in bedding down the Saham Finances acquisition.
Operating conditions remained challenging in South Africa with subdued economic
growth as anticipated. A favourable change in corporate investment confidence and
foreign direct investment flows, key drivers of economic activity and employment, are
inextricably linked to the future policy direction of the newly elected South African
government and realistic proposals to resolve the governance, operational and financial
challenges faced by state-owned enterprises, in particular Eskom. Our mass affluent
and high net worth client segments remained cautious in the run-up to the May
elections, the announcement of the new cabinet and any potential policy
announcements. This was consistent with our experience in the last three quarters of
2018.

The South African equity markets recorded robust growth in the first four months of
2019 in line with global trends, with the JSE/FTSE Swix Index delivering a return of
12.1% compared to a negative return of 2.7% in the first four months of 2018. May saw
some reversal of this performance. Average equity markets as measured by the
JSE/FTSE Swix Index were, however, still some 8% lower than the comparable four-
month period in 2018. After a benign claims environment in 2018, Santam experienced
an elevated level of claims in 2019.
Apart from Namibia, economic conditions in the other emerging markets where we
operate are more conducive to growth. India in particular is expected to maintain strong
economic growth with the renewed mandate provided to the governing party in recent
elections providing some policy certainty.
As announced early in March 2019, we concluded the 5% share issuance to the new
Broad-Based Black Economic Empowerment (B-BBEE) entity as approved by Sanlam
shareholders in December 2018. The shares were issued at a price of R70 per share,
representing a discount of some 10% to the 3-day volume-weighted average price
(VWAP) at the time. The issuance raised total capital of R7.8 billion, with a net cash
component of R4.8 billion after allowing for the net vendor funding provided by Sanlam.
Participation by the new shares in the recent Sanlam dividend reduced the net cash
proceeds to R4.5 billion.
Sanlam is now positioned as the foremost-empowered insurance and investment
management group in South Africa. The issuance also restored the discretionary capital
portfolio to an appropriate level.
As communicated in the 2018 circular to shareholders, the issuance impacts on
earnings per share in 2019 through both an increase in the number of shares in issue
as well as the R1.7 billion one-off accounting cost recognised in headline earnings in
terms of International Financial Reporting Standards (IFRS 2 Share-based Payment).
We remain focused on our core competencies in our centenary year: delivering
shareholder value under challenging conditions while at the same time executing future
growth strategies. This is founded in our diversified profile as well as a federal
management model that supports dual focus on operational and strategic delivery.

Results

The constant currency information included in this operational update has been
presented to illustrate the impact of changes in currency exchange rates and is the
responsibility of the Group’s board of directors (“Board”). It is presented for illustrative
purposes only and because of its nature may not fairly present the Group’s financial
position, changes in equity, result of operations or cash flows. All references to constant
currency information are based on the translation of foreign currency results for the four
months to 30 April 2019 at the weighted average exchange rate for the four months to
30 April 2018, which is also applied for the translation of comparative information. The
major currencies contributing to the exchange rate movements are the British Pound,
United States Dollar, Indian Rupee, Botswana Pula, Moroccan Dirham, Angolan
Kwanza and the Nigerian Naira (negative movements in the table below indicate a
strengthening in the rand exchange rate):

 Currency                    Average rand           Average rand       Change in average
                         exchange rate – 4      exchange rate – 4          exchange rate
                         months to 30 April     months to 30 April
                                      2019                   2018
 British Pound                       18.29                  16.74              9.2%
 United States                       14.04                  12.00            17.0%
 Dollar
 Indian Rupee                       0.200                 0.186                7.8%
 Botswana Pula                       1.35                  1.27                6.8%
 Moroccan Dirham                     1.47                  1.31              12.7%
 Angolan Kwanza                     0.045                 0.059             -23.7%
 Nigeria Naira                      0.039                 0.034              14.7%
The constant currency information has not been audited or reviewed by Sanlam’s
external auditor.


The salient features of the Group’s performance for the four months to 30 April 2019
are:
•       New business volumes of R72 billion, up 7% on the first four months of the 2018
        financial year (3% in constant currency and excluding Saham Finances).

    o    Overall new business volumes at Sanlam Personal Finance (SPF) declined by
         9% due to lower demand at Glacier.

         Sanlam Sky experienced strong growth of 90%. Sales through the traditional
         individual life intermediated channel increased by a healthy 12%, augmented by
         good growth at Group Benefits and Safrican as well as an exceptional
         performance of the Capitec Bank funeral product. The Capitec Bank credit life
         business was not renewed effective 1 May 2019. Unlike the strategic multi-year
         arrangement to distribute products through Capitec Bank’s retail footprint, the
         credit life business is subject to annual renewal based on a competitive bidding
         process. Sanlam Sky’s quoted pricing in 2019 reflected an expected heightening
         in claims risk given the prevailing distressed environment, which proved
         uncompetitive. The R566 million of credit life new business and related VNB of
         R36 million written in 2018 will therefore not repeat in 2019.

         The recurring premium sub cluster experienced marginal growth of 1% in new
         business sales. Good demand for single premium retirement annuities, the
         MiWay Life offering and Sanlam Personal Loans credit life was offset by flat
         sales of traditional individual life risk products and lower sales of other lines of
         business.

         Investor confidence in Glacier’s target market remained under pressure, in line
         with trends experienced since the second quarter of 2018. This contributed to a
         12% decline in Glacier’s new business volumes from the high base in the first
         quarter of 2018.

    o    SEM recorded overall new business growth of 34% (4% lower in constant
         currency and excluding Saham Finances). The Pan Africa and Other emerging
         markets portfolios grew by 36% (6% lower in constant currency and excluding
         Saham Finances) and 21% (11% in constant currency) respectively. Good
         growth was achieved in most countries and lines of business apart from
         investment business in Namibia and Kenya. Excluding these, as well as Saham
         Finances, new business volumes in the Pan Africa portfolio increased by 16% in
         constant currency.

         New business volumes in Namibia declined by 14%, attributable to lower
         investment inflows. New life business grew by more than 20%, with the entry-
         level market segment continuing to perform well.

         Strong growth in investment business supported overall growth of 21% in
         Botswana new business sales (14% in constant currency). Life business had a
         slow start to the year, reflecting a decline of some 6% combined with a change in
         mix to savings business.

         Saham Finances’ new business contribution increased by 173% (142% in
         constant currency), supported by the structural activity in 2018. The year-to-date
         performance reflected a pleasing outperformance of targets.
        Rest of Africa (excluding Saham Finances) new business volumes declined by
        15% (25% lower in constant currency) due to the lower investment management
        mandates in Kenya. Excluding this, new business volumes increased by some
        30%, with strong growth in most regions.

        The Indian and Malaysian businesses achieved double-digit growth, with
        Malaysian life business finding particularly satisfactory traction.

    o   New business volumes at Sanlam Investments Group (SIG) increased by 8%
        (6% in constant currency), a strong performance under difficult conditions. The
        value of new mandates awarded to the South African Investment Management
        and International businesses increased by 7% and 11% respectively. Growth at
        Private Wealth was subdued, reflecting investor caution in the high net worth
        market.

    o   Within Santam, the conventional insurance business achieved acceptable growth
        in gross written premiums, while the alternative risk transfer business recorded
        strong growth, specifically relating to the risk financing lines of business.

    o   Sanlam Corporate had a strong start to the year, more than doubling its new
        business contribution. Both recurring and single premium sales achieved
        exemplary growth.

    o   Net VNB increased by 10% (up 17% on a constant economic basis) with all
        clusters contributing good growth. Overall net VNB margins improved by some
        27 basis points on a constant economic basis on the comparable 2018 period.

    o   Overall net fund inflows of R15.9 billion were 30% higher than the R12.2 billion
        achieved in the comparable four-month period in 2018. SIG attracted strong net
        inflows of R8.4 billion compared to R3.5 billion in the comparable period. Net
        fund inflows at SPF declined due to the lower single premium inflows at Glacier.

    o   Persistency trends remained in line with the second half of 2018.

•   Net result from financial services increased by 9% on the first four months of the
    2018 financial year (up 3% excluding Saham Finances and in constant currency).

    o   Sanlam Personal Finance’s net result from financial services increased by 17%,
        supported by strong growth at Glacier and Sanlam Sky. The improved relative
        investment market performance in 2019 compared to the first four months of
        2018 benefited fee income from Glacier’s participating products. Sanlam Sky’s
        contribution reflects higher profit releases from the growing in-force book, as well
        as positive mortality experience and improved investment variances.

    o   Sanlam Emerging Markets’ net result from financial services increased by 51%
        (25% excluding Saham Finances and in constant currency). The Pan Africa and
        Other emerging markets portfolios grew their net operating earnings by 62%
        (25% excluding Saham Finances and in constant currency) and 37% (25% in
        constant currency) respectively.
    Saham Finances’ net result from financial services were below target, due to
    persisting high motor claims experience in Morocco, fire claims in Ivory Coast
    and some exposure to the cyclone damage in Mozambique, which resulted in an
    overall underwriting margin at the lower end of its 5% to 9% target range. The
    claims experience in Morocco is in line with industry experience, with repricing
    and claims management key areas of focus. We have seen an improvement in
    float return in some markets. Good progress has been made in evaluating the
    optimal strategic asset allocation of the float balances in Morocco and Ivory
    Coast.

    Most other businesses in the Rest of Africa portfolio achieved good growth.

    The Indian operations are the largest contributor to the Other emerging markets
    portfolio. Indian net result from financial services increased by some 40% (28%
    in constant currency), supported by strong growth in the credit and general
    insurance businesses. The credit businesses benefited from an increase in
    lending books as well as lower provisions following an improvement in credit
    quality. Shriram General Insurance’s operating earnings were supported by a
    relaxation of claims reserves in the third party motor book based on recent
    claims experience.

o Sanlam Investments’ contribution to net result from financial services decreased
  by 15% (19% in constant currency). The South African asset management and
  wealth management businesses did well to achieve 1% growth in net result from
  financial services despite the 8% lower average equity markets in the period that
  suppressed fee income. Investor caution also impacted negatively on brokerage
  income. Provisions in respect of credit exposures in Sanlam Specialised Finance
  and the International businesses had a negative impact of some R70 million
  gross of tax.

o   As indicated above, claims experience weakened at Santam following a benign
    claims environment in 2018. The first four months of 2019 were characterised by
    a number of significant catastrophe events, including fires in the Betty’s Bay area
    in January, hail damage in Newcastle in March and the storm and flood damage
    in Kwazulu-Natal during April. In addition, significant crop insurance losses
    relating to hail were experienced. These events negatively impacted the net
    underwriting margin of the conventional insurance business, which ended slightly
    below the bottom end of Santam’s target range of 4% to 8% of net earned
    premiums. The operating results of the alternative risk transfer business were
    positively impacted by growth in net income from clients with solid contributions
    from both Centriq and Santam Structured Insurance.

o   Claims experience at Sanlam Employee Benefits also weakened compared to
    the first four months of 2018, in particular lump sum disability claims. This had an
    adverse impact on profitability at Sanlam Group Risk, contributing to an overall
    decline in Sanlam Corporate’s net result from financial services.
•   Diluted headline earnings per share declined by 40%, but increased by 9% per
    share if the B-BBEE IFRS 2 charge is excluded. Headline earnings reflect the
    combined effect of:
     o The 9% increase in net result from financial services;
     o A 79% improvement in net investment return earned on the capital portfolios in
        line with the relatively stronger investment market performance in the first four
        months of 2019 compared to the same period in 2018;
     o A one-off accounting cost of R1.7 billion recognised in terms of IFRS 2 in
        respect of the B-BBEE share issuance, which is in line with the financial effects
        disclosed to shareholders in the 2018 circular. Of this cost, only R594 million
        constitutes an economic cost to Sanlam shareholders in management’s view,
        being the excess discount granted to the B-BBEE investment vehicle above
        what would have been a market-related discount of some 5% for a normal
        private placement of shares.
     o A 5% increase in the weighted number of shares in issue following the share
        issuances in 2018 and 2019.


Capital

The Group’s operations remain well capitalised. The Sanlam Group Solvency Capital
Requirement (SCR) cover ratio amounted to 2.3 times on 31 March 2019 (Sanlam Life
Insurance Limited: 2.5 times).
The Group started the year with a negative discretionary capital balance of R3.7 billion.
The portfolio was augmented in the first four months of 2019 by inflows of some R5.1
billion, which included the capital raised from the B-BBEE issuance, excess dividend
cover in respect of the 2018 dividend paid in 2019 and excess investment return earned
on the Sanlam Life covered business operations. The latter represents investment
return earned up to the end of April 2019, which is subject to investment market
volatility. A few small bolt-on transactions were concluded during the period, which
utilised some R124 million of discretionary capital. These cash flows contributed to a
discretionary capital balance of some R1.3 billion at 30 April 2019.

Outlook

We do not expect a major recovery in the economic conditions in South Africa and
Namibia for the remainder of 2019. New business growth potential will commensurately
remain under pressure. Investment market volatility is also expected to persist,
aggravated by increased tensions in the trade war between the United States and
China.

A recovery in the South African mass affluent and high net worth new business
performance is largely dependent on developments in the political environment. New
business growth in the South African entry-level market will be impacted by the
diminishing base effect from the launch of the Capitec Bank funeral product in May
2018 and the loss of the credit life business. Outside of South Africa, new business
growth in other emerging markets is expected to remain strong, supported by the base
effect of the Saham Finances acquisition in the last quarter of 2018.
Average investment market levels, the relative strength of the Rand exchange rate and
the level of long-term interest rates are key factors that may have an impact on the
growth in net result from financial services, normalised headline earnings and Group
Equity Value to be reported for the six months to 30 June 2019.

The focus will remain on delivering results from the Saham Finances acquisition and to
deliver value from the package of B-BBEE transactions approved in December 2018,
once implemented.

The information in this operational update has not been reviewed and reported on by
Sanlam's external auditors. Sanlam’s interim results for the six months ending 30 June
2019 are due to be released on 4 September 2019. Shareholders are advised that this
is not a trading statement as per paragraph 3.4(b) of the JSE Limited Listings
Requirements.

Conference call

A conference call for analysts, investors and the media will take place at 17h00 (South
African time) today. Investors and media who wish to participate in the conference call
should register as indicated below.

Audio dial-in facility

A dial-in facility will be available. Please register at
http://www.diamondpass.net/2702813 for the call. Registered participants will receive
their dial-in number upon registration. For assistance, please contact Sanlam Investor
Relations at +2721 947 8455.

Recorded playback will be available for three days after the conference call.

Access Numbers for Recorded Playback:

Access code for recorded playback: 25289

 South Africa             010 500 4108
 USA and Canada           1 412 317 0088
 UK                       0 203 608 8021
 Other Countries          +27 10 500 4108

For further information on Sanlam, please visit our website at www.sanlam.com

Cape Town
5 June 2019

Sponsor
The Standard Bank of South Africa Limited

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