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7 June 2017
Strong growth in the more profitable recurring premium risk business in South Africa supported sterling growth in the value of new life business at a higher overall margin. Embedding client centricity and a stringent focus on new business quality in Sanlam’s culture over many years has been a key driver of the Group’s new business performance and is also supporting persistency levels. Satisfactory growth was achieved in net result from financial services despite a marked increase in new business strain recognised pursuant to the increase in new risk business, as well as the negative impact of a stronger average Rand exchange rate against the major currencies where the Group operates. The operational performance of Saham Finances, the major new acquisition concluded during 2016, remained in line with the business plan.
The first four months of 2017 was a very eventful period for South Africa. An unexpected cabinet reshuffle and removal of the Minister of Finance at the end of March were followed by downgrades of South Africa’s foreign currency rating to below investment grade by two rating agencies, with one also downgrading the local currency rating to below investment grade. Investment market reaction to these events were not as adverse as anticipated, as it coincided with renewed emerging market interest from global investors, providing support to the Rand, equity markets and long-term interest rates. The renewed political and policy uncertainties were, however, detrimental to investor, business and consumer confidence, which impacted on the Group’s new business growth in the mass affluent and high net worth segments, and will also delay any meaningful improvement in economic and employment conditions. The South African operating environment therefore remained particularly challenging for our businesses.
Economic conditions in Namibia continue to be impacted by liquidity constraints emanating from its twin deficit, while the economies and currencies of Nigeria and Angola remained under pressure from low oil prices. The economic outlook in the other Africa regions where the Group operates is slowly improving. Economic conditions in India and Malaysia remain robust, with the short-term impact of demonetisation in India negatively impacting on the results of the Shriram credit businesses, as anticipated.
Despite volatility in the Rand exchange rate during the four-month period to 30 April 2017, the average exchange rate of the Rand against the major currencies where the Group operates was significantly stronger during the first four months of 2017 compared to 2016. This had a major negative effect on the translated Rand results of Sanlam Emerging Markets as well as Sanlam Investments’ international operations.
Globally, investor concern around geopolitical risk subsided somewhat following the Dutch and French election results, supported by anticipated stimulative economic measures in the United States and improving leading economic indicators in China and Europe. This drove a rally in global equities and a return of demand for emerging market investments. These conditions provided some support to the South African investment markets as highlighted above, and commensurately investment return earned on the Group’s capital portfolio.
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. It is presented for illustrative purposes only and because of its nature may not fairly present the company’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 2017 at the weighted average exchange rate for the four months to 30 April 2016, which is also applied for the translation of comparative information. The major currencies contributing to the exchange rate movements are the British Pound, Indian Rupee, Botswana Pula and the Nigerian Naira.
All of the Group operations remain well capitalised. Sanlam Life Insurance’s statutory capital covered its Capital Adequacy Requirements under the current solvency regime 5.4 times on 31 March 2017 after allowing for the annual dividend payment to Sanlam Limited. Under the new Solvency Assessment and Management regime being implemented in South Africa, Sanlam Life Insurance’s Solvency Capital Requirement cover ratio amounted to 297% on 31 March 2017 after the dividend payment to Sanlam Limited.
The Group had excess capital of R550 million available for redeployment at the end of December 2016, after allowing for US$200 million of the US$340 million consideration for the acquisition of an additional 16.6% stake in Saham Finances, and R700 million for the acquisition of a 53% stake in BrightRock in South Africa. The Saham Finances transaction concluded in May 2017 (refer below), while the BrightRock acquisition is still subject to conditions precedent.
Utilisation of discretionary capital since 31 December 2016 to date included the following:
The following added to available discretionary capital:
Once the envisaged gearing is introduced for the Saham Finances transaction, available discretionary capital will amount to some R2 billion post payment of the BrightRock and PineBridge transactions. This is considered sufficient for the Group’s immediate needs and the Group will continue to look for value-enhancing growth opportunities.
We expect that the economic and operating environment will remain challenging for the remainder of 2017 with a resulting impact on the Group’s key operational performance indicators. Persistent investor risk aversion, 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 first half of the 2017 financial year. The Group is, however, well-positioned to weather the current headwinds and to continue delivering value for our shareholders and other stakeholders.
The information in this operational update has not been reviewed and reported on by Sanlam's external auditors. Sanlam’s interim financial results for the six months ending 30 June 2017 are due to be released on 6 September 2017. Shareholders are advised that this is not a trading statement as per paragraph 3.4(b) of the JSE Limited Listings Requirements.
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