Sanlam banks on low-income segment for growth
The low-income consumer segment could be the goose that lays the golden egg for Sanlam’s SA insurance operations in 2018.
Sanlam’s retail operations aimed at the middle and upper end of the market reported a 2% decline in net operating profit in the six months to June, while Sanlam Sky, which provides funeral policies and life cover to low-income earners, reported an 8% improvement.
Sanlam Sky’s new business volumes surged 77%, while the value jumped 20%.
The growth in the low-income market provided a glimmer of hope amid subdued consumer spending. Old Mutual’s Mass and Foundation Cluster increased its value of new business 12% when it presented results at the end of August.
However, the performance of these two insurers is in sharp contrast with MMI, which saw a 14% decline in headline earnings in its business aimed at low-income earners when it reported results this week.
While Sanlam Sky contributes about 16.5% of the group’s profits, the value of new business from this division now makes up 31% of the entire life book.
The group reported a 1% decline in new business volumes to R110bn, but the value of new business increased 1% to R791m. Normalised headline earnings were up 10%.
Sanlam has traditionally positioned itself as an insurer for the middle-and high-income groups. It re-entered the low-income market when it acquired Safrican Insurance in 2005 and Channel Life in 2006.
It disposed of its stake in Metropolitan Life in 1993, effectively ending its relationship with low-income earners.
But since its return to this market, Sanlam Sky has delivered impressive volumes and has seen the value of new business increase.
It now contributes a third of the retail business’s profits.
"Although consumers struggled to keep their policies on the book, the entry-level market had a positive story and we expect to be more bullish in that space going forward," said Sanlam personal finance CEO Jurie Strydom.
Strydom said the entry-level market volumes had consistently grown by double digits and outpaced those of middle-and high-income markets.
"Even with these high growth numbers, there’s still opportunity for us to grow our market share in that space.
"We’ve recently launched underwritten cover and we see an opportunity for a retirement offering. We will have a more diversified product set in future to take more market share."
The personal finance business as a whole is important to Sanlam as it contributes more than 50% of the group’s earnings. Even as Sanlam grows its presence outside SA, the experiences of other insurers demonstrate the necessity of keeping a strong grip on home markets to continue growing.
Group CEO Ian Kirk said he is not worried about the decline in volumes or the retail business’s operating profit.
Instead, he attributed it mainly to the initial losses from new growth initiatives and rand volatility.
"The economic situation in South Africa will play a big role in our results going forward.
"The remaining four months aren’t going to be easy, but all we have to do is focus on executing our strategy.
"We have a game plan to catch up where we are left behind," he said.
Kirk’s strategy also includes an expansion to more African countries, with Ethiopia and Egypt singled out as possible future markets.
Sanlam is also expecting to complete the acquisition of Moroccan insurer Saham Finances in 2018.
Saham has operations in 26 countries across North, West and East Africa, as well as in the Middle East.
Equity analyst at Cratos Wealth Ron Klipin said Saham would give Sanlam a large thrust into Africa because of its diversified product profile compared with competitors.