Sanlam hit by poor investment returns
Sanlam became the latest South African insurer to be hit by the sluggish economy and poor market returns, joining Discovery and Liberty in posting a decline in 2018 net profit.
Investment returns plummeted 57% to R707m compared to R1.66bn in the previous year, the company said on Thursday. That was largely behind an 8% decline in earnings to R9bn.
Investment returns are important for insurers, who invest the capital that they need to hold for solvency reasons, and poor returns can offset profits elsewhere in the business.
"It’s a tough environment in SA. Good businesses are producing mediocre results," Sanlam CEO Ian Kirk said on Thursday. "We would have liked to have been in a better position, of course. But given the conditions, I think these are very credible."
Sanlam CEO Ian Kirk spoke with Business Day TV about the company’s full year results
A report this week showed the SA economy grew 0.8% in 2018 which, although it was slightly higher than what the Treasury and the Reserve Bank predicted, was just more than half the rate of the previous year, when Jacob Zuma was president. The JSE all share index fell 11.4% in 2018, the most since 2008.
"We have good and bad investment years and that’s why insurers focus on the operational results. We have capital invested in various instruments. Even though money markets were okay, equities were down, bonds were pretty flat," Kirk said.
After falling by as much as 3.7% to their lowest since December, Sanlam’s share price recovered to close 1.4% stronger at R78.38. They are still down 18.52% in the past 12 months, compared with a 13.68% drop in the financial services index.
The company also announced on Wednesday that Johan van Zyl, a director since 2016, would step down as chair of the board by June 2020.
Karl Gevers, head of research at Benguela Global Fund Managers, said life insurers were likely to struggle further given that weak equity markets were accompanied by weak consumer spending.
Apart from invested capital reserves, Sanlam businesses that deal with savings and investment were also hit as lower investment returns reduced their fee income.
Sanlam Personal Finance, which houses single premium business Glacier, as well as the recurring savings division, had a 5% reduction in net operating profit to R4.2bn. Glacier, which predominantly serves high-income investors, was the biggest culprit with net operating profit down 32%.
Kirk said although business volumes decreased at Glacier, the business was also affected by the investment returns.
"Unfortunately it’s the nature of that business. When markets are up, we make more money and when markets are down, we lose money. We are making it more resilient by adding more assets under that platform. We have lots of plans to do that."
The results showed mixed contributions from recent acquisitions. Saham Finances, the Moroccan insurer in which Sanlam acquired the remaining 53% stake it did not already own in 2018, increased the value of new business 125% to R7.6bn.
Life insurance company BrightRock, in which Sanlam holds 53%, still contributed operating losses to the personal finance division’s earnings, it said. Startup life insurer Indie, which the company established in 2017, recorded losses in both 2018 and 2017.
Kirk said Sanlam was happy to keep funding these businesses because their value of new business was positive and the losses had been narrowing.
He said a new insurance business usually took seven to eight years to post meaningful profit, so Sanlam expected to support the companies for the next two to three years.
With Karl Gernetzky