Sanlam: A firm in fine fettle
None of the company’s business units is in intensive care. But its diversification into health may raise eyebrows
Sanlam is a juggernaut that writes more than R220bn in new business every year. And under Ian Kirk, a former PwC partner, it does so in a sustainable manner: it has a return on group equity value (net worth as adjusted by actuaries) of 18.2%, ahead of its entire peer group, and is assisted by the strong underwriting management of its subsidiary, Santam. Its new business margin of 2.46% on its SA life business shines next to the dismal 0.7% for Liberty and MMI.
"Among our strategic pillars are responsible capital allocation and resilience through diversification," says Kirk.
The group has met its target of the SA nine-year bond plus 4% since the 2008 global financial crisis. "But there are still areas in which we need to close the gap, such as entry-level life [insurance], third-party asset management, employee benefits and health," he says.
Unlike some of its peer group, none of Sanlam’s businesses are in intensive care. Of its five pillars — Sanlam Personal Finance, Santam, Emerging Markets, Sanlam Investments and Sanlam Corporate — the personal finance cluster remains the largest contributor, though earnings were flat at R2.1bn. There are a number of moving parts in this cluster, which includes the SA life businesses across the income spectrum.
Quite small changes in product mix can depress growth: in the upmarket Glacier book, for example, there was a higher proportion of low-margin third-party unit trusts and a lower number of high-margin on-balance-sheet products, like life annuities and guaranteed product.
The joint venture with Capitec is the most significant recent diversification: Sanlam will underwrite the credit life and funeral policies sold through the bank.
Through this, it hopes to narrow the gap in one area in which it remains some way behind Old Mutual — the entry-level market.
The R566m sold through Capitec in just two months doubled the new business of Sanlam Sky to R1.19bn. In comparison, the Old Mutual Mass & Foundation cluster had gross inflows of R6.5bn over the six months.
When it comes to short-term insurance, Sanlam’s listed subsidiary, Santam, is the market leader, with Old Mutual Insure a long way behind. Santam was the best performer in the group, with earnings up 70% to R573m.
Santam now plays a vital role in Sanlam Emerging Markets — about 75% of the premium income in Sanlam’s African territories is for short-term, not life insurance.
Sanlam raised equity finance earlier in the year to fund the takeover of Moroccan-based Saham Finances, leading to a dip in the Sanlam share price. The deal is certainly washing its face, with a 16% return on equity. Operating profit of R911m was almost double the profit from Old Mutual’s rest-of-Africa cluster, even though the latter has the benefit of a Zanu-PF-like grip on the Zimbabwean market.
But Warwick Bam, head of research at Avior Capital Markets, warns that while the real GDP growth and demographic profile of some African countries look promising, political and financial instability make certain markets unattractive.
Leonard Kruger, a portfolio manager at Allan Gray, says the company has disinvested after being a large holder of the share for many years — but only on valuation grounds, not because Sanlam is off-track. "In fact, it is Old Mutual, which we do own, that has to prove it can execute and deliver," he says.
Sanlam’s results for the six months to June show that the only unit with lower new business volumes was Sanlam Investments, at which some of the large institutional inflows of the comparable period were not repeated.
Sanlam Investment Management SA, which includes the Satrix index business, is still a small contributor to the group, down 8% to R122m.
There is a secular move from life-wrapped investment products to unit trusts. Sanlam is the fourth-largest unit trust manager in SA, if money market funds are excluded. But the most profitable exposure to the unit trust business is through Sanlam’s popular Glacier platform, in the core Sanlam Personal Finance cluster. Its net new business of R6.1bn was almost double that of the entire investment cluster.
Sanlam is trying to position its third-party investment brand, SIM, against independent fund managers such as Coronation.
Some of the stodgier, more risk-averse members of the team now work exclusively on Sanlam’s own balance sheet, in the specialised finance unit. But Bam says changing the perception of the SIM brand will be slow and could take several years.
He adds that volume growth in the rest of the group has been distorted by certain acquisitions. For example, BrightRock provides more sophisticated life products that compete well with Discovery Life (which is no surprise, given that the management team are refugees from Discovery). Without the R180m contribution from BrightRock, recurring premium life business (outside the entry-level market) would have been up just 1%, rather than 6%. Similarly, the acquisition of Absa Consultants & Actuaries helped Sanlam Corporate. And Sanlam Emerging Markets’ growth was skewed by an exceptional 25% increase in Namibia.
Perhaps Kirk’s most controversial diversification is into health, a sector in which the group has lost billions over the past 20 years. So far this diversification is through an indirect minority holding in Medscheme, but it is already considered a core offering.
"If we are going to be competitive in the corporate market, here and across Africa, we need to offer employee benefits and health as a package," says Kirk. "And we are well aware of the strength of the main incumbent in health [Discovery]."
Sanlam’s reputation as a responsible capital allocator is sure to be closely watched.