The very nature of their business forces life insurers to pay more attention to the seriousness of the global Covid-19 pandemic than other companies. The last 18 months proved beyond any doubt that life insurance companies deal with the cycle of life and death.
People who listened to Sanlam CEO Paul Hanratty’s discussion of the group’s latest interim results would have picked up on Sanlam’s view that the pandemic is far from over and that it will affect everybody’s life for years to come.
One only needs to look at the figures: Sanlam paid approximately R10 billion in gross mortality claims in the first six months of 2021, the highest ever in a six-month period.
Cumulative mortality payments since the start of the pandemic at the beginning of 2020 have reached a massive R22 billion.
In addition, Hanratty points out that Sanlam is paying close attention to the longer-term impacts of the Covid-19 pandemic on mortality rates. “Globally, research into these impacts is still limited,” he says.
“We are particularly concerned that Africa may suffer from inadequate vaccination programmes for several years. There are also growing concerns about the longer-term health implications for people who survive Covid-19.”
Sanlam indicates that the most substantial impact on mortality claims related to the pandemic was recorded in its SA life insurance operations, but it expects even worse to come.
Management warns in its commentary to the results that the most severe impact on mortality from the third wave of Covid-19 has emerged subsequent to the current reporting period. “The third wave is longer in duration and therefore more severe than expected,” it says.
According to Hanratty: “Actual gross mortality claims for the month of July 2021 were some R2 billion relative to R1 billion for July 2020.”
Sanlam expects mortality claims to remain above average for the rest of the financial year, so much so that it started to increase premiums.
Despite the negative effects of the pandemic on Sanlam’s underwriting results, disruptions in operations and low consumer confidence, the group announced that activities are very close to the normal levels of 2019.
Operating earnings increased by 33% to R4.68 billion in the six months to end June 2021 compared to R3.5 billion in the first half of 2020, based on a strong recovery in new business volumes.
New business volumes increased 12% over the same period a year ago, with Hanratty noting that it is 57% better than in 2019.
The net value of new business increased by 94% year-on-year to show growth of 37% since 2019.
Sanlam Life and Saving recorded particularly strong growth, with all market segments contributing, says Hanratty.
He indicates that the higher savings rates relate to the pandemic – in that lockdowns prevented people from spending money – while a new understanding of the need for saving and insurance among its customers benefitted sales of policies.
Sanlam also noted an increase in single premium business due to higher demand for life annuities following increased early retirements and higher long-term yields.
Shareholders will have been happy to note that it all translated into higher returns.
Operating earnings benefitted from stronger equity markets that supported fund-based fee income, a contraction of credit spreads, lower levels of provisions for doubtful debts, improved returns on insurance funds, and an improved underwriting performance from Santam.
The end result is that headline earnings per share increased slightly to R1.94, compared with R1.86 in the first half of 2020 and R1.71 in 2019.
The improvement did not come without effort and difficult decisions.
As was the case with most companies, Sanlam accelerated its reliance on technology. It is also implementing a hybrid working model which includes developing the new skills and culture needed to reach clients in a future digital environment.
New alliance, and some exits
Sanlam announced the establishment of a strategic alliance with MTN in countries in Africa – to “enhance the financial inclusion of consumers that are currently not reached through traditional distribution channels”.
The partnership with MTN shows the might of fintech, with Sanlam saying that it is aimed at helping it in its goal to reach 50 million customers by 2025.
On the flipside, Sanlam is continuing to exit some of its UK businesses, announcing that the process to dispose of the UK life insurance business and the wealth management arm is at an advanced stage. “We are considering offers,” says Hanratty, adding that the transactions reflect Sanlam’s strategy of reallocating capital from the UK to Africa and selected emerging markets, notably India.
Given its focus on Africa and India, it is not surprising that Sanlam believes Covid-19 is likely to remain a feature of its business for years to come.
CFO Abigail Mukhuba says: “It will impact on lives and on our businesses for years to come. It is prudent to plan accordingly, even if our expectations turn out to be wrong,” she says, indicating that erring on the side of caution would be preferable to the alternative of simply waiting for things to normalise.
Hanratty noted in his presentation that the roll-out of vaccination programmes across many of the markets in which Sanlam operates has lagged the pace originally assumed, especially in certain African countries.
“In SA, the pace of vaccinations has improved in recent months, which should reduce the severity of future waves,” he says.
“Shareholders should however remain mindful of the uncertain impact on our results of future waves, possible variants and the progress made with the vaccination rollout.”
Sanlam has set about taking steps to reduce the financial impact of higher future deaths, including increasing group life premiums.
The results state that the increases are “fair and actuarially sound”.
“We will continue to implement a range of pricing and underwriting changes in the latter part of 2021 and will follow a risk-based approach by taking vaccination status into account for certain product lines and for clients with particular risk profiles,” according to management.
Listen: Mukhuba discusses mortality claims, the UK exit, Africa plans, vaccinations and more
While Hanratty and Mukhuba both say they are confident that Sanlam took the right decisions to secure a better future for clients, employees and shareholders, this better future is anything but certain.
In addition to the pandemic and an already weak SA economy, Hanratty says the near-term economic outlook in SA deteriorated further due to the onset of the third wave of Covid-19 and the civil unrest in Gauteng and KwaZulu-Natal that resulted in the widespread loss of lives, livelihoods and damage to property.
It is thus not surprising that the share price is way off its pre-Covid-19 levels of above R80.