Sanlam doing much better, but still cautious

It’s hoping that the worst of excess mortality and the resulting high death claims have passed.
New business volumes exceeded R350bn for the first time. Image: Mike Hutchings/Reuters

Sanlam stuck a bold title on the front page of the booklet announcing its results for the year to end December 2021: ‘Live with confidence’. It added a similar bold title to a summary of the results: ‘Sanlam overcomes Covid pandemic and drives growth’. Both are true. The first is generally good advice, while Sanlam’s numbers proved the latter.

Management announced that headline earnings increased by 27% to a bit more than R9 billion – nearly R2 billion better than the R7.1 billion in the previous financial year. Headline earnings per share increased by the same percentage to R4.33 compared with R3.40.

Sanlam CEO Paul Hanratty says the results were achieved in a challenging environment.

“We managed to gain market share in virtually every product line and segment, in every part of our business. Our people have continued to serve our customers diligently and our clients have chosen overwhelmingly to do business with Sanlam.

“We managed to restore our metrics to 2019 levels, which takes us to the base we had before the outbreak of the Covid-19 pandemic,” says Hanratty.

The figures show that operational performance is back at pre-pandemic levels. The net result from financial services increased by 18% on 2020 on a constant currency basis and was 4% higher than 2019 (excluding one-off items), according to a presentation to shareholders.

Hanratty pointed out to stakeholders that Sanlam enjoyed strong inflow of new business. “New business volumes exceeded R350 billion for the first time, up 14% on 2020 and 43% higher than 2019,” he says.

Contributors to the improvement

A look at the income statement shows that the bulk of the improvement of R2 billion in operating income came largely from three sources.

While the core, Sanlam Life & Savings, was able to grow net operational earnings by 4% to R4.8 billion, it was the Investment Group, Santam and investment returns that contributed the most to the improvement.

As Moneyweb reported last week when Santam announced its results, the short-term insurer in the Sanlam stable saw a 115% increase in earnings, nudging Sanlam’s result in the right direction by close to R700 million. Sanlam Investment Group added R500 million.

The stars were the equity markets, which pushed investment returns higher by more than R1 billion during the financial year – to R1.3 billion compared with the previous year’s contribution of only R271 million.

Additional information supplied by Sanlam showed that the SA stock exchange increased by 24% in 2021, but by only 4% in 2020.

The increase in new business obviously contributed to the higher investment returns as well.

Read: Sanlam buys Absa’s investment management businesses in SA

Moneyweb had 10 minutes to ask financial director Abigail Mukhuba for some insight into the results, and in particular to explain where the massive R350 billion in new business originated from.

“Mainly new investment flows as Sanlam won market share in the industry, but also because people seem to save more. A part can be attributed to people who lost their jobs and looked to invest pension fund money,” says Mukhuba.

“Single premium business from Glacier increased significantly.”

She points out that many people were looking at investments other than the traditional savings account in banks, due to low interest rates.

Excess mortality

Management noted that Sanlam paid mortality claims of R22 billion, some 76% higher than in the previous year, as mortality rates in SA remained far above normal levels.

“The Covid-19 pandemic had a significant impact on mortality claims across the group’s operations, resulting in a significant increase in excess mortality claims (claims above long-term actuarial assumptions),” according to the commentary to the results.

Read: SA excess deaths peak at fraction of previous Covid waves

“The group’s South African operations have the largest life insurance exposure and commensurately reflect a much higher value of excess mortality claims. The group recorded total excess mortality claims of R4.2 billion (net of tax, reinsurance and annuity and disability offsets) on an embedded value basis for 2021.”

Sanlam says that its mortality trends reflected those of the broader South African experience, as published by the South African Medical Research Council (SAMRC).

“The impact of excess mortality claims was most severe in the second and third waves of Covid-19, in the first and third quarters of 2021,” it says.

“The fourth wave in the final quarter of 2021 had a softer impact on excess mortality claims relative to previous waves,” noted management.

Sanlam indicated that the effect on business was more severe than would have been expected. “The group believes that the group risk market has been consistently under-pricing premiums for pandemics and is hopeful that more rational pricing will prevail in the market in future,” it says.

Mukhuba says it straight: “The excess mortality claims is as a result of Covid-19.”

Sanlam reiterated that its subsidiary, Santam, made good progress in the payment of contingent business interruption claims, with payments of R3.2 billion made to the end of December 2021.

Covid behind us?

We quizzed Mukhuba on the possibility that the Covid pandemic is behind us; her experience when interacting with Sanlam’s huge staff complement; as well as feedback from its advisor corps when dealing with clients.

“People are happy to be back at work, enjoying contact with other people. I definitely think that the gloominess experience at the height of the pandemic is disappearing.

“Our performance [over] the last year points that way,” she says, adding that companies are resuming dividend payments and paying bonuses to their employees.

While Sanlam ventures that the worst of the pandemic has passed, Hanratty warns that its impact might persist and that it has implemented actions, including: risk-based repricing of all group schemes, the redesign of retail risk products, implementation of new underwriting protocols, and strengthening of the mortality basis.

“We will maintain a higher level of discretionary capital than is normal for some time, to provide a buffer should our actions on Covid prove to be inadequate. We will target a minimum of R3 billion of discretionary capital, which may be used to mitigate the impact of any unexpected Covid-19 mortality experience,” he says.

As such, Sanlam increased its dividend by some 11% to R3.36.

The results seem to have been welcomed by the market, with the share price increasing nearly 4% to R63, but still way below pre-pandemic levels of R80.

Leonard Date Line, portfolio manager at Momentum Securities, says the results were good overall and that the 27% increase in earnings, increase in equity value to above R64 per share, and recovery in the return on equity (from a negative 2% to nearly 14%) bodes well for the future.

“We suggest accumulating the share at current levels. There is still potential for upside,” he says, sharing a graph that shows that Sanlam’s share price has been moving sideways over the last two years.

Sanlam moving sideways

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