6 June 2018
Economic growth in many markets remains below longer-term potential, in particular in our large South African and Namibian markets where only modest growth is expected for 2018. In South Africa, business and consumer sentiment improved following the political changes in December and early 2018. As anticipated, it will take some time for the improved confidence to transpire into accelerated economic growth. Economic conditions in Namibia continue to be impacted by liquidity constraints emanating from its twin deficit, while the economies and currencies of Nigeria and Angola remained under pressure. The economic outlook in the other Africa regions where the Group operates is slowly improving, while conditions in India and Malaysia remain robust.
The first four months of 2018 were also characterised by significant volatility in South African and international investment markets. Global stock markets reached record-levels during 2017. The South African market also rallied into December 2017, finding support from the global market performance as well as the favourable outcome of the ruling party’s elective conference. Optimism improved further with the appointment of Cyril Ramaphosa as South African president and the subsequent cabinet changes. Indications were that the South African market would continue its rally following these developments, but this was short lived as global markets were halted by fears of an accelerated interest rate hiking cycle by the US Federal Reserve and heightened global geopolitical risk. This spurred a global stock market sell-off and resulted in a decline across investment markets at the end of Q1 2018. The South African equity market recovered somewhat during April 2018, but still recorded negative returns for the first four months of 2018 compared to positive returns in the comparable period, impacting negatively on the investment return earned on the Group’s capital portfolio on a relative basis. South African interest rate markets also reacted positively to the political developments, with long term rates declining since 31 December 2017.
The sharp strengthening of the Rand exchange rate in 2017 and 2018 is reflecting in a stronger average exchange rate in 2018 relative to the first four months of 2017, suppressing the overall translated results of Sanlam Emerging Markets as well as Sanlam Investments’ international operations.
The acquisition of the remaining interest in Saham Finances is progressing according to plan. The first phase of funding for the transaction was concluded at the end of March 2018 through an accelerated book build equity issuance. An additional 5% equity raising is planned, with the intention to utilise it as an opportunity to further strengthen the Group’s empowerment credentials (refer Capital section below).
The constant currency information included in this operational update has been presented to illustrate the impact of changes in currency exchange rates and is the responsibility of the Group’s board of directors (“Board”). It is presented for illustrative purposes only and because of its nature may not fairly present the Group’s financial position, changes in equity, result of operations or cash flows. All references to constant currency information are based on the translation of foreign currency results for the four months to 30 April 2018 at the weighted average exchange rate for the four months to 30 April 2017, which is also applied for the translation of comparative information. The major currencies contributing to the exchange rate movements are the British Pound, United States Dollar, Indian Rupee, Botswana Pula, Moroccan Dirham, Angolan Kwanza, and the Nigerian Naira (negative movements in the table below indicate a strengthening in the rand exchange rate):
Average rand exchange rate – 4 months to 30 April 2018
Average rand exchange rate – 4 months to 30 April 2017
Change in average exchange rate
United States Dollar
The constant currency information has not been audited or reviewed by Sanlam’s external auditor.
All of the Group operations remain well capitalised. Sanlam Life Insurance’s statutory capital covered its Capital Adequacy Requirements under the current solvency regime 5.4 times on 31 March 2018 after allowing for the annual dividend payment to Sanlam Limited. Under the new Solvency Assessment and Management (SAM) regime being implemented in South Africa, Sanlam Life Insurance’s Solvency Capital Requirement cover ratio amounted to 2.85 times on 31 March 2018 after the dividend payment to Sanlam Limited.
The Group had excess capital of R2 billion available for redeployment at the end of December 2017 after allowing for the acquisition of Absa Consultants and Actuaries, which was finalised in the first four months of 2018. No other significant transactions were concluded during the period.
The Saham Finances acquisition remains subject to regulatory approvals, which is expected in the second half of the year.
The discretionary capital portfolio was augmented in the first four months of 2018 by the new share issuance in April (R5.5 billion after allowing for the dividend payable in respect of the new shares), the excess dividend cover relating to the dividend payment in April 2018 (R690 million) and the release of R1.5 billion from the capital allocated to the South African life insurance operations (as indicated in the 2017 results announcement). This increased the level of available discretionary capital to R9.6 billion at 30 April 2018. This capital has been earmarked for the Saham Finances acquisition, which will require cash resources of R13.9 billion based on the average hedged rate of $1/R13.24. The deficit will be funded from short term debt facilities as previously communicated to the market. A second share issuance of some 5% is planned for the second half of the year, with the intention to use it as an opportunity to further enhance the Group’s empowerment credentials. Proceeds from this issuance will be used to redeem the short term debt facilities and to augment the discretionary capital pool. We intend proposing the planned share issuance to shareholders for approval in the fourth quarter of 2018.
We expect that the economic and operating environment will remain subdued in our largest markets for the remainder of 2018 with a resulting impact on the Group’s key operational performance indicators. The improved investor sentiment in South Africa is, however, expected to support new business growth in Glacier and Sanlam Investments during the remainder of the year.
The change in mix to less profitable lines of business in Glacier is expected to continue. Sanlam Personal Finance’s new business volumes and VNB will benefit from the newly concluded funeral and credit life underwriting arrangements with Capitec, an exciting new growth initiative. Sanlam Employee Benefits’ VNB performance will similarly benefit from the new business pipeline referred to above.
Average investment market levels, the relative strength of the Rand exchange rate and the level of long-term interest rates are key factors that may have an impact on the growth in net result from financial services, normalised headline earnings and Group Equity Value to be reported for the first half of the 2018 financial year.
The information in this operational update has not been reviewed and reported on by Sanlam's external auditors. Sanlam’s interim financial results for the six months ending 30 June 2018 are due to be released on 5 September 2018. Shareholders are advised that this is not a trading statement as per paragraph 3.4(b) of the JSE Limited Listings Requirements.