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Capital management

The Group started the year with discretionary capital of R550 million, after allowing for the BrightRock acquisition and a portion of the acquisition consideration in respect of the additional 16,6% stake in Saham Finances.

A number of capital management actions during 2017 affected the balance of available discretionary capital, which amounted to R2 billion at 31 December 2017.

Discretionary capital at 31 December 2017

The discretionary capital portfolio was augmented by the following inflows:

  • The excess cash operating earnings cover in respect of the dividend paid in 2017.
  • Capital of R1,4 billion released from the covered business operations in Sanlam Life. As communicated in the Group’s 2016 annual results announcement, capital allocated to the covered business operations on the Sanlam Life balance sheet can be reduced by R2 billion over time. Investment return earned on this capital base is also available for release. The first R500 million was released from the capital base in 2017, together with the net investment return of R862 million earned during the year. The remaining R1,5 billion will be released from the base during 2018.
  • The introduction of the CCM enabled the transfer of credit exposures from the Sanlam Capital Markets balance sheet to Sanlam Life. This released R350 million of the capital allocated to the Sanlam Capital Markets business.
  • Disposals of Group operations yielded R1,6 billion, with the main contribution from the Enterprise Group disposal announced earlier in 2017. Sanlam Investments also disposed of the developed market component of Summit Trust, retaining the Mauritian-based operations.
  • Investment return and other small movements added R98 million.

A net total of R2,8 billion was redeployed in 2017 in respect of new transactions, which included the following major acquisitions:

  • We entered into agreements for the acquisition of Absa’s employee benefits and actuarial consulting business to add scale to SEB’s offering. The transaction remains subject to final regulatory approval.
  • Sanlam Investments acquired a 30% stake in EasyEquities, an innovative low-cost investment platform, which significantly enhanced the Cluster’s reach into the lower income markets and complements its Satrix index-tracking offering.
  • Debt funding of up to US$140 million was considered as part of the funding model for the acquisition of the additional 16,6% stake in Saham Finances. The Enterprise Group disposal eliminated the need for debt funding, with this portion of the acquisition consideration (R1,9 billion) also funded from discretionary capital.
  • The acquisition of a controlling stake in PineBridge Investments East Africa (renamed to Sanlam Investments East Africa) and other smaller transactions utilised some R260 million. The PineBridge acquisition provides the Group with a meaningful investment management capability in East Africa for future growth in this line of business.
  • Sanlam Emerging Markets acquired the non-controlling interests in the Soras Group in Rwanda for R113 million and invested R94 million to capitalise its Ugandan business, which expanded its products lines through the acquisition of a general insurance business.

Subsequent to the 2017 year-end, we concluded agreements to acquire the remaining 53,4% stake in Saham Finances. This transaction significantly enhances the strategic positioning of Sanlam as the leading insurance provider in Africa, and will accelerate the extraction of synergies from the combined footprint. The transaction price of US$1 050 million will be funded through a combination of available discretionary capital, debt and a Sanlam Limited share issuance within the limits of current approvals and the Group’s risk appetite.

The rand experienced significant volatility during 2017, weakening in the latter half of the year as uncertainty around the outcome of the African National Congress’ national elective conference heightened. General market consensus was that the rand could weaken further depending on which candidate was elected as the new party president. As the acquisition of the remaining stake in Saham Finances was only viable below a certain rand/US$ exchange rate, we decided to partially hedge the transaction through a combination of foreign currency acquisitions and forward exchange contracts. US$602 million of the total US$1 050 million consideration was hedged at an average exchange rate of R14,12. The unrealised fair value loss on the hedging instruments amounted to some R562 million after tax at 31 December 2017. The loss was recognised directly in the Statement of Changes in Equity in terms of the hedge accounting applied under IFRS. The eventual profit or loss realised at payment date will be recognised as an adjustment to the acquisition price. The investment will meet Sanlam’s hurdle rate at the hedged exchange rate, taking cognisance of the expected depreciation of the rand against the US$ over the long term.

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