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Shareholders' fund income statement for the year ended 31 December 2017

Net result from financial services (net operating profit) of R8,5 billion increased by 7% on 2016 (10% in constant currency), with substantial growth in SEM and SI contributions.

Structural activity that influenced growth in 2017 included the following:

  • The acquisition of a 30% stake in Saham Finances at the end of February 2016, followed by an additional 16,6% investment in May 2017
  • 23% direct stakes acquired in Shriram Life Insurance and Shriram General Insurance at the end of September 2016
  • The disposal of SEM’s interests in the Enterprise Group in Ghana with effect from 1 July 2017
  • The acquisition of a 75% interest in PineBridge’s East African investment management business, effective July 2017
  • The acquisition of a 53% interest in BrightRock with effect from October 2017

Sanlam Personal Finance (SPF) achieved strong growth in new recurring premium risk business, contributing to a 13% increase in new business strain recognised in terms of Sanlam’s prudent accounting policies. This suppressed operational earnings growth at SPF, while Santam’s performance was depressed by the abnormally large catastrophe events during June and October 2017. Excluding these, net result from financial services increased by 10% (12% in constant currency):

Analysis of net result from financial services for the year ended 31 December 2017

SPF delivered a solid performance for a mature business in an environment of stagnant economic growth, low investor confidence and a lacklustre equity market performance for a large part of 2017. The restructuring of SPF into a more agile and focused business was largely completed in 2017. SPF now comprises of the following main businesses:

  • Sanlam Sky, which focuses on funeral insurance business
  • Recurring premiums sub cluster, which is responsible for all recurring premium risk and savings business. Included in the sub cluster are: Sanlam Individual Life (traditional recurring premium risk business), Sanlam Savings (traditional recurring premium savings business), Closed Book, BrightRock, MiWay Life and Indie
  • Glacier, which incorporates single premium life investments and the Linked Investment Savings Plan platform (LISP)
  • Strategic business development, which focuses on Sanlam Personal Loans, Sanlam Reality and is an incubator for new initiatives

The profit contribution from each business unit is presented in the following table:

SPF net result from financial services for the year ended 31 December 2017

As indicated, SPF’s operational earnings for 2017 were impacted by a 13% rise in new business strain. BrightRock in addition added a maiden loss of R32 million in 2017, as this business is still in its growth phase, with profits released from the in-force book not sufficient to fully offset its new business strain. Excluding these, SPF’s net result from financial services increased by 9%.

Sanlam Sky grew its profit contribution by 3%. Excluding additional new business strain, its gross result from financial services increased by 10%. Mortality experience weakened slightly, albeit still positive overall, while positive expense assumption changes recognised in 2016 did not repeat in 2017. These contributed to R67 million lower earnings in 2017 relative to 2016.

The Recurring premium sub cluster’s gross result from financial services declined by 4%. Excluding additional new business strain and the BrightRock maiden contribution, the gross result from financial services was 6% higher than 2016. The relatively low level of growth is largely attributable to the following:

  • Benefit improvements for accidental injury cover products and improved persistency experience that resulted in a lower release of reserves, in particular in respect of level premium business, suppressed profit growth from Risk business;
  • Lacklustre investment market performance for a large part of the year limited growth in the average level of assets under management and commensurately asset-based fee income earned from Savings business and the Closed Book;
  • Investments in MiWay Life and Indie of R113 million in 2017 compared to R80 million in 2016;
  • Partly offset by the reallocation of administration costs to Glacier.

Glacier achieved sterling growth of 17%. Life investments achieved profit growth of 29%, largely due to positive annuity mortality experience and spread risk reserve releases. The LISP business’s profit declined by 5%. Growth in average assets under management slowed down following lower net fund flows and weak investment market performance during the year. A reallocation of administration costs from the Recurring premium sub cluster to Glacier also occurred as part of the restructuring in 2017.

Strategic business development (SBD) profits increased by 3%. Growth in the size of the Sanlam Personal Loans book supported 13% growth in the business’s profit contribution. Bad debt experience remained broadly in line with 2016. Net losses of R24 million were incurred in respect of other SBD activities, mostly related to initiatives aimed at further embedding and improving the benefits and attractiveness of the Reality loyalty scheme.

SEM grew its net result from financial services by 15% including structural activity and exchange rate differences. Organic growth in constant currency amounted to 10%.

Namibia’s net result from financial services increased by 14% (down 7% on a gross basis). Capricorn Investment Holdings (CIH) sold 14,5% of its stake in Bank Windhoek during the year, resulting in Bank Windhoek becoming an associate of CIH. CIH’s participation in Bank Windhoek’s earnings is commensurately equity accounted on a net basis from the transaction date and not consolidated on a gross basis as in the past. This is the main contributor to the variance in the level of growth in Namibia’s gross and net result from financial services. The performance of the life businesses improved since June 2017 as group life claims experience stabilised. Mismatch profits also increased compared to 2016. Bank Windhoek’s profit contribution declined, attributable to the lower effective stake in the business as well as higher cost of capital and lower interest income emanating from the liquidity pressure experienced by Namibian banks.

The Botswana operations achieved mixed results with an overall decline of 6% in net result from financial services (-1% in constant currency). Life insurance profit declined by 12% (8% in constant currency) due to lower annuity new business volumes and asset mismatch losses recognised following credit-related provisions. Letshego, the second-largest profit contributor, achieved growth of 5% (10% in constant currency). This was lower than expectations, due to low growth in advances and an increase in provisioning in respect of its East African exposure. The underperformance contributed to an impairment charge of R103 million against the carrying value of SEM’s effective interest in Letshego (refer below). The asset base of the investment management business benefited from the large new mandate awarded by the Botswana Public Officers Pension Fund (BPOPF) in 2016, supporting 17% growth in its profit contribution (23% in constant currency).

The Rest of Africa operations achieved growth of 26% in net result from financial services. Excluding the structural impact of the Saham Finances and PineBridge acquisitions and the disposal of the Enterprise Group investments in Ghana, net result from financial services decreased by 5% (up 20% in constant currency). All businesses achieved growth in excess of 20% in constant currencies, apart from Kenya and Tanzania that reported declines in operating earnings. Kenya continues to experience cost pressures from low new business volumes, aggravated by one-off net credit-related provisions of some R20 million in 2017. Tanzania also underperformed due to lower new business volumes. Saham Finances tracked the business plan, contributing net result from financial services of R243 million in 2017 (R264 million in constant currency) compared to R88 million in 2016. Structural activity is the main contributor to the significant increase in Saham Finances’ contribution.

Net result from financial services in India rose 42% (54% in constant currency); 19% (29% in constant currency) excluding profit contributed by the 23% direct stakes acquired in Shriram Life Insurance and Shriram General Insurance during 2016. Shriram Transport Finance fully recovered from the impact of demonetisation in 2016 and grew its profit contribution by 38% (48% in constant currency). Double digit growth in the size of the loan book, recoveries from the equipment finance book and cost efficiency gains supported the strong performance. Shriram City Union Finance was more severely impacted by demonetisation as well as the introduction of Goods and Services Tax in 2017, given its exposure to small and medium enterprises. One-off consulting costs and higher minimum wages also placed pressure on its profit contribution, which declined by 28% (23% in constant currency). The insurance businesses recorded strong growth in operating earnings as their in-force books continue to expand. The Shriram General Insurance results were also positively impacted by R95 million of net realised profits recognised on the disposal of held-to-maturity fixed-interest instruments included in the float portfolio. Due to these disposals, the remaining held-to-maturity instruments in the portfolio are also required to be valued at fair value in terms of IFRS. The unrealised fair value gains on these instruments of R241 million (SEM’s share) are recognised in other comprehensive income in the Statement of Changes in Equity, and will be recycled to net result from financial services and the IFRS Statement of Comprehensive Income on disposal.

The Malaysian businesses had another disappointing year. Net result from financial services declined by 61% (48% in constant currency), the aggregate of a 56% decline in general insurance earnings and a 4% lower contribution from the life insurance business. Growth in general insurance business premiums remained under pressure, with insufficient diversification of the product lines and further losses of market share in the core motorcycle market. The comparable 2016 period included one-off IBNR releases that furthermore increased the comparative base. The focus remains on product innovation and branding initiatives to regain market share and to expand its product lines. De-tariffing of the general insurance industry in the second half of 2017 did not have a significant impact on relative market pricing. The life insurance business continues to be under pressure from low new business production, resulting in negative expense experience. Weaker mortality claims experience also affected the 2017 earnings.

SI achieved overall growth of 12% in its net result from financial services (17% in constant currency), with sterling performances from Capital Management and the International businesses.

The Investment Management SA net result from financial services declined by 20% on 2016, attributable to the following:

  • A R47 million after tax decline in performance fees. Some R40 million of the decline relates to performance fees earned by the Private Equity business in 2016 from the listing of Dis-Chem, with the remainder attributable to a relatively lower level of outperformance of the relevant benchmarks.
  • Low growth in the average level of assets managed on behalf of the Sanlam life businesses. Net outflows from the legacy life book persisted, while the redeployment of discretionary capital further reduced assets under management. The legacy life book managed by SI is running off while SPF’s open architecture approach results in only a portion, albeit increasing, of its new business being managed by SI. A weak equity market performance in the first half of the year aggravated the pressure on fee income earned from these portfolios, which declined by some 9%.
  • The establishment of the CCM resulted in a reallocation of earnings of R12 million (after tax) from the SA Investment Management business to Capital Management.

These factors were partly offset by good growth in fees from third party and collective investment portfolios, which benefited from good net inflows during 2016 and 2017. Key focus areas to mitigate the impact of anticipated further outflows from the legacy life book include:

  • growing third party inflows as well as the share of open architecture business managed on behalf of SPF;
  • expanding capabilities in alternative asset classes to attract new inflows; and
  • stringent focus on cost efficiencies.

As indicated to the market in December 2017, Sanlam Investments’ exposure to Steinhoff International (Steinhoff) equity instruments in Sanlam and third party portfolios was largely at or slightly above its index weighting. The collapse in the Steinhoff share price in December 2017 will therefore not have a disproportional impact on future fee income.

Wealth Management net result from financial services increased by 14%, supported by strong growth in performance fees and lower start-up losses incurred in new business units.

The International business experienced a sharp turnaround in profitability following the restructuring in 2016. Net result from financial services grew by 92% (116% in constant currency). Fee income benefited from the rise in global equity markets, augmented by a lower recurring cost base after the restructuring. The comparable period also included one-off restructuring costs.

Capital Management achieved 19% growth in its net result from financial services. One-off income from equity structuring and financing deals and the revaluation of property finance deals contributed some R50 million (after tax). Sanlam’s largest exposure to Steinhoff instruments are within the Capital Management business:

  • Steinhoff equities serve as partial security for some of the loans granted by the collateralised lending business. The maximum exposure, attaching no value to any security held, amounted to R580 million after tax. Significant progress has been made since December 2017 to obtain additional security and updated valuations for the security instruments. Allowing for the current best estimate value of security held, an after-tax adjustment of R37 million was raised in respect of this exposure. The eventual security value realised may differ from current best estimates with a potential positive or negative earnings impact in 2018.
  • The non-participating policyholder portfolios managed by the CCM have exposure to foreign debt instruments of R368 million, which reflected an unrealised marked-to-market (MTM) decline of R157 million at 31 December 2017. These portfolios also have exposure to South African debt instruments of R771 million, which traded at unrealised MTM declines of R71 million. The MTM declines from these exposures were largely absorbed by discretionary margins held by the Group for such events. In the absence of actual defaults, the MTM declines will reverse up to the maturity date of the instruments. The utilisation of these margins did not affect GEV, as no value has been placed thereon in the Embedded Value of Covered Business.

Santam did exceptionally well to increase its net result from financial services by 5% despite the major catastrophe events highlighted before. Underwriting results increased by 1%, while the contributions from float income and SEM investments grew by 5% and 50% respectively.

An underwriting margin of 6% was achieved in 2017 (6,4% in 2016) including the catastrophe events, which decreased underwriting profit by R156 million after tax and non-controlling interest. The 2017 performance is in the middle of the target range of 4% to 8%, testimony to the resilience of its diversified insurance book. Net earned premiums increased by 8%, while the combined administration cost and float margin ratio remained broadly in line with 2016. The underwriting results of the key lines of business (excluding SEM investments) are reflected in the graph below.

Santam Commercial and Personal experienced the costliest 12 months for natural catastrophe losses in Santam’s history. The business was challenged by the Western Cape storms, devastating Garden Route fires, further large commercial and corporate fire claims and flash flooding, and hail events in Gauteng and KwaZulu-Natal. Underwriting margins were under less pressure than expected due to the benefits of the diversified portfolio and reinsurance support. Santam Commercial and Personal’s year-on-year premium growth showed a significant increase mainly due to book acquisitions and dedicated focus on the Sanlam tied advisers and Santam Direct. There was a sustained focus on improving the profitability of the business, in particular the commercial property business.

Santam Specialist has a leadership position across most segments in which it operates and leverages this position across distribution channels and specialist intermediaries. The Santam Specialist business experienced competitive trading conditions, and underwriting results were negatively impacted by a number of large corporate property claims. The engineering class of business achieved excellent underwriting results with limited claims activity during 2017. The liability class was impacted by a number of large claims and estimate adjustments, and reported underwriting results significantly lower than the strong results achieved in 2016. The crop insurance business was negatively affected by significant hail claims during the weekend of 30 December 2017; it, however, still achieved an excellent underwriting result, mainly due to low incidents of drought claims during this period.

MiWay delivered solid premium growth on the back of new business offerings, although a slowdown in growth occurred during the second half of the year due to the increased focus on profitability during 2017. The disciplined underwriting resulted in excellent underwriting results following an improvement in the claims ratio net of catastrophe reinsurance recoveries to 56,9% (2016: 62,7%).

Santam Re continued to contribute to Santam’s diversification strategy and its ability to create long-term value, and remains the main vehicle for Santam reinsurance optimisation. It continued to build partnerships with international reinsurers with portfolios of good standing.

The growth in float income is largely the function of prevailing short-term interest rates and the level of float balances.

Santam continued to provide comprehensive technical support to SEM business partnerships. This included product, pricing, underwriting and reinsurance input, which together with Saham Finances structural growth contributed to strong earnings growth from the SEM investments.

Read more about Santam’s performance in the Santam Integrated Report.

The 9% increase in Sanlam Corporate’s net result from financial services is the aggregate of 29% growth in the Healthcare contribution and 4% growth at Sanlam Employee Benefits (SEB). The Healthcare businesses benefited from income earned on new business as well as cost efficiencies. At SEB, increased allowance for one-off project expenses and high disability and mortality claims experience partly offset good growth at the investments business, which benefited from positive annuity mortality experience and asset mismatch profits.

Normalised headline earnings of R9,8 billion are 18% up on 2016. This is the combined effect of the 7% increase in net result from financial services, a 146% increase in net investment return earned on the capital portfolio, a 3% increase in amortisation of intangible assets and equity participation costs as well as an increase in net project expenses from R29 million in 2016 to R114 million in 2017.

Net investment return benefited from the relatively stronger investment market performance in 2017 and the base effect of the R192 million additional deferred tax expense recognised in 2016 after the increase in the effective CGT rate in South Africa from 19% to 22%. This more than offset the R250 million lower after-tax investment income earned following the redeployment of discretionary capital during 2016 and 2017. As communicated to shareholders in December 2017, the Group had index-weighted exposure to Steinhoff shares in the South African capital portfolio. The collapse in the Steinhoff share price contributed to some R120 million lower investment return earned on the portfolio after tax.

Net project expenses include Shriram Life Insurance expansion cost of R26 million, due diligence and related costs incurred on investigating and concluding transactions of R47 million and one-off restructuring and small project costs of R41 million. Shriram Life Insurance is incurring an abnormal level of branch establishment costs as it aggressively expands its own distribution footprint. These costs are recognised as project expenses, while expansion activities are significant relative to the size of the in-force book, to avoid distorting the underlying operational performance of the business. Once profit releases from the in-force book reach an appropriate size, the costs will be reallocated to net result from financial services on a prospective basis. This is anticipated to occur in the next three years. The remainder of project expenses are one-off in nature and related to specific corporate actions.

Normalised attributable earnings increased by 35% from R8,1 billion in 2016 to R11 billion in 2017. The biggest contributor to profit on disposal of subsidiaries and associates of R1,3 billion is the R1,2 billion realised on the disposal of the Enterprise Group investments in Ghana. Impairment charges largely relate to the impairment of the investments in Letshego (R103 million) and Pacific & Orient (R161 million) due to the operational underperformance in these businesses.

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