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Group equity value

GEV amounted to R121,8 billion or 5 940 cents per share at 31 December 2017.

Including the dividend of 268 cents per share paid during the year, a RoGEV per share of 14,8% was achieved for 2017. This exceeded the 13,2% target for the year, due to strong growth in VNB and positive experience variances, investment market returns in excess of long-term assumptions, lower risk discount rates (RDR) and profit realised on the disposal of the Enterprise Group in Ghana. These factors more than offset the negative effect of a stronger rand exchange rate, write-off of goodwill recognised in respect of the BrightRock, Saham Finances and Rwandan acquisitions in terms of the EV methodology, as well as IFRS impairments of the investments in Pacific & Orient and Letshego that also affects RoGEV. Adjusted RoGEV per share, which excludes the impact of higher investment return than the long-term assumptions, interest rate changes and other one-off effects not under management control, and assuming normalised exchange rate movements, amounted to 15,8% – well in excess of the target.

South African nine-year and five-year long-term interest rates declined by 20bps and 60bps respectively in 2017, with a corresponding decline in the RDR used to value the Group’s South African businesses for GEV purposes. A discounted cash flow (DCF) valuation basis is used for essentially all of the Group’s operations, with the decline in RDR having a positive effect on the end-2017 valuations and RoGEV for 2017. This positive impact was augmented by a relatively stronger equity market performance, which supported assets under management and hence GEV valuations at Sanlam Investments (SI) and Sanlam Personal Finance (SPF). After strengthening significantly in 2016, the rand ended the year slightly stronger against most of the currencies where we operate.

GEV at 31 December 2017

The main components contributing to the return on covered business are included in the table below:

Return on covered business for the year ended 31 December 2017

The Group’s covered business operations achieved a good overall performance, exceeding the Group hurdle rate by a healthy margin, despite the economic headwinds faced in a number of countries during 2017. Most businesses achieved returns in excess of 20%, with the notable exception being Sanlam UK, which was affected by the stronger rand exchange rate. The main items contributing to the return from covered business are:

  • Expected return on covered business declined in 2017 relative to 2016 based on the lower RDR applied at the end of 2016.
  • Value of new covered business: The strong new business performance in 2016 persisted into 2017, despite the challenging conditions in South Africa, Namibia and Botswana. VNB benefited from the change in mix to more profitable business and contributed 3,6% to the overall return.
  • Operating experience variances increased markedly in 2017. Particularly satisfactory is the improved diversification in the source of positive experience. Risk experience was broadly in line with 2016, despite weaker claims experience in Namibia and SEB. Similarly, our businesses did well to maintain robust persistency experience under challenging conditions. Our South African middle income market reflected some deterioration in some products, which was largely offset by good persistency at Sanlam Sky and successful premium updates at SEB. SEB was able to increase premium rates following weak claims experience in 2016 while retaining clients. The Central Credit Manager (CCM) is optimising the Group’s exposure to credit assets, which contributed to a significant increase in positive credit spread experience. As highlighted before, the embedded value of covered business does not capitalise any future profits to be earned by the CCM, while only partial allowance is made for SPF and SEB’s profit sharing. Most of the credit spread profit is therefore recognised as experience variances. Other experience variances include the decline in cost of capital following the release of capital from the South African covered business operations. Refer to the Capital management section.
  • Operating assumption changes had a negative effect on RoGEV in 2017. Assumptions were relaxed in certain areas of consistently strong positive risk experience where the actuarial basis has moved too far from actual experience. The persistency basis was strengthened in line with the 2017 experience. The maintenance expense assumption changes relate largely to a strengthening in the unit cost assumptions applied to the closed book in SPF. In addition to various modelling improvements, one-off expense allowances were also increased in line with new regulatory requirements, in particular the introduction of IFRS 17, the new insurance accounting standard issued by the International Accounting Standards Board, effective 2021.
  • The RDRs declined to a lesser extent in 2017 than 2016, contributing to a lower RoGEV from economic assumption changes.
  • The relatively stronger investment market performance in 2017 is the main driver behind the improved contribution from investment variances, which supported assets under management and commensurately fee income earned in 2017 and into the future. Investment return earned on the capital portfolio was in line with expectations, as the largest part of the portfolio is invested in hedged equities.
  • On a relative basis, the rand strengthened by a significantly lower margin than in 2016, with a commensurately lower negative impact from foreign currency translation differences.

The main components contributing to the return on other Group operations are:

Return on other Group operations for the year ended 31 December 2017

Other Group operations achieved a return of 12,9%. The following impacted on RoGEV in 2017:

  • Modelling changes had a negative impact of some R460 million on the valuation of the South African investment management businesses.
  • The Shriram Capital valuations benefited from a relaxation of the prudent assumptions applied at the end of 2016 in the aftermath of demonetisation. This was to some extent offset by lower valuations of Letshego and Pacific & Orient in Malaysia following their operational under performance (refer below) and foreign currency translation losses recognised in respect of the investment in Saham Finances.

The Group’s investment in Santam is valued at its listed share price, which achieved a strong return of 18% in 2017.

The low return on discretionary and other capital is essentially the combined effect of the following:

  • Net corporate expenses of R115 million recognised in net result from financial services.
  • A relatively low level of return earned on the portfolio’s exposure to low yielding liquid assets.
  • Hedging of the Saham Finances transactions (including the additional 16,6% stake acquired during 2017 and the anticipated acquisition of the remaining 53,4% interest in 2018).

Refer to the Capital management section.

The transactions were partly hedged through forward exchange contracts and the acquisition of foreign currency, which earns a very low rate of interest due to the US dollar denomination. The marked-to-market differences on the hedging instruments of R562 million after tax, that were recognised in comprehensive income in terms of IFRS, were excluded from RoGEV as these will be capitalised against the investment once finalised in 2018.

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