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Group Equity Value

GEV amounted to R134 billion or 6 341 cents per share at 31 December 2018. Including the dividend of 290 cents per share paid during the year, a RoGEV per share of 11,6% was achieved. This was lower than the 13% target for the year.

Strong growth in VNB, all-time high positive experience variances from covered business, good returns from the investment in Santam, the profit realised from the foreign exchange hedge implemented for the Saham Finances acquisition and the benefit of a weaker rand exchange rate on the valuation of non-South African operations provided support to returns in 2018. This was, however, not sufficient to compensate for the pronounced negative impact of weaker equity markets across most regions, higher risk discount rates (RDR) and the write-off of goodwill recognised in respect of the Saham Finances and other smaller acquisitions in terms of the EV methodology. The capital raising during 2018 (refer Capital management section below) occurred at a price of R87 per share, in excess of GEV per share at the time. This supported RoGEV per share by some 1% compared to the absolute RoGEV of 10,6% for 2018.

Adjusted RoGEV per share, which excludes the impact of lower 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 19,4% – well in excess of the target.

Group operations yielded an overall return of 11,6% in 2018, the combination of 11% return on covered business and 12,2% on other Group operations. All clusters achieved satisfactory growth in GEV, apart from SIG, where valuations were severely suppressed by the negative equity market performance. Adjusted RoGEV for group operations amounted to 20,1% and 14,5% for SIG, which better reflects the underlying operational performance.

The covered business operations delivered a very strong operational performance. Adjusted RoGEV amounted to 19,9%, with all businesses exceeding the Group hurdle rate by a healthy margin, apart from the Sanlam Investment Group businesses. The latter is predominantly due to negative expense experience variances and assumption changes at Sanlam Investments and Pensions in the UK.

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

The main items contributing to the return from covered business are:

  • Expected return on covered business increased in 2018 relative to 2017 based on the slightly higher RDR applied at the end of 2017 and the change in mix of the book to the higher-RDR SEM businesses.
  • Value of new covered business: Despite the higher RDR in 2018, VNB still contributed 3.7% to the overall return. As highlighted in the Business volumes section, Sanlam Sky, Sanlam Corporate and SEM Namibia made particularly satisfactory progress in growing their VNB.
  • Operating experience variances reached an all-time high, exceeding R2 billion for the first time (2017: R1.6 billion), up 35%.
    • Risk experience variances of R535 million increased by 20% on 2017, driven by favourable experience across most lines of business in SPF, including Sanlam Sky. SEM also achieved overall positive experience, albeit slightly lower than 2017. Claims experience weakened further at SEB, contributing to negative experience variances of R96 million compared to negative R43 million in 2017.
    • Our focus on client-centricity is a major factor in our success to maintain good persistency under challenging economic conditions. Positive persistency experience variances of R147 million in 2018 (up from R67 million in 2017) is a particularly satisfactory achievement. SPF’s negative variance of R45 million is largely due to lower than expected continuations of single premium savings products. Persistency across risk products remained resilient. Dedicated focus on managing the in-force book contributed to an improvement in SEM’s experience from negative R3 million in 2017 to positive R99 million in 2018.
    • Working capital experience variances include a one-off reserve release of R47 million. Excluding this, experience was in line with 2017, commensurate with short-term interest rate trends during the year.
    • Credit spread experience increased by 10% in line with growth in the corporate debt book managed by SanFin.
    • Other experience variances of R436 million include an amount of R272 million relating to a reduction in cost of capital following the release of R1.5 billion of allocated capital from Sanlam Life’s covered business (refer Capital management section below), which should be regarded as one-off. The remainder comprises of a number of smaller variances.
  • After strengthening the persistency and maintenance expense bases in 2017, no significant operating assumption changes were required in 2018. Modelling improvements and other result from the continuous refinement of actuarial models and are small relative to the size of the in-force book.
  • RDRs increased across most of the portfolio in 2018 compared to a decline in the prior year. RoGEV from economic assumption changes were accordingly negative in 2018 compared to a positive contribution in 2017.
  • Negative returns from equity markets in a number of countries in 2018 had a 5.1% negative impact on RoGEV in 2018 (1.2% positive in 2017). The hedging strategy applied in the Sanlam Life capital portfolio, the largest component of adjusted net worth, provided downside protection to returns on the overall capital portfolio.
  • Foreign currency translation differences and other include forex gains from a weaker rand exchange rate (R393 million), which was more than offset by the write-off of goodwill acquired in terms of actuarial guidance (R1.2 billion). The goodwill write-off is net of R300 million of profit realised on the Saham Finances forex hedge that is attributable to covered business.

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

Other Group operations achieved a return of 12.2%:

  • Sanlam Capital Markets within SanFin is valued at net asset value for GEV purposes, with profits earned in this business the main contributor to RoGEV from investments valued at net asset value. Losses recognised against equity-backed empowerment transactions and the non-recognition of income on the Mayfair collateralised loan (refer Earnings section below) are the main drivers behind the decline in RoGEV in 2018.
  • The Group’s investment in Santam is valued at its listed share price, which significantly outperformed the market with a return of more than 14% in 2018, compared to the 9% negative return of the JSE/FTSE All Share Index.
  • The majority of the Group’s other operations (excluding Santam and Nucleus) is valued on a discounted cash flow (DCF) basis. The benefits of the Group’s diversified profile are evident in the overall 11.7% return earned from these businesses, with negative operating and economic assumption changes largely offset by foreign currency translation gains.

The impact of lower equity markets is noticeable in the 4.3% negative operating assumption changes. More than half of this relates to SIG, where future fee income assumptions were reduced in line with lower than expected assets under management. A prudent valuation approach was also followed for Saham Finances and the Indian businesses. It is our usual approach to keep valuations at or close to transaction prices shortly after acquisitions, which was applied for Saham Finances’ local currency valuation. Valuations of the Indian credit businesses were kept broadly unchanged in local currency given recent liquidity constraints in the Indian market. This is also in line with movements in the listed share prices.

Economic assumption changes (-3.7%) reflect the higher RDR as referred to above.

The valuation of the non-South African operations benefited from the weaker rand exchange rate. This was augmented by some R1 billion of profit realised on the Saham Finances forex hedge. The total hedge profit amounted to R1.3 billion after tax, of which R300 million is attributable to covered business (refer above). Overall, foreign currency translation gains contributed 5.8% to the RoGEV of businesses valued on a DCF basis.

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

  • Net corporate expenses of R109 million recognised in net result from financial services.
  • The low-yielding nature of liquid assets held in the discretionary capital portfolio.
  • Funding cost in respect of the temporary debt incurred for the Saham Finances acquisition.
  • An increase in the present value of future corporate expenses, with additional investment in capacity, including new appointments to the Executive committee.
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