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:
The main components contributing to the return on other Group operations are:
Other Group operations achieved a return of 12.2%:
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: