New political leadership within the ruling party, early indications of political and policy certainty, and the distinct possibility that South Africa’s main structural issues are going to be addressed are all contributing towards expectations of an improved outlook. Tangible progress in this regard is eagerly awaited and should be supportive of business and investor confidence, which in turn would provide a more favourable operating environment for our savings and investment businesses.
Economic growth in South Africa and the commodity-based economies in the Rest of Africa is still expected to remain below longer-term potential in 2018, but likely to accelerate compared to 2017. Markets that are not dependent on commodities, such as East Africa and India, are expected to record robust growth.
An improved operating environment will support growth in GEV, new business volumes, VNB and net result from financial services. These performance measures are, however, also shaped by investment market performance, currency volatility, interest rate cycles and political events, which have become even more unpredictable in the current global environment. A downgrade in South Africa’s domestic sovereign rating to below investment grade by Moody’s is likely to cause volatility in these measures; a risk that we are monitoring and managing as best as possible.
New and evolving business models, driven by the rapid and wide-ranging advancements in technology and the demands of a new generation of clients, will continue impacting insurance markets and business practices. Concomitantly, these pose an increasing threat to the confidentiality, integrity and availability of business-critical information and information systems.
We will remain focused on executing our strategy and are confident that we have developed the depth of experience over almost 100 years to successfully navigate through these conditions, and to continue creating value for all our stakeholders.
As highlighted in this report, it is imperative that we respond to the changing environment, competitive landscape and client needs by investing in new initiatives and innovation to remain relevant and, by doing so, drive future growth. A number of initiatives are planned for 2018, that focus on business intelligence across all clusters in South Africa and further enhancing our distribution channels, footprint and reach in South Africa and India. Negative earnings contributions from BrightRock and MiWay Life will also increase in line with anticipated strong growth in new business and VNB. These initiatives will require a combined financial investment of some R270 million after tax and non-controlling interest in 2018 (including the increase in losses at BrightRock and MiWay Life), of which R135 million will affect net result from financial services while the remainder will be recognised as project expenses.
We are also planning to grow new recurring premium risk business and VNB strongly in Sanlam Sky and the traditional middle-income market in South Africa, which will impact earnings growth through higher new business strain.
The acquisition of the additional 53,4% stake in Saham Finances is likely to be concluded only in the second half of the year, with commensurately no significant impact on the 2018 results.