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Ground zero for increased regulation

In 2007-8 the world was hit by a devastating financial crisis. Had it not been for government intervention and massive bailout packages, the crisis could very well have brought large international financial institutions to their knees.

Although the reasons for the financial crisis are manifold and complex, it is now unanimously accepted that a big part of the meltdown was caused by widespread failures in regulation and supervision. Perhaps not surprisingly then, the immediate post-crisis years internationally saw a marked increase in regulation in the financial services industry as governments and regulators all over the world scrambled to ensure that the recklessness that caused the crisis in the first instance, is curtailed by introducing more and stricter rules to govern the soundness and conduct of industry participants.
The United Kingdom and Australia were amongst the countries that were fast to move and has progressed significantly along this path. Closer to Namibia, in South-Africa the Financial Services Board (the South-African regulator of non-banking financial services) took many a leaf from the books of these jurisdictions and have also started implementing considerable regulatory reforms.
Namibia is no different and the wheels have been set in motion to bring Namibia’s generally outdated regulatory regime up to date with the requirements and challenges it faces from the complexity of financial services and products in the twenty-first century. Namfisa, the Namibian regulator for non-banking financial services, spearheads these reforms for the insurance industry.
Why do we need regulation?
At its core, the aim of regulation is to maintain the integrity of a country’s financial system. To do so, what a regulatory regime should broadly try to achieve, is to:
Foster and maintain market confidence; Adequately protect consumer rights; Protect and improve the stability of the country’s financial system; and Reduce financial crime.
In simple terms, a regulator should thus ensure that all industry participants keep to the rules of the game, as contained in laws and regulations and ensure that those who do not are reformed or removed from the field of play.
Making the rules
The rules that form the basis of a country’s regulatory regime are to be found in legislation. As already mentioned, in this respect Namibia’s legislation is quite outdated and in dire need of rejuvenation. This rejuvenation is on the horison in the form of primarily three draft pieces of legislation: The Financial Institutions and Markets Bill, which will effectively amend or replace most existing non-banking financial services legislation; The Namfisa Bill, which will govern the powers and duties of the regulator; and the Financial Services Adjudicator Bill, which will create, empower and govern an Ombudsman to whom aggrieved customers can complain if they have been unfairly treated by an insurer or financial adviser.
All of these pieces of legislation are already at an advanced state of completion.
Twin Peaks
All insurance regulations fit into one of two broad categories, namely those dealing with prudential standards and those dealing with market conduct rules. If this sounds quite complicated, a simplistic way to look at it would be to say that prudential standards determine the minimum requirements an insurer must meet before being allowed “to play in the game” to ensure we have financially sound insurers; whilst market conduct rules determine the “way the game should be played” by both insurers and financial advisers, which in turn ensures that undesirable practices are rooted out of the industry and that healthy competition prevails. Internationally, the trend is to house the prudential and market conduct supervision separately – this ensures a dedicated regulator looks after just one aspect of the regulatory spectrum, increasing focus and transparency as well as adequate consumer protection and market integrity.
As it stands, Namfisa regulates both prudential standards as well as market conduct for insurance industry participants and this is a situation that will prevail under the expected new legislation. Given international trends and the very good reasons put forward in its support, this puts Namibia out of step with the rest of the world and it may very well be revisited in future.
In conclusion
History, common sense and good sustainable business considerations dictate that there is a definite need for regulation in the insurance industry. The challenge will be to do this at the correct level so as to cause as little disruption as possible and to reduce the costs thereof as far as reasonable, as these costs inevitably trickle down to consumers. But perhaps more importantly, both the regulator and insurers should not become so pre-occupied with rule-making and rule-keeping, that they take their eye of the true prize – namely to provide great products and services to every client for whom they are collectively responsible.

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Sanlam 2018 Annual Results

7 March 2019

 

Sanlam’s 2018 annual results provides testimony to its resilience amid challenging operating conditions and negative investment markets

Sanlam today announced its operational results for the 12 months ended 31 December 2018. The Group made significant progress in strategic execution during 2018. This included the acquisition of the remaining 53% stake in SAHAM Finances, the largest transaction concluded in the Group’s 100-year history, and the approval by Sanlam shareholders of a package of Broad-based Black Economic Empowerment (B-BBEE) transactions that will position the Group well for accelerated growth in its South African home market.

Operational results for 2018 included 14% growth in the value of new life insurance business (VNB) on a consistent economic basis and more than R2 billion in positive experience variances, testimony to Sanlam’s resilience in difficult times.

The Group relies on its federal operating model and diversified profile in dealing with the challenging operating environment, negative investment markets and volatile currencies. Management continues to focus on growing existing operations and extracting value from recent corporate transactions to drive enhanced future growth.

The negative investment market returns and higher interest rates in a number of markets where the Group operates had a negative impact on growth in operating earnings and some other key performance indicators. This was aggravated by weak economic growth in South Africa and Namibia and internal currency devaluations in Angola, Nigeria and Zimbabwe.

Substantial growth in Santam’s operating earnings (net result from financial services) and satisfactory growth by Sanlam Emerging Markets (SEM) and Sanlam Corporate offset softer contributions from Sanlam Personal Finance (SPF) and Sanlam Investment Group (SIG).

Key features of the 2018 annual results include:

Net result from financial services increased by 4% compared to the same period in 2017;

Net value of new covered business up 8% to R2 billion (up 14% on a consistent economic basis);

Net fund inflows of R42 billion compared to R37 billion in 2017;

Adjusted Return on Group Equity Value per share of 19.4% exceeded the target of 13.0%; and

Dividend per share of 312 cents, up 8%.

Sanlam Group Chief Executive Officer, Mr Ian Kirk said: “We are satisfied with our performance in a challenging operating environment. We will continue to focus on managing operations prudently and diligently executing on our strategy to deliver sustainable value to all our stakeholders. The integration of SAHAM Finances is progressing well. In addition, Sanlam shareholders approved the package of B-BBEE transactions, including an equity raising, at the extraordinary general meeting held on 12 December 2018. Our plan to implement these transactions this year remains on track.”

Sanlam Personal Finance (SPF) net result from financial services declined by 5%, largely due to the impact of new growth initiatives and dampened market conditions. Excluding the new initiatives, SPF’s contribution was 1% down on 2017 due to the major impact that the weak equity market performance in South Africa had on fund-based fee income.

SPF’s new business sales increased by 4%, an overall satisfactory result under challenging conditions. Sanlam Sky’s new business increased by an exceptional 71%. Strong growth of 13% in the traditional individual life channel was augmented by the Capitec Bank credit life new business recognised in the first half of 2018, and strong demand for the new Capitec Bank funeral product. The Recurring premium and Strategic Business Development business units also achieved strong growth of 20%, supported by the acquisition of BrightRock in 2017. Glacier new business grew marginally by 1%. Primary sales onto the Linked Investment Service Provider (LISP) platform improved by 5%, an acceptable result given the pressure on investor confidence in the mass affluent market. This was however, offset by lower sales of wrap funds and traditional life products.

The strong growth in new business volumes at Sanlam Sky had a major positive effect on SPF’s VNB growth, which increased by 7% (14% on a comparable basis).

Sanlam Emerging Markets (SEM) grew its net result from financial services by 14%. Excluding the impact of corporate activity, earnings were marginally up on 2017 (up 8% excluding the increased new business strain).

New business volumes at SEM increased by 20%. Namibia performed well, increasing new business volumes by 22% despite weak economic conditions. Both life and investment new business grew strongly. Botswana underperformed with the main detractor from new business growth being the investment line of business, which declined by 24%. This line of business is historically more volatile in nature.

The new business growth in the Rest of Africa portfolio was 68% largely due to corporate activity relating to SAHAM Finances, with the East Africa portfolio underperforming.

The Indian insurance businesses continued to perform well, achieving double-digit growth in both life and general insurance in local currency. The Malaysian businesses are finding some traction after a period of underperformance, increasing their overall new business contribution by 3%. New business production is not yet meeting expectations, but the mix of business improved at both businesses.

SEM’s VNB declined by 3% (up 6% on a consistent economic basis and excluding corporate activity). The relatively low growth on a comparable basis is largely attributable to the new business underperformance in East Africa.

Sanlam Investment Group’s (SIG) overall net result from financial services declined by 6%, attributable to lower performance fees at the third party asset manager in South Africa, administration costs incurred for system upgrades in the wealth management business and lower earnings from equity-backed financing transactions at Sanlam Specialised Finance. The other businesses did well to grow earnings, despite the pressure on funds under management due to lower investment markets.

New business volumes declined by 13% mainly due to market volatility and low investor confidence in South Africa. Institutional new inflows remained weak for the full year, while retail inflows also slowed down significantly after a more positive start to the year. The international businesses, UK, attracted strong new inflows (up 57%).

Sanlam Corporate’s net result from financial services increased by 4%, with the muted growth caused by a continuation of high group risk claims experience. Mortality and disability claims experience weakened further in the second half of the year, which is likely to require more rerating of premiums in 2019. The administration units turned profitable in 2018, a major achievement. The healthcare businesses reported satisfactory double-digit growth in earnings, while the Absa Consultants and Actuaries business made a pleasing contribution of R39 million.

New business volumes in life insurance more than doubled, reflecting an exceptional performance. Single premiums grew by 109%, while recurring premiums increased by a particularly satisfactory 56%.

The good growth in recurring and single premium business, combined with modelling improvements, supported a 64% (71% on a comparable economic basis) increase in the cluster’s VNB contribution.

Following a year of major catastrophe events in 2017, Santam experienced a relatively benign claims environment in 2018. Combined with acceptable growth in net earned premiums, it contributed to a 37% increase in gross result from financial services (41% after tax and non-controlling interest). The conventional insurance book achieved an underwriting margin of 9% in 2018 (6% in 2017).

As at 31 December 2018, discretionary capital amounted to a negative R3.7 billion before allowance for the planned B-BBEE share issuance. A number of capital management actions during 2018 affected the balance of available discretionary capital, including the US$1 billion (R13 billion) SAHAM Finances transaction. Cash proceeds from the B-BBEE share issuance will restore the discretionary capital portfolio to between R1 billion and R1.5 billion depending on the final issue price within the R74 to R86 price range approved by shareholders.

Looking forward, the Group said economic growth in South Africa would likely remain weak in the short to medium term future, and would continue to impact efforts to accelerate organic growth. The outlook for economic growth in other regions where the Group operates is more promising. Recent acquisitions such as the SAHAM transaction should also support operational performance going forward.

“We remain focused on executing our strategy. We are confident that we have the calibre of management and staff to prudently navigate the anticipated challenges going forward,” Mr Kirk concluded.

Details of the results for the 12 months ended 31 December 2018 are available at www.sanlam.com.