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If global leaders fail to finger debt, how can we save the world?

It is mind-boggling that the leaders currently convened in Davos for the World Economic Forum can discuss a myriad of economic elements still lingering on a precipice, but every single one fails to name debt as the number one problem of the global economy.
Debt is being discussed all the time at this august meeting. It is looked at from all angles, dissected, proportioned, pushed, pulled, restructured, and every imaginable solution offered for how to handle the debt, but not a single presenter bluntly said, there is too much debt and it is killing the world economy.
The annual meeting of the World Economic Forum (WEF) started on Wednesday in Davos, Switzerland. This is the meeting that has been marred by serious protests in preceding years but this week the low media profile of the first two days was very obvious. One really had to dig to find information on the WEF sessions, other than the official press releases sent out in a flood. Even the BBC that usually gives this meeting wide exposure, only ran a single blurp with four items.

But it is not the attention the WEF receives that interests me, it is the actual opinions expressed by the various world leaders and the numerous experts. And this is where I picked up that, in my view, the core problem namely debt, is discussed and analysed in all its multiple facets, but not a single opinion on how to reduce it.
Immediately after the 2008 financial crisis, cyberspace was flooded with opinion how to solve the crisis, and there were many experts proposing all sorts of temporary solutions. One of my favourites  came from an analyst in America stating “you can’t borrow your way out of debt.” In the ensuing years since, this obvious truth has been widely discredited and even in academic circles, usually more prone to honest analyses, sentiment has shifted to believing “you can actually borrow your way out of your current indebtedness, as long as you lay it on the necks of the next three generations.”
When the leaders at Davos talk about “reshaping the world”, I become an instant skeptic if I do not hear solutions for the reduction of debt, not as a percentage of some or other macro-economic measure, but in absolute, nominal terms. Nobody at Davos this week, sees the reduction of debt as the long-term solution to all the economic ails.
Europe and European conditions are discussed in great detail. Labour market inflexibility is named by several experts, but not a word on debt. The cost of debt and the sustainability of debt, and eventually the growth of debt, all feature on the radar rather prominently. Even the willingness of bond investors to stay in debt markets in southern Europe, is discussed, and the impact of their exit is named repeatedly, but bringing down that debt does not feature.
I gather that the latest wisdom on reshaping the world has departed far from the common sense observation that pre-crisis debt, current debt, growing debt, and the debt overhang, will still kill the world slowly, as long as it is bearable, not too painful, and does not happen on the watch of the current set of political leaders, in whichever country you chose as an example.
The focus is all on growth and on sovereign debt, but it seems to me all the experts forget that there will be no significant growth as long as debt on household balance sheets remain a pressing issue. Ultimately, it looks as if it is forgotten conveniently that in a consumer society and economy, you can stimulate as much as you want, and you can inflate banks’ balance sheets as much as you want, but as long as the consumer chooses not to come to the party, growth will remain a mirage.
I don’t think it helps the world economy one bit, least of all us in Africa, to state that 1% GDP growth must be seen as the new norm for developed economies. That is stating the obvious, but it avoids addressing the core issue why economic growth is so low, and will remain so for another decade. I do not need a panel of experts to tell me the world economy is trapped in a low-growth environment, and it can be cladded in any form of academic or quasi-academic economese, the basic fact remains: the debt overhang is dragging down the world economy.
Another obvious observation that borders on the imbecilic, was the statement that Europe must create jobs. Now that is a topic we in Africa know everything about, but the Davos crowd does not seem to get it. As long as consumers are so indebted that they can not even stretch their necks, the economy will not grow and as long as it does not grow, the jobs will not magically appear from some daft policy.

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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.