The group risk market has been “consistently under-pricing” premiums for pandemics, and Sanlam hopes that “more rational pricing” will prevail in future, Sanlam’s financial director, Abigail Mukhuba, said during the group’s annual results presentation on 10 March.
Sanlam reported a strong performance in the year to the end of December 2021. It achieved its aim of restoring performance to pre-pandemic levels and gained market share in most lines of business in South Africa, chief executive Paul Hanratty said.
New business volumes exceeded R355 billion for the first time, up 14% on 2020 and 43% higher than in 2019. The net value of new business rose 44% to R2.8bn and was 21% higher than in 2019.
Overall life insurance new business volumes increased by 28%, investment business increased by 13%, and premiums from general insurance increased by 3%.
The net result from financial services increased by 13% (18% on a constant currency basis) to R9.5bn compared to 2020 and was 4% higher than in 2019 (excluding one-off items).
Headline earnings increased by 27% to more than R9bn, from R7.1bn in the previous financial year. Headline earnings per share increased by the same percentage to R4.33 compared with R3.40.
Despite the impact of higher mortality claims, net client inflows were 27% higher compared to 2020 and 38% higher than in 2019, reaching R78.3bn. The group attributed this to inflows into Sanlam investments and Sanlam by Glacier.
Group risk claims ‘really hurt us’
Life insurance contributes 51% of the group’s net operating earnings, and Hanratty noted that excess mortality claims in the group risk business “really hurt us” far more than in the individual risk business.
The core Sanlam Life and Savings (SLS) cluster’s net result from financial services was 4% higher, from R4.6bn to R4.8bn. Retail Mass’s net result fell 1% and Retail Affluent was down 21%, but Sanlam Corporate saw a massive decline, from R836 million in 2020 to a loss of R1.9bn.
The main contributors to SLS’s net performance from financial services were Glacier (from R1.56bn to R1.67bn) and Sanlam Personal Loans (from R122m to R437m), as well as basis changes and the release of reserves.
Hanratty said the entire group risk benefits market needs to rethink how it works. “Clearly, it doesn’t price for pandemics”, and the ability to reprice only once a year if it was hit “by something really severe” was also a problem.
Sanlam implemented price increases on its group risk policies, but, because repricing took effect only on renewals, it did not benefit from most of the repricing in 2021.
“We felt that we were quite early into the repricing, but still I think, particularly with the benefit of hindsight, we would have liked to see that repricing happening much more quickly,” Hanratty said.
Impact of excess mortality claims
According to the annual results, Covid-19 resulted in a significant increase in excess mortality claims (claims above long-term actuarial assumptions) across the group last year.
Sanlam paid out mortality claims of R22bn to clients last year, 76% higher than in 2020.
The impact of significantly higher Covid-related mortality claim payments was reflected in the net client cash flows in the SLS cluster’s life business, which fell from R9.3bn to R9bn – with Sanlam Corporate seeing a net outflow of R1.9bn. Retail Affluent’s net inflow rose from R3.6bn to R6.9bn, mainly because of “significant” flows into Glacier.
The group’s total excess mortality claims net of tax, reinsurance, and annuity and disability offsets was R4.2bn, of which R3.6bn was incurred by SLS – and most of this, R2.4bn (a massive jump from R69m), was in Sanlam Corporate (largely due to group risk).
Excess mortality claims in Retail Mass rose from R248m to R468m and in Retail Affluent from R30m to R656m.
SLS’s excess mortality claims of R3.6bn were largely offset by basis changes and a repricing of the group risk business.
The impact of the basis changes and the release of reserves contributed R4.2bn to SLS’s net operating performance, up from R492m in 2020. The reserve release alone contributed more than R3bn.
Hanratty said the group has been “through an extensive exercise to reprice and redesign products, introducing new underwriting measures to help reduce the Covid risk. Furthermore, our actuarial assumptions have been reviewed to establish a pandemic reserve on retail life insurance business and to release some of the historic reserves no longer required by the business.”
He said Sanlam believes “that the pricing changes we’ve made, the reserving changes we’ve made, and the underwriting actions taken should mean that future mortality losses from the pandemic should be modest, although the future course of the pandemic is extremely difficult to predict precisely”.
Historically, Sanlam has aimed to hold discretionary capital of R1bn. It had discretionary capital of R2.9bn at the end of 2021, and Hanratty said the group would seek to target minimum discretionary capital of R3bn until Covid “no longer poses a threat” to its operating performance.
Higher new business volumes in SLS
Overall new business volumes in SLS were 40% higher than 2020, rising from R77bn to R108bn. The volumes by segment were:
- Retail Mass: Up 51%, from R2.5bn to R3.8bn. The segment saw recurring premium growth of 39% for individual life policies, 81% for group business and 48% from funeral policies sold through Capitec.
- Retail Affluent: Up 39%, from R65bn to R90bn. Glacier recorded single-premium growth of 40%. Recurring-premium growth (9%) was more muted, as improved growth from the individual life, Sanlam Indie and MiWay Life businesses were partially offset by weaker sales of assistance and group risk business in BrightRock and marginally lower credit life sales from SPA Life. Individual risk sales from traditional intermediated channels (including BrightRock) increased by 10% compared to 2020.
- Sanlam Corporate: Up 41%, from R9.8bn to R13.9bn. Most of this came from growth in the single-premium investment business (up 70%). Quote activity in this segment has recovered to pre-pandemic levels, but conversion rates remain lower.
Santam and investments were the out-performers
Sanlam’s net operational earnings grew 23%, from R8.3bn to R10.2bn. Notwithstanding the growth in SLS, the main contributors were Sanlam Investment Group (SIG), from R805m to R1.2bn, Santam, from R686m to R1.3bn, and the net return on investments, from R271m to R1.3bn.
Sanlam said SIG’s much higher contribution to the net result from financial services was due mainly to Sanlam Specialised Finance (SanFin) and higher asset-based fees from the improvement in investment markets last year.
Within SIG, the net result from financial services by segment were:
- SanFin: Up 162%, from R241m to R631m. It benefited from marked-to-market gains on local and offshore listed bonds as spreads narrowed further relative to 31 December 2020. The preference shares and equity businesses also recorded improved performances, while lower credit loss provisions were raised relative to the prior period.
- International: Up 46%, from R282m to R413m, supported by an improved performance from Sanlam UK.
- Wealth Management: Up 15%, from R214m to R247m. This was attributed to higher performance fee income, higher average assets under management and increased income from diversification.
- Sanlam Investments: Up 10%, from R552m to R608m, mainly because of higher asset-based fees, which were partly offset by lower performance fees in 2021.