Group Chief Executive’s strategic review




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“Our engagement with Government, labour and business leaders delivered a specific set of responses geared toward addressing factors that contribute to suboptimal economic growth.”
Ian Kirk
Group Chief Executive



The 2016 financial year presented the Group with a particularly challenging operating environment as further elaborated on in the Economic review and the Financial review . Despite these conditions, the Group delivered a good overall operational performance. This was achieved through diligent focus on executing the Group’s strategy that is premised on building a diversified financial services group that can deliver sustainable long-term growth.


Read more about rewards in the Remuneration Report online.


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The significant global and local events that made 2016 memorable – including Brexit, the US Presidential election, local elections and sovereign rating milestones – again emphasised the need for large corporates, such as Sanlam, to play an increasingly active role in shaping the environment in which businesses operate. Active participation in industry and community bodies – to influence development, job creation and ensure stability – is an important feature to sustain long term growth.

Our engagement with Government, labour and business leaders delivered a specific set of responses geared toward addressing factors that contribute to suboptimal economic growth. Sanlam’s priority was to help create an ecosystem, characterised by the main ingredients and capabilities to achieve much higher levels of economic growth. Of equal importance is the message to our employees and business partners to remain focused and realistically optimistic about our operating environment over the medium term, and that we should actively play a role in positively shaping our environment.

Highlights
  • Adjusted RoGEV of 17,8% exceeded hurdle of 14,1%
  • The acquisition of an initial 30% stake in Saham Finances became effective in February 2016, with the acquisition of a further 16,6% stake announced in December 2016. Sanlam now has an unparalleled footprint in Africa.
  • Concluded additional investments in India.
  • SEM experienced robust growth, and benefited from the first-time contributions by Saham Finances, the 23% direct stakes in Shriram Life Insurance and Shriram General Insurance, and the Zimbabwean operations.
  • Client-centric restructuring was effected at SPF and Sanlam Investments to position the clusters for agility and growth.
  • Substantial progress with Afrocentric co-operation.
  • Good progress in further developing the Group’s capital and balance sheet management capability in a SAM environment.


Lowlights
  • Relatively weaker investment market performance, in particular on non-South African exposure.
  • Financial irregularities uncovered at Soras General Insurance in Rwanda.
  • Increased claims levels at Santam, SPF, SEB and in Namibia.
  • Underperformance in the UK, Malaysia and at some general insurance businesses in Africa.
  • Regulatory delays in South Africa create distribution and product development uncertainty and increase compliance costs.









Strategy process and overview

We believe that the Sanlam Group’s strategy ensures our long-term success and ability to create sustainable value for shareholders. We can best achieve this by optimising returns through a continued focus on the Group’s five strategic pillars. We acknowledge that sound governance, people development, responsible products and services, a prosperous society, and being able to do business in a healthy natural environment will enable our long-term success.

The successful implementation of our strategy relies on having optionality, and our ability to remain focused on execution of these strategic pillars. Diligent execution on the strategy has been, and remains, a key differentiator for Sanlam, and is enabled by our ability to attract and retain the best skills available in the market.

Our objective of maximising shareholder value demands that we maintain focus on two critical areas:

  • Maximising the return on investment in the existing business through efficient and effective management
  • Sourcing new growth opportunities by identifying core markets for growth and expansion





We have a differentiated approach per region, with the following focus areas:

South Africa: delivering growth in a mature market

Sanlam is a large player in a mature market with strong competition. We have to further diversify our distribution capability to drive growth. This can be achieved, particularly through our entry-level market footprint, the Sanlam Reality loyalty programme, health offerings, digital enablers, outcome-based investment solutions, our Ubuntu-Botho empowerment partnership and the use of advanced analytics. Operational and capital efficiencies are key in managing our legacy book.

Other emerging markets: balance structural and organic growth

Sanlam focuses on accelerated growth to obtain leadership positions in all countries. Cross-border alliances and relationships enable us to capitalise on the expanded footprint following the Saham Finances transaction. Geographic expansion will be prioritised in line with client and intermediary needs.





Developed markets: niche investment and wealth management approach

Developed market products and services can be offered in South Africa and the Rest of Africa. The UK consolidation will result in a focus on efficiencies and distribution under new leadership, with a continued wealth and investment management focus.










The strategic focus areas per cluster are summarised in the table below. We continue to make progress in implementing our five-pillar strategy through these focus areas, while remaining flexible in prioritising the pillars according to our federal model and the different requirements or levels of maturity per cluster.

SPF: become a leader in all retail market segments

SPF has been realigned for agility, and in preparation for changes in the regulatory environment.


The cluster is addressing digital solutions and business intelligence opportunities, while extracting value from the refreshed Sanlam Reality offering. It continuously fine-tunes its advisor partnership models. There is a strong drive for accelerated growth in the entry-level market. Optimising balance sheet and capital management within the new solvency regime is also prioritised. Transformation of the distribution and office employee profile to reflect South African and client demographics – remains high on the agenda.

Sanlam Investments: growing third-party market share

Sanlam Investments is defending its leading position in private wealth while building on the success in attracting retail fund flows.


The cluster’s focus is on growing corporate and third-party fund flows, where it does not have its fair market share. Improved cost efficiency is a priority. Transformation of the employee profile – to reflect South African and client demographics – is a particular focus area in support of the corporate and third-party growth initiatives, with specific emphasis on portfolio management.

Sanlam Corporate: become the partner of choice to targeted corporates

The cluster, initially comprising SEB and Sanlam Healthcare, will focus on cross-selling to existing clients, bundling products to unlock value and on integrating with other clusters through Sanlam Reality.


It aims to target South Africa’s top companies and multi-nationals (both South African-based and other) with corporate solutions that follow a needs-based approach. Transformation of the employee profile – to reflect South African and client demographics – is a priority within the corporate market space. Optimising balance sheet and capital management is another important focus area.

SEM: leading Pan-African player, with diversifiers in India and Malaysia

SEM is leveraging its expanded footprint through organic growth.


Providing an unmatched Pan-African offering to corporate clients and multinational intermediaries is augmented by an in-country retail focus. It will provide expanded central support capabilities to execute on these initiatives. At the same time, focus remains on structural growth opportunities through increasing stakes in existing businesses, expanding product lines and entering new markets. The primary criteria for entering new markets are market potential in terms of size and growth prospects, low financial services penetration and relative political stability.

Santam: further entrenching its leadership position; extract value from SEM investments

Santam is focusing on profitable growth – both in South Africa and emerging markets – and improved operational efficiencies, aimed at optimising the acquisition cost ratio.


There is continued focus on risk management to reduce claims cost. Santam is increasing the value extracted from SEM co-investments. Transformation of the employee profile – to reflect South African and client demographics – remains a strategic focus area. A new agreement concluded with Munich Re of Africa to use its AA- Standard & Poor’s international credit rating creates the opportunity to more effectively compete for reinsurance business.






The summary below highlights the Group’s performance against each strategic pillar during the year:



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Net result from financial services increased by 10%, from R7,3 billion in 2015 to R8 billion in 2016, a particularly satisfactory performance.

New business volumes increased by 11%, a solid performance under difficult conditions, with SEM outperforming targets for the year, and the other clusters coming in slightly below stretched targets. The 18% increase in VNB (10% on a consistent economic basis) is ascribed to growth in new life business as well as an improvement in the business mix. The new business performance contributed to net fund inflows of R41 billion in 2016 (2015: R19 billion), with net inflows across all clusters during the year increasing their future earnings bases.

SPF increased its net operating earnings contribution by 7%, despite markedly weaker risk claims experience. All of the main SPF businesses contributed to the growth. Future earnings growth at SPF relies on the cluster’s ability to respond to, and manage the decline in the legacy book by growing in other areas. The restructure of the cluster (discussed in the operational review) will improve agility and responsiveness, and will enable the cluster to empower more people to drive earnings growth, while acknowledging that higher levels of investment will be required in the short term, to encourage new ventures and enable omnichannel distribution. New business volumes increased by 1% compared to 2015, to reach R62 billion. The uncertain environment in South Africa and persisting investment market volatility contributed to a significant slowdown in discretionary single premium life and non-life savings business. Other lines of business performed well, with highlights including a 20% growth in Individual Life risk business and an improvement in business mix at Sanlam Sky.

SEM grew its net operating earnings contribution by 30%: a combination of solid organic growth in India, Nigeria, Ghana, Tanzania and Uganda; and the first-time inclusion of new acquisitions, principally Saham Finances, Shriram Life and General Insurance and in Zimbabwe. Lower earnings contributions from Namibia, Malawi, Zambia and MCIS in Malaysia partly offset the robust overall performance from the other regions. Organic growth in new business volumes amounted to 47%, with overall growth of 63%, including new acquisitions.

Sanlam Investments achieved a satisfactory performance despite low investor confidence due to challenging macro-economic factors. Net result from financial services grew by 4%, impacted by weak investment markets, lower profit in the UK and lower performance fees in the South African businesses. South African investment management had good retail flows, but institutional flows remained weak. New business volumes for the cluster increased by 8%.

A change in mix of business placed pressure on Sanlam Sky’s new business profitability as tax-free savings account sales exceeded expectations. Sales of funeral plans in general were slower than expected. The model for the entry-level market is being adjusted, as a different sales approach is required to still achieve an optimum long-term mix of products in line with client needs. Group benefits business growth exceeded expectations.

Santam experienced a normalisation in underwriting margins after exceptional results in 2015, contributing to a 13% decline in its contribution to operational earnings. Earned premiums grew by 7%, reflecting the maturity of the South African market and competitive niche and specialist market segments, that muted renewals.

Sanlam Corporate achieved growth of 36% in net result from financial services, with strong growth at SEB Investments partly offset by weak risk underwriting profits. The first-time contribution of Afrocentric also provided support to the results. Strong new business growth of 73% was skewed to lower margin business. 


The restructuring of several business units – including SPF, Sanlam UK and Sanlam Investments’ South African investment management business – and the establishment of the new Sanlam Corporate cluster, was based on client-centric alignment, while offering the opportunity to optimise efficiency in an environment of rapidly rising regulatory compliance costs and continued pressure on fee levels. For example, this includes the elimination of product duplication and unnecessary statutory costs and creates the ability to roll out regulatory changes in a consistent manner at the lowest possible cost. It also reduces relative levels of overhead costs, except where new ventures and innovation requirements are prioritised.

SPF, in particular, continues to evaluate and close business offerings where declines or profitability challenges result in unfeasible or unsustainable outcomes. Further work has been done to improve measurement systems to ensure optimal use of capital, measurement of growth, and to drive the appropriate behaviour through rewards.

SEM drives operational efficiency through piloting projects in different territories and with a variety of business partners. SEM’s preferred life system was successfully implemented in Namibia, further enhancing the ability to efficiently roll out new products across the cluster. The same approach was followed with the launch of a loyalty programme in Botswana – set to be replicated in other territories. In addition, there is a focused effort to roll out a standardised general insurance platform in a number of sub-Saharan countries.

Sanlam Investments’ transition to Silica, for outsourced administration and IT services, entered a phase where the environment has stabilised. The contact centre is operating at a level matching that of pre-outsourcing. Some challenges remain, such as delays with transaction processing, due to our decision to FICA all our investors, and delays in distribution of statements to clients.

Santam’s willingness to invest in large, long-term projects to provide data capabilities and agility for future business contexts, are delivering the anticipated benefits. Most of the personal lines policies have now been migrated to a new administration system and deployed to nearly all personal lines intermediaries. This has enhanced Santam’s personal lines product offering, and its ability to provide online access, and to apply state-of-the art pricing and underwriting techniques on an automated basis. The commercial product has been built and successfully deployed in a pilot phase, enabling Santam to proceed with the full implementation and migration process during 2017.

The Sanlam Actuarial and Risk Management function initiated a business intelligence renewal investigation project, to find a centralised solution that will apply advanced analytics to big data to inform the strategic choices that the Group is facing. Good progress is being made.

The most significant challenge for the Group is to manage complexity as it diversifies across countries, jurisdictions and product lines. Therefore, it is important to have tight principles. These are managed from a centralised point with a practical approach that recognises that different businesses are in different phases of development. This demands an adaptable approach to operational efficiencies, product development and financial management.

Sanlam has a solid track record of delivering on operational efficiencies. This is evident in our ability to largely maintain new business margins on a per-product level, despite cost and fee pressures. We, again, managed to achieve this in 2016. Growth in administration cost was limited to an inflationary 7%, despite additional restructuring expenses incurred during 2016. From the initiatives highlighted above, it is, however, clear that operational efficiencies are not only about cost management but, more importantly, about also creating the ability to more effectively service the changing needs of clients, from a product and engagement perspective. As such, it is a core mechanism to ensure client satisfaction and persistency, while also using data and analytical support to enhance innovation in pursuit of new business performance. This enabled the delivery of remarkable persistency and a solid new business performance, despite the current challenging environment.
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Capital management is a tight standard, managed from the Group Office. To enhance RoGEV, Group businesses are allocated an optimal level of capital, and are measured against appropriate return hurdles. Further opportunities to optimise the capital base are continuously investigated as the Group and the operating environment develop, including more sophisticated balance sheet management, strategic asset allocation and the most appropriate capital structure – including the option to return capital to shareholders if not used within a reasonable timeframe. The new solvency regime being introduced in South Africa through the SAM regulations enables the Group to further optimise balance sheet and capital management. Progress includes the following:

  • The enhancement of the Group’s projection capability within a SAM environment received significant attention. The modelling results, combined with the more conservative investment strategy introduced at the end of 2015 for the capital supporting the South African life operations, indicates that the Group should be able to release further discretionary capital over the next few years.

  • Read more in the Financial review


  • Balance sheet management also received particular attention. The diversified nature of the South African life operations will enable the Group to expand its exposure to credit assets in this business in a capital-efficient manner, thereby enhancing future profitability and RoGEV. The relevant mandates have been adjusted to facilitate a higher asset allocation to credit assets in the appropriate products. This was one of the drivers for the establishment of the Central Credit Management function in Sanlam Capital Markets (SCM).

    Read more about our operations



  • The introduction of SAM also enables the Group to more effectively manage future profit margins embedded in certain policyholder liabilities with a dual benefit of enhancing RoGEV, while decreasing GEV volatility. The necessary Board approvals were obtained with implementation scheduled for appropriate times from 2017.

  • Read more about these acquisitions in the Operational review


    SEM continued balancing the need to achieve the hurdle rate with sensitivity towards the countries and stakeholder expectations where the cluster operates. A model was developed for SEM to calculate risk-sensitive economic capital – including its credit and banking businesses – and to set an appropriate risk appetite to monitor exposure.

    In turn, Santam declared a special gross interim dividend of R8 per share, after taking current and future solvency requirements into account. Sanlam’s share of the special dividend enhanced available discretionary capital at a Group level by some R540 million.

    The Group has excess capital of R550 million available for redeployment at 31 December 2016, after allowing for the cash component of the acquisition of an additional 16,6% stake in Saham Finances (R2,7 billion), and a 53% stake in BrightRock Holdings in South Africa (R700 million) that will be finalised during 2017, subject to conditions precedent. Additional discretionary capital will be unlocked during 2017 and the years following, as further elaborated on in the Financial review. The available discretionary capital remains earmarked for value-adding acquisitions.

    Efficient capital management has contributed largely to Sanlam’s ability to deliver an average RoGEV of 16,3% over the last 10 years.

    View charts



The Saham Finances transaction, which became effective in February 2016, expanded the Group’s footprint to 33 markets in Africa.

Read more in the Operational review by the Group Chief Executive


Sanlam acquired a further 23% stake in Shriram Life Insurance and Shriram General Insurance, whereas Santam made a few small acquisitions in the local market. SPF also announced the acquisition of a 53% stake in BrightRock Holdings in January 2017.

Read more in the Operational review by the Group Chief Executive



These initiatives further enhanced the Group’s geographic and line of business diversification. The transformation of the Group, from a diversification perspective, over the past 14 years has been remarkable. From being largely a life insurance company, the Group’s line of business exposure has become much more balanced.

Progress made with geographical diversification is similarly stark, with a significant increase in the contribution from non-South African operations.

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SPF’s restructure positions the cluster for further client-centric diversification. Product innovation included the new segmentation of Matrix Life Insurance Cover, which includes an “express” option that advisors can sell during one visit to the client, and with the client not having to do a medical test. These changes give advisors more options, and resulted in strong growth in new business volumes from this line of business. Product integration with Sanlam Reality is also progressing well, allowing more benefits, and gaining positive traction from advertising and marketing support. Sanlam Reality has been able to attract about 7 000 new members a month, up from 2 000 in the past few years. Clients who engage on Sanlam Reality are also two-and-a-half times more active than they were a year ago.

Distribution diversification requires an omnichannel approach – providing clients with a consistently excellent experience across engagement vehicles or platforms. This entails seamless access to financial advice, products and services wherever, whenever and however clients choose to engage – and at any point of the relationship lifecycle. The Group is making good progress in capturing data to be able to understand client needs in terms of omnichannel experiences.


Read more about omnichannel implementation in the Operational review by the Group Chief Executive


Santam continues to invest in ways to penetrate new and non-traditional markets. This is partly achieved by leveraging off key stakeholder relationships, and aligning the various distribution channels to exploit business opportunities. A platform was established to enable business units, such as Santam Agri, Santam Direct and Vulindlela Underwriting Managers (VUM), to explore and discuss cross-sell opportunities and share leads.

Consumer education remains one of the most effective ways in which Sanlam creates new market opportunities.


Read more about consumer education initiatives in the Prosperous society supplementary report online.




Ongoing transformation is driven at both a Group and individual business unit level. Transformation includes the Group’s diversification efforts, but also aims to align the Group’s demographic profile to the territories in which it operates, and contributes towards black economic empowerment in South Africa.

Sanlam’s talent management strategy takes into account global and local talent management practices, and guides the Group in how to attract, recruit, develop and retain its people to strengthen Sanlam’s pool of intellectual capital.

In South Africa, the Group tracks demographic developments and shifts to transform its employee profile and distribution presence. This includes, for example, the increasing importance of Gauteng as a key metropolitan area, due to urbanisation. SPF has made good progress in penetrating new areas and market segments through employee and distribution transformation.

The restructuring initiatives in different clusters provided an opportunity to improve employment equity profiles to meet the Group targets for black recruitment. Good progress was made in senior and middle management appointments, with the South African operations achieving a ratio of 77 black and 23 white appointments.

Overall, the number of black professionals, as a particular category, has continued to increase at a steady pace – from 203 employees in 2014, to 270 in 2016. This is an increase of 33%.

Succession plans show encouraging signs of increasing the number of black people in key roles.

Sanlam and Santam have both been certified as Top Employers in 2017.


Read more about transformation in the People development supplementary online report


Sanlam maintained its BBBEE level 2 (2015: level 2).


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Strategically aligned remuneration philosophy

Sanlam’s remuneration philosophy and policy align the strategic pillars with organisational behaviours. Short- and long-term strategic objectives are measured and rewarded to mitigate excessive risk-taking, and provide balance between long-term sustainable growth and short-term performance.

The annual bonus targets at a Group and cluster level incorporate financial and non-financial performance measures that are directly linked to the Group strategy and key performance indicators. These include net result from financial services, VNB, adjusted RoGEV and employment equity. The specific performance targets and relative weighting is determined per cluster, based on the cluster’s specific strategic initiatives.

The vesting of long-term incentives is also directly linked to strategic key performance indicators that support sustainable performance, and ensure full alignment with shareholders. Remuneration components for the Group Chief Executive and Group Financial Director are illustrated below, indicating the linkages to strategic KPIs. Performance hurdles are set relative to all five strategic pillars as well as the material sustainability themes.


View guaranteed pay and short-term incentives

View long-term incentives


Read more about short and long-term incentives for members of the Executive committee in the Remuneration report online