Challenges for Revenue Growth and Profitability in a Declining Interest Rate and Low Inflation Environment

Transcription

1 Challenges for Revenue Growth and Profitability in a Declining Interest Rate and Low Inflation Environment October 2003 Agenda General results Business Environment Issues Addressed Strategic Focus Cost saving initiatives in Sanlam Life

2 Results H1 of 2003: Steady Performance in Difficult Environment Sound earnings growth excellent performance by Santam Sanlam Life under pressure Net cash inflow (>R500m in total) New business investment inflows up marked decline in life single premiums decline in EB in general Business Environment

3 Market volatility investor uncertainty flight to certainty & liquidity low demand for contractual savings Business Environment ALSI flat since December 2002, after sharp drop in Q1 of 2003 negative market sentiment impact on investment performance lower asset management fee base ALSI Performance

4 Business Environment Market volatility ALSI flat since December 2002, after sharp drop in Q1 of 2003 Disparity between short and long term interest rates impacted on competitiveness of life products Interest Rates /01/ /02/ /03/ /04/ /05/ /06/ /07/ /08/ /09/ /10/ /11/ /12/ /01/ /02/ /03/ /04/ /05/ /06/ /07/ /08/ /09/ /10/01 3m NCD's 30yr Govt Bonds Repo rate Source : Sanlam Investment Management

5 Business Environment Market volatility ALSI flat since December 2002, after sharp drop in Q1 of 2003 Disparity between short and long term interest rates impacted on competitiveness of life products The flow to liquidity and attraction of high short term rates favoured cash based investments Proportion of Unit Trust Assets Q3 03 Q2 03 Q1 03 Q4 02 Q3 02 Q2 02 Q1 02 Q4 01 Q3 01 Q2 01 Q1 01 Q4 00 Q3 00 Q2 00 Q1 00 Q4 99 Q3 99 Q2 99 Q1 99 Q4 98 Q3 98 Q2 98 Q1 98 Q4 97 Source : Cazenove, ACI Domestic equity Asset Allocation Foreign, World, Reg Fixed Interest Money Market

6 Issues Addressed Issues Addressed : Sanlam Corporate Strategy and structure strategy developed, approved and communicated: Back to Basics Focus on Delivery new top management, corporate headcount reduced business structures: done Board review in progress Banking strategy defined Absa co-operation agreement Gensec Bank restructuring Sanlam International restructured (focus/cost savings)

7 Improved investment performance Issues Addressed : Sanlam Investments Changes to investment process bedded down renewed focus on fundamental research individual accountability database & decision support systems conviction of calls Regained confidence of intermediaries/clients Obtained new business incl. Balanced & Equity mandates Issues Addressed : Sanlam Investments Improved investment performance Domestic LMW 12 months to 31 July /10 12 months to 31 July /10 Year to 31 July /10 Global LMW Plexus UT Survey Periods to 30 June AFAC Absolute Return Survey (30 June 2003) 8/10 5/10 3/10 24/26 8/23 Outperform benchmarks 15/16 periods A leader in this segment

8 Investment returns improving Group Schemes Business launch in October Focus on costs (R400m savings over last 4 years) Employee Benefits Themba Gamedze appointed as CEO Based in Johannesburg Renewed focus on strategy & market share Issues Addressed : Sanlam Life Issues Addressed : Sanlam Life /continued Strengthened Sanlam visibility and presence service centres expanded and upgraded (kiosks) increased Gauteng presence Group Executive interaction with intermediaries & clients Competitive products Matrix range extended escalating guaranteed plan new investment funds (EB & Individual) amnesty product, etc.

9 Issues Addressed : Sanlam Life /continued Service excellence maintained Employment Equity increase 30% 32% Improved ABSA relationship Strategic Focus

10 Define sustainable business model Low inflation/interest rate environment Mature life industry Changing needs of clients Growing contribution from Black market New players New legislation Strategic Focus : Sanlam Life We are running a parallel strategic process Strategy review and refinement Cost management initiatives

11 Strategic Focus: Sanlam Life - Project work streams (1) Strategy review and refinement - create the context What is the winning value proposition for the future? Target markets (including the black middle market) Solutions, products and services (including trusted advice) Distribution channels Operational agility and flexibility Customer retention (2) Cost management create an effective base for the future (1) Strategy Review and Refinement : Sanlam Life Back to basics : Our value proposition for clients Tailored for each target market segment (EB & individual) Translate client centric wealth creation & protection trusted advice value for money deliver on what we promise products distribution model service model

12 Value propositions need to be uniquely tailored for each target market segment Customer Segment Mass Affluent Middle market Entry level Distribution Channel End 2003 target for completion of Individual Life and Employee Benefits Service Product Solution (2) Strategic cost management: Sanlam Life Right sizing : Match capacity and volumes Target annualised savings in excess of R250 million in acquisition & maintenance costs Rigorous prioritisation of project spend Minimise disruption; maintain volumes & service levels Process launched August 2003 Substantial benefits in 2004 financial year

13 (3) General Strategic Focus : Sanlam Life Capitalise on Absa relationship distribution to Absa client base distribution of Absa products to Sanlam client base back office synergies Continue focus on retention & agility Develop TPA (acquisition of MIA) Strategic Focus : Sanlam Investments Build long term investment performance track record Establish trusted investment brand Improve communication and advice Become increasingly client-centric Identify & utilise synergies & opportunities in cluster Expand client base and AUM Customize international offering for SA clients

14 Strategic Focus : Santam Apply strict underwriting discipline Optimising cash-flow management Reduction of management expenses Improve reinsurance efficiency Improve cost of claims Procurement initiatives Diversification of income base Strategic Focus : Gensec Bank Restructured towards Sanlam Capital Markets unlocking value release excess capital (>R1bn) significant reduction in costs (R200m) Core activities retained complementary to insurance and asset management activities Close/Dispose non-core activities Absa Pursue co-operation on core activities Possible acquisition of non-core activities

15 Strategic Focus : Sanlam Corporate Absa co-operation Realise Gensec Bank restructuring benefits Black Economic Empowerment Business performance measured on ROE / ROEV targets Capital management and efficiency Cost management Cost management Sanlam Life

16 Cost-savings Programme Framework Issues considered Long-term financial objectives Scenario analysis to achieve objectives Cost saving target determination Areas of expected cost saving Planned actions per business unit Resulting business risks The future : Why lower top-line growth Operate in over-insured market with low savings culture Increased competition from non-insurance savings products High positive real interest rates dampen level of contractual savings Pressure on savings from consumption substitutes (cellphones/gambling) Growing consumerism challenging traditional life product offerings Reduced subsidisation of retail inflows from pension outflows However, there are some short-term term catalysts

17 Short-term growth promoting catalysts Improved penetration through multi-channel distribution strategy (mainly bancassurance) On-going political initiatives to reduce taxes & ease forex controls Improved equity markets Declining interest rates (but still showing real returns) Depreciation of the Rand BEE deals (particularly in group business) Conclusion : Best possible growth <10% nominal Financial objectives driving cost cutting Shareholder : i + 10% NUB EV margin = 18% positive operating experience variations (profit) Policyholder : lower cost structures for future competitive offerings/pricing costs as % of future returns (2% - 2.5%) Question : Given top line constraints, what is an affordable/aligned cost base? Resulting scenario planning for i + 10% return & calculations for reduced cost charges (aligned with EV assumptions)

18 Sanlam Life Costs Savings Targets R million Acquisition Shareholder (i+ 10%) 100 Policyholder (2% - 2.5% costs) 145 Total 245 Maintenance Benchmarks to achieve this : Non commission acquisition costs: unit cost increase of CPIX 1% Maintenance costs : unit cost increase of CPIX 1% Sanlam Life : Required cost savings Business unit Current cost base + 5.3% Projected savings 2004 Resulting 2004 cost base Savings as % of current cost IL Distribution Operations & IT Client Solutions Marketing Finance/Actuarial/HR Employee Benefits Other Projects TOTAL % 10% 4% 19% 13% 6% 1% 27% 12%

19 New business volumes Retention of key people Broker and advisor channels EE personnel Visibility and presence in the market Business risks Innovation Lack of flexibility due to reduction of project budget Morale and motivation Ineffective implementation Too slow or timing across business units where interdependencies exist Business volume projections Factors to aid volumes: Greater productivity in the advisor force Better quality business More focus in the broker channel New distribution channels (Group schemes, ABSA) Volume Impact: NUB Item Lower lapses Net effect Source Traditional distribution sources New distribution channels Better quality business & improved focus Ongoing work on refining estimates Impact -0.8% +8.3% +1.2% +8.7%

20 Conclusion General market reaction Sanlam relative to FINI 11/98 01/99 03/99 05/99 07/99 09/99 11/99 01/00 03/00 05/00 07/00 09/00 11/00 01/01 03/01 05/01 07/01 09/01 11/01 01/02 03/02 05/02 07/02 09/02 11/02 01/03 03/03 05/03 07/03 09/03