When Sanlam was approaching its demutualisation and the listing of its shares in the bleak equity market of late 1998, it was often described as a transformation story. Latest financial results and the share price performance indicate the transformation has started delivering useful returns for shareholders.
In the year to December 2001, operating profit grew by 21,4% to R2,091bn and the new-business embedded value margin - a key measure of profitability - improved from 9,7% to 13,2%.
It demonstrated an important point: though business volumes have remained under pressure, and margins are still well below those of an industry leader such as Liberty Group, profitability in the life business is improving.
The share price, at 750c by the end of the first quarter of this year, had increased by a quarter on the listing price of R6, adding about R4,68bn to the market capitalisation. Last August it reached a high of 1 155c before weakening in the more bearish sentiment towards financial services companies. It has outperformed the JSE Life Assurance index by about 5% since the flotation.
That may seem modest, but it exceeds some of the earlier expectations. And it vindicates Sanlam's strategy - espoused first by its ex-chairman, the late Marinus Daling, and still embraced by CE Leon Vermaak - of focusing for now primarily on domestic markets while strengthening the current operations.
In part, that choice of strategy reflected the extensive reshaping needed in the existing activities . Profits in the banking division, Gensec, for example, could charitably be described as volatile.
But the latest results, published almost a year after Vermaak's appointment as CE was announced in March 2001, also indicate that Sanlam got to grips with some key issues. "Since demutualisation we have been in a fix-it phase in the individual businesses," says Vermaak. "This included modifying the sense of autonomy, without meddling in the day-to-day operations. And we had to build the teams. That absorbed a lot of time. Now it is in place."
The nature of Sanlam's transformation was influenced by its history and by legacy issues. For decades after it was established in 1918, its primary aim was Afrikaner economic and social empowerment. Even in the first half of the Nineties, it seemed that its ownership of assets would often take precedence over profitability.
But it embarked on rapid structural change early in that decade. The noncore investments held through Sankorp, an unlisted holding company, were sold or spun off to shareholders. Sanlam retained merely portfolio investments in some of these.
It also facilitated SA's first major black empowerment transaction, by creating New African Investments Ltd (Nail) - a listed company controlled by blacks - which acquired effective control of Metropolitan Life, a Sanlam subsidiary focused mainly on the emerging black market.
After the demutualisation, Sanlam held several wholly owned operating activities, and two strategic investments in financial services: a 59,5% stake in Santam, the general insurer, and a 23% stake in Absa, the commercial banking group.
Aside from the structural shifts, the demutualisation has demanded that it become a profit-focused company whose mission is to deliver shareholder value without compromising the requirements of policyholders and other stakeholders. This meant changes in the corporate culture, in the system of corporate governance, the cost structure and, often, in market positioning.
There were also specific weaknesses in the operations.
The returns in the life business were well below those of other listed life companies. Its asset management division had a history of weak investment performance . Significant market share had been lost as the group moved towards more profitable insurance business. Gensec did well out of the bullish financial markets of the Nineties but its earnings proved brittle in more bearish markets. And the health-care company lost money heavily .
The senior management team has changed a lot in recent years. Much of the old guard has moved on. Daling stepped down as chairman last December and died two months later.
The key appointment, of course, was that of Vermaak as group CE. But there were numerous others, some of which occurred before Vermaak came in. Angus Samuels had earlier taken over the investment management division. Charl le Roux became CE of the life division in December. Bonang Mohale was hired to fill a new job, as CE of corporate marketing. Marius Ferreira succeeded Anton Botha as head of Gensec. Xoliswa Motswai came in as company secretary.
There has also been structural change at operational level, some of it aimed at greater integration across the group's businesses.
In December 2000, the group bought out minorities in Gensec and delisted it. Last year, two divisions, Sanlam Personal Finance and Sanlam Employee Benefits, were merged in Sanlam Life to benefit from the trend of group scheme members moving towards individual choice.
Vermaak also found a solution to the thin returns from Sanlam Health. Last September the company was sold to Medscheme.
A key issue during his tenure so far has been investment performance. By the end of the first quarter of 2002, the group had been moving up the Large Manager Watch rankings for some months. "I am now confident we will see better performance this year," Vermaak says.
The group has continued to expand in this activity, lifting its assets under management at year-end to exceed R224bn. Most of the funds are institutional, but it has broadened its presence in retail investment management. It acquired the private client division of ABN Amro and, more recently, bought most of the Merrill Lynch retail business in SA. After these deals, private client assets under management rose to over R11bn. Management contends that after restructuring and closures of loss-making offices, this activity should be large enough to deliver profits under all market conditions.
Nonetheless, the success of the efforts to turn the group's investment performance around, or the profitability of this area of the business, has yet to be proven. As is occurring widely in this industry, margins are tightening. Operating profit (before exceptional items) in Sanlam Investment Management fell in 2001 by 2%, to R272m.
Banking remains a thorny issue, in part because of Sanlam's investment in Absa. Management has already decided that the traditional bancassurance model that results in mere cross-selling of bank and insurance products is insufficient. One conclusion is that Gensec needs to develop a broader product range which will help to reduce its vulnerability to market conditions.
But Vermaak is moving cautiously on the group's strategic approach to banking. Its options could include making a significant acquisition or simply developing its own banking business more actively. Either way, the board will have to address its longer-term plans for its stake in Absa. "This is such a transformational decision that it cannot be taken lightly," says Vermaak. "It must be right. I'm hoping we can do it this year."
Another strategy evolving in a measured way is internationalisation. Vermaak believes that in the long term Sanlam will have to expand internationally if it is to achieve its aim of sustainable real growth of 10%/year. He says the target is to make at least half of group operating profit offshore within 10 years.