An African alliance
It’s a win for Santam as Sanlam strikes a deal with German insurer Allianz
Santam, Sanlam’s short-term insurance subsidiary, may stand to gain the most from the latter’s tie-up with German giant Allianz in 29 African markets.
Last week, Sanlam announced an arrangement with the German insurer to create a R33bn enterprise (based on group equity value) which will hold one of the top three spots in most markets in Africa. As part of the 10-year deal, Sanlam will contribute its African assets outside SA and Namibia, while Allianz will do the same in a 60:40 split between the two insurers.
Sanlam will hold on to its reinsurance unit (Continental Re) while Santam will probably sell its 10% stake in San JV (with Sanlam) to the new joint venture. San JV houses Sanlam’s general insurance business in markets outside SA, including the rest of Africa, India and Malaysia. Sanlam holds 90% of the JV and Santam the balance.
“For Santam the deal is more positive than for Sanlam,” Glen Heinrich, an equity analyst at Perpetua Investment Managers, tells the FM. He estimates that when Santam sells its 10% stake in San JV, it will release about R2bn to the short-term insurer. “Santam will receive R2bn in regulatory capital while keeping strategic relationships [across the continent] intact.”
The release of so much regulatory capital will give Santam more firepower to write a lot more business in SA. At end-December, Santam’s economic capital requirement, to cover insurance obligations, stood at R8.3bn while the company held R13.9bn in actual capital. With R21.1bn of net insurance liabilities at end-December, the R2bn boost in capital may afford Santam space to increase its book by at least 10%.
Santam saw a 10% increase in gross business premiums during 2021, according to its financial statements, and Heinrich says this shows that Santam “can still sign quality business”.
A look at Sanlam’s financial results for the year ended December shows just how important general insurance in its African unit is to the company. The net financial result for general insurance in the rest of Africa jumped 60% to R2bn in 2021, whereas life insurance fell 20% to R875m — mainly due to excess death claims caused by Covid. Sanlam’s take of Santam’s net results — following large business interruption claims in 2020 — jumped to R1.3bn last year.
The bulk of Sanlam’s rest-of-Africa business is concentrated in North Africa, through its Moroccan subsidiary Saham. The tie-up with Allianz will give Sanlam access to the lucrative East African market, including Kenya, Rwanda, Uganda and, to an extent, Burundi. “These markets are focused more on general insurance than life insurance,” says Heinrich.
Andrew Bahlmann, CEO of Deal Lead
ers International, tells the FM that the Sanlam-Allianz partnership comes at a time of increased interest in the rest of the continent. The prospects for African economic growth (excluding SA) is on the up.
“Economic growth made a welcome return to Africa in 2021 even though the Covid crisis was both a supply and a demand shock,” Bahlmann says.
Cyclical economic growth in Nigeria, Angola, Ghana and Equatorial Guinea is being driven by high commodity prices, including oil.
“The World Bank expected robust growth for Botswana, Ivory Coast, Guinea and Kenya in 2021 because of ‘a rebound in private consumption and investment as confidence strengthens and exports increase’, and this is all positive for the Sanlam JV with Allianz,” Bahlmann says. “One of the things a disaster such as a pandemic does is to make people aware of why insurance is important and useful.” In addition to the JV, which shows Sanlam’s intent to push hard into the rest of the continent, the company has sold its UKbased business for £153m (R3.04bn at the time of writing).
This money will go towards Africa and other selected emerging markets, says Sanlam.
Yet the insurer’s shares — like most other financial stocks — have taken a beating in the selloff that has engulfed world markets of late. While its shares crested R72 in March, they’ve since slumped to just over R60.
As Heinrich points out, Sanlam’s group equity value is closer to R70 a share. “Even before the deal we thought it was a share to buy.”
Bahlmann concurs. “Sanlam shares are a ‘slow-burn buy’,” he says. Though the deal is a large one that took some time to come to fruition, the market’s response to date has been basically zero. But, he says, “in Africa, everything is about trust, and as mentioned this deal will take years to show shareholder value”.