While everyone’s attention has been focused on the trials and tribulations of the life insurance sector, Sanlam has been quietly transforming itself into a diversified financial services company, focusing on home loans and money market accounts rather than life cover.
Chief executive Johan van Zyl expects the company to move to the financial services sector on the JSE towards the end of 2008. As a total percentage of profits, life business has been decreasing from 73% in 2002, a year before Van Zyl took over the helm, to less than 50% today.
“Life insurance is a declining industry. It cannot sustain managing 80% of savings, 20% maybe, but not the levels we had,” he says.
This was Van Zyl’s strategy from the beginning and it has placed his company two years ahead of its competitors.
The life industry as a whole is undergoing a massive transformation. The mature life business, which although not growing rapidly is still a cash cow, is diversifying into other financial services and recreating itself. The difference is that Sanlam started four years ago, when Van Zyl came to head the organisation, while his competitors only began changing in the past two years.
Sanlam’s most public product launches have not been around new life products. It is taking the banks head-on with home loans, money market funds and share trading.
Van Zyl says that when he took over Sanlam was not in a good place. By selling Metropolitan, the company lost a foothold in the emerging black market. Van Zyl realised that to grow Sanlam would have to expand outside of its white Cape Afrikaaner base.
At the time Sanlam had only 5% of the Johannesburg market. “We decided to broaden our market and focus on distributing bank products.” Part of this strategy was to purchase African Life and Channel Life to access the emerging black market, but its move into the banking and investment sectors has proved the most profitable.
While some lambasted Van Zyl’s decision to sell Sanlam’s stake in Absa, it opened up a new market for Sanlam by allowing it to go into investments and savings without sharing the pie with Absa.
Sanlam’s strategy has been to take its client base of two million and find more ways to impact on their purse. “You can’t just look at a person’s surplus cash of 5%. You have to be part of their biggest financial decision,” says Van Zyl, referring to Sanlam’s move into the home loan market.
This begins with an analysis of a person’s expenses, starting with his or her mortgage, followed by pension contributions, medical aid, life insurance and short-term insurance.
With the launch of Bestmed last month, Sanlam can now provide its customers with the full range of products by using its distribution network. “We already have a fixed cost with regards to our distribution. It was a matter of taking that fixed cost and dividing it by more products,” says Van Zyl.
As the incentives are the same irrespective of which product the broker sells, the broker will make the right decision for the client.
It is strange that investment analysts have not been writing much about Sanlam’s transformation. “Analysts discount everything else we are doing,” says Van Zyl, who regards them mainly as insurance analysts who look only at the insurance businesses within Sanlam.
Van Zyl concedes that Liberty and Old Mutual have better life businesses, but he is the one smiling all the way to the bank: Sanlam’s share price has rocketed more than 50% from 1Â 415c to 2Â 226c in the past 18 months, double that of its competitors.
The life business makes up 22% of new business inflows, but Van Zyl says it will keep shrinking as a percentage. Not, he says, because the business is running backwards, but simply because the non-life businesses are performing so well.
While still growing at about 10% a year, life business is not shooting the lights out, yet Sanlam’s diversified financial services have been growing at 40% a year since 2002.
Van Zyl cannot set a date for when Sanlam will switch sectors on the JSE. He says it is something to start considering seriously when the life business is contributing less than 50% of profits, which it is expected to do by next year.
Heading for homes
Sanlam’s move into the home loan business is a pretty clear sign that it is no longer simply a life company. It is also a way for Sanlam to gain a greater share of its clients’ spending, with mortgage repayments usually the biggest household expense.
The home loan business was launched in 2004 as a joint venture with Absa, which processes the administration. Until now, however, it has been marketed primarily to existing customers.
So far Sanlam has a book of R5-billion with 10Â 000 customers and it is already making a profit.
Piet van der Walt, chief executive of Sanlam Home Loans, says it aims to have a return on capital of 20% and take 15% of the market share. Of its two million customers, 800Â 000 have existing home loans, so Sanlam has been focusing on switching them.
It is a strategy that works well for its brokers, who are able to create savings for clients, which in turn they can invest with Sanlam either through retirement structures or investment house SIM.
Sanlam home loans offers substantially better rates as it does not have some of the restrictions that the banks have, such as reserve requirements.
As with SA Homeloans, it securitises the book and sells it on to investors rather than raising funds from deposits. It has been profitable in a remarkably short period of time, considering that most banks take at least three years to start making a profit on a home loan once they have paid the administration fees and mortgage origination fees, which are starting to bite.
Van der Walt says a major part of the cost saving is that Sanlam does not have a branch network to maintain and broker commissions are a lot lower than the fees the mortgage originators extract from the banks.
It is able to provide top-end clients with bonds of 2,45% below prime, certainly the best in the market at the moment. Sanlam also has a fantastic database. Apart from having access to two million people, it has a pretty good idea of the risk level of these customers.
As insurance is usually the first thing people stop paying when they are under pressure, a customer who has been religiously paying his or her premiums has developed a good track record and Sanlam will soon offer him or her credit.
The Sanlam liquid fund, which is a money market account linked to a debit card, was established for the thousands of customers who retire each year and who want to have money in money market funds and benefit from higher yields.
Rather than give this business to another bank, Sanlam has created a cost-effective, high-interest-yielding product to keep the business. — Maya Fisher-French