Paul Hanratty’s plan for Sanlam

When Sanlam listed on the JSE on November 30 1998, a conservative pricing of 600c a share gave the then 80-year-old SA life office a market cap of R15.67bn. It added R5bn to that market value as fund managers piled into what was clearly a cheap share. But that was overshadowed by the R45.1bn listing value of rival Old Mutual, just eight months later.

At the time, Sanlam was behind Old Mutual in almost all areas, from unit trusts to pensions and annuities, and in what was called "group schemes" — the life and funeral products sold in the workplace to lower-income workers, "Tupperware style".

Today, Old Mutual has a market cap of just R55bn — a touch more than the value of its UK lovechild Quilter, which was unbundled two years ago and is worth R49bn.

Sanlam, on R122bn, is worth more than the two businesses combined, and is the largest insurer in Africa.

The two companies are mirror images of each other, operating in almost exactly the same lines of business. So it’s unsurprising that, in July, former Old Mutual stalwart Paul Hanratty took the reins as CEO Sanlam. He is the second Irishman to head the group and succeeds Ian Kirk, a Dubliner.

For most of his career Hanratty had been a star executive at Old Mutual, which he joined in 1984 after qualifying as an actuary. Once there, he leapfrogged a number of more experienced executives, including Dave Hudson and Mike Harper, to become MD of Old Mutual SA in 2006.

In 2008 Hanratty moved to London to run the company’s long-term savings unit — everything but Nedbank and US-based asset managers such as Acadian and Barrow, Hanley, Mewhinney & Strauss — before becoming COO of the London-listed entity.

Hanratty would have been the logical choice to take over from Julian Roberts as Old Mutual Plc CEO if the board had intended to keep the business together. But outsider Bruce Hemphill was perhaps the right man to pull it apart in the so-called managed separation.

Incidentally, it was not the first time that Hemphill’s ascent had brought a top executive into the heart of Sanlam. In 2006 Hemphill was selected to succeed Myles Ruck as CEO of Liberty, when deputy CEO Kirk was widely expected to get the job. Kirk instead moved to Sanlam as head of strategy, then spent eight years running short-term insurer Santam. Hanratty is picking up where Kirk leaves off after a five-year stint as CEO.

Hanratty himself is no stranger to Sanlam, having been a nonexecutive director since 2017. Still, when he arrived for a board meeting in early 2020, just days before SA went into its Covid-induced lockdown, he was surprised to be offered the top job. After all, Afrikaans CEOs (apart from Kirk) had traditionally held the reins since Sanlam’s earliest days.

Hanratty now has the chance to run a much more successful business than the "Big Green", Old Mutual. And despite his familiarity with Sanlam, he’s found it still surprises him.

"We always thought [Sanlam] keeps things simple," says Hanratty.

"But I never knew how true that was. It has a lot in common with the Swiss railway system."

He’s also surprised at how little tension and testosterone there is in the business, and notes the absence of the turf battles that were often highly destructive at Old Mutual. "The team is always bigger than the individual here," Hanratty tells the FM.

Head of human resources Jeanett Modise similarly points to a high level of humility in the corporate culture, and the low staff turnover you might expect to go with it.

For Kirk, scrupulous honesty and strong compliance are at the heart of Sanlam, and he says the company’s "what you see is what you get" approach is demonstrated in its approach to disclosing profits.

As Sarine Barnard, an analyst at Ninety One Asset Management, observes: "During times of high growth in new business, Sanlam will absorb the full new business strain [commissions and other costs of writing business] in its earnings, so the earnings will be somewhat depressed and not tell the full growth story."

But, she says, growth is clearly shown in the embedded value — a combination of net asset value with the current value of the life book. It’s a conservative approach that is "comforting in difficult trading environments, like we are currently experiencing".

Keeping up with the Motsepes

Hanratty believes this conservatism is a weakness as well as a strength — but the company gets around the downside by partnering with younger organisations.

Its phenomenally successful funeral policy joint venture with Capitec, for example, has more than 1-million clients, and BrightRock is taking on Discovery at the more sophisticated end of the life broker market. In MiWay direct insurance it partners with René Otto, the "forgotten co-founder of Outsurance".

But perhaps where Hanratty has made most waves since stepping into the corner office has been in concluding the deal in which Patrice Motsepe’s African Rainbow Capital (ARC) is taking a 25% stake in Sanlam Investments to create one of SA’s biggest black-owned investment houses.

The relationship between Sanlam and Motsepe dates back to the early 2000s, when SA’s main life insurers were on the hunt for empowerment partners.

Sanlam had actually kickstarted the process a decade before its competitors, handing over control of Metropolitan Life to New Africa Investments (Nail), headed by struggle activist Nthato Motlana.

Liberty later did a deal with a consortium including tycoons Saki Macozoma and Cyril Ramaphosa. And Old Mutual opted for an eclectic coalition that included Gloria Serobe’s Wiphold and Mustaq Brey’s Brimstone. In 2004, Sanlam did another deal, this time with Ubuntu-Botho Investments (UBI), a consortium led by the high-profile billionaire Motsepe.

None of these partners plays a role in the insurers any more — other than UBI, that is.

Back in the early 2000s, Sanlam had a very limited pool from which to select a credible and strong empowerment partner, says then CEO Johan van Zyl. Motsepe, in contrast, had a number of suitors. What sold him was Sanlam’s record of uplifting people (historically, poor Afrikaners) from poverty.

From the age of six, Motsepe worked in his father’s businesses — including supermarkets, restaurants, bottle stores, and a fruit and vegetable shop, he tells the FM. "I went to boarding school in the Eastern Cape, and was exposed to Sanlam both in the family businesses and in an environment that had a lot of influence and exposure."

He was particularly impressed by Sanlam’s contribution over decades to the growth of the SA economy. He wanted the group to form partnerships with black and white businesses, their communities and residents, and ensure that black South Africans were brought into the mainstream of financial services.

An added bonus was that Sanlam was open to exploring opportunities in the rest of Africa, and in other emerging markets.

UBI helped Sanlam build products for the emerging mass market: when the partnership began in 2004, Sanlam’s low-income client base was well below its natural market share. That started to change only after it acquired African Life in 2005.

By the end of 2013, the end of UBI’s contractual deal with Sanlam, the consortium had created R15bn in value for its 700-odd shareholders, from an initial R1.3bn investment — sufficient value creation to renew partnership talks.

It also looked like time to diversify, and UBI subsidiary ARC was formed in 2015. Van Zyl and former Sanlam Investments CEO Johan van der Merwe, along with former Santam finance director Machiel Reyneke, were all looking for new challenges, and became the backbone of the new venture.

The company has a portfolio of industrial interests including Afrimat and EOH, but also a growing financial services side, where management’s expertise lies.

Motsepe says the input ARC gives to investee companies includes strategic advice, access to capital, guidance on governance and business ethics and access to a broad network of business executives.

But he has little time for any sort of patronage politics. Motsepe is a staunch supporter of competitiveness, innovation and meritocracy, saying: "Political connection is the most useless and hopeless base on which success in business can be built."

In setting up the Sanlam Investments deal, UBI didn’t sell any of its Sanlam shares — UBI is the group’s biggest shareholder, at 14% — but borrowed against assets to fund the new business, and not necessarily from banks. Two years ago, the consortium was given a R2bn facility by Sanlam to build out its financial services interests, for example.

Motsepe believes the creation of a black-owned third-party asset manager provides an exciting opportunity to recruit and retain the best talent, while also attracting new investments and growth. He’s upbeat, telling the FM the deal "will create value for all partners and shareholders".

It is a bit of a hedge, though. The package does, after all, include active manager Sanlam Investment Management and Satrix, the leading player in the index fund market with a dominant position in exchange-traded funds. And there’s Sanlam Multimanager, in which a number of managers are together in one fund and Sanlam itself rarely manages more than about 10% of each portfolio.

Ultimately, though, Sanlam remains the most important asset for the UBI consortium. "It is extremely important to UBI that Sanlam continues to grow and create globally competitive returns for its shareholders," Motsepe says.

Internal restructuring

Beyond Sanlam’s partnerships, there are also "hidden gems" in Sanlam itself, says Hanratty. "Look at Sanlam Private Wealth, which is just a whisker smaller than its main rival, Investec Private Wealth."

Modise says there are plans to prepare for a hybrid model of office and home-based work. And as work practices change there will be fewer, smaller offices at all levels, even among the executives. Modise has already ensured that job titles more accurately reflect the job carried out. She has eliminated dozens of CEO titles in the group.

There’s also been some organisational restructuring on the go. Within two months of taking over, for example, Hanratty had created a mega-cluster called Life & Savings.

It falls under the eye of long-time SA life boss Jurie Strydom, and includes two Old Mutual stalwarts: Kanyisa Mkhize, who at 37 is the youngest member of the executive committee and will head Sanlam Corporate; and Bongani Madikiza, who will head the retail mass market cluster.

SA Retail Affluent will be run by Anton Gildenhuys, a highly capable manager probably inefficiently used in his previous job counting beans as chief actuary.

Strydom says many units in the SA life business (previously Sanlam Personal Finance) ran independently.

The heart of the mass market business was, after all, African Life.

"Bringing the retail businesses together with corporate makes more sense than you might think: we are providing solutions to fund members, and helping them to preserve their assets, which might well be in a retail vehicle," he explains.

Mkhize says her first task will be to increase the size of the Sanlam umbrella fund, which with R50bn under management is smaller than its counterparts at Old Mutual, Alexander Forbes and Momentum.

"I agree with Jurie that we need to refocus on the member instead of focusing all our efforts on the employer," she says. "And retail gives us distribution into the much-neglected small business sector."

Strydom doesn’t believe that advice and direct solutions are necessarily binary. Advisers, for example, "might find the best solution is within direct vehicles such as Sanlam Indie and MiWay Life", he says. In any case, during lockdown advisers were forced to move from face-to-face contact, conducting business "on the phone and through Zoom or [Microsoft] Teams when possible".

He believes Sanlam’s mass-market business is now as large as Old Mutual’s, if the funeral policy joint venture with Capitec is included. But its three businesses — Sky, Safrican and African Rainbow Life — will be rationalised to optimise costs.

Sanlam and Old Mutual both had almost equal declines of about 28% in sales from the traditional adviser-based channels in the six months to June. But Sanlam sales through Capitec increased by 9%, restricting the fall in overall sales to 14%.

Avior Capital head of research Warwick Bam says Old Mutual’s lead in umbrella funds and group risk cover is unlikely to change for several years.

But with work-from-home trends increasing, the effectiveness of worksite marketing has been reduced, making it easier for Sanlam, through its multiple channels, to erode Old Mutual’s market share.

Keeping it conservative

Sanlam certainly doesn’t resemble the messy business it was in 2002, when the board summarily dismissed CEO Leon Vermaak without explanation. (He went on to a successful career at Auto & General, suggesting he was a competent manager after all.)

It took a year before Sanlam appointed another CEO. When it did so, it looked beyond insurance lifers such as Liberty’s Mike Jackson or Old Mutual’s Peter de Beyer, appointing the previous head of the University of Pretoria, Van Zyl.

It proved to be quite the departure. At the time, Sanlam was accustomed to the charismatic but domineering hand of chair Marinus Daling and, previously, to other larger-than-life personalities including Andreas Wassenaar and Fred du Plessis. Neither Van Zyl nor his successors fitted this pattern, coming instead from a more participative school of management (though it is said that Hanratty can have an abrasive, impatient side).

But Sanlam, it seemed, needed something different. The brand was looking tired, and the distribution network lacked energy.

"I had to look afresh at the business and devise a new growth strategy at the time when the business faced significant internal challenges — number one being the lack of capital to initiate growth," says Van Zyl.

No doubt a key reason behind Vermaak’s departure had been his support (putting him at odds with much of the board) for a merger between Sanlam and Absa, in which Sanlam had a 19% stake. He presumably had looked enviously at the (now unwound) merger of Momentum and FNB four years before.

Luckily for Van Zyl, Barclays came around to buy Absa, and he was able to secure R10bn for Sanlam’s holding. It turned out to be a boon: some of that capital was used to buy more shares at a discount, the rest was used to buy African Life.

Not only did African Life have an established business in the mass market, where Sanlam was barely represented after the sale of Metropolitan 10 years before, it also owned the dominant life and asset management business in Botswana, and had footholds in Namibia, Zambia, Ghana and Kenya.

"The reality is that capital is a scarce resource and should be treated as such," says Van Zyl. "Sanlam was able to buy back a substantial portion of its own shares at a large discount to embedded value, and only then to make significant investments in key emerging markets such as Africa and India."

It’s a conservative approach to spending capital that Van Zyl’s successors — Kirk and now Hanratty — have also taken on board.

Beyond SA

The most significant emerging-market investment Sanlam has made was in the Morocco-based Saham Group.

The pan-African insurance group — with a presence in 26 countries across North, West and East Africa, and in the Middle East — is very much a part of Kirk’s legacy. Though planning preceded his tenure, it was on his watch that Sanlam took 100% ownership of Saham (90% through Sanlam, and 10% through its short-term insurance subsidiary Santam).

It had previously not been conceived that Sanlam would take full ownership of the group. Back in 2016, the group was happy with a minority holding in the company. But when Saham founder Moulay Hafid Elalamy was appointed Moroccan minister of trade, he needed to divest the rest of his shares.

The result was a $1bn deal in 2018 in which Sanlam took over the remaining 53% of shares.

Former Sanlam financial director and emerging markets CEO Heinie Werth — the dealmaker in the 2005 African Life buyout — oversaw the three-tranche transaction. It proved, he says, the more trying of the two: about half of African Life was in SA itself, while the rest was in Anglophone countries with a familiar culture and legal system. Saham, in contrast, "had a barrier, as the working language was French, and the legal system quite different".

In line with Sanlam’s traditionally conservative approach, Kirk says the company didn’t use debt for the acquisition.

"A 102-year-old company needs to be treated with care," he says. "We de-risked the transaction by issuing R5.7bn worth of new shares, though it was equivalent to just 3% of our shares in issue."

With about 85% of the business in short-term insurance — though this includes underwritten health insurance that does not exist in SA — Santam is spending management time at Saham. And given that just 15% of the business is in life cover, there is potential for growth in life insurance sales.

Avior’s Bam, however, is not entirely convinced the venture has paid off yet, as the ambitious transaction has struggled to meet investor expectations.

"The complexity of operating in multiple jurisdictions has absorbed management resources," he explains. "Saham requires time to mature within the Sanlam stable."

Barnard points out that Sanlam paid a very full price for Saham — one that didn’t allow for things to go wrong. Only, they did, particularly in Lebanon, where a port explosion in Beirut this year caused untold damage, and in oil-dependent Angola.

"There was pain in the short term from Lebanon, as we insured much of the goods and tanks destroyed in the port blast. Angola suffered from the oil crisis," says Hanratty.

Despite the setbacks, Hanratty is keen to keep Sanlam’s African footprint wherever that makes sense — though Barnard expects some rationalisation of its foreign properties to make the portfolio more efficient.

Saham has already been renamed Sanlam Pan Africa, though the Saham brand could still be used in countries where it makes sense over the next decade — in Morocco and other countries where it is strong. And Bam admits that West and East Africa, both underpenetrated insurance markets, are attractive thanks to rising cellular connectivity and limited competition.

Santam, for one, is looking to have its hands full transferring its knowledge into Africa, where it can develop specialist insurance lines for Saham, such as commercial property and engineering cover, as well as increasing the sophistication of its reinsurance operations.

For now, though, Sanlam is not trying to run the whole of Africa from Bellville; it continues to keep the head office in Casablanca intact.

India, of course, remains an important part of Werth’s emerging-markets empire. The country has a larger population than all of Africa, and Sanlam’s 15-year relationship with the Shriram Group has produced solid results.

The main frustration there is that, as a foreign business, Sanlam may legally not own more than 49% of any enterprise. But there have been positives: the Indian operation has allowed the group to diversify into businesses it doesn’t offer in SA, such as microfinance and commercial transport finance.

Ups and downs

Joining an insurance group during a global health pandemic was always going to pose challenges. As it turns out, Hanratty has come in at a time when short-term insurer Santam — generally considered the best-managed business in the group — has come under significant criticism for nonpayment of Covid-related business interruption cover.

"I’m glad to say that surveys in the end showed that personal experience of service was good," says Hanratty. "The real problem is that this cover was designed for local outbreaks [of, for example, disease], not a national pandemic."

He suggests a national scheme needs to be in place for these sorts of events — something along the lines of SA Special Risks Insurance Association’s riot cover — as it will be hard for private sector insurers to cover these claims in the future.

Still, the apparent double-talk and manipulative excuses for not paying out have been at odds with the scrupulous honesty and plain-speaking ethos of the Sanlam group, and won’t have done it any favours.

At the same time, the company — particularly through the deal with ARC — is making strides on the transformation front. Sanlam Investments head Nersan Naidoo points to the diversity of the investment team: Natasha Narsingh as head of absolute return, Mokgatla Madisha as head of fixed interest and Cromwell Mashengete as co-head of equities.

He admits, though, that there should still be more black African executives on the team. "We don’t see the new BEE shareholding through ARC to be a ticket to the game," he says. Though, to a large extent, it must be.

But it’s about more than just the team itself, says Naidoo.

"We see transformation as a lot more than the right shareholding and the right mix of staff. It also involves providing the products that the client needs. We have been at the forefront when it comes to hedge funds. We have a unique partnership with Matrix, which has some of the best fixed-income hedge funds in the market, as well as our partnership to develop climate-change funds from the Netherlands."

And making sure that the client interaction is a smoother process is also part of the company’s transformation, says Naidoo.

Sanlam Investments’ performance has certainly been competitive enough: its Top Choice fund is ahead of all institutional equity portfolios over five years, apart from Ninety One Value. But its balanced fund is in the middle of the pack, ranking at 18 out of 26 over five years.

A consultant for insurance broker Willis Towers Watson, however, doesn’t believe the deal will be a gamechanger for Sanlam Investments, as there hasn’t been a rush of clients switching to the company.

 Real transformation, say Sanlam insiders, is about much more than getting more black executives and shareholders

—  What it means: