Sanlam will take controlling stakes in its insurance joint ventures in India, a market the financial services group has identified as key to growing its profits and creating value for its shareholders.
Africa’s largest insurer announced on Friday that, following an agreement, it will increase its effective shareholding in Shriram General Insurance Company (SGIC) from 40.25% to 50.99% and its stake in Shriram Life Insurance Company (SLIC) from 42.38% to 54.40%.
SGIC and SLIC are joint ventures between Sanlam and the Shriram Group, an Indian financial services conglomerate that was founded in 1974.
Most of the SGIC and SLIC transaction will be funded by the proceeds from Sanlam Life’s part disposal of its direct holding in Shriram Finance Limited (SFL).
The transaction comes as Sanlam is laying the foundations for a new wealth and asset management business with Shriram. The launch could take place next year.
Sanlam has been in partnership with Shriram since 2005.
“Shriram continues to deliver strong growth in its key performance indicators since Sanlam’s investment, and the transaction further underlines the value of Sanlam’s partnership with Shriram,” Sanlam said in a SENS announcement.
“Sanlam recognises India as a core market and strategic pillar in achieving long-term earnings growth and sustainable shareholder value creation. The country has very strong growth dynamics, with relatively low insurance penetration. Growth in the insurance sector has been strong, fuelled by the easing of regulatory policies, fast-paced digitisation efforts, and increased awareness among customers,” Sanlam said in a statement.
“The transaction will enable Sanlam to further enhance its position in India’s insurance market and growth. Additionally, the deal reaffirms Sanlam’s confidence and commitment to India’s economy.”
In 2022, India narrowly overtook China as the country with the largest population in the world, at more than 1.43 billion people. India has the fifth-largest economy, which grew by 8.4% in the fourth quarter of 2023.
The International Monetary Fund forecasts that India’s economy will grow by 6.5% in 2024 and 2025. Some economists believe it will become the third-largest in the world as early as 2027.
Sanlam’s long-term strategy has three pillars: build a “fortress position” in South Africa, accelerate growth across the rest of Africa, and strengthen the group’s position in Asia (India and Malaysia).
India’s contribution to Sanlam’s net result from financial services rose to 17% in 2023, up from 10% in 2021.
Read: Sanlam’s India operations pave the way to stellar performance in 2023
The Shriram businesses
In its 2023 integrated report, Sanlam said Shriram has built a strong track record in the lending and insurance businesses, offering products and services to the underbanked through its extensive branch network in semi-urban and rural areas, and is diversifying its distribution capabilities through digital platforms.
SGIC sells commercial and retail vehicle, home, and travel insurance to 4.5 million customers.
SLIC sells long-term financial products targeted mainly at the underbanked and unbanked segments of the Indian population. It has 10.9 million customers.
SFL is India’s second-largest retail non-bank financial company by assets under management. It offers vehicle, home, gold, personal, and small business loans to 8.2 million customers. SFL is listed on the National Stock Exchange of India.
Strategic benefits
Sanlam said the SGIC and SLIC transaction will have strategic benefits. These include:
- Strengthening Sanlam’s position in India and enhancing the group’s diversification and scale in emerging markets outside of Africa.
- Increasing Sanlam’s exposure to the underpenetrated and fast-growing Indian insurance market, which is “set to benefit from a number of underlying structural tailwinds”.
- Maintaining a disciplined approach to capital allocation, because about 60% of the funding requirement will be via the sale of part of Sanlam Life’s stake in SFL. This capital redeployment also increases Sanlam’s exposure towards core insurance entities and decreases its exposure to the credit business, in line with its stated strategy.
“The transaction is expected to have a marginal positive impact on net result from financial services and a marginal negative impact on dividends in the initial years. Both net result from financial services and dividends are expected to grow strongly in the medium to long term. The transaction is expected to deliver an internal rate of return on capital deployed well in excess of Sanlam’s internal hurdle rate,” the SENS announcement said.
Details of the transaction
The SGIC and SLIC transaction entails:
- the acquisition of an effective 6.29% in SGIC and 7.04% in SLIC from TPG India Investments II Inc;
- the acquisition of an effective 4.45% in SGIC and 4.98% in SLIC from the Shriram Ownership Trust (SOT), and;
- the disposal of a part of Sanlam Life’s direct holding in SFL.
On 28 March, Sanlam Life sold 1.59% (of its 2.01% direct holding) in SFL to Shriram Value Services (SVS), resulting in gross proceeds of R3.3 billion.
The net proceeds from the disposal of the SFL shares will form part of the consideration to acquire the combined 10.74% in SGIC and 12.02% in SLIC. The balance of R2bn will be funded using available capital resources.
Sanlam owns an effective 26% stake in SVS, which is subsidiary of Shriram Capital Private Limited (SCPL).
Sanlam owns 40.70% of SCPL, while the balance is controlled by SOT and its affiliated entities.
The SFL disposal will result in Sanlam’s effective economic shareholding in SFL decreasing from 10.19% to 9.54%.
The transaction is subject to conditions precedent, including approvals from the relevant regulatory authorities.
The effective date of the transaction will depend on fulfilling the necessary suspensive conditions and is expected to occur during the second quarter of 2024.
