Momentum Group Limited (MTM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Momentum Metropolitan Holdings Quarter 3 Operating Update. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Hillie Meyer. Please go ahead.

Good afternoon, everybody, and welcome to this session. Thank you for your time. The operational update was made available this morning, and it contains a fair bit of detail. I will just briefly highlight a few things, and then I will hand over to Risto Ketola. If -- he will also talk to some of the salient matters. And as mentioned, then there will be time for questions. I think the first point just is that the 9 months was, because of COVID, another disappointing 9 months from an earnings point of view, especially. But it's also, I think, and we've made the point in the opening paragraph that the comparative period, even though we -- appears favorably to the comparative period, the comparative period was also impacted. As you remember, mostly the impact on markets in the last 2 weeks or so of March 2020. So we're thought we're comparing 2 pretty abnormal and 2 relatively disappointing 9-month periods with one another. And also because of the -- because the impacts are so different, the investment markets and mortality this year. Unfortunately, it got more tricky, I would imagine, also for you guys, just to, I think, interpret everything and analyze it and so forth. So yes, I mean, COVID, the second wave was quite severe, and it really hit us in this quarter. We -- just looking at competitors and so forth, it looks like we were -- we came out sort of quite relative to the others, we were maybe harder hit than one would have expected, even us. We obviously internally looked at claims practices of everything we did in the year and there, there's something that's beginning to make sense, but it's not as if there are obvious reasons why, let's say, our corporate business or our Momentum Life business were impacted as severely as it was. Especially, for example, if you look at Momentum Life, we've got quite conservative reinsurance. So one would probably not have expected it. But yes, it is what it is. All 3 months in quarter 1 from a mortality point of view were quite severe. So yes, that is a bit of a negative overall. But I think on the positive side, the most positive aspect of our results is new business. Again, there, I mean, one can look at it and come to the conclusion that it's mostly investment business and it eased to some extent. But I think we're very pleased with the continued improvement of sales volumes in Metropolitan Life. I think that is very encouraging. Also, it's maybe not yet clear from the 9-month picture. But if you look at Momentum Life, Momentum Life's, if I think I looked at present value of new business premiums, the third quarter was better than the second quarter, the second quarter was better than the first quarter. So Momentum Life is also sort of improving, and that's in spite of the COVID impact being most severe in the third quarter. So we -- I think there are some positive sides. Also, Africa performed very, very well from a new business point of view, but also more generally. Yes. So I would say essentially investments, Africa and Metlife were really, I think, some of the stars if we look at the 9 months. I'll say a few things just around the outlook. Again, we've seen the first signs of the third wave. I think a lot will depend on the impact or how severe the third wave will obviously impact, of course, the full results. But as we've also pointed out in the outlook section that it might also impact our reserving at the end of this year. So it's a little bit difficult to be too definitive on outlook. Having said that, I think there is some excitement internally in terms of our internal and external launch of our Reinvent and Grow strategy. There are some exciting things that we will be tackling. And the focus is now squarely moving on to some of those projects and initiatives. Yes. I think that -- I mean, we've communicated with the investor community, all of you, what our plans are. And yes, as I said, we're now focusing on delivering on that. I'll go on over to Risto. I think he will focus on some of the financial aspects.

Sir, this is the operator. I just wanted to check if the next speaker is perhaps with you? Or are they supposed to be connected on the line? Hello, Hillie?

It seems like the line got cut off, so they will be redialing.

Thank you. Ladies and gentlemen, if you could please remain online. We are just waiting for the main speaker to reconnect. Ladies and gentlemen, we have been rejoined by the main speaker. You may proceed.

Yes, it's Risto here. Apologies for that. I managed to cut that line. Okay. Now Hillie has already mentioned quite a few things. And obviously, the 9-month operating update is quite detailed. I just want to touch on maybe 1 or 2 things that might not be that obvious in the announcement. I'll start on capital. We make a point that our Momentum Metropolitan Life's SCR cover has dropped from 1.95x to 1.81x. So that looks like a bit of a reduction in the capital ratio. There's probably 2 things that we need to highlight. One thing is that there is an asymmetrical adjustment that the regulator makes with a variety of the stress tests, and one of them is for equity market stresses. And with the equity markets improving, that stress factor has been increased. And what happens in our case is that the increase to the SCR calculation is greater than the benefit to our own funds. I think that some of the other insurers have mentioned the same recently. So there's a technical factor in that asymmetrical adjustment. The other one is that Momentum Short-Term Insurance historically was owned by Momentum Metropolitan Life within our own group structure. We have recently moved Momentum Metropolitan Life out and put it under a subsidiary called Momentum Metropolitan Specialized Investments. And that was done because that is where Alexander Forbes Insurance is held. So we plan to merge those legal entities. So that also had a bit of a negative impact on the SCR ratio. And then obviously, yield curve moves have some impact as well. So I'm just trying to make a point that we haven't retaken capital out of that business, except for the transfer of the Momentum Short-Term Insurance business. The other thing is COVID-19. Now the report gives you quite a bit of detail, but that detail is given on a 9-month view. I just wanted to mention that for the 3 months alone, January to March, the net mortality loss -- experience loss was about ZAR 450 million. Now that is ZAR 250 million in Momentum Life, about ZAR 150 million in Momentum Corporate and about ZAR 50 million in Metropolitan. So Momentum Life was probably the most surprising in terms of the size of the net mortality impact for the 3 months. The other thing that I must note is that in our investments business, which harbors our annuity book, we have not shown big mortality profits or longevity profits. So we have seen quite different behavior on our risk book and on our annuity book. And it is something that we continue to investigate this more ourselves. Now in terms of the outlook for fourth quarter, I mean, Hillie mentioned that, obviously, we need to see how the fourth -- sorry, the third wave plays out. In terms of the reserves left, I would say Metropolitan Life, we're quite comfortable. The COVID-19 reserves left are sufficient to fund another second wave, which was quite an extreme scenario. In Corporate and in Momentum Life, we can sort of afford a more modest wave, probably about half the size of the second wave. So it is really dependent on the size of the third wave, whether we need to make additional provisions for mortality. I'm not -- I think that's why our outlook statement was a little bit muted, is that until mortality returns to normal levels, I think our profitability will not have really reached its potential levels either. And we have also learned over the last year that modeling COVID-19, you can model all that you all want, but there's significant modeling risk in that as well. On the positive side, I must say that the sales performance continues to be extraordinarily strong. It is not only the volumes, but it's also the, how would I say, the efficiency of the whole process in terms of the activity levels, the business mix, the variable costs even. So the VNB doubled, and we're very comfortable with the current run rate as being something that we can maintain for the foreseeable future. So while I'm sort of maybe talking about the earnings a little bit in the current environment because of COVID-19 uncertainties, I just want to stress the fact that new business where we fully have greater control and less exposure to external factors, we are extremely pleased with what's going on there. Again, I think that is enough in terms of comments from my side. I'll open it up for questions.

[Operator Instructions] The first question comes from Matthew.

You made mention of sort of excess mortality losses in the region of about ZAR 450 million for the quarter. What was kind of the excess mark-to-market profits or the reversal of those previous mark-to-market losses? What impact did that have on the P&L in this quarter? Because sort of the circa ZAR 700 million run rate for the quarter is not far off from your sort of sustainable view of ZAR 800 million to ZAR 1 billion.

Yes, Matthew, that's probably right. I mean, I've already mentioned that optically these results are quite good at ZAR 750 million. But there are 2 very large divergent effects. One is the negative ZAR 450 million on mortality, but then the positive investment variation was not too dissimilar. Now you'll see Momentum Investments, in particular, had a very strong result. So you can see a lot of it's from annuity book. So those negative spreads that played havoc last year, those are largely reversed now. Yes. So you are right. I mean, the 2 are largely offsetting. For the full year so far, they're not fully offsetting. Anyway, we're just checking about it that the mortality losses for the year are ZAR 1.2 billion, and the investment variances aren't quite that positive.

Okay. Great. And then speaking on sales, I mean, obviously, as you guys mentioned, Momentum Investments and Metropolitan, seeing very good run rate in terms of sales. I suppose the one that's kind of still underindexing versus sort of the pre-COVID period is corporate. And when is that expected to kind of return? Are you seeing any sort of positive pipeline? Or it's just too early to really get corporates back to the table?

I'll go first. Look, we do have a quite a promising pipeline. So things are beginning to look up a little bit. But I suppose once bitten twice shy, we're not too sure. With corporates, maybe there's a bit of a quote process or whatever, and that might not lead to clients moving business or decisions might be pushed out like we've seen for the last few months. But it's true. There is some sort of -- there is more activity certainly than there was about 12 months ago, definitely. But what we must understand in the corporate environment, the impact on, let's say, employment levels and salary levels or so is having a bit of a dampening impact just on short-term prospects of, let's say, corporate flows over the short term that we also see. Thank you.

[Operator Instructions] The next question comes from Michael Christelis from UBS.

I'm not sure if you can hear me okay. The line is not great. Can you hear me?

We can hear you perfectly.

Okay. Great. Two questions, if I can, from my side. Firstly, can you comment about lapses and persistency and how that's holding up relative to both your provisions, but also long-term assumptions? In other words, where are we in each of your business units relative to normal from a persistency perspective? And particularly in corporate, where I get that there's not much new business going on, but that should mean that persistency is holding up really well on the back end if nobody is churning business either? So that's my first question. And then the second question is around your Metlife margin target of you say it's approaching your longer-term targets of about 5%. I mean that's still nearly half of what some of your competitors are doing in that space? And maybe I'm just trying to understand the rationale for why your targets can't get up towards the sort of 8% or 9% that some of your competitors are showing in the medium-term in that business?

Yes. Okay. I'll start. So in Metropolitan life, our persistency remains very close to actuarial assumptions, which means it's actually better than a year ago, 2 years ago. So we're closer to actuarial assumptions now than we were. And that really reflects the big effort over the last few years in terms of doing more payroll deductions, accepting better quality business, having sales people better trained on what to sell and who to sell to. Metropolitan Life so far has held up very well. Momentum Life also has held up well. You can say there's maybe some marginal deterioration, but nothing that requires a basis change at this stage. So it's just the statistical noise. At the same time, Michael, I have to say, during a global pandemic, are you going to cancel your life covering? So maybe there's that effect as well, is that while money is tighter, I suppose, the fear factor of not having it is more prevalent. So on the retail side, we're doing well. Obviously, in wealth, most of the products can't really be surrendered or -- the annuities and things like that. Corporate is an interesting observation because in corporate, we have lost 1 or 2 clients. So without getting into much specifics, we probably have a net negative at this stage in corporate from a persistency perspective. But as you know, it's quite lumpy. So it's 1 or 2 large clients who might have moved. But persistency, in general, I would say, is holding up well. In terms of margins, our funeral margin in Metropolitan is 10% to 12%. The problem is that our savings margin is closer to 0%. So that 5% target is really a function of a very normal market type margin on funeral and probably not too similar margin on savings, but our mix of savings is maybe bigger than other people. So for our margins to really reach the levels of other people, we would need to see a much more material shift in new business, which is not really -- we're not disengaging from savings. Let's put it that way. I mean we obviously perform more funeral, but we are comfortable that our salespeople continue to sell savings as a part of their solution.

The savings business even though it doesn't have a significant margin, it still contributes to overheads positively.

Yes. I understand that. It's just when you look at Old Mutual in this space, they also have quite a large savings book. I'm just trying to understand, in your view, why your margins even with a mix that's not too dissimilar from my understanding, are your margins that much lower than their's on a longer-term basis, I'm not talking near, current year, obviously?

Yes. I mean, you're right. Our mix is more similar to, let's say, Mutual than it is to a Sanlam, okay? I acknowledge that. I do think we're a little bit more savings, but it's not fair enough like it will be with some of the other competitors. I will probably have a little bit of a bet here that Mutual's unit costs are a little bit lower than ours. And historically, their sales productivity has been a bit higher than ours. So ours improved a lot. But we're still having [indiscernible] up to them. So...

And I will also say that some of our sales contracts are still quite generous, which is something which is a bit of a legacy of when you're in a downward spiral, you've got to probably pay more to retain some of your better people. So I would say there are probably structural reasons. Having said that, Michael, I mean I -- my personal view, I mean, we -- again, sometimes we have our internal arguments here in front of you guys. Personally, I think we can -- I'm a bit more bullish on our Metropolitan profit margin, more bullish than maybe, especially the Metropolitan guys themselves. So we might not reach a 10%. But I mean, I think we can see, certainly aim for something like 7% or 7.5%, which -- but most guys would argue with me around that.

Michael, I think I would only add that it's very much a function of what we do around savings products. I mean, the value for money we offer on savings.

The next question comes from Itumeleng Molefe from Standard Bank.

Can you hear me?

Yes.

Yes. Just one question from my side. Looking at your Momentum Life result on VNB, it seems like the VNB has largely dropped because of the maybe sales of risk -- I mean, higher risk margin products? Is there maybe sort of like a solution in place to try and improve the sales because looking at your other operations within the business segments, they've been doing quite well, but Momentum Life is just not really hitting the mark?

Yes, Itumeleng, do you mind just repeating yourself? The line wasn't so great?

No, I was asking, basically, is there a plan in place to improve basically the sales of higher risk margin products within the Momentum Life space? Because just looking at the numbers itself, it looks like you did benefit from lower costs and expenses. But the sales were just not high enough on the higher risk margin sales side to actually bring up the VNB? Because I can see that you guys mentioned that the yield curve did actually contribute to the discounting of future premiums, which actually lowered them?

Yes. Look, I would say that on Momentum Life on risk products, in particular, I think we've seen that the market remained flat for the last, yes, I don't know, probably 6 or 8 months, maybe -- quarters, maybe even longer. So I think what we really need -- and you're right. I mean, on the cost side, I think things are under control. And we've actually been very disciplined there. So that helped the fee book. But we need to increase our volumes a touch and a little bit will make a big difference. And I think we are -- there are indications from some independent comparisons so far that we are marginally improving our market share. So our lack of growth in sales is really a function of the market in the affluent segment. And hopefully, the market will improve a touch, maybe we can improve a bit of market share again. I mean, we need to -- our agency force is still the smallest by a long margin in the industry. And there, we need to improve our footprint growth. But again, that takes a while before it falls late into improvement in new business. So I think we just need a bit more of positive jaws. So -- and that's -- I don't think we're in a position where we foresee that possible reduce. So we probably just need to improve our sales volumes a touch. It will make quite a difference.

Yes. I mean, Itumeleng, maybe the last thing I would add is, we have to grow Myriad sales and premiums. Because if you remember the Investor Day, quite a big part of our story in the next couple of years is to grow our risk profits, and Myriad and Metropolitan Funeral have a massive part to play in that. So if Johann Le Roux was here, he would tell you that there's a humongous amount of initiatives around Myriad. I just want to also make a quick statement here in that I've got a WhatsApp from one of our executives saying, the reason why we lost the easy client is because somebody offered them a pre-COVID rate on their risk book. I'm just saying maybe there's sometimes good reasons to lose a plan.

The next question comes from Francois Du Toit from Renaissance Capital.

Can you hear me?

Yes.

Yes.

Just quickly on Momentum investments. From what I can see, there's been a bit of a step change in volumes for the last sort of 2.5 quarters. Is that correct? How did it come about. Is it -- I think you mentioned structured products and annuity sales. Is it new product developments, new sales team? And can you also give an indication of which competitors do you think you've gained that share from? My sort of high-level reading would be that a lot of it appears to have come from Old Mutual. Is that reasonable?

Yes. I mean, Francois, I'll start by saying you're right. There has been a step change in single premiums. Not so much structured products, but first of all, annuities. Annuities are seeing literally double. And we already had 25%, 30% market share to start with. And I think the whole annuity market has grown substantially, and I think we have maintained our market share within that much bigger market. So annuities account for quite a big part of that step change. And we like annuities. We have very little longevity risk in the group as it is. And then secondly, we're very comfortable with our balance sheet management processes. So annuities is a product we like. Beyond that, we have also seen a significantly improved support for our offshore wealth platform and to some degree also our domestic wealth platform. And a lot of that has to do with sort of improved IFA support. There has been some product improvements, but I will probably put it down more to improvements in the channels rather than in the product. I'm sure Hillie can add to that.

Yes, I think Risto is right. And I would say, Francois, it's not my understanding that we're gaining a lot of that from Old Mutual. I don't think Old Mutual was that strong in the investment market in the first place. So I think we're gaining the business from some of the other competitors. I'm not sure where exactly, but we're winning back some IFA business.

Yes. I mean, Francois, just to bring a perspective, let's say, we added 300 supporting IFAs in the last 12 months, which is -- well, that's actually about a 15% increase, I mean. So yes. I mean there are not that many IFAs in South Africa that really move the needle. And we've been very happy with the way things have been going.

Okay. Excellent. And then maybe just related to your answer on the product specifics. It's mostly annuities. And maybe if you could give a sense of whether this -- these sales have had a meaningful impact on your capital requirements. What is the sort of capital impact of the increased volumes?

It's quite limited at this stage because, remember, we underweighed longevity in quite a big way. And so there's quite a good diversification benefit versus our existing book. Also, we are underweight credit versus equity, for example. So that also favors annuities. And your expense reserves are quite modest, and your lapse risk is quite modest in annuities. So you know what, when you're writing annuities next to a big risk book, the marginal capital impact is actually quite modest. ROEs are good in these products for the IRR.

The next question is a follow-up question from Michael Christelis from UBS.

Sorry, just one more. If we go back a year ago, there was quite a big impact on your earnings from effectively increased volatility and lower equity market levels affecting your investment guarantee reserves. With the market rally we've seen in quarter 4 and quarter 1, I mean, I understand this is quite technical, so I'm happy to take it off-line. I mean, have you been able to put away a significant second-tier margins to effectively buffer you if we get another downturn? Is there anything you can give us on the size of that, perhaps?

Yes. I'll answer that because it's a very good question. Now, Michael, you might have noticed that in the current quarter, investment variation was maybe a bit better than some of the earlier quarters, and it's exactly that because we haven't really -- we haven't really rebuilt second-tier margins massively. A lot of it's come through as investment variation. Now the reason is that our company policy is that last year when we built through the stabilization reserves, this year, we were first recognizing profit in equal amount before we start rebuilding second-tier margins. And I mean -- so a lot of the gains directly related to losses last year, we will first recognize profits to the loss last year. And only then do we start building up second-tier margins again. So short answer is funding levels in the smoothed bonus funds are good. But secondly, we haven't built up massive second-tier margins.

Okay. So I mean in the event that we do see a significant downturn, again, you'd be quite exposed immediately, there wouldn't be much to buffer you?

Yes. The buffers we are sitting at the moment are smaller than they were, let's say, a year ago. I mean there is something. But you're right. I mean, if the market was to do what it did in March last year, we'll probably see quite a bit negative variances again. I mean, the one benefit is that our funding levels in the smoothed bonus funds are good. So maybe the first 5%, 10% wouldn't be such a big hit. But beyond that, yes, it does grow quite rapidly.

Hillie, we have no further questions. Can I hand back to you for closing comments?

Yes. Thank you very much. I think in closing, just we -- as we mentioned earlier, a lot depends on how we -- this third wave will turn out, and then looking at the longer term, how the vaccination process really finds traction. So those things are quite important for us. And as Risto mentioned, until mortality levels return to normal, even if it's a new normal, it will be difficult to see our results improving to its full potential. But having said that, I think in terms of over the short term as far as our relative position is concerned, we remain quite happy with where we are right now. And also, just finally, I mean, it's just worth flagging that on the short-term side also, there were a few dampening factors, which I think that's largely out of the system now. So we're not used to Guardrisk and even MSTI being a drag on our results over the last few quarters or so. So hopefully, better times will return. With that, thank you very much. We appreciate your interest. All the best.

Thank you very much. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.