Momentum Group Limited (MTM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Momentum Metropolitan's Third Quarter of 2022's Operating Update. [Operator Instructions] Please note that this event is being recorded. I'd now like to hand the conference over to Mr. Hillie Meyer. Please go ahead, sir.

Good afternoon, everybody. Thank you for joining us. Thank you for your interest. I will kick off with an introduction, and then I'll hand over to Risto, which as is our normal custom. I think from a management point of view, we're very pleased to have the results. I think there's a lot to be happy about looking at the 9 months, the last 9 months. We're not blind to, I think, a few challenges, which we will also unpack in a bit more detail now and I mean, which you would have picked up in the results itself. But I'm going to just kick off with some of the positives. I think first of all, you would have seen that the impact of COVID-19 is slowly but surely dissipating. And as that happens, our normalized headline earnings number are moving back to the trend line that will, we believe, take us back to our sort of putting our reinventing growth target back into our scope, which is very, very pleasing. Also pleasing, and you would see it from the results that most of the business units are actually contributing positively to earnings and performance in line with, I think, what would be reasonable expectations under the circumstances. Obviously, the business units that had huge mortality losses have recovered very, very nicely. The biggest turnaround in Momentum Corporate. And yes, I mean, the business units that might be lagging in terms of what we would expect from an earnings point of view are Africa, a disappointing quarter in particular, Momentum Insure, but that was to some extent expected, but obviously, I think the claims ratio is hurting Momentum Insure. And then to a lesser extent, Metropolitan Life. I think it's not really at the level that we would expect. We're very pleased still with new business sales. I think one must expect things to level out a little bit. But if we run through the different sort of product lines, guaranteed annuity is up 23%, [ virtual ] platform, up 16%, I think of a quite a challenging base. Offshore platform business down 3%, which I think is not a surprise given the base. I mean there was a lot of money going offshore in the previous periods. So that's sort of quite down a little bit. But remember, it's still significant volumes. Metropolitan all products showed positive growth, 27% the combined business, Corporate, up to 32%. Momentum Insure -- and I think that's maybe worth emphasizing our Momentum Insure we had the impairment in the last quarter, which took a little bit of a shine-off Momentum Insure in our results, generally. But as far as the acquisition of Alexander Forbes is concerned, things are going according to plan. We're meeting the targets that we set in terms of the integration of the business. And as we sort of hope that post the -- putting everything on one system and relaunching one combined new product set, we're seeing the benefits of the external focus. So Momentum Insure's business is 29% up year-on-year. And it's on the back of a very good quarter from a new business point of view. And then Africa, also very pleasing new business numbers. So the exception is really [indiscernible]. And again, I think it's worth mentioning that as far as we can get -- a lot of it probably anecdotally, but I mean our sort of information intelligence from this market out there is that I think you will probably see and we'll only know once everybody has published the results, but the upper end of the market protection business, it is a tough environment. So we're not -- I think we're not the only ones that are finding it tough, hopefully, other results and someone will bear it out. Yes, I think that's -- those are the sort of things that I would like to highlight. I would just also mention that we still -- there's a lot of digital initiatives and IT initiatives and so forth. And we're still also happy with we containing costs to the extent that we wanted to. We're spending a bit more than in the past, but all of the additional spending is really on future-proofing the business and then building capabilities that will take us into the future. And then just in conclusion, [ our IRR ] is the negative items in this quarter as a result is the VNB, which Risto will unpack. And then in Metropolitan, I think it's the third quarter where we have some persistency challenges. Unfortunately, we have to report on, but again, Risto will unpack that in a bit more detail. I've given the rest of the more difficult problem that we have today. So Risto, over to you.

Thanks, Hillie. Yes. Before I go in the VNB, which is obviously the more difficult part of today's results, I must just back what Hillie said, it is very pleasing to see earnings back to and above pre-COVID levels because ultimately, earnings is what drives dividends. As they say, you can eat earnings, but you can't eat the [indiscernible]. So yes, let's be happy about the earnings being ZAR 1 billion for the last quarter. It's good to see. Okay. In terms of value of new business, I'll try to give you a little bit more info that is maybe not obvious in the announcement. So it will help you to make up your own minds in terms of how this is going to unfold from here. Well start with Momentum Life where VNB was obviously disappointing at pretty much zero. Now I think I have to be frank here, that if you look at the volume in the last quarter, at this level of volumes, the VNB is going to be modest. I mean we really need to see probably a 10%, 20% pickup in the protection volumes for us to have a meaningful VNB number. So to some degree, we're going to have to get our volumes up. And if the external environment doesn't let us do that, then we're going to have to look at pricing and expenses to sort it out. I mean it's not a -- zero VNB is not what we want to run a retail life business at, that's for sure. Now two less obvious items in here. One is that the number of policies that are integrated into multiply actually continue to drop and less than 1/3 of the policy sold in the last quarter had what we call sort of multiply integration. That's important because we -- in internal valuation basis, we assume that the mortality claims and persistency improvements that you get from integration is actually more than the discount. So there is a positive on the VNB when you have more [ multiplying ] business, which was not the case in the current quarter. The other not obvious item was that the average premium size was lower than normal as well, and that might lead to maybe the economic environment or whatever, but like on most insurance products there is quite a direct link between the average size of the policies and margins. If we then move on to investments, here, we did warn people -- I mean investments had a good VNB for 9 months. But if you did the math, you would have seen the third quarter was a bit slower than the first 2 quarters. We did warn everybody at interim stage that we're looking at our reinvestment assumptions, our credit spread assumptions, and we have changed those. Many of you will know that in the current environment, it's quite hard to find high-quality credit assets out there. So we take in a more modest view on our long-term strength. So you could say a lot of that decline is really just conservatism around ultimate returns we can earn on the bonds back in the annuities and the guaranteed products. And in the wealth platform side, Hillie raised the fact that we have more local than offshore sales. Margins are quite different across those two products with local being premium margins than offshore. I did notice a couple of e-mails from shareholders asking about the earnings decline in investments. Now remember that we have spent nearly ZAR 100 million in the last 6 months and developing the [ F&Z ] platform that we think will take our old platform to the next level. We're expensing pretty much all the expenses, well, as we like to be prudent, as you know. Also, it's easy to forget but first quarter last year, we saw a normalization of the bond curves after some volatility in the beginning of the COVID 2-year cycle. So there were substantial interest rate or yield curve related profits in the prior year, 18 months ago now, that didn't repeat. If we go to Metropolitan, this one was always a bit disappointing. We had first 2 quarters as very good VNB, this quarter wasn't so great. Now [ they're not taken up story ] for those who're not familiar with insurance. I mean this relates to business where the policy has been issued, we try to collect premiums and we try to collect it again and normally after the third collection, if that fails, we cancel the policy. So effectively, we reversed the volumes on the VNB we thought on the policy. But there are certain costs, the issuance cost that we'll never recover. And to be frank, some of the commissions we also don't recover, for example, if the agent is no longer in service and so on. So there is quite a high cost to when we sell a policy that never get a premium. And unfortunately, we had quite a big chunk of those in the current quarter. Now there is a bit of a lag. So a lot of these business would have been sold maybe late last year. And then we didn't collect the premiums as expected through the festive season. And during the quarter, we had basically eventually written -- reversed that VNB on those policies with a timing lag. I also mentioned -- I referred to forward in the operating update. You always think you've seen it all. So in this market, it's not unusual that an agent will submit the case and say that Mr. Smith works for ABC Limited and then ABC says never heard of the guy. But this time, we actually had where that [indiscernible] actually corrected companies today were we sell payroll deduction business. So you learn something new every year. So we had interesting fourth case that we had to deal with. The other thing that we have said before, but it's not obvious, that we have reduced the fees on our savings products. As you know, the fees as a percentage of assets can be quite high in this part of the market. So we try to be a bit more planned centrically. And then the last thing maybe to put in as a notebook for the future is, we would expect the third quarter in this business to always be a bit weaker VNB than other quarters because it has the festive period. And as an example, in January, we actually do pay the agents some basics just to keep them going because there's so little new business going around. So generally, the cost of distribution compared to sales will be a bit higher in the third quarter. But it's fair to say that this is the one area we would expect VNB to recover quite substantially in the next quarter. It's not quite as structural as one would like to because you can see a big change in volumes to really improve the VNB. Then moving on to Corporate. VNB remains quite modest. At midyear, we said we're trying to get -- land a second leg of a big transaction. We haven't landed that yet, so that VNB has not come into -- well, into numbers yet. We continue to work with the client to land that second leg of the deal, which could or could not have a -- well, if we land it, it will have a positive impact on VNB. The one thing I would say here that in Corporate, we've seen the biggest benefit of, COVID moderating. There's been a substantial turnaround in risk results here. Also disability, which was a big theme 4, 5 years ago, we're seeing another year of, let's call it, acceptable or good level of profitability and disability. I think in general, after what been the last few years, I think long made [indiscernible] that we make some gross profits here. I think we need to keep our pencil sharp here to make sure that we generate decent returns. Then Africa, VNB remains muted. The story is very similar to the first half. The suite that continues to have strong VNB, Botswana is okay, but Namibia, unfortunately, is a negative VNB. We continue to work on numerous actions around products and distribution in Namibia. But I think it's fair to say, like I did say a quarter ago that over the next 2 years, the fortunes of the African VNB are largely going to be dictated by whether we get the Namibia VNB, right, or not. Also, Africa, the earnings remained quite low for 9 months, but remember the first quarter was really poor in that the COVID-related losses that are bigger for [indiscernible] Africa than in South Africa. So the second and third quarter have been a bit more normal in Africa. So that was great. Okay. And I think in terms of capital position, we don't talk about it humongously in the trading update, but it has strengthened a bit since midyear. We remain comfortable with the capital position of the group and each of the individual entities. Obviously, there's been a bit of market correction since 31 March. But again, all our ratios remain strong. So there's nothing really -- I suppose on capital, I'll just say that it continues to be strong enough to execute on our strategic plans. I think I'll open up for questions.

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

Two questions if I can. Firstly, on the Indian business, we saw the numbers about a week and a half ago now, where they're talking about trying to grow the top line over the next 12 months by about 40%. And given you did 30-odd in the last 12 months and 14 in the next 12 months, gets you way short of your 50% target that you articulated a year ago. Can you just talk about what that means for your targeted earnings out of India for the FY '24 targets? That's the first question. The second question is just around the productivity...

Should we just take the questions one by one?

Yes.

So India is pretty straightforward. So maybe two things on India. I think there's been a few e-mails wondering about the second half earnings. I think what I would say here is that the latest COVID wave in India was quite mild. So I wouldn't be too fast about the second half earnings. Your question is a very good one because you're right, Aditya Birla Capital has stated that they want to accelerate the growth of this business. And through the Board, we have agreed to that plan, and it will widen then the initiative expense -- well, basically, the J-curve will get a bit steeper again on this business. So that is a very valid observation. Obviously, we've done it because we are very excited about the growth prospects of the business, and we have faith and Aditya Birla's ability to execute it.

[indiscernible] probably missed the FY '24 target then?

For India, yes.

Yes. Yes. Okay. Okay. And the second question then around the productivity in Metropolitan. I mean you made a lot of commentary in the half year about how fantastic it was, best ever type productivity levels. I noticed the commentary [indiscernible] are a bit more neutral now. Is this a function of maybe a [ forger into ] activity effectively overstating what productivity was? And maybe just talk a little bit about where productivity is relative to what you reported at the half year?

Michael, look, I mean, the persistency might have a marginal impact. I don't think that's the big -- that's not the explanation. I would say that you're always going to -- productivity is always going to drop over December and January. And we saw that. I mean, I -- earlier today, I was in a meeting and I looked at the graph. So we -- let's say, it sort of probably drops from -- average 3 probably drops to 2 or 1.7 or something for that through 1 month. But it's -- towards the end of this quarter, it was back where it was in October, November. It was not at the same level as the best productivity month, that was -- I can't remember whether that was July or August. But it's definitely, I think creeping up again, and we're very happy where it is or when it was February, March, April and so on and so.

Yes. Hillie, I mean the only thing I would add is, Etienne is the CFO here, he showed me that even if he takes out all the bad business, the fictitious business, the average productivity was still about 3% for the last 6 months, the prior 6 months. I mean so we have looked at it that if we took out those agents, what will the productivity be. And in reality there are a couple of rogue agents that can hurt your VNB by a few million bucks. But in terms of a couple of thousand persons in sales force, they're not going to affect the numbers much.

I mean I'm just struggling to understand then the magnitude of the reduction in margin from 5 to 3, effectively. And then [indiscernible] I mean it seems like a big change on -- for 3 months you have on a 9-month margin. That makes sense?

Yes. So think of it this way is, I think the first quarter and the second quarter, the VNB would have been about ZAR 70 million each quarter. This quarter it's likely, say, ZAR 10 million. So a sharp reduction in this quarter. That includes ZAR 40 million, maybe ZAR 50 million catch-up because of these [ NTUs ] in the fourth. Now remember these [ NTUs ] are coming through from -- so maybe the [ 17 ] in the second quarter should have been 50 and now you're catching up in the current quarter. So quarter is always quite a short period of time discretely, but there's no doubt that it was a weak quarter. Also remember, I'd say that the third quarter will always be weak. So let's say, normal year would have been 77, 50, 70 and now the 50 was 10 because of these issues.

Yes. Yes. I mean are these issues specific to one channel? Is it call centers, is it agents and where...

It's actually more on the agent side. But of course, things actually haven't been performing well. I could say as far as we know, but [indiscernible].

I mean then just on -- around your capitalization comments, yes. Say again.

No, I was -- you get pockets. For example, some of these persistency issues. You can take it back to certain provinces where there might be management changes or we lost a few branch managers in one province. And then a month or two later, they take the agents with them and so forth. So these are sort of isolated incidents, but I mean that happens on a continuous basis, I would imagine.

Thanks for that color. Just then the last one around capitalization, your comments there. I mean, clearly, your capitalization has improved a little bit. I don't know where it's at. Obviously, you mentioned it's still robust. I mean when it comes to thinking about dividends for the full year, I mean, would you consider, given where your share price is, you would buyback instead of dividend and pausing dividends again? Or is that not -- is there a sort of a restriction there in terms of some of your shareholders need the dividend? I mean can you just talk a little bit about your thinking around dividends versus buybacks at the current levels.

Yes. So I mean there's no restrictions, but we have indicated in our dividend policy that we would like to do buybacks on top of dividends. So I think a realistic view right now is expect the ordinary dividend in line with our policy. And then possibly, we might do a share buyback if our capital position and the market conditions warranted. So it would be an and rather than an or.

Yes. Maybe one more, if I can. I don't want to hog the call, but just any comments you can give around the impact of the current sort of spot market conditions on your investment guarantees? I mean should we be worried about a hit in quarter 4 if things stay where they are?

The line is not great. Did you ask about the guaranteed reserves.

Yes. Just at spot. In other words, obviously, we've seen weak markets since the end of March.

Yes. I mean I -- the latest number, I think, is from end of April and the funding levels were still 100% or above our average. It hasn't become problematic enough that the [indiscernible] are tracking it like or reporting it back to me weekly or daily. But the funding levels were solid a couple of weeks ago.

The next question comes from Warwick Bam of Avior Capital Markets.

Thanks for the commentary. A few for me, but I'll take it one by one. The first one, just putting COVID-19 aside, what do you consider your most significant risks to profit for the remainder of, I guess I'm talking about the 2022 calendar period?

Let's see, maybe Hillie has the same answer there. I've written mine down already. I think one thing in our results, we have very favorable investment returns on [indiscernible] Africa this year. Now if we look at normal headline earnings, that's going to be the hard part to repeat. If you look at it more operationally, it's a good one because expenses are under our own management. Does it have the controls on mortality? I'm open, there's no further away. So that should be -- or material way that should be okay. Lastly, there's always a risk. But again, I think we are on top of that in the mind.

It can't go much worse, I would say.

In pockets.

Okay. Yes. I don't know. I mean, we...

I know what it is. Interest rate volatility because it's hard to hedge the new [indiscernible].

Yes. And then also, I mean, look, I just know from past experience, I'm not close enough to give you an informed view, but from past experience, I know that sometimes we [indiscernible] valuation basis changes in the last quarter. but I don't know what -- I mean, I just know that it's been an issue in the past because that's where we normally do these valuation basis changes at year-end.

That's valuable. Just maybe explain the situation that's particularly unfavorable from an economic variance point of view, specifically around the yield curve. You put some commentary in the set of numbers around the change in long bond yields and how that's affected the I guess your annuity portfolios. Just give us some more color around what you're currently seeing?

Yes. So the risk of many is on the risk book, protection books. So annuity book is actually quite well matched. The volatility there tends to be small. Remember that 2 years ago, the interest rate movements were like highest ever seen. So that's where we need to be also focused. But let's call it 1 in 10 years than rather than 1 joint year. Then it's your protection book that is mainly affected. Now we saw a lot of [indiscernible] level premium business. So our sort of liabilities are more on the talent of the products. So declining long-term yields. And I mean invert in yield curve ends to the result in earnings impact on us. So that's a very short version of it. Obviously, the market [indiscernible] by inflation is another one. So we're quite heuristic that we use inflation as the gap within the real and the [indiscernible] curves. So if that gap widens, then we think to strengthen our expense reserves as well. So your thinking of the worst possible scenario for us, which obviously I hope doesn't happen is an inverted nominal curve with rising inflation expectations, marketed by inflation expectations. How big the numbers been? A few hundred million out of way. I mean it's not like it's going to blow us out of the water, but it will be -- it will create noise.

Useful. And my second question is just around the rest of Africa segment. What's your normalized quarterly profit? I mean there seems to be lots of unders and overs and quite difficult to get a baseline. Maybe you can give us some guidance there?

Yes. So I'd say the last few quarters have been best. I think the first quarter, we had quite a big loss and it's probably we might ZAR 50 million to ZAR 60 million in the last 2 quarters. I think normalized, I would expect it to be, I think, closer to, let's say, 75, 80. Somewhere there.

Right. And then lastly, just around the sales dynamics in Momentum Insure. Just your new business volumes increased by 29% for the 9 months, and you comment that persistency was good. However, your gross written premiums declined by 3%. Just maybe you can expand on that. I think it's what seems to be a discrepancy on obviously your year-on-year growth between gross written premiums and net written premiums, and I can't quite remember the reason for that.

Yes. So I suppose new business and gross written premium were a bit of a lag. So I think the good new business you're seeing today should reflect better gross written premium in the next 12 months. So that's the first obvious comment to make. Then secondly, I think we're starting to see a bit more rewriting in the renewals in the market now and that had not been the case maybe a year ago. And then the last point to make is that remember, we did lose a small part of the book to a competitor where intermediary moved a particular block of business during last year. So that will have hurt gross written premium growth as well. But maybe the key takeaway here is Warwick, the good new business now give us a slightly better outlook for GWP in the next year.

I appreciate that. I'm just going to sneak one more in here. Just around the catastrophe [indiscernible] or catastrophe cover -- the aggregation of that catastrophe cover, I'm assuming the April and May floods would be considered 2 events. Is there any possibility that it's a single?

No, no. That doesn't come across our desk. We're keeping it at 2 different events. Thanks for the idea.

It's going to be from the same weather pattern to be a single event.

[Operator Instructions] The next question comes from Kevin Harding of Investec.

Just one question for me. I guess, and this seems to be an industry dynamic, you have negative mix effects coming through on the sales side with people trading down to a thinner margin product. And just given the negative macro dynamics, it does seem to be sticky over the medium term. Taking all the one offs out in your individual franchises, where do you think VNB margins are going to be maintained through the cycle given the current dynamics in [indiscernible]?

Yes. I mean that's a very good question because I agree with you that maybe we deliver a bit of a slog here to get volumes back up to where they need to be, unless we can relist still market share. I think the margins you see in Corporate at the moment have already been on the lower side. I'm not too worried about that. Investment, I think we can maintain the margins, particularly the margins now that have a bit more prudence in the reinvestment assumptions. And Metropolitan, I think you'll see a bit of a recovery in margin after this weak quarter. So the only business where you might need to be a bit patient to get the margins back to where we previously thought they would be is Momentum Life where we need to get Myriad volumes or product margin up quite a bit. Yes. But again, we have diversified business, so it's not like our long-term outlook on margin has collapsed at all. It's probably towards the lower end of the target we have always had. I mean a favorable economy will definitely help. That's for sure.

Yes. I will add two things. One, maybe more bearish and one may be more bullish relative to your comments, Risto. I would say that, I mean, the business mix of the investments, there's a lot annuity business in there, and that's underlying margins. I wouldn't bargain on that being -- necessarily being maintained. I mean maybe there wouldn't be a big shift. But I mean, if we lack a little bit less annuity business, it will put pressure on the investments, our new business margin. And then on Myriad, I mean, we're planning a number of things for later this year. Now those were the things, if we do write more builders than it would have, I think, really -- it could have contributed to improving our profit margin significantly because it views a lot worth, call it, onboarding expenses, underwriting costs and so forth. Quite a number of unrequired interesting things that we will be changing in the next 2 months. Where we currently are, hopefully, those things will help us to return to positive VNB numbers even if business doesn't grow. And I think that's more or less where we are. We're not expecting volumes to grow in that segment of the market. And I think it will be a bit of a hard slog for all the competitors, who will have to become more effective, more efficient. And I think maybe we were just all a little bit spoiled with the margins that were available in that segment. Because I know from our side, we can actually -- I think be sharpening our pencils quite a bit, and that will have to be done now. But as Risto said, it's a hard slog. It's -- you're talking about something that will hopefully see the impact of our 9-, 12-month period.

The next question comes from [ Jared Houston ] of [ Orbiter ].

Just a question on the investment return. I'm just questioning the revaluation in the venture capital funds. Is that something that's happened since the half? I'm just trying to think of that in the last 3 months? Or is that from the first 6 months and onwards that you had already reported. If I can just have a sense of the quantum of that number as well.

Yes, Jared, there has been [indiscernible] again since December. There's been quite a few investments actually to raise money. Probably the best -- the one that you might know as better is that -- took the currency exchange, for example. We were the early investors in that. So we have continued to close deals in the last quarter. Now Jared, you might be informed of the fact that everybody is talking that the fintech market is slowing down a bit. So maybe at 31 March, things won't as easy as it was up to 31 March. I agree with you, that is why I said it might be hard to repeat this growth for the calendar year. The one thing I can give you a little bit of comfort, though, on is we're currently carrying this portfolio, approximately 700 million lower than the fund managers [indiscernible] portfolio. So we're basically applying about a 20%, 25% hit at the portfolio just to protect ourselves a little bit in case these funding rounds stop before we are able to exit some of the investments.

The next question comes from Musa Malwandla of Differential Capital.

Thanks for the detailed disclosures and congratulations on the numbers. Just a quick question for me on capital. So I know your ROE is sort of now is in your long-term target range and, let's say, stays at this level. I'm just curious around what that means for the level of distribution? So for example, if we take the 645% payout that implies to your book, your NAV would be growing around 10% to 11%, which seems a bit high given previous guidance. I think in the past, you've mentioned that the incremental requirements on the Life business are basically net [indiscernible] in terms of capital requirements. And if now you are seeing a skew towards more savings, in other words, less capital-intensive products that would be even more the case. So I'm just wondering what would dissuade you from considering a higher industry level of distribution, if that makes sense?

Yes, Musa, you're right. Our dividend policy -- the current dividend policy combined with this level of ROE will result in sort of circa capital forming on the balance sheet over time. But that's normal. You always want to have like 500 million to 1 billion [indiscernible] as a gap. So you can maybe implement strategic initiatives you want to look at possible sort of opportunistic acquisitions, you can look at buybacks. So we do have -- we have optionality. I think your question of whether we're going to increase our payout ratio. I think at the current share price, one realistic option is to stick to a payout ratio within policy, but then also look at the buybacks. And I mean, so that's something -- that's a realistic option, stick towards the low end of the payout ratio and maybe do buybacks on top of that.

Yes, yes, that makes a lot of sense. I'm just trying to figure out what capacity in -- for more distributions in general, regardless of funds planned. So at the current level of profit and whether you think there's any downside risk to that level of profitability, mainly that's what's dissuading. I just want to get a good sense of the fact...

Yes. We have said before that -- I think the current dividend policy reflects the investment phase into India. Now Michael asked the question earlier, than in India, we're accelerating the growth again. So that might stop us from changing the dividend policy anytime soon. But the statement we made 2 years ago still holds that once India is self-funding, our dividend policy is little bit outdated. So that gives you some idea. The other point is that like in the current year, quite a big chunk of our earnings are from fair value gains. Those are hard to distribute before you actually exit the investments. So you must also look at the mix between investment returns and operating profit when you're trying to determine maybe the cash generation within the earnings. But you're right, 2, 3 years out. It's a managed statement that we've given us also a bit of a buffer.

[Operator Instructions] The next question comes from Saul Miller of Truffle.

Just a question on the Corporate side. So profitability is looking decent. The margin is still under a bit of pressure but it sounds like there's a deal still to be completed. It's a business that struggled for quite a number of years. Do you think you've made enough changes to the business so that it will now be a business sort of generates a reasonable VNB margin going forward? So something closer to a sort of 1%?

Saul [indiscernible], I think 1% will be a stretch for Corporate. So I don't think that we foresee that. I mean, obviously, the new business volumes are pleasing. And I mean, [ closer to work ] is a great product. But the bulkiness make it difficult. I mean, it will always be a function of your business mix. And sometimes you land these big deals and the margin will be a little bit lower. Plus, I will add that we probably need to pay a bit more attention to our expense base. I think for the current sort of volumes and given the seasonality or bulkiness, we probably need to run Corporate, I don't know, 20 million, 30 million, 40 million per annum leaner. And there are plans around that. But also some of it is a function of improving systems and system efficiencies and so forth. So I know it's a bit of [indiscernible] I'm giving you. But I don't think [indiscernible] see us running at a 1% profit margin anytime soon.

I mean what do you need to generate to give you what you would consider to be a sufficient return?

Yes. First of all, I maybe -- this time around I maybe a bit more upbeat than Hillie in that, I think, if we can take 30 million to 40 million out of the new business overheads, which is not overnight thing, but it's something that continues to be spoken about. Then I think our margins will be close to that. But I'll talk to the point there's not going to be a massive margin, [ 8.8 or 1.2 ] or whatever. I think 30 million or 40 million is a realistic cost cutting, and it will help a lot for a business of such tight margins. Now remember, if you look at our cost of capital and so on, at 1% margin, we're pretty much generating an IRR more than I don't know, 15%, 16%, which is not exactly what we want. It's fully a bit shy of our expectations. So I think on new business, we continue to have to be looking at ways improving the margin. And on the in-force book, in our profitability back now, we need to be very diligent to -- with the market to react sensibly going forward to make sure we get the 18% to 20% ROE we would like. Remember, 3% ROE at group level, it's an average of lots of different ROEs. So maybe this business will be a little on the lower side. But yes, diligent pricing is needed to get anywhere close to 20 in this segment.

But you're basically still going to make some -- it sounds like you're still going to make some changes to that business to sort of break away from where it's been historically. So that -- is that sort of something that you would expect to do in the next year? Or is it more like a 3-year process?

It's already started. There's actually 2 projects under plan.

Yes, so 24 months.

And it's cost cutting -- is it primarily cost cutting that needs to be done? I mean are you just [indiscernible].

No, it's not as simple as this. It's doing things differently. So it's almost like putting in systems that will free up resources and make you more efficient. So it's more sort of reengineering rather than just cost cutting.

Cost cutting will be a side benefit of that. Cost cutting while doing things better.

Thank you. Ladies and gentlemen, with no further questions from the lines we have reached the end of the question-and-answer session. I will now hand over back to Mr. Risto Ketola for closing remarks.

Yes. Thanks, everybody, for joining us on this call. It's nice to see people showing interest in our business, be happy with the results. We'll continue to work on the VNB. So hopefully, one of these days, we'll have good news all around rather than sort of mixed results like they tend to be often for such a diverse group. But yes, thanks for joining us, and have a good afternoon.

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