Momentum Group Limited (MTM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Momentum Metropolitan Third Quarter FY '23 Operating Update. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Mr. Hillie Meyer. Thank you, and you may proceed, sir.

Good afternoon, everybody, and welcome to this trading update. And thank you for your attendance. As is normal, I'll give an introduction, and then I will hand over to Risto, who will, I think, just then highlight some of the financial futures in a bit more detail. And we're also joined today by Jeanette Marais. And I'll say a little bit more about our new CEO towards the end of my introduction. As we've indicated in the trading update, we're pleased with the results under the circumstances. I think, just as far as earnings is concerned, obviously, it's a very good comparative number. I mean the prior period still suffered from some of the COVID-19 impact. So I think that the improvement is to be expected. But I think, we're very pleased with the operating profit in particular. I think sort of our reliance on investment results and so forth or the contribution of investment results to this very, very good set of results was rather muted, which I think is -- I think something that just sort of emphasizes a very strong operating result. I think also just, I mean, I think the strong earnings number is proof again that for a financial insurer, the sort of current economic environment's impact on earnings is less than what it would be for other entities or probably what people would generally expect. I mean our earnings is really a function of what we've done over the last 15 or 20 years. And therefore, what we did over the last year doesn't necessarily impact earnings that much. So again, one would expect then earnings to probably not necessarily reflect, I think, a very tough trading environment. Moving on to new business, the present value of new business premiums declined by 8%. I think now we get to some of the numbers that probably reflect the environment. I think just especially if we -- our results are compared to other companies that are also delivering results. I'd just like to point out that for the 9 months to 31 March 2022, in other words, today, a year ago, we reported present value of new business premium growth of 16%. I think that the decline of 8% should probably be seen in that context. So it's still a growth compared to 2 years ago. And certainly, also growth compared to the prior periods. Yes. Maybe just one quick comment on specific business units. Metropolitan, I think we're sort of reasonably happy with progress. Quite a number of actions are being taken and have been taken. And I think we -- I think we're pretty positive that we will start seeing the impact of it come through from this current quarter, fourth quarter onwards. Also, I mean, a lot of the -- I think if you look at the 9 months, a lot of the, I think, sort of the results are strongly impacted by what happened over the first 6 months. So even though in some areas, not all but in some areas, the third quarter results already have a little bit of improvement as we bottom out, but it's not all that apparent from a 9-month number. But we -- I think we've met, we sort of have turned it cleaner. As far as Momentum Insure is concerned, it was a tough quarter also from an underwriting results point of view. Now I mean, I think we've communicated that we're little -- we're somewhat behind in terms of just adjusting our premiums. But I think just from a weather and experience, we'd say load shedding related and so forth. The plans and results, in other words, from -- just from a client's point of view, not so much from a premium point of view, was actually not a good quarter. It's probably the worst quarter in the history of Momentum Insure. But again, in Momentum Insure, there's a lot of action, decisive actions being taken, and we're confident that we'll see things improve. But I mean, we're quite happy and we know the market will work for us to deliver on that, happy with that. Then just finally, as you will have seen from the trading update, we announced last week that Jeanette Marais will succeed me on 1 August. Just sort of yes, wanted to comment. I think the one comment I'd like to make is that we now are sort of pretty close to the final year of our 3-year reinvent and grow strategic planning period. And it will not necessarily planned that way, but I think it's quite so truth is that Jeanette on the guidance now and the new team, sort of repeating a new team, but quite a [ settle ] team. We'll have a 12-month period before when we'd be in a position to share to the market what will happen from a [ sturdy ] point of view beyond 2024. And I think that's quite now, I mean the strategic planning for whatever we're going to do beyond reinventing, grow that process has started. And under Jeanette's leadership, that will now continue and conclude sometime next year, around May. They are about normally we announce our new sort of strategic objectives to the market. So when you get to the question time announced here today, so you're welcome to also ask to make any questions that you might have. So with that, I'm going to hand over to Risto.

Thanks, Hillie. I'll just cover a couple of maybe not so obvious things in the results. Just be a bit more sort of [ disparate than ] in the numbers. We do mention in quite a few places that mortality results are much better in the current period. I think what we didn't make clear is that mortality is used to be back pretty much to pre-COVID levels. So in the previous few quarters, we have spoken about the fact that mortality is still above long-term norms in a few places. But now we seem to be back to sort of long-term levels. That's quite important because before COVID came, we were thinking about possibly making some basis changes on mortality. So we're back in a situation we'll be considering maybe lowering some of the mortality assumptions. Now I'll spoke about the positive basis change because on the other side, on the expenses side, it is obviously quite difficult in this environment. Now our book is not really growing. So we need to keep our expense growth below sort of 5% every year, which is quite difficult in light of like professional salaries, administered inflation and so on. So if I'm saying mortality is looking really good on the expense side, we're going to have to be quite diligent to not have a basis change at year-end. I'll also note that there was an analyst report today talking about yield curve impacts, which are always a feature of our results. They were positive in those 9 months, particularly in the third quarter. And the yields continued to increase in April. So those should be supportive of results in the fourth quarter. We always take the pain when they go down, so we'll take the credit now as they're going up. The other thing that we just talk about the interim, so probably worth highlighting again is just the importance of a new to stock current value of new business. I looked this morning, I think about 80% of our VNB is from annuities. Now we are a market leader in annuity. So it's a great position to be in, but it may be also just to take note of if there are sort of -- well, we're not seeing it. But if there is a reversal of the demand for life annuities, then our VNB will probably reflect that change in trend as well. So at this stage, it's a great thing, but it's something that obviously keeping our eye open. Then in terms of Momentum Insure, Hillie mentioned, it's a tough quarter. One thing that I find quite curious, well, it's the wrong word. I think one thing is really worth noting is we had an unusual amount of claims coming in January from December. So the reporting delays in this whole day period were kind a bit longer than usual. So part of the weak result in this quarter was actually claimed from December been held over the holiday periods. So that sort of made a tough quarter even tougher than they needed to be. Now obviously, that's work as well as the system. So April was already a lot better in terms of claims experience. We injected some capital in this business in December, which is in our interims. Now obviously, we'll have to wait and see how the fourth quarter plays out. But there's probably -- there will probably be a need for a capital injection before end of June as well. And I'm just wondering if the analyst reports the way question around the acceleration of this business and the goodwill. We'll take it at year-end, but obviously, the current results have been quite difficult for Momentum Insure. Okay. Beyond that, I don't think there's anything unusual in these numbers. I mean I've given you the 5, 6 items that I thought are maybe not so obvious but relevant. I'll hand over back to Hillie.

I think we're ready for any questions, I don't know, so it's probably back to the operator.

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

A couple of questions, if I can. Firstly, on Met Retail. And I hear your comments around being optimistic and some of the management actions being taken. But we've seen a marked deterioration in quarter 3 to a negative VNB number for the first time in a while. So maybe if you can just give us a bit more color as to why you are so confident that you're going to turn this around in the relative and near term. If I'm not mistaken, you were targeting a margin of at least 3% by year-end. And it looks like you're a long way away from that, where we stand at the moment. Secondly, if you could talk a bit about the deteriorating persistency. I wasn't sure whether your comments there related to the 9-month period or the 3 months since half year-end. So maybe if you could just talk about what persistency is doing relative to where you were, as of the end of December. And then, I think you've touched on the yield impact. I mean can you talk a bit about the quantum that we can expect if you'll say, for example, where they are, what sort of impact that would have on the full year number and maybe how much was in quarter 3? That would be quite useful.

I think Risto and I will share at least a question around Metropolitan and then Risto, you will deal with the yield curve. Michael, there are a few things that's happening. I think, first of all, as far as Metropolitan and the VNB is concerned, there has been some rate increases that's been put through recently, and it's in the process of happening and it will start to reflect in the results in this quarter. That's the one point. I think the second point is a fair bit of, I think the lapses related to fraudulent activities in the sales environment. Now when you discover these figures, it takes a little while for it to work out of the system. We -- I would say, if you know that sort of 12, 15 months, there was still quite a growth in sales force numbers. That's -- we actually stopped really focusing so much on recruitment and rather focus on quality, quality, let's say, from 9 months or so ago. But again, those things take a little while to come through. But for the last few months, the focus has been on quality. And I don't think we're going to see the same level of fallout from fraudulent activities and so forth. So I think that will come through. Then also, I think there are a number of activities around improving debit order collections, also a mix of stock order, debit order business, a bit of a refocus there. Again, I mean, those things we're beginning to see that there are improvements in the quality around that. And then just finally, we're keeping our eye on cost and manage and so forth. And I think, we're sort of going to see a bit of discipline. So that will also assist a little bit. I think there were quite a few initiatives over the last sort of 9, 12 months that impacted the cost side of equation a bit. I don't understand what -- I would just say that we're sort of targeting a VNB as a percentage of premium. We look at recent numbers that the guys have produced for us, that it would return back to maybe not exactly 3% but 2.5% in the next financial year. And I think, we're definitely positive that there will be an improvement even this quarter between each year. Look, I mean it was a particularly bad quarter. I think even if you look -- if you compare it to the last 5 quarters is where normally Metropolitan and VNB would be -- and it was not a really good period that it's between ZAR 50 million and ZAR 80 million per quarter. And this quarter was ZAR 4 million. I can't see it stay at that level.

Yes, Mike, I mean the only additional thing I'll say is Met normally has a weaker third quarter because December and January falls in May. And in the holiday months, we pay the guys a basic salary, even if they're not really producing enough business to be validated using our jargon. So normally, our commissions are a bit higher in January, in particular, compared to production volumes. So VNB is normally a bit seasonal for me. Then in terms of...

Sorry, two questions.

Yes.

Perfect. Sorry, the persistency question in Met, is it deteriorated from December? Or is that...

Yes. I'm getting to the last two. So efficiency, the third quarter was almost exactly half of the first 6 months. So from an earnings perspective, basically a straight run rate from the first 6 months. What it may be a bit different is that in the first quarter, we had a few technical issues. Remember we changed operating -- well, line of business systems here, which resulting some lapses not happening when they should have. So they came through in the first quarter of this year. But now, I think it's more of the underlying lapses, they're not improving. I think that's probably behind the persistency comment. And then the yield impact, I'll give you the numbers with the nearest ZAR 100 million. So in the first 6 months, we had about ZAR 100 million positive investment yield variance, yield curve variance. It was ZAR 200 million in this quarter. So this quarter, a ZAR 200 million gain from yield curve movements. And there was another ZAR 100 million in April. But I mean you have to watch the 15-, 25-year bonds in June to see what the impact is at year-end.

Michael, the only other thing I could have mentioned and should have mentioned was in Metropolitan, there's quite a number of sort of management activities around activity management in sales force. Commission payments and sort of I had more discipline required to earn bonuses at management levels and those sort of things. So I mean, a whole number of activities which is designed around improving the discipline and the quality in the sales environment.

The next question comes from Warwick Bam from RMB Morgan Stanley.

Just two from me. If you could just elaborate on Momentum Corporate. You mentioned the release of COVID-19 reserves, just how material was that? And does that all come through in the third quarter? And then, just comments around Momentum Insure and the potential need for more capital. How material will that be when it comes to assessing the group dividend at year-end? Could it have an impact on that decision?

Yes. I can deal with the Insure one. I don't know about Corporate .

Warwick, your Corporate question was on mortality?

So in your comments you mentioned there was a COVID-19 reserve release. Obviously, there was positive mortality experience and reserve. Just want to get a sense of how material the reserve release was.

Actually, it will not be massive in the context of total earnings. So we started the year with a lot lower provisions than the previous year. So you probably measure that impact in tens of millions, not hundreds of millions. So it doesn't explain the strong result. It's more your underlying mortality and disability experience.

And also I'll deal with your final question. So along, Warwick, and I think that I don't think we -- capital that we pass on to Momentum Insure would impact dividends at all. It won't be sizable enough plus, I mean, it's not going to impact earnings. So it won't impact dividends at all.

I agree. I suppose the capital injection will be a function of how the last quarter goes, but I think you can look at a quantum between ZAR 200 million to ZAR 400 million in the quantum. But that will not affect our ability to pay a normal dividend. I mean that's really -- we will still be able to pay as the dividend policy, which is based on earnings. Yes. And by the way, I've got a number here, the provision release, the reserve release for COVID-19 has been ZAR 101 million for the 9 months. So you can use up a ZAR 30 million, ZAR 40 million run rate in terms of the corporate COVID-19 release.

The next question comes from Matthew Pouncett from Laurium Capital. [Operator Instructions] The next question comes from [ Cornel Fonceo ] from Sanlam.

Risto, you did allude to this in your commentary earlier. Generally looking at the trading statements that have come out of the life insurance companies, it looks like guaranteed annuity sales are holding up well. And in fact, they're actually looking surprisingly strong. Could you maybe comment on that in your own businesses and just sort of even off to March what it's looking like?

Okay. I think Jeanette is probably the best person to comment, but I would say that it persisted for longer than I would have thought it would be the case. But yes, we had stronger results this quarter and even in the last few months, I mean, it continues. But Jeanette, I don't know.