Momentum Group Limited (MTM) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Momentum Metropolitan First Quarter Full Year 2024 Operating Update. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Jeanette Marais, Group CEO. Please go ahead, ma'am.

Thank you very much. Good afternoon, everyone, and welcome to all our shareholders and key stakeholders to our Operating Update for Quarter 1 of Financial Year 2024. I'm joined by -- on this call by our Group Finance Director, Risto Ketola; and from our Investor Relations team, [ Raymond Berger ] and [indiscernible] in the room with me here. It feels like a short time since we presented our full year results for 2022. Thankfully, as quarters go in our volatile world, there are few and noteworthy external events to report on for this past quarter. Normally, we would publish more pages of interesting financial metrics that gives evidence of our progress. But while we transition to IFRS 17, this operating update does not include normalized headline earnings. It provides an update on the group's operational performance against key measures such as our sales volumes. These are numbers, I will ask Risto to guide you through and give commentary on the business' performance after my introduction. The operating update follows a more qualitative view of progress this financial year. I will, therefore, give a summary of the various business unit performances before I will hand over to Risto. So I will start with the two businesses where we are focusing on the turnaround plans. Firstly, Metropolitan Life. Management has been focusing on improving the quality of business. Although Metropolitan's customer base is most constrained by the current economic conditions, they managed to improve lapse experience in the protection business that also saw an improvement in mortality experience compared to the prior period. As the Metropolitan's plan, the number of advisers in the tied agency force decreased, but they maintained the number of advisers who have been with them for longer than a year. This positively influenced the quality of business written and early lapses decreased. In the next 1.5 years, Metropolitan aims to attain a new business margin of 5% and normalized headline earnings on the IFRS 17 basis of ZAR 600 million. They have a comprehensive five-point plan to achieve this, which involves, firstly, enhancing product commerciality; secondly, efficiently managing the channel workforce; thirdly, improving business quality; fourth, aligning to the cost base to the revenue and then lastly implementing migration and automation measures. Next up is Momentum Insure. In this business, the focus is on restoring the claim ratio to a range between 64% and 67% during F 2024. We have shared with you that we are in the process of achieving this through three specific focus areas. Firstly, our disciplined approach to make sure premium rates return to the appropriate level and much progress has been made in this regard. Secondly, retaining targeted clients at the appropriate levels and then lastly reducing exposure in areas where the claims experience is being poor. Momentum Insure has already started benefiting from these actions, and they reported a profitable quarter and a claims ratio of 66%, which is in line with the turnaround plan. I must add that they also had more favorable weather conditions in quarter 1. The floods in the Cape are included in these numbers, and we avoided the large fire claims. Initial indications are that the impact of the recent hailstorm in Johannesburg 13 November is not expected to reach our new catastrophe reinsurance levels. There were, however, many claims in excess of 200, with 80% of these being motor claims. New business has slowed somewhat given the focus on writing profitable business, so we do need to keep an eye on our new business numbers. Momentum Life. Momentum Life really is the heart of the organization. It saw a good improvement in new business volumes on PVN -- sorry, present value of new business premium basis, reflecting year-on-year growth in long-term savings new business, which was up 20% and protection new business, which was up 9%. Our VNB is expected to remain in line with the same period last year. Myriad's key focus remains the entrenchment of our new LifeReturns proposition. That is our world first innovation that improves the onboarding experience for clients and advisers by providing underwriting and capturing capabilities through a mobile phone. Over the past quarter, 80% of all Myriad policies were submitted on the new Myriad underwriting solution. This uptake will in the future have a positive impact on the cost and the accuracy of underwriting and improved engagement and persistency, which in time will improve the value in force of this book. Momentum Investment. By volume, the group sales numbers are dominated by the investments business. In particular, life annuity sales continue to be strong in the high interest rate environment. Assets under management of ZAR 240 billion on the Momentum Wealth Investment platform improved by 14%. Institutional and retail assets under management improved by 22% to ZAR 580 billion, largely due to the acquisition of Crown Agents Investment Management. This is the fixed income and multi-asset manager in the U.K. we acquired in April 2023. Momentum Corporate. Momentum Corporate earnings declined, but it was expected. It's mainly due to the normalization of the underwriting experience on group risk products, the impact of yield curve movements on the annuity book, and the non-repeat of COVID-19 reserve release in the prior period. Momentum Corporate's new business volumes grew, boosted by significant single premium structured investment flows. This was however at a tight margin. Continued focus on attracting business at the appropriate margin to deliver the target and new business growth. Health. Earnings in our Health business improved due to growth in fee income generated from membership growth and an increase in interest income. Despite the tough economic environment, overall membership grew by 4%. This is largely due to the continued growth in the public sector 5% growth and Health4Me membership, which grew by 19%. Membership in the Momentum Medical scheme and Corporate Market segment declined because of decreasing employment numbers in the corporate client base. Guardrisk. Guardrisk's diversified portfolio continues to deliver strong dependable results. The earnings improved slightly due to solid growth in management fee income and Guardrisk Life, good growth in the core revenue lines of Guardrisk Insurance Cell Captive business, partially offset by a 5% year-on-year decline in Guardrisk General Insurance underwriting profits. Revenue was supported by investment income benefiting from the current high interest rate climate. Expenses increased slightly above inflation, primarily because of higher personnel costs incurred to build capacity for reporting requirements and for future growth. Momentum Metropolitan Africa continued to see death and disability claims in line with expectations for most countries, except with Botswana where mortality experience remains slightly elevated. Earnings were impacted by weaker persistency experience as lapses and surrenders increased. New business volumes were pleasing. It was supported by good growth in retail risk business. The new business mix has shifted to focus on higher-margin risk business, particularly in Namibia. Health premium income improved strongly, mainly driven by solid contributions from Botswana and Lesotho. Ghana has shown some recovery after the negative macroeconomic impact in the prior period. And then largely New Initiatives. We are looking to rationalize our New Initiatives into the various business units. The key remaining business in this cluster is our joint venture in Aditya Birla Health Insurance. Growth in membership remains very strong. There are a few factors putting pressure on the claims ratio, such as greater benefit utilization and the increased cost of healthcare provision. To address this, management is focusing on product pricing, new business sourcing, underwriting and provider fraud, waste and abuse. So before I close off with our outlook, I hand over to Risto to talk to some of the metrics and to provide some insights on our financial performance. Thanks, Risto.

Thanks, Jeanette. I'll just make a few comments that might add to the operating update a little bit. So firstly, we mentioned an operating update that we've done ZAR 439 million of the buyback. As of this morning, we actually completed the ZAR 500 million earlier today. So the buyback program has now reached its end. I think the average price will be not that different to the average price in the announcement because, obviously, we've done the most by last week. Come year-end, we will obviously do our usual solvency and capital modeling and projections and then decide whether to do further buybacks, and we'll announce that at the interims. But for the time being the buyback program is over for now. I'll give some of the divisional comments in the same order that Jeanette went through them. So starting with Metropolitan Life. The sales are flat, but there's definitely a quality improvement. So we track things like not take enough policies. So a number of policies canceled at inception. That is down, so that's one of the most obvious sort of metrics for quality improvements. One thing I would mention to listen is we made some basis changes end of last year. That means that this year's new business is obviously going to be calculated on a slightly more prudent basis than what we did with VNB last year. So that basis change might offset some of the quality improvements when we did publish VNB at midyear. Hopefully, if this continues, we can really look at the assumptions at year-end or next year. And then you will sort of start seeing a bigger VNB impact from that -- from Metropolitan Life improvement. Momentum Insure, as Jeanette said, it's early days of the hailstorm. There are few claims have come in after the 200 Jeanette said. There's a very wide estimate given to me by the business unit. But I think for your own modeling, again, maybe think of it as about ZAR 40 million ultimate loss from the hailstorm or I'll reserve the right to give you more info in terms of new info. But our best guestimate at this moment is the ultimate loss of about ZAR 40 million from the hailstorm. Momentum Life, very good PVNBP growth, but this is the business where the reduction in the discount rate would have at the biggest impact. Remember, there's a lot of long-term business there, retirement, annuities and Myriad Life contracts. So if you look at that savings growth rate of 20% and a protection growth rate of 9%. On a like-for-like basis, using the old discounting curve, those growth rates would be pretty above 10% and 0%. So that's the one business where the change in the discount rate flatters them a little bit. Momentum Investments, quite a good period for them, but Jeanette alluded to Crown Asset Management, that was ZAR 64 billion in terms of assets. If you remove that, it's still a decent growth rate. But Crown is actually quite a large business. Obviously, fixed income. So maybe the margin impact or profit impact is not quite the same as the ZAR 64 billion mark might suggest sort of upfront. On Momentum Corporate, I think Jeanette mentioned that earnings decline was expected, that's true. Remember that we come out of the environment where we lost [ 1 million ] during COVID. And then last year, we made good profits because obviously COVID reduced quicker than we feared at one stage. Now we need to be careful not to calculate too quickly. So obviously, we -- if we're looking at the clients experience and we've been rational and responding to market dynamics, but when we say about earnings declining, I'm trying to play it down a little bit. They're declining, but I'm hoping not to see the margins collapse to the levels they were at pre-COVID very quickly. And I'm hoping we can maybe hold on to profits a little bit longer. Obviously, it's a competitive market. So let's see how that goes. But yes, it's normalization. Hopefully, slower rather than quicker. Then on Health. Health doesn't continue to do well. I think that the growth in terms of 5%, Health4Me of 19%. I think they are very good growth rates in the current economy. It resulted in fee income actually growing by 9% quarter versus first quarter last year. So you can see that it's about the 4% plus inflation if you want to look at the fee income. I think in the current environment, we get revenue growth of nearly 10% and the headwind business is not bad. Guardrisk. The level of earnings remains high in absolute terms. There is a commentary about small reduction in underwriting profitability. The three product lines that we saw underlying profits declined a little bit is motor. So the motor business also come under strain. Commercial property and then gap cover, which is quite a big business line for us. On the other hand, the other 10 or 12 product lines that we monitor all showed some level of growth. So yes, 5% becoming underwriting profits and if I told you motor, commercial property and gap cover. Hopefully, that's not too surprising based on market dynamics. On Africa, we reported a 20% growth rate [ of ups ] in volumes. Namibia was the best performer, 40% growth year-on-year. Botswana was the weakest performer for the quarter, sort of flat against last year. And Lesotho continues to do well as it normally does 20% growth year-on-year. On India, we reported gross written premium growth of 25%. What is quite important to understand there is that we have reduced our exposure in a couple of the, let's call it, segments where we feel that our profitability has been modest for the past year or so. So some of the GWP growth rate reduction or deceleration. I mean, 25%, I don't know if you call it deceleration, but deceleration is about choice in terms of also trying to manage some profitability. What is maybe quite important for your modeling is the net earned premium grew by 40%. So at that level of revenue, things are still looking pretty good. Also the mix is tilting a little bit towards corporate business. Now we try to manage claims and our expense ratio at the same time. And the expense ratio is really driven down by selling more corporate and the claims ratio is driven down by managing the retail claims there. So we're trying to combine those two things to try and get this business to profitability as soon as feasible. Okay. So I gave you sort of one or two tit bits of the business unit. Obviously, happy to answer questions just now. But before we do that, I'll hand over to Jeanette for an outlook statement.

Thanks, Risto. I think to just close off, I think it would be a good summary to say that we are pleased by the growth in our new business volumes. However, the slow pace of economic recovery and the higher interest rates will continue to put pressure on new business volumes and persistency, and specifically in Metropolitan Life. We will continue to drive sales volumes and improve the sales mix to increase VNB outcomes. We are very focused on the VNB outcomes across our business. And we remain committed to achieving the Reinvent and Grow business targets for F2024. Our strategy also continues as it is until the end of the financial year. So I think if I look back, we have done much to fix the business and to restore the good name of our brands in the eyes of consumers and advisers. Here, there's still much to do to remain competitive, and maintaining our position in the market simply won't be good enough. We need to continue to get our basics right, but the next phase is critical as we divide our new 3-year strategy that we'll look to accelerate our growth in the process beyond Reinvent and Growth. And we are in the process of shaping and finalizing our new strategy, which we will share with you in May next year. I remain committed to our federated model, which empowers business units to be entrepreneurial and drive their own destinies. However, there is sometimes a shadow to this approach, and we need to ensure the necessary checks and balances are in place to drive discipline and accountability and to increase collaboration between business units. To end of, I would really like to thank our staff for the efforts, our advisers for their support, but most importantly, our clients for entrusting us with the investment and insurance cover needs.. Thank you very much, and thanks for attending our call. We welcome your questions, and I will hand over to Chorus call to facilitate the questions for us, please.

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

Three questions, if I can. I know it's obviously a bit of a moving target and it's difficult to give numbers, but can you talk a little bit about your earnings sensitivity to yield under IFRS 17? So just trying to get a sense of what are the yield impacts look like where yields stand today actually that's come down considerably since September. So that's the first question. Second question, just on the improvement in lapses in Metropolitan, can you talk about how much of this is the elimination of fraud that was in your announcement a year ago versus actual normal? I don't know what else to call them, so normal traditional lapses. What's actually happening to the consumer in that space at the moment relative to a year ago? And then thirdly, any comments you can give on the venture capital valuations in the context of the current slowdown, I guess, in private equity realizations in the global market?

Yes. Okay. I will try to [ answer ] those. So the sensitivity to your IFRS 17 earnings is lower than under IFRS 4. But I mean, there's always going to be some degree of volatility. I mean it's impossible to match all the cash flows out as far as we would need to. To give an indication, I mean, in the first quarter, we have quite big news in the yield curve. And I think the total investment variance on yield curve will be under ZAR 200 million, just to give you an idea of the sensitivity. And I'm aware with the -- think the yields are largely reverted -- largely and these halfway reverted back in October. So maybe half of that will come back. I think if the yields remain at the current levels, then investment variance will be, let's call it quite modest compared to our history, but I mean there's still 4, 5 weeks to go. So hopefully that adds some help to you. Now in terms of the VC valuation, I'll go there next. You might recall that we value our VC funds using a liquidity discount, which means that we argue that for us to liquidate this portfolio quickly, we can't align the portfolio manager valuations. So what we normally do every 6 months or maybe every quarter or 6 months actually, we take the fund manager valuations and then we go to international brokers with dealing this market and said, you want to look at this portfolio in a hurry, what sort of discount will we need to take on these valuations. And that's a 40% discount we applied in June. So there's about ZAR 1 billion difference between -- which is about a -- yes, it's about 40% in the portfolio, between what the fund managers think these assets are worth and then what we carry them on our balance sheet. Our [ total ] exposure to VC at the moment, including the latest investments we have made is bit under ZAR 2 billion. Yes, our fund manager think it's worth close to, let's say, ZAR 3 billion. Then on Metropolitan, now it can be quite hard to extract every single different component out, but there's a metric that we follow, which is our sort of premium collection ratio. And I saw the graph recently where they tried to take out the specific one-off events. And those remain slightly higher than long-term average, but they're not trending worse at least in the last couple of months. But remember, we are trying to take a whole lot of action, not just full, but it's also other things we're trying to do. So what degree is that flat curve a function of us trying to do things better versus a weakening backdrop that's hard to say. I think I can tell you with confidence is that lapse rates remain higher than what they were, say, 5 years ago.

[indiscernible] than they were a year ago.

Yes, Yes. effectively the own goal of our [indiscernible] one way of thinking of it. Yes.

[Operator Instructions] The next question we have comes from Warwick Bam from RMB Morgan Stanley.

Three from me. The first, total direct costs that you state on Page 1 on that table, rising 9% year-over-year. It seems quite high. Can you expand on what you consider direct versus indirect? And whether there's any dynamics that we should be aware of around the sustainability of, I guess, your expense variances. And then secondly, on the corporate business, your recurring premium sales volumes, the 73% decline there. Does that relate to your view on mortality and morbidity being slightly different to competitors? Or are there other reasons why you were struggling to kind of win business in that space? And then lastly, on Aditya Birla, just come back to that, just the difference between gross written premium and net earned premium, the difference in the growth rate being quite substantial. Gross written premium up 23%, net earned premium up 43%. Just explain the gap?

Okay. I will probably deal with these. So what we call total direct cost. [indiscernible] about controllable costs. Those costs that not include commissions paid to mean it doesn't also include asset management fees paid. That number is about ZAR 11 billion, I think, for the full group, if you are well just more like [indiscernible] nowadays. It is up by 9%, and I think we highlighted it because the last 5, 6 years, that growth rates averaged well below inflation, maybe 4% per annum, 3% per annum over the last 5 to 6 years. What is happening at the moment is that our business units are investing quite heavily in sort of modernizing their business, improve our digital experience for consumers and intermediaries. And that has written costs and often a little bit of overlapping costs or maybe the grand example is the [ F&B ] being replatforming way. We're building a new platform, but we need to maintain all of them at the same time. So for the businesses to be competitive long term, we haven't been able to pull to that range versus inflation. In fact, we're spending a bit above inflation. At the same time at the center, which is more like the head office, we've been keeping costs flat for a number of years, and now we're facing a slightly more like inflationary 5% or 6%. You could add, well, depends [indiscernible] I suppose. But we've squeezed the center quite hard over the years. So now we're facing a more normal inflationary increase. And then the last thing is that some of our -- what we would view almost like administrative expenses, regulatory fees, audit costs, all those sort of costs are also increasing quite a lot at the moment. So I think that 9% was exactly the reason you said, which is just to let you know that investment variances, I don't think they'll be negative because we budgeted for these increases. But I don't expect massive positive expense variances coming through. On corporate recurring premium business, you're right. We're taking a bit of a conservative view on mortality at the moment. The market seems to be quite split on that, including the reinsurers that we talked to. There seems to be a lot of opinion about the long-term impact of COVID on mortality. I think even the bigger impact was last year, they had some very exceptional recurring premium sales. I think the decline is more of a function of loss here, but there is some [ fees ] to your statement that we are. It's not like we're winning majority of the quotes on group risk either. I think we have been a bit conservative, which is fine. I mean profitability is more important than volumes. Then on India, I mean, the obvious answer to your net premium question has got to do with reduced reinsurance, but it's also a bit of the timing of the sales volumes last year in terms of exactly when premiums were with and versus when they were recognized. You must remember that a lot of the business in India is annual premium not monthly. So the timing of the premium flows have a bit more of the impact under GWB NEP gap -- on monthly premiums.

Warwick, just on the corporate recurring premiums question. In the prior year, there was a large postretirement medical aid outsourcing that was paid in a number of tranches and circles considered a recurring premium. That is obviously not an equivalent deal like that this year. And that's one of the reasons why we see that big delta in the relative numbers.

[Operator Instructions] We have a question from [indiscernible] from SBG.

Hi, everyone. Thanks for the time. Just a quick question on the PVNBP. If possible, how much of the increase in PVNBP would you say it's attributable to the new discount rate you've used? And how -- to what extent does this new discount rate differ from what's the new until now? And then on Aditya Birla Health Insurance. Can you maybe give a bit more color on as how high the claims ratio has climbed to now?

Yes. Okay. So on PVNB, it's quite a big impact. I mean, I mentioned Momentum Life, where your average contract duration is the longest. The impact was literally about 10% on year-on-year growth rate. In other business units like Metropolitan Life where the contract terms are shorter it will have less impact. And then obviously if there's many single premium business like investments, it's almost no impact. So if you look at the 19% -- sorry, 18% growth for the group maybe it's closer to, let's say, 13% on a fully like-for-like basis, it's still a good quarter and it's still a very big quarter particularly in investments where lot of that growth is also driven by new keys, which we continue to see as an attractive product to sell. Also, before I answer your Aditya Birla I question. I just got to walk up from Peter Tshiguvho, he is the CEO of Metropolitan as many of you will know. He also mentioned that the quality of -- well, the fact that our lapse rates haven't got worse is also maybe a function of fact that we have improved our business capability. So this is the sort of [indiscernible] management that we do. And we're also improving the ratio of our stockholder business. So it's not only the fraud. There's quite a few things there, okay. And then on Aditya Birla Health. The claims ratio has gone up since last year. Now I don't think we disclosed it and I'm always a little bit nervous of disclosing what Aditya Birla hasn't disclosed. But I think the increase in the claims ratio is largely driven by the growth in the corporate business versus the retail mix. So it's a mix impact more than a deterioration in claims. At the same time, remember, we need to get the claims ratio lower. So the fact that the claims ratio hasn't come lower yet, that to me -- like if you break it down to the components, it's also not a great story, not a big improvement at least. I think at the interims, we will need to give you a lot more -- well, somewhat more info. I mean some of the feedback we got from investors recently is as the India business is growing, we thought of not disclosing more. I mean many of you look at Aditya Birla results. But I think we need to bring it in our context as well in ZAR and everything else, just to make it a bit easier for you. So after the very lengthy answer, well, I would say the claims ratio is got a bit worse because of the mix.

[Operator Instructions] The final question we have comes from Saul Miller from Truffle Asset Management.

Just a question on Momentum Life. Given the changes that you've -- that you had in terms of digitization, underwriting. I think you said your VNB profits were close to flat. Does that -- I mean, does that mean that you're sort of at breakeven VNB profits, your -- given what's happened on that front, how does that sort of change your outlook for the next year in terms of reaching positive margin?

Yes. Jeanette, giving me the nod. Now we haven't published VNB information in this quarter, mainly because we've done quite a rough VNB calculation internally. We will obviously give you a detailed VNB at the interim stage. That rough calculation shows that the VNB result from Myriad is close to breakeven. And on the savings business, it's slightly negative. I think there's been a year-on-year improvement. But I agree with you. I think the breakeven result is probably the most realistic type of expectation for the full year at this stage. So we're seeing improvement, but it's not like it's not [ overnight ] recovery .

Ladies and gentlemen, at this stage, there are no further questions on the conference line. I will now hand back over to Jeanette Marais for closing comments.

Yes. Look, I mean we can give it another few seconds and see whether there's another question. But I mean, I think from my side and Risto and the team side, we've said everything that we needed to say and wanted to say. I think just thank you for your support and for dialing in today. We really appreciate it, and we see you in March at income stage .

Thank you, ma'am.

Thank you.

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