Momentum Group Limited (MTM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Momentum Group Limited Q1 '25 update. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to the CEO, Jeanette Marais. Please go ahead.

Thank you. Good morning, everyone, and welcome to all our shareholders and our key stakeholders to our operating update for quarter 3 of F 2024, which is also our first quarter, obviously, of F 2025. Oh, that's weird. I'm sorry, that was a typo. So quarter 1 F 2025. I'm joined on this call by our Group Finance Director, Risto Ketola; and [ Tokala Manuitzi ] from the Investor Relations team. So I have them here with me, to also help to answer some questions. So maybe I'll just start by talking a little bit about our general intro on -- our Impact strategy and -- is the first quarter and linking it back to the Impact strategy. And, really, if I look back at the Impact strategy, it really is there to aim to set us apart as a financial services company that excels in advice, pays for our clients through our simple products and services, is enabled by technology, and has excellent vertically integrated product and asset management capabilities. I will only highlight progress we made on key initiatives that we started as part of the Impact strategy. We continue making progress with the Metropolitan Life and Momentum Insure's turnaround strategies. We can report that in Metropolitan Life product commerciality and quality of new business have improved. In Momentum Insure, our claims ratio has improved to well below the business long-term target range, which is 58% to 62%. In fact, I can say that, we've dramatically improved the claims ratio. And this is due to disciplined management of underwriting supported by favorable claims environment. Weather has been playing along, and we've had no hail or -- any kind of bad weather events. But also to add to that, our combined ratio is relatively -- materially better. In fact, it's more than double that of our competitors. I just came out of a Momentum Insure Board meeting, so actually the numbers there look really well. Our focus on value of new business has started to pay off, and we've seen an improvement from the prior period. The group's value of new business improved from the prior period supported by a shift in your business volumes towards higher margin products across many of the business units. Our focus has been on VNB and I'm confident that we're going to have good numbers in the first half of the year. And we're also seeing improving VNB margins. So our efforts are definitely starting to pay off. We launched Curate Investments in the last few weeks, our new outsourced asset management business, which offers a range of local and global unit trusts from excellent local and offshore asset management partners. I'm also sure you're well aware of some interesting moves in the asset management industry today with an announcement that just came through an hour or so ago. But in our space, we now have an attractive fund offering for financial advisors and discretionary fund managers that provides access to a range of carefully selected portfolios, and funds tailored to made diverse -- or to meet diverse investor needs across risk profiles and financial goals, which we can use for vertically integrated advice solutions across our advice channels. Our partnership in India, Aditya Birla Health Insurance, continues to grow strongly with increased attention on improving the combined ratio. Core to our strategy are plans to reduce our controllable cost base through our cost optimization strategic objective. In the first quarter, we focused on identifying targeted interventions to achieve cost savings and improve operations through streamlined processes and some innovation. Going forward, the focus will be on disciplined execution to achieve these identified savings. And then more general on our group performance, we are happy that we started the new strategic cycle with steady performance, continuing the positive direction we shared at our year-end results. We had satisfactory new business and earnings performance of most business units. Sales across the group as measured by the present value of new business premiums increased by 5% to $20.7 billion on a year-on-year basis. And this was supported by continued growth in life annuities new business volumes from Momentum Investments. So that positive trend is continuing. Africa's present value of new business premium improved by 25%, following good retail sales growth in Namibia and Botswana and higher corporate sales in Lesotho. Momentum Retail sales volumes increased by 1%, resulting from an 11% growth in Myriad protection new business, but dampened by a 5% decline in long-term savings new business. You can clearly see from there the shift from higher margin to -- from lower margin to higher margin sales. Its new business mix shifted towards the higher margin protection products in Myriad. There was a marginal decline in Metropolitan Life sales volumes, and Momentum Corporate experienced lower single premium sales volumes over the quarter. And then before I end off, I saw that our competitors spent quite a bit of time on it, so I thought I'll just give you an update on our 2-pot withdrawals. So by 14 November, what is that, about a week ago, we had received almost 200,000, in fact 197,000 valid claims to the total value of ZAR 3.5 billion, of which we paid about 94%, just over ZAR 3.27 billion. This is just below 1% of our total retirement assets under management, which is actually quite a lot lower than our expectations. We think withdrawals have been lower than expected due to sources of aggressive collection of tax. In fact, we experienced that clients received quotes and advice on their 2-pot withdrawals, but the moment they became aware of the tax implications, they actually never activated. Financial advisors also had a significant positive impact, and we could see that clients with financial advisors at far lower withdrawal rates. We even saw that some of our clients reactivated dormant policies or invested in new retirement annuities. The pace of claims received and paid decreased strongly from just under 148,000 claims received in September. And you will recall that, we were actually ready on the 2nd of September to take 2-pot withdrawals and that being declined to 41,000 claims in October and only 8,600 in the first 2 weeks of November. So a marked decline in the number of requests. So in November about 12% of the number of claims that we saw in September. So maybe to end off, we are encouraged by our new business sales performance, very positive. Our operating environment, of course, remains under pressure from weak economic growth and an increasingly competitive landscape. However, we are seeing early indications of economic recovery in South Africa with inflation easing and the start of the interest rate reduction cycle alleviating the pressure on disposable income. We committed to maintaining our competitive attractiveness to our clients and will continue our focus on driving sales volumes and providing innovative solutions to improve our VNB outcomes. We're on a solid financial footing and we are well positioned to meet the evolving needs of our clients. I will hand over to Risto now for a few comments as well.

Okay. Thanks, Jeanette. I'll just try to add a little bit of color where maybe it will add value to the listeners. So firstly, you'll see there's very little commentary on earnings in the operational update, and it's because we didn't do a full consolidated set of results for the group in this quarter. With IFRS 17, our number production time basically increased by 2 weeks. You would have noted our year-end results were 2 weeks later. So we spent this quarter retesting some new processes and improvements in reporting, let's call it, production. The idea is that we eventually get back to the same time lines that we used to have under IFRS 4. Now that said, obviously, I've seen the results for all the business units, not on a consolidated basis, but I've seen them all. Obviously, for regulatory reasons, we do some reporting as well. So I can confirm what you maybe get through the -- between the lines and the operating update, the earnings were good in the quarter. Now firstly, we have quite substantial investment variances, positive. At year-end, we spoke to many of you about the fact that we're backing our CSM with bond assets. So we basically got more than ZAR 10 billion of bonds that notional CSM liability. So those bond-related investment variances were substantial in the first quarter. And they're stable in the second quarter. Secondly, when I read some of the analyst reports, I got the vibe that the guys thought mortality wasn't great. Now, I would say it was like average in retail, but in corporate, it was still good. I mean, we were coming off very high levels of mortality there, instance. So it's moderating, but there's still very strong risk results. So I would still characterize risk results as good on the life side, maybe better than good. And then, as Jeanette mentioned, Insure's had a very good quarter and Guardrisk also had a very good quarter. So, caveat of not having done intercompany consolidations in my head, I would estimate that our quarterly earnings were probably like ZAR 1.3 billion to ZAR 1.4 billion versus last year's run rate of ZAR 1.1 billion. So it was a really good start to the long way to continue. Then in terms of capital, our life company capital ratio, I think it was 1.99% at the end of the quarter. Now, we issued some Tier 2 instruments 2 weeks ago at very good spreads. Now, first of all, it reduces our cost of funding compared to the previous. I mean, we raised this debt at much lower levels than the ones we redeemed before in a quarter. But it also brings our life insurance capital ratio back to just over 2.0. Beyond the Life business, Guardrisk, both the life and the insurance license are also above the upper-end of the capital target. And the insurance capital ratio is also now at quite a high level. So across the group, we're sitting in a very strong capital and solvency position. We have commenced some work looking at our dividend policy and so on going forward. These are all nice problems to have, much better than the other way around. Also on the buybacks, we only got the prudential authority approval quite recently. And in fact, we haven't bought one share yet. I mean, we're starting to buy shares. I think tomorrow is probably the day we're going to start. So the buyback program hasn't really been in the market for the last 2 months. And obviously, looking at the balance sheet now, we might have to then talk a bit more about that in March when we got our results, what do we do beyond there. Then just coming on VNB. And here, I must thank Mike. I see Mike is already ready for a question. Mike, I read your note this morning, and I thought you were like not that excited about the VNB. So I went to look at our results announcement, and I wondered how you got to the number you did. There was a typo for -- apologies for that. A typo for the investments VNB it's ZAR 198 million, not ZAR 158 million. So if you do the math, you'll see that like group VNB is actually closer to ZAR 200 million than let's say, ZAR 150 million. So again, VNB trends are a lot more like second half last year than first half last year. So we're actually quite happy with the VNB improvements we have seen. I mean, if I say anything negative about VNB, we are still a little bit overly dependent on annuities. But we have seen improvements on like protection, retail protection, VNB and stuff. More work to be done, but the trends are there. Okay. Beyond that, I think that is all I can say at this stage. I've just been conf -- I just think that there's some great incentives just went out. That's what the title corrected for the VNB investments. Okay. I think happy to open up for questions.

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

Can you hear me?

Yes. We can.

Thanks Risto for that correction. It makes a lot more sense now. But maybe, if we can start on VNB. When I look at Africa, for example, you've got massive growth and it looks like all recurring growth, which is generally VNB accretive. Why are we still seeing a negative VNB there? And maybe. if you can just talk about the outlook for VNB for some of those negative units heading into the rest of the financial year?

Okay. I'll make 1 or 2 comments. You normally ask 3 questions, you caught me off guard.

I've got a few more. Do you want me to ask the question first?

Well, no, it's fine. I'll start -- I mean, African VNB obviously been disappointed for a long time. The first thing I'll say is, we just only exposed the savings business in Africa. Like in Botswana, 80%, 90% of our business is recurring savings. And the suit to I think it was like 50-50 or something. Now just like in South Africa, in these markets, especially as value for money for clients improves, it's becoming very difficult. I won't say impossible yet, but it's become very difficult to sell recurring savings. So we're going to have to get this tilt this mix significantly towards retail risk and then maybe more corporate business as well. I would also say that, we are running a little bit of higher expenses than we would like. We are doing quite a few system implementations in Africa, which will then improve the situation quite a bit once implemented. But it will not be enough we have to get mix tilted heavily towards protection. Otherwise, the margins will remain quite disappointing.

Mike, what I will add to that is that in Africa, part of the systems delivery is also a better, more modernized risk product for the retail market for Africa. So at the moment, unfortunately, the product that we have out there is not ideal. And it's going to take a few more months in order to launch the product that the Africa guys have been kind of waiting for quite some time. On top of that, I have started to actually also get quite involved in the Africa operating model, which is what Risto linked to in terms of the cost of running that business. And we plan to actually make some quite drastic changes to the way in which the Africa business is run, the Africa business is supported to actually bring that cost base down quite considerably. So I think it's a combination. And the first thing that I started to focus on with that team is actually, how we distribute, what we distribute and a focus on the distribution model there, which I believe will actually help us quite a lot in addressing the view of the economy.

Understood. Maybe then the next question, just obviously, annuities has been sort of spectacular volumes over the last year, at least, if not more. Can you talk a little bit about what the sort of run rate has done since yields have come off quite sharply from around about the middle of June? I mean, is it -- is this still kind of the sort of tailwind of business that was maybe secured before quarter end heading into quarter 1, and maybe things slowdown from here? Or is -- do you think this sort of run rate is sustainable?

Yes. Obviously, in the quarter, we saw that sales up year-on-year. I can confirm that I think September was weaker than the previous 2 months. But I'm a bit reluctant to make too many conclusions yet based on the time series of 3 months, Mike. So, ask your next question. I'm going to have a look if I can find the latest -- latest sales just to see if there's anything to say there. But yes, September was lower than the previous 2 months. But let's not jump to conclusions.

Okay. And then India, I'm just -- I'm a little bit perplexed about your commentary. You talked about a pivot towards corporate business because of the more expensive cost ratio sitting in retail. If I look at Aditya Birla's quarter 2 numbers that were released recently, they show much stronger GWP growth in retail than in group, sort of roughly 50% versus 30%. I mean, can you just talk like how do I sort of close that circle?

Yes. I think you closed the circle by maybe not saying the comment too literally. And what I mean by that is, I think that's a comment on the higher strategy over the last couple of years. Now you might recall, well, you know very well that in India, you got that expense of management target of 35% you need to meet in 1.5 years from now -- year from now. And there was a heavy tilt a couple of quarters away or more than a year away, we tilted towards selling more corporate to get to the 35%. As we're getting closer to 35%, which we are, now they can start tilting back towards retail a little bit. So I think that comment is a high-level comment over a year or 2, not the quarter. But I think what you will see is the more confident we become in meeting the 35%, the more we can afford to tilt back towards retail the long-term profits are. We'll have to manage those 2 levers as we get to the 35%.

Yes. And especially in light of the claims ratio, because I think that's the -- it's kind of the cost on the one side and the claims ratio on the other. But we're definitely keeping a very close eye on that. And Risto is searching for the September annuity.

Sorry, October one.

Sorry, the October numbers that we could maybe just tell you whether it's a 2-month trend or 1 month. I think we can go to the next question and then we can answer at the moment we get it.

The next question we have is from Marius Strydom of Austin Lawrence Gidon.

Risto and Jeanette, I assume you can hear me. Thank you very much for this update, which really gives us the first clean look at the quarter from June to September for the industry as a whole. And obviously, certainly, from our point of view, we were looking for green shoots following the election and declines in inflation, higher -- lower bond yields, stronger markets and the start of the easing cycle. It's very promising to see, in particular, your growth in recurring premiums over the period. My question relates to the profitability of these recurring premiums and obviously, the combined premium set because obviously, prior to 30 June, there were negative impacts from bond yields and lapses and the like. So could you give some insight on whether the quality of the business written in the quarter would have improved considering, firstly, the lapses, but -- well, firstly, the bond yields, but also whether you are seeing green shoots from your lapse experience?

Okay. I mean, the bond yields have a mechanical impact on VNB, which is beneficial from the risk-based protection business, less beneficial -- well, actually negative for the savings business and then quite neutral for annuities. So when I mentioned earlier that we've seen a bit of an improvement in retail protection VNB, part of that would have been the yield versus what you saw in the savings product. So you're right about that. I think the overall impact on VNB is not humongous because annuities, which are quite neutral to the yield curve is such a big part of me at the moment. The lapses is a nice question because we're definitely seeing improvements in Metropolitan. Now remember, we -- we incurred losses on lapses in a few ways. One thing is the obvious wasted effort of actually going through the issuing process and everything else, getting the policy and so on. And obviously, salesman time is also wasted so we have other heads of management distribution. And we're getting our NTU rates down quite a bit. So, a number of people taking up policies where we never get a premium. So let's call them totally wasted time policies. Those are down heavily, and that's great. The other area we lose money on lapses is when we pay commissions and then the salesman is no longer with us when we try to recover the commission. That trend unfortunately remains quite high. So we're still losing too much money on what we would call sort of claw backs that are not recovered or executed. So yes, NTUs are looking better, so that's helping -- outcomes on business that does lapse.

That's specific to Metropolitan, do you want to comment on Myriad around lapses?

Yes.

So obviously, Myriad, the direct-to-consumer business has become a bigger part of Myriad over the last few years. And there the lapse rate is higher than the intermediate business. I mean, we've always been fans of the intermediary. And yet again, you see collections are much better on business intermediaries than direct. But the improvement on the lapses in Myriad new business was actually the direct-to-consumer. We're starting to see those lapse rates. They're higher. They're definitely higher, much higher than intermediate, but they're starting to be very close to our assumptions, which is obviously important for sustainability of our direct-to-consumer business. So yes, generally, I would say lapses is a good story for us. Yes. Okay. Carry on.

And then also, it is certainly our sense that you have either maintained or even grown market share a little bit over the quarter. Can you confirm or deny that?

Marius, unfortunately, we don't have those numbers for this quarter specifically. You remember, we spent quite a bit of time on that at our year-end results. So I think the work we haven't done is to actually kind of go in detail through our competitor reports to see whether we could glean anything. But the specific market share measurements that we normally use, we actually haven't obtained a very recent update on that. I do recall that the NMG numbers that we often use for Myriad, we actually back in the #1 position. But my worry is whether it was actually updated for this quarter or whether it's maybe lagging a quarter. So I'd rather comment on that specifically for this quarter because the information I have might actually lag a quarter.

Good luck for the rest of the year.

I think Risto is ready to answer.

Yes. So October annuity sales were better than September, but lower than July and August. So let's put it somewhere in between. So -- but still, I mean, overall run rate is not that different to last year. I mean we've spoken about a lot internally. Even if we can keep the current annuity volumes, the amount of business we're adding in terms of CSM and the annuity book itself because of inflows versus outflows, we're very happy. Yes, I think overall, October sales are as good or better than the first 3 months, if I look at across all the business units.

The next question we have is from Jarred Houston of All Weather.

Just a clarification just on your comment about your estimate of earnings for the quarter, the ZAR 1.3 billion to ZAR 1.4 billion. Just the guidance that you gave in the statement about the cost savings suggests you haven't really realized cost savings yet as the execution is going to be in the next quarter. Is it fair to say the gain in earnings is ex the benefit of cost savings?

Yes. Definitely, I forgot the guy who's running the program sitting across from me. I think we've got…

And he's gone gray since the quarter ago.

Yes. I think we've got like -- savings to date out of like ZAR 1 billion we're targeting. So it's very early days. But we do have probably 3/4 of that savings target is already sort of captured up and running. We have business plans tracking, work has started. The number we often talk about is a run rate. I think by end of the year, we want the run rate to be ZAR 300 million, ZAR 400 million, okay, closer to ZAR 500 million. So by end of the year, this financial year, we want to be able to claim that the annual forward-looking savings is ZAR 500 million. So look at the timing, we're going to book like ZAR 150 million or ZAR 200 million this year max. But it will be nice to come end of the year, and saying guys, it's already implemented and next year, you're going to see a big part of that segment coming through.

Ladies and gentlemen -- apologies.

Sorry, I was going to tell Jarred, remember those are pretax numbers before we update you.

[Operator Instructions] It seems we have no further questions at this time. Apologies. We do have a follow-up question from Michael Christelis of UBS.

Sorry, if nobody else is going to ask. Maybe just a question on where mortality pricing is at the moment in Corporate. Obviously, we've seen -- you make the comment about competitive sort of dynamics. I mean, are we -- it's hard to gauge, but I mean, are we going to see mortality profits come off considerably, do you think over the next 12 months to 18 months? Or do you think you can still hold on to some of these profits where they are?

Yes, that's a very -- well, it literally is a ZAR 1 billion question. Again, the first quarter surprised us. So we're always nervous. We're always nervous of these things coming down. And it's always negotiations and there's no doubt, I mean, can be given back to the clients. Now at the same time, we're obviously trying to improve our own processes and our own claims management. So while we're giving away premium, we're also trying to improve in terms of expenses and claims management and everything else. But I think, I would say, it's very, very likely that profits are going to go backwards on group risk. It's just about managing how far it goes backwards and how quickly. It's also different in different parts of the book. I mean, I'm not going to get into much specifics, but some of the sub-segments are easier to hold on to whereas some of them tend to re-price very quickly. But yes, Mike, I mean, in our internal projections, we're expecting the profits to go backwards somewhat. Some people think it could halve, some people say it could be 20%, but so far, so good. Every quarter, I'm relieved that the price of repricing is a little bit slower than we always hear. So clearly, the corporate guys are doing their best to hold on to the margin.

It seems we have no further questions at this time. And I would like to hand back to Jeanette for any closing remarks.

Yes. No, I just wanted to say thank you very much. Interesting times. Competitors are busy. We're very busy. There's great energy in the business. We've actually kicked off a kind of a culture program to align with our impact strategy and with our purpose that we've spoken about before. And there's really a great positive energy, especially for this time of the year, it feels like people are still very focused. We internally are busy finalizing and passing on the breakdown of our ZAR 7 billion earnings target to our different business units to make sure that they're completely aligned with what they need to reach on an annual basis in order to get there. Mine and Risto's biggest fear is to not J-curve towards the end, but make sure we start to bank that as early as possible. So some great conversations happening around that. But from our side, thank you very much. You know, where to find us, if you have more questions. And yes, I just also -- yes, wish you all a good break in December. I think we all deserve it. Thank you very much for joining us.

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