Old Mutual Limited (OMU) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Old Mutual trading update. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Iain Williamson. Please go ahead, sir.

Good afternoon, everyone, and thanks for taking the time to be with us today. I'm Iain Williamson, interim Group CEO. Joining me today from home is Casper Troskie, our CFO. And the purpose of this call is to give a brief overview of our quarter 1, 2020 operating update released earlier today and to answer any questions that you may have. While the full impact of COVID-19 lockdown restrictions isn't yet fully reflected, these results reveal an extraordinarily difficult macro environment and a significant market volatility experienced during the month of March. Despite this backdrop, we progressed well against our strategic priorities while improving digital servicing and enablement for our customers and employees. The arrival of COVID-19 further accelerated our digital journey, and we're delighted that Old Mutual customers can now service funeral plans and disinvestments using both USSD and worksite platforms. All of the progress is underpinned by our strong balance sheet and the capital position, which stands us in good stead to weather the storms ahead. Taking a look at solvency and liquidity, we've performed a comprehensive set of downside scenarios, including a 1 in 200 perfect storm scenario where severe market shocks are accompanied by a pandemic. The outcomes of these analyses have consistently given us comfort that we remain sufficiently capitalized with appropriate liquidity levels through these scenarios. The group's liquidity management remains robust and our cash reserves are more than sufficient to cover our business requirement. In quarter 1, life APE sales fell by 15%, largely due to lower recurring sales in corporate and lower volumes in both MFC and PF as well as weaker persistency as a consequence of consumer pressure in South Africa. Our loan book growth of 2% was stable, in line with our credit risk management philosophy. I'm pleased with the positive net line cash flows despite higher outflows as we can expect in a time of extreme uncertainty. Funds under management reduced by 7%, driven by the deteriorating market conditions during March. Results from operations declined by 33% as life sales volumes fell and corporate underwriting experience deteriorated. As we look ahead to the rest of the year, we're supportive of the President's announcement of a move to Level 3 lockdown in South Africa. Although we expect the gradual easing of lockdowns across our markets to be positive, we do expect the pandemic to affect our performance for the remainder of the year. Consumer pressure and higher unemployment will be with us for a while longer. And this is likely to reduce levels of disposable income, resulting in lower volumes, higher lapses and higher credit losses. As a management team, we're acutely focused on driving improved operational efficiencies in the short term as well as further out into the future. And lastly, we remain confident that the benefits of our well diversified business, our strong balance sheet and stable cash-generating ability will help us to weather the storm as we have many before. Thanks very much. I'm going to hand over to the operator to take any questions on the line. Operator?

[Operator Instructions] The first question comes from Andrew Sinclair from Bank of America.

Three from me, if that's okay, as is usual. Firstly, just wondered if you could give us a little bit more context about business interruption exposure, which you mentioned in the release today. Just in terms of potential plans, premium exposure and why you have comfort -- feel comfort on the wording? Secondly, I just wondered if you could give us any more color on profitability between business units for Q1. Were all the business units profitable in Q1? And thirdly, again, just looking for a little bit more context, sorry, on the solvency ratio at group level. I saw you gave you OMLACSA number, but not a group number. I just wondered at group level, is it near above the low -- the level of full year '19? It sounds from the sensitivity context you provided that it seems it could have even strengthened since full year '19. That's the 3 for me.

Thanks, Andy. I will -- I'll start and then I'll just ask Casper to add and to elaborate. On the BI exposure issue, Old Mutual insurers been working on this for quite some time with its Board. And I think we've landed in a clear position. We -- the number of contracts on our books that have exposure is of the order of about 1,500 contracts, with wording mostly through the big broker houses in the -- operating in the South African market. So similar to, I suspect, other players in the industry. We do have reinsurance cover in place, and our reinsurers have reassured us that they will stand behind legitimate claims. So consequently, we believe our exposure is fairly limited. On the business unit profit, I'm going to ask Casper to elaborate, but all of the business units were certainly profitable in the first quarter. And as far as the group solvency goes, the main reason we haven't supplied a group number, and again, Casper will elaborate, is because we don't have access to an update from Nedbank that would allow us to understand Nedbank's contribution to the group number. We don't have any concern about it, but we don't physically have a number with which to do a calculation. Casper, would you like to elaborate on anything I've said?

Yes, Iain. Just to add that whilst Nedbank has given a capital ratio, and you would have seen that in the operating updates, we actually need the earnings and the -- our share of their NAV to enable us to do calculation of our group solvency ratio. And unfortunately, that hasn't been published. So we only have an estimate of where we've landed. And we're very comfortable with where the group estimate has landed for the quarter. We just didn't want to publish anything where we couldn't calculate it property.

Thanks, Casper. Andy, did that address your question?

Yes, broadly. I just wonder if we clearly -- sorry, going back to the business units, if there's any other color that you can provide in terms of which business units maybe held up better, which business units were maybe feeling more pain in Q1, even if you can't give kind of the granular detail.

I guess the headlines would be the mark-to-market on credit with a material impact in the wealth and investment business unit. And the market level generally would have put pressure on all the business units that have exposure to asset-based fees. And then I guess in the mass foundation business, I expect most of the pressure there was more from the economic environment, persistency and sales levels. Casper, anything to add on that topic?

No, Iain. I think you've captured it.

The next question comes from Michael Christelis from UBS.

First question, just around MFC. You talk about a slowdown in sales volumes there. I mean, if memory serves, you were already down 18% last year for Q1 year-on-year. So I was just very surprised to hear that pre the lockdown, you still saw a significant -- or you didn't say significant, but you saw a decline in volumes. Maybe you can just elaborate is it credit life sales that are much lower because of loan volumes? I'm just trying to get a sense of what's driving that. The second one, if you can give us some sort of color on your funding levels within smoothed bonus, but also particularly in the with-profit annuity space, either as at the end of the quarter or more recently, if you can provide that. And then the last one, I guess, around your comment around bringing in -- running in costs in response to this environment. I mean, you've embarked on and you've achieved quite a significant cost saving exercise over the last couple of years. Is there still much fat to cut out? Or what do you -- how are you achieving further cost savings?

Thanks, Mike. MFC sales were down somewhat single-digit sort of numbers in the first quarter. The main impact on the headline number we disclosed was, as I mentioned in my script, the corporate piece because the baseline, I guess -- the base for corporate in quarter 1 last year, there were quite a number of large scheme business secured. So that's the main driver of the headline that you see, but MFC was also down. To be honest, funding levels are not at a 100%, but they're significantly better now than they were at the end of March, and we're pretty comfortable with where they are sitting, both across the preretirement and the postretirement space. And then in terms of running costs in, we do think there are still quite a number of opportunities for us to pursue, both sort of short-term one-off items that are more quickly executable as well as longer-term items that will require some work. But mostly the latter category, mostly related to digitization and automation work that is already underway, but where the benefits will come through in the future. Casper, again, if you would like to elaborate.

No, Iain, I think you've got it all. I think the cost that we're talking, we are looking at another -- quite a big cost target. We're trying to reduce costs over the next 3 years.

The next question comes from Larissa Van Deventer from Barclays.

Two questions from my side, please. The first is that on your hedging program, you mentioned that you had success in the first quarter limiting the mark-to-market move. Can you please provide a little bit more color to the nature of the hedging program and when those hedges are up to be rolled? And then if you can give us any update as to when we may expect news on the appointment of the next permanent CEO, please?

Okay. Thanks, Larissa. So on the hedging side, there are, I guess, a few categories of different exposures that are -- the one is what, I guess, you would characterize as a deeply out of the money option, which is what effectively underpins the smooth bonus portfolios and that's hedged by a replicating portfolio of assets that are purchased in the market to hedge that exposure, and that's updated dynamically and regularly. We also hedge the interest rate risk inherent in the main liabilities, which is mostly around the 10-year point on the interest rate curve. And then finally, we hedge the equity exposure in our shareholder fund. And it's done by means of a collar arrangement, which at any point in time -- well, it rolls in batches of roughly 25% of the exposure 4x a year, if I can use that sort of terminology. So that's the -- a little bit of the detail, and I'm sure Casper can give you a chapter and verse, if you would like. On the CEO matter, I'm afraid you'll need to refer to the Board. So I don't know what the timeline is for that at this stage, but I expect that it is not too far off from being finalized. Casper, do you want to add anything on hedging or you're satisfied with that one?

Now you have covered -- the big question in my mind is whether or not -- how much it's going to cost to roll them, but I suspect that's not a fair question. Do you have any indication if you can roll at similar rates to what you paid in the past?

Well, we have actually rolled fairly recently the last sort of tranche and very happily so. So I don't think we've got any immediate concerns.

The next question comes from Londiwe Buthelezi from fin24.

Just my question. You've given a very detailed figure when it comes to challenges in life and new business volumes and your expectation for lapses in the coming months. But I would like to just look at your in-force book, if you can maybe give us a little bit of color on what Old Mutual experience has been when it comes to customers who are taking up premium holidays and airplane downscaling [indiscernible] as in lapses as far as that's concerned. And if you've got specific figures on how many actually pick up premium holidays and how long those will last?

Thanks, Londiwe. We have, obviously, in this environment seen a pick in, let's call it broad requests for support from customers, whether that's on the short-term insurance side in terms of premiums being paid or premium flexibility on the last side and we've also seen pressure on persistency, but nothing -- it's difficult to give you an indication of quantifying it. It's noticeable in terms of volumes of calls we get from customers requesting some assistance and we are checking it. But it's nothing that is sort of beyond what I think you would expect given what's playing out in the market.

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

A few questions from my side. Just can you elaborate on the underwriting experience? You mentioned a deterioration in Old Mutual Corporate. Is that across lapses, mortality and morbidity? Maybe add some color for us there. In Old Mutual Insure, you mentioned positive underwriting experience. Can you elaborate which lines of business and how big the motor book is in general? And then your credit guarantee book there, has there been any change since March? And then with regards to your sales force, what proportion of agents were able to sell under level 4? And how do you anticipate that changing as we change down levels and look towards the rest of the year?

Thanks, Warwick. I'm going to answer the last one and then ask Casper to come back with the others. So the -- we did indicate, I think, in the update view on agent productivity [indiscernible] quite a bit by segment. So the MFC segment during the full lockdown was the most impacted with very few agents being able to be productive. That has improved somewhat during the month of May and we have equipped all the advisers with the necessary technology to be able to interact with customers remotely in all of our segments, but it's a case of, I guess, partly familiarity and partly just the business model of how they typically engage customers. So as I say, we've seen some improvement in that in May. And I would imagine that as [indiscernible] levels ease, it will become easier. In MFC, it's partly dependent on how much branch footfall we end up having, 3 branches. And how many of our branches we have opened responsibly. And it is also dependent on which parts of the economy open and whether work sites are available to advisers. And where they are available, I think, even there, the social distancing kind of issues are going to still have some impact for a while because large group meetings are not likely to be possible. In the Personal Finance and Wealth spaces, significantly less impact, and it varies quite a bit by channel. So our tied adviser, of course, was the least impacted. And I would describe that many -- that we have enabled them technologically quite fully. Whereas I think many independent brokers were not particularly well set up to be able to cope with the initial lockdown. So again, I would anticipate that in those cases, those businesses will have invested in the technology necessary to improve their ability to interact with customers over time. So that gives you a bit of a pain picture, I guess, of situation as we see it. Casper, could I ask you to perhaps cover some of the other questions?

Yes. So in corporate, we had risk underwriting experience, mainly as a result of the increased number of claims in some of the larger schemes in our group life assurance book. So that was sort of getting the corporate numbers. And then the Old Mutual Insure and CGIC had a good first quarter in terms of claims environment. But obviously in CGIC, we expect that to worsen as lockdown continues because given that they have some exposure to a number of sectors that are under pressure.

Casper, can you give us any color on the potential magnitude of that [indiscernible]?

Look, not off-hand. I think we'll get -- we can give you -- look, the size of the book hasn't changed much from the year-end. We would have -- we are able to manage the book down fairly quickly in difficult conditions. So I would just going to have a look at what we gave you at the year-end in terms of where we started, and that book would be a lot smaller now given that management is taking action to reduce exposure.

The next question comes from Saul Miller from Truffle Asset Management.

2 or 3 questions from me. You mentioned in your commentary that lower life sales volumes were not sufficient to cover fixed distribution-related costs, but does that mean that the VNB profits would have been at 0 or loss-making, if you could just sort of elaborate there? And I suppose specifically, what might have happened to margins in the Mass Foundation Cluster? And then secondly, did the fall in funding levels in the smooth bonuses, does that have any impact on your profits or is that covered by the investment guarantee reserve? And then just finally, you mentioned there were fair value adjustments in unlisted equity. Was that particularly significant for the division that, that occurred in?

Thanks. So Casper, I think I'm going to ask you to answer those ones as well.

Yes. Sorry, I didn't get all of them. So I'll just start with the last one, that was that I heard clearly. So the mark-to-market losses, they were fairly large as at the end of March. So that did have a substantial impact on profitability in the world and investments cluster. So just repeat the first 2 questions.

Sure. The one was, did the fall in funding levels in the smooth bonus book, did that have any impact on your earnings or was that covered by the investment guarantee? And then finally, just you mentioned in the commentary that the lower life sales volumes were insufficient to cover fixed distribution-related costs. Does that mean you didn't generate a VNB profit?

So let's just talk firstly about the comments around issued sales. You'll recall that we made a comment that you should tell in April, it reduced in the Mass and Foundation Cluster. So those issued sales would only get reported around 2 months later. So you wouldn't have yet seen the impact through your reported numbers. So we are expecting to see potentially -- because there was -- to see a negative VNB for that tranche of sales. And then as -- obviously, as sales improve, as the lockdown opens, we should see an improvement in the VNB number.

[indiscernible] questions, Saul. It doesn't directly impact our profits in the manner that you implied, but it's not because of [indiscernible]. It just effectively means that the asset-based fees we earn, we earn off a slightly lower asset base for the period. And that would flow through to profits from a revenue pressure perspective, but that's the only direct impact of the funding levels.

The next question comes from Asanda Notshe from Mazi Asset Management.

In your sort of modeling and the stress testing that you've done to kind of give us the numbers, what are your thoughts around the length of time that the current environment goes on for? So when you look at maybe the question that Saul just ask now about the costs and advisers not being able to sell as well as maybe some other assumptions around market levels and so on. Just at a high level, what are the key assumptions that you put in the stress scenarios that you've modeled, just to give us a sense.

Sure. Okay. Let's start with -- I'm not sure how relevant the stress scenario is other than that it's pretty dire stuff. I guess, we characterize the stress scenario as an L-shaped view, which gives you some indication ideas of the shape of what it is. But it's one of our -- I think someone characterized it as looking more like a backwards J than an L. So it's a pretty severe set of assumptions. And I think you would have to go back actually before the -- probably before the Great Depression to see anything that looks like that. So it's very severe. I think probably, in a way, more importantly, we're not managing the business currently on a particular view because I don't think anyone knows what will happen. So we've generated a number of scenarios for -- in our internal ways of thinking about the future as -- and we've, I guess, worked out what we think the no regret actions are that we need to take immediately. And we've aligned with our Board around those and we will start to implement those quite quickly. But it's work in progress to think through, I guess the -- sort of navigate your way to a period of slightly more certainty so that you know what you're dealing with as a longer term picture to make the kind of decisions that you need to make around some of the trade-offs that become inherent in this kind of environment. So if the future scenarios there are -- they likely play out, end up on the more extreme end of the scale, one would want to take more significant action more quickly. But all of those actions have ramifications for your capacity and your ability to recover well and compete, should the world turn out to be better than you think. So you don't want to take those kinds of actions too quickly. So I mean that gives you a sense of how we're thinking about it, very much thinking about what have been our competitive advantages in the future, which of those are likely to play in the past, which of those are likely to still be competitive advantages in the future under what scenarios and those things you want to protect. And what other things can you afford to think differently about quite quickly. So I'm just trying to give you a sense of how we're thinking about it. Hopefully, that's helpful.

The next question comes from Mikhail Motala from PSG.

So one is a philosophical question in that given sort of the restrictions on funerals currently in South Africa, have you noticed to date any change in customer behavior with regards to switching out of your, call it, Rolls Royce funeral cover type product? And if you haven't seen any risk or any change in customer behavior yet, do you anticipate any change in customer behavior going forward? And then the second is working with shareholder funds. Can you quantify or at least like how material the impact from nonpayment of tenants in your property portfolio is from a lost profit or lost revenue point of view related to last year?

Should I start, Iain? Hello?

Casper, did you say something?

Yes. So I'll start with the property portfolio. So we don't have any real estate exposure in our shareholder portfolio, the investment portfolio directly. So that's important to understand. We do have some -- we have some property exposure in the -- in some of the books where the shareholder takes -- provides a guaranteed return and takes a potential downside risk on the capital return. So you won't see a direct hit to the shareholder investment portfolio as such. You could see some impacts in the Wealth and Investments OMSFIN book, should there be any defaults. But at this stage, we're very far away from that. So any mark-to-markets net book less, it's for our shareholders.

And on the funeral plan?

We haven't seen any change, in particular, in [indiscernible] buying behavior as -- actually did have this discussion the other day and one of our Board members, he said something along the lines of, we still think -- we're still going to slaughter. So I think that it's not something that -- something you'll continue to keep an eye on, but it's not something we're currently seeing emerge as a changing behavior pattern.

[Operator Instructions] The next question comes from [ Sarine Barnard ] from [ 91 ].

Can you share with us the size of the private equity fair value adjustments as well as the size of the losses on the credit portfolio, just to get a better idea of the underlying operational performance. And can you maybe just give a little bit of color on the losses on the credit portfolio? Is that only mark-to-market losses? Does it include market to model? Is it unlisted stuff? Just a little bit more color on that will be very helpful.

Casper, you want to take that?

Yes. I don't have that level of detail on me so it will be difficult to answer that on the call.

Yes. I think we can say, Sarine, that the -- both the reference to the equity position piece and the credits are mostly unlisted? And therefore, I guess, it is more of a mark-to-model strictly speaking. But the quantum thereof, I don't have off the top of my head either at this stage, so...

Okay. And when you do mark-to-model, do you reference it to current bond yield? So what has been reference to bond yield at the end of March? Or I mean how forward looking is that mark-to-model exercise?

It is -- most of the actual interest rate risk in terms of bond levels is hedged. So most of what we experience as a -- let's call it a mark-to-model, we refer to it as a mark-to-market loosely internally is more spread-related than it is absolute interest rate level related.

Yes.

The next question comes from [indiscernible] from Excelsia Capital.

I just want to find out, given volatility and the fact that the business is in a good capital position, how are you guys thinking about the dividend going forward? And also in your branches, especially in the Mass Foundation Cluster, where you are able to operate, how are you dealing with the impact of COVID? Where you have to either maybe close the branch and then reopen it again? And how does that affect yourself?

So I'll answer the second question and then I'll ask Casper to talk about the dividend. We've -- essentially, when we went into -- when we were in level 5 and level 4, we were obviously designated as an essential service, but we were quite cautious about in our approach around what we kept open. And I think we only had about 15% of our branches open with quite strict protocols and none of them are staffed with normal full staff levels to allow for the appropriate social distancing protocols to be in place. We have subsequently -- now that we've been for a while as level 3, we've opened up a few -- some more, but we're very much looking at it from the perspective of almost looking at the geographic footprint and seeing from a customer convenience perspective, which ones do we really need to have open. And working from the principle of anyone that can work from home should continue to keep as far as possible. So that's broadly how we're thinking about it. We would anticipate relaxing slowly through the levels, but I think in the risk that you've highlighted in the short term is probably quite high as people adapt to level 3. And I think we'll be quite cautious about how we go about that. Casper, do you want to maybe just talk about the...

Yes. So just to reiterate that we do believe that our capital position is very strong. And as we've said in the early -- in the sense that we've modeled quite extreme scenarios and still feel after that the capital position would remain strong. We wouldn't, however, make any calls on whether or not we pay dividend and the size of the dividend until we've seen our June results, and we've done our -- an update on our capital -- forward-looking capital position. We'll only make a decision at that point in time and make a recommendation to our Board.

The next question is a follow-up question from [ Sarine Barnard from 91. ]

Yes, please just a follow-up. So on the investment guarantee reserve, you didn't like mention of that in the release, but is it fair to assume no top-up required in the Q1 numbers?

Correct.

And then just on the credit spread story on the losses on the credit portfolio. So do you reference it to listed markets when you do the mark-to-model? I'm trying to get a sense for, I mean, March was to sort of blow out in the markets, but in the [ SA ] market, you haven't really seen credit spreads going up. But in international markets, you have seen it go up substantially. So I'm trying to get a sense for, is there more time to come here, just to understand how you've taken that into account in the mark-to-model.

We do reference all the information available to sort of estimate at a granular level, I think what the appropriate spread mark for a particular counterparty is. It's -- in the [ SADC ] market, I think it's quite a difficult call because of the lack of liquidity in the listed credit market generally. So we think we've -- we thought about it, but it is a -- there's certainly a level of judgment involved in that exercise. And we expect that there will be a similar level of judgment required in that exercise when we do same for the half year results.

And we have no further questions in the queue. Do you have any closing comments?

I really just want to say thanks to everybody for participating and for the manner of the engagement. We appreciate it. If you do have follow-ups or specifics that you would like to discuss, please do get in touch via the Investor Relations team and we'll be happy to try and assist. So thanks very much, everybody, for your time.

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