Old Mutual Limited (OMU) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Old Mutual Limited Investor Call in relation to the Q1 voluntary operating update. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Bonga Mriga. Please go ahead, sir.

Welcome to everyone joining us on this call, and thank you for taking your time. I am Bonga Mriga, the Investor Relations Manager at Old Mutual. Today, we are joined by our Chief Executive, Iain Williamson; and CFO, Casper Troskie. They will both provide more color and context on the voluntary trading update we released earlier today. This is also available on our website. After that, we will open for any questions that you may have. And now we'll begin with our Chief Executive. Over to you, Iain.

Thank you, Bonga, and greetings to everybody. I'm happy to say that since the beginning of the year, we've experienced continued momentum in our key focus areas of rectifying, simplifying and amplifying our business. As we keep reenergizing the customer experience, we've built an entirely -- and as we build an entirely new financial services business, we remain focused on our victory condition of becoming our customers' first choice. In our full year results announced in March, we updated you on the progress we've made on achieving our cost targets. We are reenergizing our adviser experience and in Personal Finance are making progress in attracting more experienced advisers to our restricted financial advice models. We continue to embed digitalization in our operations, and we progressed the migration of our South African technology estate to Amazon Web Services. That process is 73% complete as at the end of March. Turning to taking a look at our KPIs. Life APE sales grew 19% year-on-year as the momentum witnessed in financial 2021 continued in the first quarter. We saw improved productivity across all our retail businesses with volumes per week reaching 5.9 lives per week for the quarter in MFC. Issued sales are above 2019 levels with greater opportunity for field advisers to return to their work site. We've also seen a shift in the sales mix with risk sales accounting for a higher proportion, now 64%, up from 61% in the prior year. And as we've stated in engagements with you, this is positive for MFC margins and thus, those of the overall group. Also, as indicated at the year-end, we are pursuing opportunities to expand into the full value chain of funeral services through strategic partnerships, and we will update you at our interim results on the progress we are making in this regard. In Personal Finance and Wealth Management, sales are above 2021, 2020 and 2019 levels, up 4% in this segment for the quarter. This momentum continued in the first quarter, driven by an improvement in savings in funeral product sales with double-digit growth there, but annuities and other risk sales did, however, decline. In Corporate, sales were up 9%, with an improving pipeline with focus on converting that pipeline into deals. We continue to see increasing quote activity across the sector. And the Corporate businesses' growth of funds under management gives us confidence the business is able to compete effectively in this space, and it will be further assisted by the Futuregrowth and AIH transformation transaction through the Old Mutual Investment Group. Sales in Rest of Africa were up 62%, driven by Corporate volumes as our pivot to corporate approach gained momentum. And despite lockdowns in China that were put in place to curb the spread of COVID-19, sales there grew 77% as savings were strongly promoted in the broker channel. Across the group, I'm encouraged by the activity we've witnessed in the first few weeks of the second quarter as well with sales momentum and productivity holding up very well even with the effect of the floods in KZN and the number of the holidays in April. Our value of new business as a consequence of the sales momentum grew 53% compared to quarter 1, 2021 to ZAR 464 million as issued sales in the Mass and Foundation Cluster grew, and we secured new Corporate business across the rest of Africa. We achieved a VNB margin of 2.8% for the quarter, an improvement of 70 basis points on the prior year result. The 9% decline in gross flows was driven by lower inflows into the investments business, and informing this was really a repeat or non-repeat of large new mandates from the prior year first quarter. The outlook for flows and net client cash flow remains good with a strong, secured flow pipeline in the investment group in particular. The negative NCCF of ZAR 5 billion was impacted by the decline in gross flows but somewhat offset by lower terminations and reduced mortality claims across the life business, particularly in Personal Finance. There was a 3% pullback in funds under management as markets and the Rand signaled what was to come in the second quarter with major central banks and particularly, the Fed in the U.S., embarking on a hiking cycle and reducing balance sheet. In some of the regions in which we operate, central banks have also embarked on hiking cycles of their own. This, we expect, will contribute to a level of volatility, particularly in equity markets. However, compared to prior year, funds under management have grown in our investments and corporate businesses, and this has supported growth in asset-based fee income. We expect that the conclusion of the recently announced sale of a stake in Futuregrowth to African Women Chartered Accountants Investment Holdings at an OMIG level will contribute positively to win rates of new business and to defending existing mandate. And this momentum should receive a further boost from the group-wide proposed Bula Tsela B-BBEE transaction as the overall black ownership of OMIG business will improve to over 51%, once this is approved by shareholders. On loans and advances. Loans and advances declined by 2% in the quarter compared to the end of 2021, and that outcome was driven by lower disbursements in Rest of Africa. Such disbursements remain under pressure with a tougher overall economic environment and increased competition in some markets. The growth of ZAR 53 million in the Mass and Foundation Cluster loan book continues to be cautious with lending volumes following a tightening lending criteria that were in place for much of FY '21. We expect the modest growth in this book to continue over the remainder of this year and into next year. The results from operations for the quarter was marginally ahead of the prior year, mainly due to improved mortality profits in Personal Finance. But as you know, in the first quarter of last year, we recorded significant excess deaths in Personal Finance. These were later largely offset by provision releases. The improved mortality profits resulting from materially lower excess deaths in Personal Finance in the current year were partially offset by lower underwriting results in Old Mutual Insure and in Corporate as well as an increase in central expenses due to our investments in digitalization and our innovation initiatives. We estimate that the April floods in KZN will have a net impact on Old Mutual Insure of between ZAR 100 million and ZAR 150 million net of reinsurance recoveries, but also including the cost of reinstatement commissions. To date, we've received over 2,200 claims related to this catastrophe, and we're currently reviewing our claims pattern for the recent second wave of floods in KZN in May, and we'll provide further updates in due course. During this difficult time for customers and communities in the region, we've deployed additional resources from across the country as part of our claims catastrophe plan to assist with handling these claims expeditiously. We've provided intermediaries with an immediate mandate of up to ZAR 15,000 for emergency repair settlements. We've mobilized service providers to prioritize affected KZN customers and process the majority of claims as cash pay-out to assist customers in need. We've also separately partnered with Gift of the Givers by committing ZAR 300,000 towards providing the affected communities with immediate relief, and the Old Mutual Foundation has mobilized ZAR 2 million in relief to provide food and dignity pack and to assist in the rebuilding of houses with both the Collen Mashawana Foundation and the Nelson Mandela Foundation. We remain committed to serving customers in good and bad times. And with that, I'll hand over to Casper to unpack the finances in more detail. Casper, over to you.

Thank you, Iain, and good evening. I will take you through some additional detail by segments to fill out what Iain has spoken to. Overall, we are pleased with the financial performance in the first quarter, and we have seen an improvement on prior year across a number of our KPIs and underlying metrics. I will begin with Mass and Foundation Cluster. In our banking and lending business, the credit loss ratio normalized to 4.9%, up from 0.9% for the 2021 financial year. We expect the trajectory to continue towards our stated target range of 7% to 9% over the next 3 years. When it comes to Personal Finance and Wealth Management, the return to profitability following excess high mortality claims last year was pleasing. Results from operations for Personal Finance were up more than 100% from the prior year. Our expenses also remained well managed and below those of the prior year. I'm pleased to report that improving investment performance has continued in our Old Mutual Investments business in line with our commitment to investors. 75% of funds are above median over 3 years and 69% are above their respective benchmarks over the same period. High market -- average market levels have contributed to Old Mutual Investments' revenue growth of 24% year-on-year with performance fees from OMIG and fair value gains in Alternatives the underlying drivers. In Old Mutual Insure, we have maintained our net underwriting margin target of 4% to 6%. We do note, however, that achieving this target is likely to come under pressure given the net impact of the KZN floods of between ZAR 100 million and ZAR 150 million. On central costs, those were higher given the costs incurred in our new growth initiatives. Lastly, our capital position remains strong with the OMLACSA solvency ratio at 200% and towards the upper end of the 175% to 210% target. The redemption of subordinated debt has contributed to the reduction from 203% we reported at the year end. The group remains well capitalized within our target range of 170% to 200%. With that, back to you, Iain.

Thanks, Casper. We're making great progress on final details of the proposed Bula Tsela BEE transaction. So please be on the lookout for both circular and the retail scheme prospectus, which will be released in due course. And in closing, the positive sales momentum and higher productivity across our retail segments are confirmation of a focus on enhancing customer and intermediary experience. Flows in some businesses are lumpy in nature and not necessarily comparable from 1 year to the next, but we expect that the work we're doing to transform the business in terms of increased black ownership will have a positive impact on our ability to attract this business and retain existing clients. The parts of the business which experienced pain last year from increased mortality claims, particularly Personal Finance and our Rest of Africa business, have taken positive strides in the first quarter. We remain on track to meet our medium-term targets communicated to you previously. Thanks for taking the time again, and we will now take any questions that you may have.

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

Four questions, if I can. So firstly, just on the value of new business and margins you've reported here. Are these on constant economic assumptions from year-end given the higher [indiscernible]? I'm just wondering whether that's had an impact on net margin or not. Secondly, just on PF, I'm just trying to understand why the risk sales are down. I mean you showed really good momentum last year on the risk sales. And if I remember, back to June last year, your strategy specifically spoke about double-digit growth in risk sales from 2019 levels. So maybe can you talk a little bit about what's going on there? How do these numbers compare to 2019, first of all? And do you still think you can get double-digit growth in 2023, given the slowdown we're seeing now? The third question is just a clarification around the mortality impact in quarter 1 versus a year ago. In other words, what -- when you say your RFO is slightly higher than last year, what net mortality variance was in last year's first quarter versus this year? I'm just trying to get an understanding of how big the delta was in that. And then lastly, just around the capital position. You talked about the strong capital position and I think you've got some debt issuance plan to come further this year. I mean is it premature for us to expect some form of capital repatriation either by buybacks and a special dividend this year? And what would your preference be between those 2 options at this point?

Thanks, Michael. Casper, I suggest that you start with most of those, or you and your team.

Okay. Okay. So just confirm that the VNB margin would be on the same set of assumptions that we had at the year end. We will only relook at our assumptions at the half year. So that's important to understand. On the -- I'm happy that Iain adds color afterwards. On the Personal Finance side where you're seeing lower risk sales in a complex -- more complex risk sales arena. So we're also seeing a simple risk sales going well, but it's really the complex risk sales where we are seeing those results. And hopefully Iain can provide more color on that. And now on the Personal Finance provisions. So if you recall last year, at the end of 2020, we set up quite material COVID provisions. And in the first quarter, we would have released a lot of those provisions against the very high excess deaths that we saw in the prior year. So the impact in the first quarter on the -- the net impact is quite small. In the current year, we've seen much lower excess deaths, but then because we released the lower of our pre-set release pattern, an actual excess is experienced, the net impact on the current year for Personal Finance is also quite low. Now you recall that we set up another set of provisions at the half year and given where we are to date, it's unlikely that we'll have to do that again. So Michael, year-on-year, the net impact of -- it looks like a bit of an anomaly, but it's because we had much higher provision releases last year than we've had in the current year. And quite a large portion of the provision that we set up at the end of the year is still available. On the capital position, we are -- we remain well capitalized. And look, as we've said before, it's still quite a risk on -- quite a lot of risk in the system, and we generally don't sort of prejudge what we're going to do sort of in the interim period. So we'll give you a clear update in August when we come to market on where we stand on our capital position and what our thinking is. But to answer your question, if we were thinking about additional returns to shareholders, I think where the share price is trading it probably makes sense to look at buybacks as opposed to dividends. I don't know if I've missed anything, Iain, I don't know if you want to add.

Maybe I'll embellish 1 or 2 things. So Michael, our practice when it comes to provisions versus experience, this is going back to your question on the mortality, is to release from the provision the lower of the expected provision release or the actual experience. So year-to-date, actual experience has been a bit better than provisions, but essentially, we haven't released that piece to surface. We released the actual. So you could think about -- in my head, you think about the mortality variance for this year has basically been 0 year-to-date. But with, in a sense, provisions continuing to build. Whereas last year, we would have been releasing the provisions. And they were -- and then as you know, from a timing perspective, we ended up having to bump the provisions up in quarter 2. So I think the quarter-to-quarter comparison, it doesn't really tell the full story at this stage as to what's likely to emerge on a forward-looking basis.

And then just to confirm, so aren't any once-off releases for mortality profits in our numbers in the first quarter? It's -- so I just wanted to make that point.

So just -- it sounds like there's a 0 net variance, I guess, for this quarter and probably, very similar zero net variance after provision releases for quarter 1 last year. So mortality hasn't really been a delta on RFO. Is that a fair comment?

That's fair. Well, as stated -- I think in the prior year, there was a slight negative variance. I think in the current year, variance is quite small.

I don't think it's a material number one way or the other.

The next question comes from Andrew Sinclair from Bank of America.

Two for me as usual. Firstly, it was just on the new business margin. You're doing well going towards the end of the target range -- in terms of the top end, sorry, of the target range. Just really wondering now that you are towards the top end of the target range, are you still looking to push margins higher? Or would you now be saying, actually you can push a bit more for volume and just be increased competitiveness, given the margins are towards the top end of your target range? Secondly, it was just on the provisions. I actually thought it was quite interesting that you were suggesting in the release that you have a look at that at H1. And a bit analyzing then what's the appropriate level of provisions suggested to me that you could be thinking about releasing then, which seems a bit quicker than I would maybe have been expecting. Are you going to be considering releasing provisions at H1? Or would you want to wait until you've gone through the colder months and get towards the end of the calendar year? And third question for me was just I was sitting in Scotland instead of South Africa, I just really wondered if you could give bit of context on the May floods in KZN. Just any context you can get there, how the May floods compare to the April floods? And in particular, are there any changes on the reinsurance protections you have for that second bout of floods?

Thanks, Andy.

Iain, should I...

You'll start again, Casper. I'll chip in on the OM Insure a bit in particular, yes.

Yes. So Andy, so we only are going to be looking at our half year positions in the next few weeks. So actually, as you sit here, I can quite honestly tell you that we haven't firmed up on the position. But just to confirm that at each half year, we would look at reserve sufficiency. So if we needed -- if we thought our reserves weren't sufficient, we would adjust them. And we have to then distinguish between discretionary margins and the actual reserves that we set. You will recall, we did set up some additional discretionary margins at the end of last year. So the corporate discretion margins that we set up were for 6 months. So we're going to have to look at that specifically at the half year, and then you also look at what the discretion margins look like at the half year for the rest of our book. But we haven't made any calls on that yet, and we'll have to -- we'll only be doing that in the next 2 to 3 weeks. Sorry, and I forgot got the other part of the question, Andy.

I think the rest was all about May floods and OM insure. I can pick that up, Casper. So Andy, I think when we refer to the May floods, it's literally last weekend. So I think it's a bit early to assess the pattern of claims that are likely to come in from that. They do appear to have been significantly less severe than April, but nevertheless, strong material for certain particular areas. And then just to confirm with the reinstatement commissions, et cetera, paid immediately after the April event the full reinsurance cover we enjoyed previously was reinstated on the same terms and conditions. So that still -- that protection is still there.

Guys, just the other question was just about new business margins and whether you're maybe pushing more for volume and competitiveness, or if you think margins can go higher?

Yes. I think as has been alluded to, I think the main driver of the margin expansion has essentially been volume in Rest of Africa given the extent of the sales increase and then the volume and mix in the Mass business. On the PF side, the mix is not where we would want it to be. So our main drive is to push the mix in -- within the risk business. So to the question that Michael asked earlier, essentially, what we're seeing is, we're selling a decent volume of overall risk business, including funeral and non-underwritten cover, but we're not selling almost too much of the non-underwritten and not enough of the other kinds from our perspective. So the focus right now is very much on trying to drive the mix in the right direction in the PF business primarily. I don't think there's -- we don't feel any desperate need to have to reprice, particularly in MFC to drive volumes further. I think productivity level of 5.9 a week, we pretty much got a smoothly running engine from that point of view.

And just one additional comment. So if you think about business unit mix, if we sell more in Mass at higher margins and slightly less in Personal Finance at lower margins, it does push up the average ratio. So you need to think about that, that we had a very good quarter for Mass. So as PF improves at a lower margin, the overall group margin will actually reduce. So I think that the guidance we've given, 2% to 3%, I think is right for the time being because we have to think of that business unit mix as part of that equation.

The next question comes from Larissa Van Deventer from Barclays.

Just 2 from me because the other 2 was covered by Mike and Andy. On sales growth, congratulations on a very strong number. My question is about sustainability and run rate for the rest of the year. Casper, you mentioned -- sorry, Iain, you mentioned that you're happy with the productivity. Is the current rate sustainable? Was there ones-offs in the prior year that we need to take into account? Or do you believe that a [ high teen ] run rate is sustainable through to December? And then the second question is related to BEE deal. Are you able to give an indication when the circular to shareholders may be made available, please?

Okay. On the sales, one, Larissa, I think my personal view is that there's really good momentum in the system on a weekly basis, and it continues to be like that. So I'm fairly confident that we have got a sustainable momentum going at least in the retail businesses. Corporate's obviously a lot more lumpy, more difficult to call, the timing of closing our pipeline, et cetera. And then ROA, I think, is also on a good momentum recovery from certain of the COVID issues, et cetera. So I think there's no reason as I sit here now, I think to think that we shouldn't be able to sustain it. I haven't gone back and looked at the patterns during last year to sort of understand whether there's a particular surge in the prior year that might mean that the percentage comparatively shifts, but at a kind of an absolute level of productivity. From that perspective, I think it's sustainable. The real challenge is the mix in -- particularly in PF. I think other businesses, we're actually quite comfortable with how that's going.

And the circular.

Casper, the circular, do you have anything you can add around the timing?

I don't have the exact dates in my head, Larissa, but it will be in the next month or so. So what I will try and do is trying and get all the team if we have time, we can give you an anticipated date. Otherwise, Bonga can just send -- yes, sorry, the guys are telling me the next few weeks within the next months, we should be releasing.

Actually, if you don't mind a quick follow-up question, Iain. In the slides of FY '21, you had a really interesting chart about COVID and how you expected the waves to become less severe, which certainly has played out post Omicron. South Africa had a surge in cases in the last few weeks, but deaths have remained really low and the curve has been coming down. Was that the first wave? Or do you anticipate that it's still on its way?

No, we think...

[indiscernible]

Sorry, in the model -- the way that our model works, the way that we've been experiencing in South Africa has pretty much peaked in the last week from an infections perspective in all the provinces except the Western Cape. I think the Western Cape may have peaked this week. I've not checked the data in the last 2 days, but -- and from our perspective, certainly in my head, that is the fifth wave. So yes, in short.

[Operator Instructions] We have a follow-up question from Michael Christelis from UBS.

I thought I'd ask another one since there's not others there. There is no comment in release all and in your commentary earlier about persistency. And can you give us a sense of whether the really good persistency we've seen over the last 2 years has continued or have we seen periods of deterioration in the areas that you're concerned about?

So Michael, I think we haven't seen a material change from what we saw at the end of last year. So we -- yes, so I think you shouldn't expect at this stage any surprises from persistency.

The next question comes from Jarred Houston from All Weather.

Just want to clarify, the impact -- the estimated impact of the KZN floods and the timing of when that's included in these numbers. Is that in the Q1 numbers? Or given that happened post-March, was that something we'll see in Q2? I'm just trying to understand the timing of when it's actually included.

Yes, you'll see it come through in Q2. So the published numbers are struck, as you say, at the end of March. And at that stage, we weren't anticipating the floods and certainly have no idea of the extent. So the only reason for providing essentially specific post-March commentary is that obviously, it's a potentially material event. And so I was just trying to give shareholders a sense of how material it is on a net basis, possibly a lot less material than people might have expected.

Just to clarify, the underwriting margin in Insure in Q1 is also lower and ex the floods. Is what you're saying?

Ex the floods, yes.

At this time, we have no further questions. Bonga, may I hand over to you to conclude.

Thank you, ladies and gentlemen, for joining us on the call today. We'd like to remind you to keep an eye out for future announcements and to use our Investor Relations website for any detailed information that you may need. The transcript of the call will be made available on our Investor Relations website by close of business tomorrow. Thank you, and good evening.

Thank you very much. Ladies and gentlemen, that does conclude today's conference call. Thank you very much for joining us. You may now disconnect your lines.

Thanks, everybody. Thanks, operator.