Old Mutual Limited (OMU) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Old Mutual Quarter 1 of 2023 Operational Update. [Operator Instructions] Please note that this event is being recorded. I'd now like to hand the conference over to your host, Bonga Mriga. Please go ahead, sir.

Thank you. Thank you, Judith. Good day, ladies and gentlemen, and thank you for joining us on the call for the release of our voluntary operational update earlier today. I am Bonga Mriga. As have already been announced, I'm the Interim Head of Investor Relations. On the call, we are joined by our CEO, Iain Williamson; together with our CFO, Casper Troskie. We also have Ranen Thakurdin, who is our General Manager in Group Reporting and Insights; together with Sanesh Albert, who heads up our Capital. Iain will take us through the call, and we will open for Q&A after Iain has concluded on what he has to tell us today. The operator will then guide you on how to queue up your questions. And with that, I'll hand over to you, Iain. Thank you.

All right. Thanks, Bonga, and good evening, everybody, and thanks for taking the time to join the call this evening. Our business has shown great resilience overall in the first quarter of the year and demonstrated, I think, the continued momentum that we saw last year despite economic pressures expressed -- experienced across all of our markets and, in particular, in South Africa. Just looking at some of the key performance indicators. Life APE sales were down 1% mainly on the back of lower sales in China following the withdrawal of a particular product in the Chinese business. But life sales, when you exclude China, were up 7% with the momentum, particularly in our retail business has been maintained. Mass and Foundation Cluster life sales grew 15% on the prior year, driven by credit life sales. And in Personal Finance and Wealth Management, life sales were up 11%, mainly on the back of improved productivity in the channels and with a good contribution from guaranteed annuity sales, which should be encouraging for VNB and margins. There was strong growth both in the single and recurring premium arena. In our Africa regions, life sales are up 10% driven by new business secured by renewals and by improved productivity in the East Africa region. Persistency does remain under pressure despite the strengthening of our persistency basis at the end of last year, and particularly in the Mass and Foundation Cluster business, as you would expect in this economic climate. We remain focused on deploying an identified set of management interventions, which we believe will continue to improve our retention outcomes. Turning to gross written premiums on the short-term insurance side. GWP was up 19%, with a strong showing across both the Africa regions businesses and in Old Mutual Insure. Africa region has been up 32% and Old Mutual Insure up 15%. Growth in the Africa regions was driven by the health and general insurance business in East Africa and by corporate new business in Southern Africa. Generic, which has been included in Old Mutual Insure numbers for the first time in this quarter, contributed to the growth in GWP there, with the other channels also showing positive momentum. Gross flows were up 22% on the prior year. And in Old Mutual Investments, gross flows are up 90%, boosted by money market flows, fixed income and corporate cash inflows into future growth. And we've seen some but we have seen some drawdowns on -- from an investment perspective from our alternatives, ideas and [ A4 ] funds. So that's the infrastructure, the [ fourth ] infrastructure fund. We've seen strong growth in gross flows resulting in stronger performance in net client cash flow as well. Loans and advances are flat on the year-end position at December. But if you look back to the equivalent end of March last year, we were up 3% on the prior year. The business in the Mass and Foundation Cluster is up 6%, in line with the constrained economic environment, and the Africa Regions loan book is down 8% due to lower disbursements given the tough economic climate, and in particular in Kenya. I'm going to move now from the operational to some more strategic matters. We will be hosting an investor update on the 28th of July this year in Cape Town, and we will include a hybrid option for that meeting. We will update you in detail on our strategy for the medium to long term. And in that session, we will include detailed content on both the progress on the bank build as well as the impacts from IFRS 17, and we will include a teaching session on IFRS 17 over and above what we have already spoken you through at our annual results in March this year. From a capital perspective, we have now received approval from the regulator for our share buyback, which we announced in March. And we are happy to confirm that we will be aiming to conclude a buyback of ZAR 1.5 billion. The share buyback, the Generic acquisition and the Old Mutual Finance Namibia acquisitions have resulted in discretionary capital decreasing to ZAR 1.4 billion from ZAR 3.5 billion at the end of December. We continue to monitor group solvency, and our group solvency ratio remains stable and within our target range of 170% to 200%. As you all know, one of the main contributors to the tough operating environment at the moment is that the energy crisis in South Africa has worsened over time. And that's been coupled with strong depreciation of the rand against major currencies and particularly against the U.S. dollar. These present great concerns around consumers' ability to handle additional financial pressure in an already financially stressful environment. We continue to call on the South African government to demonstrate leadership and take decisive action to address the concerns faced by the business community and by the citizenry of the country. We will strive to continue to balance the interest of all our stakeholders, including customers and shareholders. The time has come for our government to implement concrete actionable steps to reverse the recent negative events. And to achieve this, we believe that government needs to engage in a much more open dialogue with the business community, fostering relationship of trust and collaboration. The willingness from the business community to assist is certainly there, but the ability to attain any traction in initiatives has proved to be incredibly difficult. So with that, I will stop talking and ask the operator to help us manage the Q&A process. Thank you very much.

[Operator Instructions] The first question comes from Andrew Baker of Citi.

The first is just on the persistency pressure that you're seeing. Should we read into what you're saying that you are expecting further strengthening of your basis in the first half? Or are you just flagging for sort of experience variances purposes? And then unrelated to the same topic, are you beginning to see any early signs of the benefits from the management actions that you've been referencing or that you referenced for the full year results around persistency? And then secondly, just on China and the regulatory changes that you mentioned. Are you able just to give a little bit more detail on what they were and then potentially maybe a percent of the 2022 China APE that was contributed to from the products that are now ceased?

Okay. Thanks, Andrew. On the persistency, we have seen some positive indicators from some of our management actions in the sense that our first premium collection success rates have improved, NTU rates have got a bit better, et cetera. But the pressure on the -- I guess, the longer-dated in-force book remains a concern and something that we will continue to monitor. I think it's too early to say whether this pattern is something that would result in an assumption change being required. Obviously, 3 months of data is not very much. And the -- and historically, as you know or you may know, our practice has been that we mainly revisit basis at the end of the year. Although it is possible we could review a short-term provision at the half year, but I think it would require quite a significant deviation from experience. As far as the China piece goes, we actually withdrew a product from our own product set in advance of the regulator then essentially clamping down on a similar kind of product range across the market. And that was for reasons of concerns around essentially the adequacy of pricing for risk in the way that, that product was constructed. It was a single-premium universal life top product. The -- I mean, as you can see from the -- it was a fairly material contribution to total sales last year, but I don't have the percentage off the top of my head to help you. So we will need to come back to you with that number. Thanks. Casper, anything to add?

No. Iain, I don't have anything to add. We haven't started -- we started to work on experience investigations between earlier in the year, concluding on what we're going to be doing for the half year, so it's too early to give you any guidance on that. Thanks.

Going on to the next question, which comes from Andrew Sinclair of Bank of America.

Three from me, please. First is on buyback. Great to hear it's been signed off. I just really wondered if you can give us some color on the time scale and formats of the buyback, please? Second, was just going back on persistency. I mean It's just over 2 months since you last updated the market, and now the persistency provisions have been taken. What's been said today leaves quite a bit of uncertainty until the next update in September. I just really wondered if you can give us a bit more context on potential impact and potential for more provisioning. I'm sure we'd all like to get ahead of this debate and feel we can kind of do one-and-done. Third question was just on China again, actually, just on the products, given that you withdrew it even before the regulatory changes. Can you give us any details on concerns on the back book of product that's been written there? Any risks on that? Any thoughts there?

Okay. Sanesh, can you deal with the buyback process and issues, please?

Yes, sure. Thanks. Thanks, Iain. So yes, it all kind of happened at once in terms of getting Prudential Authority approval of the line and getting to our Board steps. So AGM is also coming up, so we will effectively get that vote count into the AGM and then we will execute basically imminently. I think the results are expected by tomorrow afternoon. So you can effectively say we will start early next week. The timing, obviously, just looking at the trading volumes, we do expect that we will conclude over [ 8 ] swap towards the end of, let's say, Q3 and Q4 but just depending on trading volumes. But we will definitely execute before the end of 2023.

And that would just be the full ZAR 1.5 billion in one tranche?

Yes. We did note a range of ZAR 1 billion to ZAR 1.5. billion. We have now confirmed it will be ZAR 1.5 billion that we will execute.

Okay. Andy, on persistency, I don't have much to add to the way that we answered the question earlier. Unfortunately, it is a bit early to call it. And I realize that everyone would like clarity. We would, too. The truth of the matter is, I think that with the way that the economy has played out in South Africa, and we saw another 50 basis point interest rate hike today, I think the -- we are seeing pressure on that sort of lower-income consumer group. And I think it is just -- it is really just too early to answer how that's likely to pan out. On the China product, essentially the crux of the issue was that the early termination values on the product had to earn returns from a yield perspective that were tight, not ridiculous but very tight. And so I don't expect material exposure. But equally, the product was not going to pass sort of profitability, return on capital criteria from our perspective. So that was why we terminated it. But I don't anticipate that it should result in any sort of material big loss problems or anything like that.

The next question comes from Michael Christelis of UBS.

Just maybe 3 from me as well. You called out the generic impact on South African GWP. Can you just give us a sense of what the size of that is, how much of the 15% is Generic? And what's the rest of the book done? The second one, maybe a bit of comment on the credit quality of Old Mutual Finance and how that's tracking in the current environment. We've seen some of the finance businesses locally take quite a bit of strain in the last couple of months. And then the third one is a question around maturities and withdrawals from affluent market savings products. Are you seeing a pickup there in terms of outflows from those products at all? And maybe any color you can give us on some trends there.

Thanks, Mike. Casper, can you -- do you have the generic picture off the top of your head and Old Mutual credit bit?

Sure. On the Generic, I'll just look it up. I don't have it off the top of my head, but I'll try and find it quickly, Iain. And then on the credit piece, we have seen that tick up, Michael, to the top end of our range. So there has been pressure on that credit. Just to remind you that our range is 6% to 8%. So we feel comfortable with where that's sitting. And we're obviously watching that, and we'll obviously be able to give you an update at the end. Obviously, our growth in that book has been a lot slower than in the marketplace. So you shouldn't see the same level of impairments largely elsewhere.

And then finally, on the maturities and withdrawals piece, I don't think we've seen anything specific to talk about. As in terms of problematic issues is we keep quite a close eye on that top end on things like impact of immigration and things like that. But I don't think we've seen anything that I would call out as a material issue worthy of noting in terms of impact on outflows and things like that at this stage.

A little bit of that Generic, frankly, would be great.