Old Mutual Limited (OMU) Earnings Call Transcript & Summary

Dear ladies and gentlemen, and welcome to the Old Mutual Limited monetary update for the third quarter. [Operator Instructions] Please note that this event is being recorded. I will now hand the conference over to the Head of Investor Relations, Langa Manqele. Please go ahead.

Thank you, Chris, and good afternoon to everyone. As already mentioned, welcome to the Old Mutual conference call and the operational update for the third quarter. Today's call will be conducted by our CEO, Iain Williamson and our CFO, Casper Troskie, joined by Ranen Thakurdin, who is our Head of Group Reporting and Insight. That's all from my side for now. And with that, I turn the call over now to Iain.

Thanks, Langa, and good evening, everybody, and thanks for taking the time to join us. As you would have seen in the announcement we put out this morning, we're very pleased with the continued momentum in our top line with Life & Savings sales growing well on the back of continued channel productivity improvement and management actions and focus on both the mix of business and on persistency. That's driven the growth in the volumes and the sales momentum across the segments and the regions in a difficult operating environment. In our Africa Regions business, we've seen strong retail and corporate sales from new business, renewals and improved productivity in the East Africa region. So overall, the Life APE sales ex-China were up 13% to ZAR 9.6 billion. And with China in, we're looking at a 4% increase on the prior year period up to ZAR 9.85 billion. And if you break that down into product lines, the mix of sales was 51% in Savings and Investments, 42% in Risk and Credit sales. And from a segmental contribution perspective, we've got Mass and Foundation Cluster contributing 37%, PF and Wealth contributing 36% and Africa Regions contributing 12% being the primary contributors to the Life APE sales. Gross flows were also continued to show strong momentum, up 8% to ZAR 146.5 billion with higher inflows in Africa Regions. Annual premium increases put through on our Mass and Foundation Cluster [indiscernible] that usually happens in July, higher single premium flows in PF and demand for investment in Namibia. We have a very strong secured to flow pipeline in our Old Mutual Corporate business and we've also secured new mandates and higher unit trust sales in the East Africa region. Net client cash flow remains under pressure as it was at the half year. We've seen strong growth in MFC and in PF, with net client cash flow in those businesses, up 12% and 40%, respectively. And that's on PF excluding the Wealth segment. But that's been offset by significant outflows in both Old Mutual Investments and in the Wealth segment for similar reasons to what we stated at the half year, clients continuing liquidity requirements given the challenging economic conditions, higher contractual benefit payments from our liability-driven investments unit in the investment business, and then a large outflow from very large index clients in OMIG, who have restructured their portfolios away from the emerging markets indexation that they were using. While it's a large outflow, it's also extremely low-margin business with revenue margins of 2 to 3 basis points. So the economic impact is limited. Our gross written premiums on the short-term insurance side were up 15%, and that's driven by a combination of new business growth, increased prices on the back of both inflation and particularly more producer parts inflation than CPI and a successful renewal round in terms of persistency. The acquisition of Genric also added volume and excluding the Genric acquisition, which we consolidated from the first of January this year, gross written premiums are up 11%. The East Africa region contributed to the growth in both the medical and the general insurance book, including new oil and gas business secured in Uganda. On the banking and lending side, we continue to take a cautious approach and loans and advances grew by a marginal 2% mainly in the Old Mutual Finance business in South Africa. And finally, you would have seen in our operating update this morning that our CFO, Casper, who's on the call, is due to reach our normal retirement age in April next year. The Board has agreed with Casper to extend his contract and Casper has willingly agreed to stay on for a year longer to the end of April 2025. We're very grateful to Casper for agreeing to do that because of the need for -- we feel for another cycle of reporting under the new IFRS 17 accounting standard under the -- under the guidance of an experienced CFO, who knows the group well. So delighted that Casper has agreed to stay with us for an extra year. That's all for me. I would like to open the call to questions, and I'll ask Casper and Ranen to help me in answering them. So operator, if I can hand back to you to please assist us with managing the questions that are coming in from the call. Thank you.

[Operator Instructions] Our first question is from Andrew Baker of Citi.

Three for me, if that's okay. First is, are you able to provide any insight into how new business margin has developed in the third quarter? And then secondly, in the release this morning, there was a line around management interventions to mitigate persistency pressures were starting to yield positive results. Are you able to give a little bit more color around what the positive results you are seeing there? And then finally, have you seen any increase in the credit loss ratio in your Mass and Foundation lending business in Q3? Any insight there would be helpful.

Okay. Thanks, Ranen (sic) [ Andrew ]. Casper can I ask you to have a first part of that...

Yes. So -- let me start with the last question first. So on the credit loss ratio, I think it's in line with what we saw at the half year, but there is risk still to -- there's pressure in the system. So we are watching how -- on payments very carefully, but there's no deterioration from what we saw at the half year. In terms of the persistency what we have seen is improvements -- or slight improvements in our -- the performance of the book, but it's still -- there's still a bit of work required to get us back to where we want to be. So we are watching that closely, and we'll have to assess how we see the trajectory of improvements from here onwards into next year at the year-end. I think that's the crucial part. How quickly does the reduction in the inflation rate that you've seen and the other pressures that are affecting consumers, how quickly does that dissipate because that's one of our key assumptions that we need to assess in running into the year. Sorry, I forgot the other question.

On the VNB margin.

I think on the VNB margin, the only factor I would mention is that we -- the margin is sensitive to the mix of business between our businesses. So if you look at the individual business units, I think we're comfortable with that -- margins have remained intact. But we're probably going to see a bigger contribution from our corporate business, which has a lower margin. So the mix of the margin will be different between the businesses.

I'll just add 1 thing on the persistency. I think the way I would summarize it is that -- it's probably stabilized from the half year. The lead indicators from a collection success rate perspective on first-time collections and that sort of thing have improved. But as Casper says, the forward-looking view still needs quite a bit of work to establish how we deal with that at the year-end. So we haven't landed on a call on that yet.

The next question is from Mike Christelis of UBS.

Three from me as well. Can you comment around the underwriting profitability of Mutual Insure during quarter 3 and also specifically, with respect to last week's significant hail event in Jo'burg, how big do you think that could be given your higher CAT limits? The second 1 is just around PF and the volume of risk business being sold in quarter 3. How is that tracking relative to the first half or possibly Q3 last year if you can? And then lastly, on mortality profits, particularly in Corporate, where you had really strong positive variances in half 1. Can you give us an indication of whether those have kind of been sustained at those levels or they started to come down materially yet?

The first one, and then I'll ask Casper to assist with the others and also maybe Jim Bellis. The underwriting profit in OMI has held up well, in particular, referencing that the hailstorm that you're referring to. It's a bit too early to yet assess the full likely runoff of claims. We saw a very fast first or the first registration of claims literally within 48 hours of the event, and we've only seen a trickle since then. So -- and the number -- the last number I had was circa ZAR 50 million-ish odd of claims had come in, that number could easily be double that, but we don't know at this point where that's going to land. We'll probably know in a week or 2.

But Q3 itself was still relatively good. There wasn't -- you didn't have any major file or...

There were no material events to kind of [ write home about ]. And in fact, we've built up -- let's just say we've built up a bit of a buffer. So usually, what happens seasonally with the book is that you do build up a bit of a buffer in Q3, and then you get the hailstorms in Q4. We've got the 1 bit early, but I think I think we're comfortable with the position we find ourselves in. Casper, do you want to comment on sales volumes in PF or Ranen, on the corporate mortality profit development?

So I don't have a detailed breakdown of the sales volumes in hand. I'll just give -- so we have seen continued strong single premium guaranteed annuity sales and higher recurring premium savings sales. So the guaranteed annuity sales are high margins. So that will help the margins in this. The sales were up circa 14% for the 9 months. So I think that's pulled back a little bit from where we were at the half year if I remember correctly. I'm just trying to get -- try and get some -- Ranen, you have it.

Yes, I'm happy to comment. We are seeing a shift between more risk business and less funeral business, which was in line with the goals that we were trying to drive. And the risk business sales year-to-date are up 8% on the prior period with the midyear.

In corporate mortality?

I'm just having a look. We haven't actually seen anything out of the ordinary in the corporate mortality in the business.

So does that mean that very strong mortality profit is just in half 1 are continuing? So I'm just trying to understand that comment.

We've specifically commented, Michael, on any profitability metrics at this stage. So I can't give you more detail than...

I think what we can say, Michael, is that the pattern of -- the pattern of renewals on our corporate book is such that a big chunk of them happened in April, and there are some in July, but there's not a material amount beyond that in the third quarter. So you wouldn't see much -- you wouldn't see a material impact on the overall book one way or the other just because of the pattern of when the premium increases happen.

The next question is from Baron Nkomo of JPMorgan.

Just 2 questions from me on corporate new business. You've mentioned that you've secured some business such as secured that's waiting regulatory approvals. And I wonder if you can give us time lines on the realization of that business? And then secondly, just to go back to your operating earnings, your results from operations up. I wonder if you can give us any sort of high-level of guidance for the second half of the year. I mean I know there's a lot of moving parts, but I just wonder if you can give high-level guidance. I mean can we expect a similar performance to H1 broadly? Or is it going to be slightly better or was? I'm just wondering if you can help us with that.

On the corporate pipeline, as you know, these things are very hard to predict. The material deal that won't flow this year. So at best, we'll see it flow next year, but we may essentially the -- if you like, the forward recurring premium part of it flow next year in the back book even only flow of the year after, depending on how long the regulatory process takes. So that's the level of uncertainty we're dealing with around that time frame. That's about as good a guidance I can give you. Casper, anything to say on the -- I mean, we're not -- we explicitly haven't disclosed much on RFO, but anything you want to add on the broad trends?

Look, there's nothing that I'm aware of that materially affects operating profits. But we still have to go through our the year-end process. So it's very difficult to say whether that's going to stay that way. What we have seen, obviously, we've seen lower markets in the second half. So we did have a tailwind from market improvements in the first half. So we're going to have to see where we end up from a market level perspective because that does impact our business, especially the fees that we earn and obviously, the return that we earn on our assets. So I was quite sensitive to that. And we have seen markets reduce a little bit in the second half. So I'm just thinking about that. On Corporate deal, I just wanted to add that there are 2 big deals. So we anticipate that one deal might land this year. And as Iain said, it was the second deal that potentially the recurring [indiscernible] landing next year and the [ full ] landing the year after that.

We've got one more question in the queue, and that is from Warwick Bam of RMB Morgan Stanley.

Just in terms of the -- I mean, you spoke about several African markets experiencing severe currency depreciation. At the half, Malawi was quite a material contributor to profits and -- just give us a sense of the cash you've historically extracted out of the Rest of Africa portfolio and whether there's any dependence on this cash and whether there could be any detrimental impact in terms of cash and distributions at a group level?

Iain, do you want me to try...

Just checking with Warwick, if you just got the 1 question.

Yes, I'll leave it there for now.

Thank you. Casper, please go ahead.

So we've generally extracted dividends from Namibia, Malawi, the contributions from sort of countries have been smaller. So -- and generally, our Africa portfolio we've, over time, invested more than we've extracted. So from a half year perspective to now, I think the 1 country that we have seen deteriorate obviously is Malawi and we've seen this quite severe currency devaluation. So we are watching that closely, and it could impact fungibility of funds in the short term from the impact from Malawi. The real contributor to cash flows in the [ OMI ] business has been from Namibia and there's no impact at this stage there.

And Casper, would you consider changing some of the disclosures to specifically highlight some of these movements in Malawi?

I think we -- what we what we are doing, Warwick, is in line with our new definition of cash generation. We are giving you more visibility of the dividends that we receive from our operating businesses in the center. So in line with that change, we will be giving more visibility on the cash generation. So we should be able to get a little bit more sense. And then we do give you disclosure on which parts of the capital that we have invested in those we consider as nonfungible. So that is already disclosed. If you look at our capital disclosures, how much we've taken out of capital for what we believe are nonfungible pieces. So that would already -- so anything that we -- that we see as nonfungible is already impaired home funds disclosures, so you could then look at that.

That's helpful. And then just the last one, Iain, any update on the transactional banking business and I guess the launch thereof?

Yes, look, it remains very much on track, as we've said previously. The regulatory process is sort of moving along. Basically on budget and on track in terms of the bold part of it. So [indiscernible] actually very close to being done in terms of the -- kind of core infrastructure. The regulatory process, as you know, we've submitted 6 in '16, we had a round of feedback from the regulator. It's not heavy. We're dealing with that and expect to be able to go through the next gates early in probably first quarter next year, and then we will take it from there. But -- so it remains on track as per the time line as previously communicated, we're likely to be able to -- if things carry on this way from -- mainly from a regulatory approval dependency perspective, we should be launching to market end of next year or early '25, which is pretty much always been the time line.

We do have a question from Jarred Houston of All Weather.

Just a quick question. I mean we saw the news yesterday about the 2-part retirement reforms and the implementation date being moved back to next year. Can you just give us a comment on operational readiness to deal with that and the potential impact that you expect?

Yes, sure. So we had been working towards that March '24 date anyway. And we did -- I think it is fair to say we did take our foot off the accelerator a little bit when we saw the initial relaxation announcement. So we will have to do a little bit of scrambling to put the thing back on track. But we think it's doable. The challenge is going to be really at the regulatory clarity level because there is no regulatory clarity yet enshrined in legislation and regulation on some key items. It's actually hard to know what's expected. What you actually need to do on certain of these things and -- or in certain aspects of it. And I think the other problem that you've got is that the pension funds themselves can't change their rules until the legislation is enacted, so that they've got the enabling legislation to change the rules. So I actually think that not for reasons of operational readiness, but for other reasons, the time line is, if it goes ahead in its current form, it's going to cause some chaos. So we have been in communication, but let's just watch this space. I think operationally, we can be ready whether the broader system and the expectations of the citizen around what actually happens on day 1 or will manage this thing that I'm worried about.

Thank you very much. Ladies and gentlemen, I have no further questions in the queue. And I'd like to hand back to Langa Manqele for any closing remarks.

Good day. The conference call is now closed.

Thank you very much. Ladies and gentlemen, you may now disconnect your lines.