OUTsurance Group Limited (OUT) Earnings Call Transcript & Summary

Infections as well play a role in vaccination. So Discovery has done extremely well, and they've showed their leadership and thought leadership in matters miracle. And then I call out to OUTsurance as well, as you know, they honored the business interruption claims more than a year or a year ago. And when the industry is still in the midst of debt controversy, we're very happy that we did the right thing and stuck to the spirit of insurance and fade out the business interruption claims. In-house, we established a COVID fund. You see it there, ZAR 9 million has been dispersed. Management and the Board contributed ZAR 4.5 million to this cause. And it's been a very good distribution in terms of grocery vouchers and beneficiaries of over 1,500 of food parcels. And then I think the focus really has been also to work with the affected entrepreneurs that we have in AlphaCode. The second key impression for us is the robustness of the portfolio, absolutely as well as relative to the competition. The market shares that we have across the portfolio have actually been well protected and well established. And in some cases, we even earned some further market share points in their respective markets. Secondly, and interestingly enough, we -- this was a real test for our distribution channels. And if you look across the face-to-face channels, Metropolitan, especially and then Discovery, they really stood the test of time and did extremely well. In a digital world or a world that went a bit more remote, we're very pleased with what's been achieved in the direct channels in Australia and South Africa for OUTsurance in UE. And then obviously, you would have seen that the price comparison websites in the U.K. also benefited from the remote environment that we were in. Credit to the all 4 big organizations that's in the portfolio -- that are in the portfolio. It was amazing to see that within days, they had restructured and reenergized their workforce to actually be remote and productivity has not suffered in a meaningful way. So well done to the operational performance of the portfolio. And in MMH, they were on the journey of reset and grow, and that recovery journey was probably most impacted across the portfolio, most impacted by COVID, but well done to Hillie and his team who have resume that growth path that you would have seen in the results. We cautioned in September that we would be following a prudent approach to dividend and capital planning. And we did just that. And still now, you would see that from our dividend policy and dividend planning, we are still cautious in our approach. And that's really a major effect there we would summarize is twofold. Firstly, the second wave, which was much harsher on mortality than ever expected. And I think we can't rule out the third wave of continuing winds of infection and mortality. And the second one is that to date, there's been quite a bit of stimulus into the economy and there is forms, interest rates, government additional grants, et cetera. And we are still concerned that, that stimulus may not be enough to stave off a macroeconomic problem in this country. The growth in diversity that I skipped over, that was just that we felt that the portfolio and its diversification across product, as well as across geography, was very good in terms of the overall performance. Turning to the financial highlights. We never like to adjust numbers. They are what they are. But I think it's important when we start focusing on the operating performance of the group that you look at the Discovery, they did very well on the operating line. That includes the additional COVID provision. So without that, the normalized operating profit growth would have been 22%, 23%. MMH, as you know, took quite a few additional provisions. And again, the world does not work in the without scenario, but still the underlying operating performance was very strong at MMH, especially at Metropolitan. These things, they looked at a 9% operating increase, and that's taking out the nonrecurring transactional cost. Yes, they are eye-watering, and we can -- we can't discuss those, but effectively, that's the cost of being listed in the U.K., which is one of the reasons we want to avoid that structure. As Marthinus and Jan will explain, phenomenal performance, 17% up, great performance in Australia as they'll unpack for you. So bear with us for one second. Okay. Thank you. So we've looked at the operating performance. And over the page, we talk about the prudence that especially came through in the life operations. Discovery paid out gross claims of just over $4 billion, that's gross of reinsurance. And you can see that they've now strengthened the COVID reserves to over $3 billion. That's, of course, a combination of the U.K. as well as the mortality provision in South Africa, which has been strengthened. And then we feel that there's still ample room in the lapse provision in South Africa. And then a similar number that you see there in terms of MMH, we've been working a lot with the management teams to understand this approach. And in both cases, we feel that this is now a conservative and hopefully, a realistic way of looking at what could still come. But as I said, the wave 2 was totally unexpected in its severity. And we certainly, as a country, needs to do everything we can to avoid a wave 3. And that Adrian spoke about a lot in his presentation. Over the page, it's important to think about the demand for product, that falls into the category of what is the new business growth that we see as well as obviously the lapse experience. On the lapse experience, it's been positive. And we explained this by thinking through people's tolerance for risk probably declining at the moment or having declined at the moment. And then also experiencing the higher demand for insurance product in pandemic and difficult times. We see that continuing, and we see that continuing, obviously not irrespective of economic conditions. So that's where, I guess, the South African macroeconomic overlay comes in to probably guide us to a slightly more conservative view of new business and lapses. Having said that, and you've done the work on MMH and Discovery, the lapses have actually been very good to date as well as some of the new business flows. And that's probably a testament to the distribution strength that we spoke to right up front. New business. You see across the group, we're quite happy with the new business progression that you see. We will again speak about OUTsurance, and we'll also unpack Hastings for you a bit more. We comment on the margins on the new life business, which is promising in both cases. And then I think for our portfolio, which is 65% exposed to short term business, this is probably the most important slide of the pack or the graph of the pack. And that shows that OUTsurance has improved their combined ratio. Jan, and there is obviously many factors going into this, including the non-motor claims in South Africa that have increased the lack of many catastrophes in Australia that goes into this. But still, I think, to us, when you compare this across the market, a 75% combined ratio in a business which essentially is also having some economies of scale that still need to be achieved in the likes of an out business, this is a very, very good outcome. And this has been a number with a gross operating margin of around 25%, that has been achieved over many decades. So I think this is a very good indication of the sustainability of OUTsurance's model. You see that UE, we've made the comment around catastrophe there. And then Hastings have also had a big change in their combined ratio in a positive way. Maybe let's unpack Hastings over the page. I'm not going to go into all the detail here, but I want to firstly touch on gross written premium. That, I guess, is the most difficult of all the metrics. The gross premium is definitely at the moment, the most difficult metric to keep on a positive trajectory in the U.K. You would see that in the reporting period, we grew units by 8%, yet the premiums, the total premiums only increased by 2%. It obviously shows that there is pressure on premium pricing. And what we've seen over the last calendar year, the whole of 2020, is that prices have decreased more than 10% on a like-for-like basis. The reason for that, we find in probably a number of areas, but the 2 main ones would be that the market has been the beneficiary of a very soft claims experience and that buildup of reserves are now being reinvested by some of our competitors into market share. And the second one is that there are 2 significant pieces of legislation coming in terms of the whiplash reform, which is destined to be implemented now in May as well as the FCA pricing review. And that there is a sense that we have that some of the competitors are doing a bit of a land grab to position their books ahead of these changes. Maybe at the end of the day, they are obviously many underwriters. And I think part of the pricing that deliberations are simply taking a bit on how long COVID and the lockdown will still result in the positive claims that we've seen. Hastings is following a very disciplined approach. We have not been chasing market share. And it's fair to say that, at the moment, we are probably neutral as far as market share is concerned. We are not growing and we're hanging on to our market share. On a more positive note, the retention rate in -- at Hastings we were struggling a bit 18 months ago with retention rates of low 70s, and the team has worked very hard with great input from the OUTsurance team to now be on a relative sustainable ratio of just over 80%. And as you know, that is a big determinant of the overall cost ratio in terms of the lifetime value of customer as well as the new acquisition costs. On the cost side, and I'll get to claim just after that. You would see on the graph that costs have increased slightly over time from the 14%, 4 years ago, up to 17% and we are actually seeing a soft decline now, and we hope to be going back into the 14% to 16% range. The claims ratio is the most important element. Obviously, if you look at its contribution, but rather it's detraction from your revenues. And last year was a particularly difficult year. I'm talking about the '19 year. And we have -- we managed to push down the claim's ratio quite a bit into the mid-70s. Now there are 2 relevant comments that I need to add here. This is to be expected that the claims ratio would come down. Britain has obviously been in a series of lockdown. And we've seen claims -- positive claims experience comes through in this. The second one is that maybe you would have expected a bigger decline here. And I think the simple reason here is that we now have the luxury as a private company to manage the business probably slightly more conservatively, and a lot of the claims benefit have been reinvested or have been invested in our reserves. So over time, when we disclose the full year in June, you will see more of the progression and the investment in reserves. And that's simply a notion that as shareholders between us and Sampo, we want to run the business on a slightly more conservative basis and be able to take opportunities and emergencies as they come. But overall, a very, very positive performance by Hastings and they're actually destined to do well in the coming years. So looking ahead, as I summarized there, we are managing and reflecting very deeply about the deflation environment. At some level, there's not much you can do about it. On the other level, it's all about picking the right risks and pricing them appropriately. In a market, the size of the U.K. with 32 million vehicles, there's always some space for growth and investment. And then just a word on the partnership with Sampo, it's going very well. We're really enjoying the input and the interaction. And it's -- and then we have formalized the integration and collaboration a bit more, and we're seeing some early signs of benefit there. And then just a reminder to the market that we have an option to increase our stake in Hastings by 10%, and we have the next year plus a couple of months to make up our minds around that. The important milestones, I'll quickly run through these. I think this is more the illustration of what's important to RMI and what we wanted to achieve over the last reporting period. Firstly, we spoke about the prudence and preservation. And I think we're very proud of our 2 life companies that -- which were actually very conservative and accurate in terms of their provisioning. Yes, wave 2 was definitely more severe than anticipated. But the businesses have not needed any capital, which was a very important element of the whole planning. And as you will see from our debt capacity, we've also learned a lesson there that we have to have the capacity to support our life businesses because this will -- may not be the last emergency that this market faces. We were very happy that apart from one small Fintech investments, which we supported with fresh capital. There were no capital raisings needed, which is probably a good segue into our capital structure and our cash dividend. And I want to spend a bit of time on this. I know that the market may have expected a slightly bigger dividend despite us warning 6 months ago, that is all still about prudence and preservation. I think the overall philosophy here is that as a management team and as a board, we would like or we like the discipline of paying a cash dividend to the market. Yet, we need to balance this with our capacity to reduce debt over time. And make new investments when we think it's appropriate. And the reason we want to reduce debt over time is that it increases your optionality. If you don't, over time, reduce your debt there's only 1 way to actually repay the debt and that's to sell an asset. It's not to say that we would not do that. It's more that we want to have the optionality to decide between the various alternatives. With the theme of prudence in mind, we wanted to give the market also a bit more of a sense as to how we think about our objectives when it comes to capital planning. Firstly, and they ranked in order of priority. We want to gradually reduce debt. We want to maintain a contingency buffer, and that's really a buffer that was -- that we would like to have in place for a situation where the regulator restricts our dividend flow from our subsidiaries, as was the case with the banks and certainly also guidance to the life operators. So we need to continue the buffer so that as a company with a debt burden, we are able to pay our goals for 18 months, and that's more or less ZAR 1 billion. And then another part of the contingency buffer is one where we want to have some capacity available to support our portfolio companies if there is an hour of need. And that we earmark as another ZAR 1 billion. It doesn't mean that we keep this in cash. It's probably not a great way of -- or to keep it in cash, in fact. But we want to have the contingency and the capacity to borrow into that if we needed the cash. Then -- or thirdly, as I mentioned, we want to maintain a consistent and growing dividend, cash dividend to the market. And then we also want to construct this plan to get within target debt capacity, which is a bit lower than our current gross debt levels. Lastly, and it is but in order is we want to maintain capacity to make investments, which we come across from time to time. And to give you a sense where we are now, in December '19, we had uncommitted cash, and you can read contingency buffer of [ ZAR 930 million ]. And as of December 20 we have uncommitted cash of just under [ $2 billion ]. So the contingency buffer is in place. We will -- we've started paying dividends, cash dividends again. And if all things being equal, we should actually now also be able to gradually reduce our debt levels. We wanted to -- another milestone, of course, we have highlighted to the market that we want to increase our P&C exposure. Overall. It doesn't mean that we might decrease our life exposure, but it may follow logically. But the unlisted P&C exposure with -- in partnership with Sampo was an important milestone in starting on that P&C journey. 18 months ago, when we sat with this community, there was a lot of criticism that they felt that OUTsurance and UE had become ex growth. And that Hastings had also not been growing. Sorry, just give us a second. And that Hastings had also slowed down its growth. So I think it's very pleasing that it's now the third reporting period that OUTsurance and UE have grown in a positive way, and Marthinus will speak more about that. And as I said in the beginning, we also felt -- we also feel that all 3 of these companies are probably in the best shape that they've been for a long time in terms of operational robustness, reserving, plus then the growth initiatives which are coming through. The retention at Hastings was a worrying factor. We believe that, that especially as you become more pertinent in the market, retention has to get more attention, and we've shown the results of that. The market was starting to get concerned about our OUTsurance personal lines. We're talking about a specific business here, not including our business in South Africa. And Marthinus and Jan indicated to the market that there was a bit of upfront spending in digitization and marketing and a bit of compliance. And for the first time, again, the OUTsurance personal line to cost ratio has declined or improved. So another milestone for us. The operational strength of Discovery, especially to the very nimble product reorganizational redesign and its broker distribution force has been great, considering continuing recovery at MMH we touched on. And then lastly, we've had an exceptional financial performance in our asset management portfolio, where we -- the maiden profit was one-off of [ ZAR 70 million ] for the 6 months. So fantastic performance there and well done to [indiscernible] and her team on that. So the last point that I wanted to make as far as the important points are concern would be the new approach to valuation. Those of you who have studied our interim results would see that, now that we have a much larger portfolio part being unlisted in the fact that -- or to the extent that Hastings has been delisted. We have decided to provide you with our assessment of value. And you will find a new calculation called RMI intrinsic value, which we provide, and I'm not going to go into the details, there are adequate footnotes to explain how we've arrived at these valuations. So that's something that obviously will now consistently be provided to the market. With that, we can pause for questions if they are, I don't see any, and maybe we can then move to Jan and Marthinus just to -- sorry, I'll skip one slide. What should you be expecting our attention to be on? Starting with the U.K., we spoke about premium deflation. That's the -- that's priority #1 to get to grips with that, and that's and there's not one solution. Secondly, we need to position the portfolio for the regulatory changes. Whiplash is here and now, but the FCA industry review will take some time to wash through the system and be implemented. But it may be a quite an important moment for the U.K., P&C business. And then we need to further get further traction and success with the Sampo partnership. In Australia, there's a bit of a word of warning in terms of there will be further investment in regulatory and compliance costs. That's the natural effect after the Royal commission. So you'll probably see a bit of an uptick in that in the next 2 years. We've had a very favorable catastrophe environment over the last while, and we need to obviously carefully manage that. We're coming to the end of the storm season, although it sometimes feel if there isn't an end and the beginning of the storm season in Australia. And then we will also be renegotiating our reinsurance pricing for the next year. And that's an important moment in Australia as far as the recent history of the bush buyers and higher claims are concerned. So there's a lot of focus on making sure we get the right reinsurance. Not just the pricing, of course, it's also the structure. The growth in direct personal lines have been very promising. The Blue Zebra partnership have done extremely well. And then we're in the process of building out the CGP product. So some too little warnings in Australia, which keeps us up, but also very -- quite a few positive impetus there in Australia. And then in South Africa, we spoke about the impact of the third wave. Let's hope there isn't a material one. But still, there is that a bit of a warning sign over the economic recovery in this country. The most important one across the portfolio must be the claims experience on mortality, but then also the lapses stroke new business at MMH and Discovery, which frankly, is a big function of the third wave plus affordability generally. Our churn is growing very nicely. Jan and Marthinus will talk about their growth initiatives. And the market is and the business actually gained a bit of market share on the, call it, principal product. And then at the asset management level, we are looking to implement a BEE structure for IMG. So these are the -- are the highlights or at least the focus areas for the next year, which we will report back to you on when we see you again. And with that, I'll hand over to Marthinus.

We've got some hands up, Charl.

Hi, Charl, go ahead, please.

Good morning, Herman, thank you for the presentation. I thought I put my hand up because you did mention that you want to take some questions. Thank you for disclosing your assessment of the intrinsic value. At today's share price, we're looking at about a 30% discount to your intrinsic value. In the past, you have elaborated on your reasons for why you think the discount is there. What I however find strange from the presentation is that there's no focus on how this discount will be unlocked. And I can also not see any of your KPIs in the previous annual reports where there's a focus for management to unlock the discount. So my question today is really on how do you respond to this? Because I think in the past, we have discussed why it's there, but what we have seen from some other companies also listed on the JSE that there's actually quite an impetus on unlocking the value, whether they get it right or wrong has not been clear yet. But I do lack some focus from RMI's management on this particular point in this presentation and the recent results. So just some comments on that would be nice.

Thanks, Charl. Yes, you're right. I don't think we focus on that as a specific item. It is, on the one side, the simple response to is we run -- we run the company. We produce the intrinsic value and you, as shareholders, need to decide what you're going to pay for it. That's on one level where really we have very little to do with our share price levels. On the other hand, a much more sophisticated answer, I hope to say that we feel that there are 5 controllables, which influences the price or the rating of investment holding company. The first one is strategy, i.e., we need to be clear on strategy and show you that we are executing well on those plans. And so that's the first very clear KPI that we have as a management team. The second one is that you have to show that your portfolio management and your influence and contribution to your portfolio results in a better outcome than, say, the market in a relative way, you need to show that you are contributing to your companies and that they are, as a result, indirectly or directly performing better than the market. So that's a clear KPI for us as well. Third one would be that our capital structure needs to not be a deterrent or a negative mark on our scorecard. And I think we've been quite elaborate in terms of how we think our capital structure will evolve. The third one or the fourth one is that we need to show that we are effective allocators of capital. So that when you see our capital decisions, capital investment or exits that you see that there are some real discipline that goes into it, and then it's done in a consistent and hopefully thoughtful way. It's a very clear KPI for management in terms of new deployment of capital as well as returns on sold capital and then the relative exits if there are any. The fifth way -- the fifth part that's under our control is so-called friction cost. And we pay a lot of attention to make sure that friction costs can be classified or include tax in the portfolio management cost of the portfolio. And other inhibitors that does not translate the value, the intrinsic value through to the share price. So we spend quite a bit of time on things such as the unbundling legislation. The supervisory regime that the PA wants to put -- could put on us, competition commission. So there is parts, plus, of course, this simple cost management that you would find would play an important role. So if management gets those 5 right, then you're probably in the space of saying, there's an external overlay that you need to place on investment holding companies. And the external overload, I don't want to bore you with the same factors, but for example, unless or until the activity market improves to such an extent that you are convinced that we can sell any of our portfolio companies at or above the value of the intrinsic value or that we can IPO it. And you know better than I do where the IPO market has been pricing new IPOs unless we can illustrate or the market as the belief that assets can be sold at or above, there will, of course, always be a discount on this. And this has unfortunately been the case over the last 3 or 4 years where I think the corporate activity and the regulatory overlay on top of that in South Africa's geopolitical position has meant that all investment holding companies have traded at a relatively big discount. 30% is not the number that we want. And certainly, we're doing taking a lot of a -- paying a lot of attention to the controllables, but there's definitely also a situational or environmental overlay to this. Now if you say -- okay. So that all sounds fine, but show me the money. The fact of the matter is that we still see value in our structure. We still see a responsibility and a great way to build businesses as we've done in the past. And -- but when you look at what happened at RMH, there is also a point where management says, we have addressed the 5 -- the environment is not about to change. We may have to do something more structural. And in order to do that, I guess, then you go into the space of what is the liquidity that you can achieve in your portfolio. So the last bit that we try and influence is to make sure that the road to liquidity in our 6 investments improve all the time. I don't know whether that answers your question.

Yes. Thanks for that, Herman. I mean if I can just respond to that. I mean so if we look at some of the key points, these 5 points. So number 2, you mentioned influence on the portfolio. And previously, you've also talked about investors being confused what exactly they are investing in because some investors might have a preference for Discovery and some not. So when you monitor your portfolio, I mean, certainly, given that backdrop, that it's a known issue from the investment community for you. I mean, at some stage, you also need to address what this portfolio must actually look like. So if I, for instance, really want to be invested in OUTsurance and Hastings in a P&C sort of investment environment, then the distraction is, obviously, maybe I don't want to be in Discovery or Momentum as an example. So I think that's the one thing that we want to see something on what exactly is your influence on the portfolio? And what do you -- what do you want the business to look like? Instead of having 3 different avenues, maybe a more focused avenue. And then I think the fourth point sort of is also important when you talk about allocation of capital, and we review the valuation of Hastings over time and the debt relative to Hastings. I mean, the 2 values are pretty much similar, and we are quite a couple of years down the line. And this has resulted now that in a scenario where we're actually capturing some of the dividend in RMI, so you've got an asset in OUTsurance that's paying out very healthy dividends, but it's not flowing through to the underlying portfolio because Hastings didn't create the required value to offset the debt which it was acquired with. So I do think there is some pushback on some of these strategic measures that you did mention from my side. So yes, I don't know if you want to comment on that.

Yes. No, no, absolutely. I think we were quite clear in our AGM presentation some 4 months ago on the strategic direction we're taking. So I think we're saying we want to go into unlisted P&C and growth markets in a more meaningful way. So I don't think we can be more clear that the portfolio of segue will be tilted due to those type of assets. Then if you -- then say, okay, what does it mean for assets that do not look like that? I think it's always a question of we have a specific view on the potential and the value of investments. And you have to marry those -- that concept or that deliberation with liquidity. So things are actually not always as straightforward as, this is in that particular. We need to -- we have a duty to you as our shareholders to say, our advantage point typically is hopefully better. So our exits need to also reflect that deliberation that we need -- or that lens that we need to put on to it. So I think I can't say more than we are as clear as we can on strategy. But any exits or any changes will also have to be against the right time, right value and the right way. As for Hastings, you're right, maybe they have been paying some very good dividends in the first number of years that we invested. I think our last IR calculation on that investment is probably around 7% over -- since we started. That beats the cost of capital or the cost of debt for that business handsomely, we're borrowing at 2.3% in the U.K. and our SA rate is under 7%. So yes, that is not the benchmark. We don't just want to beat the cost of debt for an investment. But we're very excited actually about the prospects for Hastings over the next number of years. So yes, I think, Charl, I take all your comments on board. At the end of the day, we have a long-term view of what we want to achieve, and we are as clear and as disciplined in getting there.

A hand from Roger.

I think Charl already covered some of the points I wanted to make. I think well done on the OUTsurance, and I think the Hastings results are also pretty [indiscernible] on that. It's just your investment in Discovery, Discovery has got a market cap of 100 -- over [ ZAR 100 billion. ] And I'm not sure how much influence you really have in the company. It is kind of exceptionally big. Is there a time to let it go, I think, there's also concerns about the free cash flow of the business that doesn't really make sense within your strategy, and it's robust enough on its own to possibly unbundle that and unlock some value for shareholders.

Yes. I think you covered the argument there. We think about our influence, which we think is material. We are -- we're probably in weekly contact with a number of executives talking about things which I think is material to -- which are material to Discovery's future. So it is a very close relationship that we have, and we feel that we are -- our partners inside the tent. That it doesn't, of course, doesn't mean that they can't do without us. I would never be that arrogant, but we -- but moreover, we see that company as a global beater. If you think of where the world is in terms of wellness, the health, the IP around vitality. We see a lot of runway for that concept, which is much more of a concept is a business that's been going for 20 years and have data points on millions of people in terms of that health rollout as a product or IP that can also be infused into life. So I think the -- my overall impressions, Roger, would be, we think it's a phenomenal company. We think it's a great management team with great debt. It is hard to say what is the right value where it reflects all the upside in the company. And of course, it's a company that is part of our fiber and which we built from 1992. So it is -- I'm not talking from a sentimental point of view. We know the company and its potential. And as such, it's not as simple as saying, let's unbundle this company. But your point is well made, and we wrestle with these concepts every -- all the time about -- and you saw the outcome at RMH with FirstRand. I think the confidence that you should have in the Board and the management team is that we've not been shy to do the right thing at the right time. It may not fit your timetable, that I understand.

Got it. No, I was just -- for 6 years, the share price is down at 30%. And one has to just say how long till the strategy starts bearing out. I see a lot of value in OUTsurance, and it's not being reflected. Discovery, maybe it's time to let the child, move out of the home. It doesn't mean you want to have a good relationship, but I think it's bigger than -- yes. It's maybe time.

Roger, your points are noted. We'll take some questions at the end. I just want to give Marthinus and Jan chance to talk through their performance.

Thank you, Hermanus. Thanks, everyone. So our churns had a very pleasing 6 months. I mean you might recall that 3 years ago, our year-on-year gross written premium was sort of stuck at 0%. And at that time, we said in order to sustainably grow the bottom line, we need to grow the top line, given where our margins at. So we embarked on a journey to increase investment in acquisition but also to sell a wider set of products through a wider set of distribution channels. Because the reality is by just sticking to the call center, you're really limiting your scope in the very large South African commercial market and the same at you, you also limit yourself in terms of the higher end of the market because we've seen the split in the market between direct and face-to-face in many markets sort of stabilizing. To that, we also added the digital channel. And on the back of that, I mean, it's now pleasing to report the 18% year-on-year gross written premium growth. You would have noted that net earned premiums lag that a bit. So net earned premium is at 11%. There's really 3 reasons for that. The first one is just in Australia where you write annual premiums and you grow fast, you see that earned premium would lag written premium. And as such, we expect that gap to get smaller over time because of the unwinding of that effect. The second reason is just this sharp increase in the cost of reinsurance. We saw at the start of this financial year, that was on the back of the 5 catastrophes, including the bush fires we had last year. And the last one is just that some of these new ventures, like we did when we launched our OUTsurance and UE, we start with the quota share reinsurance arrangements just to better learn the channel or the product. And then as we gain confidence, we wind those quota shares down. And so that explains that difference. Then if we look at operating profit, that was up 17.1%. And the 3 main factors affecting it there was better-than-expected claims experience in motor. On the other hand, we had higher-than-expected no-motor claims in South Africa. That was mainly driven by the very wet season as well as increase in search claims on the back of more load shedding. So those were 2 key factors driving that. And then another factor impacting the year-on-year performance was just we had only one catastrophe event in the 6 months compared to the 2 catastrophe events in the prior 6 months at UE. So that affected the operating result. Then you would have seen that normalized earnings was up 23%, which is better than the operating result, and that is really only because of the recovery in the investment markets over the 6 months. So Chiara, I think we can jump -- yes, on the next slide, that's perfect. So if we look at the premium growth there, it's probably worth it to unpack that a bit further. So U.S. premium growth grew by 18% in dollar terms. And that was benefited a lot from the BZI relationship. BZI accounted for 7.6% of written premium in the 6 months under review. But even if you strip that out, you would see that the direct business also had very robust growth. And that was sort of a 50-50 split between units and premium inflation. Premium inflation in Australia recovered nicely, that's on the back of all these catastrophe events where the whole market as to put through some increases because of increases in the cost of reinsurance and claims cost. OUTsurance's growth slowed down a bit and the big reason for that was COVID. If we rolled back a year ago, our run rate in business OUTsurance, February 2020 was 20%. So we really accelerated nicely up to that point. However, we basically had 6 weeks of no sales after the hard lockdown. And then the direct side of our commercial book was severely impacted. That's really the east part of SME, your one-man shows. They were severely affected. And we actually saw that book shrunk by 7 percentage points year-on-year in terms of premium income. So the growth in the commercial book, you see is the net effect of this direct book, which shrunk and some quite strong growth in our agent business. So we certainly saw that people that's not self-employed, were much more robust to the pandemic. That's why our personal lines book is more robust, but also our agent commercial book was more robust, that agent book grew strongly. They had 60% growth year-on-year. And as such, we're now sort of rebuilding our growth just from this new starting point and we see -- we're even seeing a small recovery in the direct book, but that just gives a bit of context around that. Personal lines, our run rate was 8% premium growth last year, February, that also sort of halved. But the main reason for that was really also with COVID. We invested a lot in terms of retaining units. So the sort of 4% growth you see would be exclusively units, giving more discounts to clients, having smaller renewal increases, some clients downgrading cover, some clients notifying that they're working from home. And as such, the risk is lower. So all those things come into the system. However, compared to some of the overseas markets, the South African vehicle experience normalized quite a bit more between ways. We don't have these prolonged periods. It's more short, sharp waves and that's why we do foresee the vehicle claims experience in a sort of a level 1 scenario, normalizing very close to normal. If you consider that premiums really stood still for a while. Then if we look at our normalized earnings, the top right slide there, you will see what is pleasing to note is that both UE and OUTsurance reached new high watermarks. What's also worth pointing out is that there's a lot of volatility in this. And that's because of the last retention on the reinsurance programs. And with climate change, you get more of these events and the number of events in the specific year plays a big role. So 2017 was a very benign year. And then 2018, a bit more normal and now this year, we had one big event. So it's still better than average, and that's why we had that contributed to the strong performance. But as investors, you must understand that there will be more volatility in our results because of these retention levels. But you must look through the cycle. And the good thing about climate changes that it did growth -- it causes real growth in the property, especially the property side of short-term insurance. Also the proliferation of solar panels, that contributes a lot to the cost of hailstorms and things like that. So that is something which will drive the short-term insurance industry's growth. Then maybe looking at that cost ratio there in the right bottom, you see that we had a 0.6% increase. A big factor of that is also the fast growth of UE and that the fact that this combined cost ratio will then have a larger weighting of the UE cost ratio. But there's -- in South Africa, as Herman also mentioned, very positive, our personal lines cost ratio came down. And when we look at it long term, we think a 20% cost ratio on personal lines in South Africa is sustainable in the long run. The commercial one is obviously higher as we're still in the J-curve of the agent business. We grew the agents over the last year in a bit from 350 to 500. And we expect to be through the J-curve on that sort of 2.5 years from now. But we do validate that agency force incrementally to make sure that they scale and achieve their targets. Okay. I think we can go for the next one. Then there at the top left there, you can just see that the OUTsurance growth rate came down a bit. But we do expect that to normalize as premium inflation and more normal behavior returns, also the strong contribution of our face-to-face agency force should help with that. When you look at UE, you see that very big step up there. Two things to note, though, is the role of the exchange rate, that provided a bit of a tailwind in the last year. The second one is with BZI. Part of the agreement was to transfer the existing in-force book. And that in-force book will be complete, the transfer cycle will be completed by end of March, and then we'll revert to the normal run rate. So those 2 things should be noted that. That said, CTP only launched in December, so that would not have been in the -- really in the 6 months results. So that's going to give us some extra growth going forward. We also launched the BZI SME product right at the end of the 6 months. So that contribution will also go in there. If you look at a group level through the cycle, we expect top line growth of around 15% to be sustainable over the next few years. So just to give you an indication, but bear in mind, the exchange rate might cause some volatility in that growth from year-to-year. So that should be noted. Also in terms of bottom line growth, we expect that to slightly lag top line growth. And the reason for that is just that the new channels tend to have slightly lower margins than, say, our traditional OUTsurance personal lines channel. We're very comfortable with that because the return on capital in those new channels are still very attractive. And as such, we're comfortable with that. So when we think about long-term bottom line growth, we're thinking sort of low teens could be achievable. Okay. I think we can go to the next slide. So yes, there, we already covered the growth in the agency force. And then OUTsurance business direct, we spoke about -- Herman spoke about the business interruption claims. So maybe I can hand over to Jan, to just cover those last 3 segments there. Jan's turn?

Thank you, Marthinus. We did communicate in our circular that our long-standing relationship with FNB with regards to the homeowners cover arrangement came to an end on the 1st of January as regards to new business no longer being referred to OUTsurance, that's in line with FNB's own insurance ambitions in this space. What that means for our JV is that we have agreed to run off this book in a very responsible way, which you'll see the in-force profit share, which is 90% towards FNB and 10% towards our churn stay intact. We think that we have disclosed that this represents roughly 8.8% of OUTsurance personnel's and in-force premium this book, but less than 3% of operating profit. If you take it through the cycle view of the performance of this book. So hopefully, that gives some context and what we anticipate as a management team is quite a gradual runoff, an incremental adjustment to profitability. Although the top line runoff might be a bit faster given the profit share dynamics. Marthinus has mentioned our strategy around the increase in our product set as well as our distribution channels. And the team is quite busy at OUTsurance life expanding on those ambitions. So we launched our partnership with Shoprite in April 2020, where we're distributing funeral insurance through their store footprint across South Africa. That partnership is going well for us, and that explains quite a big component of OUTsurance's last premium growth. We're not quite yet reached our sort of our business plan targets and ambitions there, which I think paints a picture of still those are potential for that partnership to grow further. Our new business in lapses overall in the life business has remained quite robust considering the impact of the pandemic. We're quite satisfied with our reserving and our coverage of those reserves with regards to our actual COVID claims, but we do continue to hold quite a strong reserve relative to our experience. But obviously, our claims experience in the 6 months is a component of explaining the lower earnings and outcome for our insurance life, coupled with the impact of a lower long-term yield and the impact that's had on our policy or the liabilities. We're also quite excited to launch into the face-to-face distribution channel. That's for both OUTsurance Life and [indiscernible]. We have learned that the direct market for OUTsurance -- for life insurance products as well as for investment products is quite small and defined in the South African context. And for that reason, we need to expand into both an agency as well as an IFA model to reach the right market segments to target. So OUTsurance life will come to market this year with a face-to-face product and distribution strategy, which will include IFA businesses as well as an agency force. We've also seen that the one fee proposition, which essentially fixes your investment fee in rand terms for investment products have seen good take-up from the direct book as well as from the IFA partnerships we've established to date. We're not quite there yet where that business is viable from an AUM perspective. But certainly, we are seeing a higher cadence. As mentioned, we do believe that the distribution of face to -- face-to-face method here and partnerships with IFAs will be a key contributor to drive out west towards viability in the future. Thank you.

Thanks, Jan.

I think we covered in the previous slide, I already spoke to the points on CTP and Blue Zebra. So I do think we can move over to questions in the little remaining time.

Good. Thanks, Marthinus. Thanks, Jan. Roger, your hand's still up. You have another question, you're welcome to proceed, and then Warwick will take a question from you after that. Okay. Warwick, I think Rogers drop his hand. So Warwick, why don't you please proceed with your question.

Thanks, Herman. Thanks Jan and Marthinus for the presentation. I'll start with a few questions for OUTsurance you keep them brief. I know we're over time. Just in terms of the reinsurance rates in UE, having increased so much in the current period. And you spoke to the fact that there will be a renewal period coming up shortly and that it's -- obviously, there's some uncertainty around it. But what is your expectation around potential increases in reinsurance rates? And how long does it take you to pass some of those increased costs onto your customer base? I'll go 1 by one, if that's okay.

Thanks, Warwick. Yes. I mean, last year, the catastrophe experience was significantly worse than so far this year. So all other things being equal, we would expect it to go a bit smoother this year. So for further context, our reinsurance cost as a percentage of gross premium used to be around 7.5%, and that increased to close to 12%. However, this year, the experience is much better but also worsened things last year was an uncertainty around COVID. So that affected the global capacity and appetite. And also, there was uncertainty around Blue Zebra as the Blues Zebra book didn't run very well with the previous underwriter. But as you might know, the arrangement when we brought it over, we took control of pricing and underwriting, and that work is running significantly better now. So hopefully, 3 of those elements, which should play along to help to make the renewal season less onerous. But that said, some of the January renewals in the market have seen increases. And as such, that's also why we're prudent. We're not paying an interim dividend out of UE, just in case, we're not able to obtain the same current retention level because should we require a higher retention, we might have to hold a bit more capital. But if we remain claim free from a cap point of view for the rest of the year, I would be surprised if it's worse than last year. Normally, you tend to see improved terms. In terms of factoring that into our pricing, because of the materiality of that, we didn't factor that into our pricing in 1 year. So you take a multiyear approach. And it's like a moving target. So I mean, we'll see what the next renewal is, and that will determine how much we need to put through in the next year. But fortunately, most of the market is in a similar position. And as such, I mean, that's why you're seeing premium inflation in the Australian market, but it all depends on what the experience is going to be for the rest of the year. But the long-term trend is definitely upwards. And as I alluded to earlier, in some areas of Australia, your solar panel penetration is more than 20%, severely escalating the cost of high severity milestones. So that is what's providing real growth in the non-motor industry. So hopefully, that gives you a bit of extra context around the reinsurance renewal.