Sanlam Limited (SLM) Earnings Call Transcript & Summary

Thank you, Chris. Good afternoon, ladies and gents. This is our operational update around COVID-19. Thank you for joining us on the conference call. Three of my colleagues are here, Wikus Olivier, Anton Gildenhuys and Patrick Hartnic. In line with guidance issued by the JSE to listed companies and our usual approach of keeping our stakeholders fully informed about Sanlam's operations, we released an operating update this morning that deals, not just with our results, it also fundamentally deals with the impact of the COVID-19 outbreak on the Sanlam Group. Now as you all know, the COVID-19 pandemic and its consequential impact on economic growth prospects as well as on the investment in the currency markets is the most significant event that corporate governance and society have had to deal with since the global financial crisis. And of course, significant uncertainty remains around what the eventual impact will be. As we indicated in the update, we had a very good start to the 2020 financial year. It continued the strength in the second half of last year that we experienced. We had strong growth in new business and operating earnings. These measures grew by more than 30% and 10%, respectively. VNB for the first 2 months of 2020 was so respectable despite a slower start at Sanlam Emerging Markets and at Sanlam Corporate. Prospects for the remainder of 2020, of course, changed abruptly when the World Health Organization declared COVID-19 a global pandemic. Given the alarming rate in which it's spreading across the globe, the emerging markets where we operate were, of course, impacted and many of our markets implementing some form of lockdown or curfew for all residents. Investment markets, as you'll be well aware, went into free fall. That impacts on our earnings, impacts on our financial position as a group, and that's what we set out in the operating update. Now as a life insurer and financial services business, solvency and liquidity are the most important factors for organizations like ours in a crisis like this. Pleased to say that our solvency remains solid, well within our target range. And essentially, what we've experienced is a full economic shock scenario as we projected, and we model for that. We've done that in the month of March. But our well-established liquidity management processes are reacting as expected, and we are able to manage any increased margin collateral calls comfortably within our internal resources. Prospects for operating earnings for the remainder of the year, of course, at this stage, we would say, will be more muted, certainly than what we've experienced in the first 2 months. But at Sanlam, we think we got the caliber of people that will enable us to face the headwinds as effectively as possible and to maintain our relative performance, and we'll be doing the best that we can. So thank you. I will now open the call for questions from the audience.

Our first question is from Warwick Bam of Avior Capital Markets. [Operator Instructions] Warwick, unfortunately, we cannot hear you on this line. I see that you are on the web phone, please disconnect and check your settings. The next question is from Michael Christelis of UBS.

Okay. A few questions, if I can. Firstly, you talked about credit mark-to-market losses. Can you -- due to credit spreads widening, can you give me a sense of, firstly, the size of this portfolio and what the mix of credit in there is? I'm trying to understand what have you got exposure to here that's causing this level of mark-to-market loss? And just confirm whether the number is pre or post tax. That's the first question. Then when I look at your -- you talked about new business up 30% in the first 2 months, but value of new business are only 5%. So what am I missing there? Is it all non-covered new business that's growing? Or maybe just a bit more color there. The third question around your hedges on your capital portfolio. You comment about rolling those into cash, what are you doing with the underlying equities? My understanding is you've got a portfolio in equities with hedges over those equities. So the hedges are becoming cash. Are you keeping those equity positions make it then thereafter? Or are you selling out of those equities? And then lastly, if you can, maybe just give me a bit of a sense of the sensitivity of your -- firstly, your funeral cover book to mortality deterioration? And if you know sort of to what extent that book is exposed to elderly relatives of customers? And then the sensitivity of your annuity book to a 10% improvement, for example, in annuity mortality -- or sorry, a 10% deterioration in the near-term mortality, both of those from an earnings perspective, what that would mean for the year?

Okay, Michael, there's got a few questions there. So on the credit mark-to-market, Wikus, if you can start with that and then Anton can add some flavor. And then you can also, Wikus, deal with the second question. Anton, if you can deal with the -- your second question was on the business volumes. Anton, maybe you can just deal with the hedges and what we're rolling into there. And then also on the funeral versus the offset on the annuity.

Yes, I'll start, but Anton, please come from your side. So the mark-to-market losses that we disclosed there is actually is an offshore-listed bond. So it doesn't include unless it credit at this stage, which, of course, as we value those at the end of June, they may also have an impact from a mark-to-market perspective. Then at the onset, we quoted the -- it was of the tax amount. Anton, I'm not sure if you can maybe comment on the spread within the book.

Yes, basically, it's mainly offshore-listed credit, mostly denominated in U.S. dollars. African sovereigns, some African projects, but using those African projects would have a risk mitigation in place usually with the backing of if it's a world project with BP and Exxon and so on, guaranteeing the exposure. And then there were also some offshore-listed bonds in Europe, like Naspers bonds and so on. So it's a well-diversified portfolio, but spreads have widened across the board.

And the size of that portfolio?

I think it's about ZAR 11 billion, thereabouts, but I'm not sure. I can get back to you on that.

And to deal with the question of VNB growth, you -- operating your assumption, especially on the Sanlam Corporate side, had very good new business growth year-to-date, but it was, from a mix perspective, more into the lower margin investment business with the risk -- recurring premium risk business having a little bit of a slower start, but it is kind of more volatile in nature. And the 2-month period is really too short to measure the sum on corporate business. Within Sanlam Emerging Markets, we listed kind of the 3 markets, where margins were lowest in Namibia, Morocco and Côte d'Ivoire. And there's a combination of changing mix, in particular within Namibia, lower [ intra-legal ] market sales. And then within Morocco and Côte d'Ivoire, you would record year-end results also in the second half of the year, the margins already started declining due to a change to lower margin savings products.

All right. I'll just pick up on other questions. I just got the number. It's about ZAR 5 billion, the portfolio. It's a little bit less than ZAR 5 billion the nominal exposure. In terms of the equities, clearly, we will be able to sell it, given that we are talking about the ring of tranches. And as you know, these tranches are spread out over the 12 months. We'll talk about ZAR 700 million each tranche. And of course, that ZAR 700 million declined to about ZAR 500 million. In this instance therefore, we actually kept the equities on the balance sheet in the portfolio where we had other buyers elsewhere in the portfolio for rebalancing purposes and so on. So we actually have ended to sell the equities into the market, but that ability is clearly there. Given the nature of...

The intention is to have cash and no equity exposure for those. Is that right? You're replacing equity exposure with cash?

Yes, yes, yes, absolutely. So now, we definitely don't have any appetite to increase market equities in the shareholder portfolio. Then on the annuities and funeral, we've stress tested all of our mortality experience in all directions. So that will be our underwritten insurance business, our group life insurance, funeral and annuities. You correctly pointed out that in [indiscernible] of course, goes in other directions. On a relative basis, funeral is actually quite small, and that includes our Capitec JV, the stress parameters. So I would say it's about half of that of our underwritten life insurance exposure. And that is actually stress where we simply applied the World Health Organization's mortality book. We are getting idea of where the different exposures lie relative to one another. The annuity book would offset the underwritten book more or less 60% to 70% in terms of exposure. And then Group Life is a little bit higher than your underwritten insurance exposure.

Okay. So but the point is, it's your elderly age groups that you're worried about, so it's [indiscernible] underwritten.

Yes. So what we've done is, if you look at the World Health Organization, you would have mortality rates for age band, and we've improved mortality rates and simply applied it to the ages of underwritten lives, which we, of course, know. Just to get an idea, so that would dramatically cap the age profile of our underlying portfolio. And we go to that at per age bracket. [indiscernible]

And you know the ages of each life in the funeral cover, right, which -- if I've got a policy of 5 or 6 lives on it, you know each one, right? Okay.

Yes. So we applied that stress to the wider company, and you do need to know the age of the wider family is actually correct. So we've used those ages and apply it to them. Now of course, it is a good measure. We don't know to what degree mortality is of the World Health Organization is accurate. Your number is clearly, totally understated because we don't have all the reported cases. So that makes this stress very conservative. But on the other hand, we also don't know exactly how this pandemic would be unfolding in Africa, which could go the other direction. So the purpose was just kind of what you ask is, where is most of our exposure. And it's pretty evenly spread. Clearly, we are still very much net exposed to insurance. The rest of annuities is only somewhat of an offset.

[Operator Instructions] Our next question is from Francois Du Toit of Renaissance Capital.

I just want to check on the mismatch provisions. Would that -- could that be applied to reducing the impact of the ZAR 479 million credit losses, for example, that you've mentioned in your update? And you also mentioned ZAR 11 billion credit booked. It seems a bit small compared with your South African annuity portfolio. Is it more corporate -- South African corporate risk, corporate credit, corporate bond risk that we should also be cognizant of? And just maybe can you quantify the vision that you've got left for mismatch reserve? I think you've quantified your provision for epidemics in first 2 results. And if you can do the same for your mismatch reserves and maybe even for your reserve for guarantees for marked-to-market risks over and above best estimates that you hold? Also the question that you've just been asked about the impact of mortality. And you've mentioned that about 60% of that impact is offset or leased from your annuity book, but can you quantify the 40% impact or give us a broad indication of what that -- your remaining exposure amounts in terms of rands and cents in terms of mortality plans?

Anton, I think if you can go at both of those. Maybe Wikus also a little bit on the reserves.

I'd try to give my best answer. I mean, Wikus can chime in.

Yes, yes.

The credit losses, we can't offset that against the mismatch provision. I assume that the gate, we call it the gate, our capital [indiscernible]. The gate is about ZAR 3.5 billion price in total, but we did disclose that in our results. The 11 -- it's actually ZAR 5 billion, not ZAR 11 billion. It's ZAR 5 billion in credit. We used to have a bit more or less at credit, but we sold down as spreads narrowed towards the end of last year. So we sold down quite a bit. But you're right, most of our corporate credit exposure would be in South Africa in this period. Clearly, we'll not have the same level of widening of our unlisted credit spreads because a lot of that includes that liquidity premiums that the market currently demands. In terms of investment guarantee reserve, we don't disclose the size of the reserve, but what we have disclosed is that we've built up quite a significant surplus in that reserve over time, mainly the roll-up of current premiums and then some clever investment strategies as well. And that surplus was sufficient to absorb the increased size of Teva core investment guarantee reserve. And that increase is mainly because of declining market values and then also increased equity volatilities, which pushed up the investment guarantee requirement. So there's currently no earnings impact. Even if the investment guarantee reserve should grow more, we should still be able to mitigate any operational earnings impact because we've got a lot of guaranteed premiums that we do not roll up in the investment guarantee reserve calculation, but that is in our JV. Currently, those guarantee premiums are in the JV, so that will have an impact on the JV. In terms of the mortality, I think the basis would be just to give you kind of a ratio of where the numbers lie in terms of our accrued stresses. But like I said, we have no idea exactly how it will pan out. But clearly, that's not my primary concern at the moment. The mortality claims will probably be insignificant against market impact of the declining market values and bond yield swings and credit losses and those kind of things. But in terms of it, you can think about it as just ratio to it one way or another, 3 units for underwritten insurance, 6 units insurance and then about 1.5 units for funeral. So that's relative to one another. If you can get an idea of how they stack up and then only about 2 offsetting from annuity businesses.

Wikus, anything you need to add there?

No, Anton covered everything, Ian.

Okay.

[Operator Instructions] My next question is from Warwick Bam of Avior Capital Markets.

I just want to confirm, the special purpose vehicles schemes, what's the impact of the fall in the Sanlam share price on those valuations? If you can just give me a picture from an earnings point of view as well as the group equity value point of view, question number one. Question number two...

Wait. Just tell me -- sorry, which SPVs are you referring to?

You've got 2 main ones, really talking in general. I assume they're all linked to the share price and have some share price collateral to them. But maybe you can give me some color if I'm wrong.

No, I'm just wondering which ones you're referring to. If you're referring to the one related to the 5% share scheme, is that it?

Yes, I mean, you've got one ZAR 500 million that you -- from 2017, and then you've got one from last year, the ZAR 3.7 billion.

Yes, okay. Yes. Okay. Okay. Yes, that's fine.

Then just wanted to check, so the full ZAR 8 billion capital backing the required capital in Sanlam Life, move into cash. Does that change your SCR cover ratio? And then in terms of the 25 March calculation of your SCR cover ratio of 188%, does that include the full funding gap on the smoothed bonus portfolio?

Okay. Wikus, will you deal with the SPV question? And then the -- Anton, maybe just deal with the capital in the SCR and funding level.

So the smaller SPV, the ZAR 500 million one you mentioned, that's not only our securities not, I mean, to Sanlam share, so there's still more than sufficient security on that deal. So we don't have any concerns there at this stage. Then on the BEE SPV, you will recall that the funding was split 50-50 between Sanlam and external funding. With the drop in the share price, we, of course, it go down to a trigger level where we are in discussions with the funders, but we haven't reached the -- any default level, and that default level, of course, is set more than a 1x cover. But we are in constant discussions with the funders to make sure we manage the situation as far as best as we can. But at this stage, it's still fine. Any impact on GEV, you asked, ‘cause our 50% funding to the vehicle is included in our GEV. And if we were to reach a point at any time that we need to write off part of -- that's something then, of course, is going to have an impact on our GEV.

But we're not there yet.

Yes. We're not there yet, no. But I do think this is -- where the Sanlam's share price at the moment doesn't reflect Sanlam financial position and these prospects, I think, in my view.

Then on the other questions. In terms of the cover ratio, if you have full protection figure [ on a scholarly base ], there's still some volatility in your hedged equity. If some of your [indiscernible] out of the money, you will participate in subsequent declines in market values. So moving into cash would actually slightly improve your resilience, but it won't be material, given the size of that improvement relative to hedged equity. So I think you can regard it broadly as neutral. In terms of the smoothed bonus portfolio funding gaps, that will be captured in the IGR or the Teva calculation, where we've got predefined management actions that our Board approved in line with same regulations. And those management actions are taken into account and calculating the value of the guarantees offered. The reason why we don't have a material impact is that IGR surface I spoke about earlier, absorbed all of the increased cost of a guarantee so far. We now had pretty much a 0 surface. So from this point onward, we would have to start capitalizing future guarantee premiums.

The next question is from Sarine Barnard of Ninety One.

I just want to ask, you talk about the general insurance environment and you refer to some governments that are considering requirements for insurers to pay medical costs, even if this is not covered under the policy contracts. Can you expand a little bit on that? Specific countries that you refer to and the size of your medical insurance businesses in those areas?

Okay, Sarine, I mean, we're really highlighting this as a risk, but Wikus has been going through that one. So maybe, Wikus, just update us there.

Yes. On the stage, Sarine, it is really just highlighting it as a potential impact. And because of it, there's no certainty, we're not disclosing the specific countries at this stage or -- and it's impossible to quantify potential impact. But there has been 1 to 2 countries where comments were made around this aspect that despite policy wordings that insurance companies might be required to pay for some medical costs or to contribute to something like a solidarity fund that was set up in South Africa. But it's only talk at this stage. And that's why we don't want to disclose anything specific. I think if there are developments on the specific aspect and it's material for us, and of course, we will discuss that with the market.

So I just -- we thought that people may pick up on things like that where there's commentary in the country or some of the countries we're involved in. And that's why we thought we should refer to it, but there's not a specific country or a specific issue in that country that we can report on now.

[Operator Instructions] We've got a follow-up question from Mike Christelis.

Sorry, just one more from my side, just around India. I mean, I appreciate that you've got listed subsidiaries were listed interest there that you can't really talk to. But given the sort of sell-off we've seen in those specific counters and the fact that you are invested in their non-listed sort of capital business, maybe you can just talk about some of the trends that are going on in India and even if it's just specific to the GI or the Life business? I'm just trying to understand, are we -- should we be expecting a material slowdown in earnings? Is it -- what's actually happening on the ground in India at the moment that's causing, in your view, the depressed share prices of those 2 subsidiaries?

We think it's the environment. It's not the business. We just think it's the environment. But Wikus, maybe let's go through that one.

Yes, I think, Michael, it is difficult. We can't comment on the results of the credit business because they are separately listed, and we are a minority shareholder. On the Life and GI business, there we can't comment and the results for the first 2 months was actually very, very good. But I think we need to understand that. [ Certainly ] I'm not saying that's the case, but there are linkages between the insurance businesses and selling them into the client basis of the credit businesses. So should something happen today with growth in their loan book and disbursements, of course, it can have an impact on us. But I can't say anything specific on either disbursements, loan books, all profits of the credit businesses.

And Michael, you must remember as well that we do report with a quarter lag in India.

Yes. Yes. Your GEV though would be linked based on your current methodology to 10% above the current share prices. So there's definitely going to be quite a material hit there from December.

Yes, there could be a material hit there.

50%? Yes.

Yes. But I think the question is whether that reflects fair value or not. Where we were end of December, we did say that those 2 businesses were effectively valued at PEs, PEs of less than 10x. You can just imagine where they are now.

[Operator Instructions] Sir, we have no further questions in the queue.

Okay. Let me close then. We'd like to thank you for participating in the call and for your continued support and your interest in Sanlam Group. We wish all of you the best in dealing with this pandemic. Our thoughts are with every person that's been affected and the families of those succumbed due to complications from this infection. We hope you'll stay safe, and we look forward to speaking to you again. Our plan is the interim results in September 2020. But as per now, we will -- if we feel there's a need in terms of the JSE guidance to update you prior to that, we will do so. Thank you.

Thank you very much, sir. Ladies and gentlemen, that then concludes this conference call, and you may now disconnect your lines.