Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sanlam Life Insurance Limited 10 months operational update. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Paul Hanratty. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and thank you very much for joining us on this conference call. I'm joined today by our CFO, Abigail Mukhuba; our Chief Risk Officer; Lotz Mahlangeni; as well as Patrick Hartnic and Grant Davids from Investor Relations. We released the results for the 10-month period to December 31, 2020, earlier this afternoon, and I'd like to just make a few comments before we open the lines to questions. From a strategic perspective, I'm pleased with our progress in implementing the revised strategy, which emphasizes technology as a key enabler in meeting strategic goals, putting the customer at the core of everything we do. Our focus on collaboration within Sanlam and with strategic partners is also progressing well. In the Sanlam pan Africa business, we continue to drive operational execution with the aim of getting consistent growth and a stable return on capital. India too remains strategically important for Sanlam. In our announcement, we advised shareholders that the conditions precedent relating to the sale of the 25% stake in Sanlam Investment Holdings to ARC Financial Services have been fulfilled, and the closing process has now happened on Friday evening. From an operational perspective, the group maintained a resilient operational performance over the 10-month period. There's been a gradual improvement in the operating environment since June 30, 2020, as governments have eased the level of restrictions to control the spread of COVID-19. Operating conditions, however, remain challenging in our largest markets. Lower average market levels increased pressure on asset management margins and investment-related earnings. Weak equity market performance over the period negatively impacted investment return on capital, return on the Saham float and market-related fees of participating products at Glacier. The hedging strategy in place in the South African life insurance capital portfolio limited the overall adverse impact on net investment return. Credit markets partially recovered in the third quarter of 2020, which resulted in a significant portion of the credit spread losses in our central credit manager reversing after the 30th of June. I would like to highlight the following 3 noninvestment market-related items that did impact our earnings after the half year. Firstly, I'm sure you've all seen Santam's SENS in which they alerted the market to the fact that they've made an additional provision for contingent business interruption insurance. They've made an additional provision of ZAR 1.7 billion following the Western Cape High Court judgment in the Ma-Afrika Hotels matter. So this brings the full provision and premium relief provisions in the 10-month period to ZAR 3.3 billion. Secondly, we had an explosion in the Beirut port, which has had an impact of ZAR 183 million, inclusive of the exposure in the Lebanese business itself as well as Saham Re and Santam Re who are reinsurers to the Lebanese business. And then finally, we have had an increase in COVID-19 claims, amounting to some ZAR 229 million of claims specifically related to COVID post 30th of June. Despite the significant increase in the COVID-19-related claims, year-to-date risk profits remained strong in the life and savings cluster, supported by a decrease in mortality claims from other causes. The group pandemic reserve has not been released in any way to date. How this reserve is dealt with will be considered more fully at year-end based on the overall risk experience for the year. Persistency has not deteriorated over the 10 months or indeed after the half year, but we believe that future experience in this regard remains at risk due to markedly lower South African GDP. Some of the salient features of our performance are as follows. New business volumes of just under ZAR 250 billion are 25% up on prior year. Investment business is the key driver over the 10-month period. And life insurance sales in the third quarter recovered to 5% above those in the first quarter. Net fund inflows of ZAR 51 billion are up 17%, and the Sanlam emerging markets was a key contributor to the growth. Although I must, of course, draw your attention to the support to Sanlam emerging markets numbers from the currency depreciation. The net value of new business covered was ZAR 1.35 billion, that being 21% down on the prior year. However, that is better than the 29% decline that we reported at the half year. The net VNB margin of 2.3% improved by 24 basis points from that reported at the half year. The net result from financial services is down 21%. But if we exclude all the COVID impacts, both positive and negative over the prior year, the result would have been 22% up. And headline earnings and diluted earnings per share are both increased. I'm very satisfied with our performance for the 10 months, which does reflect our resilience and our ability to maintain value creation for shareholders in very difficult times. And in conclusion, I would say that Sanlam remains very well positioned to weather the headwinds with a robust balance sheet and strong solvency position, diversification across many geographies, lines of business and market segments as well as having a strong depth of skills in all of our businesses. It's really important to note that all of our businesses remain strongly cash generative. Although, of course, you'll appreciate that at Santam itself, the provisions that have been made have obviously got a very severe impact on both the profits and the cash out of that business. We continue to actively manage the consequences of the COVID-19 pandemic and any potential second wave. Whilst economic activity is gradually recovering, we expect the operating environment to remain challenging for the balance of this year and certainly throughout next year. New business growth in the remainder of this year, which is really only 2 months, but it will be impacted by the high base that we had in the second half of 2019. The eventual claims experienced from COVID-19 remains uncertain, both at Santam with the CBI claim as well as in our life insurance operations. The Santam Board has made a decision to appeal the Ma-Afrika judgment and await the court's permission on the application to appeal. The potential outcome of the appeal, including other relevant court rulings on these and other Santam policy wordings, may materially impact Santam's assessment of the estimated net effect of the CBI claims. The overall possible financial impact of Santam's CBI exposures will take time to finalize. Over the medium to long term, we remain confident of the growth potential in all of our markets including South Africa, and we will continue to deliver value to our shareholders and other stakeholders. Thank you very much. I've made the remarks that I wanted to just to introduce, and I now open up to questions from all of you on the line.

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

Can you hear me?

We can hear you fine, Michael.

Four questions, if I can. Firstly, on mortality and then particularly around COVID. You guys were quite sort of clear in your articulation that you thought COVID was only going to result in about 17,000 deaths in South Africa as of June when you presented in September and that your pandemic reserve could cover you, I think if I remember correctly, up to about 27,000. I mean, can you give us a bit of thinking around your expected sort of SA debts from COVID -- as a result of COVID given that we're now well pass the 17,000 deaths that you had previously mentioned? And what exactly would trigger a release of your pandemic reserve? Is it a net negative risk experience, is the question? Second question around persistency. If you can maybe give us some clarity or just some guidance as to what's going on in persistency in products where you either haven't offered premium relief or premium relief has ended. I'm just trying to understand, is there an underlying deterioration that's maybe being masked by premium relief? And then the third question is just your thoughts on maybe, if you can -- the Board's thoughts on dividends for FY '20. Obviously, not holding you to commit to it now. But just your ideas about if things stay where they are if Santam's CBI provision plays out exactly to be the right number, and your current capital position looks fairly robust, would you be looking to pay a normal dividend in this sort of environment or not? And then maybe just lastly, if you can, maybe give a bit of color around the ARC potential deal that's still to come? Sort of what sort of capital do you expect to have to deploy there? Is it in the billions of rands? Is it in a couple of hundred million? Just to get an idea of what we're talking about there.

Yes. Michael, thanks. Look, I'll have a swing at this, and I'll ask Lotz in particular. Mortality was always my least favorite subject, I have to say. So -- but I'll have a swing at it. Look, you asked about where we think this thing will end up. I mean you yourself know that the deaths as of today are 22,000. It's growing very gradually. Where will it end up? Who knows. I think it all depends on whether there's a second wave and what really happens within that. We can tolerate, as we said previously, a much higher level of experience before it becomes an issue for us. You quoted the number, I think, there of 27,000 or something like that. I think we can sustain a considerably higher level before we start running into losses. And of course, the big thing, Michael, as you know, is what happens to sort of non-COVID debt. So it's very much a function of whether there are lockdowns and so on because those also have an ameliorating impact. But I really don't see this as a material issue for the group. As to whether we release the reserve or not, I think this is a matter of judgment that we're going to have to come to at the year-end. We're going to have to consider how many COVID deaths we had, and then we're going to have to look -- have to have a look at that against the total mortality experience. I think that there's no question in my mind that there's -- companies certainly can have legitimately pandemic reserves because this is not going to be the only pandemic that the business ever faces. So I'm not really going to give you much of an answer other than to say, firstly, I think the mortality is pretty much not a huge event in the first place. And secondly, we will look at the overall mortality experience, including annuitant mortality, at the end of the year and make a judgment call on that. In fact, we had quite an interesting conversation with our auditors recently on this topic, who actually was saying they'd like to have an established set of rules. And I was trying to explain to them how actually very difficult -- when you talk about a pandemic, it's by definition, a tail event. And therefore, to write an algorithm, which is what they would like you to do, is actually extremely difficult, and we'll have to exercise some judgment around that. On the persistency question, actually, we've had quite a lot of use, as you know, early on of premium relief facilities and so on. Actually, 79%, I think, of our people who took the option to use those facilities have actually started paying again. And so those facilities are definitely not masking the good persistency experience. And in any event, the numbers involved were really small when you look at the whole base of clients. So I think we're pretty clear that the persistency we're seeing is actually the persistency that we -- it's a real number, and we're very happy with that. On the question of dividends, our dividend policy is quite a simple one. Our dividends follow earnings, and we can have a small cover -- cash cover. Most of our earnings, aside from the Sanlam Emerging Markets business, are turned into cash, they convert to cash very well. So as I said at half year, if you look at the delta in our operational earnings to the prior year, that will give you a delta on the cash. And if the dividend policy remains intact, then that will tell you what the dividend will be. So you used the word, would we pay a normal dividend. I'm not sure what a normal dividend is. But certainly, if we stick to the current dividend policy, which, as I understand it, has been in place for many years, then you would expect to see a dividend that reduces in line with the earnings of the business. You can understand as well that we are -- when you look at the Santam situation, and you take the context of a ZAR 3 billion-odd provision in a year, and you know what its normal earnings are, I think the prospects of dividends from that business are not very high. So that's a factor for us in the equation because it's the other business, of course, where we don't get cash up equal to earnings. We get a -- obviously, they retain some earnings. But the dividend is a matter that we will carefully consider after the year-end. As you pointed out, our capital position is very strong. And again, we're in an extraordinary period of time. And we're going to have to weigh everything up in thinking about the application of our dividend policy when we get there. On the ARC transaction, you asked what the quantum would be. It's not in the billions. It -- I would -- I think it's -- I probably wouldn't be telling you anything you couldn't work out with a little bit of effort. It would be less than ZAR 1 billion. And actually, very likely not to put much, if any, call on our capital because of actually how we're structuring it. So yes, I hope that answers that question for you. But follow up on any of those points, if you want more detail or if I wasn't [indiscernible], Michael.

The next question comes from Warwick Bam from Avior Capital.

Your commentary around the Retail Mass new business sales, excluding Capitec, you used the word significantly down for the first 10 months of 2019. How do you -- what's the outlook considering the extension of the sort of second wave coming through? And what can you do in the meantime to try and improve sales volumes in that business? Can we go one question at a time? It should be easier.

Yes, it's absolutely fine. So look, I think there are 2 issues in that market. One is obviously the -- just the share issue of interacting with your client base has become more difficult. And as you know, in many cases, it's about work site marketing rather than anything else. So clearly, if the lockdown persists, that is, continues to be a problem and an issue for us. But having said that, those guys are pushing really hard. At the end of the day, the people who serve that market also need to put bread on the table. So they're extremely motivated. And we've rolled out actually a lot of technology to assist people. But -- so we're sort of straining every sinew that there is. But firstly, there are some practical inhibitors. And this is where, of course, the Capitec thing has an advantage because they've managed to keep branches open, so you can keep interacting with customers. So that's been really helpful for us. And the other thing, of course, is that the sales in that area will depend a lot upon the impact on people's disposable incomes. So yes, I think one's also got to just factor that into the whole equation as well. But it is going to be tough, that segment of the market.

And then your commentary around new business volumes in East Africa. Table 6 -- or the table on Page 6 discloses that your Q3 '20 and Q2 volumes were 51% and 37% of Q1, respectively, for East Africa. But your commentary on Page 7 seems to contradict that, just looking at Life Insurance volumes increasing 48% year-over-year; General Insurance, up 8% year-over-year; and then East Africa investment business has significant inflows from new institutional mandates. Just help me to understand how page -- the table on Page 6 ties into that commentary.

Okay. I'm going to have to -- I'm afraid, actually ask Grant whether -- or Abigail whether they can help you. I'm afraid I cannot, as I sit here.

Patrick, if it's okay with you, Warwick, if we can get back to you. I'm also just trying to follow the recon between the table and the other page.

Yes. I think...

No problem.

Maybe, Abigail, if -- or Warwick, if I can respond. So the table on -- where we say Q3 performance versus Q1, the 51%, in Q1, we actually had very good inflows in the first quarter, where the -- and that's mostly in the investment business side. In the third quarter, it wasn't that large. And that's why you can see that as a percentage of Q1, it's only 51%. But year-to-date, it has been strong in East Africa. But if you want a little bit more detail, we can get back to you on that as well.

Okay. No problem. So mostly a Q1 story then?

Yes.

And then just the last one, just on the retail credit provisions in Shriram. I noticed they've increased 58% since the 30th of June. And I appreciate some of that's currency, but it looks like there's been a deterioration. If you can add some color to that provision?

Yes. Look, I think maybe Patrick or Abigail, you can help. But the one snag with those provisions is that we are working in arrear to them. So we always have a -- so we have a lag. So what we report now is actually several months behind. I don't know, Patrick, if you can help with that? Or Abigail?

And also that in India, if you look at the lockdown profile, their's was extended further. It went into August period. So that's why you would have additional numbers there.

Yes. I think that's...

Yes. The business, as I understand it, from Heinie there, is actually beginning to trade up very nicely now. But there is this unfortunate lag between what we show and their accounting.

The next question comes from Larissa Van Deventer from Barclays.

I have 2 quick questions, please. The first one is just a clarifying question on the dividend. Your official policy is 1x cash earnings. For Santam, is it fair to assume that we should bode in the dividend from Santam rather than the earnings number?

Yes. We get the dividend...

Cash dividend?

Yes. Yes.

And then you comment on hedging in the life book having provided downside protection on the mark-to-market. Can you elaborate a little bit about what that hedging is and what your hedging strategy is going forward?

Yes. Actually, Lotz, do you -- I hate having to answer everything. Do you want to answer this? Or would you like me to answer it?

Yes. I can answer that, Paul. So in terms of the hedging that we apply for current year liabilities, so there's a very close matching for those liabilities. So we don't take a lot of market risk on hedging the current liabilities. So that's the one component. The other component in terms of our capital portfolio, we still maintain a position of matching our subordinated debt, which is about ZAR 1 billion with cash and near cash instruments. So there's no market risk exposure there. And the rest of our required capital is paid by the hedge equities position. So we've continued to maintain that hedge, which is both efficient from a capital perspective as well as from a tax perspective. So we don't have double gearing of our capital that's making the required capital of the life balance sheet. So from a market risk exposure in terms of our current liabilities as well as our capital portfolio, we've maintained our hedging strategies there.

There's basically a cap in the color that we're running on the equities. Am I right, Lotz?

That is correct, Paul. That is correct.

Yes.

Can you specify the color, please?

So -- yes.

No, you go.

So excuse me, can you repeat the question, please?

Can you give a little bit more detail on the color? On the foreign...

I don't think we should give you any more detail on that. I'm happy to think about it off-line, but I'm not sure that we want to be telling you exactly how we're hedging that. If that's okay?

Okay. In the past, it used to track bond behavior. Is that still a fair assumption?

Yes, I think it is a fair assumption.

It's a fair assumption.

So maybe [indiscernible] those things. It's a -- as Lotz said just now, it's a tax-efficient way of doing things.

[Operator Instructions] The next question comes from Francois Du Toit from Renaissance Capital.

First question around the business interruption plans for Santam and also the Beirut explosion. Assuming that you've correctly assessed the potential liability for the insurance companies, have you got a sense of what the reinsurance recovery level will be? And have you taken that into account in the provision? I guess, the outcomes are fairly wide in that regard as well. But let's assume that your own assessment of the primary insurance claim is accurate, can you give a sense of how much you expect will be recovered? And how your provision compares with that? Have you been conservative, in other words, in the recovery potential that you've got from reinsurance? That's the first question. Let's go one at time as well.

Francois, it might be just interesting. Did you sit on a call with Hennie Nel on this subject or not?

No, I wasn't in that call.

Okay. Okay. So maybe just to explain to you that, actually, for what on the surface can appear to be an unbelievably simple matter, it's actually quite complicated. And it's complicated because the legal cases are around a number of different aspects on this business continuity. They're around -- effectively, the first thing which most people focus on is cause. Is there a legitimate claim or isn't there? And that may seem while quite a simple thing. But what the courts have ruled, and I'm giving you a very layman's version of it, is that because this is an infectious disease, insurers should have anticipated that government would take some form of action. And therefore, the action itself is inseparable or indivisible from the infection in or near your premises. So that's a very critical thing because it then becomes very relevant to the reinsurance because if, in fact, the lockdown is the cause of the claim as opposed to the infection, you then have a defined date. And the way the reinsurance works is it's based on a catastrophe, and the catastrophe is an event that happens in a 7-day period. So -- but if that legal argument ends up being ruled in a different way, you can see that if the cause has to be an infection in your premises, then the lockdown is no longer a relevant date. So I'll give you the particular Santam matter that's being heard, in fact, the claim was about a COVID infection at around about the time of the lockdown. So that particular one is fairly simple. It doesn't really matter in that instance. But there's another client, and I won't tell you who it is, for example, and they run a game reserve. And that particular business obviously came to a halt with the lockdown. But there were no COVID infections anywhere near that game reserve for a period of 6 weeks. And then somewhere in the vicinity, there was an infection, and so there's a claim. Now the question is, is it a claim or not? And if you read all the court judgments, it's not clear whether the courts would regard that as a claim or not because -- and then secondly, from a reinsurance point of view, would they pay up or not? And would this fall within an aggregation or wouldn't it? So it's an unbelievably wide, both at the gross and at the net level, as to what the claims can be. And so what the Santam management have done is they have taken a view in setting up their provision, which is effectively a best estimate of where they think the thing will land at the end of the day. But there are still numerous court cases, both here and abroad, that will determine both the gross and the net claim. And the net result could be lower, it could be higher than the provision. But their provision is -- I suppose it's at this -- with the knowledge that we have to date, it's a sensible number. If we were to finalize the accounts today, everything we know today, it would probably be -- it would be our best guess as to what the provision would be.

Second question just around the change in the provision for doubtful debts in Santam. That's increased further since 30th of June. I think one of your peers recently reported and said that they believe the provision was no longer needed, basically it was reversing the results. Why is it increasing still here? If you can -- is there a specific default attached to this?

Are you talking about a ZAR 7 million delta from the half year?

Yes, it's increased -- yes, ZAR 7 million increased by about -- is it -- I think the environment's obviously improved a little bit. And I'm comparing it with your peer that suggested that the improvement is so much so that there could be a release of that. Maybe can you comment on what will happen to that at the end of the year, more importantly.

Yes. Within Santam, where you see provisions for doubtful debts and credit defaults, these are around specific people that we have credit exposures to. So our peers will have potentially a completely different set of people, and each of these will be case-specific provisions. So a general environment improvement, yes, in theory, could reduce this. My expectation would not be -- and if I were you, I would be taking a prudent view on that, I would not be assuming that any of that will reverse on an improvement in the environment.

And similarly, also on the, let's say, North and West Africa investment variances deteriorated since the 30th of June.

Yes, they did.

What would -- what market conditions would be needed to reverse that? Maybe give us a sense of the exposures they -- got to where it is.

Yes. Look, stock markets actually went south after June. So if you take, for example, the Moroccan Index, it actually went -- it went south from 30th of June. But actually after the end of October, it has recovered again. So again, that's going to be driven purely by equity markets in those places.

Float -- just separate to that. The float [indiscernible] was minus [ 115 ]. But the investment variances, specifically in North and West Africa, that's -- the investment variances normally talk to Life Insurance, right? And so that's a [indiscernible]

A similar issue, yes. The float, obviously, is a very significant item the -- in your short-term business in Morocco and Ivory Coast. Whereas for life insurance, as you know, I think we're all quite happy that these things ride out over a long period of time.

Okay. So the investment variance should also improving in write outs towards the end of the year with markets improving?

Yes. I mean, just to give you an idea, the Moroccan free float All Share index has gone up 10% since the end of October. So it's a very -- I don't -- it's a market I don't know, but it's a thin and small market. So it's -- yes. I mean you'll know what that means.

Yes. If I can just, one more question on your provisions. You note provisions will have a negative impact I think in the [indiscernible] business -- provisions for expenses, rather. I just wanted to get a sense of why that's necessary given the positive experience there and just steadily over time in that business? Is it a specific project that you're embarking on?

Yes. I think we highlighted at the half year that what happened is that with a very radical need to digitalize the sales force quickly, there is a huge project to invest in the digitalization at the front end of the sales force, and that's what that's about. And it's quite interesting that actually when you talk to that, Warwick asked earlier about the Retail Mass sales and so on, and I was explaining the difficulty of reengaging. Actually, what's interesting in the affluent market is that even though they can see clients now, a lot of them are actually moving to seeing clients, and probably in the long term, are going to start seeing them much more using technology solutions, which is quite interesting. So mimmicking, in a sense, all the behaviors that we're probably going to adopt as well in our working lines. So that's -- yes, the long term -- basically in operating model.

You've given us a sense of the release pattern of -- this question in the release of the pandemic provision. Is it similar in terms of the asset mismatch provision? Or is there tighter rules around the release there? And I do see that, that, obviously -- part of that was released first half of the year and some of that release has been reversed.

Yes, if you're talking about the credit spread losses, that is a very mechanistic system that we've set up for that gate -- that we've set up for that.

Yes, that's what I'm talking about.

[Operator Instructions] The next question is a follow-up question from Michael Christelis from UBS.

Just one more from my side on the Nigerian business. I mean there's quite a lot of commentary around Nigerian bond yields having moved quite significantly. Can you talk to me, just what does that mean for the valuation of that business in your GEV as to where we are today relative to perhaps where it was in June? Is this going to be a big impact, and obviously, relative to what you paid for that business? And then how far are you down the line of finding a buyer for a stake there?

Yes. Okay. So Michael, you know me, most things I'm happy to answer. These Nigerian bonds, I tell you what, I don't understand why the bond yields have done what they've done. And I understand even less about the impacts on VNB and embedded value and so on because it actually makes -- when you get a set of economic variables that in relation to each other make no sense whatsoever. So I think we all accept you get inflation, your bond yield needs to be a bit more in your equity risk premium, a bit more and so on. And so we've all got that kind of mental model. Now this thing comes along and it just turns everything on its head completely. So I -- with that caveat that I do not understand, and it has been an absolute nightmare to get on top of it, I'm going to ask Lotz. Lotz, if you don't understand it either because you've just joined us, I'm sure you do understand it because you're smarter than me, but are you able to answer that? Or do we want to take this off-line with Michael?

I can answer a part of it around what has happened to the bond yield in Nigeria, and then the question -- and then the extent to which that has affected new business volumes and VNB. But the question on -- the M&A-related question on prospects for [indiscernible], I cannot answer it.

I'll answer the bit about finding a buyer. So that's the easy question. The hard part is explaining the impact of these bond yields on the embedded value and the value of the new business and whether the actual mathematical implication of using those numbers actually is logical or not. Because I think that's the thing I was trying to allude to, Michael, is that you can get an answer, but whether it actually passes a common sense test, that's another question altogether. But I don't know if you can help with that technical side, I'll answer the question about the buyer.

Okay. So I guess on the technical side, I mean, the Nigerian bond yields have been artificially pushed down. And that was driven by excess liquidity in the market, where nonbank financial institutions or nonbank entities were not allowed to buy debentures from the Central Bank of Nigeria. So what that meant there was a lot of liquidity in the market and that ended up finding its way into government bonds. So the 10-year yield in the Nigerian market, so the naira, the local currency market was -- has dropped to about between 4% and 5%. And that's in an economy with double-digit inflation. So you've got negative real -- bond yields in the Nigerian market. So what that has meant is that for businesses like the annuity market, it has meant that it's been very difficult to get new business volumes, given the level of the bond yield. For some of our savings business in Nigeria, it also meant that because of the reduction in the long-term prospects for investment returns, if you use the current bond yield as a base, it has meant that the fees that you add on that type of business for actual valuation purposes have also been depressed. I mean that's kind of, in essence, a margin business. So you get a margin in terms of the expected investment returns that you are earning. Now in terms where we are now, we know -- we do know that the yields are being artificially depressed, so if you were to think that we are to make from a VNB perspective in terms of setting the actual basis, everything is anchored on a risk-free care, and we know that all -- that's artificial. So it's -- this is affecting all the market players in Nigeria. So what that has meant is like in any other business, you've got depressed bond yields like we -- you currently have, then you get the negative impact on the value of new business and the savings business. The other element is on the annuity business, there are cut-off requirements that are risk sensitive. So you have to hold 30% of the value of your liabilities as capital and regardless of how well matched you are. So that has also meant that for annuity business, not only the value of your liabilities increase because of the low bond yields, it also means that the amount of capital that you have to hold to pay those liabilities is also fairly high. So that also then -- it depresses your embedded value as well as your VNB. So those are some of the aspects. I mean we have spoken to a few of the market players and some other banks to kind of look at potential solutions. But that's essentially what's been happening in the Nigerian market. So Paul, I mean, that's -- I don't know if that covered everything you wanted me to cover.

Yes. Yes. No, that's great. Thanks, Lotz, so much. Yes, Michael, in terms of finding a buyer, we are optimistic about being able to do that in the new year. So no real concerns on that front. But I think you'll have got a sense that, indeed, the group equity value on that business could be reported as lower, when we eventually get to it. Whether that makes sense or not, that's a different question.

Is it severe enough that you may have to write-down the asset in your [indiscernible].

I very much doubt that.

The final question comes from [indiscernible] from [indiscernible].

Just a question, and it's coming from a generalist, but just from a clarification perspective. So you also provide this net result from financial services pre-COVID margin impacts. So quite simplistically, if we assume that your provision is accurate and it plays out accordingly, then the -- let's say, the new base in earnings from a -- on a financial services perspective for next year, does that imply we're back at, let's say, 18% or whatever growth from a 2019 perspective? Or do we start off with this minus 21% that you've recorded actually end of October? Just to get an extent of what the implied bounce back is post these provisions.

Yes. Yes. Look, it's a really -- that's a great question. It's definitely not that you can take 2019 at 22%, and that's now the base going into the new year. That is -- would be absolutely the wrong answer. It might be worth us spending a bit of time off-line with you on that. But because I myself am struggling on the fly to think hard to how to explain it, yes, in a very logical and -- because you've asked a very simple and very -- yes. It's just -- it's a straightforward common sense question. But I know the answer is not that the base is now going to be up for the start of next year to 2019 plus 20-odd percent. It's actually more like going to be 2019 itself is kind of a good base to think about, in fact.

Okay. But that implies 18% growth, right?

Sorry, 18% growth on what?

No. I'm just -- if 2019 is the base on 2020, and 2020 is currently like 21% lower than 2019, then that's already -- okay, that's already a reasonable recovery and then the assumption -- and then obviously, the assumptions are, you need to take a view on the future plays out relative to the provisions and obviously, investment market spreads, et cetera.

Exactly. So you've had a kind of a V, basically, in this year.

Okay. Got you. Okay. I'll take this off-line with Grant.

Yes. I think if you've got any doubt, please take it up with Grant because I'd hate to [indiscernible] out either way. And it's hard [indiscernible] on a phone call, it's great with a piece of paper.

The next question comes from Jan [indiscernible] from [indiscernible] Capital.

I'm very aware that this question also comes from a nonactuary, and it refers to the pandemic reserve. And just to understand that most of your peers have made a one-off provision, and it covers different time periods, but there are different elements to those provisions. It's not only claims for life, but it's also -- some of them include persistency, some of them include costs in there. And I'm just trying to understand the reason why you didn't make those provisions is because of the pandemic reserve. But does that pandemic reserve also apply to persistency and additional costs over and above simple claims from a life point of view? And if not, why have you not made provisions for those elements that your peers have?

Yes. So look, to be absolutely clear, when we set up the pandemic reserve, that anticipates higher mortality, but also morbidity. So I don't want to get too technical here, but -- so it could cover things like disability as well. It's any -- it's set up specifically for the risk elements pertaining to an infectious disease of this nature, but it is not designed in any sense to cover higher expenses or persistency. So we ourselves dealt separately with persistency. And we made an assumption that the economic downturn would be such that it would be equivalent over time to 5% of our policies going off books in one shot. Now in the case of Sanlam, it's a bit technical, but because of how we do our reserving, that doesn't impact our P&L, but it does impact our embedded value because you're assuming the 5% of the future profits on those policies that you're putting through a mass lapse scenario off the books. It also drives up your assumed unit cost per policy because you've now only got 95% of the policies that you had before. So you divide the same expenses by bigger base. So the -- so we had a pandemic reserve already. So we didn't need anything. We didn't need to add anything for -- from a risk point of view. And then from a persistency point of view, we specifically put in the mass lapse, and that happened to also have an impact on our expenses. But why -- it's very hard always to answer so why didn't we have -- why were the impacts different to other people. It's really hard to note. It may be because their reserving may have had a little less margin for error in it than ours. That's the only logical conclusion I can draw.

Paul, we have no further questions in the queue. Can I hand back to you for closing comments?

Claudia, of course, thank you very much. And thanks very much to everybody for making the time to join the call. It's obviously been a really difficult year. And next year will probably be pretty tough for all of us as well. And please, all be safe, have a wonderful holiday. And please, if you would like anything or to discuss anything, please make contact with us. We've now got Grant, who's joined us as well. And he's very capable and able as well, and he will have the time to engage and help all of you with any detail that you may have. So I wish you all the very best and be safe. And let's hope next year is a much better year for all of us. And yes, thanks very much.

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