Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sanlam Limited conference call. [Operator Instructions] Please note that this event is being recorded. I'd now like to hand the conference over to Mr. Paul Hanratty. Please go ahead, sir.

Thank you very much. Good afternoon, ladies and gentlemen, and thank you very much for joining this afternoon's call. I'm joined on this call by Sanlam's Chief Financial Officer; Abigail Mukhuba; and the CEO of Sanlam Emerging Markets, Heinie Werth; as well as the Head of Investor Relations, Grant Davids. This morning, we were pleased to announce the creation of a long-term strategic Pan-African joint venture between Sanlam and Allianz regarding our respective African operations outside of the borders of South Africa. In line with Sanlam's stated strategy to become a leading Pan-African financial services group, the proposed joint venture will enable us to enhance our capabilities by leveraging the long-term structural growth in our existing markets and to expand our footprint and leadership in key countries on the African continent. Allianz is the leading global insurance and asset management group with a complementary portfolio of African businesses and an insurance portfolio spanning 11 countries on the continent, serving approximately 2 million customers with about 2,600 employees. Allianz delivers leading international insurance programs across the African continent. And they are also committed to building a Pan-African leadership in all the relevant markets. By combining the Sanlam and Alliance African portfolio, we will together create a flagship Pan-African player, leveraging each other's strengths and broad insurance expertise and our capabilities to unlock synergies and to provide our clients with best-in-class innovative insurance solutions and making sure that there's technical excellence throughout our operations. The combined portfolio will span over half of Africa, 29 countries in total. The joint venture will create value for all stakeholders through greater economies of scale, broader geographical presence and diversification, larger combined market share and a more diversified product offering. The joint venture is a true partnership, so Sanlam will maintain overall control of the portfolio as a controlling shareholder. Many of the rules and governance as we set up really mark Allianz as a partner. The branding of the joint venture and the governance rights provided to Allianz as the minority shareholder reflects our intention to operate this business fully as a partnership. Notwithstanding that Sanlam will own 60% of the joint venture and Allianz, 40% of the joint venture initially. Allianz does have the option to increase its share from 40% to 49% over time. The Chairmanship of the joint venture partnership will rotate every 2 years between Sanlam and Allianz. The joint venture has been formed by combining Sanlam's Pan-African -- Sanlam Emerging Markets portfolio, including our stake in SAN JV with Allianz's African portfolio of businesses. Malaysia is excluded from the initial transaction perimeter and is contemplated to be contributed at that time when Allianz elects to exercise the option to increase their shareholding to 49%. Currently, Sanlam owns a 10% stake in the SAN JV. This stake will be acquired by Allianz in a separate transaction and subsequently contributed to this new joint venture. The 60-40 ratio of shareholding between Sanlam and Allianz implies that the portfolio of businesses within the joint venture are valued at group equity value in excess of EUR 2 billion or ZAR 33 billion. In arriving at this ratio, valuation methodologies were consistently applied to Sanlam and Allianz assets. The formation of this JV will accelerate Sanlam's strategic intention to build a diverse, high-quality portfolio of businesses on the continent while leveraging Sanlam and Allianz's respective skills and balance sheets and bringing the best intellectual property and technology to bear over time. What makes this opportunity exciting and unique is the significant value-enhancing long-term growth prospects of the continent. And the JV will be very well positioned to capitalize on these growth vectors. We believe real GDP growth will reach around 4% in the current year, and urbanization rates are going to rise to around about 45% by 2025. Rapid population growth, digital revolution, spurring financial inclusion and the population expected to reach 1.5 billion and 720 million smartphone subscriptions by 2025. The African insurance market is, we believe, poised to grow 2x as fast as the North American market, 3x as fast as Europe over the next 5 years. I believe this transaction underlines Sanlam's disciplined capital allocation, maximizing the value creation for Sanlam and Allianz, and consequently, for their respective shareholders. Sanlam believes that this transaction substantially achieves our strategic ambitions regarding Africa. And that together with Allianz, we will be able to, over time, continue to selectively bolt-on value-enhancing products and businesses to strengthen in-country competitive positions. This transaction is subject to suspensive conditions, including, but of course, not limited to relevant approvals from competition authorities, regulatory authorities and many of the customary conditions that are required to be satisfied by Sanlam and Allianz, respectively, for each jurisdiction in which they have a business. There is likely to be a significant period to closing, which is currently expected to occur within 12 to 15 months of this announcement. The CEO of the new joint venture, the CFO and other executive positions of the JV will be communicated to the market in due course. So I will now thank you all very much for listening to this introductory remarks and actually open up to questions. So I'll ask you really just to flag with the operator, if you have questions. And then Heinie, probably mainly, or otherwise myself, Abigail and Grant will attempt to answer your questions. Thanks very much.

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

Excellent. And looks like an interesting deal. Maybe if I can start off with 3 questions. So at a high level, what sort of split of GV or let me say, split of GV in the JV is there? In other words, I'm trying to understand what of the ZAR 33 billion, how much is the GV of the businesses you're putting in there? I can't quite work it out because you've excluded Namibia and Continental Re, and then it appears like 1 or 2 other things. So I'm trying to understand. So what is the -- maybe you can give us an indication just little based on appraisal value. Maybe if you can give us that appraisal value relative to the GV of the businesses you put in there? That's my first question. The second question is around the capitalization of Allianz. I mean clearly, we don't a lot of information out there on the Allianz operations. How well capitalized are their businesses relative to those that you're putting in? In other words, is there a stark difference at all between the solvency ratios of the various businesses that are being put in here? And then I guess, tied to that is what does the cash generation look like of those Allianz operations relative to yours. So you've always got guided us to a roughly 50% dividend upstream from SEM up to the group. Does that change materially with the creation of this JV? Are there businesses -- there's quite a bit of life business in there? Is that maybe more capital intensive or something like that? Maybe if you can answer those, I'd appreciate it.

Okay. Well, what I'll do, Mike, thanks very much. And firstly, well done for being first, you've restored my faith in you. We -- so I'll attempt to answer those questions and then see whether Heinie or Abigail or Grant want to add anything. So if I understand your first question, you're really sort of probing at what is the difference between the probable value and GV. So let me just sort of take you back a little bit. What we're trying to do here Michael, is combine 2 portfolios of businesses. Each of us held a portfolio of businesses. And if you sort of imagine that you and another fund manager each held a portfolio of listed equities and you put them together to form a new portfolio, what would your relative split be in the combined portfolio. You just look at market value. So in arriving at the ratio of 60-40, we've looked at appraisal value. And for us, appraisal value has been defined as GV plus a multiple of value new business, which varies a bit depending on the growth rate of the underlying country. In the case of our non-Life operations, GV is very close or equal to appraisal value. And the important thing is not -- I hope you understand this or I hope I'm explaining it well, is not what the actual numbers are, but the relative values of the 2 sets of businesses. So we used a consistent methodology and consistent set of assumptions to look at the relative value of the 2 businesses. So we're putting the portfolio together. And based on the appraisal values on the methodology that I've described and using a consistent set of assumptions, we've come out at the 60-40 split in terms of the shareholding. And then you know that the underlying businesses have a GV of around ZAR 33 billion. So the point is that we arrived at the split based on relative appraisal values of the 2 partners. The second question was around solvency. Yes. So look, every business, even within our portfolio has different solvency level. So we do have an undertaking on both sides by closing. Each of the businesses is fully capitalized to meet solvency requirements, including those necessitated by forward-looking business plans for those businesses. So each of the businesses will come in fully capitalized. And I think if you go back to how I was describing arriving at the relative values of 60-40, you're looking at appraisal values. And then all we're doing is saying that each of the individual businesses must be adequately capitalized underneath. But your reference point in terms of determining value is not NAV or solvency, but actual appraisal values. And then I think your third question was around effectively, will the cash generation be much different going forward. So we do expect a little bit of synergy below. I hope how we've described the thing you'll understand that what we're doing really is focusing on the strategic intent rather than trying to flesh out any cost synergies. But of course, there will be some synergies in this. But effectively, we would expect the cash generation at Sanlam to be similar to the current generation. So our 60% should get us much the same as what we currently get or a little bit better. And that's clearly a function of a whole lot of things, including some synergies. The mixes of the underlying business, as you know very well, like life and GI are quite different. But it's not significantly different. I don't know whether Heinie, Heinie is the [ boss ] of this. Heinie, Grant or Abigail want to add anything to what I said, but I probably explained bit conceptually well enough that I've given some context to your questions. Heinie, why don't you add?

No, I can Michael, just in terms of your last 2 questions. Look, if you look for the Allianz portfolio, to a certain extent, there's similar characteristics than what we have. So the business in Egypt, it is, I want to say, a really [ profitable ] business, it is mainly a life business, it is very well cash generating. And then they also have a few smaller businesses, which is more consuming cash. But overall, Paul has described it very well. So it's at top of back of businesses. And then when it comes to capitalization, I think you can understand that looking forward, there will be opportunity to actually optimize capital because many of the countries where us and they operate in, especially Franco, [indiscernible] and West Africa. The regulators are imposing very large levels of capital. So putting the businesses together on one capital-based will benefit the JV in the future. Because the capital costs are quite often part of the problem to get the level to pay dividends.

The next question comes from Warwick Bam of Avior Capital Markets.

Essentially, 4 for me. The first one is around Continental Re. Does the Allianz portfolio use Continental Re as a reinsurance partner and will Continental Re add economic benefits to Sanlam outside of the JV? Second question is really about...

Do you want to do these one by one...

Yes, maybe that's easier. Let's do that.

Because in my age, you can't remember 4 things anymore. The -- I mean Continental Re, I mean, Heinie will correct me if I'm wrong, it's a stand-alone separate business. And I don't think it has much to do with the rest of our portfolio. And it's kept outside of it. It effectively now becomes an investment for the Sanlam Group.

Okay. I appreciate that. The merger...

You can correct me if I'm wrong.

No, no, you're right, Paul, and there's often also a bit of noise because Continental Re try to compete with other insurers, obviously. But in the end -- and please, we don't say that the Continental Re management is aware that Sanlam do not really consider it a long-term strategic asset.

Appreciate those comments. Second question is just around complexity. I mean mergers of this scale often do add a lot of complexity to the group, and that detracts from some of the synergistic benefits from additional scale. How -- based on your due diligence of the Alliance business, how do you think about the balance between the probable benefits to the group and the added complexity?

Heinie is probably better placed to answer that. I mean my own view, we've already got quite a big portfolio, right? You know that in some places, we're subscale, we need to beef this portfolio up. What this really does, I think it will get you substantially different overall in terms of your portfolio. It gives you more diversification, gives you more strength in certain markets and therefore makes it a bit easier. And as it is, Heinie is having to look all the time at how he gets the right balance between local sort of operating entities driving the businesses that have sufficient oversight and governance from ourselves. And I think here in a way, you've got the opportunity because you've now got a bit more muscle from both sides to bring to bear. So Heinie is probably better placed. But I think overall, you get more strength and more control of the whole. And it's a more diverse whole than we had before. And you get more strength in markets, in many cases. Classifier to do things going forward. And one of the things that we haven't spoken much about, but one of the big opportunities across Africa is in the sort of specialist area of general insurance. And you're quite dependent on your balance sheet strength in order to win business in that space. And that's a heavy cap for us because our credit rating can never be higher than the sovereign rating. And now suddenly, we have the strongest possible credit rating to bring to bear. So it helps us competitively, I believe, very strongly going forward, this combination.

And just a follow-up on that point. I mean, from my understanding of the way you've communicated the value associated with the economic split, it seems to be closely attributed to the underlying group equity value that you already have in the business. It seems to imply that you haven't added goodwill or synergistic benefits onto the...

Of course, because you are benefiting it from it, Warwick. And that's why I was saying earlier to Michael, is if you and Michael, you have a portfolio of 10 shares and they're 10 different shares, right? And you decide a portfolio of 20 shares would be better so you put them together. And what are you each -- what share of it should you own? You can understand that at 60-40, you're kind of splitting the synergy sort of 50-50, right? So there's no need to go to the trouble of putting a value on all those things, provided you're happy you're going to divide them close to equally between you. And that's what we decided to do. If you -- again, the reason I use the example of you each having 10 listed shares, you can appreciate that the valuation of that is really simple, right, safety each of our 30 seconds to do it. But with unlisted companies, it's hard. And then if you started trying to work out what are all the synergistic benefits, I mean, we'd be here until kingdom come, and we'd be arguing over everything. So it's easier to actually just assume that you'll split the synergies.

No, I think that's an important point.

And then a -- it's complicated enough process putting together portfolio of a business like this without trying to overcomplicate the valuation methodology.

And can you share any details regarding the sort of valuation multiple of Allianz assets that are going into the JV?

Look, as I said to you, we valued both sets of assets on entirely consistent methodologies and assumptions. We both actually vetted each other's assumptions. And what matters is the relative, right? So if you come back to my example of you and Michael putting in listed shares, 10 each on the same day, provided you draw your valuations from the market on the same day, it doesn't matter whether that's the time when values are depressed or elevated as long as they're relatively the same. And so that's all we've done. We've put them in on a consistent basis. And then the split on that basis. So the [indiscernible] is completely irrelevant. The question is, have we got a fair share of the portfolio before [indiscernible] and we believe we valued it on a consistent basis.

And then just very lastly, in terms of the concentration risk of the Allianz portfolio, which by value, which is the largest business or region in the...

Egypt, by far. So I think that after -- Heinie, correct me if I'm wrong, but after Morocco will be our biggest -- remember, you got Namibia that will come in later, okay? But so Namibia, obviously, the big asset, that will come into the JV down the line. But on day 1, Morocco will be the biggest. Egypt, the second biggest and I think Ivory Coast and Botswana, in that order.

Yes. Well, that's correct then Namibia that comes into play.

The next question comes from Larissa Van Deventer from Barclays.

Three questions from my side, please. The first one, you said there was a ZAR 6 billion of cash available on your balance sheet at the end of FY '21. Why not simply buy Allianz stake?

Okay. We're going to do this one. Larissa, did my ears need cleaning or did I hear you phoning in from Hargreaves?

Sorry. Barclays.

That I thought that said Hargreaves on it, maybe it was the way you -- Barclays. Okay. Okay. So why didn't we buy? Of course, would assume if they wanted to sell it, right? But look, Larissa, what we are trying to do is to build a long-term strategic portfolio on the continent. And I think what we need is not just to be able to put the capital in today. We need to make sure that this thing is strong going forward. So I don't know if you heard my comments to Warwick about the necessity for a AAA rating on your balance sheet to be able to do the insurance around some of the opportunities in Africa. That's something that we wouldn't be able to aspire to. Secondly, we know that Alliance are very committed to the continent as well. They've been on it for 100 years, and they're committed to staying there. So their assets were not necessarily for sale. And it's a huge continent. You think of 29 countries as we're getting into insurance together. I'm not sure that either of us wants to bite that off by ourselves. So I think that this is a good opportunity for us to actually strengthen our business without putting in more capital. Certainly to diversify and to increase its opportunities going forward. I know many of you will join the Santam call afterwards as well. But it will last Santam also to keep all the benefits that they currently enjoy from the JV, but to not have to have the assets on their balance sheet. So it's more capital efficient for them.

Actually touched on what I wanted to ask on the other 2 questions. The first one is, to my understanding, Egypt is added to the portfolio, but most of the other countries overlap. So what do you see as the key long-term strategic benefit other than the AAA rating? And then on the matter of cash release, what do you plan to do with all the excess cash?

I would ask a separate question for another day. So you're right that there is a -- they're adding some very important blocks. They're adding Egypt is a very big enhancement in East Africa, which has been a glaring hole in our portfolio and where I'm a massive fan of East Africa and the prospect. So I think actually, this sold in some big gaps for us. I know before I joined, we used to get a lot of questions again, we used to say we're going to start businesses in Ethiopia and buy businesses in Egypt. I don't think so. Now we've managed to get a business, a great business in Egypt with a partner. So I think this [ ASO ] is in hold. And it, of course, allows us to strengthen in country a little bit. I guess, in some cases, it will improve our competitive position in country. And then, of course, going forward, it gives us a little bit of -- a little bit more firepower to do some bolt-ons, right? Because we're not having to put up all the capital to do them. And then as I said to you, I think it's a subject for another day. I think we did cover that results. We've still got a thing called COVID lurking around. So we are pretty keen on maintaining very significant buffers of capital for a sustained period of time. And I think we've explained before to the market that we've got sort of a cascading of what we do with excess capital. If the returns are really high, we'll deploy it inside our own business organically. If not, we'll return. The method of returning it will depend on what's the most efficient for our shareholders.

Do you see any holes in -- any opportunities in Sanlam strategy that will require that kind of capital? Is there any particular country or product that you believe could strengthen the current offering?

Look, I mean, even with the combined portfolio, we know that in the long run, there are still going to be some places where we'd like to strengthen and Heinie will tell you this -- but we really do need to be #1 or 2, worst case #3 eventually in every one of these markets because they're relatively small markets, and you need to have a really strong market position. So over time, together in the JV, we will try and bolt on. Is there anything we know about now, no. But over the next 10 years, you'd hope that there's decent opportunities that would arise from the joint venture.

The next question comes from Baron Nkomo of JPMorgan.

My questions have been answered. Sorry.

The next question comes from [indiscernible].

Yes. So most of my questions have actually been answered, but just one point of clarity. So when you talk about the countries we're going to -- are going to the disjoint venture, I mentioned Morocco Egypt, I just want to get a sense of how much more market share will you command with the JV compared to when Sanlam was flying solo as Sanlam Emerging Markets in those markets. I know some of them you are not there. But where you were like Morocco, that's the first one.

Yes, I think I'll leave that -- I'll leave Heinie to give you the specifics, but I think the 2 markets that spring to mind where there'll be a bit of a delta, one will be in Morocco, where I guess Heinie, by putting the 2 businesses to our business in Morocco is quite a bit bigger than this. I'm guessing it might move us up n notch on the rankings in the GI side in terms of relative market share. the other one that probably make quite a difference because the 2 businesses at least similar size is the Ivory Coast, where probably makes a reasonable difference. Those are probably the main 2.

Yes. I think it will help us to use in East Africa, where through the partnership with Jubilee, they've got quite leading mortgages. And then as you say in what current...

Yes. You're right. East Africa because I think of ourselves as not being there. We are technically there, but we're so small that will make a huge delta to us.

Some of the countries, we are #1, but one to be big. That's the problem we need to be bigger, even if you're number #1.

And my second and last question is just about because Allianz has this option to improve their shareholding, and you said that Namibia might be eating debt at that later stage. So when that happens and what Continental Re which, like you said, is not a strategic long-term holding. Is the idea then that Sanlam Emerging Markets will seem to exist as a stand-alone business in every...

Exactly. Sanlam Emerging Markets will cease to exist. So we will now on the African pertinence have a joint venture with Allianz, Sanlam Allianz South Africa, that will be our player in Africa. And then we will hold our assets in Malaysia and India at just at the group level as a separate -- separately from this. That's completely independent of this.

Okay. And the MTN joint venture, because I understand that was with Sanlam Emerging Markets. Where does this lead that...

It is part of the joint venture now.

Next question comes from Kevin Harding of Investec Bank Limited.

I just wanted to touch on -- you've spoken about putting these portfolios of assets together. Where there are countries with overlap, perhaps you can expand on the type of, I guess, operational integration that you need to go through or whether you will continue to run these businesses sort of independently. And then you did mention sort of going forward, the opportunities and the larger scale. Under which brand do you now sort of on...

Yes. Okay. So the answer to both of those questions is it's very case dependent. So you can understand that within each country, if there's an overlap, there will be a local process that one will have to go through if one wants to merge the businesses. And how one merges businesses and the detail of it will be a function of the relative size, the product lines and so on of those businesses. So it will be done in time on a case-by-case basis, require local regulatory approval in each case. And you'll have gathered from what we said even before this, where we're trying to build market positions to 1 or 2 risk at 3, and we're trying to bolt on. Obviously, you are trying to just get single operating businesses up to scale. So that will be what we'll be attempting to do each instance. And as to brand, we're going to be completely pragmatic about things. So the joint venture itself will be Sanlam Allianz Africa. But local, we'll look at each market at the brand. So you're probably aware we've rebranded Saham fairly recently to Sanlam and we're rolling out that process. But where there's an established brand, we would absolutely no intention of changing that at all. So if you take something like Egypt, we don't have a business in Egypt. Allianz is a well-established brand there. You would allow that subsidiary just to continue to operate under that brand. In East Africa, Jubilee is a very well-known, well-loved local brand, again, would be absolutely no sense at all. No, I can't say in 20 years' time what the answer is, but I can tell you what the answer is for the next, well Heinie and I arrived is, which is maybe 5 years, if you think about it. There's no way we would change those things.

Cool. And then just to clarify this, just from an accounting perspective. You will control -- although it's a joint venture and a partnership, you will ultimately control the...

Yes, we are on the book first.

Okay. Perfect. That answers my question.

[Operator Instructions] I have a follow-up question from Michael Christelis from UBS.

Sorry, one more, Paul. I'm just trying to understand the thinking behind allowing Allianz to go up to 49%, coupled with the fact that, clearly, you would have had the opportunity should you have wanted to, to buy the Santam stakeout and add that to the JV, and therefore, increase your participation in the JV. I mean, was there a sort of discussion at Board level as to whether to do that? In other words, to take that 10% off Santam's hand and get a bigger piece of this JV? Or was that never an option? And if that was to happen, what is your thinking?

Let me help you here. So right from the get-go, we -- in principle, Sanlam and Allianz to approach this as a joint venture, right, with 3 similar stakes. So in the long run, we would like to get to 51-49 on both sides. It's important to them. They believe they need to show commitment to the continent. We want somebody who is a partner, not just a lazy minority earning money for our strength and labor. So that was really the vision of where we wanted to be. And initially on day 1, it's not achievable, 60-40 is achievable. In time, they will have to inject either assets or cash. And we, of course, unless we can find useful deployment of that cash within the -- within we'll have to take that cash back to Sanlam. Your question about Santam I guess is that it's a bit of a technicality. So we -- there were obviously myriads of ways of doing all these things. But if we have bought the stake directly from Santam, would have complicated the things from third -- a related party transaction. It's easier for Allianz to strike a completely and you may or may not believe us, but we did not get involved in that leg of it in order to not complicate this, this was a three-way affair, if you like, that had to be resolved. And they struck an independent deal and it allows them to -- for some cash to get a stake in this thing that would help them get to the 40% on day 1. And the 40% is a very important thing for them. They wanted to start at least 40% to show their commitment to the continent. And I think Heinie earlier, actually, if you sit back from this whole thing, actually, this is a massive commitment from Allianz to inject -- I don't know what the exact number is, but it's circa ZAR 10 billion of their assets actually into a South African joint venture. So one of the businesses are in the continent this thing is the South African entity. And it's a vote of confidence in South Africa and the continent from them actually to do that. So very, very big on making sure that they can demonstrate a commitment to the continent, making this process and not to be seen to be in any way backing off the continent.

Thank you. Ladies and gentlemen, there is no further questions from the line. We have reached the end of our Q&A session. I will now hand over back to Paul Hanratty for closing remarks.

Great. Well, thanks very much for hosting us as usual. And thank you very much to everybody who dialed in and asked questions and listened and thanks very much, particularly to Heinie, and of course, to Grant and Abigail. Grant for doing a lot of the sort of background work and so on, and I'm sure many of you will follow up with him. He, of course, does know all the details that I don't know, behind all the numbers and got the patience to explain it. But thanks very much to my colleagues on the call for helping, and we wish you all the best of luck.

Thank you. Ladies and gentlemen, that concludes today. Thank you for joining us. You may now disconnect your lines.

Thank you.

Thank you.