Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sanlam 4-Month 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.

Thank you very much, Claudia, and good evening to everybody. Thank you very much for joining us on this call. I'm going to ask Abigail, if she won't mind hosting this evening, along with Grant as well online. So when we get to the Q&A, I'll fill in where I need to. But Abigail, I'm going to hand over to you to take us through the operational update. Thanks a lot.

Thanks, Paul. Good afternoon, everyone, on the call. Thank you for joining us. We released this afternoon our operational update for the 4-month period to 30 April 2022. I will give some highlights for the period before we proceed to questions. From a strategic perspective, we continue to strengthen our portfolio and market position in key markets and segments, both in South Africa and across the African continent. In May, we announced the agreement to combine our Pan-African operations outside of South Africa with those of Allianz subject to regulatory and other approvals, which will significantly strengthen our business and further support our objectives of creating shared value and driving financial inclusion across the continent. We further completed the package of transactions that finalizes our partial exit from the U.K., and also completed the acquisition of the Alex Forbes Retail and Group Life Insurance businesses. From an operational perspective, we had a strong Q1 performance, which was more than offset by the challenges in April. We saw global supply chains disrupted. Financial markets declined in the face of the conflict in Ukraine, inflation surged and, on the SA front, KwaZulu-Natal experienced catastrophic flooding. The group however recorded incredible results. Our life insurance and investment management operations posted strong earnings growth, while the life insurance new business volumes continued to grow despite the high base from 2021. Our general insurance operations, particularly those across the continent, posted pleasing premium growth. A number of weather and fire-related events in the first quarter of the year as well as a major weather catastrophe in KwaZulu-Natal which happened in April, had a significant impact on Santam's results. Market volatility impacted on SPA GI's investment returns on insurance funds and widening credit spreads impacted returns in our credit business. The life insurance business in general benefited from much lower COVID-19 excess mortality claims compared to 2021. And if I look at some of the key financial performance indicators, Net results from financial services decreased by 7%. But if you exclude the impact of one-off items, mainly relating to the impact of market volatility and the catastrophic event this number would be 8% higher. New business remained robust, with life insurance new business volumes increasing by 8%, excluding the U.K. businesses sold. General Insurance new business volumes increased by 7%, excluding reinstatement premiums at Santam. With SPA GI increasing 10% in constant currency. From a net client cash inflow perspective, ZAR 26.7 billion was down 5%, but this was in line with what we expected in as far as the lower investment flows in Sanlam Emerging Markets and Sanlam Investment Group. This was off the high 2021 base. SLS recorded a strong improvement in net client cash inflows due to lower mortality claim payments that I referred to earlier. Also, they had improved inflows of savings and investment businesses. Consistency was maintained at satisfactory levels throughout this period. The net value of new covered business was down about 8% on a constant economic basis, and this was likely due to the impact of product mix changes with lower sales of risk and guaranteed annuity products in SA retail affluent. The Sanlam Emerging Markets Life operations are ever continued to get strong profitable growth, with VNB up 12%. The group net VNB margin was 2.34%, and this was below prior year's number, mainly due to the product mix changes in South Africa that I talked about earlier. The group remains well capitalized with group solvency capital requirement cover ratio at 171% at the end of March, and this was well within our target range. Given the continuing uncertainty around the development of COVID-19 pandemic, as well as continuous economic and financial market pressures, we believe it is prudent to maintain a temporarily higher than usual level of discretionary capital to provide a buffer against any significant weakening in mortality experience and financial markets. Discretionary capital increased from ZAR 2.9 billion at the end of December 2021 to some ZAR 6.5 billion at 30 April 2022. Just to note that this number, the ZAR 6.5 billion, includes the proceeds of GBP 153 million, which we received from all of the U.K. asset sales. The group is cognizant of the lower returns and by holding increased levels of discretionary capital, and we continue to balance the need for prudence in a volatile environment as well as the overall return and growth ambitions. A higher level of discretionary capital, therefore, allows us to consider further strategic opportunities in line with our growth strategy and capital allocation framework. So maybe just in conclusion before we go to questions, our performance for the 4 months to April reflects the strength of the underlying operations and Sanlam's ability to maintain value creation for our shareholders in challenging times. Sanlam remains well positioned to execute our growth strategy with a robust financial insolvency position, diversification across geographies, lines of business and market segments and a strong depth of scale in our business. We remain confident of the growth potential in all our markets, including South Africa, and we aim to continue to deliver value to our shareholders and other stakeholders. With that, thank you very much. I will then open up the call for questions through you, operator.

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

Maybe I'll ask my questions one at a time, if I can. Can you just remind me what the excess capital impact is of the Absa transactions that are still to be completed? What is the pro forma discretionary capital level look like once all your announced transactions are done?

So Abigail, while you're -- so the thinking -- I mean, basically, we've -- Abigail mentioned in the update that we're at ZAR 6.5 billion at the end of April. That includes the money from the U.K., which we've now received. The asset transaction by my math, Abigail you can correct me if I'm wrong, should make no difference because we are giving them equity in the business in exchange for the business.

That's correct.

And all the other things that we've announced I think are relatively small bits and bolts.

They were putting in cash.

Yes. I mean, there's some lifts and so on, but it's nothing that's going to move the dial, I don't think there's anything over ZAR 500 million for the later.

Okay. Great. Then sort of 2 questions on the earnings number, which I think is the one disappointment from certainly from my expectations on this update is. How big was the credit spread earnings either last year or this year or whatever color you can give me, just to get a sense of what that swing in profits was driven? How much of that was driven by the credit spreads?

So Michael, from a swing perspective, it moved from -- we had about ZAR 50 million negative, which then moved to, I think, the move was about ZAR 140 million.

Okay. Perfect. And then lastly, there's a comment around paying new business strain in SLS. I would have thought in the context of a group mix shift, which has moved away from risk and guaranteed annuities. Does that not give you relief on the new business strains? I would have expected a lower new business strain per sale, I was surprised to see, maybe you can just explain the dynamics there.

So the new business strain, if you look at the mix of sales that we had, we actually had lower annuity sales, and usually on annuity sales, your business strain is, if I can put it, almost positive in the earlier years. So you now had a lower "subsidy" for lack of a better word that you would net off against the rest of your new business strain, and that's why the new business strain was higher during this period.

And that was sufficient to offset the lower risk sales positively, if that makes sense.

Yes.

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

Just 2 quick ones from me. How does your corporate book perform for the period as far as I recall that was quite badly hit by mortality last year, but not from a 4-month perspective? And then the second question, just around -- can you just add some more color on your VNB margin? You ascribe it to mix changes, you've talked a little bit about lower risk sales. But I mean, was there -- is there a base effect here? What was the previous -- it was quite difficult to understand what was happening last year for the 4 months relative to now? Is there something unique now? Or is it more about just a high base?

Warwick, so if I could start maybe with the VNB almost it is like you were in our meeting earlier today. It is a combination. The majority, if you look at the first 4 months in 2021, we did come off a very, very high base, the numbers that we had last year were significantly higher. So you were likely or you expected that it was going to move in this direction given the performance that we've seen in 2022. So you're correct about the high base part. But also if you look at our volumes that we have been selling this period, in the 2022 period, we have been selling more, as I said earlier, lower annuity products and more lower margin type of products. So already in these 4 months that then impacted the VNB negatively. And then the question on the corporate book. The corporate book was severely hit in 2021 with the mortalities at that time. And the experience that we've now had in this period, it wasn't as severe. When we went into 2022, we were in the middle of, I think, it was wave 4, and then since experienced wave 4 and wave 5, and the impact of that was not as severe on the book. Grant and Paul, please feel free to add.

The next question comes from Larissa Van Deventer from Barclays.

Just looking for a quick update on your JV with Allianz. If you can give us an indication if anything has changed since the announcement and if you have a better sense of timing or whether the previous announcement still holds please?

Larissa, the timing to hold on a high level, obviously, it is -- when we came out to the market, we said at least around circa 15 months or so. It is a long process in terms of getting different approvals from the different regulatory authorities in the different countries. For now, that has not changed. We are going according to plan at this stage, the preparatory work that needs to happen in the brand is already happening to the extent that we're allowed to because you also don't want to be going ahead of yourself in terms of things like your competition commission or your competition authorities in the different countries. So we are doing the preparatory work that we can that we are allowed to do, but the overall time lines remain on track.

Okay. While we're on the JV, Egypt, could you give us an indication of how the margins compare to SCM's margins in Africa, please? That will be in long-term of your business.

And I don't know if Paul will want to add more. But last I checked, Allianz themselves did not disclose that information. So it would not be appropriate for us to be disclosing that information.

[Operator Instructions] The next question comes from Kevin Harding from Investec.

Just one question from my side. So the reasoning behind holding high discretionary margins, the one reason you give is just uncertainty around the evolution of the COVID pandemic. Just given the quite good experience that we've seen in wave 5, it would just be good to get a sense of, I guess, what the significant concerns are on your mind or is the bulk of those discretionaries as action for strategic initiatives.

So if we -- if one looks at discretionary capital and our positioning, we came out to the market, I think the last time in March. And we said we would like to keep a minimum of between ZAR 3 billion to ZAR 5 billion. So it was a minimum range that we gave. We are slightly outside that minimum range. But having said that, it's only been 2 months or 3 months since we came out with the previous announcement. Discretionary capital conversation is a bit more medium to longer-term conversation. And if you look at what is currently happening around the globe in terms of the challenges that we're experiencing over and above the uncertainty of the pandemic. You've got, as I mentioned earlier in the introduction to the call, the uncertainty that is created by the conflict in Russia -- in Ukraine because of the Russian invasion and how that has had significant impact on issues such as inflation, my apologies, such as inflation around the world and the cost of living. That has a significant impact on disposable income of our clientele market that we look to. And a lot of these global of volatility usually take time to impact -- for us to see the direct impact on our target markets, mainly if you look at our strategy, the African continent. So we're buying ourselves time to say given our strategic initiatives that we have communicated in terms of our growth aspirations locally in Africa internationally how best can we position ourselves to grow the business. And having said that, we are not saying that we're planning on putting more discretionary capital to Africa, not necessarily. We're saying that the Board would sit and consider any opportunities that come up as and when they come up. And we do have a few opportunities already at hand that we're busy with. So the uncertainty for now is more driven more from a global economic performance or economic position on the disposable income of our client base.

Abigail, I think you've answered it very well. But Kevin, although it's fantastic and we are obviously very hopeful that COVID is fading a little bit from the severity that we had in waves, particularly 2 and 3, there is always a fear on our side that there can be another variant. And so it's still a little bit early to declare victory on that front. And then as Abigail has mentioned, we've now been faced with the instability in the world. And I mean, you would have seen how central banks have been revising by the week, their forecast, the impact on markets. We haven't seen that in South Africa. But if you think of what's happened to the U.S. market, it is for us, it is a time of caution. And I don't want you to read too much into what Abigail said. Our focus is actually on -- is not on acquisitions. Clearly, having done what we've done in Africa, there's actually very little more that we can do in the short term. We're in the middle of a transaction that's going to take more than a year to close. It's virtually impossible to do anything anyway in that period because you're in the middle of an existing transaction. And for us, this is a time where we see rightly or wrongly, a great deal of danger in the world, and we are not at all uncomfortable with having significant buffers both for COVID and for economic events.

In support, if I could just follow up on that. I guess, is it more a case of park the capital now given the weak outlook, particularly the pressure on disposable income. What we're seeing in the retail affluent space that is trading down, that perhaps those growth levels maybe or a bit muted for a longer period of time. And if something does come up over the medium term, it's having that capital for, I guess, optionality in the future.

Yes. Look, we had a discussion, we had a discussion with our Board about it, and this is a matter of judgment. So we all understand that it puts a drag on our return. But on the other hand, none of us can foresee the future, and you will know probably better than Grant, Abigail and myself that the range of views are large in terms of how things are going to unfold. And we just think that we are happy to forego some return on capital in the short term in order to provide ourselves with optionality and security in the medium term. It's really that simple.

The next question comes from Sarine Barnard from Ninety One.

I just wanted to check in, you talk about persistency being maintained at satisfactory level. Can you maybe provide a little bit more color around that, maybe by talking to what you're seeing in the different segments?

Well, look, I think to add to what Abigail said earlier, we've noted what our competitors have said, and we're a little surprised because our persistency is as good as ever. We've seen absolutely no deterioration or whatsoever. And we can't explain to you why that would be the case. But it does seem to us that -- we believe that the lower segment will take more strain than the middle segment because inflationary pressures are going to have a much greater impact on people who spend a high proportion of their income on food and transport. In the retail affluent sector, it's not as -- there shouldn't be as much strain taking place in that area. So it's really hard to see. And what we have seen, Sarine, is quite good wage. Well, not good. I mustn't use the word good. We've seen relatively high wage increases taking place. So it is quite hard to read, the banks also beginning to issue credit. So the question is, will sort of savings rates remain high because people put money into insurance policies and unit trusts and so on, and finance some of the higher expenditure from inflation through taking on debt. We don't know the answer to that. But at this point, we are seeing absolutely no difference in any of our segments. But our expectation is, because we are at historically good levels, that we would expect to see some deterioration, if nothing else back down to sort of historic levels over time.

Okay. Great. That's very informative. And then maybe just on the mortality. So you talk about the swing in terms of mortality on 4 months last year. But so last year, there was negative coverage mortality, which was offset by the release of discretionary margins. So does that mean that you are actually producing positive experience on interest in mortality again?

Sure. I don't know Abigail the -- I mean, either Abigail or myself or Grant can answer this. I mean, the fact is, we've -- and I think I've explained this to you in the past is that, unfortunately, with COVID, it's very cyclical, right? It depends where you are in the wave. So we have actually produced very big mortality profits in the first 4 months of the year. The waves 4 and 5 have not been as severe as we predicted. But I think we also told you that we weren't going to let all of those profits emerge into the P&L that we would be reserving some of them for future pandemics. And so this is something as the year -- we don't -- unless under very extreme circumstances, we don't make reserving and basis decisions at this point in the year. But certainly, by the end of the year, we will make a decision about how much of the mortality profit to allow to come through in the current year and how much should be set aside to rebuild pandemic reserves for the future.

But so because the access data still shows that there is some excess debts in the country. But so basically, your mortality experience is back to sort of a normal experience or even slightly better than...

The excess debt is actually not -- is not happening uniformly in the different segments. So we're not seeing excess debts in the affluent segment. We are seeing some excess debt in our group risk book. But of course, that's exactly where we've really pushed the premium. Yes, very significantly. So if again -- sorry, it's not a simple answer. Excess debt is not. This pandemic has been very unfair and very unequal in its distribution.

And then the last question, just on the Saham underwriting margin. So you talked about it being at the lower end of the range. You've done quite a lot of work in terms of remedial action. So if you can maybe just talk or provide a little bit of color around that. Were there any big events or big launch of plans that impacted it? Do we need to be a little bit more patient?

It will be interesting to see what Abigail will say to this. But the answer is that -- so we don't -- we haven't had any big single events you can point to. But the disappointing area for us continues to be the health book. And we've undertaken a huge amount of action to try and change market practice in that area. And the fact is that we continue to not get a satisfactory result in that area. And that is the thing that has dragged the margin below we would like it to be. But we're continuing to work on that area.

Further action needs to be instituted to get it sort of back to...

You basically need to -- yes, exactly. We actually need to see market practice changing. A lot of the health business is controlled by brokers. And we've been trying to wrestle back control of the premium payment and claims process from them. It's basically in West Africa that this is an issue.

Thank you. At this time, it seems like there are no further questions in the queue. Mr. Hanratty, can I hand over to you for closing remarks?

Yes. Thanks very much. And thank you all very much for joining. And Abigail, thank you so much, I can see that I can now start playing golf 5 days a week because you are really capable of doing everything now. So well done. Thanks very much to everybody. I hope you have a wonderful evening all of you.

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

Thanks a lot guys.