Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sanlam's First Quarter 2023 Operational Update. [Operator Instructions] Please note that this conference is being recorded. I'd now like to turn the conference over to Mr. Paul Hanratty. Thank you, and you may proceed, sir.

[indiscernible], thank you very much for hosting us and being so efficient. Good afternoon, everybody, and thank you very much for joining us on this call. I'm joined here today by our great Finance Director, Abigail Mukhuba; our Chief Risk Officer and Chief Actuary, Makhenkodwa Mahlangeni; and the Head of Investor Relations, Grant Davids. Earlier this afternoon, we released our operational update for the 3-month period to 31 March 2023. This is the first time at Sanlam that we shifted to providing a quarterly update instead of the historical full month's update. We will report on the first quarter and the third quarter regularly from now on. I'll comment briefly on the strategic and operational progress for the period before we move to questions and answers. From a strategic perspective, we've made good progress in implementing the corporate transactions completed over the last few months. These transactions increased our scale and improved our competitive position, which we believe will contribute to our long-term growth. The asset management and Alexander Forbes transactions are completed and effective. The focus is now on integrating these businesses and extracting synergies. All required approvals have been received for the AfroCentric acquisition, and the transaction will be implemented on the 29th of May [indiscernible] on the 26th of May. The BrightRock and Capital Legacy transactions are expected to complete in the next few months. Regulatory approvals for the joint venture with Allianz across the African continent are progressing well, and we expect to complete in the second half of this year. From an operational perspective, we are pleased with the performance of our businesses over a 3-month period, in which we faced a continuation of many of the challenges from 2022, including sustained high inflation and interest rates, and in South Africa, continued electricity supply disruptions and adverse weather conditions. From an earnings perspective, the new accounting standards, IFRS 17, was implemented from the 1st of January 2023. As such, [indiscernible] earnings is reported based on the IFRS 17 results for both 2023 and 2022. Cash and net results from financial services increased by 26% for the quarter. Our Life Insurance, General Insurance as well as Credit and Structuring lines of business contributed to strong growth in net results and financial services, with our Pan-Africa and India operations performing particularly well. This was partially offset by the Investment Management operations reported lower earnings, due to a one-off gain in the first quarter of 2022, which lifted that base of earnings. Turning to Investment Management, 11% higher, excluding the impact of this one-off adjustments in 2022. Good news, business volume increased by 9%, and that was supported by asset management business acquisition, strong Life Insurance recurring premium growth and satisfactory growth in the General Insurance business. Growth was dampened by lower life insurance single-premium sales, which we believe is due to rand weakness and broader investment market volatility. The effect is also very negatively impacted net client cash flows. The group still recorded net client cash flows of ZAR 7.7 billion for the quarter. In addition to the lower life insurance single-premium sales, there was an increased outflow from savings products in South Africa, a large single institutional asset management mandate withdrawal from Sanlam Investment's multi-manager as well as outflows in the U.K. Investment Management operations. Retail net inflows remained strong in Sanlam investments and more than doubled relative to 2022, despite the net inflow -- outflows from the Asset Management business. These outflows within Asset Management were in line with the historic trends for that particular business. Persistency trends remain resilient in the South African Retail Affluent business. Retail Mass persistency continues to be under pressure considering this market segment remain heavily impacted by the weak economic environment. The premium [indiscernible] net value of new business up by 21% on a constant economic basis, while the new business margin was higher as well, despite the muted life insurance sales. This was driven by a shift to more profitable recurring premium and single-premium products in both South Africa and emerging market operations. Our discretionary capital balance reduced to ZAR 4.9 billion. [indiscernible] transactions, the balance on the 31st of March would have been around ZAR 2.6 billion. We completed share buybacks of 347 million in the first quarter. In conclusion, the group's performance for the first 3 months of 2023 highlights the strength of Sanlam and the ability to deliver attractive earnings. The underlying net result from financial services performance remains strong, but first quarter growth should not be extrapolated to the full year. We expect the operating environment to remain challenging for the remainder of the year, particularly considering the recent volatility in our local markets and the impact on the value of the rand. We believe we are well positioned to weather the short-term volatility with a robust financial [indiscernible] position, diversification across geographies lines of business and market segments. We remain confident of the long-term growth potential in all our markets, including South Africa, and we aim to continue to deliver value to our shareholders and to other stakeholders. This concludes my remarks, and we will now open up for questions. So please [indiscernible].

[Operator Instructions] The first question comes from Andrew Baker from Citi.

So the first is on persistency. Are you able to just give a little bit more color on the persistency pressure that you're seeing in Retail Mass and how this is tracking with your expectations? And then I guess, have the management actions that you put in place on persistency earlier in the year, are they having the desired effect that you are hoping for that? And then secondly, just on the growth rate for the cash net result from financial services. You're very clear that we shouldn't extrapolate the 26% in Q1. Just wondering if you had a more normalized growth rate you think is more appropriate for us to be using going forward?

Andrew, thanks very much. I'll give a few [indiscernible] remarks and I'll ask my colleagues to either correct my errors or amplify things. So on persistency in Retail Mass, we're talking about 3 months only. So that's important to remember. Persistency is running kind of in line with where we ended off last year. So it's not getting worse, but it has not yet responded in a positive direction as much as we would have liked. We have implemented quite a number of actions, and we do believe the management of that business is still confident that they can get an improvement later on in the year. The way I would characterize it is to say that the risk of a negative basis change from persistency is low, but that we are not seeing the uplift yet that we would have liked to see in that area. I'm going to ask Abigail to comment more on what would be more normalized. But the only thing I would say is that we -- we're talking about one quarter, and we're also talking about a new accounting standard, which, although we're pretty sure we've implemented correctly. I think you'll understand some hesitancy in drawing too much conclusions from [indiscernible], you will see much the same because of the cash adjusted metric that we're talking about, if we don't change the old accounting standard anyway. So I think what we would say is that if you look towards the rest of the year, we had particularly strong underwriting performance in the GI business across Africa. We've had some very good results coming out of India. And although we have no reason to believe that those will definitely moderate, I think it's wise to be cautious. I don't know, Abigail, if you're willing to stick your neck out. But I think, Andrew, my caution -- I would caution, Abigail, again, trying to give you a number. But if you want to, of course, Abigail, you're welcome.

[indiscernible] a specific number, but it would be significantly less than what we have currently shown.

Andrew, do you have any follow-up questions?

No. That's it for me.

The next question comes from Warwick Bam from RMB Morgan Stanley.

I've got four questions, but specifically on two themes. And the first one is around just the shift -- the mix shift that you're experiencing in new business and the fact that margins are being supported by this mix shift. One of the comments you made is also that you expect us to continue to support the margin into the rest of the period. Just give us a little bit more color around your confidence and why that's sustainable? And then how does this mix compare to sort of pre-COVID levels?

Okay. So I think what we obviously have the benefit of a little bit more data than you have. So I guess when we talk about being confident that the mix we see will continue. We've obviously got a little bit more data to support that. So -- and I guess we've got a reasonable understanding of why we are seeing what we are seeing [indiscernible] clearly elevated interest rates. So that is promoting quite a strong shift away from things like annuities to much more guaranteed annuities. This is a very logical thing that's happening. And of course, we know -- we don't know, but our expectation is that interest rates are going to come raising back down in the very near future. So I think that if we take a sort of -- we look at the next 6 months, I think we can be fairly confident that the factors that are driving the sales and the type of products we're seeing are very likely to continue. Whereas -- yes, the single premium products that are aimed as people taking money offshore as well as discretionary single premium list money that's gone offshore, I think our expectation, having looked at the trends in it, we're kind of back to 2021 levels rather than last year's somewhat elevated level. And we do think that the rand where it's been, that was before [indiscernible] obviously, the global volatility in market has made people very hesitant. So we think that there's a lot of money sitting in bank deposits. And we don't expect a surge again in those single premiums until there is some stabilization in the global macro and the rand. So I think we can be fairly confident that the kind of volumes and the kind of mix of business that we've seen so far is likely to persist for the balance of the year.

And my second question is just really around the buybacks and the strategy there. You disclosed repurchasing 6.1 million shares in the first quarter, which compares to 20 million in December of last year alone. Your share price is not at the level seen in December, but it has retraced some of the gains from the first quarter. I mean will you take advantage of these market opportunities by accelerating the buyback? Or do you plan to be quite consistent? And then have you refined the quantum of what you are allocating for buybacks?

Yes. So we obviously know exactly what we plan to do, and we also have no intention of telling you or anyone of what we're planning to do.

Okay. And I mean in terms of the quantum, you're not willing to share, I guess, the 3.6 billion that's available, will you max that out? Or is that a possibility?

I think if you read into our half year results, you'll know the answer. So let's be little patient.

The next question comes from Michael Christelis from UBS.

Three questions from me, if you don't mind. So firstly, you talked about savings product withdrawals, presumably [indiscernible]. It seems to be the first indication, I think, across the industry that maybe affordability is starting to bite that middle and aftermarket a bit harder. Maybe can you just comment about where you're seeing those withdrawals and what sort of products those are looking like? So that's the first question. Second question, commentary around strong new business growth in recurring premiums. Is that -- is that the mass market? Is it the aftermarket? I'm just trying to understand what sort of products are we talking about risk or savings in the aftermarket? And then the third question is just on your risk variance run rate. Are we back to pre-COVID levels? Are we higher than that, given the repricing that's happened, particularly in corporate [indiscernible]?

Michael, I like to hear from you. And I think it's mostly the first time in history that you came third in the queue. But just to answer you [indiscernible] in this market. To answer your question, the single premium life outflows, those are not withdrawals. Actually, it's just, as you know, your maturities are a function of past new business recommend. There's just a little bit of a bubble going through our book at the moment. So you shouldn't read too much into that. On the recurring premiums, actually, the recurring premiums are very strong in every segment. They have been strong in retail [indiscernible]. They've been strong in the mass business and actually almost identical in terms of both the Capitec and our own core business channel. And then within the corporate business, recurring premiums have also been very strong. So I think that's -- and we've had this conversation, I guess, many times before. It's interesting that recurring premiums really need consumers to be able to allocate spend to it. And we've had a, I suppose, you may say quite a surprisingly robust performance on that front. And the difficulties we faced in terms of the growth relative to last year, we're in a single premium area, where things are driven much more by things like interest rates, currency and sentiment than by affordability. Your questions pertaining to the risk margins, I believe that the first few months of the year seem to be relatively light in general [indiscernible] I think, Lotz, you can help here. But I do think we are still seeing an elevated level of claims compared to an expectation in the base pre-COVID. We don't obviously fully understand why that is the case. But of course, margins are coming through strongly, and there have been, of course, two things. One, repricing of the group risk book. And the second thing, a basis changes, as you know, very big basis changes in Sanlam to strengthen the retail books in order to create, in effect, a prospective pandemic reserve. And that's obviously also feeding through. So all other things being equal, you are going to see a decent risk experience this year, but not perhaps as high as it ultimately will turn out to be.

Just to clarify on the savings withdrawals then, those are not negative variances because they're just maturities.

Yes.

The next question comes from Larissa Van Deventer from Barclays.