Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sanlam Q3 operational update. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Paul Hanratty.

Irene, thanks very much, and good afternoon, ladies and gentlemen, and thank you very much for joining us on this call. I'm very aware that it is late on a Friday afternoon, and I appreciate you dialing in. I'm joined on the call today by our Interim Group Finance Director, David Marshall, who's filling in while Abigail is on maternity leave; the Group Chief Risk Officer and Chief Actuary, Lotz Mahlangeni; and the Head of Investor Relations, Grant Davids. Earlier this afternoon, we released our operational update for the 9-month period to 30 September 2023. I'm going to comment briefly on the strategic and operational progress before we move on to Q&A. From a strategic perspective, we were very pleased to conclude the SanlamAllianz joint venture in early September. We're tremendously excited about this business and how it positions us as a true African champion. At our Capital Markets Days in October, we took a deep dive into this portfolio, laying out our view of the growth opportunity in Africa and how we intend to capture it, how we set out our key priorities and the financial targets. The joint venture brings scale with operations in 27 countries across Africa, holding top 3 market positions in 16 countries for life and general insurance, and an estimated 16% market share in insurance premiums in Africa outside of South Africa. The benefits of the transaction are not only in revenue and cost synergies, but also in derisking the portfolio through greater diversification across country and product line. In August, we completed the transaction with Capital Legacy, one of the fastest-growing financial services businesses in South Africa, through its wills and estate offering packaged into a unique life insurance product. The integration of Capital Legacy's innovations and their innovative product and sales engine, Sanlam's well-established estate, trust and administration and distribution capabilities opens up an additional growth avenue for our South African businesses. Our Retail Affluent business also concluded the Absa LISP or linked investment platform transaction in November. This, together with the Alexander Forbes list acquisition completed earlier in the year, enhances our leading position in the retail savings platform market in South Africa. The asset management integration has progressed extremely successfully, and most of the activities that we need to take -- to happen and now, to get the integration complete, have taken place. We believe the Sanlam's long-term growth profile is significantly strengthened by these various transactions. Turning to the operational perspective. The group continues to perform well. The net result from financial services and the cash net results from financial services increased by 19% over the corresponding previous 9-month period. Although the growth rate has slowed from that reported at our interim results, this is in line with our expectations given that the base effect of a weaker first half in '22 and the recovery in the second half of '22 influenced this apparent slowdown in growth rate. The earnings performance of our life insurance, credit, restructuring and investment management operations are solid and in line with the trends seen in the first half of the year. We're pleased with the underlying performance trends in our general insurance operations as they continue to focus on appropriate pricing and risk management in a very challenging environment. The performance in the third quarter was impacted negatively by weather and fire events in South Africa, as well as some fire and large claims in our pan-African operations. Overall, however, we still expect the group's earnings for the second half of the year to be very similar to those posted for the first half, which we indicated in the group's interim results a few months ago. Group new business volumes increased by 13% over the prior 9 months, supported by the Absa Asset Management business, very good life insurance sales in the South African retail businesses and in India, and satisfactory growth in general insurance. The value of new business was up by 28% on a constant economic basis, while the new business margin was higher as well. But, as I always caution all of you, be very careful about margin. We really tend to focus on the total value of new business and whether we're satisfied with that or not because it's very sensitive to mix. The group recorded positive net client cash flow of ZAR 18.5 billion for the 9 months, with a very pleasing turnaround in the flows into our South African asset manager in the third quarter. The group's discretionary capital balance was just over ZAR 1 billion on the 30th of September. The group remains well capitalized, with the group solvency ratio well within the target range. In conclusion, I would say that our strong performance in the first 9 months of 2023 reinforces our confidence in the prospects for the group despite what we all know the really challenging economic backdrop. We believe the group is well positioned to successfully navigate this environment. That concludes my opening remarks. We will now open up to questions, so please just let Irene know and we'll dial you in. And between the 4 of us, we will try to answer your questions.

[Operator Instructions] The first question we have is from Andrew Baker of Citi.

Great. Three from me, please. The first, just on persistency. I was just wondering if you've seen any sequential deterioration in persistency on the long-duration Retail Mass business in Q3, specifically over the first half? And secondly, on the new business profit, are you able to just talk through some of the underlying drivers of the new business profit growth that you've seen, again, specifically in Q3 versus the first half growth rates? And then finally, just on the India credit business. Can you talk about the year-to-date growth between annual collections and how they vary? Or kind of what you see versus the industry as a whole?

Andrew. I think this is a momentous day. You're the first in with your questions, so well done. I must say, it's either my line or yours, it wasn't terribly good. So if we answer something that you didn't ask, let's put it down to the line rather than misunderstanding. I think your first question about retail persistency, I think we haven't seen any deterioration. It's -- we're seeing much the same pattern in Q3 that we saw in the first half of the year, and we would have hoped by now that we might have seen a slight improvement in that. So we are undertaking a series of actions later this year and early into the new year that we hope will address that. So we haven't seen a deterioration, but we also haven't seen the level of improvement that we would like to have seen. Your second question pertains to, I think, the new business margin and why this has got slightly stronger in Q3. It's -- as I've mentioned in my opening remarks, I'm always very, very cautious about the margin in life insurance. I think it's a very crude measure. But having said that, clearly, our volumes are quite a bit stronger, and I think we did guide a little bit at the half year that we were seeing some pickup. So that trend in Q3 has maintained itself. We're seeing better new business volumes, and of course, the margin is a very sensitive measure so volume definitely helps in terms of the margin. And then mix. There is quite a -- there's been quite a strong switch to risk products and to guaranteed life products in the investment space, and both of those have higher margins. So it really is about a shift in the mix of business. And I always remind people that although it's not a bad thing to have a higher margin, it's not necessarily a good thing either because it quite often can imply more capital-intensive products sitting in behind us. And then your third question, which I know had something to do with the credit book in India. I'm going to ask David Marshall because aside from acting now in Abigail's place, David is actually on the Board in India and actually looks after the Indian operations for it, now that Heinie is looking after the JV. So David, I don't know if you caught the question and are able to help. Otherwise, just ask Andrew to repeat it.

Thanks, Paul. I think I caught the question. In terms of our disbursements in Shriram Finance, they continue to be excellent in the third quarter. Record levels, continued record levels, and collections continue to be extremely strong as we are used to seeing in that business.

The next question we have is from Michael Christelis of UBS.

Three from me as well, please. Just to clarify on the persistency experience, can you just confirm that the persistency experience in both Capitec and your own Sanlam business are similar? Or is this -- 1 of them much better or worse than the other? Then secondly, just again, a clarification on your comment around half 2 earnings. I think you said at the half year that it's net result from financial services, it will be similar to half 1, not operating profit. Can you just confirm which of those 2 metrics you're referring to when you talk about half 2 earnings? And then the third one, maybe a little bit more more difficult for you to answer. I'm not sure if you can give me much color, but I sense quite a lot of excess capital building up over the next 12 to 18 months. And just your thoughts around where the likely deployment of that capital would be? What's kind of missing in your sort of armory at the moment that we could expect you to maybe deploy some of that capital?

Michael, thanks. So on the persistency, the persistency is a little bit worse in the Capitec book than it is in our own book. And I think that that -- I don't find that particularly surprising because it clearly doesn't have as high a touch in terms of client selection and relationships, so it is a little bit worse than in our own book. Your second question related to --

The environment.

Earnings run rate. Yes. Okay. So of course, what we're referring to is the net result from financial services because the operating number, of course, is -- got investment return in that so very, very hard to predict. So it's the net result from financial services specifically that we're guiding on. And then your third question related to how we deploy -- you had a sense that capital was building up. I love your optimism on that. I think -- the way I explain this is, I say we've got a tremendous number of moving parts at the moment, and I think you're probably referring to the JV. And in particular, in the JV, we've got quite a few moving parts. We know that the [ Namibian ] business will move across next year. You know Allianz has an option against us. But we also have a mandatory takeover offer in Morocco taking place. So I'm being brutally honest here, not evasive, we ourselves don't know exactly what the capital movements are going to be. I think you're right, we'd expect on balance for it to be positive. But we have not -- until we've got the capital, we won't really apply our mines to the allocation. But in terms of your question, I think generally speaking, we're fairly happy that we've got most basis covered in the South African context, certainly the more significant areas of it. We do -- we said this, that we remain open to further investment into Africa as the opportunity arises. But I can also say right now, there's nothing particular on the horizon. But -- and of course ideally, we'd prefer nothing in the next year because we've got so much. I think you would have gathered as Heinie and his team have an awful lot of work to do. So the last thing we need is is an acquisition. And of course, India. It all depends on opportunities, but I think we've been very clear all along that we remain net biased towards making further investment there but only at the right price. So I mean I'm being -- you probably think I'm being very evasive, but honestly, we don't have any plans and we don't know how much capital we're going to have exactly to deploy.

That's clear. And then just on the Moroccan one, is there an idea of what sort of capital outlay that could involve?

Yes, we do know. I mean maybe, David, I'll ask David. David is super close to it because he's actually doing the transaction. And what I should say before he answers is that, of course, what you don't know in an MTO is how many people are going to exercise. So you know what your maximum exposure is and your minimum is a 0 theoretically. But David, if you can give some color there?

Yes, sure, Paul. Michael. So as Paul said, I think the big variable on Morocco is what the percentage take-up will be. We're going to process there, which was only triggered as soon as the Allianz transaction closed. So quite recently, that was when the process triggered and then there's a standard process with the capital authority there to establish the appropriate price. And that process is now well advanced so we've got a, I'd say, a pretty good beat on the price for that MTO now and the main outstanding should become clear next 3 weeks, I think or so, will be what the percentage take-up is. So this is a good example of 1 where we're sort of modeling a range from low to high, and we will be clear on that, I think, in the latter part of December. But as Paul has alluded to, we tend -- with our capital forecasting, we tend to assume the worst on outflows and assume that some of the inflows, which could be quite large, don't happen until we know they will. So we're pretty prudent in how we look at that. That's all I can say at this stage.

[Operator Instructions] The next question we have is from Warwick Bam of RMB Morgan Stanley.

Three from me as well. You mentioned good growth in Morocco. Is this growth rate similar to the first half? Or did it improve? Just -- if you could add some color there? And then on your day 1 accounting treatment of SanlamAllianz in the JV, is there any goodwill created or one-off income statement implications for us to consider? And then lastly, just the cash net result from financial services, was slightly ahead of your standard company metrics on financial services in the first half and it converged in your 9-month update. So in the first half, it was 30% up versus 26% on an accounts basis, and now, it's converged to 19%. Are there any one-offs for us to consider in the move between the 6 months and the 9 months?

Okay. Warwick, nice to hear from you. Should we divide those questions up? Grant, do you want to take the question on Morocco?

Yes, probably what -- is the one slight improvement since half year in Morocco.

But it's not a very significant item, yes, so I'm not sure that it's something particular to flag. Warwick, second question related to -- just remind me, Grant?

SanlamAllianz JV.

Yes, whether there are any funny transition accounting. I don't know, David or Grant, are you able to help with this? I can explain to you conceptually how it's going to work. But in the context of the question, Grant or David, are you able to help?

Maybe, Warwick, I can maybe just come back to you with more detail on that particular point.

I mean maybe just to explain conceptually what's going to happen is that we're going to have 9 months of Sanlam results in the full year, and then we're going to have 3 weeks -- 3 months of a combined results are 60% of a combined result. But there are -- the accounting is quite complicated because it looks as if we sell something and then buy something back, so there are a series of transactions that will take place. My understanding is that there will not be any significant accounting impact of it, although I'm sure it's going to look very confusing. But there certainly are not going to be any earnings impact, Warwick, from us. What -- you did have another question as well on the back --

That's helpful. Last one, just on the cash net result on financial services. Just -- it's aligned to the accounting treatment in this period, but at the half when you reported, it was slightly ahead. Just wondering what the moving parts are there as to why it's certainly converged?

Okay. David, do you want to cover that? Or Grant?

Yes. I could take that one. So there's 2 main parts to that. The first 1 would be the amortization of capitalized IT projects, so that would be the first moving part. And in the second moving part would be our negative reserves. And from quarter-to-quarter, there could be quite significant moves. But generally, I think as a rule of thumb, there shouldn't be a big variation between the 2 numbers. But I think on a quarterly basis, you would get a bit of movement between the 2.

Okay. Irene, are there any other questions online?

Yes, sir. We have a question from Larissa Van Deventer of Barclays.

Really impressive growth in credit structuring, which you mentioned a particularly attractive story in India. Could you please give us a little bit more color about what is driving it? What rates? If you -- are you able to isolate the growth in India? That would be helpful. And also, what experience you're seeing on defaults within that loan book?

That's great. Again, I'll ask David to comment. And I think we've traditionally seen much lower growth than the overall market, but it is fundamentally an underlying market growth story. David, do you want to cover that?

Sure. Larissa. I mean I think it is effectively driven by continuing improvements in the Indian economy, government spending on infrastructure and notwithstanding fairly erratic monsoon rains, a relatively good agricultural season. So I think it's literally just a story of a lot of tailwinds at the moment. In terms of collections, I'm not sure how much growth we'll have to guide in terms of how much disclosure we give, and maybe we can follow up with a bit more specific information. But we -- let me just say for the moment that we are very comfortable with the experience. We are not seeing any signs of concern in that or any deterioration in that despite the strong growth at the moment.

Are you seeing an improvement? Will the economy now fully open after COVID?

An improvements in growth, or?

No, loan collection. Sorry. Both, actually.

Collection is always extremely strong in this business. It's actually around 100%. So it would be difficult to see much of an improvement, and that's been true through the period. But it still remains extremely strong, as I said before.

Yes. Larissa, it's got a very unique model for credit granting, which is basically an extremely high knowledge of each individual customer who takes a loan. And of course, many of the loans are supported and backed by assets as well. So -- and that's why traditionally, the business has grown a little bit [ more ] than its competitors. That's a very deliberate tactic in order to make sure that the quality of the book remains excellent.

The next question we have is from Jarred Houston of All Weather.

Paul and team, well done on what looks like another very strong quarter performance. Just a question on the group net client cash inflows, the ZAR 18.5 billion. If I remember correctly, it was about ZAR 11.5 billion at the half year results. If you could just give us a little bit more explanation on the big improvements and what drove that huge number?

Okay. Look, I think -- Jarred, thanks for the question. I mean, obviously, at the half year, we were very disappointed in the situation. We've had some big outflows. Our biggest sort of bugbear is on the international side. We sold off the -- some of the businesses in the U.K. and so on, so we've been battling a little bit there and that has continued into this period. But what has happened in Q3 is that we've won some very big mandates on the institutional side into our business, and our retail flows have continued to be solid and strong.

It seems we have no further questions on the lines. And I would like to turn the floor back over to Paul for his closing remarks.

Irene, thank you very much. And firstly, thank you very much for hosting very professionally. And I really just wanted to wish everybody a good weekend. And thank you very much for taking the trouble to dial in. And particularly, thank you to all of you -- all of you for your support of our group. And for those of you that we don't speak to before Christmas, we wish you all a very good holidays over December and January, whatever form that takes for you, and we look forward to speaking to you again in the new year with the full year results. So yes, thank you very much, and look after yourself.

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