Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sanlam Investor and Analyst Call. [Operator Instructions] Also note, this event is been recorded. I will now hand the conference over to Mr. Paul Hanratty. Please go ahead, sir.

Thank you very much, and good afternoon, everybody, and thank you very much for joining us on today's call where we will have some brief comments about the Assupol acquisition as well as our Moroccan [indiscernible] and we'll open up for questions after that. I am joined today by our Group Finance Director, Abigail Mukhuba, Chief Risk Officer and Chief Actuary; Lotz Mahlangeni and our group executive for Strategy, Dave Marshall, as well as the Head of Investor Relations, who I think most of you know, Grant Davids. This morning, we announced Sanlam's firm intention to acquire 100% of Assupol, which is the leading life insurer operating in the Retail Mass market in South Africa. This is consistent with our Fortress South Africa strategy, and the acquisition of Assupol does provide us with a very strong platform in the Retail Mass market and importantly, one in which we have now going to have control over in the long term. This opportunity arose due to the intended exit of 2 of the largest shareholders of Assupol, and we believe that the timing is opportunity to acquire an excellent asset at a fair price. Assupol will form part of Sanlam's retail mass cluster, and together with Sanlam's Sky, African and the Capitec JV, which I think most of you know, comes to an end in October 2024, will create a strong market position for Sanlam in the Mass market segment in South Africa, and that will complement our very strong position in the retail affluent and corporate markets. Just to give you a little bit of background on Assupol. Assupol has a very proud history in South Africa, it's 110 years old and has had a focus on public service, the police in particular. And like Sanlam, it's had a history of being a mutual, it's got a very strong client focus and a shared value creation model. And it is guided by their ethos of serving those who serve. Also like Sanlam, it's mission is to empower individuals and families to pursue their dreams with confidence. Assupol has a strong and widely recognized and trusted brand in its core market segment. Because their traditional market being government agency law enforcement parastatals, the company does tend to have a relatively defensive revenue base. The company insures 5 million lives through just over 2 million policies. And importantly, they've got a very well-established distribution with the national sales force, including a net worth of 2,700 sales advisers, 86 branches and 8 mobile centers. For us, it's important that it has a very strong presence in the [indiscernible] market, which is extremely complementary to Sanlam's business, which has always been slightly underway to [indiscernible]. Most of its business consists of premium policies and the majority of those premiums are collected through salary deductions. It has a very strong, stable, capable management team, and they know this business well. In Life Sanlam, it has a really strong focus on the S in the ESG. From a financial perspective, it reported at the 30th of June 2023, an embedded value of just over ZAR 7 billion and a solvency ratio of 179%. For the financial year 2023, it reported gross insurance premium revenue just over ZAR 5 billion profit attributable to ordinary shareholders of ZAR 716 million. The value of new business was ZAR 269 million on an NPV of premiums of ZAR 5.5 billion. The company has a solid history of long-term growth, but it's been badly impacted by the COVID-19 pandemic. And similar to the broader trends that we see in the mass market segment has also experienced a deterioration in premium growth and persistency in recent years, impacted by high inflation and weak economic environment. However, in the long run, we see this as a strong growth segment and we do believe that growth will slowly begin to return to this segment of the market. As indicated, Assupol will form part of Sanlam's Retail mass cluster, Bongani Madikiza, CEO of that retail mass cluster will ensure that Assupol gets the support that it needs to flourish in the Sanlam Group. Although Assupol will continue to operate under its own brand and identity, we will be seeking opportunities to cross-sell and then product into that base. They're very much a one product line business to date. We do believe that there's some balance sheet efficiency and there are lots of back office, IT and support structure synergies that are available to us now over time. The purchase consideration of ZAR 6.5 billion is below as Assupol last reported embedded value of around ZAR 7 billion. Together with the long-term synergies that we think we can unlock both cost and revenue, we're very confident that this asset is going to deliver a return well above our hurdle rate and be accretive both to group equity value and to dividends. While we have you on the call, we also wanted to mention that we've recently received the results of the mandatory takeover offer that has taken place in respect to Sanlam Maroc. This was implemented as a consequence of the SanlamAllianz transaction, and it was a mandatory tender offer. Sanlam will acquire an additional 23.9% of Sanlam's Maroc taking the shareholding of SanlamAllianz to 86% of Sanlam Maroc with ongoing local shareholder participation, obviously making up the other 14%. This increase of exposure for SanlamAllianz to Morocco which we believe is a good thing for the joint venture. We regard the price paid in the -- in this mandatory takeover offer as safe and we do expect to earn our hurdle rate on the additional state. On the matter of funding, the funding for both of these transactions will form part of the group's overall capital plans. There is absolutely no intention to issue any equity to fund these transactions. We will use our cash resources of the group. There are quite a number of moving parts, which I'm sure you appreciate, we cannot go into any detail, but we can assure you that we have the cash resources and if necessary debt capacity because we have a very low leverage to deal with the funding these transactions. And with that, I will now open up for questions. So Chris, if you wouldn't mind opening up the line, and we'll deal with the questions.

[Operator Instructions] Our first question is from Andrew Baker of Citi.

Congratulations on the acquisition. I guess the first one, are you able to say anything more on the funding mix between cash and debt? And then secondly, can you just give us a sense of the competition today between Sanlam and the Assupol business. And I know you said it was complementary in terms of geographic mix, but how are you going to handle that going forward? Because presumably, you'll still run up against each other because it's a stand-alone business. And then thirdly, are you able to just give a little bit more detail on the products that you hope to cross-sell between the 2 businesses. That would be really helpful.

Andrew, thanks very much for your questions. And please, to my colleagues who are online, please feel free to add, subtract or correct. Andrew, on funding mix, without wanting to go into any detail, we have quite a number of transactions that the movements in the capital structure that are taking place at the moment. So you will be aware, for example, that there is an option for Allianz take up their share of the JV. And there's a very specific time period for that to take place in and that will coincide more than likely with the closing of this transaction. So it's absolutely impossible for us. I mean, as you know, the money is fungible. So we've got a variety of movements taking place at different times. But we've modeled in to all scenarios. And we may need a little bit of debt. We may need a little bit of bridging finance but it's completely -- it's really simple for us to handle. And I think the important point is that, firstly, as I mentioned earlier, there's no equity issuance required. And secondly, if there is any movement between cash resources and debt, actually, it will be de minimis in terms of the overall leverage in the group. So although I'm sure you'd like me to go into a lot of detail, I unfortunately cannot. In terms of competition, it's a great question. We do see Assupol in the market, and they're particularly strong in certain segments of the market. They've got an extremely good brand and reputation and a good sales force. So I think the question of competition is valid. They've got a very different geographic footprint to us. So that is helpful. I think one interesting point to note is that we do look after the police health insurance scheme as well at Sanlam already. So you can see some immediate benefits in that direction. In terms of the base issue, I guess, is how much can we cannibalize each other's business. By putting all of these businesses under Bongani, although people allow Assupol to run as a separate entity. We will ensure that things like commission arrangements do not permit one of the businesses to capitalize the other one's book that would be absolutely senseless. So we will control the rules of distribution and commission for the businesses. So they can compete as aggressively as they want, but not -- they can't share each other's book. In terms of products, I think one of the big challenges for this segment of the market is to widen the product sets that are offered. And this is something that we're addressing inside our own business as well. So if you talk about which are the life products should be distributed. I mean there is a need -- there's a very big need to distribute products like normal -- properly but normal whole life insurance way beyond just the need of the funeral, retirement savings products, retirement annuities and the like. There's a massive need to address the absence of wills in the market and clearly, we're very well placed to do that with the capital legacy business. If there's also a need to -- I'm sure you're aware that we have a very small credit business and again, this is a product that is not currently available to Assupol customers. They, as you all have noticed, have a very big branch network, and that's very helpful from a credit distribution point of view. So there's quite a widening of the product set that's going to be required. And that's why although we're not immune to the opportunity of pursuing cost synergies, there are clearly some big revenue synergies in this as well. I don't know if any of my colleagues want to add or correct anything. I think they are all silent. So I'm going to, in the absence of anybody jumping in, if there's any more clarity you need please just ask.

[Operator Instructions] The next question is from Michael Christelis of UBS.

Thanks very much for the time and the details. Maybe if I start with 3 questions, if I can. So firstly, you talked about earnings, but clearly, Assupol reported under IFRS 4, can you talk a little bit about the impact that IFRS 17 is expected to have on those earnings? In other words, can we expect this to be the number that comes into your net results from financial services or else being equal? Or would there be material changes required from an IFRS 17 perspective? The second one is just around the EV. And it's a difficult question, I assume for you to answer, but do you have a sense of what the EV looks like on a Sanlam basis? In other words, you've got a strong track record of very conservative EV calculations. If you applied that to Assupol, would the EV still be ZAR 7 billion or would it be materially less? And then just on the EV as well. I mean, the or a EV at 12% is not fantastic. And it looks like it's largely driven by VNB collapse if you look at it relative to 2019, it's about half of what it was. I mean is this a business that can achieve? You talk about your hurdles? Is that risk free plus 4 or you're talking about the stretch of risk free plus 17?

Great. Love to hear from you as always. I wrote down on my piece of paper looks his name, and I had yours first because you normally first so the Andrew beat you to. I'm going to start with the first question. I'm going to actually Lotz and Abigail if they want to add anything around the IFRS 17 questions. So Assupol has not yet adapted the accounting to IFRS 17. So we -- and we have not yet been able to figure out the impact of exactly what IFRS 17 looked like. I think there's also -- and you'll appreciate this, that there is -- once it comes into our group, the IFRS 17 numbers may not look exactly as it stood alone because there's quite a lot happening in the neutral surface at the Sanlam level as well. So I don't know if Abigail or Lotz can add anything, but let me say there are any great concerns about the earnings coming through. Your question on the EV is a very important one. We have been through quite an extensive period of due diligence on this asset. And one of the area of the focus was undoubtedly the embedded value, and we spend time -- actually we spent time with them going through this. And clearly, it wouldn't be exactly the same. But we satisfied ourselves that actually it was a reasonably prudent striking of the EV. And so while there may be some differences, we don't expect it to be very material. And again, I like Lotz because he was personally very close to that aspect of EV. Your last question is around VNB in sales. And there's no question that if you go back a number of years, this business regularly produced strong premium, new business premium growth, strong VNB and there has been a very sharp deterioration that in recent years. And our expectation is that under our ownership and with the right management and oversight of this, we would expect that management team to get it back to the historic growth level. But your question on returns, we would expect this to be above the top end of our stretch hurdles. If you think about it very simplistically, the embedded value, of course, itself implies return along the lines of the discount rate. And then we expect the synergies to be very significant. And remember, the cash flow duration in the book is relatively short. So it's not as if you're projecting the things out 20, 30 years, the bulk of the cash flows are fairly early on. So when we turn it around and do our calcs, we would expect to get a very healthy return and the asset should be accretive to us. But the reason we're buying it is not just the market, it needs to make sure that this management team returns to part of growth. And we believe that they will be able to do that. Lotz or Abigail, can I ask you please to deal with IFRS 17, which I have to admit is my least favorite subject, but an important one and Lotz on EV.

Thanks, Paul. Nothing to add. You're correct there, yes, end is June. So IFRS 17 is actually applicable to them a year later. So we don't have that information as yet.

Yes. Paul, then on the EV, we did as part of the due diligence, As Paul indicated, review the EV assumptions and we look at the EV on an overall Sanlam basis, and we are comfortable with the level of prudence that was included in the EV basis. And that was used on the basis on determining what was the price to pay for that business. So we are comfortable with the EV basis, and we don't expect any other consequences once it comes on to the Sanlam basis. To add on the RoGEV point, Paul has covered everything there.

The next question is from Francois Du Toit of Anchor Stockbrokers.

Most of my questions has been asked around return on embedded value and IFRS 17. The other question curves around the capital requirements within the business. Have you had to look at what the SCR would be if it was -- or how much SCR would increase in Sanlam group if it was added to your group as a freestanding entity as it was solvency capital requirement was ZAR 4.4 billion. Obviously, there will be a lot of diversification benefits, right? So it should be less than ZAR 4.4 million. Is that the way to look at this? That's the first question. Second question is around corporate cost. I think corporate costs in Assupol was around ZAR 17 million. Can you give us some sense of how much of that corporate cost would disappear within the Sanlam Group as well?

I'll ask Lotz to cover the capital question, but you're quite correct. Although Assupol will run as a separate entity, we would expect in time and move them to work off the Sanlam license. But even without that, I think Lotz will correct me if I'm wrong, we can take credit for the diversification. So -- and that's why we did mention that there are some balance sheet synergies. The thing I always remind people, those are one-off in nature, right, because you do it and that's -- it's done -- it doesn't help you past the initial little bit of [indiscernible] new sales that you get. In terms of cost, I think it's fair to say that we do expect there to be a considerable amount of cost synergies and not just on overheads, but Assupol themselves have plans to bake in to try to upgrade their IT systems and so on and they sell pretty much the same products as we do. So we see a lot of synergies down the line into the spend on IT systems and that kind of thing. So we don't want to go in any detail today. And you can also appreciate that until the transaction is cleared by the competition authority, we can't engage at the level of detail required to do detailed planning. We can simply made estimates. We're in exactly the same boat with the Allianz transaction, and it's turned out afterwards that the assumptions we made about the kind of level of savings will exceed those easily. So we're fairly confident that the kind of costs that we've put into our target returns will be exceeded. Lotz, I don't know if you can help a bit on the capital side.

Yes, Paul. I think the ISR requirement was ZAR 4.4 billion at 30 June and the old funds were ZAR 7.9 billion. that gave the 179% SCR coverage ratio. As part of the consideration of the transaction, we have looked at what the impact of that will be on the overall Sanlam balance sheet. Given that we do treat some of our [indiscernible] based insurance entity as part of the accounting consolidation group. There will be some capital benefits that will come through there. So the delta impact in terms of an SCR perspective will lead to a benefit. And then, of course, over time, there will be other benefits that we'll look at.

Lotz some way in saying that it's not a huge -- it's not a huge issue, though. It is true that there's a synergy, but it's not very material in the context of overall deals there.

No, that is great. That is great.

[Operator Instructions] We do have a question from Sarine Barnard of Ninety One.

Just a quick question, Paul, you talked about some of the issues that this business as far as like persistency et cetera. Can you maybe just talk a bit about the new business. If I look at the recurring APE, it's still at about 40% of the level it was in 2020. What is the issue there?

Yes. Thanks very much, Sarine. So look, this is a business that faced actually we had a not dissimilar situation in BrightRock if you'll recall. So the problem with any business that is effectively a monoline business, particularly when that the mortality business in a pandemic, it's really problematic. So the management had to be very, very cautious about volumes. As you know, in this particular market segment, sales freighted very badly. And of course, that meant that your financial advisers will have put under huge pressure. Many of them left the industry. People like ourselves with deeper pockets. You'll recall, we're able to provide financial assistance to advisers to keep them through, so this is a business that's actually been quite hard hit in that period. They had also started up some businesses a few years ago in the direct marketing area that has actually grown the sales. But I think the quality of those are quite close the management terms as also -- I mean that could sort of batten down the hawks you like from 2020. And I think we'll now be able to open these hedges up again and get things moving.

So if you compare the advisory force, you talked about 2,700 agents. So was that force substantially higher if I look at the history back to, say, 2019, 2020.

I think it was a little bit higher. I'm actually trying to recall now from memory, but the problem you've got is not just the numbers. So the one thing that happens in those adviser forces in that particular industry is that your years of service at an absolutely massive impact on your productivity. So if you replace your staff with -- if you lose people, and you then replace them with new and inexperienced people, your productivity absolutely decretive. So that will be a factor in that space for them as well. So I think that, therefore, a little bit smaller, but I think it's also the year service has reduced over this last few years.

The next question is from Jarred Houston of All Weather.

Just a couple of questions from me. Just trying to understand how the management team just manages the complexity of another acquisition. Just given we've recently had the capital legacy deal for Centriq and the SanlamAllianz combination. There's just a lot going on at the group. So just to understand how you're managing all these acquisitions at the same time? And the second one is just when you look at the capital allocation tree, how you would weigh up this acquisition against potentially buying back your own shares.

Okay. So I guess the issue of how we handle all these projects and acquisitions sort of perennial question that comes up. And I'll give you the same answer we always give is that a transaction like this, the actual operational aspects of it now become the focus of Bongani and his team. And so things like [indiscernible] Centriq capital legacy, all those things have very little impact on him and his team. So we're very careful to make sure that with any one particular cluster, we wouldn't overcomplicate. We wouldn't complicate things. And of course, from the center, we manage the progress of the implementation, and we measure the benefits coming out versus whatever we postulate is going in because the management teams are very involved in making estimates of the kind of outcomes. So I'm very comfortable that we can handle the workload. Your second question sorry, if you give me, I have completely slipped in my mind. What is your second question?

I was just asking about -- I mean, when you think about capital allocation.

Oh, capital allocation, how do we have this and buying back your shares?

Yes.

Well, I mean we've always been very clear if we can earn above our hurdle rates and then -- and depending on the price to JV, it's extremely simple. So round about now, our price -- share price to JV would be very close to 100% might be a few percent above or below, give or take. But for all intents and purposes, it's trading at around about the JV. So if you take a business like this, as I said, it's got a very -- a relatively short-term set of cash flows. So we can work out with a very high degree of confidence, what sort of return we're going to get. And it's higher, right, than we get on buying back our shares by a country mark. And you then factor in that strategically, this is really important to us because if you look at the long-run future of South Africa, not the current South Africa because the current South Africa, clearly, this is a segment of the market that is under pressure. But if you look at the long-term future, the long-term growth of South Africa hinges around the broad middle market of South Africa, whatever industry you're in. So for us, where we've been relatively underweight. It's a crucial strategic step for us to step up. And I always point out to people that buying back shares versus a long-term strategic return, you're comparing 2 very different. To get the return, that's a fully mechanical calculation. And in this case, it's better for us to do the long-term assessment. But in any event, you have to look at the strategic nature of it, not just the financial aspects. And it's critical for us, and that's why we're so pleased about this to actually bolster what in the long run is a very key growth segment for us.

The next question is a follow-up from Michael Christelis.

Paul, sorry, one more question. In your answer to Andrew, I mean you spoke about the branch network and you spoke about the fact that you have a credit product that you don't have high penetration in yet. I mean are we -- was this bought with the view of turning it into an entry-level branch or as a first step into an entry-level banking-type branch business. I mean do you have strategic plans to become a transactional bank or lender aggressively in the entry level market?

No, we don't. And I'm laughing because we do -- we -- as you know, I'm quite allergic to this concept of banking. But we've been fairly consistent in saying that doesn't mean that we won't offer. We do -- we've got a big credit advice business, we do and will increasingly do credit product. But we're not going to be done a full-scale bank at all. What is...

You're not going to buy back into the existing small bank?

In that. It's exactly -- it doesn't mean that we won't partner with the bank to provide services. We've actually got a very big payments business within Sanlam as well. So we think that there's an awful lot we can do without having to own a bank, Michael.

So we have no further questions in the queue. Would you like to make some closing comments.

Thank you, Chris, very much, as always, for efficiently hosting us all. I just want to thank everybody very much indeed for -- I know that it's a Friday afternoon, and it's late, so thank you very much for dialing in. And yes, I'd love to wish you all a good weekend, and thank you once again for your interest and take care.

Thank you very much, sir. Ladies and gentlemen, that then concludes today's event, and you may now disconnect your lines.