Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sanlam 2024 9-month Operational Update. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Paul Hanratty. Please go ahead.

Irene, thank you very much, and good afternoon, ladies and gentlemen. It's good to be with you this afternoon. I am joined on the call today by our Group Finance Director, Abigail Mukhuba; our Chief Risk Officer and Chief Actuary, Lotz Mahlangeni; and Head of Investor Relations, Grant Davids. Earlier this afternoon, we released our 9-month operational update for the period up to 30 September 2024. I'm just going to make a few brief comments before we open to Q&A. The Capitec joint venture was successfully terminated at the end of October 2024, in line with our expectations and guidance to the market with the in-force book of business transferred to Capitec Life. Sanlam received the cash reinsurance recapture fee of ZAR 1.9 billion, noting that that's gross of tax on the 1st of November 2024. And this will be recognized in our net results from financial services for the full year. To maintain Sanlam's strong position in the retail mass segment in South Africa, after conclusion of the Capitec joint venture, we have completed the acquisition of Assupol Holdings in October 2024. We're tremendously excited about this business, and we anticipate significant synergies to arise over time. We anticipate being able to improve the sales force productivity, drive IT development rationalization and to improve the P&L and balance sheet efficiency of that business over time. This transaction reaffirms our commitment to a key growth segment in the South African economy. Bongani Madikiza has been appointed the CEO of Assupol, but he will continue to lead the broader retail mass segment within the group. In Pan-Africa, the SanlamAllianz joint venture continues to progress well. Namibia's operations have now been incorporated into the joint venture with an effective date of the 1st of July 2024, with the group receiving proceeds of ZAR 2.3 billion in October 2024. From an operational perspective, the group has maintained the positive financial performance seen in the first half of 2024 with double-digit growth on most key earnings and new business metrics. The group achieved 15% growth in the net result from financial services for the 9-month period. Life Insurance recorded double-digit growth in earnings and new business volumes. The value of new business grew by 13% and the new business margin remained at a reasonable level of 2.81%. General Insurance recorded good earnings growth with both Santam and SanlamAllianz operations recording margins within their respective target ranges. Investment Management growth was supported by good performance in International and Wealth Management businesses, while credit and structuring growth benefited from strong India performance and improved South African performance, of course, the latter on a much smaller book of business. Group client net client cash flows more than doubled to ZAR 40 billion, supported by improved flows across all our lines of business. We've been pleased to see persistency trends in the South African retail mass segment continue to stabilize, but persistency does still remain a key focus area for management. The group solvency position remains strong and within our target ranges at the end of September '24. The group's discretionary capital balance was ZAR 841 million on the 30th September 2024. And this excludes Namibia and Capitec proceeds, which were received in October and November 2024. In conclusion, I'm pleased to say that we are very happy as a group with the robust performance of the group and good continued strategic execution. Performance of the group is testimony to the commitment of all our people, our partners and the diversity of our operations, and we remain optimistic for the balance of the year. At this point, I'm going to ask Irene if she could open the lines to questions. And as usual, it will be very helpful if you could just give your name and indicate which company you're with. And then one of us will attempt to answer your question. If we can't, we will always make sure we get back to you afterwards. So Irene, if you wouldn't mind opening the lines.

[Operator Instructions] The first question we have is from Marius Strydom of Austin Lawrence Gidon.

Thank you for the update today. I note -- well, the area that I'm most interested in is the new business production in the quarter specifically. I note that your value of new business increased by more than it did in the half year and the margin was also enhanced. So clearly, more profitable business being written, although it does appear that the volumes in the quarter compared to the similar quarter in the previous year did not grow as much as it did during the first 6 months. If you could confirm that, please, and then explain how you managed to extract more margin during the period?

Marius, it's always great to hear from you, and thanks very much. I'll try and answer, but there's always a massive risk that I give you the wrong answer, in which case, I really would encourage Grant and Lotz, who are probably all over this thing to give you an answer. Let me start by saying that when it comes to the margin, on new business. I always remind people that the Life insurance net margin is not as good as guide to margin as perhaps it would be in a retailer. So it's -- I think it's a good measure over time of health, but little movements from one quarter to the next are very vulnerable to changes in mix of business and so on. But you are indeed correct. The rate of growth of volume is not quite as great as the expansion of the value of new business itself. So obviously, that implies that the margin has risen a little bit. I think the one thing that we could say is, I think we've mentioned several times, a very big crackdown in the retail mass space on churn and driven by changes in remuneration system, and that has caused a bit of a slowdown. And of course, we had a tailing off coming towards the end of the Capitec joint venture, which I think you can imagine is a very reasonable thing to happen. But what I will say, and I've said this many, many times before, I'd rather have a lower new business growth rate and the book of business growing than a high rate of new business and the book shrinking. And I can confirm that we have a very healthy position with the book growing nicely. So you have to look at it in the round. And I suppose the other obvious point to make is one quarter is just a quarter. So you shouldn't read too much into it. But I think overall, I hope those comments are helpful. Lotz or Abigail or Grant, if I've got it wrong, please shout.

Maybe just to add one comment. Marius, the corporate business, I think we made a comment in the update about group risk premiums having picked up. So the margin in the corporate business in South Africa picked up quite a bit in the quarter. That obviously assisted the overall group margin.

Okay. Just briefly then, obviously, we're looking for positive impacts in the South African market from lower inflation and the turn in the interest rate cycle and specifically improvements in lapse experience. Have you started to see any of those trends emerging? Or is it too early to say?

Yes, Marius, look, again, I'll leave it to my colleagues to contradict me. But my own view and talking to absolutely everybody across not our industry, but other industries is I think sentiment has improved. But I think the reality is it's very tiny shoots of real improvement. And I think that if you think of the cut in interest rates, I mean, it's been actually -- I'm not criticizing the governor or the SA, but they've been very small. I think there's still enormous strain in the system left over from the past couple of years. And I think it's going to take -- and I've been saying this consistently to people, it's going to take a little bit longer, I believe, for the middle income and lower middle income consumer to have more disposable income.

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

Just 3 questions, if I can. So the first one is on your GI business. You're showing net results from financial services up 46% for the 9 months. But for the 6 months in half 1, it was only up 16%. So there's clearly some big improvement in quarter 3 this year versus last year. Can you give us a bit of color there, given Santam's update earlier this week, it must have been the rest of Africa. I'm just trying to understand, it sounds like a massive improvement in one small quarter. So that's the first question. Second one, any comment you can give us on how mortality profits are holding up, particularly in the corporate business in SA. That would be quite useful. And then -- sure, which one should I go for? Let's go with just hyperinflation and your thoughts around both Nigeria and Egypt, given that both of those countries under U.S. GAAP would be hyperinflation accounting at the moment. I know IFRS is an election. What are your thoughts around whether or not you're going to go that route? And if so, what the impacts will be?

Michael, thanks very much. The last one is a beautiful question for Abigail, I think, to answer about hyperinflation. In fact, I think just yesterday, we were talking about Abigail. So you should be capable of answering that. Your first question, Michael, to be honest, you've lost me, and I'm going to have to...

To you GI and net result, up 46%, where your Half 1 net result was only up 16%. So there must be either a very low base last year or a very high number this year for quarter 3.

I mean my -- so I'm just going to ask my colleagues. You said that, that was from Africa. It's not -- it's driven mainly by Santam in my -- the way I understand the numbers, but I'm just going to ask Grant and Abigail.

Maybe I just misunderstood it.

I think you might have -- either you have or I have. Maybe both of us have, that's also possible. But Abigail, can you help with that?

Yes, of course, Paul. Michael, so for the GI one, the majority of it is driven by Santam, as Paul is saying, in terms of improved underwriting actions implemented. They did have a low base in last year's comparative relative to this year. And then also from a Pan-Africa business, they also benefited from the strong investment return on insurance funds and then the improved performance of a low base as well compared to last year. That's what's driving the jump from the 16% to the 46%. And then on the hyperinflation one, yes, we are following it, and you make good reference to say from a U.S. GAAP perspective. From IFRS, both -- from an IFRS perspective, both Egypt and Nigeria are not yet in hyperinflation environment. They are on the watch list. There are other smaller countries that might be on the watch list, but the numbers are not significant in terms of the contribution to the overall portfolio. But for purposes of IFRS accounting, if Egypt and Nigeria fall into that fold, we will then report accordingly from an IFRS perspective, but we don't expect that to impact the underlying business. But we'll continue to monitor it. And we've confirmed it with our auditors that Egypt and Nigeria are not yet in hyperinflation.

Michael, your second question, I just want to confirm on the first one. It is definitely -- just to clarify what Abigail said, the drive in that increase comes from Santam. Actually, the SanlamAllianz numbers were very, very similar in Q3 in profitability, although she's right, there's slightly more from the investment side, but there's no material difference. This drive is coming from Santam. But I've forgotten now your middle question, which was...

Mortality profits in SA.

Yes. Look, I mean, obviously, these things can change at any time. But in fact, just the other day, we were going through this. And those profits are holding up pretty well. This is a very boring thing, but I'm sure you know that the third quarter can be not such a good quarter because of the winter season. But it seems that profits are holding up fairly well on that front.

The next question we have is from Baron Nkomo of JPMorgan.

I was going to ask about the General Insurance business and Santam, but I think you've already answered that. So maybe just a couple more. Can you maybe just unpack the leadership changes in your retail mass business, including Assupol? And then also any comments or updates you can give us in relation to Allianz's option to increase its stake in the SanlamAllianz JV.

Yes. Just to go in reverse order, the Allianz still have an option to increase their stake and that option remains in place. And I think it terminates around the end of Q1, if I'm not mistaken. But again, Abigail or Grant will correct me. But no update on that at this point. And on management changes, Bongani Madikiza continues to be the Chief Executive of our retail mass cluster in South Africa. He's now obviously shed the Capitec thing, although there are inevitably some loose ends to deal with. But on -- he has assumed responsibility as the CEO of Assupol as well. And that enables him to drive the integration of that business in a very direct and hands-on manner. So at this stage, there are no other changes to notify anybody of. But I guess, over time, out of all of those teams, he's likely to construct a slightly different team over time with kind of best of both Being involved ultimately in the business.

[Operator Instructions] The next question we have is from Francois Du Toit of Anchor Stockbrokers.

Can you hear me?

Yes, we hear you, Francois.

Maybe just if you could, I guess the value of new business was calculated on the economic assumptions at 30 September when interest rates was at a low point. Maybe if you can give a stab at what the VNB would have been on constant economic assumptions? That's my first question. Second question, the -- I think the guidance for investment management earnings is quite strong and acceleration on the half year in spite of what was quite a strong second half of the year base last year. If you can maybe just give a bit of color in terms of seasonality, timing of when, for example, things like performance fees come through and impact that business and whether that would have impacted the fourth quarter of last year's base. Just want to get a sense of whether this acceleration in growth on what is a strong base last year can be used for the full year -- full second half of the year in our forecast. Maybe also as a third question, if you can just discuss the Assupol acquisition in terms of what you found so far and whether it will be contributing to earnings and new business value in this half year already.

Okay. So let me start with Lotz. Would you mind terribly answering the VNB question and the economic basis?

Yes, Paul. Yes, it's about 10 basis points impact -- 10 to 12 basis points impact on the VNB margin. So we showed a VNB margin of 2.81%. So on a constant economic basis, that would have been 2.71%. So it's a 10 basis points impact on effect.

So you just take that proportionate difference, right Lotz to the margin and you'd multiply it by the number and you have the answer.

That's correct.

So that's question one. Question 2 was about seasonality in the investment world. I don't know, Abigail, if you want to answer this. The only thing I would say is that in my experience, there's not seasonality in that business. It has to do with average AUM at the comparative period. And so quite often, results can look a bit surprising. You need to look at the average AUM over the period. But Abigail, I don't know if you want to comment at all. Clearly, what has happened, we've had higher markets in Q3, and we've also had good net client cash flow. So those 2 things combined to lift earnings. But you can give more color. I'll be honest with you, I don't know which months performance fees are paid, and I think it's a mandate-by-mandate answer to that question.

I was going to comment to say at a high level, general equity market average that we would have experienced would have been higher than prior year. But in terms of the performance fees, I don't have that detail with me right now. We can follow-up.

All right. And then on Assupol, I think the question was twofold. A, what have we found relative to what we thought we might find and b, will it come into the numbers. So the second -- let's answer the second piece first because that's just a matter of fact. Yes, it will because Assupol officially became a subsidiary on -- you'll have to give me the date, Abigail, October 4 or something.

October 7, but practically it will be the first.

Right. So there will be 3 months of profit. We will also receive a dividend, which actually we've already declared at the Assupol Board, which is -- so that's the prior year dividend that comes to us. And of course, you will have 3 months of new business. So I suppose Abigail's challenge won't be the theoretical question of whether it's and it's whether she can get it exactly correct given the time pressures that will be the issue. But at least what will be in will be approximately right for the year, 3 months of new business and 3 months of earnings. As to what we found, we found pretty much what we expected, I guess, which was a business with a good franchise with a very solid embedded value. Their assumptions are pretty decent. And mostly, what we found is a rich source of opportunities for ourselves to improve the business and create value for everybody. So yes, we are super positive about it. And I think, again, it illustrates the advantage of buying what's maybe not a very sexy business, but one that we understand well. Financially, it's attractive.

Francois, do you have any other questions?

No, that's all from me.

The next question we have is from Warwick Bam of RMB Morgan Stanley.

Your net client cash flow number of ZAR 40 billion, quite an acceleration from the ZAR 23 billion in the first half. Can you just elaborate on the source of the strong performance there potentially coming from the corporate business, but please clarify. And then the ZAR 6.6 billion you paid for Assupol, should we think about that as the deduction to discretionary capital? Or is there an offset given the fact that you're acquiring a business that may still give you some capital advantages at a group level? Maybe you can just walk us through the impact to discretionary capital post the Assupol transaction? And then lastly, just coming back to the Capitec JV and the termination, just give us a sense of how we should think about the impact to the accounting for the 2024 year, especially from a new business point of view, you highlight the fact that there will be a slight reduction in the growth rates because of that, just explain why? Is it because you don't account for it for, I guess, the November, December period? Or is it because it's a discontinued operation or something like that?

Warwick, it's great to hear from you. Sorry, there was -- there were a lot of different -- quite a few different questions in there. Maybe if we could just start off with the Capitec question first. I mean it obviously terminates at the end of October, which means that for the full year, you have only 10 months, not 12. So it's a mathematical impact you're going to have. And I think as we've always said, the volumes and the VNB are currently lower at Assupol than they would be at Capitec and yet the profitability is quite different. So that's I hope that answers why you'll see that effect. And then as to the capital, you should expect a deduction from discretionary capital of ZAR 6.6 billion. Any capital synergies that come through will come through later. These are things, clearly, we need to think through very, very carefully. You're not going to implement these things on day 1. And also, you have to make sure that anything that you do that you've got regulatory clearance for it. So that's something that you'd expect to take kind of a year to get out, maybe longer on the capital side. And lots if you disagree with that, but I certainly don't have any expectation of a big capital release on day 1. Abigail and Lotz, are you happy with those? I'm just trying to think if there's anything else that Warwick asked us.

On the client cash flow.

On the net client cash flow where did it come from? Look, I suppose when you ask where something comes from, there's 3 possible answers to that. One could be which distribution channel did it come from? It could be which clients did it come from and which asset classes. So I think it's all of our businesses have shown an improvement and particularly some of our international portfolios have picked up quite significantly, but it's really been across the board. You can't single out any one particular area. Actually, maybe, Warwick, that sort of is a very interesting counterpoint to the question that Marius asked earlier in the call. I think it was Marius. It's this issue of what's happening in the economy. And I think things move at different speed. So I think it's likely that we will see the upper end of the market recovering more quickly perhaps than the retail mass area. Irene, did you hear any other questions online?

We have another question from Larissa Van Deventer of Barclays.

Just a basic question from my side. You specified that VNB at the end of the year will suffer the impact of Capitec leaving, which makes sense. But to what extent should we expect that to be offset by Assupol joining key?

I think Larissa, certainly nice to hear from you, and it's a good question. And I don't know, Grant or Lotz, if we want to put our neck out here. I mean you're losing -- if you're talking about the current year, you're losing 2 months of one and gaining 3 months of the other. And I think we've indicated all along that the VNB today at Assupol is quite a bit lower. And actually, I'm sure some of you have pulled those accounts out. So you've got a fairly big idea -- a fairly good idea of what its reported VNB has been. So I honestly think we're a bit in the weeds here. I don't think it's going to have -- overall, it's going to be a massive difference in the current year. It's going to be very much at the margin. But in a full year, pro forma, I would expect us to be behind going forward because Assupol will not generate in 1 year the same VNB as Capitec would have. But having said that, and if you listened earlier to what I said about Assupol, our expectation over time is that we'll be able to improve the VNB quite significantly at Assupol.

At this time, we have no further questions. And I would like to hand back to Paul for any closing remarks.

Irene, thanks very much again for your efficiency at Chorus Call. And just to thank everybody very much for joining the call this afternoon. And yes, we wish you much health and good luck and may the markets be with you. And thank you to my colleagues as well for helping out on the call.

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

Irene, thank you very much for everything.

It's only a pleasure, sir. Thank you.

Abigail, Lotz, Grant, thanks a lot, guys. Have a good evening. Bye now. Bye.