Santam Ltd (SNT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to our interim results presentation for the first half year of 2022. I'm joined this morning by Hennie Nel, our CFO; and Gloria Njamo, our Head of Investor Relations. And this morning, we will be taking you through the interim financial results. Now our focus for this morning is obviously the financial results, but it's very important for us to give a level of context to the market in which we're operating. And just to give you a sense as well around our strategy and priorities and the ESG priorities that are important to us as a Santam Group. We've also shared with you, previously, our trading update, and we will largely build on this. Now for me joining the Santam Group, it's very important for me to say that I joined a company that has a very strong heritage, a very strong track record and an incredible depth of experience within our business. Across the board, what we find is that our business is well-diversified across class and by geographical location in South Africa. And so we have our conventional insurance business that's largely our Commercial and Personal lines business, operating in the personal line space and in the SME and commercial space. Our Santam specialist business operates in the upper end, providing specialist solutions to some of our big corporate clients. Santam Re provides us with diversification outside of South Africa, and our MiWay business is our direct play within South Africa. Our alternative transfer business is mainly our captive cell business and also our Santam structured insurance business provides bespoke solutions to our clients. And then we also have exposure outside of South Africa through our strategic investments, mainly our business in India, our partnership with Santam into the rest of Africa. And so quite a well-diversified business, which helps us to manage risk across the board. Now it's very important for us to talk about the market context, because coming out of COVID, we would not have expected that we would be dealing with this level of uncertainty in the global economic environment. And so what we've seen is persistently high energy prices. We've also seen incredible inflation coming through as well as just the disruption to supply chain logistics. And then I think it's also important to state that I think across the board, we are seeing an increase in weather-related events coming through. The long-run average of CAT events across the world now stands at 10% above the 10-year average. As we've seen USD 35 billion of claims coming through in terms of weather-related events in the global environment. And so the reality of weather-related events is definitely here to stay with us. And so the climate change is definitely a real phenomenon that we are seeing coming through. And then I think definitely on the people front, an absolute increase in the war for talent and then obviously an increase in ESG and climate-related disclosures. So across the board, a very difficult global macroeconomic environment in which we are operating and presenting our results today. Much closer to home here in South Africa, it is also quite clear that events that are happening very, very far away have a strong bearing on our local environment. And so in the short run, we do have a positive outlook on insurance. And so we've seen growth estimates for the country revised up, but I think the surge in inflation that we've seen has definitely had an impact on our business for the first half of the year. Supply chain disruptions; again, with persistent load shedding means that we are seeing an increase in claims costs coming through. And so I think we are seeing a very perfect storm of weather-related events, potential risks from civil unrest, poor infrastructure coming through. We've seen extensive load shedding affecting our claims in the first half of the year. And I think it's on the back of this that we're also seeing reinsurance rates start to harden. And I think the cumulative effect of COVID, the civil unrest, and now KZN does mean to some extent that reinsurers appetite towards South African risk is waning to some extent. Now it's very important for us to talk a little bit about what has happened around KZN. I think first and foremost, the unquantifiable loss of human life is probably the biggest issue that we faced in KZN. On the economic front, from a Santam perspective, we saw our exposure topping ZAR 4.4 billion. And I think to put that in context, the whole impact of KZN from an economic or insured loss perspective, has been estimated at just over $34 billion. And so this is one of the biggest catastrophe events that we have seen within the South African context. And certainly, the biggest natural catastrophe that Santam has experienced in our long history, but I think over and above that, I think it's also important to say that we have been able to provide extensive support to our clients in KZN at an operational level. We've processed extensive claims topping 7,000 claims. And so I think we've been able to process claims at scale in addition to the thousands of claims that we typically process. And so I think this is a key competitive advantage, our ability to pay and process claims at scale. Our reinsurance support has been very effective. And so it does mean though -- although our exposure is estimated at ZAR 4.4 billion, our net exposure is ZAR 566 million inclusive of reinstatement claims. Now so I think just to give you some perspectives, we do share with you what the profile of catastrophe claims looks like over the last couple of decades. And I think what you're seeing here is clearly an increasing trend, both in frequency and also in severity of these natural catastrophes coming through. If you also look at a similar global picture is that it does reflect or looks very, very similar. And so as I've said, for just the first half of 2022, global CAT claims topped $35 billion. And so we saw claims coming through from Australian floods. We also saw massive claims coming through -- from the storm weather in Texas. And so some of these events that we are seeing, whether it be catastrophe claims or infrastructure failure, are not particularly unique to South Africa. And so the whole climate change impact is all too real across the world, but I think just the perspective that this is not specifically unique to South Africa is very important. Now if you strip out the impact of KZN is that what you will see is that our underwriting margins have been under significant pressure. And so I think you can quantify the totality of the first half year results into three buckets. The first bucket relates to KZN claims, ZAR 4.4 billion worth of claims with a net exposure of ZAR 566 million. The second bucket is -- comes from investment volatility where we've experienced losses on our bond portfolio. So although these losses are unrealized, there are a significant component of the impact on our net insurance result. And then the third, an important bucket, on a go-forward basis, is a mix of factors that we are seeing coming through. So we've got the adverse weather from Q1, and so we saw quite a few small CAT events coming through, again, causing significant claims even before KZN in the first quarter. The second big bucket, which is quite important for us, is just the impact of claims inflation in excess of premium increases. So we're coming out of a benign environment from a claims frequency, an inflation point of view out of COVID into 2021. And so what we've seen coming through this year is a surge in inflation. And so increased frequency, increased severity, particularly on the motor book, and that's been largely being driven by a couple of factors. So the inflation is quite nuanced, right? And so we do see increases in the cost of repairs. We are seeing increase in the labor when it comes to repairing motor vehicles. There's also been a surge in theft of high-end Toyota vehicles. And so again, a significant increase that we are seeing in the theft of vehicles. And then I think on the supply chain side, again, disruptions, slow repair of motor vehicles. And then we're also seeing, again, significant pressure on parts for motor vehicles. And then we've also experienced large losses across the board, large fires, more large losses than we would have expected. And then the Eskom challenges are coming through insignificant power surge claims. And so again, that's quite a material development that's come through in the first half of the year. And so we have a whole bucket of these challenges that are coming through outside of KZN and investment volatility that is putting significant pressure on our underwriting margins. And so we are looking at underwriting actions to address claims inflation. So we are looking at putting through targeted increases into -- across our client base. And so this convolution and mix of these factors is a combination of whether a combination of economic shocks, pressure, claims inflation also affecting our clients. And so we're also very mindful of the economic pressures that our clients are facing in dealing with these tough economic environments. And so coming back to the CBI matter. We have made significant progress in terms of paying these claims and resolving these claims. And so we do have a level of comfort that we can release just under ZAR 400 million in terms of reserves. And so what we found is that the actual claims that are coming through are a little bit lower than our initial estimates, but I think a big important factor is that we do have significant support from our reinsurers who are meeting their obligations. And so that does enable us to make settlement on our claims. Again, we are coming close to the tail end of the CBI matter. We've made significant progress around making payments. And so we are 70% of the way through in terms of these particular payments. And so again, good progress in settling these matters. A lot of the large complex claims have largely been dealt with. And so again, good progress in this space. Now looking a little bit wider across our entire business, I think you will have seen some of the announcements that we've made. We've diluted our economic interest in SGI, and we've received the payment for that. And so our interest there has dropped from 15% down to 14.1%. Again, very pleased to retain our exposure in the Western of Africa in terms of our specialist business. So though although we've exited the SAN JV deal is that we will retain our specialist exposure. So we do have the ability to quote for up to 50% of all specialist business that comes through the SAN JV alliance -- JV. And then -- I think just moving on to our sub debt portfolio. Again, we've issued ZAR 1 billion to redeem the callable sub-debt of ZAR 1 billion that comes through in June. And then I think we have spoken about the second bucket of investment volatility, pressure on our bonds portfolio. And so what we have done is to take out a 0 cost collar on our listed equities. And we're also looking at our investment portfolio and looking at the mandates there to reduce the investment volatility across the board. And so I think looking at our results in summary, I think it's been a very difficult and a very tough year, as I've said, a perfect storm of several factors, economic -- weather, economic pressure on our clients. And so the sum total of that is that our underwriting margin has come under significant pressure to 2.3%. On the upside, our business has managed to grow by 7% during this very, very difficult period. Alternative transfer business has performed very well under the circumstances. The fee income, very, very strong, but that result partly affected by sort of like negative investment income. Our headline earnings, as you've seen in our trading updates, have decreased to ZAR 4.09, and again, off the back of the pressure on our underwriting margin. Our return on capital now sitting at 74.4% outside of our long-term range, but we are very pleased that the economic capital coverage is well within the bands of 145% to 165% at 157%. So I think it's very important to say that we need to understand the context of these results that it's over a very short period of time, a mix of factors that have created pressure on our underwriting results. But over the long run, I think our expectation is that we maintain our long-term targets, both for capital coverage and also for our underwriting margin. And so off the back of that, we are quite pleased to be able to still announce an interim dividend of ZAR 4.62. And so I think that's the sum total of the result for 2022 up to June, a mix of factors, putting us under extreme pressure. But I think what you see here is that the business has shown incredible resilience in terms of managing the shocks that have come through in the first year, providing immense relief both to our clients on the ground and also the staff that work behind the scenes to deliver this result. And so I think on that note, I'll ask Hennie, our CFO, to give us a little bit more detail and color on our financial results. Hennie, over to you.

Good morning, everybody. Welcome also from me to -- it's really good -- so many of you can join us today. Rather gloomy day in Cape Town for spring day, but it's great to be with you. So Tavaz really sketched the picture for the overall view on the results. I'm going to give you a bit more detail. As always, very welcome to ask questions. You'll have both the opportunity to ask it directly through Chorus call or you make sure use of the web platform where you can ask written questions. So the environment, I think Tavaz really explained it well. Maybe just to add a bit to the market volatility, we've definitely seen sort of the impact of the bond market and especially international bond market during the second quarter, having a significant impact on the results. But that being -- it's not the realized losses, so I think we've already seen a better improvement after the end of June. And then, of course, with the balance sheet quite heavily invested in non-rand currencies, we've seen some good currency gains as well. So again, helping with the diversification of balance sheet helping in this environment. And then last, but not the least, we've seen an increase in interest rates, which, of course, will flow through over time also in the float and also the investment income that we've seen. So starting off with conventional insurance. I mean, the picture, there's 7% growth in the top line. I think in the current environment, very satisfactory. I mean we've seen -- also, I think that the really good points was within the CMP business, the commercial and personal business in South Africa, we've seen much better growth than what we've experienced last year. So that was an improvement. We've also seen a slow start from the specialist businesses, but strong growth towards the end of the reporting period. And then the other one that really performed well with the Santam Re business, where we still get a lot of new business flows and mainly in that Southeast Asia, Middle East region, which was very positive. I mean the loss ratio you can see it, there's almost 68%. That's almost 4 percentage points more than the long-term average. And that's where the real pain sits, the acquisition cost. I'll impact that in the other side, but more -- if you take away the impact of reinstatement premiums, which really is a one-off item, that number is closer to 29%. So I think we've done a lot of work on the acquisition cost ratio. And then the real pain also sitting on the investment return on insurance funds, 0.2%. I mean the long-term average, much closer to 2%. And I think that's where that also had a big impact on the numbers. But at the end, a margin of 2.3% in the current environment, Tavaz said, it's only 6 months I think we still -- it's still a positive message, I think, overall. Looking at the -- I don't always show this slide, but I just -- I think I thought this time around, just to show you, I think it's really almost a perfect storm in this reporting period with the investments under pressure and also underwriting. And you can see compared to previous period, a really, really tough period. Moving to the different classes of business. Good growth on the motor and the property books, mainly driven by Santam Re. I mean the motor was pulled back slightly by the MiWay numbers and also CMP, didn't have good growth on motor. Property doing well. The engineering class got impacted. We had a number of big ones of policies written last year in Africa, which didn't repeat itself a slightly lower liability book, really good growth. And I think we've really seen that book performing very well over the last 18 months. The other one I want to lift out is the accident and health class. We've seen the very good growth, and that's really -- we all started traveling more. So people buy travel insurance again, and that's come through also in the growth numbers. If we go over to the underwriting results, I think the number that really sort of -- maybe the most visible, it's right at the bottom, the ZAR 100 million we made on the motor book compared to, on average, we should make about ZAR 600 million on that book. So that's where the big gap sits. I mean, as Tavaz explained, all the things that impacted on that. I think on the positive side, with the motor book, there's things you can do to address the actions. I think those actions are very much now in play and making sure that we work both on the procurement side in terms of really making sure that we've got that optimized. And we've -- as you know, we've constantly work in that space. So that work is very much continuing, helping clients to sort of look at their excesses and then, of course, also looking at segmented premium increases depending on the risk profile of a client. The other one that -- the two positives they're really sort of helping us in this period. And again, showing the diversification and the benefits of diversification in the Santam Group, is the engineering book and the liability book, both of them are really contributing. And then also -- even the traveling insurance. So despite the traveling, we haven't seen big claims coming through there. So also a very good profitability in that book. And in the crop insurance book, after quite a tough last year. I think you remember, December was a very, very tough year for our crop insurance business, a much more improved performance during the first half of 2022. On the downside, property -- and as you would know, we've had the release of the CBI claims of about ZAR 400 million. So that all goes in against that property number. So the real pain of KZN, sitting on the property book, in excess of ZAR 700 million if you exclude the CBI release there. And then transportation also negative. We've had quite a large marine claim for the net account that came through and then also, of course, the impact of KZN coming through the different transportation classes. Moving on to the split between personal and commercial. You'll see the quite good growth in both those. I mean you've seen the latest numbers. MiWay only growing by 3%. So our personal intermediated book actually having growth in excess of 7%, so strong growth in the personal lines intermediated book. But then looking at the impact of the -- on the underwriting results between personal and commercial, I think we've talked a lot about the real profitability in our personal lines book in the past. I think we've seen the real impact in this time around. And coming really from the things Tavaz mentioned, the power surge claim, that's mainly all of us in our houses, the impact of Eskom power are just coming through; motor theft, all those things playing in that space, and of course, also the impact of KZN, having a big impact on the personal line book. Commercial also impacted and also KZN impacted, but the benefit there of the CBI release coming through in those numbers. Then the business flows from outside South Africa. As you know, this is one of our key areas that we look to further diversify Santam as a more international group than just South African. And we're seeing good growth, more than 8% growth in total. Our Namibian business for the first time in the number of reporting periods showing good growth. Rest of Africa is slightly down, mainly because of that engineering class that I mentioned earlier. But this -- I think what was positive on the African business is we've increased the business flows through the Santam pan African business almost ZAR 200 million in this period, so that was a positive and then good growth outside Africa and mainly driven by Santam Re in that space. Then the acquisition cost ratio and what we've done here, we show the numbers for 2022, excluding reinstatement premiums. And it's really -- because the reinstatement premium is a once-off premium that is really abnormal in these results. So to get a feel for -- on a competitive basis of what happened to the ratios, we've presented on that basis. And what you can see is the increase in the commission rate, and that's mainly driven off the Santam Re business, where we've seen some real increases in growth, but also lower reinsurance commissions given the hardening of reinsurance market, also playing a role on the net commissions that we paid. The management expenses, I mean a much, much lower number. I think it's something that -- in the current environment, as a group, really a strong focus on containing and managing our cost base really well. It doesn't mean we're not spending money on the growth initiatives, but really sort of the business as usual expense base to manage that very tightly. And then, of course, given the underwriting results, the variable pay component of our expenses very, very low in this period. I mean we -- that's the way our variable pay mechanisms work. And then as you can see, we're still spending money on strategic projects, that's still continuing, and we haven't stopped investing for the future. The reinsurance percentage of gross earned premiums, quite a big uptick there. But if you exclude the impact of the reinstatement premiums, very much in line with what we had in 2021. And then the float, I thought just to maybe pause a moment here. Our float has now moved to about 30% being the dollar float backing out international business. And given the volatility that we've experienced on the bond markets, a lot of that pain came through that component of the float and pushing our float return overall, down quite a lot. So that was just to lift at that point. And then last, but not the least, on conventional, the numbers for MiWay. You can see the disappointing growth. I think just under 3%. It is -- the business has really been impacted by the fact that we've seen premium defaults. In other words, they're playing in a part of the economy, which is, I think, the hardest hit by sort of this increase in inflation and petrol prices and that having an impact in terms of the premium collections. But then on the other hand, not getting enough new business on to the books. And you can see there the premium -- the policy number count or the number of clients also slightly decreasing in this period. Management team doing a lot of work to focus on this and especially on doing the basics right on the growth side. And we're positive that can [turn around] looking forward. On the results, a margin of just over 7%, I think given the impact of KZN that's sort of, I mean, probably acceptable. But I mean we want to -- as you always know, the MiWay loss ratio over the number of years have been closer to 55%, and we still believe that's the right level for the business to operate in. But given the exceptional circumstances in this reporting period, very happy that we can at least have a profitable MiWay business contributing more than ZAR 100 million of profits to the group. Moving across to the ART businesses. And as you know, this is Centriq, our cell captive business and then Santam structured insurance, both of these businesses actually performing very well in the current market. The numbers might look lower than previously. But I mean, I think what we have seen and Tavaz mentioned that the fee income from clients, very good growth. The negative side of that was the investments. So they also were impacted by the moving bond markets. But again, that's unrealized. And I think we've seen positive movements after June on that side. The underwriting result is very positive. We had some releases on CBI claims in 2021, which caused that higher number, and management expense is very well contained. So I think overall, very, very comfortable with the performance of our ART book in this environment. And then the third component of our group, as Tavaz mentioned, is our in-partner businesses. Now this for the first time, we exclude SAN JV or the Saham business from this view. As you know, we announced the sale of that investment. And effectively, it's not classified as a held-for-sale asset and discontinued operations. So what's now included is predominantly the SGI or the Indian business and then Malaysia and there's 11 smaller African partner businesses in this segment. So overall, the results, you can see the gross in premium down. It's mainly because of the Indian business where we've seen significant lower flows of business coming through the Shriram Group and they had to go and find business outside. And of course, that business come at a lot higher cost, and you see the increase in the acquisition cost ratio. But we have the benefit on the claims line. So claims at least down quite a lot. Small underwriting loss, but you can still see the very positive float returns. So overall, results up by about 18% on the operating line for this segment. Then moving over to the group numbers. Slide, it should be well known to you. Asset liability matching, no change from how we've dealt with this before. But maybe just to -- I mean you can see the grey blocks, those are the areas where we had bonds in the portfolio, and you can see the big exposure that had on the numbers. Looking at the asset mix for the shareholder funds, also no big change there. We still got significant exposure to the -- I mean India making about 16%. We've got Saham business at 18%, and the fact that we also carry listed equities on the balance sheet about 16%. So no real change to those. Those asset classes backing the shareholder funds and the currency mix still about 47% in rand terms and the balance between ringgits, dollars and now euros because we're expecting to -- well, we'll be paid in euros for the SAN JV business. So no changes overall to the currency mix of the group in the period. Then the shareholder return on shareholder funds or the investment income. This includes also the float income. And you can see there we're much lower. And the big yellow block at the bottom, that's where we had the mark-to-market losses coming through, both in the equity portfolio and on the bond portfolio, as I've mentioned. On the positive side, interest income significantly up. I mean the benefit of the increased interest rate environment. And then we got the dividend from SGI. As you know, when we diluted by that 1% that Tavaz mentioned, it was a deal done in India, where 10% of SGI was sold off to KKR and that effectively at a price significantly exceeding our carrying value. And effectively, the way our arrangement work as we get our proceeds through a dividend and that money we've perceived and you can see there the very positive impact on the overall investment income and then the currency gains that I've mentioned earlier. Last slide on the investments. Just to show you the picture of our -- the target share investments that we hold SGI now at ZAR 1.3 billion. You might ask the question, it's significantly lower than the actual -- the price at which at our transaction happened. The way we value that investment is very much to look at the supporting cash flows and on that basis to a DC evaluation. We haven't changed the principle from what we applied in previous periods. Then moving across to capital management. Just one or two slides on that. Return on capital, given the financial results I just discussed, a difficult return for the period at 7.4%, but confident that we still -- the 24% target that we've got, that is something that we will definitely work. We haven't sort of moved the view on that -- return on capital target that we've got. We've got the capital numbers there. So as you can see there, the economic capital coverage ratio at 157%. It benefited from the fact that we had the equity hedge put in place at the end of June. So that supported the capital number. We still get a very real benefit from the fact that we've got our internal model -- approved the internal regulatory model that we can apply for capital purposes, that benefit very much still sitting there. And we -- in terms of our dividend policy, we've grown the interim dividend in line with the growth of the overall book. And therefore, we're very happy and I think in the current environment, to be able to declare an interim dividend of 462 cents. As you can see there, very much growing the dividend still in line with the underlying book. So that's a short summary of a difficult reporting period, but I think with a lot of things that we're working on to sort of make the second half much better -- and with that said, I'm going to hand back to Tavaz to talk about our group strategy and the priorities that we're working on.

Thank you, Hennie. And so Hennie has given us a good sense of the detail around our financials. And so in the short run, you can expect a lot of volatility in this business. But I think it's well within our tolerance range. And so we are holding our long-term assumptions around our capital coverage range and our margin range constant. And so I think it's important for me just to share a little bit around our response to the pressures on the margin that we've seen in the first half of the year. I think critically, it's important that we implement tactical actions to make sure that we stay ahead of inflation. And so we are putting through targeted premium increases into our client base. So that's a very important aspect that we're dealing with into the second half of the year. But it's also important that we work with our suppliers through our procurement to ensure the availability of parts, the availability of cars -- rental cars, does not create undue pressure or inflation pressure on our plans. And so again, that's a very important component. And then looking at our property portfolio within our Emerald business, very important that we derisk that portfolio to some extent, and so we're very clear on geocoding and understanding exactly how that portfolio looks. And so that goes a long way to ensuring that we are able to work with our reinsurers as we look to put place our reinsurance program for 2022. And then on the investment side, as Hennie said, we saw significant volatility coming through. We've already put the hedge on our equities, but also looking at mandate changes on our float portfolio and bond portfolios just to make sure that we don't experience significant volatility and just return almost a focus to the underwriting side of our business where we are facing significant pressure. And then on the growth side, working very closely with Sanlam to ensure that we drive cross-sell across Sanlam and Santam. We believe that could be a significant growth engine for us into the future, again, working on several strategic partnerships that we will share in due course as and when they come to fruition. Again, with a few small tactical acquisitions to support the overall growth agenda of the -- of our group. And then on the digital and data capabilities, continuously ensuring that we are providing our clients with end-to-end digital capability. I think what we are finding is that, although we do have a very large, intermediated business, our clients are keen to engage and communicate with us in a direct and also in a digital way. And so top of mind for us, particularly as we've gone through a very difficult H1 is just ensuring that our client experience lives up to our brand promise of insurance good and proper. And then Hennie, of course, worrying and spending a lot of time in ensuring that IFRS 17 and compliance is ready as we go into 2023. And then I think we've mentioned that our Pan-Africa business and international business does give us a level of diversification out of South Africa. And so again, a keen focus on the growth in Santam Re and also ensuring that we work very closely SAN JV and our partners in Santam across the rest of Africa and ensuring that we have access to specialty business across the board. And so again, very difficult H1, but as I've said, I think very important for us to take a very holistic long-term perspective, a perfect storm of factors coming through in the first half of the year, but I do believe that our business has shown incredible resilience through this particular period, both for our clients and also for our shareholders with a progressive dividend for the half year. And then last but not least, I think for us, as the Santam Group, our aim is to continue to be a very responsible social citizen. And so we're very committed to matters around sustainability and the transformation within South Africa. And so pretty much across the board, we are very particular around our part that we play, particularly around risk management, risk mitigation. And so our flagship program, partnerships for risk and resilience where we work with the municipalities around matters of risk and sharing some of our expertise to mitigate issues around fire and flood. And so I think this is our contribution to addressing some of the challenges that we are seeing coming through an infrastructure. And so we fundamentally believe that creating more resilient communities is part of the solution to some of the risks that we do face. And then across the board, we are quite pleased that we've been able to add scale, process and pay ZAR 14.2 billion worth of claims in the first half of the year, significantly up on the first half of 2021, but I think this is reason for being and ensuring that we provide support into the economy and to our clients at difficult and uncertain times as we've seen. And then I think on the investment side, we are a constituent of the FTSE4Good Index Series and also responsible investment top 30 index in South Africa. And so across the board, significant commitment on our part across the pillars of ESG, very strong with the South African context that we are very focused, particularly on the S around our ESG commitments. And so even though mandatory reporting is coming through, there is a lot of work that we are already doing to support our ESG commitment across the board. And so ladies and gentlemen, on that note, that does bring us to the end of our presentation. We are taking questions on Chorus call, as well as online. So I am looking forward to answering your questions together with my colleagues, Gloria and Hennie. Thank you very much for joining.

[Operator Instructions]

Thank you, Judith. If there's nobody on the Chorus call, we have received some few questions this side. So if I may start, one question from Francois du Toit from Anchor. I'm not sure who's going to answer this one, Tavaz or Hennie?

Let's hear the question.

Investment return on insurance funds reduced from ZAR 200 million to about ZAR 30 million and ART business were also impacted by the weak bond market. Please indicate average fixed interest duration and suitable benchmark of your index returns?

Thank you. I think Hennie, you can pick this one up.

Thanks, Tavaz. Thanks, Gloria. Francois, it's a good question. So as I've mentioned on the float, I think two important portfolio is to consider the international bond portfolio. And there, the duration of the portfolio is quite short, less than 0.7 of years, but we had that incredible bond volatility, especially emerging market bonds which came through. I mean our target there or the benchmark we want to achieve would be LIBOR plus 2% to 3%. But I mean we've seen the real challenge coming through on that portfolio in the period. On the South African side, the active income fund, we had slightly longer duration, but also not to the same extent of volatility. So just over a year's time period on the investments on average. But the impact less so on the numbers, but still also pulling down the return. The underlying yield of the portfolio, both the international one and the South African one, looking forward, I have not got the benefit of these lower -- or the increased interest rates in and we'll definitely see that coming through. On the ART side, it's mainly also the South African Active Income Fund playing a role. So there, they haven't got big exposures to the international bonds, but on the South African side. And that also mainly sort of the impact of June coming through on their numbers. And as I've said earlier, we've had quite strong investments months subsequently. So we should see improvement in the next reporting period.

I think, Hennie, what I would add to that is that these losses are unrealized losses. And as a group, we've also taken measures to relook the investment mandates across our investments, I think what we're looking to do here is to reduce the level of investment volatility without compromising too much on the investment income. And so I think it's been a very tough H1, but we have seen some pullback on some of those investment losses.

That's quite right.

We've got a question from Warwick from Avior Capital. Considering your solvency at the top end of your target range, and your unfavorable investment returns are mostly unrealized, why did you opt to have the listed equity portfolio? And does that -- the consistency of your holding strategy not imply a need to adjust the investment strategy? I think Tavaz, you touched a little bit on that.

Yes. So in fact, I think that's a very good question. So I think when we went through H1 and as you've seen, facing a perfect storm of pressures on our claims, significant operational pressure on our business, significant investment volatility coming through on our business. And then again, the bucket of inflation, power surge challenges that we saw coming through the business, I think our thinking around this is just to return our focus, particularly on the underwriting side. Our view with the Board was that we simply could not stomach further investment variance coming through on the investment side of our portfolio. And so we took a very short-term targeted measure reduce downside risk from the performance in our equities portfolio. So you are right, it does give us some headroom in terms of our capital range. But beyond and over and above that is that even within our bond portfolios, we are reducing investment volatility. And so this is something, obviously, that we will continue to monitor. It is a short-term hedge that takes us close to the end of the year.

Yes Tavaz, if you can maybe add to that Warwick, I mean, we also -- a discussion we often have around the makeup of the shareholder funds and what assets should back and why, we've got the listed equities there. We still believe that over time, and it is always dangerous to just look at a very short period that over time, they've added real value to shareholders and to have that balanced portfolio then, but it's something we constantly look at. So it's not we just sort of leave it there without thinking about it. Almost once a year, it goes to the investment, a proper discussion around the benefits or not of having the listed equities in the portfolio.

We've got a question -- another question from Francois. So he's got several today, so there will be a lot coming from Francois today. Disposal of Saham stake, are there meaningful risks to complete in that transaction, Saham is currently carrying the value that -- Saham is carrying reduced to 16% and is discounted to ZAR 2.1 billion, expected sales proceeds. Why the discount?

Okay. Maybe let me pick up the first part and give my comments on the transaction. So I think if you look at the rationale and the reason for us disposing of that particular stake, is that it did constitute and does constitute a significant part of our balance sheet, where we have no significant control, but what is important for us is that we do retain the access to the specialist business on the continent. We believe that market to be close to $2 billion and so we believe that, that is an area that we still significantly want to play in -- and so the arrangement with SAN JV does continue post our disposal. And so we have 50% access to all specialist business. And I think the kicker on our capital -- on the capital side is that, obviously, with the disposal of that unlisted stake that it does give us some level of capital relief we do get, I think, some capital gain on the carrying value from that business. And so it will, in our view, obviously, increase our disposable capital. But I think it's also important to say that this transaction is still a way out. I think we're probably 12 months or so out before we come to this. I think the risks around this deal not coming to fruition are, in my view, to some extent, mitigated. But I think as with any M&A, right, I think there remains some inherent underlying risks. But I think we are not terribly concerned about that.

Just to add to that. The process with the regulatory approval process that's in progress. So I mean, it is just a long process. And maybe Francois, just to get back to your point also around the valuations that we carried out. So you'll recall that in December 2021, we run the ZAR 2.1 billion, a very weak rand. So the rand and MAD exchange rate effectively created a lot of sort of that spike or increase in the carrying evaluation. That, of course, with the rand strengthening against the MAD over this period pulled back. And that's really the reason for the change. I mean it was really a currency play and the current proceeds, as you know, we've effectively entered into a collar structure by which we protect any downside risk so that at least we know the ZAR 2.1 billion, that's the number that we should get from -- if the deal completes in euro terms. Should the rand weaken further against the euro, of course, there could be further upside.

Another one from Francois, he asking all the good questions today. KZN catastrophe. Please detail the ZAR 566 million cost to shareholders in the light of the ZAR 150 million catastrophe retention risk capital that you currently have. How much is the reinstatement premium costs? That's question #1. Was there any of these claims picked up by Santam Re, question #2.

Okay. So let me take the first part of that. So if you look at the net that came through, right? So maybe starting with the gross exposure. So we had ZAR 4.4 billion. And I think you're quite -- I'm sure acutely aware that we use significant facultative reinsurance, as well as quota share within our Emerald business to reduce the property exposure within that business. And so the combination of the net residual that comes through on the property Emerald business, together with the exposure in our C&P business, is what goes through our catastrophe program. And then the net of that is what you're seeing coming through as ZAR 566 million. And so I think the context is important here that while the net retention is ZAR 150 million, is that what we have found with the reinsurers is that there is a very limited appetite for those lower layers of reinsurance. And so they typically tend to be a little bit of a rand swapping exercise. And so the reinstatement premiums are quite steep at the lower end. And so Hennie, correct me if wrong, so we had 150 net and ZAR 366 million worth of reinstatement premiums. And so I think the reality of it is that we are seeing those lower layers get hit by CATs a lot more. And as I've mentioned a little bit earlier is that reinsurers appetite for catastrophe risk, I think the global market -- I think we've seen a retraction of CAT capacity coming through. And I think it's not a surprise that reinsurers are reassessing their portfolios and asking very difficult questions. And so it does mean even for us, as we go into the renewal for 2023 is that we expect very difficult discussions and very tough discussions. And so we will need to evidence significant derisking of our property portfolio, apart from the loss of information that reinsurers are now asking around our exposure to property.

Just to add, Francois, in terms of Santam Re, I mean, as you know, when we think about risk appetite, I mean, whether the risk is taken by Emerald or by Santam Re, we always look at a combined base from a group perspective. So we haven't had more risk because of Santam Re, there's a very clear appetite for the group around these risk activities. Santam Re itself in terms of each reinsurance didn't pick up the significant risk from -- in the South African environment. So that wasn't a big impact.

Another question from Warwick, Avior Capital. This relates to the acquisition costs. Can you add some detail on what levers you pull in to control management expenses and whether you expect to achieve sustainable benefits into 2023?

No, I think that's a very good question. So I think any business when faced with the pressures that we're seeing on H1. So we've talked about how do we manage the pressures of inflation coming through on the claims side into the premium increases that we're putting through on a selected basis to clients. So the one part is, obviously, managing procurement and keeping those pressures under control. And I believe we have the scale and capability and relationships with our providers to manage that adequately. And then on the management expense side, I think we've been quite aggressive just around managing and containing, for example, our people costs, keeping our recruitments to an absolute minimum so that we manage that. And so I think you're starting to see that coming through in the result. Hennie?

100%, Tavaz. So I think, Warwick, I mean the one lever that we've got to pull is the people cost. I mean as you know, we spend a lot of money on digital enhancements, new things we want to do so to make almost in a year like this, you make 100% sure that the efficiency benefits we should get from all the investments we've done that we can get that on the people side. And I mean, I think given that focus, we really sort of limit the number of new people we bring in the group. So we really manage the numbers very, very tightly. And then, of course, there were discretionary spend that we were sort of looking to do things, we will, in a year like this decide not to do it. So your question on how sustainable this is, of course, the efficiency benefits we get that sustainable and that which should flow through. To the extent we pull back on discretionary spend, you might find some of that coming back in the next year. But I mean, overall, the view is very much we -- and you know our view, we want to manage this business as efficiently as possible. And the one thing that we've got at scale and to really make sure that scale benefit comes through on the management expense ratio.

And then I think, Hennie, it's also been important that while we keep that balance between cutting back on expenses that we are not cutting back on key investments that drive growth into the future. And then also just around our claims capability, automating that back end and making sure that, that claims capability is able to operate at scale into the future. And so we've made significant investments there and then also just around IFRS and just making sure that we remain compliant into the future. So managing that balance very, very carefully.

Thank you, Hennie and Tavaz. That looks like a clear plan. Another question from Francois. This relates to the property class. Property insurance has detracted from Santam's performance for a number of years now. Are you seeing the light at the end of the tunnel? Can you discuss the market dynamics? Are there any meaningful premium increases that have been achieved currently?

Okay. So I think that's a very good question. And I think that's not unique in my view to South Africa, just around the performance of the property class. And so from our perspective, we see our property offering as an integral offering to our corporate clients. And so if you look at just how our Emerald business operates is that our net retention within that business is a combination of what we fact out and also what we also put out in terms of quota share. So I do believe that the net exposure on our property portfolio is of a manageable perspective. But I think it is right to say that property margins do remain under significant pressure. And so as I've mentioned, as part of even just our reinsurance exercise for the end of the year is that we do need to derisk that portfolio to a large extent so that we do -- we are able to continue to offer that class to our clients. But if you also look at our corporate clients is that the cost of insurance and reinsurance within the property plays as the rates have hardened does mean that your corporate clients are also looking at alternatives, right? And so to what extent do they self-insurance, so we are seeing an appetite for captive insurance coming through our Centriq business. But we're also seeing that clients are struggling with the rate hardening that's coming through double-digit significant increases in the property class and just the need to show effective risk management. And so if you typically own a building that the questions around whether you have an adequate sprinkler system. And so I think property owners are finding some of those conversations incredibly difficult. But I think the property plus for us as a big player in South Africa does remain important and is a cornerstone of our overall portfolio.

Hennie, do you want to touch a little bit on the premium increases on that class?

Yes. I think Tavaz mentioned, I think it's always important for property. I mean, -- and corporate property as Tavaz mentioned, Emerald, I think they've really run a very good business. I mean, over time, we have definitely not lost money there. So that's a very positive class of -- positive over a good corporate QMA business that we've got. The commercial property, that's been more challenging. I think -- but always important to remember that we don't write just the commercial property. You're write it with a number of other classes. And I mean, overall, a policy would still be very useful and very adding value to overall underwriting performance. But I mean, Francois I think you're quite right that over years that the pressure on commercial premium rates, that's the one that we need to get up. And I think there's a focus on that. In terms of the actual premium increases, so in the commercial and personal book, I mean, it depends really on a segmented basis. So we would look at your risk profile, we look at sort of your claims history. We look at your excesses, what we can do there. And all of that plays around what the actual premium increases. But we are pushing on the property side. There's definitely premium increases coming through and a lot of that driven by the fact that reinsurance rates where we -- especially on the larger risk, you need to sort of reinsure quite a lot of that and the fact that the reinsurance costs a lot more -- almost drive the fact that you need to increase also the cost of the primary policy.

Thank you for that. Another question from Francois, and I guess this is the last one from Francois. We've got additional questions coming through still. The Indian business makes up 15% of the Santam NAV. Can you give us a bit more color about this business and the expected returns on the carrying value you expect in the near and long-term strategy? Separately, please, the short term and the long term, please separately.

Yes. So as you know, SGI, it's -- we really like the investment. We think it's a very good operator within that Indian market. They don't play against the big players. They've got some slightly below the radar, but a very, very good management team and having done well. I mean I think the Indian environment, the market has been hardly hit -- really COVID had a big impact there. And also then playing a role in the transport business. And as you know, a lot of the business from SGI comes through the transport businesses. So we haven't seen that -- those flows. So in the media, the short to medium term, I think we've definitely seen pressure on growth, and you saw that in the numbers I presented. We believe what it forces that business to do is to go and find new business from third parties and not through the group. And I mean that, over time, can be sustainable. But we believe that over time, there will also be good flows still coming through the Shriram Capital Group. So that, that would -- in the medium term, actually bring back the growth that we got used to at SGI. In terms of the valuation, I think we really think it is a business that's done well. I mean, the fact that it was interest from U.S. equity fund and the fact that they're prepared to pay a significant higher amount entity valuation to what we care I think shows the external view on the value of that business. It generates really good dividend flow. So even in a normal year, we get good dividend flows from it from that perspective. We think the valuation as it currently stands, is supported by those cash flows coming through. But we're positive that in long term, this should create good value for Santam.

Yes. And then I think Hennie, I think, quite right that the valuation we're holding it, I think, is conservative, right? And obviously, we would caution against extrapolating from the single transaction that has come through.

Good point.

A question from Michael Christelis, UBS. You mentioned target pricing actually to improve underwriting, but at the same time, premium defaults are up in my way. How do you assess the net impact of profitability versus unit growth?

So I think that's a very good question. So I think typically -- so I think if you look at the motor book, in particular, so you have renewals coming through pretty much throughout the year. And so our intention is that we see those targeted premium increases coming through well into 2023. And so you are right that we have been very mindful just around where do we want to precisely put through those premium increases. And so it is true that the MiWay business is under pressure, again, a very competitive space. But if you look at that competitive environment, those premium rates across the board are also going up. So I think it will be a very delicate balancing act to make sure that we can push through those increments and prevent an envelope of loss from developing into 2023. And so in the short run, you can expect your churn to come up slightly, but we do hope that the premium increases keep us well ahead of inflation. In fact, I think for us as a business, that's one of the significant risks that we must and absolutely say stay ahead of.

We've got another question from Baron Nkomo from JPMorgan. Given high levels of inflation, particularly PPI, are you in the process of critically reevaluating your pricing like some of your competitors? That's question #1. If so, what plans do you have in place to ensure that the top line, your DWP is not significantly affected in the near term?

Okay. So I think maybe just building on the previous answer is that in the competitive space of short-term insurance, particularly in the personal lines, it's very important that we balance those premium increases with the churn, right? So the balance between those two needs to ensure that, that book continues to grow. And so I think it is quite right that working with our partners, we are largely an intermediated business that we are communicating effectively and taking the response back from what they are also seeing in the Indian market? And then, sorry, just the second question?

How do you make sure that the actions that you're doing now does not place you in significant risk over the near term in the GWP line?

Okay. So I think, again, a very, very good question. I think, firstly, we are monitoring this on a very close basis, monitoring any clients that are withdrawing or where the debit orders are not necessarily going through. And I think an important point to note is that where we find clients are looking to proactively cancel is that a significant more than 50% of that business within MiWay, we're actually able to keep -- talk to those clients and to keep them on books. And so that's how we are managing some of those pressures to our clients. But I think it's a two-sided equation here that I think managing the premium increases is one part of it within the context of a very competitive environment. But I think then secondly, on the -- as I said, on the supply side, that's a big part that we need to manage. So working very closely with contents, so home content providers working very closely with motor body repair shops and also the original equipment manufacturers, just to make sure that inflation to the extent that we can manage it that it doesn't just transmit straight through on to the claims side and also by extension, also to the client. So this is one of our key priorities for us in the short run to managing this issue around inflation.

Thank you Tavaz for that detailed answer. And I think this one actually is a nice question for you as you as already hogging the mic over. We've got a question from Colin Smith from all Africa partners. What is the single biggest change we can expect from you as a new CEO in the coming years?

So I think that's a very good question. But I think I'd like to preface that question by saying the Santam Group is 104 years old. And so I think it's seen many successive changes of executives through the time. And I think the one thing does remain true that this is a very robust group. Like I said, a very incredible depth of talent and skill sets. I think what we manage here is very complex risk from our specialty business all the way to our direct businesses in MiWay. And so I think a lot of that doesn't hinge in my wave on a single person. But that said, I think it's important given the shocks that we've seen in the first half of the year that we do think through where do we want our focus to be. And so you've seen the focus we've put on managing volatility on investments, putting the pressure on underwriting performance, monitoring that a lot more closely. And then I think, obviously, as we go along, just trying to manage the systemic risks that I think we are seeing in the environment so potential grid failure, inflation shocks, weather. So quite a lot happening in our environment. And so you're starting to see that creeping through the different types of claims that we are seeing through. And so in the short run, working with the team is just to manage that into 2023. And then, of course, longer-term, work with the management team and the Board just around our positioning and where we could possibly create emphasis. So I have every confidence in the current strategy that's in place that my predecessor has put in place, and so we will largely continue driving that maybe with some minor modifications and tweaks.

That's the end of the written question, Judith, do you have anything on the Chorus line there before we get closer remarks from both Tavaz and Hennie.

And no, we have no questions from the line.

Thank you. Tavaz, Hennie, any closing remarks?

Hennie, you want to start?

Maybe just to say, I think we've had a tough 6 months, but it's not that we haven't been here before. I think those of you who have been investors for a long time and some time would know 2012, 2013, were tough years. And we had a similar environment where we have to deal with inflation and a book that wasn't performing. And we were able to very -- to deal with that. And I think they're very much the same approach we're following now. So for I think from that perspective, for all the things we mentioned this morning, there's also a really good, I think, energy in the business around how do we address these things and actually believing that we can do actually well going forward as well. So that would be my closing remarks.

Thanks, Hennie. And I think on my end, I think quite right. It's a half year. I think the level of volatility that we see in short term is not unprecedented, right? So I think we see this level of hosted, even with the reinsurers and with short-term players, across the world. And I think for us being a big player here in South Africa. I think this level of volatility is well within our tolerance range. And as I said, we maintain our long-range, long-term assumptions, constant because we still fundamentally believe that this is a good business, and we can achieve a lot of those targets. In the short run, obviously, an acute focus on ensuring that we address the pressures that our underwriting margin and investment return is facing. And then I am quite pleased Hennie, that we have an incredible focus and just the level of sophistication and expertise, geocoding risks, all that sophistication believe, I believe that we've got a fundamental understanding of the risks at play and how that landscape from a risk profile is also shifting. And so I have every confidence that for us, this is -- these are items that are well within our control. And then I think last but not least, just to thank the executive team that are found in place, that I work with on a daily basis and to thank the widest of staff complement of Santam, particularly the team that has delivered the claims capability as we face the surge in claims. And as I've said, I think that's an incredible competitive advantage in this market. And then last but not least, obviously, to thank you for joining us this morning and for your support and looking forward to the ongoing conversations on our business. So thank you very much for joining us. And Gloria, thank you very much for being very gracious with your questions. Thank you all for joining us this morning. Have a lovely morning.

Thank you.

Thank you.