Santam Ltd (SNT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Santam Ltd 10-month Operational update. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the conference over to Tava Madzinga. Please go ahead, sir.

Thank you very much. Good afternoon, everyone, and welcome to our 10-month updates to the end of October. I'm joined by Hennie, our CFO; and Gloria, our Investor -- Head of Investor Relations. So I think let me start by making some introductory remarks, and then I'll ask Hennie to give some context on the performance. So looking at our conventional insurance business, you'll have seen our note this morning, we've reported good growth across the business, which we're quite pleased with of 8%. And this is in a fairly -- what we consider a fairly difficult environment. And I think it will be first half of the year and the 4 months to October, we've seen and improved the performance at an underwriting level. And so the impact of the underwriting actions that we're taking basically to increase premium rates, increase excesses and to combat the myriad of factors around inflation, the increased cost of claims and to some extent, frequency, those are starting to come through for us in the second half of the year, but we do expect quite a few of those actions to follow through into 2023 as we continue to push premiums as the cohorts of policies come up for renewal on a month-to-month basis. Now looking across all our businesses, I think the one key item that we are pleased about is we are making good progress with resolving the remaining of the CBI claims. We haven't made any changes to the reserves at this point in time, and we will review this as we get closer to the end of the year. Across all our businesses, particularly in the CMP businesses, this is where we are seeing the bulk of our underwriting correct actions. And again, very pleased that the push on premium increases is starting to come through. We are starting to see double-digit premium increases coming through on cohorts of policies on a month-to-month basis. In terms of our Santam Specialist business, good top line performance. I think, again, this is a business where we are seeing great performance coming through on travel and crop a lot more people traveling [indiscernible] will opening up. And so, again, great performance there. In terms of the MiWay business, the top line performance does remain subject to some extent, but we have made significant operational improvements in terms of this business. And so we are seeing the loss ratios improved significantly within the MiWay business. The Santam business, good top line growth, but we have seen some large losses coming through in that business. And then as far as investment performance, we have taken actions to reduce volatility within the underlying investment portfolio. The ART businesses doing greater than -- doing better than we would have expected, very stable businesses, good fee growth income. And then I think as far as the disposal of the 10% in the SAN JV, so that's largely still on track, still quite a bit of regulatory approvals, but we expect that to complete by the middle of next year in 2023. And then in terms of our underlying equity portfolio, we did communicate the hedge that we have put in place. So that expires at the end of December. And then across the board, our capital remains pretty much within the communicated range. And then looking out into the future, we have come to the end of our strategy review process. And looking at the business, I think it's our every intention to keep Santam a market leader into the future. But we do recognize that we do need to make some pivots in terms of our operating model. We have accept that our customers' needs, behaviors and the technology around this is changing, and customers want to reach us in different ways. So most of you will know that we largely run an intermediated business. And so we are taking the big part of our business, the CMP business, and we will transition that to 3 distinct business units: one, focusing on clients where we effectively own control the client and the data, and we have direct access to the these clients under the Santam brand. The second segment will largely be a broker focused business. And so that largely remains focused on the intermediated business. And then we have a third business, which is the partnership business. And so that will largely look to drive value through the partnerships that we have within the telco and retail space and the ART business would largely form part of that segment. And then we've still got MiWay, Santam Specialist [indiscernible] Santam Re and so we'll continue to drive those businesses as they currently sit. We've also consolidated our shared services under a single Chief Operating Officer. And so a lot of these changes start to take effect from the 1st of January. And so what this gives us, going into 2023, is a much more focused approach in terms of how we go to market, a business that focuses on clients. Again, significant focus on client servicing, data ownership and developing out -- so like data-driven insights where we have access and control the data. And of course, just a continued focus on our broker business, which will remain a significant part of our business for the foreseeable future and then looking a little bit more how we can extract value from our partnership space. And so I think what is important for us is that we also start to think about talent management across the group. We start to think about rotation across the group, succession within the group, and tapping really into the depth of skills that we have across our business. And so I think in summary, a relatively improved second half of the year that we are seeing post June. And then I think maybe, Hennie, I'll ask you to make a few more comments.

Thanks, Tava. Good afternoon, everybody. Yes, I think Tava summarized the results well. Maybe just 1 or 2 comments, I think what we have seen in this period is just the benefits of the diversification as a group. So where there is sort of the [ crude motor book ] and then being under pressure for the inflation, all the reasons that Tava mentioned. We've seen sort of the specific Specialist businesses where we've really seen some good performance. So that always overall helps the group to sort of perform satisfactory in difficult environment. And the second point, maybe just to lift out, is we've had quite significant brand volatility. And as you know, we've got a significant exposure to do non-rand assets on the balance sheet. So we've definitely seen some big foreign currency movements and with the rand weakening towards the end of October, it's quite big gains coming through. I mean, as the rand strengthened subsequent to that [indiscernible] some of that will be given back in. And then maybe the last point is we've now been through this strategy refresh process, which I think was very valuable from a group perspective. But just to confirm, we've now again looked at our 5% to 10% guidance on the underwriting margin, and we're still very comfortable that, that is appropriate going forward, as well as the return on capital [indiscernible] of 24%. So just to -- having gone through the process now we've specifically looked at that again and comfortable to say that, that's still in place. Tava, that's a few comments from me.

No. Thank you very much, Hennie. So I think the refresh strategy, I think, for us confirms that I think our targets that we have publicly communicated are right. And I think what this does for us is ensure that we are able to meet these targets into the foreseeable future. So I think on that note, very happy to open it up for questions.

[Operator Instructions] We have a question from Michael Christelis of UBS.

Can you hear me?

Michael, we can you loud and clear.

Awesome. Three questions, if I can. So the first question, just regarding the hedge -- the equity hedge on your capital ratio, the impact there is, if I remember correctly, about 5% or 6%. Presumably, that means that you're still above -- well above the low point of your range even if you were to remove that hedge. I mean, can you give us any guidance as to whether you're likely to roll that hedge in the next couple of weeks? Or if you -- at this point, you're quite comfortable you're going to make it on the equity side again? That's the first question. Second question, just regarding the settlements around the KZN and floods and you can give us some sort of idea as to how those settlements have played out relative to your reserve rate, just to give a sense of how much caution or not there was perhaps in the reserving as of June for those settlements? And then -- just a last question, I guess, on some more color around your GWP growth sitting at about 8%. Can you give us an indication of how much of that is kind of the average renewal increase versus how much is actual unit growth? My sense is that renewal increases are running north of 10% at the moment. So does it mean that you're actually losing units at the moment year-on-year?

Okay. Thanks, Mike. Maybe I'll start with your last question first. So I think it is fair to say in -- with the push on premium increases, we typically would have expected a marginal increase in churn. So you've got a combination of both. But I think the bulk of what we've seen at least in the second half of the year is effectively renewals increases coming through. Like I said, a marginal amount of churn starting to come through, but I think it's well within what we consider acceptable given our drive to push premiums up. And then I think just coming back to KZN. I think from our perspective, this process has gone quite smoothly with -- to a large extent, very little contention. I think our reinsurers have come through for us in a really big way. This has been quite a smooth process. In terms of the exposure or at least our net exposure, very little movement in that sense. And again, the reinsurance kicking in as we expected. So not much movement in terms of the net position to us. And then as far as the hedge is concerned, you are right, it does give us some relief in terms of the solvency coverage ratio. But even with the removal of the hedge, we are fairly comfortable that we stay pretty close to the midrange. And so I think at this point, it is our intention that when the hedge does come to the end on the 15th of December, we will not be holding that over.

Excellent. Sorry, just to clarify, you said that you're near the midpoint of the range, even once removing the hedge?

Even when we do remove the hedge, we are fairly comfortable that we are so close to the mid-range.

Our next question is from Sumaya Ncala from JPMorgan.

Just checking, you can hear me?

Yes, Sumaya.

Fantastic. I just had a quick question with regards to the underwriting margin remaining below targets. And one of the reasons being cited is due to power surges and [ current ] events. Just specifically zoning in on the power surges, I have just 3 elements to my question. Firstly, is this primarily due to load shedding, I'm sure [indiscernible] decided to ask...

I'm sorry to just interrupt your line. We just cannot hear you well.

Sorry, Sumaya. Could I just ask you maybe just to repeat the question?

Sure. No problem. is it a little bit better?

Yes, we can hear you now.

Okay. Just on the underwriting margin remaining below target and one of the reasons being power surges. I just want to check that, yes, this is primarily due to load shedding. Secondly, can you give an indication of some sort of quantitative value for this, if -- whether it's a percentage or a notional amount? And thirdly, what are your thoughts going forward on this, specifically in light of the fact that we could have worse load shedding stages being implemented and maybe the knock-on effects are worse than we are anticipating. And are you planning for this in your numbers in any way?

Okay. Thank you very much. So I think in aggregate, Sumaya, the impact of the power surge is not material in terms of shifting the overall underwriting margin. The impact that's coming through on the underwriting margin is a combination of several factors. So I think the big impact is really inflation on our motor book. And I think that's where we're seeing significant impact. And we've spoken about increasing premiums, and that's starting to take root, but it will take some time to bring that through across the entire book. We've also got motor theft coming through, again, on the motor book, in particular brand of high-end motor vehicles. And so what we've done is that we -- in a nutshell [indiscernible] reached out to all those customers of that particular brand and type of vehicle, and we are putting in different types of trackers to improve the recovery rate. And we've also reached out to the actual manufacture to try and address some of the challenges with those particular motor vehicles. So power surge, yes, is relevant. We've seen a significant increase in this, and that's largely coming through from the impact of load shedding. And again, what we've done on a forward-looking basis is that we have increased the excesses where we have these particular policies. We've put in place screening actions. And so what that means to a large extent is that we won't provide this cover to customers that haven't been with us for more than 6 months or simply coming on board looking for this particular cover. And in some cases, we have removed it. But I think looking a little bit wider to the impact of load shedding and potential issues around grid failure is that I think in line with the market and pressure from our reinsurers is that we are moving to reduce the exposure that we have to [indiscernible] across our commercial and personal lines policies. And so that starts to come through from the first of January and well into next year. So quite a few mitigants that we are putting in place to manage the exposure to grid failure or load shedding into the future.

Fantastic. And I know it's also fairly new. Is there any kind of amount or percentage of value that you can attribute to the power surge specifically on the claims side?

Sumaya, it's Hennie. At this stage, we haven't disclosed the number, but maybe just to mention, put it this way, if it was -- we would not have mentioned it as a fact if it was insignificant. So it's sort of -- it is fair but we haven't disclosed the number.

Our next question is from Warwick Bam of Avior Capital Markets.

Three from me. You mentioned that investment returns on the [indiscernible] increased significantly. I mean I can add any context to that comment, especially on whether you've seen reversals of your fair value losses that you reported in the first half? Second question, just on gross written premium growth. I mean, based on the timing of the increases that you're passing through, should we expect growth to accelerate slightly into the year-end? And then lastly, just can you expand on the subdued growth you're experiencing in MiWay? What portion can you attribute to competitive pressure versus a deliberate attempt to manage profitability?

Warwick, let me start with the float. So I think we made the comment that it's still volatile and the volatility really comes with the mark-to-market adjustments mainly on the bond portfolio. We have seen some good performance and the recovery of some of the mark-to-market losses we took coming through in this period. And we've also seen the underlying book the portfolio the run rate on that increasing over the years. So I think we've also seen the benefit of that starting to come through. But one, we have seen some reversal of the fair value losses in this -- in the 4 months since June. But just to make the point, I think it still remains volatile. We're quite happy that the actions we put in place to sort of reduce volatility into the mandate we give to the investment managers, it's a very short period, but over the last 2 months, we've definitely seen that it's got the desired effect on the performance of the float return.

Thanks, Hennie. And then Warwick, just to answer your questions on the premium growth. So I think maybe the way to think about it is that we are pushing up double-digit increases in the personal lines and commercial space, right? And so -- yes, we do expect improved growth in the second half of the year relative to the first half of the year. But I think it's important to bear in mind that, that's largely a response to the increased average cost of claims that we are seeing coming through, particularly in the motor space. And so to some extent, the premium increases will go a long way to managing the average cost of claims that we've seen coming through. And so we expect that obviously to continue into 2023. We are doing it with the new business. It's a little bit easier on new business. But to a large extent, that is counterbalanced by the inflation impact on the claims side. And then as far as MiWay is concerned, I think quite a few factors coming through here. So I think there is the element of managing the book towards profitability. And I think this a space where I think we've seen that the margins to a large extent are better than what we've seen in ours or like CMP space. And so we have tried, to a large extent, to maintain that margin. But we are also facing pressure, not to a large extent competitive pressure, although we are able to measure where we do lose business to particular competitors. But I think what we are seeing is that the clients in this segment are coming under significant economic pressure and the disposable incomes in this space are definitely under pressure. And so that's where you do see some of the pressure. I mean, we track it in terms of just the debit orders or big orders that are rejected or bonds. And so we have seen some movement in this space. And so it is a mix of factors. But I think this will remain a key focus for us in terms of [indiscernible] profitability into the New Year.

[Operator Instructions] Our next question is from Francois [indiscernible] of [indiscernible] Stockbroker.

A quick question on your premium increases. You've mentioned segmented premium increases. Can you maybe give a bit more color about the segmentation and maybe on -- you've mentioned about reinsurance, but is that pretty much across the board in motor insurance? Or is it in certain provinces, more higher premium increases required, for example, than others? Obviously, we've seen in the past that sort of one-size-fit-all premium increases can have the opposite impact as you often -- as you can lose your best risks in the process. Bottom line is I just want to try to figure out where it's worst in terms of risk categories. And also, maybe if you can give a bit of -- a bit more color on that underwriting margin. It was 2.3% at the half year. Now you say it's less than 5%. Does it mean there was no improvement in the last 4 months on underwriting margins or do the mention of that range mean that you still have to get to at the bottom end by year-end? Maybe if you can give a little bit of that sort of color. I think what you've told us now doesn't really suggest that there's been any improvement. And then maybe also just on the float returns that was very weak in the first half of the year. You've mentioned improvements, but -- yes, is that just a function of bond market movements? Or should we expect a sustained level from that, more in line with historical levels rather than in the previous half year?

Okay. Thank you very much, Francois. So maybe let me start with the underwriting margin question. So we have seen a difference and an improvement in the actual underwriting margin in the 4 months to October over the first half of the year. But on a weighted basis, the overall impact is that we are still seeing that the impact on -- from the first half of the year does pull down that average underwriting margin on a weighted basis. And so it does remain, at this point, slightly below our lower range. I think given that we are headed into November and December, I think we are cautious to provide any further information in terms of where we expect that underwriting margin to land. I think it is fair to say that across the board, we've definitely seen the impact of our underwriting actions. The excess is going up, the screening actions, the premium increases going through. And I think it touches partly on your first question, which is that when we talk about segmented premium increases, we are quite mindful that the book and the profitability from different cohorts, policies and brokers is different. And so we have not taken an approach that says we are pushing through a blanket increase, but we do expect on average that we will see double-digit increases. And so with the benefit of the last 4 months, we are comfortable that we are seeing those double-digit increases starting to land at least on a cohort basis. And so we keep up that effort into 2023. So it's not simply only on the motor side. We're also looking at household contents and so pretty much across the whole of the CMP book. And then, Hennie, do you want to pick up the question on float?

Yes. So I will do that. I'm just going to add one point to what Tava was saying on the underwriting front, but I mean, I think part of that process also is to derisk and derisk doesn't mean we do is cancel the policy. But we're definitely looking at certain areas where we say we see more increases so that you adjust for that in either by increasing excess or limit the amount of coverage you provide or you -- and looking at the premium increases, all those factors are taken into account. You're quite right. There's always the risk you're losing the good business if you don't do this really well in terms of looking after your good customers and making sure that the customers with a much higher claims ratio, you can put higher increases through. So that's exactly what we want to mean. On the float, I think the second -- the 4 months since June, we've definitely seen a much improved float performance, much closer to what we sort of would normally budget for. So it's much more in line with that sort of expectation, but it's a lot -- it is still very volatile. The question about how sustainability is -- I do think as we get probably towards the end of this increased interest rate cycle that we probably have more stability. And I think we definitely ended up, as I mentioned earlier, with a much higher base rate on the portfolio now. So if you sort of take away the mark-to-market movements, the actual interest that we earn in the portfolio is definitely significantly higher compared to what it was, for example, a year ago. And that -- I mean, that does provide some stability more stability, and I think a more positive outlook for 2023.

It seems we have no further questions from the conference call. And I would like to hand back to Tava for any closing comments.

No. Thank you very much, and thanks, everyone, for joining us. Always happy to have follow-on questions, please do shoot them across to Gloria, and happy to carry on the conversation. But thank you, everyone, for joining us this afternoon. Bye-bye, and have a great day.

Thank you. Bye-bye.

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