Santam Ltd (SNT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Notice of Santam Group First Quarter 2023 Operational Update. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Mr. Tava Madzinga. Please go ahead, sir.

Thank you very much. Good afternoon, everyone, and thank you for joining our 3-month update call. I'm joined by Hennie Nel, our Group CFO; and Gugu Mtetwa, our Head of Strategy and Investor Relations. I think we will be breaking away from tradition and start doing these update calls at the end of March and end of September starting this year. So I think we've put up the update, but I think I'd like to maybe just provide a level of context and some clarity to the note we put up earlier today. I think starting with the operating environment. I think we're certainly finding it difficult and certainly remains very challenging. I think disposable income on the personal line side is certainly challenged. The load shedding, we are seeing that coming through in our results. And I think it also goes without saying that the market, despite the challenges in the insurance space, remains very aggressively competitive. Our results, by and large, are affected by attritional weather losses and some power surge claims that are coming through. But I think what is different about this quarter is that we're not under siege or at least we're not in the eye of the storm as we were in 2022. And so we do fundamentally believe that the corrective actions on the underwriting side that we are taking, are certainly taking effect. But I think when we look at the underwriting margin for the businesses, that it does come out at below the bottom end of our target range of 5% to 10%. And I think it's important to say that, that has largely been driven by attritional weather. It has been raining incessantly during quarter 1. We're also seeing some power surge claims coming through there. But if we strip out the effect of the attritional weather losses, that what we find is that the core business then is certainly well within the underwriting range, and that's largely driven by the significant turnaround in our motor book. The grid failure actions are certainly also kicking in. And so while we saw a significant impact in quarter 4 last year, to a large extent, the actions are also taking root. And I think with all the changes that we're implementing also from the 1st of July around grid failure exclusion, we expect that to also largely curtail some of the losses coming through from our power surge. And so I think if you compare quarter 1 2022 to quarter 1 2023, I think you see a marked difference in the underwriting performance of the business. But I think it's also important to say that quarter 1 is a very short period of time and you also have the effect of seasonality. I think we typically expect much lower underwriting performance in Q1 compared to the successive quarters into the rest of the year. And then I think in addition, that within our quarter, some of the lumpy business in the specialist business hasn't settled yet. And so taking quarter 1, I think we have to accept that there will be a level of volatility coming through that result. And I think it's important that what's creating underwriting drag on the business is different from what we had to a large extent in 2022. And so the underwriting actions are taking effect, but we are seeing significant impact of attritional weather. So while we haven't had a CAT event, just the impact of the loss of rain, the flooding, a lot of that is impacting the business. But I think the implementation of underwriting actions has been effective. And this has also been against a backdrop of trying to manage and to keep the churn significantly under control. And so while the premium prices have come up, we're not seeing a major impact in terms of churn on the business. And I think for us, this has certainly been a very positive income. And then I think if you look at our capital, I think it's going to say that remains well within the range, 145% to 165%. And so we do continue to explore methods to manage the solvency better within that range and also reduce earnings volatility, particularly given the higher retention that we've seen on our reinsurance program. And then as far as our new operating model is concerned, that's taken effect from the 1st of January, and it really goes to emphasizing a multi-focused, multichannel approach in terms of our distribution. And so focus is management across the different alternative channels: our broker business, our partnership business. And I think you've seen that we're happy to report on the approval we received from the Competition authority on the MTN JV that we have in place. And so that's a positive for us in terms of just starting to see some greenshoe coming through on the alternative channel that we are trying to drive as a management business. In terms of the growth of the business, we've come out at 6% for the first quarter. But again, I think it's important to say that the core South African business is certainly performing well in line with our expectations for growth, where the drag has come through in terms of the growth has largely been in our international business, where we have pruned the portfolio quite significantly to eliminate some of the loss-making business that we saw at the end of the last year. The MiWay growth is certainly not where we want it to be, and I think this continues to be an area of focus for us. And then I think just my closing comment is that I think the risk profile that we are seeing within our South African environment is certainly shifting. But I think the combination of the long-term strategic shifts we are making, the short-term tactical actions we are taking, I think that's certainly has positioned our business in a much better space in the short run and so certainly also for the long run. Hennie, do you want to cover anything around -- for SAN JV and then we open it up for questions?

Thank you, Tava. Good afternoon, everybody. Maybe so firstly, just on IFRS 17, this is not the first year we're reporting under IFRS 17. As we noted in the update, no significant impact on the way we report our results. So from that perspective, we should keep things relatively simple. On the investment side, we've definitely seen a much better investment performance compared to 2022. And I think there's still -- I mean, given the -- in the events of last week, still quite a bit of volatility on the bond -- in the bond markets, but at least the running yields on our core investment portfolio is running at significantly higher levels than what we've seen last year. So I think from that perspective, it also bodes well for investment performance for the year. And then, yes, lastly, I think you would have seen we've issued some further sub debt now during this quarter, partly to redeem the ZAR 500 million sub debt that was callable in April, but effectively increasing the overall sub debt by ZAR 500 million. And I think, again, very comfortable with the auction that we had. And again, demonstrating almost the debt market's sort of faith in the Santam debt that has been issued. And I think that creates also some scope for us on the capital side having sort of remaining within that 25% to 30% debt equity ratio.

Okay. Thanks, Hennie. Maybe let's open it up for questions.

[Operator Instructions] The first question comes from Warwick Bam from RMB Morgan Stanley.

Some questions really around the operating environment. With regards to power surge losses, I mean, do they correlate directly with the frequency of load shedding? Or are there other random factors to consider? And within that, I mean, do you expect these claims to start declining as more homes install alternative energy? Let's start there.

Thanks, Warwick. I think maybe we can separate that. I think there's certainly an increase in load shedding. And so we've been tracking frequency and just the total amount of claims that we are seeing coming through on -- from power surge claims. And this is coupled with the actions that we've taken. One, increasing excesses I think across the market, we believe the drive for exclusion, particularly around grid failure. But I think we've also been very clear that we believe that power surge is still an insurable risk. I think if you compare the frequency to other classes of business just around what we see in motor, motor frequencies, that we largely believe that it is insurable, but it must be insurable at the right price. But I do put the disclaimer that we are uncomfortable with systemic risk from grid failure. And so while load shedding has increased in the last quarter, is that we've seen almost a disproportionate decrease in the claims we are processing simply because of the underwriting actions that we put in place. And so we are continuing to be quite aggressive around this. And so we do or at least we are optimistic that this should become certainly a lot more manageable. But I did make the point that, and I think even towards the end of last year, I think we've made the point that the key delta to our underwriting performance is not led by power surge claims. And even in this quarter, it is quite fractional, right? And the real big delta that is impacting the business has really been attritional weather losses. It simply has just been raining a lot.

Thanks, Tava. I mean, I guess, continuing on the same topic here. Just in terms of 1 of the comments you made in the press release was just around the fact that the industry is very competitive. And in that sense, I guess, it may impair your ability to price appropriately without changing your market share significantly. But I mean, are you still confident that you can achieve your underwriting margin targets without some return or stability to the South African kind of operating environment? And when I talk about the operating environment, really talking about the inherent risks to the insured assets, which my sense is that sort of continue to deteriorate and potentially accelerate in their deterioration. If you just think about core infrastructure and services, such as road surface repairs, grid stability, firefighting capacity and those kinds of issues that you're facing that are impacting kind of the inherent risk in the book.

So I think certainly, I think if we were carrying out a lot of the underwriting actions in isolation. I think then the competitive impact, I think, would certainly start to impact our units, particularly from a churn perspective. But I think what we are seeing in the market is that with most of the actions that we've taken around load shedding, premium price increases, that I think you found that a huge part of the market has followed, right? And so I think everybody is concerned about all these systemic factors across the board. And so we are not acting, at least in my view, in isolation. That's why I made the comments that despite the thrust on underwriting actions and pricing, we are not seeing a significant dampener on our churn rates. And so I think for us, that means we've been able to retain quite a huge part of our underlying book. But I think just around the question of systemic risk, what we're seeing across the country. And I think you can pretty much divide this into several buckets. So I think there's a bucket that comes around crime and fraud. I think there's a bucket that comes through on infrastructure challenges. And I think the impact across that are certainly different. And so our underwriters are working together with our brokers. I mean, we've been very busy, I think, much to the mild unwind and irritation of our brokers and just the underwriting or policy changes that we're making pretty much across the board. And I think at least in the short run, that does curtail or protect our underwriting margin. But I think when you take a much longer-term outlook, I think the broader impact of the economy. So we've pegged our growth and part of our underwriting margin, we linked it pretty much to inflation and to growth in the underlying book. And to the extent to which in the long run that we start to see much more or less muted impact on economic growth, I think been as a big player within the South African economy, that certainly would have an effect on us. But I also mentioned that we are thinking about our strategy in terms of just how we think about diversification within the South African context, going multichannel, diversifying to some extent away from the core broker channel and starting to look at the direct and the partnership space. But I think beyond that is that we're also spending a bit more time just thinking through diversification in terms of the international space. So I think you all know we've got quite a strong specialist business. We're working with the SAN JV -- sorry, with the Allianz JV with FTA in the Rest of Africa. And so we do see some potential for further diversification in that space.

The next question comes from Michael Christelis from UBS.

Maybe 3 questions, if I can. Just to kind of understand the margin movements there. So can you give us an indication of what the underwriting margin looks like relative to Q1 last year, excluding the CAT event? In other words, I mean, elevated rain has been something that we've seen for quarter 4 last year and pretty much planned for the last 18 months of weak underwriting. So I'm just trying to get a sense of is this a worst quarter, obviously, excluding last year's CAT event than 1 year ago? And similarly to that, if I look at your underwriting margin for half 2 last year, where you were sitting at about -- well above 7.5%. What's changed into quarter 1 this year? Because half 2 last year also had very high levels of precipitation. That's the first question. Maybe just go with that one for now.

Okay. So thanks, Michael. I think on a relative basis, I think the comment I made is that we're not in the eye of the storm that we were in last year, right? And so Q1 2023 is relatively a much better performance quarter compared to Q1 2022, right? And so I think the best way to think about this is that if you stripped out the impact of attritional weather losses, right, you certainly have a quarter where you would be in the range, and that will be consistent with the performance that we saw in H2 outside, obviously, stripping out all the agricultural performances and some of the things that created an uplift in the second half of the year. So in terms of the core business, what does give us some optimism is the fact that the big drag last year was really inflation, significant impact on the motor book. And I think what we've seen is that we've been able to turn that book around. And so motor theft is significantly down. The premium increases are coming through. We still have 6 months more of bringing that through. And so we are cautious about it. You do see increase in thefts here and there in terms of alternate motor vehicles from what we saw last year. But I think by and large, we've traditionally shown you these big bars. We show motor performance by [indiscernible]. And I think what we are seeing is that the motor is certainly not in the negative and it is significantly much better performance compared to last year. Hennie?

And Michael, just to add, I think, to what Tava was saying is also, if you think of last year, we had significant reserve releases in the H1 2022, both CBI and also on the specialist side, a number of sort of positive developments on reserving coming from the previous year. So if you strip that out, I think we have, as Tava said, definitely sort of, I think, got a much stronger performance. And also, the other point that he made -- also just to keep in mind is we're about halfway through the premium increases now. So about half the book has been repriced. The other half will be repriced as we continue throughout 2023. So from that perspective, we're very comfortable with what we've seen in terms of the impact of the underwriting actions on the book. And then I think that sort of combined with the fact that we have seen the impact of the -- on the business outside the core side. So a business like MiWay for example, has been able to, in the current environment, also perform in line with targets. We haven't achieved the growth, but at least we achieved the underwriting margin. And it almost looks back to the point Warwick made earlier. I mean, we're very comfortable to say that even if we -- we'd rather get the pricing now correct, then to sort of say we price too low, but keep on growing the business. And I think that principle we've applied and comfortable with the progress we're making there.

Very clear. Maybe then just a second question on MiWay itself. I mean, this is an area where we've seen subdued growth for a long time now, and you talked about confidence of acceleration into half 2 because of growth initiatives. Can you elaborate on any of those initiatives? Or maybe just give us a sense of what gives you the confidence that half 2, well, certainly the rest of the year is going to accelerate from here?

Thanks, Michael. So I think, Michael, we've spent some time really looking at the MiWay strategy and operating model. And I think when you look at the core part of the personal lines business in MiWay, it is largely an outbound model, right? And if you look at our -- similarly, if you look at the commercial product of MiWay, a smaller part of it, similarly also in outbound motor. And so the inbound aspect of the MiWay model are significantly much, much smaller. And I think we're all quite acutely aware at just the difference in key underwriting metrics that you get between the different operating models, whether it's inbound, outbound. And so we have some sense of what could be possible by shifting that operating model to some extent. But we also accept that we are in a very aggressive and competitive space, and so we've been able to keep the business profitable. I think the margin from our perspective is more than healthy. And I think with a new team in place now in MiWay, quite a strong team. And so you can see already the impact on the loss ratios significantly down from where they were operating 1 year ago on the loss ratios. And I think with this team in place, we have some confidence that we should be able to compete a little bit more aggressively into the rest of the year in the MiWay space. And I think, Michael, probably at this stage, I think the proof of the pudding is in its eating. And so we would like the new management team to really take root and really start driving some of these initiatives. But I think we are pleased that in the process of trying to manage this business better is that the operational aspects of the business on the back end, the claims management is certainly much tighter. And so as we start to push a little bit more aggressively on the top line, we are less worried that you get a leak coming through on the bottom end of the business.

Great. And then just 1 last quick one. Can you give a sense of the size of the reinsurance business you walked away from? Just an understanding of how big that is for maybe the half year or the full year's run rate of GWP.

Yes. I think, Michael, what I can say, and I think possibly at the half year, we could look at it in a little bit more detail. But I think what we can say is that a significant weight of the growth components typically would come from our international business. But I think we are also very aware that it's still a small part of our entire business. And within itself, any losses that come through in the international space, and I think we talked about Turkey before, that it does create significant volatility within the international business. And in some cases, we come across business where we're simply uncomfortable or our risk appetite is now different and we are uncomfortable to carry some of those losses. And so we've taken very proactive actions to protect the underwriting margin and to simply look for business where we believe is a lot more profitable in the long run. So I think you'll appreciate that with the international business, it is quite chunky and quite clumpy. And so where we take aggressive underwriting actions, I think you certainly see the impact of that on the growth line. But I did make a comment that if you separate out the international business outside of the subdued growth of MiWay, that I think within the South African business, that's certainly in line with the guidance we've given around growth.

The next question comes from Kevin Harding from Investec Wealth and Investment.

Just 2 questions from me. You spoke to the headwinds of sales in MiWay. Perhaps if you could just highlight which is the biggest headwind? Is it competitive pressures? Is it client affordability? Or is it you just taking your foot off the pedal to kind of bed down the new team and operating model before accelerating in that business again? And then if you could just comment -- you've spoken about churn that has been within sort of your expectations. Could you maybe just comment on sort of the impact on policy count, whether that's been sort of same level, down or up?

Okay. Thanks a lot. Maybe I'll start with the last one first. But I think we're quite cautiously pleased about this is that I think while we've been aggressively implementing all these management actions, I think certainly 1 of the things that does come under pressure would be your new business rates or conversion rates. And I think what we are seeing across the board within our personal lines business and even within the commercial lines business is that there is negligible churn. In fact, it is well below our expectations given the amount and the level of aggressive actions that we are pushing through these books. So if you think of pushing through double-digit increases, I think in the beginning, when we started with this last year, I think we did talk about this and we were, to some extent, concerned that I think we did see 1 or 2 players bucking the trend or 1 player in particular. I think everybody else has come along with the premium increases, the aggressive underwriting actions, the screenings. Everybody has been very, very careful here. And so I think last year, we did see 1 or 2 players, like I said, who were trying to move big books across from different players using different brokers. But despite that, is that the churn hasn't been material. And so we are not talking about a loss of units. I think we are largely neutral in terms of the unit across our book. And then just coming back to MiWay. So if I sort of think of the fact that you've missed it, I'd like to say all of the above, right? If you look at the client pressure, I think we've seen, to some extent, an increase in the R&D rates in this book. But I think at the same time, just the strength or relooking at the operational side of the business, working with the MBR groups, bringing better alignment and working between procurement in MiWay and in Santam, again, those teams to work a lot closer, I think we've been able to successfully and materially impact the loss ratio within MiWay. And so we're quite pleased at least on the underwriting team side. And I think it's a choice we've made that we believe that we must keep the business profitable, right, and contribute to our return on capital. And then off the back of that, we are then now comfortable to start being a little bit more aggressive on the top line. I think had we been a lot more aggressive on the top line without managing the back-end operational aspects of the business, just getting the telematics to work better, properly understanding the rating of the clients we're dealing with, I think we could have grown the top line, but I think the bottom line certainly would have suffered. But I think we're in a position now where we believe that the profitability or at least the margin is moving in the right direction. I think we can certainly be a little bit more aggressive in terms of driving the top line. And then, of course, the added benefit of what I'll call it quite an experienced team that's been in the market, worked at some of the competitors that we are in the market against. So I think that gives us a level of comfort that while MiWay certainly is the way we would have wanted it to be, I think the outlook in terms of moving forward is certainly a lot more positive. But I think we can expect in the short run, you will see your management expense ratio come up as we invest a little bit more in driving the top line. So that shouldn't come as a surprise within MiWay.

[Operator Instructions] The next question comes from Baron Nkomo from JPMorgan.

Just 2 questions from my side. Firstly, just circling back to growth in SA, are there any product lines where you are seeing or anticipating any real or actual units? And then secondly, if you could maybe comment a bit on the MTN device insurance, which you recently bought. I appreciate you've commented around the top line contribution. But will Sanlam or MTN have any share in the profits from that business?

Okay. So I think maybe I'll start with your first question. So I think if we look at the different classes of business across the board, like I said, the motor, there has been a significant turnaround, where the drag has come through on both personal lines and commercial lines has largely been in the public class of business. And I think profitability in the property space typically is challenged. But I think comparing again quarter-on-quarter, we are certainly in a much better space than we were at the same time in the previous quarter. So obviously, property, I think from a profitability channel, still remains challenged, but certainly relatively in a better space compared to last year. I think, again, all the other classes of business certainly in a positive space. But like I said, the major effect that's come through has been on the property classes as a result of weather. And then we are seeing some power surge claims again coming through in content, some coming through on property. And so we've had to tighten our underwriting so that you don't have creep in the same claims or power surge claims now coming, that used to come through, let's say, on content, now coming through other classes in other parts of our underlying policy. So just to answer your question straight, I think in the property space, but that's been largely as a result of the weather. But again, just to emphasize that we are not seeing material impact, a material impact on churn. But I think that's not to say that as the year unfolds that there will be increased competitive pressures. I think we can certainly expect to see that. But I think the fact that the entire market has largely moved in sync with the premium increases certainly helps the impact on books moving from one insurer to the other. And even with some of the more aggressive growth focused competitors, where we simply have been chasing growth at the expense of underwriting margin. Even in that space, when you look at their units, their units haven't moved, right, which means they are similarly pushing price a lot more aggressively in order to combat the losses that came through as we saw at the end of last year across most competitors on the underwriting side. And then just shifting to MTN, and I'll let Hennie share a little bit about that. I think 1 part of our strategy that we emphasized is the multichannel approach. And 1 of the key or still smaller business units where we're also our ART businesses is really to allow us to focus on telco partnerships, the retail partnerships, using our licenses within Centriq. And also to allow us to start thinking about offering insurance at -- within bite-sized chunks to a part of the market that we traditionally haven't been able to focus on. And so a much more inclusive approach to driving insurance. And so we believe that there is or there are pockets of growth and hence, this diversified multichannel approach that we are pursuing quite aggressively into the future. Hennie, you want to talk a little bit about the MTN transaction and the economics of it?

Thanks, Tava. Yes. So as we mentioned in the update, this is part of the largest Sanlam MTN partnership. As you know, that partnership really deals with the African continent. The deal that we've done covers South Africa, so it's within South Africa, but part of the larger deal. And as you know, in the larger deal, there is a profit share arrangement. But what we have sort of made clear also in the update is that in terms of our participation in profit will be more than sufficient to cover our required return on capital. So I think that's always important for us as a business. I mean, that's 1 of our key metrics to make sure that where we write business, we can achieve sufficient profitability to pay for the capital we deploy and make [ return ] of 24%. So that was the background to that. And I think, as Tava said, the real opportunity. I mean, we've got the device book, and that will come over time. It's still subject to regulatory approvals. But I think the opportunity to, over time, also start writing other. And Tava said, chunk-sized products through that channel is for us a really interesting opportunity. So the growth opportunity using that network, we're really excited about that.

At this time, that does conclude our question-and-answer session as there no further questions in the queue. Mr. Madzinga, I'd like to hand over to you for closing remarks. Thank you, sir.

Okay. So maybe just to summarize. So Q1, I think, is a relatively short period. I think we expect volatility within a single quarter. There's a seasonality effect coming through, chunky premium that typically may not come through quarter 1. The significant drag on the underwriting margin has largely been as a result of attritional weather losses with some power surge coming through. But we believe that the power surge and grid failure with our actions and exclusion should largely be manageable. We've seen a good turnaround coming through in the motor book. And so with the exclusion of weather, the core book is certainly within the underwriting range. And then in terms of the top line, significant pruning within our international book, and that's created some drag within the top line. But the South Africa top line performance is certainly within our expectations. And then we continue with the premium increases for the next 6 months and continue with aggressive underwriting actions. And so we optimistically expect improving performance. But we are clearly very mindful of the broader systemic risks within the SA macro. And so that's why we talk to new operating model that gives us a multichannel approach and an attempt to drive diversification, both within South Africa and outside South Africa. And I think this is an ample response, I think, to the challenges that we are facing within our environment. So I think on that note, thank you all very much for joining us. And I think if you have any further questions, please do direct them through to Gugu. And like I say, we're always happy to engage further on this. But thanks very much for joining us. Everybody, have a good afternoon.

Thank you very much, sir. And Ladies and gentlemen, that does conclude today's conference. Thank you very much for joining us. You may now disconnect your lines.