Good day and welcome to Old Mutual 2023 Annual R esults. We are coming to you live from our offices in Johannesburg, South Africa. Before I get carried away, I can get ahead of myself, let me introduce myself. My name is Langa Manqele, I am the Head of Investor Relations at Old Mutual. We have already uploaded our reporting suite on the website, so for those of you who have not seen it, you may already download it from there. When we get to the Q&A stage, I'll give you further instructions on the conference call. The operator will be available to assist you with questions, and for those who are on the webcast, I will be selecting the questions and reading them to you. Moving on to the agenda for today, we have our standard items which we are really excited to present to you.
First off, is our Group CEO, Iain Williamson. He will take the stage and give us a strategic review. He will shortly be followed by Casper Troskie, our Group CFO, who will give you the financial review. After that, Iain, I'll ask Iain to come back to the stage to cover the looking-forward item on the agenda. I will then pick it up from there to cover the Q&A. Once we are done with the Q&A, Iain will close the day for us. So on that note, I would like to call Iain to the stage. Thank you.
Right, thank you, Langa, and welcome everyone to our 2023 results presentation. It's our strongest set of results, I think, since we listed back in Johannesburg in 2018, and it really is a privilege and a pleasure to stand here and to unpack them a little bit for you. These results demonstrate a clear link between the strategic choices that we've made, market share gains we've seen in key business segments, and the improved profitability of our business. We've seen good strategic delivery against our group targets and real progress towards our victory condition with robust underlying operational delivery. We have high conviction in our strategy, which I will get to shortly. So, as I said, strategic choices across our segments are driving profitable top-line growth. We gained market share in key market segments with live APE sales showing continuing strong momentum and growing by 17% to ZAR 14.6 billion.
If we strip China out of the numbers, like-for-like Life APE sales were up 25%. On the gross written premium side, we saw an increase of 14% to ZAR 25.5 billion, driven by both new sales and good client retention. From a value perspective, our top-line growth has been profitable in a competitive environment, with VNB up 37% to ZAR 1.9 billion, and we believe that this is a sustainable base to drive forward from. This was driven by higher margin risk sales, and obviously, with the top-line growth expanding, you've also seen margins expanding somewhat. Return on net asset value up 170 basis points to 11.1%, driven by both the increase in RFO as well as higher shareholder investment returns. This is not yet where we would like it to be, but it is heading in the right direction.
From a capital and returns perspective, the board approved a final dividend of 0.49 per share, bringing the total dividend for 2023 to 0.81, an increase of 7% on 2022. We also should note that we concluded our share buyback of ZAR 1.5 billion during the second half of 2023. Just as a reminder, our strategic framework, which is our true north, has not changed. It's anchored in our victory condition of becoming our customers' first choice to sustain, grow, and protect their prosperity. We use the value drivers on the right hand of the slide to link our strategic actions to our value creation process. We're building out an integrated financial services business underpinned by both a growth vector in growing our core business as well as in unlocking new growth engines for longer-term growth in the future.
So, to recap on why we've chosen an integrated financial services strategy: this represents our strategic choice to deliver value through deeply engaging experiences for our customers, partnering with them on a journey to lifetime financial wellness. We really care deeply about this. It's deep in the DNA of Old Mutual. The integrated financial services is built around what we refer to as the My Old Mutual ecosystem, which is a data-rich platform bringing together customers and advisors with Old Mutual Rewards underpinning a value-sharing system for customers who fulfill their lifetime goals with us. This ecosystem is advisor-led, integrated, tech-forward, and underpinned by trust. So moving then on to strategic delivery. We said that we would measure our progress under five pillars, the first three of which sit underneath our growing and protecting the core theme: holistic coverage of customer needs, distribution and digital engagement, and operational efficiency.
Under holistic coverage of customer needs, Old Mutual Protect continues to drive further increases in underwritten sales, particularly in our Mass and Foundation Cluster business. This has provided us with a platform for strong profitability. We've also added an affordable private healthcare solution for low-income earners, which is delivered through their employers. This highlights the benefit of group synergies we've been able to unlock with this product being underwritten by the recently acquired Genric business in the Old Mutual Insure table. We launched our Old Mutual Rewards program into our Namibian customer base during 2023, and this has taken the total membership of our rewards program to 2.2 million customers. That's an increase of 22% on the prior year. Work in progress in this pillar includes the pilot of our Old Mutual Home Loan solution.
This is a friends-and-family pilot in conjunction with SA Home Loans as an origination partner, where we originate assets onto the OMLACSA balance sheet directly. Turning into distribution and digital engagement. On the 1st of December, we concluded the acquisition and took management control of the Two Mountains business. This complements our existing Mass and Foundation Cluster businesses and allows us vertical integration across the funeral services value chain. It also allows us to expand our distribution presence across five provinces in South Africa, and we believe there's material scope to further scale this business in partnership. Our My Old Mutual app has now reached 1.4 million of our customers, an increase of 17% on the prior year. Work in progress in this pillar includes the pilot phase of the digital advisor enablement toolset that we have built in partnership with One Connect Technology Solutions.
So moving then on to operational efficiencies. The highlight of the second half of 2023 was that we migrated our entire Greenlight risk book of business onto our new Old Mutual Protect platform. This constitutes the migration of 1.85 million risk policies. And having them now on the same platform as Old Mutual Protect allows us to deliver operational efficiencies and will allow further efficiencies over time as we decommission the legacy administration systems. And on that note, work in progress is, in fact, the decommissioning of our legacy platforms. We have started this to start to unlock efficiencies. The real benefits will only emerge when the systems are completely switched off. We also are progressing the finalization of the build of our savings and income proposition, which will be consolidated onto the same Old Mutual Protect platform, resulting in further scale and efficiency benefits.
Moving then to the new growth engines, and starting with these are intended to grow our profitability and our earnings in the longer term through both the high-growth strategic markets in Old Mutual Africa Regions and through accelerating our integrated financial services capabilities with the build of both the bank and the NEXT176 ecosystem. In strategic growth markets, we've continued the pivot to corporate on the life side, as well as the turnaround in our P&C business, which is now bearing fruit. We've seen gross flows in these regions up 54%, driven by new mandates in East Africa. The P&C turnaround has contributed significantly to profitability, with East Africa as a region now turning to profitability. We continue to execute against a perimeter review of this business, assessing all our businesses in market for their potential to achieve a top-three market position.
In line with this framework, we've decided to exit the UAP insurance business in Tanzania, with the sale of that business pending regulatory approval. Work in progress in strategic growth markets includes our focus on expanding our distribution and refining our product set in China. We've signed a headquarter-to-headquarter agreement with China Everbright Bank. And I think I should acknowledge at this point that during 2023, we've experienced significant headwinds in China, both from a regulatory perspective as well as from a market and interest rate volatility point of view. In the area of strategic growth businesses, on the bank build, the review of our Section 16 application by the Prudential Authority is underway. They have confirmed that our application is legally complete and that they are reviewing it and will get back to us.
The core capabilities of the bank are now complete, both on time and within the budget envelope of ZAR 1.75 billion that our board had approved. The capabilities that have been built on that platform have been independently reviewed by our external auditors and certified to the PA as being fit for purpose and capable of supporting the running of a fully fledged bank. We now shift in this program from project mode to what we are referring to as a transition phase before the launch. Once we receive our Section 17 license, which is a conditional bank license, we will be required to conduct an extensive industry testing period, which will take at least three months. During that period, we integrate into the national payment system and into all the payment clearinghouses in the payments association.
We've set aside a budget of approximately ZAR 800 million for this phase, and we expect to complete this phase towards the end of this year. That will then take us to a position where the bank is ready for launch to the public. Work in progress in this pillar includes the further building out of our early-stage innovative venture portfolio in NEXT176. It's a bit early to opine on the success of that portfolio, as well as on orchestrating new strategic investments and partnerships for the group. Two examples of success in this area: in the second half of 2023, we launched a branded digital wills solution under the TEBA brand in partnership, and we launched a micro-SME lending capability in Kenya in partnership with Standard Chartered Ventures. As a group, we remain hugely proud of our efforts in sustainability.
We are funders into 39% of the installed capacity of renewable energy in South Africa as a country. OMIG has invested ZAR 167 billion in the green economy, amounting to around 37% of their assets under management. And of this, we've invested ZAR 30 billion or almost ZAR 31 billion in renewable energy. We've received independent third-party recognition for our efforts in this area, with S&P Global increasing our ESG score to 43 in 2023. And that's an improvement of 34% over the prior year. OMIG also won an award as the Best Sustainable Investment Manager in Africa from European Global Investment sorry, European Global Business. A few brief remarks on the operating environment that we needed to navigate during 2023. I don't think I need to tell anyone that lives in South Africa or, indeed, on the African continent just how tough it's been out there.
We've seen severe growth constraints in the South African economy, with GDP growth in 2023 revised down to 0.6%. We've seen heightened market volatility across many of the Africa region's markets, with currency volatility and U.S. dollar shortages being almost par for the course in many of these markets. As a consequence, businesses and consumers have faced tight financing conditions, low business confidence, and constrained disposable and discretionary income. So, in responding to these headwinds as a business, we've relied on our ecosystem partnerships to unlock new growth opportunities, as well as on the trust that consumers have in our brand and the depth of our customer relationships to retain and grow our customer base. And I think our intermediary force, in particular, has done a magnificent job of navigating through this environment.
From an outlook perspective, we do believe that the interest rate cycle has peaked, both in South Africa as well as generally across the continent. We do expect rates to start to come down now in the medium term. In South Africa, a significant rollout of private power generation capacity is underway, which should start to alleviate the burden of load-shedding on a forward-looking basis. These factors combined should serve as a catalyst and be growth-positive in our key markets going forward. I'm now going to move on to a brief commentary of the performance of each of our segments, and then I will hand over to Casper to take you through the detailed financial results.
Starting with Mass and Foundation Cluster, Clarence and its team have delivered a great outcome, underpinned by the power of our diverse distribution channels and focusing on margin-accretive risk sales, which has delivered profitable growth. We're accelerating market share gains in the life insurance business in this segment, with life APE sales up 14%, driven by underwritten sales growth. Our top-line growth in this segment is highly profitable, and our VNB margin came out at 8.8% at the upper end of our target range. Persistency remains a key concern in the medium term. We continue to grow our lending book responsibly, with the book growing 6% to ZAR 16.3 billion. But we have seen both higher borrowing costs and pressure on disposable income, leading to a credit loss ratio of 7.2% for the period and a decline in our net lending margin by 220 basis points.
In our personal finance and wealth business, we've continued to scale our advisor footprint and deployed tech-forward productivity toolsets to help to drive productivity and growth in our channels. Kerrin and her team have delivered strong profit growth and strong growth in top-line metrics. We're gaining market share, with a material opportunity still in front of us to make further inroads in this regard. Life APE sales increased by 15%, driven by, in particular, guaranteed annuity sales, which were up 57%. Our value of new business grew by 64%, with the margin increasing by 30 basis points. We continue to enhance our client value proposition to further drive flows. Gross flows increased by 7% to ZAR 82.8 billion. We launched our high-net-worth proposition, Private Plans, by Old Mutual Wealth, expanding that proposition and increasing assets under management in that area by 30% over the year.
In Old Mutual Investments, we continue to benefit from the diverse capability set that we have, including our peer-leading private markets franchise. We delivered resilient results in difficult markets. Both assets under management and gross flows grew in a challenging environment, with assets under management up 8% to ZAR 839 billion and gross flows increasing by 3% to ZAR 32.8 billion. This was supported by higher inflows into money market, fixed income, and into our private markets franchise. Our differentiated investment capability underpins the quality of earnings in this business. We, again, recorded an exceptional ZAR 14.7 billion capital raise in the private markets business, supporting solid growth in non-annuity revenue and highlighting the benefits of this franchise. In Old Mutual Corporate, we continue to focus on both expanding our core business through new solution offerings and harnessing group synergies to drive growth.
We delivered really strong top-line growth in this business and enhanced profitability in the core. Life APE sales were up 68%, with the value of new business growing by 85%. The margin, with rounding, stayed at 1% relative to the prior year, but clearly, given the higher increase in VNB, it did improve a little bit. We're broadening our value proposition to expand the core offering. Our Rem channel consulting service has extended its suite of solutions to large corporate clients. Our SMEg o offering to SMEs has expanded the range of business-enabling and financial solutions that it offers over the period. A huge shout-out to Prabashini and her team for really excellent delivery during 2023. In Old Mutual Insure, we have also seen very pleasing top-line growth from a combination of the benefit of the acquisitions that we've done, as well as operational efficiencies, supporting insurance revenue momentum.
Acquisitions and partnerships have helped to drive both growth and product innovation. Genric and One Financial Services contributed about 4% to our top-line growth, with acquisitions adding ZAR 266 million to the insurance service result and to that top-line growth. Both our Retail and Specialty Classes of business were impacted severely by the weather events in both the Western Cape and Gauteng during 2023. We've also seen higher net reinsurance costs negatively impacting our underwriting margin. And we continue to invest in climate risk modeling capabilities to assist us to better manage extreme weather event risks on a forward-looking basis. I'm pleased to confirm that Charles Nortje, who is the CEO of CGIC, has agreed to take on the role of Acting Managing Director of Old Mutual Insure following Garth Napier's decision to leave the group.
And finally, turning to Old Mutual Africa Regions, Clement and the team have delivered another excellent year of profitability growth. The continued pivot to corporate and the strategic P&C turnaround has driven this improvement in profitability. Life APE sales are up 27%, driven by growth in corporate mandates, specifically in Kenya and across both retail and corporate in Uganda. The value of new business margin increased by 60 basis points to 2.8%. And on the short-term side, gross written premiums were up 3%. But particularly pleasing was the strong improvement in the underwriting margin by 870 basis points to near break-even. We launched U.S. Dollar Unit Trust Funds in Uganda to help to drive sales and assets under management. And in Zimbabwe, our O'Mari FinTech platform reached 600,000 active customers a few short months after launch.
So, with that, I will hand you over to the capable hands of Casper to take you through our financial results in detail. Casper, over to you.
Thank you, Iain Williamson, and good morning, all. I'm really pleased with the continued track record of delivery, with a strong set of results for the 2023 year. In this presentation, we will be focusing on our IFRS 17 results. Please refer to our bridging pack for a comparison to our 2022 IFRS 4 results. Our diverse business delivered improvements on most of our earnings, capital, and value targets. Our results from operations increased by 14% to ZAR 8.3 billion. Adjusted headline earnings grew 21%, further bolstered by increased returns on our shareholder portfolios, with cash generation remaining strong at 82%. Our return on net asset value improved to 11.1% due to earnings growth and continued capital optimization.
Final dividend of ZAR 0.49 per share was declared, in line with our dividend policy, bringing the total dividend for the year to ZAR 0.81, an increase of 7%. I remain extremely pleased with our sales traction, with the value of new business, or VNB, increasing substantially by 37% to ZAR 1.9 billion, and the VNB margin increasing to 2.3%, remaining well within our target range. Our contractual service margin, or CSM, grew 4%, translating to a return of 14.5% for 2023. Unpacking the RFO in a bit more detail, RFO in Mass and Foundation Cluster grew by 22% to ZAR 1.8 billion, largely due to higher life profits, partly offset by lower profits from the banking and lending businesses. Life profits showed a strong improvement due to higher risk sales volumes, higher returns on the CSM, and better retention outcomes relative to stronger assumptions.
Banking and lending profits declined due to the higher credit losses and the negative impacts of increased funding costs from higher interest rates. RFO in PF and Wealth grew by 10% to ZAR 3.7 billion. Personal finance RFO benefited from better returns due to higher interest rates on our CSM, positive reinsurance-based changes, and higher morbidity profits. Our mortality experience was better in 2023. However, profits were lower due to the prior year benefiting from further excess COVID-19 provision releases. In wealth management, higher annuity revenue was supported by higher average asset levels. Non-annuity revenue increased significantly to improve market valuations of seed capital investments. RFO in Old Mutual Investments reduced by 1% to ZAR 1.2 billion.
Higher RFO in the alternatives business was offset by lower earnings in asset management and a reduction in specialized finance earnings due to mark-to-market adjustments, and higher overall expenses as a result of vacancies filled, investments in revenue-generating initiatives, and technology. Corporate's RFO increased by 19% to ZAR 1.7 billion. This performance was driven by higher returns on the CSM, better than expected mortality underwriting experience, with prudent expense management also contributing to profits. Old Mutual Insure RFO decreased by 23% to ZAR 524 million, mainly due to the decline in underwriting results. The net underwriting result decreased by 92% to ZAR 46 million, and an underwriting margin of 0.3%.
This decrease was due to a significant increase in reinsurance costs, higher weather-related claims experienced in our retail business, a once-off impairment in IOIs, as well as an increase in insurance service expenses. African regions showed exceptional growth in RFO, more than doubling to ZAR 1.1 billion. This was driven by very strong growth in life and savings and property profits, with solid growth in asset management, partially dampened by reduced banking and lending profits due to continued challenging macroeconomic environments. Life and savings profit was driven by the ongoing shift towards more profitable corporate business, as well as improved mortality experience. Property and casualty RFO increased due to good top-line growth and improved underwriting margins, as Iain explained. The loss on net result from group activities, which includes our investment in new growth and innovation initiatives, increased by 22% to ZAR 1.8 billion.
The increase in shareholder operational costs was primarily due to increased product and advisor platform project costs, with the rest of expenses increasing in line with inflation. As we transition, the existing and new product platforms are being run in parallel, resulting in duplicate costs, which will reduce as old platforms are decommissioned. IFRS 17 implementation costs also contributed to higher expenses, and this will not repeat following the successful implementation in 2023. Adjusted headline earnings grew 21% to ZAR 5.9 billion, driven by strong operational growth and a significant increase in the shareholder investment return. The increase in the shareholder investment return is largely driven by higher equity and bond returns in South Africa and higher equity returns in our Africa regions.
The increase in finance costs is driven by higher interest rates in South Africa, as well as the issuance of ZAR 1.5 billion of subordinated floating-rate debt during the year. The loss from associates represents our investment in China. Our loss increased as a result of decreased new business growth, increased claims, and rising reserve costs due to a downward-trending yield curve. Shareholder tax increased as a consequence of increased profits. The effective tax rate remains above the statutory rate, primarily due to the apportionment of expense deductions for tax. The main movement between Adjusted Headline Earnings to Headline Earnings results from our operations in Zimbabwe, which remain excluded from Adjusted Headline Earnings due to us not being able to access the majority of our capital.
Zimbabwe profits of ZAR 2 billion were largely offset by the increase in the balance sheet foreign currency translation reserve, with the net impact an increase in net asset value of ZAR 450 million. Accounting mismatches consist mainly of once-off hedging losses that arise from the transition of the hedging program to IFRS 17, which is now concluded. The impact of residual PLC on our profits continues to decrease as we unwind our operations and reduce cash balances, with a dividend of GBP 3 million paid to the group in 2023. Overall, IFRS earnings increased by 35% to ZAR 7.1 billion. I think this is my favorite slide. Our opening contractual service margin on 1 January 2023 was ZAR 59.8 billion. New business written grew the CSM by 5.3% in 2023. Annual interest contributed a further 9% compared to 5.6% for 2022.
The ZAR 1 billion positive economic experience is driven by actual returns being higher than expected on policyholder funds, resulting in an increase in expected asset-based fee income on most investment and smooth bonus products across the group. A key item to note is the ZAR 6.5 billion that is released into profit at an allocation rate of 9.4%, which is within the expected range, resulting in an overall return of 14.5% on the opening CSM balance. The group's value of new business increased by 37% to ZAR 1.9 billion, and the VNB margin increased to 2.3%. Our VNB margin is sensitive to mix and volume changes between segments. While we saw strong growth in higher margin risk business in MSC and PF, the margin was diluted by a very large Rand value accretive transaction in our corporate business.
Given these outcomes, we will continue to target a VNB range as we prioritize growth in Rand value of new business at profitable margins. The strong growth in VNB is reflected in the ZAR 3 billion increase in embedded value, with operating embedded value earnings increasing to ZAR 7.3 billion. Development costs relate mainly to new platforms to deliver proposition, digital, and advisor platforms to support our integrated financial services strategy. Experience variances improved, with positive mortality and expense variances partially offset by worse persistency. This resulted in a return on embedded value of 11.2%. Group equity value represents management's view of the market value of the group based on a sum of the parts valuation by line of business.
The share price continues to trade at a significant discount to group equity value, and we believe that the combination of improved margins and returns from our core business, as well as the traction on our new growth engines, will close the gap between our market capitalization and the group equity value. We remain committed to our capital management framework, consisting of balance sheet strength, concerted capital deployments, and balance sheet efficiency as a means to enhancing value for shareholders. Our group solvency ratio of 178% remains solid and within our solvency target range. The reduction relative to 2022 is due to the inclusion of our China operations on a South African prudential basis for the first time this year. With approval from the Prudential Authority, this had previously been included on the local Chinese regulatory basis called C-ROSS.
Our view of the economic risks we are carrying aligns much more closely with C-ROSS than the South African basis. Therefore, this change does not impact the group's cash generation, dividend- paying ability, or discretionary capital. We expect cash generation to be between 70% and 80% of adjusted headline earnings before capital optimizations. Operating segments generated gross free surplus of ZAR 4.8 billion in 2023, representing 82% of adjusted headline earnings, with ZAR 0.8 billion contributing to discretionary capital. We continue with various initiatives to optimize our capital, which will support capital generation in the medium term. This then brings us to our discretionary capital. The capital allocation for the year includes the acquisition of an equity stake in the Two Mountains Group, the generic acquisition, and minority buyout of Old Mutual Finance Namibia and IOIs.
In addition, capital support was provided to fund growth and innovation initiatives, with the largest allocation to the Bank Build. ZAR 1.5 billion was returned to shareholders via the share buyback. The December discretionary capital balance of ZAR 1.1 billion has been earmarked for the continued investment in our growth and innovation initiatives. An OMLACSA special dividend of ZAR 2 billion has been approved by the Board. Should regulatory approval be obtained, this will increase our discretionary capital balance in 2024 and will therefore be available to fund growth or a return of capital to shareholders. Our group RoNAV continues to trend upwards, supported by significant improvements in adjusted headline earnings. RoNAV, excluding new growth initiatives, increased by 210 basis points to 13.1%, now above our cost of equity.
Improvements to our RONAV, excluding growth initiatives, are dependent on three factors: the ongoing optimization of our balance sheet, the continued market share recovery of our retail segments, and the impact of external market factors and investment returns. We have delivered on most of our medium-term targets and will continue to focus on improving our net underwriting margin and our RONAV. I am really proud of our team who has delivered this excellent set of results here today, and with that, over to you, Iain. Thank you.
All right. Thanks very much, Casper. So, just moving to the outlook. We aim to continue strategic delivery on both our core and on accelerating the identified new growth engines. From an operational performance perspective, as Casper has highlighted, we will focus on further improving the net underwriting margin and short-term business, mainly through efficiencies. We have delivered now a RONAV of 11.1%, with RONAV excluding our new growth initiatives coming in at above our cost of equity at 13.1%. But going forward, we continue to aim to enhance RONAV through considered capital allocation, optimization, and distributions. From a strategic delivery perspective, we would like to accelerate the transition phase of the bank by completing the industry testing and industry integration that we have in front of us within budget, and we will provide clarity to the market on our path to and timing of profitability in the future.
We will launch our savings and income proposition consolidated onto the Old Mutual Protect platform, and we will decommission our legacy Greenlight platform and unlock further efficiencies in our cost base as a consequence. We will provide the market periodically with updates on the outcomes of our perimeter review execution. So, in conclusion, I'd like to highlight just a few points. Our integrated financial services business is taking concrete shape with a strong value proposition for customers, and the proof points of this lie in the market share gains we've seen, with a strong top-line growth, which actually, on a compound annual growth rate basis from 2021, has been delivered at 13%. We've seen profitable growth as an outcome of deliberate strategic choices across our business segments, and we've seen capital and returns improving as a consequence of both optimizing our capital allocation and improved profitability.
I'd like to just acknowledge and thank all the teams in Old Mutual who contribute every day towards achieving our victory condition of being our customers' first choice to sustain, grow, and protect their prosperity. Thank you, everyone, for your time, your interest, and your support to our business, and I'd like to ask Langa to join me up here to facilitate our Q&A session. Thanks.
Thank you very much, Iain and Casper, for that very succinct presentation and very strong set of results that you've presented here today. With that, I would like to just now move on to the Q&A session. I'm going to improvise a bit; I've gotten information that we've got quite a high number of people who are on the Quarterly Call. So, I will start with the operator. Just some few housekeeping rules. Please introduce yourself. Tell us the name of the firm you're from and who you're directing the question to, and we'll limit the question to just two hands. I'll start first with the first set of hands on the Quarterly Call, and with that, over to you, Operator.
Thank you, sir. The first question we have comes from Andrew Sinclair of Bank of America. Please go ahead.
Thank you very much, everyone. 3 questions from me, if I may. Casper, can I start with your favorite slide, slide 24, I think it was, on the CSM? It looks to me that CSM underlying growth, by which I mean new business plus interest accretion minus the unwind, was about 3.7% on an underlying basis. And I think interest accretion is possibly going to be a little bit lower going forward. So, really, just I just wanted to see if you can give us some guidance on what sort of organic growth potential you see for the CSM medium term. That's my first question. Second question was just if you can give us some more color on persistency you've seen. What's left of your persistency provision now, and what do you think that should cover?
And then my third question was just a point of clarification on the ZAR 800 million spend for the bank that you were talking about today. Is that incremental to what's previously been announced for expenditure on the bank, or is that part of the previously announced expenditure targets? Thank you very much.
Thank you, Andrew, for that question. I'll hand over to Casper to take those questions.
So, let me start then with the CSM. So, obviously, we still see significant growth potential in the size of our value of new business, and we expect that to help the growth rate of the CSM going forward. We'll have to see how interest rates behave going forward to see how sustainable that growth rate is for future periods. But I would expect our value of new business to help increase that growth rate. And then, it's important that the actual allocation of the CSM is dependent on the individual business units, and we have different accretion rates or actual allocation rates for the individual segments. So, it depends on where that value is being allocated from. But we should see continued growth in the CSM, supported by that new business growth, and then in the short term, the high interest rate environments.
On the second item, I think the question was persistency.
Kind of on persistency.
Persistency.
Clarence, do you want to take that?
Yeah. I will give an answer, and I will also invite Nico to help in terms of the technical side of it. And if you don't mind, Iain, I'm going to expand a little bit on it, and I'm going to talk about what we did last year, what we saw last year, and what we invested is going to happen over the next two years, because it's very important that I unpack that, because I think it is one question that is asked quite a lot at an industry level. And how we go about answering it, I don't think it is giving a true picture of what is happening. So, first half of the year last year, persistency was very bad, and we raised or we topped up our short-term provision at H1.
You will recall we took a nice hit on our profits as well as the CSM at that point in time. The reason why we did that, we just wanted to make sure that we protect our outcomes, particularly for the second half of the year. What we then saw happening through H2 was an improvement relative to that strengthened basis that we had strengthened at H1. Then, at the end of the year, we went to the Board, and the Board challenged us and said, "Well, you know, guys, you guys have been raising these short-term provisions or persistency and the like.
You need to do a better job and tell us what is going to happen over the next few years." We then commissioned work from our actuarial consultancy team, because I had a hypothesis, and my team also had a hypothesis, and the hypothesis was, when the cost of living is very high, you tend to see persistency going down. And then the actuarial team did a piece of work, and then they identified the relationship between a number of things. One, the cost of living. Two, real disposable well, real income first of all, household income, real household expenses, and the resultant disposable income part of it and persistency. And the success is simple.
When the cost of living goes up, what happens is that there's an impact in terms of the expenses going up at a household level, the income being usually doesn't go up, because in a country like South Africa, over the past four, five years, real income has not really gone up. And what you then see is its impact on persistency, because people cannot afford. And it plays itself the same way when it comes to credit. The relationship is the same. And then we said, "Well, looking forward, what do we expect is going to happen?" So, we said, "Well, nothing really changed in H2. We don't think in H1 of 2024, much will change, because we think the cost of living, particularly inflation, will still be a little bit elevated.
Interest rates, it will take a bit of time before they start cutting them down, and our belief is that they will start cutting interest rates in the second half of the year. So, we needed to set up what we call an economic recovery reserve. I don't know if you can call it whatever, but we set it up for a two-year period, because we believe that for a two-year period, that recovery will gradually come through. And at the end of the two-year period, we believe we will get back to our normal base, and as such, there won't be any need for any short-term provisions, economic recovery, or whatever recovery you want. So, I hope I have answered this question, because it was very important, because I know I'm going to be asked this question for the next two weeks.
Thanks. Thanks. Nico, is there anything you'd like to add? That was a very comprehensive answer. Thank you very much. On that note of provisions, I might just add a provision myself for five minutes' time, Clarence, that you've taken. But, Iain, there was a question on the bank. Is the ZAR 800 million additional to what?
Let me just add one thing to Clarence's answer first. So, the other thing to just say, I think, is we did update our provisions at the end of the year, and they are consistent from an input into the model perspective with everything that Clarence has said, and we believe that, based on what we've seen, the provisions are appropriately positioned. From the bank build perspective, so, as we've said to you previously, we've adopted a gated approach, and we've always communicated the pieces of funding that the Board has approved at the point where they've been approved. So, the ZAR 1.75 billion, which was the previously announced approved funding, was for the build of the capability. As I said in my presentation, that's now complete. It was done within the budget. It was done within the timeframe.
The next incremental gate that the Board has approved funding for is the transition, which is the ZAR 800 million. It's actually ZAR 798 million, if you want to be completely precise about it. The intention is that that money is sufficient to get us to the place where we take the bank to market. The activities that need to be done in the envelope of that money, we obviously need to retain the team that's working on the bank for the period. We need to do all the industry testing into the 15 payment clearinghouses in the Payment Association of South Africa.
We need to do what's called pavement testing, which is essentially getting a small pilot group of potential customers to take bank cards and go and use them at points of sale machines, ATMs, etc., etc., and make sure that nothing leaks out of the parts in that process, and then we will be allowed by the regulator to launch to the market. So, that's what that funding has been set aside for. It doesn't include any budget for the piece beyond the start of the bank as such, but it should include everything else, as long as we don't have a material delay from a regulatory timeline perspective.
Thanks, Iain, for that answer. Thank you, Andrew, for your questions. Could we please move on, Operator, to the next set of questions? As a reminder, just two per person, please.
Thank you, sir. The next question we have comes from Francois du Toit of Anchor Stockbrokers. Please go ahead.
Hi, guys. Can you hear me?
Yes, we can. Go ahead, François.
Thanks. Can I get some color on the ZAR 1.9 billion other earnings, negative other earnings, other costs in the adjusted headline earnings? How much of that relates to life insurance development costs? Maybe just a bit of color on that. I see a number of ZAR 948 million in the EV statement related to that. Maybe also related to that, are you capitalizing any of the bank development spending costs, or is a lot of that reflected in those numbers as well? Just trying to get a sense of how much of those costs are recurring, how much of those are related to projects and build of the bank, etc. That's the first question. Bit of a long one. Second one, can you maybe comment on the foreign exchange variances in the EV statement?
It does suggest that there's also hyperinflation or very high inflation in other African countries because Zimbabwe is not included in there. Then related to that, how much of your Africa earnings and also your investment return on capital comes from those countries that are affected by high inflation? Not necessarily hyperinflation, but also high inflation. Those are my two allowed questions.
Thanks. Thanks, François. Over to you, Casper. First on the ZAR 1.9 billion.
Yeah, let me start with the second question, also. I'm looking for the other growth. We have seen elevated inflation in a lot of the African countries. In particular, this year, which we commented at the half here, was obviously Malawi. And at Malawi, we hadn't seen the currency devaluation. We'd seen a lot of inflation. So, if you look at Malawi's results, they are supported by very high stock market returns in the year, but we've seen that, obviously, the exchange rate go backwards. So, that return is elevated, and it's one of the what we would call the one source in the results that we can take people through. But for the rest, we all know Zimbabwe, we have the same phenomenon, but that's excluded from our Adjusted Headline Earnings.
We've commented on the extent of profits versus currency devaluations through the balance sheet in Zim separately, so you should be able to see that. But those are the two notable areas that we highlight in the results. So, I'm just going to find my graph that you referred to, so we're on the same. So, of the costs that we've seen in the center and the elevated costs that we saw during 2023, there is a, and I'm excluding the bank and the NEXT176 cost. There is a large element related to the life and savings business, which you would see coming through as either once-off costs in the EV statement. The development costs that you're seeing in the EV statement are more related to costs that are capitalized, that are not coming through our normal income statement analysis.
We can take you through a little bit more detail in the Q&As afterwards. Then, obviously, the bank and the NEXT176 costs are outside the life business, and they also resulted in elevated expenses in the year.
Thank you very much, Casper, for covering that question. I'm just going to balance a little bit. There are a number of questions also coming through from the webcast. Just to start off with, Marius from ALG, he has a question. He says, "We note that your total net investment result contributed a much higher level to RFO than your peers, while at the same time, your calculation of your unallocated insurance cost, after excluding calculations of asset management, banking, etc., are particularly high. Is this an allocation issue? Normalising for this, how content are you with your unallocated cost level, and what are you doing about this?
I don't totally understand the questions.
Okay. So, the question is, the contribution on our total net investment result is much higher. So, that's the first one. To RFO. So, that's just what they're noting. Two, Marius is noting that, at the same time, that calculation is higher than our peers. And he's saying that, after our allocated insurance cost, including asset management, banking, etc., is this an allocation issue or not? Yeah.
I don't think it's an allocation issue, and I'll ask Nico or Ranen to answer. If you look at what's driving our investment return, we had an equity we run most of our equity exposure in a capped portfolio, so we returned 5.3%. The investment returns in our shareholder investment portfolio, on the bond part of the portfolio, was about 9.1%, if I remember correctly. So, that's driving a lot of the higher returns, is the higher interest rate environment. And you would see that coming through in 2 places. Firstly, obviously, the interest we accrete on the CSM, which we've commented was higher than we expected. And then the actual returns on the underlying investments were actually better than what we expected. So, we've seen a higher expectation, firstly. And secondly, we've seen outperformance against that expectation coming through in both segment results and in the shareholder investment portfolio.
Thank you very much, Casper. I'm going to group these two because they are very similar. They are staying with the theme on shareholder costs. One is Jarred from All Weather. He wants just to know what is the quantum of parallel systems cost. Then Violet, too, from Travel, is asking for guidance, what we believe is a sustainable shareholder cost over the next three years.
Okay. So, if we talked I'm excluding NEXT176, and I'm excluding the bank. The total base, I would call a sustainable base, is between ZAR 700 million and ZAR 800 million. And if you run that forward with inflation, we'd expect to return to our sustainable base on a three-year basis, so by 2020, by 2026. But we have this hump in the interim. In the current year, it's not just the additional dual platform costs. We also had quite a lot of costs relating to load shedding and the fact that we need to install generation capability. And we also then had a lot of fuel costs, and we had forex costs coming through that sensor line. So, as I said, run rates ZAR 700 million to ZAR 800 million, expect to come back to that on a three-year timeline.
Thank you very much, Casper. I would like to cover one more from the webcast, then I'm going to go back to the Quarters Call. Baron from JP Morgan, he asked, "May you please unpack the key challenges in the short-term insurance business and when you think you can turn the business around?" I'll throw that over to Iain and Tas.
Okay. So, I'll start, and then Charles can always build if I miss anything. So, if you look at, I assume you're referring mainly to Old Mutual Insure versus to the Africa Regions piece. So, I'll talk to that piece specifically. If you'd like some stuff on Africa Regions as well, by all means, we can add it, but the drivers are a little bit different. So, within Old Mutual Insure, if you look across the various books of business between personal lines, Premier, Specialty, CGIC, iWYZE, and the sole captive businesses, in all cases, the claims ratios for those businesses are in line with or better than market for 2023. So, it's another way of saying we're very comfortable with the pricing and with the quality of the book and the way that the underwriting's been done across those portfolios. Always room for improvement, but broadly speaking, in line.
There's one exception, which is the Premier book. That's the, let's call it, the bespoke commercial lines business. It's quite a small book of business. We have done work to stratify the customer base and look at it between almost a good, okay, and bad experience piece of that book. And we're doing work to look at what the best path is to remediation of that piece. But that's the only piece where I'm kind of concerned from a pricing versus risk perspective. Let's put it that way. The fundamental challenge we have, particularly in the personal lines business, is an efficiency challenge. The cost ratios are too high. I think I've said this for a few results periods in a row. We've done a lot of work to start to optimize that cost base, particularly on the claim supply chain side of things.
That part has been dealt with quite well. However, we've kind of done the low-hanging fruit, and some of the harder bits are in front of us from an efficiency perspective. We've benchmarked the entire thing against international best practice. We understand what good looks like. We understand what needs to be done. However, the what needs to be done includes a lot of tech work and a lot of automation. So, there's a series of automation projects underway in the business, which are likely to still take another year or two to bring to fruition. In simple terms, it's not the complicated stuff. It's the relatively simple stuff from a conceptual perspective, but the hard-to-do stuff from an operational perspective. It's going to just take a bit longer to get it done.
But there's a clear plan, a clear path, and a clear view of what that needs to look like. It will probably take us until sort of 2026 to get to a place where we're more comfortable with that feature. Charles, is that covered? You want to add something?
Not sure where I should stand.
Yes, you should.
Okay. Is it okay to stand here?
Yes.
Yeah. Good afternoon, everyone. I think that's a good answer. Maybe just add two things. I think the one is whether the related claims are a source of problems for us. I think the whole industry battles with this. What do you do about it? So, we've invested a lot of time and money in producing climate models. So, we know, for example, that one of the big challenges in our portfolio is covering risks on the east coast of KZN in South Africa for obvious reasons. We've seen catastrophic levels of flooding there. So, we already sort of know that, but we've modeled it, and it's confirmed our kind of suspicions. The question is, how do you now operationalize that knowledge? What do you do now? Knowing that you have these exposures in parts of the country, do you just exit? Do you price massively for it?
So, the answer is there's a combination of things that you need to do to operationalize your modeling. So, what we are definitely doing is working to implement the findings of those models and then also to grow our business in classes of insurance risk which are not indexed to the weather and are not as vulnerable to the weather. So, not an easy one to do, but I think probably the whole industry is struggling with this, but we're making good progress there. So, it doesn't mean that every time it rains, I have to panic and not sleep. You want to have some peace of mind. And then, yeah, just one of our big growth engines is our Specialty business. And in fact, we made more gross underwriting profit out of Specialty than any of our other businesses, including credit guarantee, for that matter.
However, the issue that we've got there is it's quite a volatile business. So, when you have a claim there, it could be ZAR several hundred million. It could be a major factory fire, that type of risk. So, we have tended to reinsure that business quite conservatively. So, for those of you who have some knowledge of reinsurance, you've got to pick your attachment point. At what point do you want reinsurers to come in and participate in the claim? And the lower your attachment point, the more expensive your reinsurance is, gives you greater peace of mind and less volatility, but it comes at a cost. And I think, quite honestly, we've got to revisit, and we are revisiting, our risk appetite in the Specialty business where we've built up very strong underwriting capabilities. And the team is going to back itself.
We're going to back the team more and say, "Look, we need to buy reinsurance for the big bangs," but we've been doing that perhaps at too conservative a level. So, I think that will unlock a lot of value out of our Specialty business, which at a top line level is growing at 20% per year. So, you can't deny the growth at the top. We just need to harvest more of the value coming out of that top line. Thank you.
Thank you very much, Charles. We are now 8 minutes past 1:00. I'm going to try and drive and maybe see if we can land it by quarter past 1:00. I'd like to take a set of questions again, 2 per person each. I'll take 2 from the quarterly call, then I'll come back to the room because I know I've kind of held you at bay for now. Operator, do we have hands on the quarterly call?
We have a question from Larissa van Deventer of Barclays. Please go ahead.
Thank you. Good afternoon. Two quick ones on the bank from my side, please. The first one, thank you for clarifying. On the ZAR 800 million, that is the additional cost to get to launch. Do you have any estimate of how much you're likely to spend in the year to launch, including marketing, the advertising campaign, and the like? And related to that, can you remind us or tell us what your current break-even target is for the bank, please?
Okay. So, we haven't disclosed a number for the post-launch trajectory of either cost base or profits at this stage. So, the ZAR 800 million is everything we'll spend prior to switching on, as it were. But that would include things like preparing marketing material, etc., etc. But the actual operating costs post-launch, we clearly have a business case. We have a model. We haven't disclosed those items. So, I'm not going to comment on that particular issue. Do you want to say anything?
Casper, anything to add?
Yeah. On the return, the business case for the bank, obviously, that was approved at a, if you look at the longer-term business case, at a rate that's above the upper end of our target range. So, we'll certainly add a lot of value in the longer term.
Thank you. The next question, please.
The next question we have comes from Bankole Ubogu from BofA Securities. Please go ahead.
Afternoon, everyone. Thanks for the time. Just two questions from my side. First is the OMLACSA special dividend approval. Can you just walk us through how that changes the group solvency ratio? You spoke about returning some of that to shareholders. Could that, by any means, result in a below-the-target solvency ratio at any point? Then secondly, you had a huge jump in risk sales in 2023, particularly in the fourth quarter. Could you just give us some more color on the potential growth and whether or not any of that you'll probably not really see as being sustainable? Thank you.
Thanks. Over to you, Casper. I think the second question, I'd like the segment entities on the retail side to tackle, but the first one on solvency.
Just to confirm that, when we declare dividends, we have to take that into account in our ratio already in the ratio that you're seeing at the end of the year. We've already accrued for both the normal dividends that we're going to pay by OMLACSA and the special dividends. The 204% that you're seeing from OMLACSA's capital ratio has already taken into account that special dividend. When it gets paid up to obviously, we haven't included that dividend in our discretionary capital because we only count the capital when it's paid as a dividend to the holding company. There won't be an impact on the ratio. There will be an impact in terms of additional discretionary capital of ZAR 2 billion that then comes through in 2024. I hope that answered.
Obviously, it's obviously then also taken into account in our group ratio because OMLACSA is a part of the group ratio. The dividend has already been fully accounted for.
Thanks, Casper. I'll give Kerrin then Clarence. Strong growth in sales H2, but partly Q4.
Maybe I can go first, and Prabashini can also add. We thought you could be a contributor to that. So, it's a normal phenomenon for the Mass and Foundation Cluster, Casper, because there's a 5-month lag between issuing of the business and the flowing of the first premium. So, you tend to have high sales volumes from an APE basis on the second half of the year, particularly for Q4. So, Q4 last year, the growth rate versus 2022 was about 20% on the retail side. And so, that played a role in terms of that big number. But I'm not so sure, Prabashini, whether there was something.
No, we did have good risk sales, but they were spread across the year. We did have a very large retirement fund deal that flowed in Q4, but that's not risk. Yeah.
Yeah. Thank you. I think we are comfortable. Kerrin, okay, we're comfortable. Thank you very much. I'll hold it at that and come back to the room. Apologies to anyone who we have not been able to get to. In the room, do we have any questions? I will take a very limited set of hands. Going once, twice. Okay, we do not have any questions in the room. We are 14 minutes past. I'm happy to wrap it up here. Thank you very much to everyone. Thanks, Iain and Casper, for the presentation and to the executive team. I would like to just apologize for some glitches to those who were logging in in the web stream in the first few minutes. We did pick that up, and the teams were on it, and it was resolved quite quickly.
So, apologies to all of you who may have had those hiccups. I will now hand over to Iain to wrap up. Thank you.
Yeah. So, all that's left for me to say is thanks very much, Charles, for your time and attention and your support for our business. And look forward to seeing many of you in one-on-one sessions in the next couple of weeks as we go about our roadshow. So, thanks for coming, and I hope you found it useful.