Good day, ladies and gentlemen and welcome to Old Mutual's business update. All attendees will be in listen-only mode. There will be an opportunity to ask questions when prompted. If you should need assistance during the call, please signal an operator by pressing star and then zero. Please note that this event is being recorded. I'd now hand the conference over to the CEO, Iain Williamson . Please go ahead, sir.
Thank you very much and welcome to all of you who've joined us this afternoon. I believe we've got quite an attendance. Thank you very much for your time this afternoon. We wanted to take the opportunity to verbally update all of our shareholders following the SENS announcement this morning. Casper and I will provide you with an update on the quarter three year-to-date performance, on our capital position and on the execution of our strategy. I'll ask that if you have not got the brief slide presentation that we sent out. Please do refer to our investor relations website. It is there as well. Moving into the operational update first. At interim results, we showed to you that the business had started to demonstrate growth in our life sales owing to improved productivity compared to the prior year.
We also highlighted the risk of worsening persistency resulting from inflationary pressures impacting customers' living costs. I'll update you on both of these as I take you through the performance through the end of September. Starting with the life sales. Life APE sales are up 17% year-on-year as the momentum evidence that the entrance continued during the third quarter and actually accelerated a little bit. We've seen improved productivity across all of our retail businesses, with volumes reaching 5.4 lives per week for the quarter in the Mass & Foundation Cluster. Issued sales are at the highest level in history of MFC, given the continued return to worksites for field advisors and the positive momentum from Old Mutual Protect.
The positive shift in risk sales mix that we spoke about in previous results has continued even in the context of growth in savings sales. Our strategy for MFC is still to grow the risk sales contribution as it benefits our margins in that segment and lifts the overall group margins as well. In Personal Finance and Wealth Management, sales are in line with 2021 over the same period at ZAR 3 billion and are still above both 2020 and 2019 levels. We started seeing a gradual shift in the mix, which we highlighted to you as a key focus area at the half, with a pickup in our margin-rich living benefit product volumes. Industry surveys indicate that we continue to make progress in recovering market share in life risk business.
In Wealth Management, life APE increased by 3%, mainly from higher single premium sales into the Absolute Growth Portfolios and Fixed Bonds. In Corporate, sales were 11% higher with an improving pipeline, with management focusing on converting that pipeline into closed deals. The growth in sales was driven by higher Group Assurance product performance and annuity sales, offset by lower pre-retirement sales. We have, however, continued to see relatively longer lead times as clients delay on making switch decisions. The recently concluded Bula Tsela transaction will move the Old Mutual Investments Group and Futuregrowth closer to the 51% black owned threshold following the earlier Futuregrowth deal with the African Women Chartered Accountants Investment Holdings Group. We have confidence that this will also contribute positively to the appeal of both Old Mutual Corporate and the investment group.
Sales in our Africa regions were up 21%, driven by corporate volumes as the pivot to corporate approach gained further momentum. Corporate sales now account for 59% of sales in East Africa and 57% in West Africa. That's up from 56% and 52% respectively in the prior period. In China, sales grew by over 100% as savings products were strongly promoted into the broker channel. I'm pleased by the sales performance right across the group, with group life APE sales now 5% above the levels of 2019. Moving on to gross flows. We've seen a 7% decline in gross flows, driven by lower inflows into the investments business. At interims, we spoke about the non-repeat of large new mandates from the prior year and we've seen that reduce marginally in the third quarter.
Flows in the Africa regions were up 28%, buoyed by a strong corporate performance in East Africa. The outlook for flows and Net Client Cash Flow in Old Mutual Investments remains good, with a very strong security flow and pipeline of business. Net Client Cash Flow was at a negative ZAR 1.2 billion at the end of the quarter and that's a 56% improvement on the prior and an improvement on the picture at the half as mortality plans moderated with reduced COVID-19 severity across the group. Our Funds Under Management declined 6% compared to the levels at the start of the year, largely driven by weaker international equity market performance.
We expect the combination of the Futuregrowth AIH transaction at an OMIG level to contribute positively to win rates of new business and to assisting us in defending existing mandates. On loans and advances, we have retained a healthy risk appetite in this area and our loans and advances remain unchanged compared to the prior year. However, Old Mutual Finance loans and advances ticked up slightly by 2% as we execute a gradual reopening, bringing the total OMF loan book to ZAR 15.1 billion. Africa region's loan book declined 8% with lower disbursements due to the tough economic conditions. The group net lending margin remains robust. It pulled back by 180 basis points as we continue to see a moderating credit loss ratio.
Turning to Results from Operations, they were significantly above the prior period, mainly driven by improved profits in the life business as a result of the lower COVID-19 excess deaths in the current period. This is particularly true in Personal Finance, Corporate and in the Africa regions. Despite market volatility, Old Mutual Investments delivered higher asset-based fees due to higher average asset levels. Results from Operations did suffer from two headwinds, one being deteriorating persistency experience in the Mass and Foundation Cluster. This appears to be in line with industry trends given the macro environment. The second factor was the net catastrophe losses related to the KwaZulu-Natal floods in the Old Mutual Insure business. You will have seen in the SENS announcement that we updated you on the capital front, disclosing externally for the first time our discretionary capital.
This is an extension of how we've always assessed our group capital position and I'd like to hand over to Casper to give you further details on that. Casper, over to you.
Thank you, Iain, good day to everyone on the call. Since listing in 2018, we have returned just under ZAR 60 billion to our shareholders in the form of special distributions with a focus on reducing complexity and optimizing our Return on Net Asset Value. These distributions were in the form of a special dividend of ZAR 4.9 billion in 2018, a share buyback of ZAR 4.9 billion in 2019 and the unbundling of Nedbank. The special dividend and share buyback were funded from the sale of Latin America and distributions from Residual plc. Initially, we unbundled 32% of our Nedbank stake in 2018, followed by a further unbundling of 12%. The total value of which was ZAR 49.5 billion. We've been actively managing the group and life companies' Net Asset Value.
The combination of the ordinary dividends and the balance sheet optimizations has actively reduced complexity and surplus capital, bringing the net asset value of the group, excluding Zimbabwe, down from ZAR 115 billion at listing to ZAR 58.3 billion in half one, 2022. If you refer to the group net asset value slide on our website, the net asset value is our Adjusted IFRS equity in green, plus equity in respect of discontinued and non-core operations in orange. Adjusted IFRS equity as the base for Return on Net Asset Value has the same adjustments as Adjusted headline earnings. The active management of the group net asset value allows us to optimize Return on Net Asset Value. Despite the reduction in net asset value, the group solvency ratio has remained strong over the period.
The OMLACSA solvency ratio remains at 212% and at the upper end of the 175%-210% target range. The group remains well-capitalized within our target range of 170%-200%. On the OMLACSA solvency slide, you will see how we have managed our solvency position since listing. The iterative risk margin approval that we obtained in 2020 resulted in a 20% improvement in this ratio. The own funds and the solvency capital requirement reduced materially in 2020 due to the dividend in specie of 12.2% of Nedbank shares in preparation for the second unbundling in 2021. The move between the ratio of 2%-3% in December 2021 and 212% in June 2022 was largely driven by the impact of subdued markets on equity risk and the mass lapse risk requirements of the group, rather than any fundamental change in the balance sheet and risks.
This movement reiterates the necessity for a wide range in the solvency ratio, as well as the alternative discretionary capital disclosure to provide users with a clearer view of our capital. In line with our goals to optimize net asset value. Whilst growing our earnings profile, I would like to elaborate on the framework within which we make our capital decisions and how we allocate capital in the group. We follow a structured approach to new investments, whether they form part of the core or new growth opportunities. The framework ensures alignment to strategy whilst ensuring that the return generated over time will exceed the cost of equity and will ultimately result in an increased return on net asset value.
Other factors such as the fundable nature of the capital and the impact on the wider group operating model are taken into account through the process. We also follow a gated approach on new ventures and ensure a portfolio split of capital allocation between our core operations and growth opportunities. Going forward, we will be disclosing our discretionary capital and the utilization thereof. This will provide a clearer view of how we proactively manage our capital and maximize shareholder value by optimizing the group's balance sheet and capital allocation. Discretionary capital represents the surplus assets that we hold at a group level and that are available for distribution, deployments, or acquisitions. The group's discretionary capital for the current period was ZAR 3.5 billion .
This discretionary capital balance includes amounts earmarked for investments in growth and innovation initiatives, including building our transactional banking capabilities. Distributions paid up from our subsidiaries to the group continue to the discretionary capital balance and our internal capital is managed in such a way that future group distributions from our subsidiaries would be sufficient to fund the holding company distributions. The Residual plc board has approved a dividend of GBP 59 million, which is expected to be paid to the group before the end of 2022. This dividend will increase the discretionary capital at the group level. Further detail on discretionary capital will be provided at the full-year results announcement. Back to you, Iain.
Okay. Thank you very much, Casper. I'm gonna move then on to the strategic update. As we repeated a number of times, we've anchored our strategy in our victory condition of becoming our customers' first choice to sustain, grow and protect their prosperity. We're pleased to announce several developments which bring us closer to delivering on that commitment. We recently announced that our Old Mutual Insure business has concluded an acquisition of a specialty insurance business, Genric Insurance Company Limited. This, however, remains subject to the receipt of a regulatory approval, which is expected to close early next year. We've also closed the acquisition of a 51% shareholding in Versma Management Services, which is an insurance brokerage and that deal was negotiated as a package with another firm called Primak Brokerage, wherein we've also acquired a 51% shareholding.
Our intention remains to broaden our presence across the short-term insurance value chain. Referring to our cost savings target of ZAR 750 million to be delivered by the end of this year. As at the end of September, we had banked more than ZAR 700 million in savings in our life and savings businesses. We continue to strive to extract efficiencies across our business beyond 2022. Given where we've got to by the end of September, we remain confident that we will achieve the targets that we had set by the end of the year. You will recall that at the interims, we announced a partnership with Bridge Taxi Finance. We have since then launched a pilot with them, which at this stage covers 40 taxis in the last month.
We are assessing the early insights that are emerging from that pilot. We'll provide an update on this at our full-year results announcement. We are also pleased that recent external research indicates that we've regained our number 1 position in the risk market in the Mass and Foundation Cluster. In Personal Finance and Wealth Management, we've begun seeing the positive impact of the Old Mutual Protect enhancements that we spoke to you about at the interim results. These continue to deliver results for the turnaround in the Personal Finance sales mix. We saw better traction in quarter three sales and volumes, with average weekly cases on Old Mutual Protect jumping 16% in quarter three compared to quarter two, excluding funeral business. As we've indicated, living benefit products are amongst the most margin-rich of our product set .
This is a combination of the various management actions that we spoke about at the half year. It is still early days in terms of seeing the impact. We continue to focus on delivering on our commitments, we will provide you with further updates on these and more at our full year results announcement. We previously mentioned that we're investing in expanding our transactional capability. I'm pleased to announce that on the 21 October, we received Section 13 approval from the Prudential Authority. This means that we can now go ahead and lodge an application under Section 16 of the Banks Act for the registration of a bank.
The establishment of an entity in the group with a banking license is a natural progression in our core strategy of providing a holistic set of financial services to sustain our customers prosperity. Our current transactional solution, being Money Account, is delivered through a commercial arrangement with a third-party bank. As such, this carries a level of risk for Old Mutual, which we are seeking to manage through our application. Having a banking presence will allow us to achieve three key objectives. The 1 is to enhance our ability to have a regular, natural, business-driven interaction with customers. The second is it gives us proximity to the customer data directly into the payment system and increases our cross-selling opportunities. Thirdly, it gives us access to cheaper sources of funding for our loans as we will be taking deposits.
We are building the bank through a digital-lead functionality that will target the upper mass and lower affluent consumers primarily. The board-approved expenditure to complete the build of the transactional capability is ZAR 1.75 billion. In line with the business case that we have put together, we have incurred costs of around ZAR 850 million to date and approximately 10% of these costs have been capitalized. Once we receive the relevant approvals from the Prudential Authority, launch is targeted for the second half of 2024. However, there are potential costs and risks associated with the regulatory approval process and the timeline to achieving or obtaining that approval. We expect the entity to break even three years after its launch.
As the capability matures post break even, return is expected to be significantly above our target return of cost of equity plus 4%. I firmly believe we're making good progress on the commitments made and have laid strong foundations for continued further growth. I also want to touch briefly on the Bula Tsela transformation transaction. We launched Bula Tsela yesterday with the issue of 205 million new Old Mutual shares to a number of beneficiary vehicles. The take-up of our retail scheme was pleasingly oversubscribed. In fact, heavily oversubscribed, which reinforces the need for schemes such as Bula Tsela, especially amongst those who previously not had the opportunity to participate in such retail schemes. We're incredibly proud to have launched such a truly transformative and broad-based transaction.
In closing, our balance sheet remains well capitalized with the group solvency ratio within our target range. We remain committed to deliver on our medium-term targets, noting that our target for Results from Operations will be very difficult to achieve given the current economic climate and market volatility. We remain on track to achieve our cost savings target for the end of this year and our Value of New Business margin remains within our medium-term target range of 2%-3%. We continue to be concerned about the impact that the current economic environment is having on policyholders' ability to maintain their commitments on either their policies or their loans. At year-end, we will reassess a package of our remaining COVID provisions, which you'll recall are substantial.
The long-term impact of COVID on our book from a mortality perspective, as well as the increased pressure that we have witnessed on persistency in the Mass and Foundation Cluster. We're now open for questions. If I could ask the operator to please assist with outlining how that process will work. Thanks very much.
Thank you, sir. Ladies and gentlemen, you can now ask a question. You're welcome to press star then one on your touch-tone phone or the keypad on your screen. A confirmation tone will indicate that your line is in the question queue. You may press star two to exit the question queue. In the interest of time, we ask that you please limit yourself to a maximum of three questions. Thereafter, you're welcome to rejoin the queue for any additional questions. Just a reminder, if you'd like to ask a question, you're welcome to press star and then one. The first question comes from Andrew Baker of Citi.
Hi. Thanks for taking my questions. The first is on the Mass and Foundation Cluster. I was just wondering if you could give a sense of why the cost of living pressure is impacting persistency but not new business. On persistency, whether you've seen acceleration of the pressure there in Q3 or whether it's fairly in line with the first half. Secondly, just on the bank. Just curious what happens to your existing partnerships with or partnership with Bidvest between now and 2024. Can I just check the timing of when you expect the remaining development costs to come through over the next couple of years? Thank you.
Okay, thank you. Deal with the persistency question first. I think it's hard to say whether persistency has had an impact on new business or not. Obviously, you don't have a comparator to tell yourself, you know, whether it would have been better without the challenges of the economic environment. I think it's fair to say that we certainly saw increased pressure in quarter three. You know, I think there's always a bit of a lag effect. Inflation peaked in July, as I indicated at the interim announcement. I do expect that as inflation starts to subside, that things will improve and that this is, you know, at least partly a significant cyclical issue. But cyclically, you know, it was a little bit worse in quarter three than it had been year to date by the half year.
As far as the bank goes, we do have a very good relationship with Bidvest. We have informed them in advance of what we intended to do. They remain committed to supporting us. We do have a contractual relationship which takes us, you know, far enough that we don't run into any issues with that. There will be a, I think, a continual working relationship between the two parties as we go forward until we are ready to, you know, go it alone, as it were. I think we're managing that situation quite tightly. To date, you know, the conversations with Bidvest have been completely cordial and understanding, so I don't anticipate any particular issues. Thank you.
Great, thank you.
The next question comes from Warwick Bam of Avior Capital Markets.
Good afternoon, Gavin and Casper. Thanks for the time. Three from me, c an you add some more color on the improvement in mix that you've had in Personal Finance and whether we should expect a material improvement in the Value of New Business for the second half in comparison to the first? Second question is just, can you remind us of what the post-tax ZAR value of your pandemic provisions is at the 30 September? Lastly, just the Bula Tsela transaction. Do you have an updated figure as to what the financial impact will be on an Adjusted headline earnings perspective for the 2022 period? Thanks.
Thanks, Warwick. I'll take the PF one and then I'll ask Casper to talk about the provision and I think we've got Taskeen on the line regarding Bula Tsela. As I indicated in my voiceover, the mix in PF has improved. However, you know, it's been a quarter and obviously you've got the first half. I think I wouldn't anticipate that you're gonna see a materially better VNB outcome this year. It's, you know, the trend is our friend in the sense that it's certainly improving. You'll recall that at the half year, we indicated that two things need to happen for the numbers to get back to, let's call it historical norms. One is the mix and that does appear to be, you know, trending in a better direction. The other is the absolute volumes.
Obviously, with absolute volumes being flat on last year and, you know, across the board now, not in the risk business, the risk business is up, we would need to see a further increase in volumes in order to really deliver the full benefit of the margin expansion that we perceive as possible. There's still work to do. I think it's early days but hopefully we'll start seeing the first signs of it this year. I don't think. You know, don't hold your breath for a massive improvement this year, I don't think. Casper, can I ask you to talk about the COVID provisions and then yourself and Taskeen to talk about Bula Tsela?
Right on the COVID provisions, we haven't seen, you know, any significant movements in those provisions post-June. We haven't disclosed, you know, the remaining provision as part of this interim announcement. I think you can work on the numbers that we've described at the half year as a reasonable estimate of what we're still holding at the end of September. Hope that helps.
Going on bullets. Ella, Taskeen, do you wanna take that one?
Thank you. We haven't disclosed that updated efforts to cost on our income statement as part of the same. We do give quite good guidance in the circular and prospectus that we issued earlier this year. I can't remember exactly which page it's on in the circular but there is a sensitivity table looking at what the actual OML price would have been when we eventually launched. In the circular, we had done our initial pro forma numbers based on an OML share price of about ZAR 12.69, if memory serves and we actually priced the deal at ZAR 10.22. That should give you some good guidance.
From a facilitation cost perspective, we'd always targeted getting to an overall facilitation cost of between 25%-30% and we're quite happy to report that we have actually maintained our facilitation costs within that range, being towards the lower end of that range.
Okay.
Thanks, Taskeen.
Thank you. The next question comes from Michael Christelis of UBS.
Hi, guys. Thanks, thanks very much for the time. Three questions from me. I mean, can you just confirm the amount of earmarked for spend on the bank that's over and above the ZAR 800 spent today or does that include the ZAR 800 spent today? Does that include buying out Old Mutual Finance minorities? That's the first question. The second one, I'm a bit perplexed as to why this bank makes losses in the first three years. If Old Mutual Finance is already making a profit of circa ZAR 500 million a year, where is the, you know, I'm obviously not looking for sort of a lot of detail but on what basis do you expect to still make losses, obviously greater than that, when you finally launch it as a bank on its own?
I mean, I appreciate the comments you've given us on capital and that you're gonna talk to us more about excess capital and that's certainly very welcome. What's holding you back when you're trading at half of GEV from buying back shares at this point in time with some of that excess capital? Clearly some of it's gonna be used for deployment but why is there no buyback at this point in time, even if it's small, say a half a billion ZAR to 1 billion ZAR? Thank you.
Thanks, Michael. Okay, a couple of things. On the bank, just to be absolutely clear, the ZAR 1.75 does include the ZAR 800 spent to date. That's the total for the build. We could run, you know, I'll refer to the regulatory risk. We could run into a situation where we're ready to go but we're not ready to launch. Then we'll have a holding cost for a period, you know, while we're not able to generate revenue. If that happens, that will be over and above. The board gating is around, you know, a budget for, to actually physically build and get prepared. Then we will separately go back to them for the subsequent releases of what we require for working capital to run the bank.
It does not include, so it does include the ZAR 800 but it does not include the potential cost to buy off the minorities that exercise is imminent from a dates perspective in the optionality that both parties have. As far as the losses question goes, we've tried to be quite. What's the right way to put this? We've been trying to be quite purist with ourselves around saying, "What does this look like on a standalone basis versus on a synergistic basis?" The pieces we're quoting to you are the standalone figures. You know, obviously we would hope that, you know, when you add the stuff together, you get a slightly different answer.
The reason we haven't done that is in the way that we've disclosed it is because we would need regulatory approval in order to move various parts of the existing stuff underneath the regulated entity. You know, timing is not certain, et cetera, et cetera. That's, hopefully, that gives you clarity on that issue. Then, Casper, maybe you could pick up the capital question. I'm happy to chip in as well.
Yeah. Michael, we normally talk about and you can go back. We normally take capital decisions to our board at year-end and at the half year. That's been consistent over time. We've said to you we'll come back with further detail on the use of discretionary capital at our year-end announcement. I think that's important. I think the, you know, the additional disclosure which we'll be providing consistently should provide investors now with a clear view of, you know, what the, you know, what discretionary capital is sitting at a holding company level. Hopefully, we can give you a much clearer view of the way forward at the year-end.
Thanks, Casper. That's useful. Can you just clarify then that the ZAR 3.5 billion either includes or excludes the level of capital in OMLACSA that's above the midpoint of its target range? In other words, if you move OMLACSA back down to ZAR 185 or whatever the midpoint is by paying a dividend up to Group, is that included in the ZAR 3.5 or is that over and above the ZAR 3.5?
Let me just go back to the comments I made on the call. What we said, what we were trying to explain is that there's quite a big move in the OMLACSA capital ratio. Just based on how the equity symmetric shock and the shocks were applied by the regulators. In times of markets falling, you get a very big benefit, which, as I said in the commentary, you saw quite a big increase in the capital ratio from 203% to 212%, where we hadn't really seen much movements in the balance sheet and the risk profile. It's really this mechanism that's which means that we had to hold quite a wide range. I just wanted to get that point across.
The discretionary capital is clearly the capital that we hold at a group level and therefore any excess capital that may be sitting in the OMLACSA license, you know, will be dependent on that the board, you know, the board declaring that up to be counted at a group level. At this stage, it doesn't include any undeclared capital that's sitting in OMLACSA.
Okay. Thanks very much.
Thank you.
The next question comes from Baron Nkomo of JPMorgan.
Yeah. Hi, guys.
Hi, Kenny.
Yeah, very well. Yeah, just two quick questions from my side. About a year or two ago, you mentioned that you expected a material turnaround in most of your rest of Africa operations by 2023. I just wanna ask if that's still the case. That's the first one. Then secondly, just to get some clarity on your guidance, just reading your outlook statement, you said that it might be difficult to achieve your RFO targets. I just wanna confirm if that means you might be changing the previously stated targets, which was, I think, FY 2019 RFO +5%-10%, or achieving that by or in FY 2023. Yeah, I just wanna get some clarity on that guidance. Yeah, t hat's it.
Okay. Thanks. On the ROA piece, yes, I am comfortable that that turnaround is well underway. Whether you measure that from a total profit perspective, from a total VNB perspective, or from a top-line perspective or from a, if you like, a number of loss-making entities perspective, it is well underway. There's still work to do. There's still work to do, I think the statement we made, you know, in terms of a 2023 picture is not, I don't think what we're managing to deliver at this stage is inconsistent with that. Comfortable with the way that's going. As far as the outlook goes, I think at this stage we're just saying it's gonna be tough. We will obviously as part of our year-end process, we will relook at the guidance that we provided.
The combination of, you know, market pressure, particularly H2 this year with where market levels have been and they've started to recover again recently. It's a bit, you know, it's a bit of a case of gazing into your crystal ball. The persistency pressure will create, you know, do create some quite material challenges around what that picture might look like. It is something that I think we will, again, we will guide more firmly as we head closer to the year-end. Casper, anything you wanna add to that particular issue?
No, Iain. I think you've covered it.
Thank you.
Okay. Thanks.
Thank you. The next question comes from Royce Long of Obsidian Capital.
Thanks, guys. Just two questions from me. The first one, in the first half, your investment income dropped from ZAR 1.1 billion down to ZAR 400 odd million. Given the mathematical link to your dividend, that's quite a headwind in terms of growing your dividend. The second half of last year, the base that you were up against for the full year was around ZAR 1.5 billion. There's no reference in the SENS announcement or in the presentation to what investment income is doing. Could you provide some guidance as to what the run rate is at the moment in relation to the H2 base from last year? Maybe just referencing the answer to the current bond yield that's sitting around 10.7%.
The second question I would have is just going back to your guidance for the full year. Or sorry, for the your return, your RFO guidance. Does this assume that your COVID provisions remain untouched in making that guidance that'll be difficult to meet? Thanks.
Should I go, Iain?
Yeah. Thanks, Casper.
I think on the investment return, we haven't actually given any earnings numbers, as is our normal practice, we've given you operating indicators. We provided quite a bit of detail on the asset class exposures that we have in the interim results. You should be able to see how big our bond, our income, the cash piece, the equity piece and the piece is sitting with the color. You should be able to go and look at that and get a sense of how markets have performed since June to get a sense of the performance of the shareholders investment portfolio. You must just remember that the return on the shareholders investment portfolio is directly linked to the underlying asset class returns. Last year we had positive returns.
This year we've, for example, had negative equity returns and we've had negative bond returns. Those will impact on the shareholders investment portfolio. In terms of our business, where we hold client fees, it's a little bit more complex than that. You have to look at what the average Funds Under Management have done and how those have performed over time. We do, you know, we have seen a smaller impact on, you know, the returns that or the fees that we earn in RFA than what we would have seen on our shareholders investment portfolio, where the returns are directly linked to what happens to those asset class returns. I hope that answers your question.
Thanks.
The second question with the COVID provisions. In terms of the COVID provisions, the commentary that we made at the half year stands. What we said is that we are retaining the provisions at the half year. I said earlier that you could assume that the provisions we had at the half year are largely intact at the end of September. We said that we'll be looking at the impacts of long COVID and the impacts of persistency as part of our year-end position. That work is in progress and we will give you an update at the end on what's happening there.
I mean, just to be clear Casper, are you saying the guidance that the RFA target's gonna be hard to meet assumes that there's no release of any provisions?
For next year. Yes. Effectively, it does.
Okay. Thanks.
I mean guys, one of the reasons that the 2023 picture is difficult to give you a concrete view on is that we also have the transition to IFRS 17 happening at the beginning of next year. We're still working through all of that in terms of, you know, what that might mean in terms of where that all goes. That's why I think we've been a little bit cautious around what we say about next year's picture at this stage. It's one of the contributing factors that makes it more complicated than usual.
Thank you.
Thank you. The next question comes from Tshepo Maseko of Investec.
Thanks for the call. Just a few questions from my side. I think you mentioned that, from a MFC cluster point of view, Old Mutual has regained the number one position. Is that primarily life or funeral? Has this been sort of, margin accretive, or is it mainly, volumes that were pushed, with a slightly lower margin, whether it's mix or, reduced pricing? That's the first one. Secondly, with the introduction of, transactional banking capability, what does that mean for the remaining, stake in Nedbank? Thank you.
Okay. On MFC, the comment that I was making is predominantly refers to funeral business. That is still the majority of our risk sales in MFC. We have seen quite a nice uptick in the volume of underwritten life being sold by the distribution force in that business and it is something Claris is driving. At this stage, I think you can take the comment as being predominantly referring to the funeral picture. Then as far as the impact on the Nedbank stake goes, I think you'll be aware that, you know, our residual holding in Nedbank is, you know, of the order of 5%. I think it's just a little over 5% at the moment. It is hedged.
We, you know, we have said for a while that that now continues to be held as just a normal part of our capital stack to be, you know, dealt with in due course as hedges roll off and things make sense. There's not really any longer a particular strategic rationale or strategic relationship between the two companies other than our history. We remain, you know, we remain on a very good relationship with Nedbank. We have a number of business agreements with them but they All conducted on arm's length terms. In fact, it was something that they're assisting us with as of this morning. It was conducted on arm's length terms. There's no longer a strategic rationale for holding onto a stake like that.
Understood. Just on the break-even target, is there sort of a metric that you can give us in terms of maybe number of accounts or something that we can use to actually track what is in place?
I don't have that off the top of my head and we haven't shared it but I think, you know, we'll take it away and think about when we give an update at the full year results whether we can provide you with some guidance as to how to think about that particular item in terms of the drivers.
Okay, thank you.
The next question comes from Jared Houston of All Weather Capital.
Afternoon, Iain. Casper, thanks very much for the call and additional detail. A few of my questions have been answered, I'll ask a couple of extras. If you can just clarify on the Nedbank stake, when the hedge actually rolls off, when the term of that hedge expires, please. Just on the provision, appreciate that you still have to go through the year-end process, in terms of the any adjustments required to persistency in MFC. Can you just give us a sense, I mean, clearly a lot of time has elapsed since the September period end.
Can you just give us a sense, I mean, is it a case of, I mean, the hole in persistency could outweigh the ZAR ten and a half billion in excess COVID provisions or, I mean, is it a part offset? How much we think about the net impact of those two factors? Thank you.
Okay. Thanks, Jared. I'll ask Casper to talk to you about the basis. I'll just quickly deal with the hedge. It's not one hedge importantly. It's actually a large number of hedges with staggered expiry dates over time. You know, to give you a sense of it. Little pieces will come up for, you know, for rollover at different points. At the rollover point, we'll make a decision as to whether that, you know, we could essentially sell that hedge, sell that piece or roll it over. Casper, do you wanna talk about any guidance?
We obviously haven't given, we obviously haven't given guidance as to whether, you know, the impact is, you know, negative, neutral or positive. We wouldn't have made the comments that we made at the half year around persistency. You know, what we've seen around persistency in the third quarter, you know, warrants our concerns. We, you know, we wouldn't have made the comments around Long COVID if those weren't real issues that we needed to deal with. That's as much as I can say. We are in the process of completing our work on that. You know, along with other insurers, these are the two things that we have to address, you know, by the end of this year. The, you know, impacts of Long COVID and persistency.
They, if they were, if we felt that they weren't serious concerns, we, you know, we would not have raised that at the half year. I think it's important to understand that.
I think we've got time for one last round if anyone has a residual set of questions they'd like to ask.
Thank you very much, sir. The next question comes from Kevin Harding of Investec's Wealth & Investment.
Hi, guys. Thanks for taking the call today. Just one question. If you could just clarify in setting a target for the bank at 4% excess above cost of equity, could you let us know what that cost of equity number is, please?
Casper, do you wanna take that?
Yeah. I must just refresh my refresh my memory. We update the cost of equity on an annual basis. I just need to quickly check that I've got the right number in my head. If you just give me a sec.
Apologies. Kevin, has your question been answered?
I'm still waiting for Casper to respond.
No, I just wanna make sure I give you the right numbers. I've got two in my head.
Kevin, while he's looking up the number, the principle that we use is it's a empirical backward-looking audited calculation that essentially compares the yield curve to the FTSE and spend, you know, as you would expect. It's not a forward-looking kind of assumption-based thing about, you know, what's the beta, et cetera. It's very much a backward-looking empirical calc.
Would the 11.8% that you disclosed at the half year be an appropriate base, to go on?
That sounds like y eah, that sounds like the number that Casper's looking for. As you said, we update that every year. Once a year we will update the number. It tends to move by, you know, tens of basis points rather than dramatically. It does move a little bit every year depending on the prevailing historical data that we use in calculating.
Perfect. Thank you.
Thank you. We seem to have no further questions from the queue. Do you have any closing comments?
Thank you very much. Thanks everyone for your time. I hope you found it useful. If there are follow-ups that you would like to check in with us after this, please do get in touch with our investor relations team and we'd be happy to assist. Otherwise, we look forward to, you know, updating you further when we get to our results in the new year. Thanks a lot.
Thank you. Ladies and gentlemen, that concludes today's event. Thank you for joining us. You can now disconnect your lines.