Good day, ladies and gentlemen, and welcome to the Sanlam Q3 operational update. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing star then zero. Please note that this call is being recorded. I would now like to turn the conference over to Paul Hanratty. Please go ahead.
Irene, thanks very much, and good afternoon, ladies and gentlemen, and thank you very much for joining us on this call. I'm very aware that it is late on a Friday afternoon, and I appreciate you dialing in. I'm joined on the call today by our interim group finance director, David Marshall, who's filling in while Abigail is on maternity leave. The group chief risk officer and chief actuary, Lotz Mahlangeni, and the head of investor relations, Grant Davies. Earlier this afternoon, we released our operational update for the nine-month period to 30 September 2023. I'm going to comment briefly on the strategic and operational progress before we move on to Q&A. From a strategic perspective, we were very pleased to conclude the Sanlam Allianz joint venture in early September.
We're tremendously excited about this business and how it positions us as a true African champion. At our capital markets days in October, we took a deep dive into this portfolio, laying out our view of the growth opportunity in Africa and how we intend to capture it, highly set out our key priorities and the financial targets. The joint venture brings scale, with operations in 27 countries across Africa, holding top three market positions in 16 countries for life and general insurance, and an estimated 16% market share of insurance premiums in Africa outside of South Africa. The benefits of the transaction are not only in revenue and cost synergies but also in de-risking the portfolio through greater diversification across country and product line.
In August, we completed the transaction with Capital Legacy, one of the fastest-growing financial services businesses in South Africa, through its will and estate offering, packaged into a unique life insurance product. The integration of Capital Legacy's innovations and its very innovative product and sales engine with Sanlam's well-established estate, trust, and administration and distribution capabilities, opens up an additional growth avenue for our South African businesses. Our retail affluent business also concluded the Absa LISP, or linked investment platform transaction in November. This, together with the Alexander Forbes LISP acquisition completed earlier in the year, enhances our leading position in the retail savings platform market in South Africa. The Absa Asset Management integration has progressed extremely successfully, and most of the activities that we need to take to happen and now to get the integration complete, have taken place.
We believe that Sanlam's long-term growth profile is significantly strengthened by these various transactions. Turning to the operational perspective, the group continues to perform well. The Net Result from Financial Services and the cash Net Result from Financial Services increased by 19% over the corresponding previous nine-month period. Although the growth rate has slowed from that reported at our interim results, this is in line with our expectations, given that the base effect of a weaker first half in 2022 and the recovery in the second half of 2022 influenced this apparent slowdown in growth rate. The earnings performance of our life insurance, credit, and structuring and investment management operations are solid and in line with the trends seen in the first half of the year.
We're pleased with the underlying performance trends in our general insurance operations as they continue to focus on appropriate pricing and risk management in a very challenging environment. The performance in the third quarter was impacted negatively by weather and fire events in South Africa, as well as some fire and large claims in our Pan-African operations. Overall, however, we still expect the group's earnings for the second half of the year to be very similar to those posted for the first half, which we indicated in the group's interim results, a few months ago. Group new business volumes increased by 13% over the prior nine months, supported by the Absa Asset Management business, very good life insurance sales in the South African retail businesses and in India, and satisfactory growth in general insurance.
The value of new business was up by 28% on a constant economic basis, while the new business margin was higher as well. But as I always caution all of you, be very careful about margin. We really tend to focus on the total value of new business and whether we're satisfied with that or not, because it's very sensitive to mix. The group recorded positive net client cash flow of ZAR 18.5 billion for the nine months, with a very pleasing turnaround in the flows into our South African asset manager in the third quarter. The group's discretionary capital balance was just over ZAR 1 billion on the thirtieth of September. The group remains well-capitalized, with the group solvency ratio well within the target range.
In conclusion, I would say that our strong performance in the first nine months of 2023 reinforces our confidence in the prospects for the group, despite what we all know is a very challenging economic backdrop. We believe the group is well positioned to successfully navigate this environment.... That concludes my opening remarks. We will now open up to questions. So please just let Irene know, and we'll dial you in, and between the four of us, we will try to answer your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, you may press star and then one on your touchtone phone or on the keypad on the screen. If, however, you wish to withdraw the question, you may press star and then two to remove yourself from the question queue. Just once again, if you would like to ask a question, you can press star and then one, and you will receive a confirmation tone that you have joined the queue. The first question we have is from Andrew Baker of Citi. Please go ahead.
Great. Thank you for taking my questions. Three from me, please. The first is on persistency. Just wondering if you've seen any sequential deterioration in persistency on the long duration retail master business in Q3, specifically over the first half? Then secondly, on the new business profit, can you maybe just talk through some of the underlying drivers of the new business profit growth that you've seen, again, specifically in Q3 versus the first half growth rates? T hen finally, just on the India credit business, can you talk about the year-to-date book growth that you've seen, annual collections, and how you, how they vary, or how they vary what you've seen versus the industry as a whole? Thank you.
Andrew, thanks, thanks very much. I think this is a momentous day. You're the first in with your question, so well done. I must say, it's either my line or yours, it wasn't terribly good. So, if we answer something that you didn't ask, it's, let's put it down to the line rather than misunderstanding. I think your first question about retail persistency, I think we haven't seen any deterioration. It's, we've seen much the same pattern in Q3 that we saw in the first half of the year. And we would've hoped by now that we might have seen a slight improvement in that. So, you know, we're undertaking a series of actions later this year and early into the new year, that we hope, you know, will address that.
So we haven't seen a deterioration, but we also haven't seen the level of improvement that we would like to have seen. Your second question pertained to, I think, the new business margin, and why this has got slightly stronger in Q3. It's, you know, as I've mentioned in my opening remarks, I'm always very, very cautious about the margin in life insurance. I think it's a very crude measure. But having said that, you know, clearly our volumes are quite a bit stronger, and I think we did guide a little bit at the half year that we were seeing some pickup. So that trend in Q3 has maintained itself. We're seeing, you know, better new business volumes. And of course, the margin is a very sensitive measure.
So volume definitely helps in terms of the margin. And then mix, there has been quite a strong switch to risk products and to guaranteed life products in the investment space. And both of those have higher margins. So it really is about a shift in the mix of business. And I always remind people that, although it's not a bad thing to have a higher margin, it's not necessarily a good thing either, because it quite often can imply more capital-intensive products sitting in behind us.
And then your third question, which I know had something to do with the credit book in India, I'm gonna ask David Marshall, because aside from acting now in Abigail's place, David is actually on the board in India, and actually looks after the Indian operations for us, now that Heinie is looking after the JV. So, David, I don't know if you've caught the question and are able to help. Otherwise, just ask Andrew to repeat it.
Thanks, Paul. I think I caught the question. Thanks, Andrew. In terms of our disbursements in Shriram Finance, they continued to be excellent in the third quarter. Record levels, continued record levels. Collections continued to be extremely strong, as we are used to seeing in that business.
That's great. Thank you so much, guys.
The next question we have is from Michael Nelskyla of UBS. Please go ahead.
Hi, guys. Thank you for the time. Three from me as well, please. Just to clarify on the persistency experience, can you just confirm that the persistency experience in both Capitec and your own Sanlam business are similar, or is perhaps one of them, you know, much better or worse than the other? Then, secondly, just again, a clarification on your comment around half two earnings. I think you said at the half year that its net result from financial services it'll be similar to half one, not operating profit. Can you just confirm which of those two metrics you're referring to when you talk about half two earnings? And then the third one may be a little bit more, more difficult for you to answer.
I'm not sure if you can give me much color, but I sense quite a lot of excess capital building up over the next 12 months-18 months. And just, you know, your thoughts around where the likely deployment of that capital would be. What's kind of missing in your strategic sort of armory at the moment that we could expect you to maybe deploy some of that capital? Thank you.
... Michael, thanks. So on the persistency, the persistency is a little bit worse in the Capitec book than it is in our own book. And I think that, you know, I don't find that particularly surprising because it clearly doesn't have as high a touch in terms of, you know, client selection and relationships. So it is a little bit worse than in our own book. Your second question related to,
The earnings run rate.
Oh, earnings run rate. Yeah. Okay. So of course, what we're referring to is the Net Result from Financial Services because, you know, the operating number, of course, is got investment return in it, so very, very hard to predict. So it's the, it's the Net Result from Financial Services, specifically that we're guiding on. And then your third question related to how we deploy. You had a sense that capital was building up. I love your, your optimism on that. I think, the way I explain this is I say we've got a tremendous number of moving parts at the moment, and I think you're probably referring to the JV. And in particular, in the JV, we've got quite a few moving parts. We know that the Namibian business will move across, next year.
We know Allianz has an option against us. But we also have a mandatory takeover offer in Morocco taking place. So, you know, I'm being brutally honest here, not evasive. We, we ourselves don't know exactly, you know, what the capital movements are going to be. I think you're right. We'd expect on balance for it to be, you know, to be positive. But we have not... You know, until we've got the capital, we won't really apply our minds to the allocation. But in terms of your, you know, your question, I think, you know, generally speaking, we're, we're fairly happy that we've got most bases covered in the South African context, certainly, you know, the, the more significant areas of it.
We do, you know, we've said it, that we remain open to further investment into Africa as the opportunity arises. But I can also say right now there's nothing particular, you know, on the horizon. But and of course, ideally, we'd prefer there's nothing in the next year because we've got so much. I think you would have gathered that Heinie and his team have an awful lot of work to do, so the last thing we need is a, you know, an acquisition. O f course, India, it all depends on, you know, opportunities. But we-- you know, I think we've been very clear all along that we remain net, you know, biased towards making further investment there, but only at the right price.
I mean, you probably think I'm being very evasive, but, but honestly, we, we don't have any plans, and we don't know how much capital we're gonna have exactly to deploy.
That's, that's clear. Thanks, Paul. I mean, just on the Moroccan one, is there an idea of what sort of potential outlay that could involve?
Yeah, we do know. I mean, maybe David... I'll ask David. David is super close to it because he's actually doing the transaction. What I should say before he answers is that, of course, what you don't know in an MTO is how many people are going to, you know, are going to exercise it. So you know what your maximum exposure is, and of course, your minimum, I suppose, is zero, theoretically. But I mean, David, if you can give some color there.
Yeah, sure, Paul. Hi, Michael. So as Paul says, I think the big variable on Morocco is what the percentage take-up will be. We are in a process there, which was only triggered as soon as the Allianz transaction closed, so quite recently. That was when the process triggered, and then there's a standard process with the Capital Markets Authority there to establish the appropriate price, and that process is now well advanced. So we've got a, I'd say, a pretty good bead on the price for that MTO now. And the main outstanding, which should become clear in the next three weeks, I think, or so, will be what the percentage take-up is.
So this is a good example of one where we, we're sort of modeling a range from, you know, from low to high. And we, we'll be clear on that, I think in the latter part of December. But as Paul has alluded to, we tend, with our capital forecasting, we tend to assume the worst, on outflows and assume that some of the inflows, which could be quite large, you know, don't happen until we know they will. So we're pretty prudent in how we look at that.
Great. Thank you.
That's all I can say at this stage.
Good. Thanks.
Ladies and gentlemen, just a reminder, if you would like to ask a question, you may press star and then one. The next question we have is from Warwick Bam of RMB Morgan Stanley. Please go ahead.
Good afternoon, Paul and team. Thanks for questions. Three from me as well. You mentioned good growth in Morocco. Is this growth rate similar to the first half, or did it improve? Just if you could add some color there. And then on your day one accounting treatment of Sanlam Allianz from the JV, is any goodwill created or one-off income statement implications for us to consider? And then lastly, just the cash net result from financial services was slightly ahead of your standard accounting net result from financial services in the first half, and that converged in your nine-month update. So the first half, it was 30% up versus 26% on an accounting basis, and now it's converged to 19%. Are there any once-offs for us to consider in the move between the six months and the nine months? Thanks.
Okay, Warwick, thanks. Nice, nice to hear from you. Shall we divide those questions up? Grant, do you want to take the question on Morocco?
Yes, Paul, there was slight improvement since half year in Morocco.
It's not a very significant item.
Yeah.
Yeah. So I'm not sure that it's, you know, something particular to flag. Warwick's second question related to, just remind me, Grant.
Sanlam and Jv.
Oh, and how it's going to be-
Accountable.
Yeah, whether there were any funny transition accounting. I don't know, David or Grant, are you able to help with this? I can, I can explain to you conceptually how it's going to work. But in the context of the question, Grant or David, are you able to help?
Yeah, maybe, Warwick, I can maybe just come back to you with more detail on that, on that particular point.
I mean, maybe just explain conceptually what's going to happen is that we're gonna have nine months of Sanlam results in the full year, and then we're going to have three weeks, three months of a combined result, or 60% of a combined result. But there are... The accounting is quite complicated because it looks as if we sell something and then buy something back. So there are a series of transactions that will take place. My understanding is that there will not be any significant accounting impacts of it, although I'm sure it's going to look very confusing. But there certainly are not going to be any earnings impacts, Warwick, from it. What... You did have another question as well on the back of it.
Yeah, that's helpful. Last one, just on the cash net results on financial services.
Mm-hmm.
Just, it's aligned to the accounting treatment in this period, but at the half, when you reported, it was slightly ahead. Just wondering, what the moving parts are there as to why it's suddenly converged.
Oh, okay. David, do you want to cover that or Grant?
Yeah, I can, I can take that one. So there's two main parts to that. The first one would be the amortization of capitalized IT projects. So that would be the first moving part. And then the second moving part would be your negative reserves. And from quarter to quarter, there could be quite significant moves, but generally, I think as a rule of thumb, there shouldn't be a big variation between the two numbers. But I think on a quarterly basis, you could get a bit of moves between the two.
Thanks, Grant.
Okay. Irene, were there any other questions online?
Yes, sir. We have a question from Larissa van Deventer of Barclays. Please go ahead.
Thank you very much. Good afternoon. Really impressive growth in credit and structuring, which you mentioned, a particularly attractive story in India. Could you please give us a little bit more color about what is driving it, what rates? If you are able to isolate the growth in India, that would be helpful. And also, what experience you're seeing on, defaults within that loan book, please?
Okay. No, that's great.
Thanks.
Again, I'll ask David to comment. And I think we've traditionally seen much lower growth than the overall market, but it is fundamentally an underlying market growth story. But David, do you want to cover that?
Sure. Hi, Larissa.
Hi.
I mean, I think it is effectively driven by, you know, continuing improvement in the Indian economy, government spending on infrastructure, and, notwithstanding fairly erratic monsoon rains, a relatively good agricultural season. So I think it's literally just a story of, you know, a lot of tailwinds at the moment. In terms of collections, I'm not sure how much... Grant will have to guide me in terms of how much disclosure we give, and maybe we can follow up with a bit more specific information. But let me just say for the moment that we're very comfortable with the collection experience. We're not seeing any signs of concern in that, or any deterioration in that, despite the strong growth at the moment.
Are you seeing an improvement with the economy now fully open after COVID?
An improvement in growth or,
No, loan collection. Sorry, both, actually.
Collection, collection is always extremely strong in this business. It's actually around 100%. So it would be difficult to see much of an improvement, and that's been true through the period, but it still remains extremely strong, as I said before.
Yeah. Larissa, it's got a very unique model for credit granting, which is basically, you know, an extremely high knowledge of each individual customer who takes a loan. And of course, many of the loans are supported and backed by assets as well. So-
Mm.
That's why traditionally, the business has grown a little bit more slowly than its competitors. That's a very deliberate tactic in order to make sure that the quality of the book remains excellent.
Thank you very much.
The next question we have is from Jared Houston of All Weather. Please go ahead.
Afternoon, Paul and team. Well done on what looks like another very strong quarter performance. Just a question on the group net client cash inflows, the ZAR 18.5 billion. If I remember correctly, it is about ZAR 7.5 billion at the half year results. If you could just give us a bit more explanation on the big improvement and what drove that large number?
Okay. Now, look, I think, Jared, thanks, thanks for the question. I mean, obviously, at the half year, we were very disappointed in the situation. We've had some big outflows. Our biggest sort of bugbear is on the international side. You know, we sold off some of the businesses in the U.K. and so on. So we've been you know battling a little bit there, and that has continued into this period. But what has happened in Q3 is that, we've won some very big mandates on the institutional side into our business. And our retail flows have continued to be, you know, solid and strong.
It seems we have no further questions on the lines, and I would like to turn the floor back over to Paul for any closing remarks.
Irene, thank you very much. And firstly, thank you very much for hosting very professionally. And I really just wanted to wish everybody a good weekend and to thank you very much for taking the trouble to dial in. And particularly, thank you to all of you for your support of our group. And for those of you that we don't speak to before Christmas, we wish you all a very good holidays over December and January, whatever form that takes for you. And we look forward to speaking to you again in the new year with the full year results. So, yeah, thank you very much, and look after yourselves.
Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.