Good day, ladies and gentlemen, and welcome to the Sanlam 10-month 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 for an operator by pressing star and then zero. Please note that this call is being recorded. I'd now like to turn the conference over to Mr. Paul Hanratty. Please go ahead, sir.
Claudia, thank you very much as usual for very efficient service. Good afternoon, ladies and gentlemen. Thank you very much for joining us on this call this afternoon. I'm joined today by our Group Financial Director, Abigail Mukhuba, our Group Chief Risk Officer and Chief Actuary, Mlondolozi Mahlangeni, and the Head of Investor Relations, Grant Davids. We'll all be happy to answer your questions after some brief introductory remarks from myself. This afternoon, we released our operational update for the 10-month period ending 31 October 2022. I believe that the group has posted a strong performance in the context of a very challenging operating environment globally. I'll comment on some of the strategic and operational progress before we move into questions and answers.
From a strategic point of view, we continue to make progress on our journey to building a Pan-African champion. While the steps taken to simplify our business in India are also progressing well. In South Africa, we've completed the acquisition of Alexander Forbes Life insurance book, and we fully integrated it at this point into Sanlam Life. The business has contributed to a strong performance from our life insurance operations in South Africa, and it does now give us a leading position in the group risk market in South Africa. We've also completed the sale of the Sanlam standalone retirement fund administration business to Alexander Forbes, and we're in the process of transferring those clients across.
These transactions simplify our corporate business, and they enable us to focus on areas which we consider to be key to our future success, including building our umbrella fund business, our group risk underwriting business, our consulting services, and healthcare solutions. As you'll recall, to strengthen our healthcare solutions, we have made an offer to acquire a majority shareholding in AfroCentric. The proposed transaction enhances Sanlam's existing ecosystem and improves our client offering. It'll enable us to offer a leading position in health insurance and administration in South Africa, and this will complement our leading positions in life insurance, general insurance, and asset management. Our Insurtech joint venture with MTN, aYo, became effective on the 31 October 2022. We will support the continued growth of aYo as it expands across Africa and facilitates financial inclusion across the continent.
aYo will also contribute in South Africa and access to MTN's vast customer base and distribution network will support Sanlam life and savings. Regulatory approvals for the proposed joint venture with Allianz are progressing according to plan, and we hope to complete this process by the middle of 2023. In India, the merger of the Shriram credit businesses is expected to complete during the course of November, sorry, December. I really hope before Christmas. This will simplify the Shriram group structure. It is expected that we'll be able to create further growth and value over time through both cost reductions and other synergy realizations, primarily in the funding of the lending book. From an operational perspective, the environment remained difficult since we reported half-year results. Despite this, the group recorded a satisfactory performance.
Our life insurance credit and structuring and asset management operations recorded strong growth in earnings, which compensated for a much weaker performance from our general insurance operations this year. The diversification of our group is proving to be a key strength. Life insurance new business volumes were marginally lower, with absolute levels of new business remaining very strong from the high base in 2021. Although retail affluent single premiums declined, they remain well above pre-pandemic levels even after you factor in CPI. General insurance new business volumes showed good growth as some of our corrective actions on pricing and risk selection began to take effect. I'm delighted to say that group net client cash flows of ZAR 57.4 billion was slightly lower, in line with expected lower investment flows in Sanlam Investment Group off a very high base in 2021.
Our life insurance operations recorded a strong improvement in net cash flows due to lower mortality claims and continued strong absolute levels of new business. What was very pleasing to see is that the Net value of covered new business is down by only 1% on a constant economic basis, while new business margin was higher, also on a constant economic basis. Sales trends in the higher margin product lines in retail affluent have improved since June 2022. The group remains well capitalized with our group Solvency Capital Requirement cover ratio of 173% on the 30th of September 2022, well within our target range. In conclusion, the Group's performance for the first 10 months of 2022 highlights the strength of the Sanlam Group and the ability to deliver value in the most challenging operating environments.
While we expect the operating environment to remain challenging for the remainder of this year, we believe we're well-positioned with a robust financial and solvency position, diversification across geographies, lines of business and market segments, supported by a very strong depth of skills in our business to make the most of the environment next year. Corrective action has been already taken to address areas experiencing some challenges in the current operating environment, and we're seeing improvements and trends emerging, with more expected to emerge in 2023. We also expect that those transactions completed in 2022, including the Absa and Alexander Forbes transactions, will contribute positively to the bottom line in 2023. I'd like to thank you all for joining us today.
We are very much looking forward to talking to you in March to cover off the year, full year's results for the group. I'm going to open up now for questions.
Thank you very much, sir. Ladies and gentlemen, if you would like to ask a question, please press star and then one on your touch-tone phone or on the keypad on your screen. If you decide to withdraw the question, please press s tar and then two to remove yourself from the list. Again, if you would like to ask a question, please press star and then one. The first question comes from Michael Christelis from UBS. Please proceed with your question, Michael.
Hi, Paul and team. Thanks, thanks very much for the opportunity. Glad to have gone in first again, Paul, you'll be glad to know. Three questions if I can. Firstly, just on the corporate business, on the recurring premium new business side, it looks like there's been a material deterioration there from an already weak first half number that was printed in June. In the context of some of your peers who have reported very strong new business in this space over the last, you know, couple of weeks around quarter three, is there something that we're missing here from a competitive standpoint? Are you mispricing? Are they mispricing in your view? Is there a pricing issue?
Is there a materially different view, I guess, on group risk in your view than maybe what some of your competitors are pricing at the moment? It's your first question. Second question is, at June, you flagged that you were looking to revise your solvency targets within your particularly the Sanlam Life business, with an indication that that was likely to expand the level of discretionary capital. Can you give us any update there? You haven't sort of mentioned anything in this update on that one.
The third one is really around the deployment of discretionary capital and, you know, in the context of the acquisitions that were done, you know, before your appointment, Paul, you know, being Saham and, you know, quite possibly even BrightRock and AfroCentric as well, that have all been quite disappointing, I think, based on the disclosure we've seen. Is there any change in the way that you and the board assess opportunities for acquisition now relative to before you came to buy? With perhaps a different hurdle rate or some sort of different lens that you look at this relative to, say, buying back your own shares? Thank you.
Great, Michael. Let me take those three questions one by one. Let's start with the group risk question. Although we publish new business numbers and relatives growth rates to the prior year, I actually believe that if you take both value of new business and new business volumes in this space, it's actually the wrong metric. Unfortunately, it's life business, so everybody insists on reporting it that way. I think of group risk business much more like short-term insurance and the sort of way we would report for GI or Santam. To me, the big issue is what are your growth rate and premiums on books and during the year and what is your underwriting margin? We believe that we have a market share in that space that we do not want to expand.
Post the acquisition of the Alexander Forbes business, we have a leading market share in this group risk space. It's a very price-sensitive market. There are also different distribution channels for that business that I'm sure you're aware of. There is business that will be heavily broke and therefore, where price will be much more finely contested. There is business that, you know, comes through distribution channels and where one's pricing power is a little bit better. What I would say is that we are absolutely content with both the volume of business that we have in the group life space and with the profitability of that business.
All I can tell you is that we're very, very comfortable and happy with the margins that we have, with the volumes that we have, and with the return on capital that we're getting from that business. I t's not possible, and I guess probably not appropriate to comment on, you know, what the competitors are doing. I think it's fair to say we've experienced some competitors to be pretty aggressive in that market. You know, all we can say is we're extremely comfortable. Your second question was around sorry, just remind me, Michael. Was it around the.
The solvency targets in a ll life businesses, y eah.
Discretionary capital. We've been working on this. I think what I said at half year was that we, you know, we've had solvency targets and ranges in place. For many years at Sanlam, they were set in the context of a somewhat different and more capital-intensive businesses and business mix in the past. We've also had, you know, a couple of years of experience now. We've been operating under Solvency II or SAM in South Africa regime. The big change that's coming about is IFRS 17. We know that what will happen in IFRS 17 is that there will be some shift of effectively solvency support from the one side of the balance sheet to the other and into NAV. Our intention is to finalize some new solvency metrics with the year-end results.
The whole IFRS 17 is a huge exercise for us, and it's incredibly important that we get through that and we know exactly what our position, our opening position is. With the full year results, I expect that we will outline a new solvency range. You might ask why IFRS 17 has bearing on it, but it does have bearing because we a lthough technically there's no difference between VIF and NAV from a solvency ratio point of view, we have always tended to give a little bit more weight in terms of its capital support to NAV rather than to VIF. I know that technically there's no argument to be made in that regard, but I'm sure you can understand philosophically that we view it as slightly more secure as backing.
On your last question as to, you know, how we want to do M&A going forward, I think we've been quite clear that what we would prefer to do is to have acquisitions that we believe can, you know, we'd rather do fewer but have them more likely to succeed because they're meaningful in scale. If you take something like, you know, the transaction of AXA, you know, it does move the needle for us in terms of assets under management clients and ultimately we believe, you know, operating efficiency ratios. Fewer smaller transactions and perhaps, sorry, fewer small ones and rather try and find transactions that will move, you know, the dial for us. We continue to still target, you know, the same hurdles that we've done historically.
I guess the question always when you look at these things, it can sound very simple in a spreadsheet, but ultimately it does come down to, how much, you know, inherently you feel comfortable with, the ability to deliver whatever in your business case for a transaction. You know, my own view has always been that unless one can see a way that you have some advantage in terms of adding value, then it's very difficult to justify it. It's more of a spreadsheet exercise and a bit theoretical. We try to find ways of doing things where we genuinely think we have a hope of adding some value to the situation.
If you take the AfroCentric one that we're doing now as an example, by taking control of the business, we believe that we'd be able to leverage our distribution and very specifically, our umbrella fund offering and include healthcare solutions for employers alongside pension fund offerings.
Okay. Thanks, Paul.
Michael, do you have any further questions?
No, that's all. Thank you.
Thank you very much, sir. Ladies and gentlemen, just another reminder. If you'd like to ask a question, please press star and then one. If you'd like to ask a question, please press star and then one. We will pause to see if we have any further questions. The next question comes from Francois du Toit from Anchor Stockbrokers. Please proceed with your question, Francois.
Thanks. Just checking. Can you hear me?
Hundred percent, Francois.
That's good. Thank you. Quick one on the retail mass volumes that, I think it was up 12% at half year and up only 3% at the 10-month stage. I know you had a strong second half of last year. Was the ZCC renewal in the second half of last year's phase? Normally, it's in the first half, I think. Maybe if you can just give a bit more color about that, around that slowdown in terms of the growth rate, what that is as a result of. Also, just quickly, you mentioned that your, I think your operational earnings have been impacted by higher expenditure on initiatives. I think the second half of last year, the initiative spending was already quite high and that gets excluded from your Net result from financial services.
Maybe if you can give a well, two things really around that. Number one, obviously give a bit of color around what that spending. Number two, where do you think that project expense or initiative spending will land up at long term?
Okay. I don't know, Abigail, whether you want to deal with the retail mass, because the main issue is around the group, the group risk business, which longer term, you know, is something that we see as more part of the normal group risk business. I don't know, Abigail, do you want to add any color to that?
Sorry, Paul, I was just unmuting. Thanks. Hi, Francois. You also sort to say, the ZCC. Yeah, the ZCC one is two yearly renewal. The renewal last year was pretty much just around midyear, half year. Obviously in terms of the overall group risk business, we are seeing that there's a bit of a, let's say, the inflation impact on the affordability for some of our clients is having an impact on some of that business performance. In terms of comparing like with like, the ZCC renewal was done in the around mid-May last year.
Then, Francois' second question related to.
The project expenses. I can cover that as well, Paul.
Expenses, yeah. Do you want to cover that?
Sure. Francois, the project expenses, the main increases is relating to the Allianz transaction. Again, you're not comparing like with like. The majority of the Allianz transaction expenses were really happening in this side of the year when you compare to last year. Remember we only announced the transactions in May. Most of the regulatory approvals and applications have been happening, let's say, now in this latter part of the 10 months. Again, you're not necessarily comparing like with like. It was lower expenditure last year.
I suppose the other question that Francois had is, where is this thing going to be in the long run? I guess the answer to that depends on how many transactions we do. How much bank lawyers charge, for the work. Obviously the Allianz transaction was a major transaction and one of the most complicated transactions because of the number of jurisdictions that are covered by it. It's a very heavy cost for us.
Thank you very much, Paul. I think one answer you gave, the answer you gave in relation to the retail mass volumes, suggesting that the group part of that will be reported elsewhere. At the moment when funeral business is in a group scheme, it's included as retail mass.
We've got two different businesses writing it. It depends on who writes it effectively. And I think it's fair to say that it's probably not as big a focus area for retail mass going forward, it certainly will remain a focus for Sanlam Corporate.
Okay, thank you.
Thank you. The next question is a follow-up question from Michael Christelis from UBS. Please proceed with your question, Michael.
Hi, guys. Sorry, just one more if I can. Can you comment on mortality variances since June? You know, they looked quite strong for the first six months, kind of at pre-COVID levels. Can you give us any indication whether that's continued, gotten better, gotten worse? Any color at all?
Yeah. Look, I think mortality continues to be a really, you know, positive thing for us this year. We've had, you know, what I would call... I think we mentioned this last year, that our expectation would be to see a return to, we hoped, somewhat normal mortality in 2022. This last four months has been pretty much, you know, on track. I think it is true to say that here and there, you know, if we look through to the actual underlying mortality, it's probably slightly elevated on where we would expect it to be long term. Remember that, you know, this thing is, you know, it does have its own cyclical variations in any event and a little bit of variability.
It's very hard y ou know, we debated at our board today, you know, this comment that, you know, because heart attack claims have been twice as big in earlier years, which is I gather something that Discovery spoke about, we're not seeing anything like that. In the course of this year, we will more or less expect to restore what we used to call the pandemic reserve. We will have a reserve or reserve set aside for eventualities that is pretty much the same size as on a retrospective basis as we had coming into the pandemic, which will tell you that, you know, we've been able to restore that reserve. Of course, you'll know from our original basis changes, that we introduced on all our retail business, a very significant in effect reserve for the future.
I think mortality, Michael, is well under control, and by the end of this year, we will have, I believe, substantially restored the historic reserves back to the kind of level and strength that we had coming into COVID, which I think would be a great achievement for us.
Does that mean on that latter point, does that mean there'd be a like for like increase in profitability next year from not having to tuck away additional mortality reserves? Am I understanding that correctly? You have ZAR 765 million, if I remember correctly. ZAR 750 million.
What will happen is that prices will also come down next year on group risk terms, if you saying.
Yeah. Okay.
You understand. The ability to create further buffers next year will be less than it is this year.
Yeah. Perfect. Understood. Thank you.
My basic planning assumption is that we'd add no more to buffers next year, but it'll obviously depend on how everybody prices things.
Thanks.
Thank you. The next question comes from Baron Nkomo from JP Morgan. Please proceed with your question, Baron.
Yeah. Hi, guys. Just two quick questions. Firstly, could you please briefly elaborate why your underwriting margins in Sanlam Pan GI are softer? Secondly, if you could maybe give some color on what management actions are in place to address the issue in the progress there. Thanks.
Baron, sorry you broke up quite a bit during that. I gather that your first question was you wanted an explanation for the GI margins in Africa tending to the lower end of our target range. Was your second question to do with the management actions taken to address th0t or was it some other?
No. The second one is around management actions, in place to address the persistency issue in the y eah, the retail mass business.
Okay. Okay. Okay. Now with you. All right. In terms of the underwriting margins in Africa, what we saw in Santam was during the course of the year was obviously claims inflation coming through. Premium rates set for an expectation on our side of lower inflation than what we've actually seen, so big inflation. That's led to revisions in Santam, as you all know, of premium rates and across the industry, of course. In Africa, we have seen claims inflation taking hold as well, albeit that has happened slightly later than what we saw it in South Africa. It's quite interesting. You know, we obviously were disappointed that the underwriting margin has moved to the lower end of the range.
In chatting to our colleagues in Allianz, who obviously see a global picture on this front, they were saying that the combined ratio in some in the U.K. and the U.S. markets are running actually well over 100%, and in some cases in the range of 110%-115%. Inflation has actually hit those markets much harder. It's basically claims inflation, and we're addressing that obviously by beginning to revise premium rates upwards in Africa. We are also taking some steps to try to improve the supply chain and get parts on in bulk into some of those markets. The claims process and supply chain in a place like Morocco is not quite as sophisticated as the one in South Africa. Your room to, you know, to take those kinds of actions on the supply chain are less.
Coming to the retail mass point. We have made a very significant change to our remuneration structures in our retail mass business, and we believe that we've shifted the incentives very strongly to put a very high emphasis on persistency. It's mainly through addressing, you know, that point and also stepping up the scrutiny of the quality of business coming through. There's also been some work on making sure that the collection systems are strengthened. We've also taken our foot slightly down on, in terms of growth of new advisors in order to make sure that the quality of the business is really good. It's a combination of steps. We can see the effect of that beginning to come through.
Okay. Thanks, Paul.
Thank you. The next question comes from [Tebogo Mosweu ] from Investec. Please proceed with your question, [Tebogo].
Similar to what Baron was asking around sensitivity, but more focused on interest rates. At what point does the increases in rates actually start to have a negative impact, sort of offsetting the positive impact coming from the liability side? That's the first question. The second one just on Capitec, understanding the transaction, I know you didn't mention it in this announcement, but what are the synergies from a competitive point of view from this business from your business point of view? Thank you.
Okay, t hanks very much. I may not have understood your first question. If it was, can you just clarify or maybe Lozi you might have understood better. Was it an asset liability sensitivity question, or was it to do with the?
Yes. Essentially the question is what the negative impact that higher interest rates would have on disposable income, therefore, I mean, affecting whether it's premium installations or persistency. At what point does that start outweighing the positive impact of discounting from a liability side?
Okay. Please forgive me if I don't fully understand your question because I understand the first part. You, you're asking what, you know, when do interest rates really start hampering consumer ability to pay premiums and so on. The discounting of liabilities, I don't know, Lozi please help me. I'm struggling to see how that would help us because our assets and liabilities basically are matched from an interest rate point of view. I'm not sure that higher rates help us. Lozi, are you can you shed more light on this than I'm able to?
Yes. Thanks, Paul. I think, on the point around our asset liability management, we do run sophisticated asset liability management that ensures that we are immunized from interest rate movements in terms of the discounting impact that Tebogo is referring to. If the question is around whether an increase in interest rates then leads to an impact on persistency that then can have a knock-on impact on our ALM hedging, there the answer is that when we look at hedging our ALF, our liabilities on the ALM side, we do look at the interest rate sensitivity and the second-order impact that that can have on persistence and whether that, the hedging will still work. Both are covered from an ALM perspective.
Yeah. I mean, Yeah. That's why I struggled a bit with the question because for me, actually, the interest rates going up or down is basically neutral, except in the sort of second order, you know, estimation errors. Obviously higher interest rates will have an impact on consumers and their spending power. I guess, you know, the answer to when the latter will really kick in, I think depends a lot on for how long we see interest rates going up and when they're will ameliorate again. I don't know. I can't shed any more light, I'm afraid than that on it. I'm not being very helpful at all. There was a second part to that question, which I've now forgotten.
Yeah. The second one is around Capitec.
Okay. Yeah. Look, I mean, we have an agreement with Capitec that expires in November 2024. If it's not renewed, Capitec, as you probably know, now have a license. You know, they will have to terminate their business with us if they wish to use that license. You know, I think the terms of the agreement are fairly clear in terms of, you know, what would have, you know, the book that would have to be bought out. That's, you know, a process that we will engage with Capitec, you know, over the next year on to make sure that, you know, there's a value transfer in terms of the contract that we have with them.
Okay. Thank you.
Thank you. At this time, there are no further questions. Mr. Hanratty, I'd like to hand over to you for closing remarks. Thank you, sir.
Claudia, thank you very much, thanks again for everything you've done for us this year. To you and everybody else on the call, we wish you all a very, very happy holiday. We hope you get some rest. Most of all, I hope that next year is kinder to all of us in terms of the markets, whether they're equity markets, bond markets or credit markets. Yeah. We wish you all the best, and thanks very much for taking the time to join us today.
Thank you very much, sir. Ladies and gentlemen, that does conclude today's teleconference. Thank you very much for joining us. Have a good evening and do disconnect your lines. Thank you.
Thanks, Claudia.
Thank you.