Good day, ladies and gentlemen, and welcome to the Sanlam Investors and Analysts Call. All participants are in listen-only mode, and there will be an opportunity to ask questions. If you should need assistance, please pre-signal an operator by pressing star and then zero. Also, note, this event is being recorded. I will now hand the conference over to Mr. Paul Hanratty. Please go ahead, sir.
Chris, thank you very much, and good afternoon, everybody, and thank you very much for joining us on today's call, where we will make some brief comments about the Assupol acquisition, as well as our Moroccan MTO. And we'll open up for questions after that. I am joined today by our Group Finance Director, Abigail Mukhuba, Chief Risk Officer and Chief Actuary, Lotz Mahlangeni, and our Group Executive for Strategy, Dave Marshall, as well as the Head of Investor Relations, who I think most of you know, Grant Davids. This morning, we announced Sanlam's firm intention to acquire 100% of Assupol, which is a leading life insurer operating in the retail mass market in South Africa.
This is consistent with our Fortress South Africa strategy, and the acquisition of Assupol does provide us with a very strong platform in the retail mass market, and importantly, one in which we have now going to have control over in the long term. This opportunity arose due to the intended exit of two of the largest shareholders of Assupol, and we believe that the timing is opportune to acquire an excellent asset at a fair price. Assupol will form part of Sanlam's retail mass cluster, and together with Sanlam Sky, Safrican, and the Capitec JV, which I think most of you know, comes to an end in October 2024, will create a strong market position for Sanlam in the mass market segment in South Africa. That will complement our very strong positions in the retail, affluent, and corporate markets.
Just to give you a little bit of background on Assupol. Assupol has a very proud history in South Africa. It's 110 years old, and it's had a focus on public servants, the police in particular. Like Sanlam, it's had a history of being a mutual. It's got a very strong client focus and a shared value creation model, and it is guided by their ethos of serving those who serve. Also, like Sanlam, its mission is to empower individuals and families to pursue their dreams with confidence. Assupol has a strong and widely recognized and trusted brand in its core market segment. Because their traditional market has been government agencies, law enforcement, parastatals, the company does tend to have a relatively defensive revenue base.
The company insures 5 million lives through just over 2 million policies, and importantly, they've got a very well-established distribution with a national sales force, including a network of 2,700 sales advisors, 86 branches, and 8 mobile centers. For us, it's important that it has a very strong presence in the Gauteng market, which is extremely complementary to Sanlam's business, which has always been slightly underweight to Gauteng. Most of its business consists of funeral policies, and the majority of those premiums are collected through salary deductions. It has a very strong, stable, capable management team, and they know this business well. And like Sanlam, it has a very strong focus on the S in the ESG.
From a financial perspective, it reported at the 30th of June 2023, an embedded value of just over ZAR 7 billion and a solvency ratio of 179%. But for the financial year 2023, it reported gross insurance premium revenue of just over ZAR 5 billion. Profit attributable to ordinary shareholders of ZAR 716 million. The value of new business was ZAR 269 million on an NPV of premiums of ZAR 5.5 billion. The company has a solid history of long-term growth, but it's been badly impacted by the COVID-19 pandemic. And similar to the broader trends that we see in the mass market segment, has also experienced a deterioration in premium growth and persistency in recent years, impacted by high inflation and a weak economic environment.
However, in the long run, we see this as a strong growth segment, and we do believe that growth will slowly begin to return to this segment of the market. As indicated, Assupol will form part of Sanlam's retail mass cluster. Bongani Madikiza, CEO of that retail mass cluster, will ensure that Assupol gets the support that it needs to flourish in the Sanlam group. Although Assupol will continue to operate under its own brand and identity, we will be seeking opportunities to cross-sell Sanlam products into that space. They're very much a one-product line business to date. We do believe that there's some balance sheet efficiencies, and there are lots of back-office IT and support structure synergies that are available to us now over time. The purchase consideration of ZAR 6.5 billion is below Assupol's last reported embedded value of around ZAR 7 billion.
Together with the long-term synergies that we think we can unlock, both cost and revenue, we're very confident that this asset is gonna deliver a return well above our hurdle rate and be accretive both to group equity value and to dividends. While we have you on the call, we also wanted to mention that we've recently received the results of the mandatory takeover offer that has taken place in respect to Sanlam Maroc. This was implemented as a consequence of the SanlamAllianz transaction, and it was a mandatory tender offer. Sanlam will acquire an additional 23.9% of Sanlam Maroc, taking the shareholding of SanlamAllianz to 86% of Sanlam Maroc, with ongoing local shareholder participation obviously making up the other 14%. This increases exposure for SanlamAllianz to Morocco, which we believe is a good thing for the joint venture.
We regard the price paid in the mandatory takeover offer as fair, and we do expect to earn our hurdle rate on the additional stake. On the matter of funding, the funding for both of these transactions will form part of the group's overall capital plan. There is absolutely no intention to issue any equity to fund these transactions. We will use cash resources of the group. There are quite a number of moving parts, which I'm sure you appreciate we cannot go into in any detail, but we can assure you that we have the cash resources, and if necessary, debt capacity, because we have a very low level of leverage to deal with the funding of these transactions. With that, I will now open up for questions.
So, Chris, if you wouldn't mind opening up the line, and we'll deal with the questions.
Thank you very much, sir. Ladies and gentlemen, if you do wish to ask a question, please press star and then one on your touchtone phone or on the keypad on your screen. You will hear a confirmation tone that you have joined the queue. If you wish to withdraw your question, please press star and then two to remove yourself from the list. Our first question is from Andrew Baker of Citi. Please go ahead.
Right. Thank you for taking my questions, and congratulations on the acquisition. I guess the first one, are you able to say anything more on the funding mix between cash and debt? And then secondly, can you just give us a sense of the competition today between Sanlam and the Assupol business? And I know you said it was complementary in terms of geographic mix, but how are you gonna handle that going forward? Because presumably, you'll still run up against each other because it's a standalone business. And then thirdly, are you able to just give a little bit more detail on the products that you hope to cross-sell between the two businesses? That would be really helpful. Thank you.
Andrew, thanks, thanks very much for your questions. And, please, to my colleagues, who are online, please feel free to add, subtract, or correct. And on funding mix, you know, without wanting to go into any detail, we have quite a number of transactions, that are, or movements in, the capital structure that are taking place at the moment. So you will be aware, for example, that there is an option for Allianz to take up their share of the JV, and there's a very specific time period for that to take place in. And, that'll coincide more than likely with the closing of this transaction. So it's absolutely impossible for us... I mean, as you know, money is fungible.
So, you know, we've got a variety of movements taking place at different times, but we've modeled under all scenarios and, you know, we may need a little bit of debt, we may need a little bit of bridging finance, but it's completely, it's really simple for us to handle. And I think the important point is that, firstly, as I mentioned earlier, that there's no equity issuance required. And secondly, if there is any movement between, you know, cash resources and debt, actually, it'll be de minimis in terms of the overall leverage in the group. So, although I'm sure you'd like me to go into a lot of detail, I unfortunately cannot. In terms of competition, it's a great question.
We do see Assupol in the market, and they're particularly strong in certain segments of the market. They've got an extremely good brand and reputation and a good sales force. So I think, you know, the question of competition is valid. They've got a very different geographic footprint to us, so that is helpful. I think one interesting point to note is that we do look after the police health insurance scheme as well at Sanlam already. So you can see some immediate benefits in that direction. In terms of, you know, the base issue, I guess, is, you know, how much can we cap, can we cannibalize each other's business?
By putting all of these businesses under Bongani, we, although we will allow Assupol to run as a separate entity, we will ensure that things like commission arrangements do not permit one of the businesses to capitalize the other one's book, because that would be absolutely senseless. So we will control the rules of distribution and commission, you know, for the businesses, so they can compete as aggressively as they want, but they can't churn each other's book. In terms of products, you know, I think one of the big challenges for this segment of the market is to widen the product sets that are offered, and this is something that we're addressing inside our own business as well.
So, if you talk about which other life products, you know, should be distributed, I mean, there is a need, there's a very big need to distribute products like, you know, normal, proper, not proper, but normal, whole life insurance way beyond just the need of the funeral, retirement, savings products, retirement annuities and the like. There's a massive need to address the absence of wills in this market, and clearly we're very well-placed to do that, with the Capital Legacy business. There's also a need. I'm sure you're aware that we have a very small, you know, credit business. And again, this is a product that is not currently available to our Assupol customers.
They, as you will have noticed, have a very big branch network, and that's very helpful from a, you know, a credit distribution point of view. So there's quite a widening of the product set that's gonna be required. And that's why, although we're not, you know, immune to the, you know, the opportunity of, of pursuing cost synergies, there are clearly some big revenue synergies in this as well. I don't know if any of my colleagues want to add or correct anything? I think they're all silent, so I'm going to, in the absence of anybody jumping in, if there's any more clarity you need, please just, just ask.
That was very helpful from my perspective, Paul. Thank you.
Thank you very much. Ladies and gentlemen, just a reminder, if you do wish to ask a question, please press star and then one. The next question is from Michael Christelis of UBS. Please go ahead.
Hey, Paul. Thanks very much for the time, and the details. Maybe if I start with three questions, if I can. Firstly, you talk about earnings, but clearly, Assupol reported under IFRS 4. Can you talk a little bit about the impact that IFRS 17 is expected to have on those earnings? In other words, can we expect this to be the number that comes into your net results from financial services, all else being equal, or would there be material changes required from an IFRS 17 perspective? The second one is just around the EV. And it's a difficult question, I assume, for you to answer, but do you have a sense of what the EV looks like on a Sanlam basis?
In other words, you know, you've got a strong track record of, of very conservative EV calculations.
Mm.
You know, if you applied that to Assupol, would the EV still be ZAR 7 billion, or would it be materially less? And then just on the EV as well, I mean, the RoGEV at 12% is not fantastic, and it looks like it's largely driven by a VNB collapse. If you look at it relative to 2019, it's about half of what it was. I mean, is this a business that can achieve... You talk about your hurdles. Is that risk-free + 4, or you're talking about the stretch of risk-free + 17?
Okay. Michael, great. Thanks, thanks very much. It's lovely to hear from you, as always. I wrote down on my piece of paper a list of names, and I had yours first because you're normally first. So, but Andrew beat you to it. I'm gonna start with, you know, the first question. I'm going to actually, Lotz and Abigail, if they want to add anything around the IFRS 17 question. So, Assupol has not yet adapted their accounting to IFRS 17. So, you know, we-- and we have not yet been able to figure out the impacts of exactly what IFRS 17 will look like.
I think there's also, and you'll appreciate this, that there is, once it comes into our group, the IFRS 17 numbers may not, may not look exactly as if it stood alone, because there's quite a lot happening, you know, beneath the surface at the Sanlam level as well. So, I don't know if Abigail or Lotz can, can add anything, but let me say there aren't any great concerns about, you know, the earnings coming through. Your question on the EV is a very important one. We have been through quite an extensive period of due diligence on this asset, and one of the areas of focus was undoubtedly, you know, the embedded value. And we spent time, our actuaries have spent time with this, going through this.
You know, clearly it wouldn't be exactly the same, but we satisfied ourselves that, actually, it was a reasonably prudent striking of the EV. And so while there may be some differences, we don't expect it to be very material. And again, I'll ask Lotz, because he was personally very close to that aspect also of the EV. Your last question is around, you know, VNB and sales. And there's no question that if you go back a number of years, this business regularly produced strong premium new business premium growth, strong VNB, and there has been a very sharp deterioration in that in recent years.
Our expectation is that under our ownership, and with the right management, and oversight of this, we would expect that management team to get back to their historic growth level. But your question on, you know, on returns, we would expect this to be above the top end of our stretch hurdles. You know, if you think about it very simplistically, you know, the Embedded Value, of course, itself implies, you know, a return along the lines of the discount rate. And then we expect the synergies to be very significant. And remember, the cash flow duration in the book is relatively short, so it's not as if you're projecting these things out 20, 30 years. The bulk of the cash flows, you know, are fairly early on.
So, you know, when we turn it around and do our calcs, we would expect to get a very healthy return, and the assets should be accretive to us. But the reason we're buying it is not just the market. It is to, you know, to make sure that this management team returns to a path of growth, and we believe that they will be able to do that. Lots or Abigail, can I ask you please to deal with the IFRS 17, which I have to admit, is my least favorite subject, but an important one, and Lots also on EV?
Thanks, Paul. Nothing to add. You're correct. Their year-end is June, so IFRS 17 is actually applicable to them a year later. So we don't have that information as yet.
Yeah. Hi, Paul. Then on the EV, we did, as part of the due diligence, as Paul indicated, review the EV assumptions, and we looked at the EV on an overall Sanlam basis, and we're comfortable with the level of prudence that was included in the EV basis. And that was used as the basis on determining what was the price to pay for the business. So we are comfortable with the EV basis, and we don't expect any adverse consequences once it comes onto the Sanlam basis. Thank you.
Great. Thanks very much.
Nothing better to add on the RoGEV point. Paul has covered everything there.
Yeah. Yeah. Thanks.
Thanks, Michael.
Thank you very much. Thank you very much. The next question is from Francois du Toit of Anchor Stockbrokers. Please go ahead.
Hi, guys. Can you hear me?
Yes, we can hear you fine, Francois.
Excellent. Thank you. Most of my question's been asked, around the return on embedded value, and IFRS 17 . My other question I've got is around the capital requirements within the business. Have you had a look at what the SCR would be if it was... Or how much SCR would increase in Sanlam Group if it was added to your group, as a freestanding entity, Assupol's solvency capital requirement was ZAR 4.4 billion. Obviously, there will be a lot of, diversification benefits, right? So it should be less than 4.4. Is that, is that the way to look at this? That's the first question. Second question is around corporate costs. I think corporate costs in Assupol was around ZAR 70 million.
Can you give us some sense of how much of that corporate cost would disappear within the Sanlam Group as well?
Okay. Thanks very much. I'll ask Lotz, you know, to cover the capital question, but you're quite correct. You know, although, although Assupol will run as a separate entity, we would expect in time, in the event to, you know, to, to work off the Sanlam license. But even without that, I think, Lotz will correct me if I'm wrong, we, we can take credit for the diversification. So, and, and that's why we did mention that, you know, there are some balance sheet synergies. The thing I always remind people, those are one-off in nature, right? Because you do it, and that's, it's done. It doesn't help you past the initial little bit of wind in your sails, which you get.
In terms of cost, I think it's fair to say that, you know, there, we, we do expect there to be considerable amount of cost synergy. And not, not just on, on overheads, but, but Assupol themselves have plans to baked in to try to, you know, upgrade their IT systems and so on, and they sell pretty much the same products as we do. So we see a lot of synergies down the line in terms of spend on, on, on IT systems and that kind of thing. So we don't want to go in any detail today. And you can also appreciate that until the transaction is cleared by the Competition Authority, we can't engage at the level of detail required to do detailed planning. We can simply make estimates.
We're in exactly the same boat with the Allianz transaction, and it's, it's turned out afterwards that, you know, the assumptions we made about the kind of level of savings, you know, will exceed those easily. So, you know, we're fairly confident that the, the kind of costs that we've, we've put into our target returns will be exceeded. Lotz, I don't know if you can help a bit on the capital side?
Yes, Paul. I think the SCR requirement was ZAR 4.4 billion at 32. And their own funds were ZAR 7.9 billion. That gave them 179% SCR coverage ratio. As part of the consideration for the transaction, we have looked at what the impact of that would be on the overall Sanlam balance sheet. Given that we do treat some of our South African-based insurance entities as part of their accounting consolidation group, there will be some capital benefits that will come through there. So the delta impact in terms of from an SCR perspective will lead to a benefit. And then of course, over time, there'll be other benefits that we'll look at.
... So I'm right in saying that it's not a huge issue, though. It is true that there's a synergy, but it's not very material in the context of the overall deal there, hmm?
No, that is correct, Paul. That is correct.
Thanks, guys. That's all for me.
Okay.
Thank you very much. Ladies and gentlemen, a final reminder, if you do wish to ask a question, please press Star and then One now. We'll pause a moment to see if we have any further questions. We do have a question from Sarine Barnard of Ninety One. Please go ahead.
Hi, everyone. Just a quick question. Paul, you talked about some of the issues that this business has faced, like persistence, et cetera. Can you maybe just talk a bit about the new business? If I look at the recurring APE, it's still at about 40% of the level it was in 2020. What is the, what is the issue there? Thanks.
Yeah, thanks very much, Sarine. So look, you know, this is a business that faced, you know, actually, we had a not dissimilar situation in BrightRock, if you'll recall. So the problem with any business that is effectively a monoline business, particularly one that is a mortality-only business in a pandemic, you know, it's very problematic. So the management had to be very, very cautious about, you know, volumes. As you know, in this particular market segment, sales, you know, cratered very badly. And of course, that meant that, you know, your financial advisors were put under huge pressure. Many of them, you know, left the industry.
People like ourselves, with deeper pockets, you'll recall, were able to provide financial assistance to advisors to keep them through. So this is a business that's actually been, you know, quite hard hit, you know, in that period. They had also started up some businesses a few years ago in the direct marketing area that had actually, you know, grown their sales. But I think the quality of those were quite poor, so management turned those off. So, I mean, they could sort of batten down the hatches, if you like, from 2020. And I think we'll now be able to, you know, open these hatches up again and get things moving.
So if you compare the advisory force, you talked about 2,700 agents. Was that force substantially higher, if I look at the history back to, say, 2019, 2020?
I think it was a little bit higher. I'm actually trying to recall now from memory. But the problem you've got is not just the numbers. So the one thing that happens in those advisor forces, in that particular industry, is that your years of service have an absolutely massive impact on your productivity. So if you replace your staff with... If you lose people, and you then replace them with new and inexperienced people, your productivity absolutely craters. So that will be a factor, you know, in that space, for them as well. But I think it's therefore a little bit smaller, but I think it's also the years of service have reduced over this last few years.
Great. Thanks so much.
Thank you. The next question is from Jarred Houston of All Weather. Please go ahead.
Hi, Paul. Thanks, thanks very much for the time. Just a couple of questions from me. Just trying to understand how the management team just manages the complexity of another acquisition, just, just given we've, we've recently had the Capital Legacy deal, Capitec, and the SanlamAllianz combination. There's just a lot going on at the group. Just to understand how you're managing all these acquisitions at the same time. And the second one is, just when you look at the capital allocation tree, how you would weigh up this acquisition against potentially buying back your own shares? Thanks..
Okay. So I guess the issue of how we handle, you know, all these, you know, projects and acquisitions is sort of a perennial question that comes up. And I'll give you the same answer we always give, is that, you know, a transaction like this, the actual operational aspects of it now become the focus of Bongani and his team. And, you know, so things like Capitec, Capital Legacy, all those things have, you know, very little impact on him and his team. So we're very careful to make sure that, you know, with any one particular cluster, we wouldn't overcomplicate. We wouldn't overcomplicate things.
Of course, from the center, we manage the progress of the implementation, and we measure the benefits coming out versus, you know, whatever we've postulated going in, because the management teams are very involved in, you know, making estimates of the kind of outcome. I'm very comfortable that we can handle the workload. Your second question... Sorry, forgive me, I have completely slipped my mind. What was your second question?
I was just asking about, you know, when you think about capital allocation,
Oh, capital-
Yes.
How does this buying back your shares?
Yes.
Well, I mean, we've always been very clear that if we can earn above our hurdle rates, and you know, then and depending on the price to price to GEV, it's extremely simple. So round about now, our share price to GEV would be very close to one to 100%, you know, might be a few % above or below, you know, give or take. But for all intents and purposes, it's around, it's trading at around about the GEV. So if you take a business like this, as I said, it's got a very relatively short-term set of cash flows.
So we can work out with a very high degree of confidence what sort of return we're going to get. It's higher, right, than we'd get on buying back our shares by a country mile. You then factor in that, you know, strategically, this is really important to us, because if you look at the long run future of South Africa, not the current South Africa, because the current South Africa, clearly, you know, this is a segment of the market that is under pressure. But if you look at the long-term future, the long-term growth of South Africa hinges around the broad middle market of South Africa, whatever industry you're in. So for us, where we've been relatively, you know, underweight, it's a crucial strategic step for us, you know, to step up.
I always point out to people that, you know, buying back shares versus a long-term, you know, strategic return, you're comparing two very different. If you get the return, that's a purely mechanical calculation, and in this case, it's better for us to do the long-term assessment. But in any event, you have to look at the strategic nature of it, not just the financial aspects. And it's critical for us, and that's why we're so pleased about this, to actually bolster what, in the long run, is a very key, you know, growth segment for us.
Thank you very much. The next question is a follow-up from Michael Christelis. Please go ahead.
Paul, sorry, one more question. In your answer to Andrew, I mean, you spoke about the branch network, and you spoke about the fact that you're a credit product that you don't have high penetration in yet. I mean, are we... Was this bought with the view of turning it into an entry-level branch, or as a first step into an entry-level banking type branch business? I mean, do you have strategic plans to become a transactional bank or lender aggressively in the entry-level market?
No, we don't. And I'm laughing because, as you know, I'm quite allergic to the concept of banking. But we've been fairly consistent in saying that doesn't mean that we won't also... We do, we've got a big credit advice business. We do, and we'll increasingly do, you know, credit products. But we're not going to become a full-scale bank at all. What is-
You're not gonna buy a stake in an existing small bank?
No. Um-
Okay.
It's exactly, it doesn't mean that we won't partner with, with the bank to provide, you know, services. We've actually got a very big payments business, within Sanlam as well. So we think that there's an awful lot we can do without, having to own a bank, Michael.
Okay. Perfect. Thank you, Paul. Thanks for the clarity.
Thank you very much. So we have no further questions in the queue. Would you like to make some closing comments?
Thank you, Chris, very much, as always, for efficiently hosting us all. I just wanna thank everybody very much indeed for... I know that it's a Friday afternoon, and it's late, so thank you very much for dialing in. Yeah, just to wish you all a good weekend, and thank you once again for your interest, and take care.
Thank you very much, sir. Ladies and gentlemen, that then concludes today's event, and you may now disconnect your lines.