Good afternoon, ladies and gentlemen, and thanks very much for joining us on call this afternoon. We will have an opportunity for a Q&A. We'll take your questions after we've run through the presentation. All presenters are on screen currently. Everyone else joining the call is on mute. When we have the Q&A session, please unmute yourself. I'll hand over now to Paul to begin the presentation.
Grant, thanks very much. And good afternoon, ladies and gentlemen, and thank you very much for joining us. I do understand it's late on a Friday afternoon. With me today, we've got Abigail Mukhuba and Grant Davids, who both you all know well. This morning we announced that an agreement has been reached in respect of various transactions to increase Sanlam's effective shareholding in Shriram General Insurance Company and Shriram Life Insurance Company. The Sanlam board recognizes India as a core emerging market and a strategic pillar to achieve long-term earnings growth and sustainable shareholder value creation for Sanlam. This transaction will enable us to further enhance our strategic position in the high-potential Indian insurance market and to drive long-term growth for Sanlam Group. The transaction significantly increases Sanlam's exposure to the Shriram Insurance businesses while slightly reducing the exposure to Shriram Finance Limited.
Effectively, we have reallocated capital from the credit business line to the long-term business lines that we're very much interested in being insurance. This opportunity to reallocate capital arose following a decision by TPG, a U.S. private equity investor, to exit the Shriram Group after many years of investment in it. Sanlam's economic interest in the Shriram Insurance businesses will now be above 50%. The transaction increases our exposure to the fast-growing Indian insurance sector for a relatively modest cash outlay of around ZAR 2 billion. It's important to note that the terms of this transaction imply valuations of the insurance businesses well above Sanlam's published GEV valuations for these entities, and we will cover that in some detail later on, but well below market-comparable valuations and precedent transaction valuations.
In the short term, we will see a dilution to dividends and to return on group equity value, but we believe that these are justified by the strategic position that this overall transaction package creates for Sanlam and the long-term growth prospects we see for the insurance businesses. As we all know, India is a very important emerging market for Sanlam, and it has very strong growth dynamics with relatively low insurance penetration. Growth in the insurance sector has been strong, fueled by easing of regulatory policies over time, fast-paced digitalization efforts, and increased awareness among customers. India has an urban population of more than 500 million and boasts the third-largest internet user base in the world, spurring the adoption of online purchase and digital payments.
Sanlam is of the view that our two insurance businesses are extremely well-placed to capture the growth given the strength of the Shriram ecosystem and the quality of the management in that business. India was, of course, very heavily impacted by the COVID-19 pandemic. The insurance businesses felt the impacts of the pandemic in 2020 and 2021. However, just like the broader Indian economy, the Shriram businesses have recovered very strongly post-pandemic, and we expect to see this high growth rate continue into the future. Sanlam has had a long-standing partnership with Shriram and India, having first invested in the Shriram Group back in the 2000s when we recognized the growth potential of India. The partnership has grown stronger over this time, and the culture of the two groups is aligned.
This transaction is a natural next step in our partnership, and it accelerates our expansion into India, further strengthening our position in a market that is core to our group's strategy. It enhances our strategic position in the under-penetrated, fast-growing Indian insurance market, underpinned by macro and consumer dynamic tailwinds that are supportive of growth. It develops our existing strategic partnership, allowing Sanlam and our partners to benefit from knowledge-sharing potential synergies across the business and the different capital lines. This transaction maintains disciplined capital allocation with limited additional capital outlay, recycling capital through reducing exposure to credit and increasing exposure in insurance. Most importantly, it builds upon established corporate infrastructure, relationships, and knowledge that we've invested in this region for more than a decade.
A very simple way to think about the transaction is that Sanlam is increasing its shareholding in Shriram General Insurance from 40.2%-51% and increasing its shareholding in Shriram Life Insurance from 42.4%-54.4%. These increases will be funded by reducing the group's shareholding in Shriram Transport and for some cash. Of course, it's very important to note that there is capital gains tax payable on the sale of the SFL shares. So it's overall the transaction required a further ZAR 2 billion of cash from Sanlam. I want to spend a little bit of time on the valuation considerations. As you know, at Sanlam, we look at everything through the lens of group equity value, and the transaction valuation implied for the increased insurance stakes is very significantly above Sanlam's implied valuation in our latest published group equity valuation.
There are a number of reasons for this, and I think these are very important to take note of. On the one hand, we all know that Sanlam's published group equity value retains a considerable degree of prudence. Secondly, it's net of several layers withholding tax in the current structure, where much of the holdings are indirect. It's important to note that some of these will not be applicable to the new stakes that are being acquired going forward. And thirdly, the current, structure that we have, Sanlam has participation in Shriram General via the target shares. Of course, in this instance, Sanlam is not participating in the increase in the investment into, Shriram General Insurance. We do believe that this investment is justified, given that this transaction results in a more strategic position for Sanlam within the high-growth Indian insurance sector.
We are definitely not a market leader in India, but we have successfully carved a niche by catering to a large population of lower-income earners in India, particularly in underserved parts of the country through our partnership with Shriram. I've said many times that I believe that Shriram has created a competitive moat in this space. The implied valuations on this newly acquired tranche of insurance assets are still significantly below market-comparable valuations and precedent transaction valuations. The insurance businesses are now growing rapidly, and we expect these strong growth trajectories to continue over the medium term. We would be the first to acknowledge that our group equity value methodology is conservative, and it's a particularly conservative approach when you value high-growth businesses because we have a great deal of difficulty in projecting very high growth rates into the future.
So the current performance of the businesses and the outlook that we have for them mean that we are likely to be able to revise the group equity values of these businesses upwards in due course. I'll turn now to the expected financial effects. I think this gives you a somewhat different lens, maybe a more traditional lens on the transaction than group equity value. When we look at the short-term financial expected effects, we expect a slight accretion to our earnings represented by the net result from financial services. This will be just under 0.5% accretion in the short term, but obviously we expect this to grow in the medium to long term. We do, however, expect a slight short-term dilution to dividends, just less than 2% dilution to the current dividend trajectory.
It's really important to note that although the dividend payout ratio of the insurance businesses is higher than for the credit business because they are less capital-intensive, the transaction that we have carried out with Shriram has financing impacts inside Shriram itself, and these are expected to reduce the dividends that are received from the holding company for several years. However, once these financing impacts wear off, there will be a very strong uplift to dividends. We expect a slight reduction in return on group equity value for the current year, but the group still expects to achieve its 2024 return on group equity value target. The reason for the negative impact on return on group equity value in 2024 is, of course, that the price that we're paying for the insurance assets is well above the current GEV that we place on these assets.
Group solvency, on the other hand, improves slightly because the Indian insurance businesses are extremely well-capitalized, and increasing exposure to these assets raises the overall group solvency ratio. In the long term, we expect the insurance operations to grow really quickly, and because they're capital-light with high dividend payout ratios, we expect a very positive impact on earnings and dividends in the medium to long term. We also anticipate that at the current growth rates, the return measured by Return on Group Equity Value on the marginal capital deployed will be well above our hurdle rate over the medium to long term. While we can't anticipate exactly when this transaction will close because of the regulatory approvals required, we do expect that the transaction will close in the second half of 2024.
I've now completed going through a summary of the transaction and its financial effects as well as the strategic logic, and we will now open up to questions. So I see a number of people have got their hands up, and we'll ask Emmanuel, please, just to take them one by one, and we'll answer your questions as best we can.
Yeah, thanks. Thanks very much, Paul. Yeah, we do have a number of questions. I'll ask that you please identify yourself and then unmute, please, to ask your question. We'll first go to Warwick Bingham. Please go ahead, Warwick, if you can unmute yourself.
Thanks, Grant. Can you hear me?
We can hear you. Go ahead.
Perfect. Thanks for the presentation, Paul, and thanks for the opportunity. Are you willing to disclose? In the past you have disclosed what the value of Shriram General Insurance is in the GEV?
I think we can back out the life business, but it's difficult to ascertain what you're valuing Shriram GI at specifically. That would be helpful. And then are you able to split the purchase consideration between Shriram GI and Shriram Life? That would also be helpful. And then just to understand or confirm my understanding of what you've just explained with regards to the group equity value, effectively, there's a disconnect between what you're paying in terms of your consideration now and what you'll recognize in GEV, hence the slight deterioration in return on group equity value. Just elaborate a little bit on that and how you'll deal with the GEV valuation of the group. Effectively, is there an immediate impairment? Thanks.
Yeah. Okay. Thanks very much, Warwick. So I think on the detail of, you know, giving you exact valuations, we're not going to do that.
If you, you know, follow what I said, we're clearly going to have to look at a revision either at the half year or at the end of the year to group equity value in any event. To give you a very rough ballpark, we paid roughly for these stakes, and that's why I actually did point out you'd be very careful if you do the math, using the data because you've got capital gains tax to factor in, and you've got the stakes that Sanlam holds in the businesses.
So I have seen one report written already where the I could see that the numbers were wrong, but you can work on the fact that we paid around a valuation of around 2.5x, both for the life and the GI, what we value them at, you know, in our latest December numbers. Coming to the points about the impact on group equity value or return on group equity value for the current year, because we're buying this tranche of shares at well above the group equity value that we will put on that tranche, yes, there will be an impairment in the current year, effectively. And in time, just as for all of our GEVs, effectively, the GEVs, you know, creep up over time as the businesses meet their hurdles and effectively grow into the valuations.
I've explained many times that market prices of assets are almost inevitably above our GEV, but in this particular instance, they're considerably above, which is why we've, you know, tried to go to the trouble of explaining this in some detail.
Thanks, Paul.
Thanks, Warwick. It looks like we have a question from Michael Christelis. Please go ahead.
Yeah, hi guys. I'm Mike Christelis from UBS. Thanks for the time. Maybe two questions if I can, Paul. Just can you confirm that SVS, who's bought the Shriram Finance shares from you, is using its own internal resources? In other words, you're not required to contribute any capital to that acquisition as your shareholder.
And correct. And it's obviously leveraged, which is why I referred to the fact that, for a period of time, there will be a drain on the dividend.
That's why there's a dividend impact.
Okay. So there's no other cash line.
So as that financing is paid off, the dividends will really step up enormously at a future point.
Okay. That makes sense.
And it's a little bit of short-term pain for great long-term gain. Yeah.
Yeah. Understood. Was Sanlam offered to participate in this transaction?
Yes, they were. We did naturally, of course, ask them if they wanted to.
Okay. And then just the last one, I guess, now that you're sitting in a position where you have control, I mean, is there anything strategically that you think needs to change here? Is it broadening the product set, thinking specifically about, you know, health, given that two of your competitors have health products in India?
Is there anything sort of burning in your mind that should be, you know, the next step strategically different now that you have control?
You know, Michael, it's really important to note that and I think I've said it to you many times, we're not jumping at the bit to do health insurance in India. We really aren't. We've looked at that opportunity a number of times, and we're busy, actually, at the moment trying to build out an asset management and wealth management business, which we've prioritized, and we've actually taken the decision not to pursue health insurance at all, at least in the foreseeable future. I mean, it doesn't mean that, you know, we can't change our minds at some point, but I need to be very clear on that.
And, you know, for us, actually, we think that these businesses just need to continue to be invested in and to grow. It's got a great natural momentum behind it. We are having a look at whether there is some synergies between Sanlam and this business. Unfortunately, it's an area that hasn't been looked at historically, but there is some potential as well, for some reinsurance to be provided. But, beyond that, we don't anticipate any major changes.
Great. And then one more, if you'll indulge me, is just, you know, just the thinking behind selling the stake in Shriram Finance rather than funding this out of, you know, other South African resources. I mean, is this an indication that you're happy to exit SF going forward or that you think the valuation's too full?
I mean, I'm just trying to understand why not.
No. You know, I think in the note that you wrote and put out today, you spoke about the transaction being small and complex. This is an unbelievably complicated structure in India. And we had some of the finance asset held indirectly—most of it's held indirectly, actually, and then a little piece that was held directly. And we've got no intention of selling out of the finance business any further than where we are now. This is it.
You know, I've always said to you and to other people that, you know, in a perfect world, obviously, we'd love to own just the insurance assets, but in the ecosystem that we have in India, it's, we're an absolutely vital cog in that, you know, in that finance business. And together with the Shriram Ownership Trust, our current holding actually gives us, you know, full operating control over the entire ecosystem. So it's really important that we don't drop our shareholding from where it is today, and we won't. The thinking was really, you know, about financing in an efficient way. And clearly, the share price has run quite a bit.
In fact, if you look at, you know, we spoke a lot about the group equity values of insurance businesses relative to the published ones in November, but I think I'm right in saying that we've also traded out here at about a 30% premium to what we put on the GEV on the finance business in December. So for us, it was just really about an efficient capital allocation. And, you know, I fully understand that some people may view it as overly conservative and that there's still a long way to run, which we do think in the finance business. But we're hoping that, you know, what we're giving up, we're going to pick up on the insurance side.
Awesome. Thanks very much.
Thank you. We have the next question from Varun Chowdhury. Please go ahead, Varun.
Hi. Hi, Paul. Thanks for the opportunity.
This is Varun. I just have a couple of questions for you. First, being given you have set up to a majority in Shriram Insurance Ventures, would you be looking to further consolidate and acquire stakes of other minorities in the platform, Shriram Insurance platform?
No. What we are currently interested in doing is building a asset management and wealth business, which is very nascent. There is a small business at the moment, but we want to build that out with our partners, in a 50/50 structure going forward, nothing beyond that.
Thanks. Thanks, Paul. Just one more question. Whether the stake you're acquiring, will it be at the holding company level, which is the Shriram Insurance holding companies, or it will be a direct stake?
Yeah, at this stage, at the holding company level.
Sure. Thanks. Thanks a lot.
Thank you, Varun.
Are there any more questions? If there is a question, please raise your hand. I'll just pause briefly to see if there are any more. Doesn't look like there are any more, Paul. I'll hand back to you for some closing comments.
Great. Well, Grant, thank you very much. And thank you to everybody who dialed in. We really appreciate you making the time. And obviously, if you have any more questions, we're more than happy to deal with them. And I'm sure that quite a few will engage with Grant as well in the coming weeks. So thanks very much and good luck to everybody.
Thanks very much to everyone. You made it, powerful. Thank you.
Thanks a lot, everyone.