Good afternoon, and welcome, everyone joining us for Sanlam's interim results presentations for the six months ended 30 June 2026. My name is Tokelo Mulaudzi, Head of Investor Relations here at Sanlam. I will serve as MC for today's presentation and facilitate the discussion with our Group Chief Executive Officer, Paul Hanratty, and our Group FD, Abigail Mukhuba. They are joined by members of the Group Executive Committee who will be available during the Q&A session. Before we begin, a few housekeeping points.
Today's presentation will be followed by a Q&A session, and participants joining on the webcast may submit questions using the Q&A function. Those of you joining on the telephone line, the operator will open the lines after the formal presentation. The presentation, slides, and interim announcements released today are available on Sanlam's investor relations website. With that, it is my pleasure to hand over to our Group CEO, Paul Hanratty.
Tokelo, thank you very much. Good afternoon, ladies and gentlemen, and welcome to the presentation of Sanlam's 2026 annual interim results. As Tokelo said, we are joined today by Abigail Mukhuba and Mlondolozi Mahlangeni, our Chief Actuary. I will take us through an overview of the six months and our strategy, and then Abigail will cover our new reporting framework, our financial results, the business performance in a little bit more detail, as well as our priorities and some guidance for the balance of the year. This 2026 first half has been characterized by the impacts of the US-Iran war and its effect on energy prices, inflation, and the consumer's cost of living. Global markets have held up during the first half of 2026. Although recently, we are seeing markets reacting to government debt levels, ongoing elevated energy prices, and fluctuating views on the investment into the broader AI infrastructure.
Despite consumers feeling considerable pressure across our markets, our new business flows and net client cash flows have been extremely. South Africa, East Africa, and Morocco were all subject to abnormally high claims from severe weather events, and this has put the current year earnings under pressure. Strong earnings growth from our life insurance, asset management, and credit lines have meant that excluding weather claims, and in the general insurance line, some setbacks, the group earnings were in line with our expectations even after allowing for the loss of the Bonitas contract at Afrocentric Investment Corporation and poor earnings out of Malaysia as a result of elevated medical expense insurance claims. The loss of the Bonitas Medical Fund contract will impact second half earnings more than in the first half.
The group has also been working extremely hard to improve the efficient use of cash generated in operations. As a result, the cash conversion during the current year will improve over that in the previous year. This is extremely important as it shields our dividend from the shorter-term earnings impacts that I've just referred to. The first half of 2026 has seen us make excellent strategic progress. In particular, we're delighted with the reshaping of our Indian portfolio and the new partnership with Ninety One in active asset management, both sets of transactions having fully completed in the first half of 2026. Both of these transactions set us up for improved growth and performance going forward. Despite the short-term earnings pressure, we've seen a strong value creation in the first half of 2026.
Profitable new business, excellent operating experience, and uplifts in the value of the group from increased value of Shriram Finance stake and our asset management businesses have driven a strong return on group equity value on an adjusted basis. Core earnings grew by just 1% in the first half of 2026 on a comparable basis, eliminating the effects of the stronger rand and changes in corporate structure. We estimate that the true sustainable underlying earnings growth was around 7%, but that weather-related and other abnormal large claims in the general insurance operations in Africa eroded earnings by around 8%. The group stepped up investment in organic growth initiatives that eroded earnings by a further 3%. Changes to the way we are hedging our risk-adjusted non-financial risk liabilities improved earnings by about 5%.
While this will also impact positively in the second half of 2026, these changes to the hedging of the RANFR will not impact earnings materially in subsequent years. Although, of course, the whole purpose of it is to reduce the volatility of investment variances going forward. Return on equity on an adjusted basis was 18.4%, and we do expect to be able to lift this by 2030 to above our 20% target as our earnings grow and the cash efficiency in our business improves. The adjusted return on group equity value was 15.5% on an annualized basis, reflecting, as I explained, the strong operational performance of the businesses and the positive impact of strategic initiatives in India and asset management. The return on group equity value is dampened by the write-off of the group's investment in Afrocentric and the impairment to the value of the Malaysian business.
Group solvency and discretionary capital both remain sound. Despite the tough macro conditions for consumers, in total, new business was 22% up, and net client cash flow was ZAR 78 billion, representing a very strong increase in the group's assets under management. We saw decent life insurance growth in SA and India, with strong growth from the SanlamAllianz business across the continent. General insurance also had a good year, but the growth of SanlamAllianz in the general insurance line remains disappointing, and this is an area for attention going forward. Our asset management business grew strongly and retained assets well despite the shift to the partnership with Ninety One in the active asset management space. In SA, we continue to see a shift of life insurance sales to living annuities rather than immediate annuities, and as a result, the value of new business margin was 1.8%.
The growth in the living annuity business creates future asset management profits for the group. Turning now to some of the strategic highlights of the half year. India is increasingly becoming an important long-term growth platform for the group. In the first half of 2026, we completed a series of transactions that have strengthened this platform by enhancing its growth trajectory and changing the mix of business within the Shriram ecosystem that Sanlam is exposed to. The introduction of a strong banking partner in the form of MUFG positions the newly capitalized Shriram Finance to strengthen its growth profile by accessing the new vehicle segment of the market, thereby further supporting cross-sell in the insurance businesses. As I said, Sanlam's focus is increasingly on the higher ROE and more cash generative life insurance, general insurance, and capital markets business.
The increased exposure to life in general positions the group well in the fast-growing and underpenetrated Indian insurance market. The continued participation in the broader financial system of Shriram has been strengthened further by increased insurance stakes and the addition of the capital markets business, and it's expected to support future growth in earnings, as well as improve capital efficiency and an increase. The completion of the transactions with Ninety One in both the U.K. and South Africa has enabled us to focus on being a purely solutions lead wealth and asset manager, positioned to deliver the best possible investment outcomes for our clients throughout our various distribution channels.
I'm very pleased to say that we've eliminated the majority of the so-called stranded costs from the business, and a combination of focused businesses, a leaner cost structure, and very strong flows has created a more valuable business for the group. With the completion of the Morocco in-country merger of Sanlam and Allianz's businesses, the group has finally completed the integration of two very large and diverse insurance portfolios across the continent. The operating performance of SanlamAllianz has been mixed. The life insurance line and asset management line has performed well since inception, but the general insurance line has proved more challenging. Post the integration, we're going to focus hard on driving our businesses with a much greater focus on clients and on operating efficiency. We're delighted that SanlamAllianz joint venture has delivered its maiden dividend during 2026.
As this structure has matured post the original transaction with Allianz, dividends have worked their way through the corporate structure, and we expect to see dividends now growing steadily over time out of the joint venture. I want to take a moment today just to thank Heinie Werth in particular, who has been responsible for developing Sanlam's African portfolio over many years and who has led the formation and establishment of the SanlamAllianz joint venture. Heinie can be very proud about building the leading platform on the continent, and we now have a base to drive growth from for many years to come. Heinie is retiring at the end of 2026, and we've appointed Hennie Nel, previously the Chief Financial Officer at Santam, to succeed Heinie from the 1st of September this year.
Santam, as you know, has started to diversify its business into the international markets via the Santam Syndicate 1918, and this has transitioned to a business-as-usual operation following the final approval from Lloyd's. The team in London has now been fully capacitated during the first half of 2026, and it has started to write new business. The unusual accounting for Lloyd's syndicates, where premiums and profits are only recognized over a longer period, whereas costs are recognized fully upfront in the current year, does create a drag on reported group earnings while the syndicate gets to maturity. Turning now to South Africa. Financial services in South Africa are undergoing a profound change, much as in other places in the world.
Banks have increasingly entered the insurance market for simple products requiring limited advice. We've seen ongoing disintermediation in general insurance personal lines, extensive digital engagement, and the growing use of passive investment solutions. Our Indian franchise relies very heavily on an ecosystem approach to servicing its customers across multiple product lines. We are gradually moving our South African operations to be much more customer centric. Our partnership with GoTyme has finally had approval to offer banking services to Sanlam clients, and we will extend these in the coming years to offer better value for money to customers and to permit a more integrated approach to financial services, which we are convinced will promote loyalty from our customers.
Progress has been slower than we would have liked, but we have established the structures and rolled out a number of branches across the country in anticipation of allowing us to compete in the retail mass market, where a combination of digital and physical presence is necessary. We're beginning to train our staff and have started the internal testing of our banking services, and we'll continue to do this for the rest of the year. This will allow us to kick off with confidence early in 2027 as we take our products, systems, and processes to our customers. On that note, I'm going to hand over to Abigail, and she will take you through the detailed financial results. Abigail, thanks very much.
Thank you, Paul. Good afternoon, everyone. Before turning to the group's financial performance, I want to spend a few minutes on how we're embedding our reporting framework, which is being entrenched to provide a clearer, more transparent, and more comparable picture of our performance. When we introduced the new earnings framework, we committed to simplifying and evolving our disclosure in line with investor experience. The measure we introduced, or rather the measures we introduced, are critical to answering three different but equally important questions: how we are doing and therefore how we compare, how performance is trending, and how sustainable the earnings are in the long term. The framework provides different lenses through which the group's earnings can be assessed more clearly, more comparably, and more transparently.
We have clarified what each measure shows and how these work together to assess sustainable earnings growth, cash conversion and dividend capacity, returns on capital, and value creation through the cycle. IFRS-aligned operating profit and dividends remain our anchor for peer comparability returns and performance drivers. Core earnings, the measure we use to manage the business, provides a clearer view of sustainable underlying performance and dividend capacity. The simplest way to think about the three earnings measures is operating profit, including investment variances, gives you a basis for comparison with peers. Operating profit before investment variances gives you a view of our performance over time, showing the underlying trend without short-term investment market movements. Core earnings is our sustainable earnings lens. It reflects the underlying earnings performance of the businesses and is the earnings on which we anchor dividend capacity determination.
Lastly, adjusted headline earnings includes shareholder investment returns, and it represents the shareholder outcome we have achieved. The targets for operating profit and core earnings are aligned because target setting assumes your expected investment returns. In any reporting period, actual operating profit may differ from core earnings as market returns vary from these assumptions. Core earnings, therefore, provides the clearest reference point for assessing performance against target. It smooths short-term market volatility and reflects the underlying earnings capacity of the business. The evolution of our framework is designed to give you a clearer picture of three things: what is operational, what is market driven, and what underpins our dividend capacity. The historical view of net result from financial services is closely aligned with our view of core earnings. The difference now is that we expressly include project expenses in determining core earnings, which was not the case in the past.
We have also removed non-cash asset mismatch reserved, especially the releases across Pan Africa and India. Operating profit, including investment variances, will over time align closely with core earnings, but it is much more volatile and therefore more difficult to judge progress from year to year. I must reiterate that there has been no change in the economics of the business resulting from the change in reporting. There will be ample opportunity to engage with investors on our road shows as well as in the Q&A as well as on the road shows over the next few days. With that, enough of the framework for one afternoon. If we can then turn to the actual financial results. The group created strong value in the first half of 2026.
We achieved a healthy adjusted return on group equity value comfortably ahead of our hurdle rate, and the balance sheet remains in good shape with solvency firmly within our target range. New business volumes and net client cash flows were strong with margins intact, so the base of future profits was strengthened in the period. The foundation of growth within the business is in place, and on the back of management's cash generation and remittance focus, we expect to be able to meet our dividend expectation for full year 2026. Core earnings, however, came under pressure this period, with several factors weighing on the results. I will talk you through these in the next slide. When we look at our businesses, our focus is on sustainable earnings, separating what is specific to this period from underlying earnings generation capacity.
On that basis, if we exclude a number of identifiable period- specific items, earnings would have been up 7%. However, several factors weighed on the reported results. A stronger rand, which reduced the contribution from our offshore operations, severe weather events across general insurance business, operational underperformance in SanlamAllianz General Insurance, our South African health business, and our non-core operations in Malaysia, as well as other deliberate investments in our growth initiatives. A strategic choice we have made to build future earnings capacity. This shows in the near-term losses incurred in credit, banking and rewards investment, as well as the investment in diversification of our India distribution and the Syndicate 1918 at Lloyd's. The revised approach to asset liability management was undertaken to reduce future volatility in investment variances. This helped reduce some of the drag from the growth initiatives and the general insurance experience.
This change is a permanent structural refinement to hedging. We have additional slides in the back of the pack that I won't go through now, but it does give you full reconciliation of earnings for anyone that's interested in the detail. While the weather events and the currency movements were outside management's control, the other factors were within management's control. Management is committed to organic investment as a way to deliver future growth. Areas of weakness in performance are receiving attention. Finally, on top of all this, market movements and strategic project spend weighed on the reported operating profit, which ended at down 7.3%. Looking at performance by line of business also confirms that this pressure is concentrated, not broad-based. Three of our four core earnings engines still grew on a comparable basis. General insurance was the exception, where severe weather and large loss events weighed on the result.
We also continue to invest in modernizing and improving our client experience systems, and that shows up in the higher corporate expenses and other line. This investment is clearly scoped, governed, and tracked and is not representative of unmanaged cost growth. Pressure is concentrated. General insurance was impacted by weather and large losses. Corporate expenses, on the other hand, reflect deliberate investment for future capability. Let me now turn to the decline in net investment return during the period. The largest single driver was in the SanlamAllianz business in Pan Africa, where we saw weaker equity markets, particularly in Morocco, which weighed on returns. The second driver was the unrealized mark-to-market losses on the Ninety One investment following the listed share price decline from levels over ZAR 50 to levels just over ZAR 40 at the end of the reporting period.
In India, bond and equity markets were softer, largely on the back of geopolitical tensions in the Middle East. As a reminder, we report our Indian business with a three-month lag. Partly offsetting all these movements were a number of positives. Higher net investment income from stronger interest and dividends across the portfolio, a closed-out rupee hedge position, and lower floating rates on funding costs relative to the prior period. These market moves were absorbed by the capital portfolio while the underlying income streams held up. On this adjusted basis, ROGEV was over 15%, comfortably above our hurdle rate. This is an important outcome because it shows that despite the short-term earnings pressure, the group continued to create real economic value in the first half.
The main positive contributors were new business growth, favorable operating experience across the group, the uplift in the SFL valuation, and the valuation uplift from the Ninety One transaction. Together, these reinforce the quality of the value created in the period. This was partly offset by the write-downs in weaker non-covered experience in the South African health and credit business, together with pressure in Pan Africa. Operating experience was positive overall, led by favorable risk experience across the South African life businesses. This was partly offset by adverse medical claims in Malaysia, which remains an area of active management focus. Persistency remains slightly negative, mainly due to a one-off cleanup of non-paying policies in the retail mass business, and this was partly offset by stronger experiences in retail affluent, corporate, and Pan Africa.
The covered business benefited from healthy working capital and credit spread profits, while non-covered experience was negative, mainly from South African retail credit lending and the Sanlam Investment Fund flows. Operating assumption changes were positive overall during this period, supported by contributions from the India credit business as well as Sanlam Investments. These were partly offset by revised Pan-Africa general insurance outlook, adverse South African retail credit assumptions, and the health business write-down, and modestly negative covered business assumption changes in Malaysia. Santam also contributed positively, and it outperformed its return on capital target for the period, despite the severe weather claims experienced in the first half. Other earnings were positive, largely driven by the GEV uplift on the completion of the Ninety One transaction. Actual ROGEV was lower because of the stronger rand and weaker listed equity prices that we already mentioned.
For similar reasons I already described, adjusted return on equity of just over 18% is above our five-year average performance of just above 17% and is comfortably above our cost of capital. The group is making solid progress towards its longer-term target of 20%, and as the claims experience normalize, the growth in investments begin to deliver returns and cash efficiency improves, we see a credible path to achieving this 20% target. Our solvency remains firmly within target, even after the 2025 dividend and the capital that we deployed into growth. We closed the half year at a cover ratio comfortably within our target range, with the position further supported by ZAR 2.4 billion of new subordinated debt that was issued earlier in the year. Discretionary capital reduced from ZAR 8 billion to just over ZAR 2 billion, now back within our target range as well.
This is after roughly the ZAR 5 billion that we ring-fenced to increase our interest in the Shriram Life and General Insurance businesses, aligned with our high growth markets positioning ambition. As we previously communicated, the growth vector platforms have largely been built. Our emphasis now shifts to returns, cash conversion, and remittance discipline. That is also why the reduction in discretionary capital should not be read as a weakening of the balance sheet. Rather, it reflects the capital being deployed into agreed strategic priorities while the group solvency ratio remains comfortably within the target range. In short, we have the solvency strength and funding flexibility to keep investing behind the group strategy while maintaining a disciplined balance sheet. As I move into the business performance detail, six months can tell you a lot, but not everything should be annualized.
Allow me to remind you that our focus is on sustainable underlying earnings, cash generation capacity, and separating period-specific items from the underlying earnings base. Our life business was a strong contributor to earnings in the period. Core earnings of just below ZAR 5 billion were up on a comparable basis, driven by favorable mortality experience, higher asset fee income, cost efficiencies in South Africa and Pan Africa, and the RNFR reassessment. New business was up 14% on a comparable basis, with net client cash flows up 24%, reflecting generally higher client activity and solid retentions across all regions. If we focus on the quality of the growth, the pressure on VNB was mainly product mix related, particularly market-linked annuities in the South African. India was impacted by regulation changes, as we previously advised, and the loss of two credit life schemes.
While escalating medical claims and restricted premium increases continue to put the Malaysia business under pressure. This was partly offset by stronger retail mass, corporate, and Pan-Africa performance, all contributing strong double-digit growth. Overall client demand remains intact. This line of business earnings growth was further impacted by the headwinds in the health business from the loss of the large contract and subsequent full impairment of the Afrocentric Investment Corporation. Looking into the second half, our management focus is clear. To improve product mix in retail affluent, to improve margins, as well as conversion into future fee income and cash. This is in conjunction with repricing and remediation in Malaysia, and the right sizing of the medical schemes administration business in South Africa. At year-end, we committed to reviewing the ALM strategy for the RNFR liability. We have now progressed significantly on that work.
We have moved most of the assets backing this liability to fixed rate exposure, materially reducing interest rate sensitivity and improving the stability of operating profit. Post the change, our RNFR interest rate exposure is down by around 60%. Importantly, is that the cash flows and the risk appetite remain unchanged. This is about improving the quality and predictability of reported earnings. If we move to the general insurance business, this is where the pressure on our first half earnings emanated from, and it is most visible. Though the underlying performance remains strong despite these external pressures. In South Africa, Santam absorbed just below ZAR 700 million of flood and wildfire claims, net of reinsurance, and this was partly offset by ZAR 147 million of general reserve release.
Even so, the underwriting margin of this business came in above the midpoint of its target range, supported by favorable attritional claims and disciplined expense management. Santam is also investing deliberately in the Syndicate 1918, which has written just below ZAR 500 million of gross premiums to date and remains on track for full year ZAR 1.3 billion. Pan Africa GI also deserves a more detailed update. Our main concern is not only the weather impact, obviously, but whether the underwriting discipline and margin recovery are where they need to be. We need to be clear on both the external events and the actions that are under management's control. Weather and large loss events such as flooding in Morocco, cyclone in Madagascar, and large losses in Mauritius, totaling just below ZAR 200 million, contributed materially to the underperformance.
The result also reflects operational issues in the underwriting discipline, claims management, reinsurance execution, and some of the overall controls. Higher prescribed bodily injury claims in Morocco and weaker performance in Ivory Coast added further pressure, taking the net insurance margin down to 9%, which is below the 10%-15% target range. The proof points now must be recovering that margin back towards our target range, tighter controls, and more consistent cash remittances over the renewal period. There has been real progress. Morocco regulatory integration is complete. Overlapping country integrations are done, and we are pleased that the business has declared its inaugural dividend. The business that remained in the stable after the disposal of the active asset management business to Ninety One. All those businesses are quality operations and have had a stellar performance during this period.
Core earnings were up 48%, despite transferring just over ZAR 400 billion of assets under management to Ninety One. Net client cash flow increased significantly, and new business volumes were also up 29% on a comparable basis. The AUMs closed at around ZAR 1.3 trillion, and this, along with forecast cost efficiencies, lifted the fee income led by our multi-manager and Satrix index businesses. Pan Africa, on the other hand, also benefited from strong prior year retail net flows in Kenya and Namibia. Our investment management line of business earnings base is now more focused on solutions, platforms, indexation, alternatives, private wealth, and distribution. Any remaining stranded costs are being managed and will be addressed by year end 2026. If we move to the credit and structuring business, it remained resilient on a comparable basis with India once again our main engine.
India's earnings grew 18% on the back of stronger Shriram Finance loan book and improved net interest margin. In Pan Africa, earnings were weighed down by higher credit write-offs in Southern Africa. A further first half impact was deliberate technology development spend that we put in the South Africa business to support our digital ecosystem through the Sanlam GoTyme credit JV. We expect this business to play an important role in scaling our South African ecosystem strategy, but we are clear that growth must be delivered with appropriate risk discipline. The technology spend is therefore a strategic choice to build capability, not evidence of cost slippage. Our focus is disciplined scaling, credit quality, affordability, technology execution, and responsible customer acquisition while closely monitoring Southern Africa credit impairments and borrower quality. That covers the financial results and the line of business deep dives.
Allow me to now bring this together into the outlook. What gives us confidence? What affected the first half, and what management is focused on for the remainder of the year? Our first half was characterized by strong value creation and resilient cash generation, despite the earnings pressure from identifiable items. We are proud that new business are up. Net client cash flows are also at ZAR 78 billion. SanlamAllianz has commenced its dividend and cash remittance cycle. All 11 of Pan Africa regulatory integrations are complete. Santam Syndicate 1918 has gone live, and even with the severe weather storms, Santam continued to declare 10% fee is up and running. Lastly, that we have received banking approval, which means we are well on our way to offering transactional banking services to our clients through the Sanlam app.
Each of the growth engines that are running simultaneously are already past their build gate. For the second half, the management focus is clear. Cash conversion, remittances, efficiency, and continued disciplined capital allocation. In summary, underlying growth across our businesses is in place. We don't expect weather-related events of the same severity. We are taking actions to address areas of weaker performance. Cash generation is strong, so the performance in the first-half earnings is not expected to affect our dividend capacity. In total, we still expect to meet our guidance for the full year. That brings us to the end of the formal presentation. Thank you for your time and your continued interest in Sanlam. I'll hand back to Tokelo.
Thank you, Paul and Abigail. We will now open the line for questions. Mlondolozi , will you please join us on stage? I'd just like to go back to housekeeping. If you are joining us via the webcast, please submit your questions using the Q&A function. We will address as many as possible during the session. For those of you who are on the call, please indicate to the operator if you would like to ask questions. Before asking your questions, please introduce yourself, the organization you're with, and the organization you represent. The operator will then advise if there are any questions.
I will start with the questions from the webcast. There are two from Baron Nkomo of JP Morgan. He asks, for general insurance in Pan Africa, please unpack some of the concrete fixes to restore underwriting margin back to the target range. What timelines should we expect for recovery? The second question is to unpack the review and material reduction in RANFR and the resulting increase in CSM.
Okay. Tokelo, thanks very much. Baron, thanks very much for your questions. I think the best person to ask for the second one is Mlondolozi . But on the general insurance line in Pan Africa, this has clearly been quite a difficult line of business for us for some time, and it is true that we've been quite focused on the integration of businesses. A few things have set us back. One is, as you know, we have this model of centralizing everything as far as we can in order to create scale within our SanlamAllianz Re business in Mauritius. We've been through a very detailed refit of that business. We've had to bring in experts from Munich because that was a business that actually grew very quickly over time but didn't have the underlying systems and controls.
It now has that, and we've moved on to software, the same software that Allianz used to run their reinsurance business. I think that is in place going forward, so that will help us. One of the things we're doing around underwriting margin is taking a really good hard look at some of the places in which we do business, and we're likely to trim our portfolio quite significantly. A place like Madagascar would be a good example, where we took a very large catastrophe knock for weather events. If you really look at that honestly, it's very hard to imagine that you'd ever be able to generate the kind of profits out of a market like that would make sense to write that business. There's a review going on to begin with of the portfolio.
The second thing is we're putting a much closer focus now on underwriting standards and driving those hard centrally and actually monitoring them. I think that with Hennie Nel's appointment as well, we bring someone in who is an expert in the general insurance line. I do expect that over time to help us to improve. But it's really a question of discipline, focus, eliminating some of the negative areas that we've had, some of the areas of risk that we don't think make good sense in terms of a trade-off. The other thing that we're going to begin to focus on is where we start getting growth in these businesses as well. So as much as one eliminates areas of loss, you also start having to think about where you grow.
Another area that we've identified for rectification is the health line. I think you're probably aware that for a long time, that has been a drag on underwriting margins. So we've tried various things, and now we have to take more severe measures in order to restore a margin in that. So there's a range of actions. I would hope that we'd have a slightly better second half, but if you talk about the timeframe for real improvement, I would expect in that line as some of the management actions begin to take hold. Mlondolozi , I'm not sure how much detail you want to go into on RANFR, but try your best.
Good. Okay. Let me do that. Thank you, Paul. Good afternoon. Good afternoon, Baron. I won't go into too much detail at this point. I mean, I'll give more detail when we have the one-on-one discussions with Baron. But just to give a picture of what we've done. So there are two margins under IFRS 17 that are prudence margins on your liabilities. One is a risk adjustment for bearing non-financial risk. The other one is the contractual services margin, which is for the services rendered.
At the beginning of the year, we initiated an exercise to review the levels of those margins because they also behave differently in terms of interest rate sensitivity. As we announced, we are looking at ways to ensure that we have the right level of interest rate sensitivity on the balance sheet. So what we've done is, based on three years of experience under IFRS 17, we've reviewed the sizes of those margins and their levels. So we've reviewed the size of the RNFR, the risk adjustment for bearing non-financial risks. Based on the three years of experience that we've had, and based on some actual analysis, we've right-sized it, and we've reduced the size of the RNFR by about ZAR 5.3 billion. What then happens in terms of how it plays out is the CSM increases by some of the reduction in the RNFR.
The CSM increased by ZAR 3.7 billion. We also took some of the reduction in the RNFR to a reserve that has got a similar release profile like the CSM of another ZAR 800 million. That relates to the fact that when you make changes to your liability valuations, your adjustment to the CSM has to be done at locked-in rates rather than at market rates. The net impact of everything that we have done is that the impact on core earnings was of the order of around ZAR 390 million, which takes into account the fact that the RNFR is reduced by about ZAR 5.3 billion. CSM increased by ZAR 3.7 billion. We took some of the reduction in the RNFR to a reserve that behaved in a similar way to the CSM.
Then there was just a consequent impact on profit arising from the fact that the release profiles of the RNFR and the CSMs are different. Importantly, what we must point out is that the change that we have implemented, while it might result in a modest impact on operating profit for the current year. For future years, there is no material impact on releases in future years because of the release profile of the CSM, as well as the fact that when you add new business, any impact from the release that happened in the current year will be ameliorated. Veronica can give you more details in the one-on-one sessions. I'll provide that level of detail for now. Thank you.
Thank you, Mlondolozi . I'm going to move on to another rather technical question. This is from Marius Strydom of ALG. He asks: can you please expand a bit on your classification of VIF to NAV in EV and from RA to CSM? The second question is: can you please speak to the lack of core growth in retail affluent risk adjustment and CSM and the very modest core growth in retail mass? What actions are taking place to avoid a lack of growth translating into weak operating profit growth for these businesses going forward?
Okay. I'll take those questions. Just remind me. I think the first one related to the changes that have taken place, the reclassification from VIF to NAV.
Yes.
Good afternoon, Marius. When we move to the new reporting framework, under the new reporting framework, we've moved to operating profit. In moving to operating profit, we've ceased the application of the Sanlam specific shareholder adjustments in terms of arriving at the profit numbers. You'll recall in the past, we took IFRS operating profit, we applied Sanlam specific adjustments, and then we arrived at net result from financial services. We have the shareholder fund reserve sitting on the shareholder side of the balance sheet. But for EV purposes, we eliminated those reserves from the shareholder fund side of the balance sheet, and we placed a VIF on them because they were going to emerge as NRFS, and we're placing a value on those future profits that will be emerging. With the new reporting framework, those reserves don't get released into operating profit.
To align our embedded value, those reserves now form part of your NAV, and they form part of your required capital, and they then have a cost of capital charge aligned to them. That's what has led to the reclassification. The reserve was sitting on the shareholder fund of the balance sheet before, and they were transferred into NRFS, and then you place a VIF on them. In the new world, they sit on the shareholder side of the balance sheet, and they form part of the capital that's backing the business, and you place a cost of capital on them. On a net basis, there is no change from an embedded value neutral. It's just a classification from which side of the balance sheet they appear in.
His second question was just to speak to the lack of growth in retail affluent RA and CSM and the very modest core growth in retail mass. He asked what actions are being taken around there.
I think if we start with the retail affluent, the lack of core growth in what the dynamics that are happening in our value of new business. The material impact is on the retail affluent segment, particularly the Glacier sub-cluster, where we've had the issue around the changes in mix. What we are seeing in the lack of core growth would be arising from what we are seeing in the value of new business. Similarly, in the retail affluent segment as well, there's also a slight reduction in the value of new business for the risk business. That will translate into a limited core growth from a CSM and a risk adjustment perspective. It's just a translation of the dynamics that you are seeing on the VNB side playing out in your stores of value, being your CSM and a risk adjustment.
If we move to the Retail Mass segment, the Retail Mass segment had very good VNB. If you look at our results, the VNB added quite a lot in terms of the CSM and the risk adjustment. What was a negative on the Retail Mass business was the experience that we had on the persistency side. That experience on the persistency does then impact your CSM plus risk adjustment if you look at the margins in totality. Because the persistency experience variance does unlock your CSM, then it translates into that.
That's actions that are being taken on the two areas. Firstly, there are actions being taken to improve the margin on the Retail Affluent business, both on the risk business as well as in the Glacier business, including some of the guaranteed business that we write there. On the Retail Mass side, there are specific management actions that are being taken to improve persistence in that part of the business, particularly around the distribution channels.
Thank you for that. The next question is from Thapelo Mokonyane at Investec. He asks again about the weather losses in the GI business. He asks how much of the ZAR 728 weather loss was from South Africa.
Abigail?
It was just over, I think it was about ZAR 580. I just want to check the number. Where is year two now?
The majority of it being from South Africa.
South Africa.
Yeah.
Yeah.
The next question is from Michael Christelis at UBS. He asks what the rationale was for the revaluation of SGI. Are there any liquidity discounts still in these valuations?
Yes. There are still some liquidity discounts in the revaluation of SGI. I suppose the answer to the first question is what led to the revaluation is, what happened is when we increased our stake in that business, we now own 51% stake in that business. In our valuation frameworks, we allow for the level of stakes that we own, and we apply certain marketability and liquidity discounts arising from that. We are now in a position where some of those liquidity discounts reduce because we are now in a higher shareholding levels. There are some still discounts that are remaining in the valuation.
The weather loss number is ZAR 680 for South Africa.
Thank you for that, Abigail. Warwick Bam from RMB Morgan Stanley asks, can we expand on the net client cash flow numbers, which of the group level increases of 42% are organic?
All of them are organic.
I think all.
Yeah, all of them are organic. Warwick asks a second question, are you planning to align earnings targets to the core earnings, or will they remain at operating profit excluding investment variances?
No, I think Abigail answered that.
I think it covers that.
Yeah.
It's both.
Both. It is the same target for both.
Yeah.
Yeah. With that, I will move on to the operator. Operator, please advise if there are any questions on the telephone line.
Thank you. We have a question from Harry Botha of Bank of America. Please go ahead.
Thank you. Good afternoon. Maybe just to ask an obvious question, given the outlook you provided, is there any disruptions you would expect to earnings in the second half or into first half 2027, in that you basically had two very weak earnings results? Then maybe just in terms of the VNB results, relatively strong in Retail Mass at 5% margin, is there more to come here with most of the efforts you have been targeted have been achieved? I guess maybe finally, in terms of General Insurance, you note the concentration points. Which markets do you expect to grow in going forward in Africa? Thank you.
I must apologize. I could not hear the first question at all.
The first one was on, Hi, Harry. The first one was any earnings disruptions that we expect in the second half. The only one that I can really think of is probably Afrocentric in the sense that, the loss of the major contract had a termination notice period, so you do not actually feel the full impact of the termination. So a significant part of the first half still had earnings generated from the lost contract, and you are not going to have that in the second half.
Malaysia will also be weak in the second half.
Yeah.
For the same reasons it was weak in the first half. What was the second question?
Harry, you might have to remind us of your second question. The other was just on General Insurance. Go ahead, Harry.
Yeah. The second question was around the South African Mass focus you wanted to achieve there, complete.
Yeah, Harry, I wouldn't expect that to rise much. You might disagree with me, Luleli, because you're much closer to the detail.
Yeah, that's correct. I thought maybe Anton can cover.
Yeah. Actually, Anton, you are there. Would you mind commenting on that? Sorry.
Yeah, thanks. I think most of the work, I think you might be referring to the ASISA integration work. Most of those initiatives are complete. But, we do still have a lot of plans in terms of improving both volumes, and some of that might feed through to margin as you see scale benefit, but the focus is on volumes now, not necessarily margin.
Margin, yeah. The third question I know is about General Insurance. Just which aspect of it together was Harry asking about?
Harry, are you still there?
Yeah, absolutely. It's just around the markets that you do see growth.
Oh, that we see.
Coming back in GI in Madagascar.
Look, Harry, we think that long term, the big growth opportunities in Africa lie in the specialist area, certainly in the shorter term. So that's an area where we're pretty focused on increasing our success rate, and it's an area where traditionally we've been very strong as a group. So Sanlam itself does a lot of specialty business on the continent.
And here I'm not referring to oil and gas, which is probably an area that's offside for us, but other specialty business. So that'd be the big focus area. I think in the longer term, there are other areas that we will look at. So, for example, if you take Morocco, we'd be probably be the number one market share there. It's a fully intermediated market. That's a market that I suspect is quite ripe for a direct player. But that'll take quite a few years to pull off. In the shorter term, the growth is mainly in the specialty area.
Thank you, Harry. Does that conclude all your questions?
Yeah. Thank you.
Thank you.
Thank you. Our next question comes from Francois du Toit of Anchor Stockbrokers. Please go ahead.
Hi, Francois.
Hi, guys. Can you hear me?
Yes.
Just a quick one. Emerging markets earnings was disappointing. Maybe a bit of color and timeframe in terms of what you think is normalized earnings out of the life businesses. I think there is about ZAR 200 million of life losses in your emerging markets, well, in the Asian emerging markets business. First question. So maybe just a bit of you mentioned all the build costs that has gone in there and Malaysia write-offs and so on.
But when can we, and what can we expect from that business going forward? Second question around, maybe just a bit more color as well. Very disappointing general insurance, and well, just generally non-life earnings out of Pan Africa. You have mentioned the large claims, and maybe also a bit of color in terms of the investment return on the float in Morocco and just for us to try to normalize things a bit. Thank you.
Yeah. Tokelo, I suggest you ask David Marshall, who is online, to cover the life earnings out of India and Malaysia. Heinie Werth is online as well. He could probably provide a lot more color on the GI business in SA.
David, we'll start with you just around the life earnings in the India business.
Okay. Hi, Francois. Thanks for the question. I think Asia's a pretty mixed bag, so let's break it down. I think the first thing to take into account is that the currency situation, if you look at actual results, the currency is actually probably the single largest factor with the rupee having depreciated 17%. In constant currency terms, India was actually a reasonable first half. Specifically the life business in India, I think we've spoken a lot about the sort of regulatory changes last year that set the profitability back and specifically turned VNB negative. We're actually very pleased with the progress that is being made through management actions in that business. VNB, as you see in the half year, is actually positive already again.
We're tracking ahead of plan on turning that around, and we expect to be back in fairly good shape during next year in Shriram Life. Malaysia is a whole different ballgame. It's frankly a turnaround situation. There's a number of reasons for that, but effectively what we have there is a detailed turnaround plan with multiple prongs that management has to execute in Malaysia. That includes taking out cost, rationalization of distribution, and being able to exit some specific product lines, which are fundamentally not profitable and have been exacerbated by certain regulatory changes.
Malaysia is going to be a more complicated turnaround situation. It is, as we've said, non-core. It is getting extensive attention and I think that we will expect to see that business take a year or two to probably a couple of years to be back on an even keel. Fundamentally, the India story growth remains very good and we're confident that it is indeed profitable growth in Shriram Life.
Thank you, David. From there, we'll just move to Heinie around giving us more detail on the general insurance business in Pan Africa. Heinie.
Thank you. Francois, thanks for the question. I'm going to start on the float income in terms of settling claims. We sit with quite big reserves there and very limited investment opportunities. In around 2020, we went through extensive exercise and decided that, look, given the nature of the market, and your competitors, if you really want to compete, you have to take more equity exposure in your portfolios. As a result of that, you will have good years and bad years. Last year was extremely good investment year in Morocco. This year it turned the other way, also following the war. Those losses are obviously unrealized. We keep a close eye to the underlying investments to ensure that the quality of the investments are still there.
In the Moroccan market, where the bulk of these unrealized losses come from, you have to compare how we look relative to our competitors. I think it might be worthwhile that you, together with Abigail, sit and have a look at that portfolio. In the end of the day, we are less exposed to equities than our competitors. But the reality is, in that market, people cross-subsidize between investment income, your dividends, which is tax-free, and your underwriting margin. It is a fine balance. We just went through a board meeting again. Notwithstanding these losses or unrealized mark-to-market losses, the board and the shareholders support that we continue with the investment strategy and to accept the volatility coming along with it.
I would really encourage you guys to sit with Abigail and whoever from SanlamAllianz and try to understand it, because the volatility will stay with us if there are events, and it could be positive or negative. Compared to last year, it was a big swing. It was a few hundred million profit swing to a few hundred billion loss swing in the current year. A big portion of the operating profit results are driven by the unrealized stock market losses there. Paul Hanratty already elaborated on the normal underwriting performance. It is a concern, as Paul started off on his first slide, that we are not getting the growth in Africa as we on the GI side. You have seen we get very good growth on the life side, but we have not managed to get that on the GI side.
Obviously, the mergers are now behind us, and that should be the focus of Hennie Nel and the team. In addition to the large claims, the reality is if you do not get the top line going, you will have to look at your cost base. Because the cost base you allow on the basis that you will get certain growth, if you do not get it, you will have to look at all areas of the business. But I would say I want to come back starting with the float. It is a volatility that we accept if we want to operate in that market. You will be totally uncompetitive in Morocco if you do not live with the volatility. Thank you.
Thank you, Heinie. Operator, are there any more questions on the line?
It is on the telephone lines.
Thank you. There is one more question here from Marius. Marius, we will address this in our one-on-ones as we are out of time. Ladies and gentlemen, that brings us to the end of today's interim results. Many thanks to Paul, Abigail, Mlondolozi, and the rest of the executive committee that have joined us online today. Thank you all to all our guests and participants for your time and for your continued interest in Sanlam. If you have any further questions, please do feel free to contact myself and the investor relations team. We look forward to engaging with many of you during our investor meetings and roadshow in the upcoming weeks. Thank you and good afternoon.