Good afternoon, ladies and gentlemen, and thank you for joining us this afternoon. I'm joined today by Abigail Mukhuba, our Chief Financial Officer, the CEO of our retail affluent business in South Africa, Anton Gildenhuys, and Grant Davies, who you all know is the Head of Investor Relations. This morning, we announced the conclusion of two transactions which will significantly strengthen our retail life insurance operation and contribute to our strategy of building a fortress position in South Africa. Sorry, there's somebody who's not muted. It would be really helpful if they would. Can we mute everybody, Grant, or not from our side?
Yes, we'll check that for you.
We've still got somebody who's not on mute with a lot of background noise. I apologize for that. In the first transaction, Sanlam will partner with Capital Legacy to create a significant wills, estates, and trust management business as a merged entity leveraging the strengths of both companies. In the second transaction, we've agreed to bring BrightRock fully under our control, increasing our shareholding from 62% to 100%. These two transactions represent a very significant deployment of discretionary capital of around about ZAR 1.1 billion. We're confident that the returns we're going to generate on these two investments will considerably exceed our target. The reason for that is because in each case, there are considerable synergies between the businesses. The nature of the synergies between these two transactions is, of course, very different.
The group's discretionary capital position remains strong post these transactions. We will provide further guidance on capital allocation and deployment with our annual results in 2023, March 2023. Can I just remind you of our strategy? We always said we were trying to build a fortress position in South Africa. This would be achieved by strengthening our client proposition through improving our existing business capabilities and client offering and through the benefits that strategic partnerships can bring us. Both the Capital Legacy and the BrightRock transactions further our strategic ambitions regarding building a fortress position in South Africa. I'm going to start by talking a little bit about Capital Legacy. It's a business that many of you may not know very much about at all. The opportunity to ensure that South Africans have their wills in place remains a really huge opportunity.
Our analysis shows that the majority of South Africans do not have a proper will in place. The burden of managing estates on death for the beneficiaries of wills is still a very significant source of hardship for people. The costs of wrapping up a will are very high. Capital Legacy was founded in 2012, it's had a very innovative and alternative approach to addressing the market need. It provides a wills and estates offering, but this is packaged together with a unique life insurance product, the Legacy Protection Plan. Capital Legacy is an entrepreneurial owner-managed business, it's developed into, I believe, one of the fastest-growing financial services businesses in South Africa. They've drafted more than 600,000 wills to date, they've issued over 250,000 Legacy Protection Plans that are still in force.
65% of the clients are younger than 50 years old, the majority of the wills book covers estates that are relatively modest, below ZAR 2.5 million, and some even below ZAR 1 million. I believe that there's considerable growth still in this very underserved area of the market. In the Capital Legacy transaction, Sanlam will sell Sanlam Trust to Capital Legacy at a valuation of ZAR 390 million. At the same time, we will subscribe for shares in Capital Legacy for a cash amount of ZAR 720 million. The contribution of the cash and the Sanlam Trust business together will allow us to acquire a 26% stake in the enlarged Capital Legacy Group. The amounts are obviously as at March 2022 when we did all the calculations, there will be a roll forward to the effective date that the transaction becomes effective.
Most importantly, in addition to the shareholding that we have acquired, which is clearly a minority stake, we've negotiated a profit-share arrangement which provides additional profit to Sanlam in respect of all clients, Sanlam clients, that are serviced by Capital Legacy or where clients come in through Sanlam distribution channels. Sanlam has also negotiated the first right to provide Financial and other reinsurance to Capital Legacy on new business. This is an additional source of profit for Sanlam. I'm sure this may come up in Q&A, Capital Legacy is a business that grows extremely quickly and therefore, the ability to finance the new business strain is very important, there's a large amount of Financial Reinsurance involved in its structure.
The Capital Legacy partnership is attractive to Sanlam because of the first-mover advantage that Capital Legacy has built up in the intermediary market through their very extensive financial planning and distribution infrastructure, which will now access the Sanlam client base and the Sanlam distribution, with Sanlam sharing in the value creation. Capital Legacy has over 200 consultants that provide face-to-face consultations with clients, forming specialist estate planning, drafting of wills and selling of Legacy Protection Plans. In addition, they have over 100 broker consultants who liaise with financial intermediaries to secure new business. Sanlam Trust, by contrast, has a very strong trust management capability, we have a much smaller new business capability. The strong market position and proposition that Capital Legacy has built up means that that business has been growing very strongly.
Its wills business has been growing at 45% per annum, and its insurance business at 37% per annum over the last three years. Capital Legacy has created significant value in its life insurance operations, where it's generated a Value of New Business of over ZAR 300 million for its last financial year ending in March 2022. The CAGR has been over 40% for the last three years. As I mentioned earlier, our distribution and client base offers considerable opportunity for Capital Legacy to now grow even more strongly and to access a bigger client base. As I mentioned earlier, Sanlam will capture an extra 25% profit share on the business written to Sanlam clients or through Sanlam affiliated distribution channels. The Capital Legacy business relies on Financial Reinsurance to fund new business. As I said earlier, we will provide this reinsurance going forward.
The margin that we will capture on that reinsurance adds to the return on investment for Sanlam. The proposed transaction to create a partnership with Capital Legacy will have minimal operational impacts on the Sanlam Group. The Sanlam Trust business and its staff will be transferred to Capital Legacy, who will continue to independently manage the operations of Capital Legacy. The opening of the Sanlam distribution channels and client base to Capital Legacy is not expected to create any operational complexity for Sanlam and Capital Legacy. This brings me to ARC considerations around the Capital Legacy transaction. Sanlam, through its shareholding in the portfolio of African Rainbow Capital Financial Services, already has an indirect holding in Capital Legacy. ARC Financial Services Investments holds 29% currently of Capital Legacy, and this will be reduced to 25% post this transaction because, of course, Sanlam is injecting in Sanlam Trust.
We identified the potential of a partnership with Capital Legacy to create value by partnering them to serve our Sanlam client base. African Rainbow Capital and African Rainbow Capital Financial Services Investments are not direct parties to this transaction, and this has been confirmed in a ruling by the JSE. However, despite the fact that they are not party to the transaction, we have had our independent committee of the Sanlam board check that the terms are favorable to Sanlam, and we have also obtained expert advice by an independent advisor who has provided us with a fair and reasonable to this effect because we want to make absolutely sure that there can be no inference drawn that the terms in some way of this transaction are favorable to African Rainbow Capital, even though they're not a party to the transaction. I turn now to BrightRock.
Sanlam has agreed to bring BrightRock fully under our control. As I mentioned, we're going to increase our shareholding from 62% to 100%, and the initial payment will be just under ZAR 400 million, reflecting the current Embedded Value of the business. We do have a structure in place with the management team and the existing shareholders for a further payment to be made over the next three years, but this will depend on the extent to which Value of New Business targets are met. The management team remains highly incentivized to achieve its targets. Since acquiring BrightRock in 2017, the business has grown significantly, and it did create strong shareholder value. Between 2017 and 2019, BrightRock delivered an average operational Return on Group Equity Value of 21.5%. Of course, as you know, the COVID years have been particularly tough on a pure life insurance business.
Together with BrightRock, Sanlam has the largest market share of retail risk new business, life business in the IFA market. We're the second largest if you take all channels into account. The onset of the COVID-19 pandemic had a significant impact on life insurers in South Africa. With BrightRock being a monoline insurer, it was severely impacted. This has created a unique opportunity for Sanlam to bring BrightRock fully into the Sanlam stable at an attractive value. Post-acquisition of the 100% of the equity in BrightRock, our intention is to transfer BrightRock's business onto the Sanlam Life license. BrightRock will remain open as an operating division of Sanlam Life with its own brand, distribution, and product focus. The transfer of the BrightRock business to the Sanlam Life license will lead to capital synergies and expense synergies.
Capital synergies and the expense efficiencies are expected to enhance the return on the BrightRock asset for Sanlam. We expect the business to maintain its strong market position. As I mentioned earlier, the management of BrightRock are incentivized to deliver future value through the transaction structure, which defers payments and links the price to the achievement of Value of New Business targets. The release of capital once BrightRock is transferred onto the Sanlam Life license and the expense synergies arising from the elimination of the license are expected to generate a significant uplift to dividends and earnings. This process will take several years to achieve because I'm sure you know that just the regulatory process of moving the license will take some time.
Although BrightRock will continue to operate as a distinct offering to the market with its own management team, there will be undoubtedly some operational impacts once the business is transferred onto the Sanlam Life license. We expect BrightRock to continue to have its own operations, some functions will be performed by Sanlam Life post the transfer of the business onto the Sanlam Life license in order to realize synergies. These, of course, will be around finance and actuarial, these types of very expensive functions. We do not expect these operational demands will be significant for Sanlam because we already manage a very wide product set in these areas. These two transactions are expected to be highly accretive to Return on Group Equity Value.
In the case of Capital Legacy, from its extremely strong Value of New Business contribution, of course, we also do benefit there from the extra profit share and from the Financial Reinsurance. In the case of BrightRock, the synergies come from a very different source: from capital and expense synergies. It's important to note that these two transactions will have very marginal positive impact on earnings and dividends in the first few years. One thinks of the very nature of the Capital Legacy business. It's a very fast-growing business. Although it does have positive profits and pays a small dividend to shareholders, the emphasis is on reinvesting and growing the business. It's more about getting a Return on Group Equity Value.
As I mentioned earlier, in the case of BrightRock, because we are looking for capital and expense synergies that require a transfer of the life license, it will take some time for those synergies to be realized and flow through to the bottom line. Overall, we expect a return on capital deployed well in excess of our hurdle rate. We do not expect them to have a huge impact on our solvency ratios. The Capital Legacy transaction continues Sanlam's philosophy of partnering with innovative, high-potential businesses where we can contribute to the scaling of the business by connecting it to our ecosystem and where we can share in the benefits of the subsequent value creation. The BrightRock transaction is a little bit different, it's more about allowing Sanlam to capture cost and capital synergies.
As I mentioned earlier, we do not expect the operational impacts from these two transactions to be significant, we believe that they represent an excellent deployment of our discretionary capital. Most importantly, these two transactions will allow us to improve our already strong client offering, they support the purpose of Sanlam and our strategy. Thank you very much for listening, we will now open up to questions.
Thanks very much, Paul. If there are any questions, I'll ask you to raise your hand.
We do have a question. The first one is from Michael Christelis. Please unmute your line and go ahead.
Hi, guys. Thanks very much for the time. It's interesting, this transaction with Capital Legacy. Maybe if you can just give me a little bit more color on the nature of the existing life business that's there. I noticed that it's all underwritten by Guardrisk Life. Can you tell me how much of the risk do they retain? Is there an opportunity to retain more risk under your ownership than they do currently? That's the first question. Are you able to move the back book at all that is sitting with Guardrisk, whatever there is, if there is? Just on that ZAR 300 million VNB, is that their retained VNB or is that the total for their business? Do you want to answer that and then I'll get on to BrightRock.
Anton, would you like to take those questions?
Thanks, Paul. Thanks, Michael. Yes, I think this is quite a unique product. Due to the nature of the product, most of the insurance does revolve around Financial Reinsurance. It's an indemnification product, the actual exposure per policy is actually relatively small. The business does retain most of the risk after the Financial Reinsurance. It's a little bit of Quota Share. Not that much. Most of the insurance Sanlam participates in will be Financial Reinsurance. Clearly, the idea would be for us to work with Capital Legacy as a team to investigate the prospect of a separate license for them too. Given their growth, it makes sense to move away from a cell into a life license. There are some other advantages to that as well. That will happen in due course.
Can I ask you a question about the ZAR 300 million?
Yes.
That's 100% of the Capital Legacy VNB.
That's correct. That is after all the insurance. That is not gross of insurance. That's a net number that's retained by Capital Legacy.
Can you give a sense of that margin? Is it sort of high single digits?
No, it is double digit
double digit?
It is a double-digit margin. The main reason for that is if you look at the value chain, like Paul explained, the product is quite unique. We have integrated the whole estate proposition into a life policy as well. The margin actually represents the profit of two business lines rolled up into one. You can think of the margin you typically get in a non-American life policy, which is pretty high to start with. Then you actually capitalize the estate margin into the life policy as well. If you look at the valuation of Capital Legacy, it's actually mostly, in fact, 95% covered business, given that the margin from estate activities actually materialize in the covered business side.
You can't give us the EV itself, right?
Yeah. Currently, no. I'm comfortable to give that.
We'll publish our own when it comes on stream, Michael. They do actually have somebody doing their work. You might appreciate that when we did our valuation on it, we ended up with a slightly more conservative number.
Just trying to get a sense of the multiple, if that's something you can give or not. That you're effectively paying at 1.1. Is that something you can provide?
I think we will give it to you subsequently. Once the transaction is complete and we start reporting, you'll be able to pick that up because we will put our own GEV up, then you'll be able to see.
Perfect. Thank you. Just very quickly.
If you work backwards differently, you listen to what I said about the returns that we expect to see being above our hurdle rate, that should also help you.
Yeah. I think I just want to emphasize one more thing, Michael. Clearly, our covered VNB will include three components. That'll be our 26% share of the ZAR 300 million, so to speak. We'll also be able to put a VNB on our profit share of business written in Sanlam channels. Finally, also get us a VNB. We've got three sources of VNB in Sanlam.
Excellent. Perfect. Thank you. Moving on to the BrightRock transaction, can you give me a sense of how big the hit to the EV was during COVID, maybe in terms of variances? Just trying to understand. You bought 53% of BrightRock in 2016, is the only reference I can find in your annual reports. When did you go from 53% to 62%, what did that cost you?
Okay. I think this is a question Abigail may be able to answer. What happened, and I don't remember the exact date. Grant and Abigail, can you help here? What happened is during COVID-19, Michael, their finances got stretched, and we injected, I think, ZAR 160 million of capital in exchange for an increase in shareholding. That's why from the original
Okay
to now, it's increased. I don't know if anybody on this call knows the impact at the fingertips of the reduction in Embedded Value from the COVID-19 period. I don't know. Maybe I'm underestimating.
Yeah. I can talk in principle to it, Paul. BrightRock makes extensive use of reinsurance, they have taken a bit of a hit in terms of mortality experience, that has been muted significantly by the insurance. On the other hand, BrightRock also experienced excellent persistence most insurers tended to do during 2020 and 2021. The hit to the EV has also been limited by that as well. It's not been that significant.
Anton, you need to explain to Michael that the reason, although the business reinsures and they were protected from a claims point of view. The reason that they ran into difficulty is because the volume of claims created a liquidity problem on the balance sheet for them, and that's why it needed capital injected.
It was more of a liquidity constraint than a solvency constraint.
All right. Excellent. Lastly, can you give me any idea as to your thoughts around the remaining excess capital? Do you still see many areas to deploy, or could we expect perhaps a repatriation to shareholders through some sort of special or buyback?
Michael, just in case you need earbuds. I did say the group's discretionary capital position remains strong post these transactions. Further guidance on capital allocation deployment will be provided with the annual results on the 9th of March.
Okay. Perfect. Thank you. Thanks, Paul.
Nice try.
Thanks, guys.
Do we have any further questions? Please raise your hand if there are any.
I'm going to raise my hand.
Was that a question? Please go ahead.
[inaudible] .
Sounds like somebody's trying to raise their hand.
Sorry, it's Serene. I'm trying to find the raise my hand button. Can I ask a question?
Go ahead.
Hi, Serene.
Hi, guys. Are you well?
Very well.
I just wanted to ask, in the ARC Investments financial statements, they value the stake in Capital Legacy fair value before the discounts that they apply at ZAR 370 million, and that's for stake of 11%. Then there's a note stating that the valuation technique is EV. Is it fair to assume that the EV of that business is just that ZAR 370 divided by 11%? About ZAR 3.4 billion?
Um-
Implying that you paid a slight premium to Embedded Value.
Serene, I don't have those numbers that you're quoting at hand. What I can tell you is that, first you've got to be very careful about the dates. I'm not sure which ARC date you're looking at.
June 2022. There's a difference, yes. Fair enough.
There's a difference. This thing has been growing at a frightening rate. You will recall that we bought into ARC Financial Services in Abigail, remind me, was it 2020? We ourselves put a value on this business at that point, and it's been quite extraordinary how it has grown. Although I can't find a logic error in what you said, my own view is that we paid a considerable multiple to Embedded Value. Rather wait until we publish the GEV on it.
Okay, great. Thank you.
The transaction was based around Appraisal Value, not Embedded Value. Anton, can you add anything? I think Serene's numbers don't ring true for me. Although I can't find-
No.
I can't find the logic but
If I listen to the numbers, it sounds like an Appraisal Value numbers from ARC.
Yeah, I think so. I think that's an Appraisal Value. They may have said it's based on Embedded Value. Yeah. We don't have that, Serene, so it's quite hard. I don't have that in front of me.
Okay, great. Thank you.
Do we have any further questions? Paul, it doesn't look like there's any further questions.
Brilliant. Okay. Well, look, thank you. We really appreciate that you made time on a Friday afternoon. I'm sure you've got more exciting things to plan for the weekend, so thank you very much. And thanks very much to Abigail and Anton, Grant, for making time as well. And I hope you all have a wonderful weekend.
Thanks very much. You may disconnect.
Yeah. Cheers. Cheers, everyone. Bye.
Thanks, everyone.
Cheers. Bye-bye.