Edited Transcript of OMUJ.J earnings conference call or presentation 16-Mar-20 9:00am GMT

In our interim results, we noted that we had decided to manage Zimbabwe on a ring-fenced basis given that country’s hyperinflationary economy, and our inability to access capital through dividends. As such, Zimbabwe has been excluded from our adjusted headline earnings from the first of January 2019. With inflation reaching over 500% by year-end, Zimbabwe’s economy continued to be battered in 2019, as were our customers in that country who have endured the very real challenge of making ends meet in a hyperinflationary environment.

The economic — Nigerian inflation easily outpaced pedestrian GDP growth and equity markets there dropped by 15%. More positively, Kenya, which is a key building block in our Rest of Africa strategy, with GDP growth of nearly 6%. And at almost 8% growth, Ghana had the best GDP growth of all the countries in which we operate. In 2019, the Board and executive team spent a great deal of time refreshing our strategy. Together, we agreed our high-level strategy and set a good foundation for the future.

We remain focused on our 8 strategic battlegrounds, which are how we measure current success. In developing our 5-pillar strategy, we agreed that our overarching objective is to ensure that Old Mutual becomes customers’ first choice to sustain and grow their prosperity. And we agreed that to deliver on that outcome, we would need to deliver on 5 pillars. We’ve started to execute against these pillars, as indicated on this slide. For example, and they’re always present first, across the group, we’re rolling out and improving digital easy to use value-adding tools like an enhanced My Old Mutual Insure platform and our new My Old Mutual website, tools which save both us and our customers time and money.

And under rewarding digital engagement, our Old Mutual rewards program was a brilliant success story for Mass and Foundation and Personal Finance, while for the first time, we interacted with more than 3 million customers in South Africa this year and grew the number of active money accounts to 300,000 and counting. On engaged employees, we significantly advanced our pulse culture intervention and rolled out our new cloud-based employee self-management tool, Workday, to 6 countries.

Under solutions that lead, we’ve made significant enhancements to our wealth proposition. We’re rolling out Old Mutual Protect nationally and have a new savings and income proposition to come. These solutions will significantly enhance our intermediary experience and competitiveness in a very tough market.

In demonstrating what we mean by Old Mutual cares, this year we disbursed ZAR 80 million from the ZAR 500 million enterprise supply development fund in support of emerging businesses. We agreed to this as part of our Managed Separation.

I would just like to add at this point that this last Friday, we were formally advised that an independent verification has confirmed that we’ve achieved Level 1 BBBEE accreditation for the first time. Now if you’re not an Old Mutual Rewards customer, I’d like to quickly give you an idea of what you’re missing out on.

(presentation)

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [2]

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Here, we have a quick overview of the result from operations of each of our segments with their relative contributions on the right. Segmental RFO was impacted by various assumption changes and modeling improvements in the year. The noneconomic assumption changes you see were the result of experience reviews we conducted across our life business in 2019 and largely related to persistency and mortality across Personal Finance and the Mass and Foundation Cluster. We are satisfied that the actual basis has been appropriately adjusted, but we’ll continue to monitor this relative to our actual experience.

At the same time, improvements to our economic modeling resulted in a reduction in our investment guarantee reserves. At a group level, noneconomic changes had a negative net impact of ZAR 81 million and improvements to our economic scenario generator modeling to align with our hedging methodology, a ZAR 1 billion impact. As you can see, impacts on the segments were varied. So please bear this in mind when considering the year-on-year performance of the various segments.

Mass and Foundation’s life APE sales fell by 4% as we took steps to improve the quality of our foundation market group funeral business. I might mention, however, that sales momentum picked up in the second half. Lower sales volumes and the launch of our new value for money savings product reduced the value of new business by 10%. Positively, in a tough environment, our risk margins improved, but not enough to offset the impacts I’ve just described.

Financial constraints also impacted our banking and lending business, which experienced worsening credit losses to 8.9%. In H2, to address the deterioration in our credit quality, we deliberately slowed growth and applied appropriate price increases for specific categories of higher risk customers.

Not only was Mass and Foundation an increasingly important profit contributor, it succeeded in defending its market penetration. This is partially due to adding 57 ATMs and 20 new branches, bringing our physical footprint to 368 branches. Overall, a commendable result for this segment, but the outlook remains challenging.

Corporate returned a pleasing result this year with life APE sales rising by 16% to over ZAR 3.6 billion, largely driven by strong recurring premium umbrella sales. Gross flows reduced by 7% to under ZAR 40 billion, mainly due to preretirement single premium flows. The sharply poorer net client cash flow was all about the state of the economy with regrettably retrenchment and terminations increasing.

Results from operations rose by 7%, helped by a 14% improvement in the value of new business. And VNB benefited from a substantially improved H2 sales performance. It’s worth mentioning that Old Mutual corporate consultants had a good year, securing 10 new consulting appointments. Our market-leading umbrella offering, SuperFund, delivered an outstanding performance in 2019. We’ve succeeded in converting stand-alone funds to umbrella funds as well as winning transfers from competitor umbrella offerings. That performance would have been even better were it not for delays we continue to experience in getting our healthy pipeline of single premium deals through the Section 14 regulatory approval process.

Moving to Personal Finance. Here, you will note the decline of 14% in the results from operations, which was mostly down to a mortality basis change. In the second half of the year, we observed a further deterioration in our mortality experience against the first half of the year. To reflect this experience, we made a mortality assumption change, which strengthened the basis but negatively impacted RFO. Excluding the assumption changes, RFO would have been up by 19%.

As you would appreciate, Personal Finance’s performance and particularly the performance of its distribution channels should not be viewed in isolation. In 2019, these channels generated ZAR 35.9 billion in gross flows for Wealth and Investments and ZAR 5.2 billion for Corporate.

Our new MD for this segment, Kerrin, has already put in place measures to improve productivity and the effectiveness of our distribution channels. To this end, last week, we announced that the Wealth business will, in future, report operationally to Kerrin.

Wealth and Investments result from operations declined by 10% in 2019, a result which was driven by flat revenue as a result of lower average equity market levels. We also incurred additional one-off costs by rationalizing our boutiques to improve the competitiveness of our offering. As with much of the group’s business, adverse economic factors weighed on gross flows, which fell by 9% in 2019. Compared to 2018, net client cash flow at ZAR 3.5 billion remained positive although that result should be seen in the context of a buoyant previous year when Old Mutual International accounted for some very large flows.

For 2019, we acknowledge that our macro stance favoring South African assets negatively impacted our short-term investment performance. Overall annuity revenue was 1% up as credit spreads contracted. While specialized finance saw a 17% decline in its RFO and a drop-off in nonannuity income, encouragingly, it booked some ZAR 8.6 billion in new credit assets in a market which saw fewer deals than in 2018.

At the outset, I mentioned the effect which Old Mutual Insure’s catastrophe claims had on our bottom line, but several of the most important indicators pointed to you was impacted by our worst catastrophe claims experience since 2015. Several of those claims crop related. Credit guarantees underwriting results also disappointed. Encouraging was Specialty, which improved its underwriting margin from minus [12,9 percent] in 2018 to a positive 6.5%. Our underwriting target remains unchanged at 4% to 6%, and the medium-term outlook is positive.

We are understandably pleased with our Rest of Africa segment’s performance, which showed growth results from operations by 15%, with both Southern and East Africa’s banking and lending businesses making solid contributions, this despite some very challenging economic conditions on the ground.

In Southern Africa, we recorded a strong profit growth in banking and lending, particularly in Namibia where we successfully penetrated state-owned payroll-link disbursements. As you will appreciate, these are relatively low risk. In East Africa, lending growth was driven by retail disbursements, similarly lower risk. Overall, East Africa disappointed in 2019, and while I’m satisfied that the fundamentals there will improve, a ZAR 40 million loss was regrettable. This arose mostly from a poor claims experience in our medical insurance business as well as from lower new business volumes.

In West Africa, we have renewed confidence that the newly strengthened leadership team has rightsized the cost base and laid a foundation for the future. This year, the new MD of Rest of Africa, Clement, has become a — begun a thorough strategic review process. This review will clearly articulate how the segment can maximize its standing and strengths in our various markets to the year 2030. It will also address meaningful opportunities for cost rationalization.

I’m now going to hand over to Casper to take you through more financial details. Casper?

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Casparus Gerhardus Troskie, Old Mutual Limited – CFO & Executive Director [3]

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Thank you, Iain, and good morning, everyone. Our financial delivery in 2019 was impacted by a number of headwinds and uncertainties, the most notable being lack of GDP growth in South Africa, the reduction in the value of our Zimbabwe business and ongoing uncertainty regarding our regulatory capital position. Despite this, we have made good progress on our financial delivery with adjusted headline earnings per share up 7%; our RoNAV exceeding the cost of equity at 15.2% and ongoing strong cash generation supporting dividend flows with growth in embedded value of 12.7%.

Our group solvency ratio remains well within target at 161% after taking into account foreseeable dividends. We have adjusted our dividend cover range of 1.75x to 2.25x to a range of 1.5x to 2x to reflect the exclusion of Zimbabwe earnings from our adjusted headline earnings. Iain has taken you through our operating segment results, which were down 3%. Net expenses from central functions reduced relative to the prior year, following the increase in central expenses being more than offset by interest earned on short-term working capital balances.

Shareholder operational costs rose by ZAR 260 million, as this was the first full year of being a stand-alone listed entity as well as a result of once-off costs relating to staff restructures. This was more than offset by interest earned on higher cash balances. These balances comprise the proceeds of our Latin America disposal and remittances from Residual plc, which were used to fund share buybacks and dividends.

Shareholder investment returns reflect mark-to-market gains in quarter 4, offset by the reduction in the fair value of our property assets in East Africa on the back of lower property yields at occupancy levels. The increase in finance costs stems mostly from the inclusion of debt costs in East Africa. The decline in associate income is as a result of the reduction in Nedbank’s results of 7% whereas our China joint venture recorded an increase in earnings.

We have exceeded our cost targets by delivering cost savings of ZAR 1.2 billion. The biggest driver of cost savings was operating model improvements in East Africa, West Africa, Zimbabwe, and in the central functions in South Africa. This was supported by focusing on efficiencies in IT processes, reduction in consultant spend and improved space utilization.

Cost efficiency leadership was a key part of our financial objectives for the last 2 years and excluded increased incremental listing and other once-off costs related to Managed Separation. It also excluded commission-related expenses. A key focus going forward will be on acquisition cost effectiveness as well as focusing on driving efficiencies through group structure optimization, the simplification of our operating models, IT infrastructure and processes over the medium term.

On this slide, we provide you with sources of income by lines of business. This is to assist investors in valuing our business and is not how we run the business. You will notice that results from life and savings, asset management and banking and lending were largely in line with the previous year. This disguises fairly large offsetting changes in the components making up these lines of business. In life and savings, increased new business strain and lower operating experience were offset by an increase in economic experience. The higher new business strain and lower operating experience was impacted by pressure on volumes, lower persistency and lower positive expense variances. Iain has taken you through the impact of basis reviews that we concluded during the year, which had substantial impacts on our life and savings segments.

Asset management earnings were up with the increase in profits in the Rest of Africa, more than offsetting lower earnings in South Africa. Banking and lending profits were flat with higher profits in East Africa, offsetting the lower profits from our mutual finance and specialized finance. The biggest impact year-on-year has been the reduction in Property & Casualty profit, profits following the increase in catastrophe losses in South Africa and increased claims in the medical insurance business in East Africa.

Part of this slide gives you a brief reminder of the impact of the unbundling of Quilter and Nedbank on prior year profits, which results in a comparable base of ZAR 7 billion. There has been substantial improvements in the OML perimeter profits from the base of ZAR 7 billion, with the improvement in Residual plc more than offsetting reduction in Zimbabwe profits. The Residual plc improvement resulted from the effective implementation of Managed Separation and the reduction in risk provisions’ health. Devaluation of the Zimbabwe currency reduced profits by ZAR 1.7 billion.

Lastly, this year, we incurred ZAR 1.8 billion in the reduction in the carrying value of Nedbank following a lower outlook on dividends, and the reduction in value of Rest of Africa properties.

We set out on this slide, the group solvency position for OMLACSA and OML. The OML group has not been formally designated as an insurance group in terms of the Insurance Act. And the solvency position remains a pro forma view using the same basis approved by the regulator for Managed Separation.

The OMLACSA solvency ratio has been impacted by the reduction in owned funds due to increased policyholder participations. This results in a technical mismatch in policyholder assets and liabilities with the assets included at tangible net asset value as opposed to fair value. Higher prescribed equity shocks, given the increasing market levels from the prior year, increased capital requirements. This was partially offset by the additional issue of ZAR 2 billion in subordinated debt.

The OML level, our ratio also reduced because of the OMLACSA reduction. There was a bigger negative impact on owned funds for Nedbank due to the change in the treatment of shares held on behalf of policyholders and a reduction in the capital ratio on a Basel III basis. A higher equity shock for unregulated entities also increased the capital requirements. Our capital position remains sound as an insurance group.

We have set out on this slide the key movements in our covered business embedded value. New business value of ZAR 1.9 billion contributed 2.9% towards embedded value growth. Experienced variances was slightly negative with negative persistency in tax variances exceeding positive risk and expense variances. The model — the operating model and model changes highlighted by Iain are — and results from operations basis was substantially more positive on an embedded value basis at ZAR 1 billion.

And economic variances were ZAR 844 million, which included the positive economic assumptions noted by Iain. Operating variances related mainly to restructuring costs in Old Mutual International, which are included in embedded value, but fall outside of adjusted headline earnings as defined. The overall growth in embedded value of 12.7% was competitive and up on the prior year.

Here, we show you our estimate of the equity value of the business. We have set out for each of — each key component, the basis we have used for arriving at the value. The group equity value excludes a multiple for the value of new business, which should be added to get to a fair or appraisal value. The group equity value declined by ZAR 6.1 billion from the prior year, but has remained largely flat on a per share basis.

Key drivers of the reduction in group equity value include share buybacks of ZAR 4.9 billion and dividends paid of ZAR 5.4 billion, a reduction in the value at which Nedbank is included of ZAR 3 billion following a lower dividend growth outlook, a devaluation of our Zimbabwe business of ZAR 1.5 billion. This was offset by an increase of ZAR 8.7 billion in the value of our operating businesses and other, which includes the holding company at net asset value.

I will now hand back to Iain to conclude on our outlook.

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [4]

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Thank you, Casper. And now to the future. In October, our best projections for South African GDP growth in 2020 were that it would come in a touch above 1%. By January, we had revised this outlook down. And now here we are in March 2020, facing a pandemic, which has spread fear across the world, and the specter of global recession is growing stronger by the day.

One of our founding values at Old Mutual is to be a certain friend in uncertain times. For our staff, who are the lifeblood of the organization, we’ve implemented measures across all of our operations to minimize their exposure to this virus. We believe that taking proactive action led by the executive team will further protect our customers, their families and the communities we are honored to serve. However, even with the best measures, downside risks remain. What we do know, however, is that in 2019, Old Mutual once again proved its resilience.

Our performance under trying circumstances demonstrated the strength of our balance sheet and our diversified operations ability to weather multiple storms. We also know that our stress testing has demonstrated that we have sufficient capital and liquidity to withstand a perfect storm scenario. Our balance sheet remains strong and our cash generating ability remains strong. We follow a prudent capital management philosophy and our invested shareholder portfolio is biased towards cash and hedged equities. We remain humble about our history and look forward with excitement at the next 175 years.

Over the medium term, we expect that meeting several of our most important targets will be challenging. Taking out further costs in a time of lower revenue growth will continue. We will remain very closely focused on our operational results, digital enablement and exploiting opportunities for growth. The investments we’ve made in enhancing our customer and intermediary experience will no doubt be essential to remaining competitive and winning in our markets. We also anticipate that our healthy solvency ratios will continue to support returns to shareholders.

Thank you very much for your attention, and we’ll now be only too happy to take any questions that you may have. Our executive team are either here in the room or on the audio link to do that.

Sizwe, do you want to open up the line?

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Questions and Answers

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Sizwe Ndlovu, Old Mutual Limited – Head of IR [1]

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Do we have any questions on the conference call?

In the interim, while we wait for questions to come through on the conference, we do have one question that’s come through. It is from Londiwe Buthelezi at fin24. And she asks, can you give us some color on your banking and lending business? How many customers hold OM money accounts now? And seeing that you are aggressively marketing the account and OM rewards and the rollout of more ATMs, do you plan on getting your own banking license anytime soon?

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [2]

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Clarence, do you want to take that one?

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Clarence Tsakani Nethengwe, Old Mutual Limited – MD of Mass & Foundation Cluster [3]

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Thanks for the question. We have over 400,000 money account customers with over 270 of them as primary account holders. In terms of the question around whether we intend going on banking, it’s something that will be determined by the strategies that we’ll be communicating later in the year whether we’re going that route. But so far, we have got a relationship with Bidvest and that relationship is still very sound, and there’s no need for us to make any changes to that.

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Sizwe Ndlovu, Old Mutual Limited – Head of IR [4]

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Do we have any questions on the conference call? As things stand, that was the only question that we have received so far.

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [5]

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Is that someone trying to ask a question?

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Sizwe Ndlovu, Old Mutual Limited – Head of IR [6]

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Can we confirm?

Ladies and gentlemen, please remain patient while we just re-establish connection with the line.

Do we have any questions on the conference call?

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Unidentified Analyst, [7]

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Can you hear me?

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [8]

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Yes. We can hear you.

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Unidentified Analyst, [9]

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Okay. Am I live to the audience?

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [10]

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Yes, you are.

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Unidentified Analyst, [11]

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Okay, excellent. Sorry. Just firstly, I want to know about the impact of the release of investment guarantee reserves, we’ve added ZAR 1 billion to adjusted operating profits. In the light of market conditions now, do you think that was a prudent thing to do? Obviously, also, I think you mentioned also in the EV statement footnote that your — part of the release reflected lower volatility assumptions — market volatility assumptions and maybe you can give us a sense of what would happen to those reserves at these levels of volatility? That’s one question.

Second question relates to Nedbank. Nedbank share price is down 40% year-to-date. What impact does that have on the life ACR ratio given that Nedbank is accounted at market value towards capital? I assume that given — there will be some reliefs in the system. And given that the shock — equity shock is also (inaudible) at that significant impact on your ACR ratio, but related to that as well as it might — maybe advisable to either hedge that exposure or to have more diversified — in other words, not so much exposure to the Nedbank share price reliance on Nedbank for capitalization in the life business, the second question.

And then the third question, you’ve — in Personal Finance, your mortality experience and match experience at the quarter end consequently changed operational [growth], which had a big negative impact, but it was offset by the allowance for potential positive impact of future premium increases. I just wanted to get a sense of what is that guaranteed period? And you’ve launched Greenlight back in 2004, so it’s 15 years older. You’ve got a lot of experience now in terms of policies that come through that guaranteed period. As you’ve been able to increase premiums, what has been the impact of those premium increases on that experience, for example? Just wanted to get a sense of whether premium increases really help and whether you’re comfortable that you’re able to get some of the money back through premium increases on those policies?

I think just also last question related to the coronavirus. If you can maybe give a sense or give some pointers in the direction where we can see what is your longevity risk and whether that is higher than your mortality risk? Maybe just give us a sense in terms of what would be the impact of — if people at, say, ages over 65, there’s a very meaningful increase in mortality. Would you have — probably fairly offsetting release from annuity books, which would impact a higher mortality on risk-only policies? Given that experience — or the mortality experience, it’s most of [the older aged], is this — is it fair to say that your annuity book would give you a meaningful offset to the mortality risk there?

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Casparus Gerhardus Troskie, Old Mutual Limited – CFO & Executive Director [12]

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Okay. So there’s 4 questions there. I’ll start with a very high-level overview. On the IGR piece, the main change we’ve made is to bring the economic scenario generators model outcomes closer to the way that we actually hedge the book. So it was really just an improvement in the accuracy of the ESG scenarios to what we are doing in reality. So we don’t feel that, that was a relaxation in prudence as it were. And I’ll perhaps ask Nico to comment on what we’ve done since then to test the situation.

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Nico van der Colff, Old Mutual Limited – Chief Actuary [13]

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Nico here. I think it’s useful to also realize that our IGRs currently consist of 2 components. One, we do a best estimate calculation, and then we hold the discretionary margin over and above that. And we’ve been managing that discretionary margin very carefully over many years to accumulate a material discretionary margin on the IGRs. And a material change in this process was that we realized that our discretionary margins were starting to get excessive and didn’t need to be quite so large to provide the level of protection we were looking for from the discretionary margin. So there’s a best estimate component that you can see when you look at EV, but the profit release mostly came from needing smaller discretionary margin in addition to the best estimate APN 110 liability we were holding. We’re comfortable that it’s been holding up reasonably well through this very noisy period at the start of 2020 with the hedging behaving reasonably compared to what this model suggests and, therefore, we’re not uncomfortable with what we’ve done in the last year.

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [14]

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Casper wants to add. Can we get a mic here for Casper?

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Casparus Gerhardus Troskie, Old Mutual Limited – CFO & Executive Director [15]

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I think I’ve got…

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [16]

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All right. Casper’s got a mic on.

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Casparus Gerhardus Troskie, Old Mutual Limited – CFO & Executive Director [17]

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First of all, on the Nedbank holding, their capital requirement is a function of the value. So as the value reduces, the capital requirement reduces. So you — there’s no volatility on your ratio unless you — unless — it’s just the diversification impacts. So the volatility of the ratio is very stable, whether you have big or low market shocks.

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [18]

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And then on the PF side, Kerrin, can we check if you got the question and are able to respond?

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Nico van der Colff, Old Mutual Limited – Chief Actuary [19]

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I did hear. Can you hear me?

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [20]

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Thanks. We can hear you well, yes.

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Nico van der Colff, Old Mutual Limited – Chief Actuary [21]

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So in response to that question, we have different periods where we can review the premiums, spread across 5 years, 10 years and 15 years term. And we actually started this review in H2 last year. So we sent our first sets of letters out in July and August. The first set of increases took place in October. It is a nuance review, so it’s not equal across all different cohorts. But together, it’s a very material lever for our future profitability. And so far, we haven’t seen [letters] increasing materially.

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [22]

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Thanks, Kerrin. I believe we’ve answered all those questions. Are there any further questions on the line?

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Sizwe Ndlovu, Old Mutual Limited – Head of IR [23]

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We do have one more question.

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Operator [24]

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Yes. The next question is from Warwick Bam from Avior.

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [25]

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Warwick, would you like to ask your question?

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Operator [26]

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Unfortunately, we are not getting a response from Warwick, so there are no further questions.

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Iain George Williamson, Old Mutual Limited – Interim CEO & Director [27]

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Okay. Ladies and gentlemen, well, thank you very much then for your attendance. We look forward to engaging with many of you one-on-one in the coming days. Thanks very much for coming, and I hope you found the presentation useful.