Old Mutual (OMU) showcased a strong financial performance in its 2003 Annual Results, as conveyed by CEO Iain Williamson. The company saw a significant increase in Life APE sales, gross written premiums, and the value of new business. Old Mutual highlighted operational growth and increased shareholder investment returns as key drivers behind a 21% increase in adjusted headline earnings. The firm remains focused on strategic initiatives, including the integration of financial services and the transition phase of its banking operations, while also maintaining a commitment to sustainability.
Key Takeaways
- Life APE sales rose by 17% to R14.6 billion; excluding China, the increase was 25%.
- Gross written premiums grew by 14% to R25.5 billion due to new sales and client retention.
- The value of new business (V&B) surged by 37% to R1.9 billion.
- Return on net asset value (RONAV) increased by 170 basis points to 11.1%.
- A final dividend of 49 cents per share was declared, along with a R1.5 billion share buyback.
- Operational efficiencies achieved through the migration to the Old Mutual Protect platform.
- Investments in renewable energy and recognition for environmental, social, and governance practices.
- Old Mutual expects interest rate cuts and growth improvement in key markets.
Company Outlook
- Strategic focus on being customers' first choice for financial services.
- Building an integrated financial services business, including a bank and the Next176 ecosystem.
- Anticipation of interest rate cycle peak and growth improvement in key markets.
Bearish Highlights
- South African economy challenges: Low GDP growth and market volatility.
- Increased finance costs due to higher interest rates and issuance of debt.
- Loss from associates in China due to decreased investment growth and increased claims.
Bullish Highlights
- Mass and Foundation Cluster and Personal Finance and Wealth segments reported strong growth.
- Old Mutual Investments delivered resilient results.
- Old Mutual Africa regions showed exceptional profitability growth.
Misses
- Old Mutual Insure faced underwriting margin pressure due to weather events and reinsurance costs.
- Persistency was poor in the first half of the previous year, although improved in the second half.
Q&A Highlights
- Discussion on persistency rates and the impact of high living costs.
- Funding for the bank transition and pre-launch activities addressed.
- Elevated costs related to the Life and Savings business and bank transition.
- Confirmation of dividend inclusion in the capital ratio and special dividend impact on discretionary capital.
Old Mutual's earnings call revealed a company capitalizing on operational efficiencies and strategic initiatives to drive financial growth. Despite challenges in the South African economy and insurance business, the company's diversified segments and focus on customer trust and ecosystem partnerships have contributed to its robust financial results. Old Mutual's commitment to sustainability and strategic delivery on core and new growth engines positions it well for future performance in a recovering economic landscape.
InvestingPro Insights
Old Mutual (ODMUF) has continued to demonstrate financial resilience with a number of positive indicators that align with its robust performance outlined in the recent earnings call. According to InvestingPro data, Old Mutual is trading at an attractive earnings multiple with a P/E Ratio (Adjusted) of 17.53 as of the last twelve months up to Q2 2023. This could suggest that the stock is undervalued compared to its historical earnings, which is a point of interest for value investors.
The company's commitment to returning value to shareholders is evident, as reflected by a significant dividend yield. Old Mutual has maintained dividend payments for 14 consecutive years, highlighting its consistent approach to shareholder returns. This is further supported by the fact that management has been actively buying back shares, which can be an indication of the company's belief in its own undervalued stock and a commitment to enhancing shareholder value.
Despite some challenges, such as the anticipated sales decline and an expected drop in net income for the current year, Old Mutual remains a prominent player in the Insurance industry with a Price / Book ratio of 0.88. This could indicate that the company's assets are potentially undervalued on its balance sheet, providing another layer of interest for investors looking for market opportunities.
For those interested in a deeper analysis, there are additional InvestingPro Tips available that can provide more nuanced insights into Old Mutual's financial health and market position. By visiting the InvestingPro platform and using the exclusive coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription to access these valuable tips and data points.
In conclusion, Old Mutual's strategy and financial metrics present a compelling case for investors, especially considering the company's low earnings multiple and strong dividend history. With additional insights available on InvestingPro, investors have the tools to make informed decisions regarding their interest in Old Mutual's stock.
Full transcript - Old Mutual-Exch (ODMUF) Q4 2023:
Langa Manqele: Good day and welcome to Old Mutual 2003 Annual Results. We are coming to you live from our offices in Johannesburg, South Africa. Before I get carried away, I get ahead of myself, let me introduce myself. My name is Langa Manqele. I am the Head of Investor Relations at Old Mutual. We have already uploaded our reporting sheets on the website. So for those of you who have not seen it, you may already download it from there. When we get to the Q&A stage, I will give you further instructions on the conference call. The operator will be available to assist you with questions and for those who are on the webcast, I will be selecting the questions and reading them to you. Moving on to the agenda for today, we have our standard items which we are really excited to present to you. First off, is our Group CEO, Iain Williamson who will take the stage and give us a strategic review. He will shortly be followed by Casper Troskie, our Group CFO, who will give you the financial review. After that, Iain, I'll ask Iain to come back to the stage to cover the looking-forward item on the agenda. I will then pick it up from there to cover the Q&A, once we are done with the Q&A, Iain will close the day for us. So, on that note, I would like to call Iain to the stage. Thank you.
Iain Williamson: Thank you, Langa, and welcome everyone to our 2023 results presentation. It's our strongest set of results I think since we listed back in Johannesburg in 2018 and it really is a privilege and a pleasure to stand here and to unpack them a little bit for you. These results demonstrates a clear link between the strategic choices that we've made, market share gains we’ve seen in key business segments and the improved profitability of our business. We’ve seen good strategic delivery against our Group targets and real progress towards our victory condition with robust underlying operational delivery. We have high conviction in our strategy, which I'll get to shortly. So, as I said strategic choices across our segments are driving profitable top-line growth. We gained market share in key market segments with Life APE sales, showing continuing strong momentum and growing by 17% to R14.6 billion. If you strip China out of the numbers, like-for-like Life APE sales were up 25%. On the gross written premium side, we saw an increase of 14% to R25.5 billion, driven by both new sales and good client retention. From a value perspective, our top-line growth has been profitable in a competitive environment with V&B up 37% to R1.9 billion and we believe that this is a sustainable base to drive forward from. This is driven by higher margin risk sales and obviously with the top-line growth expanding you’ve also seen margins expanding somewhat. Return on net asset value up 170 basis points to 11.1%, driven by both the increase in RFO, as well as higher shareholder investment returns. This is not yet where we would like it to be, but it is heading in the right direction. From a capital and returns perspective the Board approved a final dividend of 49 cents per share, bringing the total dividend for 2023 to 81 cents, an increase of 7% on 2022. We also should note that we concluded our share buyback of R1.5 billion during the second half of 2023. Just as a reminder, our strategic framework, which is our true North has not changed. It’s anchored in our victory condition of becoming our customers’ first choice to sustain, grow, and protect their prosperity. And we use the value drivers on the right hand of the slide to link our strategic actions to our value create creation process. We're building out an integrated financial services business underpinned by both a growth vector in growing our core business, as well as in unlocking new growth engines for longer term growth in the future. So to recap on why we've chosen an integrated financial services strategy. This represents our strategic choice to deliver value through deeply engaging experiences for our customers, partnering with them on our journey to lifetime financial wellness. And we really care deeply about this it’s deep in the DNA of Old Mutual. The integrated financial services is both around what we refer to as the My Old Mutual ecosystem, which is a data rich platform bringing together customers and advisers with Old Mutual rewards underpinning a value sharing system for customers who fulfilled lifetime goals with us. This ecosystem is at vast lead, integrated, take forward and underpinned by trust. So moving then on to strategic delivery. We said that we would measure our progress under five pillars. The first three of which sit underneath our growing and protecting the core feel. A listed coverage of custom needs distribution and digital engagement and operational efficiency. So under her holistic coverage of customer needs augment to protect continues to drive further increases in underwritten sales, particularly in our Mass and Foundation Cluster business and this has provided us with a platform for strong profitability. We've also added an affordable private healthcare solution for low income earners which is delivered through their employers. This highlights the benefit of group synergies we've been able to unlock with this product being underwritten by the recently acquired generic business in the arbitrary share stable. We launched our Old Mutual Rewards program into our Namibian customer base during 2023. This has taken the total membership of our rewards program to 2.2 million customers. That's an increase of 22% on the prior year. Work in progress in this pillar includes the pilot of our Old Mutual home loans solution. This is a friend and family pilot in conjunction with SA Home Loans as an origination partner where you originate assets onto the OMLACSA balance sheet directly. Turning into distribution and digital engagement. On the 1st of December, we concluded the acquisition and took management control over Two Mountains business. This complements our existing Mass and Foundation Cluster businesses and allows us vertical integration across the funeral services value chain. It also allows us to expand our distribution presence across five provinces in South Africa and we believe there is material scope to further scale this business in partnership. MyOldMutual App has now reached 1.4 million of our customers, an increase of 17% on the prior year. Work in progress in this pillar includes the pilot phase of the particular adviser enablement toolset that we have built in partnership with One Connect technology solutions. So moving then on to operational efficiencies. The highlight of the second half of 2023 was that we migrated our entire Greenlight risk book of business onto our new Old Mutual Protect platform. This constitutes the migration of 1.85 million risk policies and having them now on the same platform as Old Mutual Protect allows us to deliver operational efficiencies and will allow further efficiencies over time as we decommission the legacy administration systems. And on that note, work in progress is in fact the decommissioning of our legacy platforms. We have started this to start to unlock Efficiencies, the real benefits will only emerge when the systems are completely switched off. We also are progressing the finalization of the build of our savings and income proposition, which will be consolidated onto the same Old Mutual Protect platform resulting in further scale and efficiency benefits. So moving then to the new growth engines and starting with these are intended to grow our profitability and our earnings in the longer term through both the high growth strategic markets in Old Mutual Africa regions and to accelerating our integrated financial services capabilities with the build of both the bank and the Next176 ecosystem. In strategic growth markets, we've continued the pivot to corporate on the Life side, as well as the turnaround in our P&C business, which is now bearing fruit. We've seen growth flows in these regions up 54%, driven by a new mandates in East Africa and the P&C turnaround has contributed significantly to profitability with East Africa as a region now turning to profitability. We continue to execute against our perimeter review of this business assessing all our businesses in market for their potential to achieve a top three market position. In line with this framework, we've decided to exit the UAP Insurance business in Tanzania with the sale of that business pending regulatory approval. Work in progress in strategic growth markets includes our focus on expanding our distribution and refining our product sets in China. We’ve signed a headquarter-to-headquarter agreement with Everbright Bank and I think I should acknowledge at this point that during 2023, we experienced significant headwinds in China, both from a regulatory perspective, as well as from a market and interest rate volatility point of view. In the area of strategic growth businesses, on the bank build, the review of our Section 16 application by the Prudential Authority is underway. They have confirmed that our application is legally complete and that they are reviewing it and will get back to us. The core capabilities of the bank are now complete both on time and within the budget envelope of R1.75 billion that our Board had approved. The capabilities that have been built on that platform have been independently reviewed by our external auditors and certified through the PA as being fit for purpose and capable of supporting the running of a fully fledged bank. We now shift in this program from project mode to what we are referring to as a transition phase before the launch. Once we receive our section 17 license, which is a conditional bank clause, we will be required to conduct an extensive industry testing period, which will take at least three months. During that period, we integrate into the National Payment System and into all the payment clearing houses in the Payments Association. We’ve set aside a budget of approximately R800 million for this phase and we expect to complete this phase towards the end of this year. That will then take us to position where the Bank is ready for launch to the public. Work in progress in this pillar includes the further building out of our early-stage innovative venture portfolio in Next176. And to build early to pine on the success of that portfolio, as well as on orchestrating new strategic investments and partnerships for the Group. Two examples of success in this area in the second half of 2023, we launched a branded digital world solution under the TeBA brand in partnership and we launched a micro SME lending capability in Kenya in partnership with Standard Chartered (OTC:SCBFF) Ventures. As a Group, we remain really proud of our efforts in sustainability. We are funders into 39% of the installed capacity of renewable energy in South Africa as a country. OMIG has invested R167 billion in the green economy amounting to around 37% of their assets under management and of this, we've invested R50 billion almost R31 billion in renewable energy. We’ve received independent third-party recognition for our efforts in this area with S&P Global, increasing our ESG score to 43 in 2023 and that’s an improvement of 34% over the prior year. OMIG also won an award as the best sustainable investment manager in Africa from European Global Investments sorry European Global Business. A few brief remarks on the operating environment that we needed to navigate during 2023. But only need to tell anyone that lives in South Africa or indeed on the African continent to just how tough it’s been out there. We’ve seen severe growth constraints in the South African economy with GDP growth in 2023 revised down to 0.6%. We’ve seen heightened market volatility across many of the Africa regions markets with currency volatility and US dollar shortages being almost power for the horse in many of have these markets. As a consequence, businesses and consumers are faced tight financing conditions, low business confidence and constrained disposable and discretionary income. So in responding to these headwinds as a business we relied on our ecosystem partnerships to unlock new growth opportunities as well as on the trust that consumers have in our brand and the depth of our customer relationships to retain and grow our customer base. And I think our intermediary force in particular has done a magnificent job of navigating through this environment. From an outlook perspective, we do believe that the interest rate cycle has peaked both in South Africa as well as generally across the continent and we do expect rates to start to come down now in the medium term. In South Africa, a significant rollout of private power generation capacity is underway, which should start to alleviate the burden of load shedding on a forward-looking basis. These factors combined should serve as a catalyst and be growth positive in our key markets going forward. I'm now going to move on to a brief commentary of the performance of each of our segments and then I will hand over to Casper to take you through the detailed financial results. Starting with Mass and Foundation Cluster, Clarence and his team have delivered a great outcome underpinned by the power of our diverse distribution channels and focusing on margin accretive risk sales, which has delivered profitable growth. We are accelerating market share gains in the Life Insurance business in this segment with Life APE sales up 14% driven by underwritten sales growth. Our top-line growth in this segment is highly profitable and our VNB margin came out of 8.8% at the upper end of our target range. Persistency remains a key concern in the medium term. We continued to grow our lending book responsibly with the book growing 6% to R16.3 billion. But we have seen both higher borrowing costs and pressure on disposable income leading to a credit loss ratio of 7.2% for the period and a decline in our net lending margin by 220 basis points. In our Personal Finance and Wealth business, we've continued to scale our adviser footprint and deployed tech forward productivity toolsets to help to drive productivity and growth in our channels. Kerrin and her team have delivered strong profit growth and strong growth in top-line metrics. We’re gaining market share with the material opportunities still in front of us to make further inroads in this regard. Life APE sales increased by 15%, driven by in particular, guaranteed annuity sales which were up 57% and our value of new business grew about 64% with the margin increasing by 30 basis points. We are continuing to enhance our client value proposition to further drive flows. Gross flows increased by 7% to R82.8 billion. We launched our high net worth proposition private clients by Old Mutual Wealth expanding their proposition and increasing assets under management in that area by 30% over the year. In Old Mutual Investments, we continued to benefit from the diverse capability set that we have, including our peer leading private markets franchise. We delivered resilient results in difficult markets. Both assets under management and gross flows grew in a challenging environment with assets under management up 8% to R839 billion and gross flows increasing by 3% to R32.8 billion. This was supported by high inflows into money market fixed income and into our private markets franchise. Our differentiated investment capability underpins the quality of earnings in this business. We again recorded an exceptional R14.7 billion capital raise in the Private Markets business, supporting solid growth in non-annuity revenue and highlighting the benefits of this franchise. In Old Mutual Corporate, we continued to focus on both expanding our core business through new offerings and harnessing Group synergies to drive growth. We delivered really strong top-line growth in this business and enhanced profitability in the core. Life APE sales were up 68% with the value of new business growing by 85%. The margins with rounding stayed at 1% to relative to the prior year, but clearly given the higher increase in VNB it did improve a little bit. We are broadening our value proposition to expand the core offering. Our Remchannel Consulting Service has extended its suite of solutions to large corporate clients and our SMEgo offering to SMEs has expanded the range of business enabling and financial solutions that it offers over the period. A huge shout out to Prabashini and her team for really excellent delivery during 2023. In Old Mutual Insure, we have also seen very pleasing top-line growth from a combination of the benefit of the acquisitions that we've done, as well as operational efficiencies supporting insurance revenue momentum. Acquisitions and partnerships have helped to drive both growth and product innovation. Generic and One Financial Services contributed about 4% to our top-line growth with acquisitions adding R266 million to the Insurance Service results and to that top-line growth. Both our retail and specialty classes of business were impacted severely by the weather events in both the Western Cape and Gauteng during 2023. We've also seen higher net reinsurance costs negatively impacting our underwriting margin and we continue to invest in climate risk modeling capabilities to assist us to better manage extreme weather event risks on a forward-looking basis. I'm pleased to confirm that Charles Nortje who is the CEO of CGIC has agreed to take on the role of acting managing director of Old Mutual Insure following Garth Napier’s decision to leave the Group. And finally, turning to Old Mutual Africa regions, Clement and the team have delivered another excellent year of profitability growth. The continued pivot to corporate and the strategic P&C turnaround has driven this improvement in profitability. Life APE sales were up 27% driven by growth in corporate mandates and specifically in Kenya and across both retail and corporate in Uganda. The value of new business margin increased by 60 basis points to 2.8% and on the short-term side, gross written premiums were up 3%, but particularly pleasing was the strong improvements in the underwriting margin by 870 basis points to near breakeven. We launched US dollar unit trust funds in Uganda to help to drive sales and assets under management and in Zimbabwe, our Omari fintech platform reached 600,000 active customers a few short months after launch. So with that, I will hand you over to the capable hands of Casper to take you through our financial results in detail. Casper, over to you.
Casper Troskie: Thank you, Iain, and good morning, all. I'm really pleased with the continued track record of delivery with a strong set of results for the 2023 year. In this presentation, we will be focusing on our IFRS17 results. Please refer to our Bridging pack for a comparison to our 2022 IFRS4 results. Part of this business delivered improvements on most of our earnings, capital and value targets. Our results from operations increased by 14% to R8.3 billion. Adjusted the headline earnings grew 21% further bolstered by increased returns on our shareholder portfolios with cash generation remaining strong at 82%. Our returned on net asset value increased to 11.1% due to earnings growth and continued capital optimization. Final dividend of 49 cents per share was declared, in line with our dividend policy bringing the total dividend for the year to 81 cents, an increase of 7%. I remain extremely pleased with our sales traction with the value of new business or VNB increasing substantially by 37% to R1.9 billion and the VNB margin increasing to 2.3%, remaining well within our target range. Our contractual service margin or CSM grew 4% translating to a return of 14.5% for 2023. Unpacking the RFO in a bit more detail, our result in Mass and Foundation Cluster grew by 22% to R1.8 billion, largely due to higher life profits, partly offset by lower profits from the banking and lending businesses. Life profits showed a strong improvement due to higher risk sales volumes, higher returns on the CSM and better retention outcomes relative to stronger assumptions. Banking and lending profits declined due to the higher credit losses and the negative impacts of increased funding costs from higher interest rates. RFO and in PF & Wealth grew by 10% to R3.7 billion. Personal finance RFO benefited from better returns due to higher interest rates on our CSM, positive reinsurance based changes and higher mobility profits. Our mortality experience was better in 2023. However, profits lowered due to prior year benefiting from further excess Covid-19 provision releases. In Wealth Management higher annuity revenue was supported by higher average assets levels. Non-annuity revenue increased significantly to improved market valuations of seed capital investments. RFO in Old Mutual Investments reduced by 1% to R1.2 billion. IRFO in the alternatives business was offset by lower earnings in asset management and a reduction in fixed life financings due to mark-to-market adjustments and higher overall expenses as a result of vacancies filled investments in revenue generating initiatives and technology. Corporate’s RFO increased by 19% to R1.7 billion. This performance was driven by high returns on the CSM, better than expected mortality underwriting experience with prudent expense management also contributing to profits. Old Mutual Insure RFO decreased by 23% to R46 million - sorry by 92% to – sorry, excuse me. Old Mutual Insure RFO decreased by 23%, to R524 million, mainly due to the decline in underwriting results. The net underwriting results decreased by 92% to R46 million and an underwriting margin of 0.3%. This decrease was due to significant increase in reinsurance costs, higher weather-related claims experienced in our retail business once payments in IFRS, as well as an increase in insurance service expenses. African regions showed exceptional growth in RFO, more than doubling to R1.1 billion. This was driven by very strong growth in Life and Savings and Property Casualty profits, with solid growth in asset management, partially dampened by reduced banking and lending profits due to continued challenging macroeconomic environments. Life and Savings profit was driven by the ongoing shift towards more profitable corporate business, as well as improved mortality experience. Property and Casualty RFO increased due to good top-line growth and improved underwriting margins as Iain explained. The loss on net results from Group activities which includes our investment in new growth and innovation initiatives increased by 22% to R1.8 billion. The increase in sales operational costs was primarily due to increased product and adviser platform project costs with the risk experiences increasing aligned with inflation. As we transition, the existing and new product platforms are being run in parallel, results in duplicate costs for reduced as old platforms are decommissioned. IFRS17 implementation costs also contributed to higher expenses and this will not repeat following the successful implementation in 2023. Adjusted headline earnings grew 21% to R5.9 billion, driven by strong operational growth and a significant increase in the shareholder investment return. The increase in the shareholder investment return is largely driven by higher equity and bond returns in South Africa and higher equity returns in our Africa regions. Increase in finance cost is driven by higher interest rates in South Africa, as well as the issuance of R1.5 billion of subordinated floating rate debt during the year. The loss from associates represents our investment in China. Our loss increased as a result of decreased investments growth, increased claims and rising reserve constitute to a downward trending yield cliffs. Shareholder tax increased as a consequence of increased profits. The effective tax rate remains above its statutory rate primarily due to the apportionment of expense deductions for tax. The main movement between adjusted headline earnings to headline earnings, results from our operations in Zimbabwe, which remain excluded from adjusted headline earnings to just not being able to access the majority of our capital. Zimbabwe profits of R2 billion were largely offset by the increase in the balance sheet, foreign currency translations, with the net impact and increases in net asset earnings of R450 million. Accounting mismatches consists mainly of once of hedging losses that arise from the transition of the hedging program to IFRS17, which is now concluded. The impacts of residual plc on our profits continues to decrease as we unwind our operations and reduce cash balances with a dividend of 3 million pounds paid to the Group in 2023.Overall, IFRS earnings increased by 35% to R7.1 billion. I think this is my favorite slide. Our opening contractual service margin on 1 January, 2023 was R59.8 billion. New business written through the CSM by 5.3% in 2023. Annual interest contributed to the further 9% compared to 5.6% for 2022, the R1 billion positive economic experience is driven by actual returns in higher than expected on policy holder funds resulting in an increase in expected asset-based fee income on most investment and smooth bonus products across the Group. A key item to note is the R6.5 billion that is released into profit at an allocation rate of 9.4%, which is within the expected range resulting in an overall return of 14.5% on the opening CSM balance. The group’s value of new business increased by 67% to R1.9 million and the VNB margin increased to 2.3%. Our VNB Martin is sensitive to mix and volume changes between segments. Whilst we saw strong growth in higher margin risk business in MSCI and PF, the margin was diluted by a very large rand value accretive transaction in our corporate business. Given these outcomes, we will continue to target a VNB range as we prioritize growth in rand value of new business at profitable margins. The strong growth in VNB is reflected in the R3 billion increase in embedded value with operating embedded value earnings increasing to R7.3 billion. Development costs relate mainly to new platforms to deliver proposition, digital and adviser platforms to support our integrated financial services strategy. Experienced variances improved with positive mortality in expenses, partially offsets by worse persistency. This resulted in a return on embedded value of 11.2%. Group equity value represents management’s view of the market value of the Group based on a sum of the parts valuation by line of business. The share price continues to trade at a significant discount Group equity value. And believes that the combination of improved margins and returns from our core business, as well as the traction on our new growth engines will close the gap between our market capitalization and the Group equity value. We remained committed to our capital management framework consisting of balance sheet strength concerted capital deployments and balance sheet efficiency as a means to enhancing value for shareholders. Our Group’s solvency rate share of 178% remains solid and within our solvency target range. The reduction relative to 2022 is due to the inclusion of our China operations on a South African Prudential basis for the first time this year. With approval from the Prudential Authority, reflect previously been included on the local signings regulatory basis called TIROS. Our view of the economic risks we are carrying aligns much more closely with TIROS and the South African basis. Therefore, this change does not impact the bridge cash generation, dividend paying ability or discretionary capital. We expect cash generation narration to be between 70% and 80% of adjusted headline earnings before capital optimization. Operating segments generated growth free surplus of R4.8 billion in 2023 representing 82% of adjusted headline earnings with R0.8 billion contributing to discretionary capital. We continue with various initiatives to optimize our capital, which will support capital generation in the medium-term. This then brings us to our discretionary capital. The capital allocation for the year includes the acquisition of an equity safe in the Two Mountains Group. The generic acquisition and minority buyout of Old Mutual Finance Namibia and [Indiscernible]. In addition, capital support was provided to fund growth and innovation initiatives with the largest allocation to the bank build. R1.5 billion was returned to shareholders by the share buyback. The December discretionary capital balance of R1.1 billion has been earmarked for the continued investments in our growth and innovation initiatives. An OMLACSA special dividend of R2 billion has been approved by the Board. Should regulatory approval be obtained, this will increase our discretionary capital balance in 2024 and will therefore be available to fund growth or a return of capital to shareholders. Our Group RONAV continues to trend upwards supported by significant improvements in adjusted headline earnings. RONAV’s excluding new growth initiatives increased by 210 basis points to 13.1% now about our cost of equity. Improvements to RONAV excluding growth initiatives are dependent on three factors. The ongoing optimization of our balance sheet, the continued market share recovery of our retail segments, and the impacts of external market factors and investment returns. We have delivered on most of our medium-term targets and will continue to focus on improving our net underwriting margin and our RONAV. I am really proud of our team that has delivered this excellent set of results here today. And with that, over to you Iain. Thank you.
Iain Williamson: All right, thanks very much, Casper. So just moving to the outlook. We aim to continue strategic delivery on both our core and on accelerating the identified new growth engines. From an operational performance perspective, as Casper has highlighted, we will focus on further improving the net underwriting margin short term business through – mainly through efficiencies. We have delivered now a RONAV of 11.1% with RONAV really excluding our new growth initiatives coming in at above our cost of equity at 13.1%. But going forward, we continue to aim to enhance RONAV through considered capital allocation, optimization and distributions. From a strategic delivery perspective, we would like to accelerate the transition phase of the bank by completing the industry testing and industry integration that we have in front of us within budget. And we will provide clarity to the market on our path to and timing of profitability in the future. We will launch our savings and income proposition consolidated onto the Old Mutual Protect platform and we will decommission our legacy Greenlight platform and unlock further efficiencies in our cost base as a consequence. We will provide the market periodically with updates on the outcomes of our perimeter review exclusion. So in conclusion, I'd like to highlight just a few points. Our integrated financial services business is taking concrete shape with a strong value proposition for customers and the proof points of this lie in the market share gains we've seen with the strong light strong top-line growth, which actually had a compound annual growth rate basis from 2021 has been delivered at 13%. We've seen profitable growth as an outcome of deliberate strategic choices across our business segments and we’ve seen capital and returns improving as a consequence of both optimizing our capital allocation and improved profitability. I'd like to just acknowledge and thank all the teams in Old Mutual who contribute every day towards achieving our victory condition of being our customers first choice to sustain grow and protect their prosperity. Thank you everyone for your time, your interest and your support to our business. And I would like to ask Langa to join me up here to facilitate our Q&A session. Thanks.
A - Langa Manqele: Thank you very much Ian and Casper for that very succinct presentation and a very strong set of results that you've presented here today. With that, I would like to just now move on to the Q&A session. I'm going to improvise a bit of what are the information that we've got quite a high number of people who are on the Chorus call. So I will start with the operator. Just some few housekeeping rules start with the operator. Just some few housekeeping rules please introduce yourself, address the name of the firm you are from and who you are directing the question to and we limit the question to just two hands I'll set first with the five set of hands on the Chorus Call. And with that, over to you operator.
Operator: Thank you sir. The first question we have comes from Andrew Sinclair of Bank of America. Please go ahead.
Andrew Sinclair: Thank you very much everyone and three questions from me if I may. Casper, can I start with your favorite slide 24? I think it was on the CSM. It looks to me that CSM underlying growth by which I mean new business plus the trust accretion minus the underlying and what was about 3.7% for the underlying basis? And I think interest accretion is possibly going to be able to get lower going forward. And so really - just I just wanted to see if you can give some guidance on what source of organic growth potential you see for the for the CSM medium-term? That's my first question. Second question is, just if you can give us some more color on persistency you've seen? And what's here what's left of your persistency provision now and at home? What do you think that should cover? And then my first question was just a point of clarification on the R800 million spend for the bank that you were talking about today. Is that’s incremental to what's previously been announced for expenditure in the bank? Or is that part of the previously announced expenditure targets? Thank you very much.
Langa Manqele: Thank you, Andrew for that question. I'll hand over to Casper to take those questions.
Casper Troskie: So, let me start with the CSM. So, obviously, we’ll still see significant growth potential in the size of the value earning reserves. And we expect that to help the growth rates obviously the same going forward. Well, let's see how interest rates going forward to see that how sustainable that growth rate is for future periods, but I would expect our value earning business to help increase that growth rates. And then, it's important that the actual allocation of CSM is dependent on the individual business units and we have different accretion rates or actual allocation rates for the individual segments. So that depends on where that value is being allocated for. But we should see continued growth in the CSM and what’s supported by the new business growth and then in the short term the high interest rate environments. On the second item, I think the question was persistency. Clarence, do you want to take that?
Clarence Nethengwe: Yes, I will give an answer and I will also invite Nico to help in terms of the technical side of it. And if you don't mind the end, I'm going to expand a little bit early. I'm going to talk about. What we did last year. What we saw last year? And what we envisage is going to happen over the next two years because it's very important that I have had that. But I think it is one question that is asked quite a lot at an industry level. And how we go about answering it I don't think it's giving a true picture of what is happening. So, first half of the year last year, persistency was very bad. And we raised or we topped up our short-term provision at H1. You were to call we took them a nice hit on our profits, as well as the CSM at that point in time. And the reason why we did that just one that to make sure that will protect our outcomes particularly for the second half of the year. And what we then saw happening through H2 was an improvement relative to that strengthened basis that we strengthened at H 1. And then, at the end of the year, we went to the Board and the Board is handling with that. So where are little guys, you guys have been raising this or provisions or business trends and alike. You need to do a better job and tell us what is going to happen over the next few years. We then pushed in from our I am sure our consult is a team because I had an hypothesis and my team also had a hypothesis and the hypothesis is what, when the cost of living is very high you tend to see persistency going down. And then the actuarial team did a piece of work and then they identify the relationship between a number of things. One, the cost of living, two, real disposable – and real income first of all- household income real household expenses and a result that disposable income part of it and persistency. And that this is as simple, when the cost of living goes up, what happens is that, they send impact in terms with expenses going up at a household level. The income being usually doesn't go up because in a country like South Africa over the past four five years, real income has not really gone up. And what you then see it’s impact don’t persistent is because people cannot afford and it plays itself the same way when it comes to credit. The relationship is the same. And then we said, well, looking forward, what do we expect is going to have? So we said, well, nothing really change in H2. We don't think in H1 of 2024 much will change because we think the cost of living particularly inflation will still be a little bit elevated, interest rates, it will take a bit of time before they start cutting them down and our belief is that they will start cutting interest rate in the second half of the year. So we needed to set up what we call an economic recovery reserve. I don't know you can call it forever. But we set it up for a two year period because we believe. that for a two-year period that recovery will gradually come through and at the end of the year period, we believe we will get back to our normal base and as such there won't be any need for any short-term provisions, economic recovery or whatever recovery you want. So, I hope I have answered this question because it was very important, because I know I'm going to be asked this question for the next two weeks.
Langa Manqele: Thanks, maybe there is anything you like to add. That’s a very comprehensive answer. Thank you very much. On that note of provisions, I might just add the provision of myself for five minutes time Clarence that you've taken. But Iain, there was a question on the bank, is the R800 million additional –
Iain Williamson: Let me just add one thing to Clarence’s answer first. So the other thing to just say, I think is, we did update our provisions at the end of the year. And they are consistent from a input into the model perspective with everything that Clarence has said and we believe that based on what we've seen the provisions are appropriately positioned. From the bank perspective, so, as we've said you previously, we adopted a gated approach and we've always communicated the pieces of funding that the Board has approved - at the point where that’s been approved. So the R1.75 billion, which is the previously announced pre-funding was for the build of the capability. As I said in my presentation, that's not complete. It was done within the budget, it was done within the time frame. But the next incremental guide that the Board has approved funding for is the transition which is the R800 million, it's actually R798 million, if you want to be completely precise about it. And the intention is that that money is sufficient to get us to the place where we take the bank to market. The activities that need to be done in the envelope of that money, we obviously do retain the team that's working on the bank for the period. We need to do all the industry testing into the 15 payment clearing houses and the Payments Association of South Africa. We need to do what's called pavement testing which is essentially getting a small pilot group of potential customers to take bank cards and go and use them at point-of-sale machines, ATMs et cetera, et cetera, and make sure that nothing leaks out of the pops in that process and then we will be allowed by the regulator to launch to the market. So that's what that funding has been set aside for. It doesn't include any budget for the please be on the start of the bank as such, but it should include everything else as long as we don't have a material delay from a regulatory timeline perspective.
Langa Manqele: Thanks, Iain for that answer and thank you Andrew for your questions. Could you please move on operator to the next set of questions? As a reminder just two per person please.
Operator: Thank you sir. The next question we have comes from Francois Du Toit of Anchor Stock Brokers. Please go ahead.
Francois Du Toit: Hey guys. Could you hear me?
Langa Manqele: Yes, we can go ahead, Francois.
Francois Du Toit: Thanks. Can I get some color on the R1.9 billion other earnings negative, other earnings, other costs in the adjusted headline earnings. How much of that relates to Life Insurance development costs maybe just a bit of color on that I see and number of R948 million in the EV statement related to that. Maybe also related to that, are you capitalizing any of the bank development spending costs or is there lot of that reflected in those numbers, as well? I am just trying to get a sense of how much of those costs are recurring? How much of those are related to projects both of the bank et cetera. That's first question, but I have a long one. Second one, can whether you comment on the foreign exchange variances in the EV statements. It does suggest that there's also hyperinflation or very high inflation in other African countries because Zimbabwe is not included in there. And then related to that, how much of your Africa earnings and also your - I mean, investment return on capital comes from those countries that are affected by high inflation - not necessarily hyperinflation but also high inflation? Those are my two allowed questions.
Langa Manqele: Thanks, Francois. Over to you Casper, first on the R1.9 billion.
Casper Troskie: Got it. If we start with the second question, yes of course I am looking through the growth and the - we have seen elevated inflation in a lot of the African countries, in particular which we commented at the half year it was obviously Malawi and - we hadn't seen we had seen the currency to relation we’ve seen a lot of inflation. So if you look at the Malawi’s results and they are - they are supported – we have very high stock market returns in the year, but we've seen that obviously the exchange rates start to go backwards. So that that return is elevated and the sort of the - what we would call once it was in the results that you can say people through. So for the rest, we all know Zimbabwe, we have the same phenomenon, but that's excluded from our adjusted headline earnings and we've commented on to the extent of profit services, currency relations through the balance sheet in and some separately, so you should be able to see them and those are the two notable - the two notable areas that we that we highlight in the results. Or just find my graph that you refer to so we are on the same. So, I'll see I'll see costs that we see in the center time and the elevated costs that we saw during 2023, there is a phenomenon experiencing the bank and the NEXT176 costs. There is a large element related to these Life and Savings business which one which you would see coming through is either once of costs in the EV statements and the development costs that you are seeing in the statement are more related to the costs that are capitalized that are not coming through our normal income state analysis and we could take you through a little bit more detail in the Q&As afterwards. And then, obviously the bank and the NEXT176 costs are outside the last business. And they also resulted in elevated particularly to the New Year.
Langa Manqele: Thank you very much, Casper, for covering that question. I'm just going to balance a little bit. There are a number of questions also coming through - from the webcast. Just to start off with Marias from ALG. He has a question because we know that your total net investment results contribute a much higher level to RFO than your peers, while it is same time your calculation of your analog credit insurance after excluding calculations of asset management, banking, et cetera are particularly high. Is this an allocation issue? Now I am rising for this how concerned are you with your analog credit cost level? And what are you doing about this?
Casper Troskie: Yeah
Langa Manqele: So, I totally understand the questions. So the question is, the contribution of our on our total net investment result is much higher. So that's the first one. Two RFO, so that's just what they are noting. Two and Marias, there is noting that at the same time that calculation is higher than our peers. And he's saying that after our analog allocated insurance cost including asset management, banking et cetera, is this an allocation issue or not?
Casper Troskie: So, - allocation is – almost Nico to answer. If you look at our what's driving on investments return, we had a equity return - we run most of our equity exposure in the net caps portfolio. And so, we returned 5.3%. The investment returns in our sales investments portfolio on the bond out of the portfolio was about 9.1% if I remember correctly. So that's driving a lot of the higher returns, because of the high interest rate environment. So, and you would see that coming through in two places, just in the obviously the interests to increase on the CSM, which we have which we've commented was higher than we expected. And then the actual the actual returns on the underlying investments were actually better than what we expected. So you've seen higher expectations and secondly, we have seen outperformance against that expectation coming through in both segment results and in the in the sales investments portfolio.
Langa Manqele: Thank you very much, Casper. Just to - I'm going to group these two, because they are very similar. They're staying with the team on shareholder costs. One is Jared from all weather once just what is the quantum of the parallel systems cost? Then [Indiscernible] is asking for guidance, what we believe is a sustainable the cost over the next three years?
Casper Troskie: Okay, so if we if we talked – I am excluding NEXT176 and I am excluding banks. The sort of banks we - I would just call a sustainable basis is between R700 million and R800 million and if you run that forward with inflation we'd expect to return to our sustainable base on a three year basis, so by 2026. But we have some in the interim. In the current year it's not just the additional dual platform costs. We also had cost quite a bit of costs relating to you load shedding and the fact that we too saw generation capability and we also then had lot of fuel costs and we had ForEx cost coming through that same much So as I said runrates R700 million to R800 million expect to come back to that on a three year time.
Langa Manqele: Thank you very much, Casper. I would like to cover one more from the webcast. Then I'm going to go back to the Chorus call, Baron from JP Morgan. He asked, may you please unpack the key challenges in the short insurance business? And when you think you can turn the business around? So I'll throw that over to Iain and Cas.
Iain Williamson: Okay. I’ll start and Charles crew has – if I miss anything. So if you look at – I assume you referring mainly to Old Mutual Insure business to the Africa regions, piece I have talked to that piece specifically you'd like some stuff on those regions as well by all means you can add it. But the drivers all a little bit different. So within Old Mutual Insure, if you look across the various books of business between personal lines, premier, specialty, CGRC, ours and the so captive businesses. In all cases, the claims actually are for those businesses are in line with or better than market for 2023. So it's another way of saying, really comfortable with the pricing and with the quality of the book and the way that the underwriting that’s been done across those portfolios with room for improvement but broadly speaking the inline. There's one exception which is the premier book. That's the - let's call it the bespoke commercial lines business. It's quite a small book of business. We have done work to stratify the customer base and look at it between almost a good, okay and bad experience piece of that book and we are doing work to look at what the best part is to remediation of that piece, but that's the only piece where I'm kind of concerned from a pricing - under our pricing versus risk perspective, let’s put it that way. The fundamental challenge we have, particularly in the personal lines businesses and efficiency challenge, the cost rise shares are too high. I think I've seen this for a few results periods in a row. We've done a lot of work to start to optimize that cost base, particularly on the claims supply chain side of things. So that part has been dealt with quite well. However, we've kind of done the low hanging fruit and some of the heart of its ore in front of us from an efficiency perspective. We’ve benchmarked the entire thing against international best practice. We understand what good looks like. We understand what needs to be done. However, what needs to be done includes a lot of tech work and a lot of automation. And so, there is a series of automation projects underway in the business which are likely to still take another year or two to bring to fruition and that’s but, in simple terms, it's not that complicated stuff, and it's the relatively simple stuff from a conceptual perspective, but the hard to do stuff from a operational perspective and it's going to just take a bit longer to get it done. But there's a clear plain, the clear path, and a clear view of what that needs to look like but it will probably take us until sort of 2026 to get to the place where we are more comfortable with that picture. Charles is that covered? Go ahead.
UnidentifiedCompany Representative: Not sure where I should stand. But okay to stand here. Yes, yeah, good afternoon everyone. I just - I think that's a good answer Iain. Maybe just add two things I think the one is, where there are like claims are a source of problems for us and I think for the whole industry that was with this what do you do about it? So we've been wasted a lot of time and money in reducing climate models. So we know for example that one of the big challenges in out portfolio is covering risks on the East Coast of kzn in South Africa for obvious reasons. We've seen catastrophic levels of flooding there. So we already sort of know that but we've modeled that and it's confirmed kind of suspicions. The question is how do you now operationalize that knowledge? What are you doing now knowing that you have these exposures in parts of the country. Do you just exit? Do you price massively for it? So the answer is a combination of things that you need to do to operationalize your modeling. So what I - what we are definitely doing is working to implement the findings of those models and then also to grow our business in classes of insurance risk, which are not indexed to the weather and are not as vulnerable to the weather. So it’s not an easy one to do, but I think, probably the whole industry is struggling with this. But we are making good progress there. So it doesn't mean that every time it rains I have to panic and not sleep. You want to get some piece of mind. And then just one of our big growth engines is our specialty business and In fact we made more gross underwriting profit out of the specialty than any of our other businesses including credit guarantee for that matter. However the issue that we've got there is it's quite a volatile business. So you tend to when you have a claim there it could be several hundred million, it could be a major factory fire that type of risk. So we have in between should reinsure that business quite conservatively for. So for those of you have some knowledge of reinsurance you've got to pick your attachment point what point do you want to reinsurers to come in and what to support in the claim? And the lower your attachment of points are more expansive your reinsurance is, it gives you greater peace of mind that this volatility but it comes at a cost. And I think I'm going to revisit and we are revisiting our risk appetite in the specialty. We've built up very strong underwriting capabilities and the team is going to back itself, we're going to back the team more and say look, we need to buy reinsurance for the big bangs. But we've been doing that perhaps to conservative level. SO I think that will unlock a lot of value add out of our specialty business which at a top-line levels growing at 20% per year, so you can't now the growth at the top. We just need to harvest more of the value coming out of that topper. Thank you.
Langa Manqele: Thank you very much Charles. We are now eight minutes past one. I'm going to try and drive and maybe see if you can lend it by quarter past one. I would like to take a set of questions again to the person each. I'll take two from the Chorus call then, I'll come back to the room. Because I know I've kind of held you at bay for now. Operator, do we have hands on the Chorus call?
Operator: We have a question from Larissa Van Devente of Barclays. Please go ahead.
Larissa Van Devente: Thank you. Good afternoon. Two quick ones on the bank from my side, please. The first one. Thank you for clarifying on the R800 million that is the additional cost to get to launch. Do you have any estimate of how much you’re likely to spend in the year two launch including marketing and the advertising campaign and alike? And related to that, can you remind us or tell us what your current breakeven target is for the bank please?
Iain Williamson: Okay. So, on the - we haven't disclosed a number for the post launch trajectory of either cost base or profits at this stage. So the R800 million is everything we will spend prior to switching on as it were, and but that would include things like preparing marketing material et cetera, et cetera but the actual operating cost post launch we clearly have a business case. We haven’t modeled. We haven’t disclosed those items. So I am not going to comment on that particular issue.
Langa Manqele: Anything to add.
Casper Troskie: Yeah on the return with the business case of the bank obviously, that's was approved - if you look at the longitude business case that right, that's above upper end of our target range. And certainly add a lot of value in the longer term.
Langa Manqele: Thank you. Then next question, please.
Operator: Next question we have comes from [Indiscernible] Securities. Please go ahead.
Unidentified Analyst: Afternoon everyone. Thanks for the time. Just two quick questions for my side. First is OMLACSA special dividend, can just walk us through how that changes the Group solvency ratio? Because you spoke about returning some of that to shareholders and because that by any means result in below the target solvency ratio at any point? And then secondly, you had a huge jump in risk sales in 2023 taking in the fourth quarter could you just give us some more color on the potential growth and whether or not many of that you're probably not really see as being sustainable. Thank you.
Langa Manqele: Thanks. Over to you, Casper. I think the second question unlike the segment MD is on the risk sales to tackle, but the first one on solvency.
Casper Troskie: So, just to confirm that when we to pay dividends we have to take that into account to our ratio already in the ratio that you are seeing at the end of the year. So we've already accrued for both the normal dividends that we are going to pay will access and the special dividend. So the general fourth sales as you see for OMLACSA’s capital ratio has already taken into account that special dividend. When it gets paid up to obviously, we haven't included that divided in our discretionary capital, because we only can't - the capital when its paid as a dividend to the holding company, so to add. So they won't be an impact on the ratio. There will be an impact in terms of additional discretionary capital of R2 billion that then comes through interim 2024 I hope that answers that. And obviously, it's obviously, then also taking into account our Group pressure because we OMLACSA is a part of the Group ratio. So the dividend there's already in fully account.
Langa Manqele: Thanks, Casper. I will give Kerrin then Clarence growth - strong growth in sales H2, but further a Q4.
Kerrin Land: Maybe I can go first and Prabashini can also add what she thought it could be a contributor to that. So it's a normal phenomenon for mother foundation trust. Because there's a five month lag between issuing of the business and the flowing of the first premium. So you to have a high sales volumes from an AP basis on the second half of the year, particularly for Q4. So Q4 last year, the growth rate versus 2022 was about 20% on the retail side. And so that played the role in terms of that that big number. But I'm not so sure about Prabashini whether there was something.
Prabashini Moodley: No, we did have good risks sales but that was spread across the year. We did have a very large retirement fund deal that flowed in Q4 and but that's not risk. Yeah.
Langa Manqele: Yeah. Thank you. I think we are comfortable, Kerrin, we are comfortable. Thank you very much. I will hold it at that and come back to the room and apologies for anyone who have not been able to get through. In the room do we have any questions, I will take a very limited set of hands. Going once, twice, okay, we do not have any questions in the room. We are 14 minutes past. I'm happy to wrap it up here. Thank you very much to everyone. Thanks, Iain and Casper for the presentations and to executive team. I would like to just apologize for some glitches to those who were logging in the web stream in the first few minutes. We did pick that up and the teams were on it and got resolved quite quickly. So apologies to all of you may have had those hiccups. I will now hand over to Iain to wrap up. Thank you.
Iain Williamson: Yeah, as always there for me, so thanks very much guys for your time and attention and your support for our business and look forward to seeing many of you in one-on-one sessions in the next couple of weeks as we go about our road show. So, thanks for coming and I hope you find it useful.
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