Old Mutual Ltd

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 and get ahead of myself, let me introduce myself. My name is Lange Mangaile. I am the Head of Investor Relations at Old Mutual. We have already uploaded our reporting suite 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'll 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, Ian Williamson. He will take the stage and give us a strategic review. He will shortly be followed by Cass Patroski, our Group CFO, who will give you the financial review. After that, Ian, I'll ask Ian 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, Ian will close the day for us. So on that note, I would like to call Ian to the stage. Thank you.

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 demonstrate 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 businesses. 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 will get to shortly. So as I said, strategic choices across our segments are driving profitable top line growth. We gain market share in key market segments with life APE sales showing continuing strong momentum and growing by 17% to 14.6 billion rand. If we strip China out of the numbers, like for like life APE sales were up 25%. On the gross return 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 VNB 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 ad 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 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 a 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 built around what we refer to as the my old mutual ecosystem which is a data rich platform bringing together customers and advisors with old mutual rewards underpinning a value-sharing system for customers who fulfill their lifetime goals with us. This ecosystem is advice-led, integrated, tech-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 are growing and protecting the core theme. Holistic coverage of customer needs, distribution and digital engagement and operational efficiency. So under holistic coverage of customer needs, Old Mutual Protect continues to drive further increases in underwritten sales, particularly in our Mason 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. And 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 our mutual insurer 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 loan solution. This is a friends and family pilot. In conjunction with SA Home Loans as an origination partner, we originate assets onto the Omlaxa balance sheet directly. Turning into distribution and digital engagement. On the 1st of December, we concluded the acquisition and took management control of the Two Mountains business. This complements our existing Mason 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. Our My Old Mutual 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 digital advisor enablement tool set that we have built in partnership with One Connect Technology Solutions. So moving in onto operational efficiencies, the highlight of the second half of 2023 was that we migrated our entire green light risk book of business onto our new old mutual protect platform. This constitutes the migration of 1.85 million risk policies. 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 neutral protect platform, resulting in further scale and efficiency benefits. So moving into 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 through accelerating our integrated financial services capabilities with the build of both the bank and the Next 176 ecosystem. In strategic growth markets, we've continued the pivot to corporate on the live side, as well as the turnaround in our P&C business, which is now bearing fruit. We've seen gross flows in these regions up 54%, driven by 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 a 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 set 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've 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 external auditors and certified to 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 license, 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 clearinghouses 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 a 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 NEXT 176. It's a bit early to opine 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 wool solution under the Teba brand in partnership, and we launched a micro SME lending capability in Kenya in partnership with Standard Chartered Ventures. As a group we remain hugely proud of our efforts in sustainability. We are funders into 39% of the installed capacity of renewable energy in South Africa as a country. OMIC has invested R167 billion in the green economy amounting to around 37% of their assets under management And of this, we've invested 30 billion Rand, almost 31 billion Rand 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 Investment, sorry, European Global Business. A few brief remarks on the operating environment that we needed to navigate during 2023. I don't think I need to tell anyone that lives in South Africa or indeed on the African continent 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 region's markets, with currency volatility and US dollar shortages being almost par for the course in many of these markets. As a consequence, businesses and consumers have faced tight financing conditions, low business confidence and constrained disposable and discretionary income. So in responding to these headwinds as a business, we've 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 Kasper to take you through the detailed financial results. Starting with Mason Foundation Cluster, claims that 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're 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 at 8.8% at the upper end of our target range. Persistency remains a key concern in the medium term. We continue to grow our lending book responsibly with the book growing 6% to 16.3 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 advisor footprint and deployed tech-forward productivity tool sets to help to drive productivity and growth in our channels. Kevin 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 by 64%, with the margin increasing by 30 basis points. We continue to enhance our client value proposition to further drive flows. Gross flows increased by 7% to 82.8 billion. We launched our high net worth proposition, Private Clients by Old Mutual Wealth, expanding that proposition and increasing assets under management in that area by 30% over the year. In Old Mutual Investments, we continue to benefit from the diverse capability set that we have, including our peer leading private markets franchise. And 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 14.7 billion Rand 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 continue to focus on both expanding our core business through new solution offerings and harnessing group synergies to drive growth. We delivered really strong top-ground 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 margin with rounding stayed at 1% relative to the prior year, but clearly given the higher increase in V&B, it did improve a little bit. We're broadening our value proposition to expand the core offering. Our REM channel consulting service has extended its suite of solutions to large corporate clients, and our SME Go offering to SMEs has expanded the range of business enabling and financial solutions that it offers over the period. A huge shout out to Prabhashni 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 four percent to our top line growth with acquisitions adding 266 million rand to the insurance service result 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 Nocquier, who is the CEO of CGIC, has agreed to take on the role of Acting Managing Director of Old Mutual Insurer, following Gaut 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, 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 return premiums were up 3%, but particularly pleasing was the strong improvement 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 Fintechs 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 Kasper to take you through our financial results in detail. Kasper, over to you.

Thank you, Ian, 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 IFRS 17 results. Please refer to our bridging pack for a comparison to our 2022 IFRS 4 results. Our diverse business delivered improvements on most of our earnings capital and value targets. Our results from operations increased by 14% to 8.3 billion. Adjusted deadline earnings grew 21%, further bolstered by increased returns on our shareholder portfolios, with cash generation remaining strong at 82%. Our return 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 V&D, increasing substantially by 37%, to 1.9 billion and the v b margin increasing to 2.3 percent remaining well within our target range our contractual service margin or csm grew four percent translating to a return of 14.5 percent for 2023 unpacking the rfo in a bit more detail rfo in mass and foundation cluster grew by 22% to $1.8 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 PFN wealth grew by 10% to 3.7 billion. Personal finance RFO benefited from better returns due to higher rates, 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 the 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 improve market valuations of seed capital investments. RFO and all mutual investments reduced by 1% to $1.2 billion. Higher RFO in the alternatives business was offset by lower earnings in asset management and a reduction in specialised finance earnings due to market adjustments and higher overall expenses as a result of vacancies filled, investment in revenue generating initiatives and technology. Warfrix RFO increased by 19% to 1.7 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. Home Mitchell Insurer RFO decreased by 23% to $524 million. mainly due to the decline in underwriting results. The net underwriting result decreased by 92% to 46 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, a once-off impairment in IOs, as well as an increase in insurance service expenses. African regions showed exceptional growth in RFA, more than doubling to 1.1 billion. This was driven by very strong growth in life and savings and profit 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 portality experience. Property and casualty RFO increased due to good top-line growth and improved underwriting margins, as Ian explained. The loss of net result from group activities, which includes our investment in new growth and innovation initiatives, increased by 22% to $1.8 billion. The increase in shell operational costs was primarily due to increased product and advisor platform project costs, with the rest of expenses increasing in line with inflation. As we transition, the existing and new product platforms are being run in parallel, resulting in duplicate costs which will reduce as old platforms are decommissioned. IFRES 17 implementation costs also contributed to higher expenses, and this will not repeat following the successful implementation in 2023. Adjusted headline earnings grew 21% to $5.9 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. The increase in finance costs is driven by high interest rates in South Africa, as well as the issuance of 1.5 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 new business growth, increased claims, and rising reserve costs due to a downward trending yield curve. Shareholder tax increased as a consequence of increased profits. The effective tax rate remains above the 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 due to us not being able to access the majority of our capital. Zimbabwe profits of 2 billion rand were largely offset by the increase in the balance sheet foreign currency translation reserve with the net impact and increase in net asset value of 450 million. Accounting mismatches consist mainly of once-off hedging losses that arise from the transition of the hedging program to IFRS 17, which is now concluded. The impact of residual PLC on our profits continues to decrease as we unwind our operations and reduce cash balances, with a dividend of £3 million paid to the group in 2023. Overall, IFRE's earnings increased by 35% to $7.1 billion. I think this is my favorite slide. Our opening contractual service margin on 1 January 2023 was $59.8 billion. New business written grew the CSM by 5.3% in 2023. Annual interest contributed a further 9% compared to 5.6%. for 2022. The $1 billion positive economic experience is driven by actual returns being higher than expected on policyholder 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 $6.5 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 37% to 1.9 million, and the VNB margin increased to 2.3%. Our VNB margin is sensitive to mix and volume changes between segments. Whilst we saw strong growth in higher margin risk business in MSC 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 three billion RAND increase in embedded value. with operating embedded value earnings increasing to 7.3 billion. Development costs relate mainly to new platforms to deliver proposition, digital and advisor platforms to support our integrated financial services strategy. Experience variances improved with positive mortality and expense variances partially offset 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 to group equity value. We believe 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 remain 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 solvency ratio of 178% remain 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, this had previously been included on the local Chinese regulatory basis called CROS. Our view of the economic risks we are carrying aligns much more closely with CROS than the South African basis. Therefore, this change does not impact the group's cash generation, dividend-paying ability, or discretionary capital. We expect cash generation to be between 70% and 80% of adjusted headline earnings before capital optimizations. Operating segments generated gross free surplus of $4.8 billion in 2023, representing 82% of adjusted headline earnings, with $0.8 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 stake in the Two Mountains Group, the generic acquisition and minority buyout of Old Mutual Finance Namibia and IWISE. In addition, capital support was provided to fund growth and innovation initiatives with the largest allocation to the bank build. $1.5 billion was returned to shareholders via the share buyback. The December discretionary capital balance of R1.1 billion has been earmarked for the continued investment in our growth and innovation initiatives. An OMLAXA 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, excluding new growth initiatives, increased by 210 basis points to 13.1%, now above our cost of equity. Improvements to our 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 owner writing margin and our RO-NAV. I am really proud of our team who has delivered this excellent set of results here today. And with that, over to you, Ian. Thank you.

All right, thanks very much, Kasper. 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 in short-term business, mainly through efficiencies. We have delivered now a RONAV of 11.1%, with RONAV 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 green light 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 execution. 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 top line growth, which actually on 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 optimising 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'd like to ask Galanga to join me up here to facilitate our Q&A session. Thanks.

Thank you very much, Ian and Kasper, for that very succinct presentation, 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. I've got 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 a few housekeeping rules. Please introduce yourself. Tell us the name of the firm you're from and who you're directing the question to. And we'll limit the question to just two hands. I'll start first with the five set of hands on the caller's call. And with that, over to you, operator.

Thank you, sir. The first question we have comes from Andrew Sinclair of Bank of America. Please go ahead.

Thank you very much, everyone. Three questions from me, if I may. Caspar, can I start with your favourite slide, slide 24, I think it was. on the CSM. It looks to me that CSM underlying growth, by which I mean new business plus interest accretion minus the unwind, was about 3.7% on that underlying basis. And I think interest accretion is possibly going to be a little bit lower going forward. So really, I just wanted to see if you can give us some guidance on what sort of organic growth potential you see for the CSM medium term. That's my first question. Second question was just if you can give us some more colour on persistency. You've seen what's left of your persistency provision now and what do you think that should cover? And then my third question was just a point of clarification on the 800 million rand spent for the bank that you were talking about today. Is that incremental to what's previously been announced for expenditure on the bank? or is that part of the previously announced expenditure targets? Thank you very much.

Thank you, Andrew, for that question. I'll hand over to Kasper to take those questions.

So let me start then with the CSM. So obviously we still see significant growth potential in the size of our value-adding business, and we expect that to – help the growth rates of the CSM going forward. We'll have to see how interest rates behave going forward to see how sustainable that growth rate is for future periods. But I would expect our value of new business to help increase that growth rate. And then it's important that the actual allocation of the CMS is dependent on the individual business units and we have different accretion rates or actual allocation rates for the individual segments. So it depends on where that value is being allocated from. But we should see continued growth in the CSM. supported by that new business growth and then in the short term, the high interest rate environments. On the second item, I think the question was... Persistency. Karin, do you want to take that?

Yeah. 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, Ian, I'm going to expand a little bit on it. And I'm going to talk about what we did last year, what we saw last year, and what we invest is going to happen over the next two years, because it's very important that I unpack that. Because 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 is 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, you know, H1. You will recall, you know, we took a nice hit on our profits as well as the CSM at that point in time. And the reason why we did that, we just wanted to make sure that we 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 strength and basis that we had strengthened at H1. And then at the end of the year, We went to the board and the board challenged us and said, well, you know, guys, you guys have been raising these short-term provisions of assistance and the like. You need to do a better job and tell us what is going to happen over the next few years. We then commissioned work from our actual consultancy team because I had a hypothesis and my team also had a hypothesis. And the hypothesis was when the cost of living is very high, you tend to see persistence going down. And then the actual team did a piece of work, and then they identified the relationship between a number of things. One, the cost of living. Two, real disposable, real income, household income, real household expenses, and the result, that disposable income, power of it, and persistence. And the success is simple. When the cost of living goes up, What happens is that there's an impact in terms of the expenses going up at a household level, the income being, you know, usually doesn't go up because, you know, in a country like South Africa over the past four or five years, real income has not really gone up. And what you then see is impact on persistency 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 happen? So we said, well, nothing really changed 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 rates in the second half of the year. So we needed to set up what we call an economic recovery reserve. I don't know if you can call it whatever, 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 two-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

Thanks, thanks. Nico, is there anything you'd like to add? That was a very comprehensive answer. Thank you very much. On that note of provisions, I might just add a provision myself for five minutes' time, Clarence, that you've taken. But, Ian, there was a question on the bank. Is there 800 million additional?

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 an 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 world perspective, so as we've said to you previously, we've adopted a gated approach, and we've always communicated the the pieces of funding that the board has approved at the point where they've been approved. So the 1.75 billion, which was the previously announced approved funding, was for the build of the capability. As I said in my presentation, that's now complete. It was done within the budget. It was done within the timeframe. The next incremental gate that the board has approved funding for is the transition, which is 800 million. It's actually 798 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 need to retain the team that's working on the bank for the period. We need to do all the industry testing into the 15 payment clearinghouses in the Payment 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 pipes 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 piece beyond 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.

Thanks, Ian, for that answer. And thank you, Andrew, for your questions. Could you please move on to the next set of questions? As a reminder, just two per person, please.

Thank you, Saab. The next question we have comes from Francois de Toy of Ango Stockbrokers. Please go ahead.

Can you hear me? Yes, we can. Go ahead, Francois.

Thanks. Can I get some color on the 1.9 billion rands, other earnings, negative other earnings, other costs in adjusted headline earnings? How much of that relates to life insurance development costs? Maybe just a bit of color on that. I see a number of $948 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 a lot of that reflected in those numbers as well? Just trying to get a sense of How much of those costs are recurring? How much of those are related to projects and built of the bank, et cetera? That's the first question, a bit of a long one. Second one, can you maybe comment on the foreign exchange variances in the EV statement? 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 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.

Thanks, Franz. Over to you, Kaspar, first on the 1.9 billion.

Let me start with the second question whilst I'm looking for the other graph. We have seen elevated inflation in a lot of the African countries. In particular, this year, which we commented at the half here, was obviously Malawi. And at Malawi, we hadn't seen the currency devaluation. We'd seen a lot of inflation. So if you look at Malawi's results, they are supported by very high stock market returns in the year. But we've seen that obviously the exchange rate go backwards. So that return is elevated. And it's one of the, what we would call, one source in the results that we can take people through. But for the rest, we all know somebody, we have the same phenomenon, but that's excluded from our adjusted headline earnings. And we've commented on the extent of profits versus currency deviations through the balance sheet separately. So you should be able to see that. But those are the two notable areas that we highlight in the results. So I'm just going to find my graph that you referred to. So we're on the same. So of the costs that we see in the center, and the elevated costs that we saw during 2023, there is a, and I'm excluding the bank and the next 176 costs, there is a large element related to the life and savings business, which you would see coming through as either once-off costs in the EV statement The development costs that you're seeing in the EV state are more related to costs that are capitalized, that are not coming through our normal income state analysis. And we can take you through a little bit more detail in the Q&As afterwards. And then obviously the bank and the next 176 costs are outside the life business. And they also... resulted in elevated expenses in the year.

Thank you very much, Kasper, 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. He says, we note that your total net investment result contribute a much higher level to RFO. than your peers while at the same time, your calculation of your unallocated insurance cost after excluding calculations of asset management, banking, et cetera, are particularly high. Is this an allocation issue? Normalizing for this, how concerned are you with your unallocated cost level and what are you doing about this? I don't totally understand the question. The question is, The contribution on our total net investment result is much higher. That's the first one to RFO. That's just what they're noting. Two, Marias is noting that at the same time, that calculation is higher than our peers. He's saying that after our allocated insurance costs, including asset management, banking, et cetera, is this an allocation issue or not?

I don't think it's an allocation issue, and I'll ask Nick or Ronan to add. So if you look at what's driving our investment return, we run most of our equity exposure in a capped portfolio. So we return 5.3%. The investment returns in our child investment portfolio on the bond part of the portfolio was about 9.1, if I remember correctly. So that's driving a lot of the higher returns, is the high interest rate environment. And you would see that coming through in two places. Firstly, obviously the interest we accrete on the CSM, which we've commented was higher than than we expected, and then the actual returns on the underlying investments were actually better than what we expected. So we've seen a higher expectation, firstly, and secondly, we've seen outperformance against that expectation coming through in both segment results and in the Sheldon investment portfolio.

Thank you very much, Kasper. I'm going to group these two because they're very similar. They're staying with the theme on shareholder costs. One is Jared from Allweather. One's just, you know, what is the quantum of parallel systems cost? Then Viola, too, from Travel is asking for guidance, what we believe is a sustainable shareholder cost over the next three years.

Okay. So if we talked – I'm excluding NAVSO in 76 – and I'm excluding the bank, the sort of base we call a sustainable base is between seven and 800 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 this hump in the interim. In the current year, it's not just the additional dual platform costs. We also had quite a lot of costs relating to load shedding and the fact that we saw generation capability. We also then had a lot of fuel costs and we had forex costs coming through that sensor line. So as I said, run rates, 70 to 800, expect to come back to that on a three-year timeline.

Thank you very much, Kasper. 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 Ian and Tas.

Okay, so I'll start and then Charles can always build if I miss anything. So if you look at, I assume you're referring mainly to Old Mutual Insurer versus to the Africa Regions piece. I'll talk to that piece specifically. If you'd like some stuff on Africa Regions as well, by all means, we can add it, but the drivers are a little bit different. So within Old Mutual Insurer, if you look across the various books of business between personal lines, premier, specialty insurance, cgrc iwas and the cell captive businesses the in all cases the claims ratios for those businesses are in line with or better than market for 2023 so it's another way of saying we're very comfortable with the pricing and with the quality of the book and the way that the underwriting has been done across those portfolios. Always room for improvement, but broadly speaking, in line. 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're doing work to look at what the best path is to remediation of that piece. But that's the only piece where I'm kind of concerned from a pricing versus risk perspective. Let's put it that way. The fundamental challenge we have, particularly in the personal lines business, is an efficiency challenge. The cost ratios are too high. I think I've said 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 claim 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 harder bits are 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, the what needs to be done includes a lot of tech work and a lot of automation. And so there's 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... In simple terms, it's not the complicated stuff. It's the relatively simple stuff from a conceptual perspective, but the hard-to-do stuff from an operational perspective, and it's going to just take a bit longer to get it done. But there's a clear plan, a 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're more comfortable with that picture. Charles, does that cover it? Do you want to add something?

Not sure where I should stand. Yes, you should. Is it okay to stand here? Yes. Good afternoon, everyone. I think that's a good answer, Ian. Maybe just add two things. I think the one is whether the related claims are a source of problems for us. I think the whole industry battles with this. What do you do about it? We've invested a lot of time and money in producing climate models. So we know, for example, that one of the big challenges in our 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 modelled it and it's confirmed our kind of suspicions. question is how do you now operationalize that knowledge you know what do you do now you know knowing that you have these exposures in parts of the country do you just exit do you price massively for it you know so the the the answer is there's 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 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 know, you want to have some peace of mind. And then, yeah, just one of our big growth engines is our specialty business. And, in fact, we made more gross underwriting profit out of 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 tended to reinsure that business quite conservatively. So for those of you who have some knowledge of reinsurance, you've got to pick your attachment point. At what point do you want reinsurers to come in and participate in the claim? And the lower your attachment point, the more expensive your reinsurance is. It gives you greater peace of mind and less volatility, but it comes at a cost. And I think quite honestly, we've got to revisit and we are revisiting our risk appetite in the specialty business where 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 at too conservative a level. So I think that will unlock a lot of value out of our specialty business, which at a top line level is growing at 20% per year. So you can't deny the growth at the top. We just need to harvest more of the value coming out of that top line. Thank you.

Thank you very much, Charles. We are now eight minutes past one. I'm going to try and drive and maybe see if we can land it by quarter past one. I'd like to take a set of questions, again, two per 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?

We have a question from Larissa Van Defensa of Barclays. Please go ahead.

Thank you. Good afternoon. Two quick ones on the bank from my side, please. The first one, thank you for clarifying on the $800 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 to launch, including marketing, the advertising campaign and the like? And related to that, can you remind us or tell us what your current breakeven target is for the bank, please?

Okay, so we haven't disclosed a number for the post-launch trajectory of either cost base or profits at this stage. So the $800 million is everything we will spend prior to switching on, as it were, but that would include things like preparing marketing material, et cetera, et cetera. But the actual operating costs post-launch, we clearly have a business case, we have a model, we haven't disclosed anything those items. So I'm not going to comment on that particular issue.

Do you want to say anything to add? On the return, the business case for the bank, obviously that was approved at a, you know, if you look at the longer term business case at a rate that's above the upper end of our target range. So we'll certainly add at a lot of value in the longer term.

Thank you. The next question, please.

The next question we have comes from Bunkole Ubogo from Bofa Securities. Please go ahead.

Afternoon, everyone. Thanks for the time. Just two questions from my side. First is the LACSA special dividend approval. Can you just walk us through how that changes The group solvency ratio, you spoke about returning some of that to shareholders and could that by any means result in a below the target solvency ratio at any point? And then secondly, you had a huge jump in risk sales in 2023, particularly in the fourth quarter. Could you just give us some more color on the potential growth and whether or not any of that you'll probably not really see as being sustainable? Thank you.

Thanks. Over to you, Kasper. I think the second question I'd like the segment MDs on the retail side to tackle, but the first one on solvency.

So just to confirm that, when we declare dividends, we have to take that into account in our ratio already, in the ratio that you're seeing at the end of the year. So we've already accrued for both the normal dividends that we're going to pay from LAXA and the special dividends. So the 204% that you're seeing from LAXA's capital ratio has already taken into account that special dividend. When it gets paid up to, well, obviously we haven't included that dividend in our discretionary capital because we only can't when it's paid as a dividend to the holding company. So it will add, so there won't be an impact on the ratio. There will be an impact in terms of additional discretionary capital of $2 billion that then comes through in 2024. I hope that answers that. And obviously it's obviously then also taken into account in our group ratio because we, you know, I'm lax as a part of of the group ratio. So the dividend there has already been fully accounted for.

Thanks, Kaspar. I'll give Karin then Clarence. Strong growth in sales H2, but positive Q4.

Maybe I can go first, and Prabhashni can also add. We thought you could be a contributor to that. So it's a normal phenomenon for mass and foundation cluster because there's a five-month lag. between issuing of the business and the flowing of the first premium. So you tend 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 a role in terms of that big number. But I'm not so sure about Prabhashni whether there was something

No, we did have good risk sales, but they were spread across the year. We did have a very large retirement fund deal that flowed in Q4, but that's not risk.

Yeah.

Yeah.

Thank you. I think we are comfortable. Thank you very much. I will hold it at that and come back to the room. And apologies to anyone who we have not been able to get to. 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, Ian and Kasper for the presentation and to executive team. I'd 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 it was resolved quite quickly. So apologies to all of you who may have had those hiccups. I will now hand over to Ian to wrap up. Thank you.

So all that's left for me to say is thanks very much, guys, for your time and attention and your support for our business. And I look forward to seeing many of you in one-on-one sessions in the next couple of weeks as we go about our roadshow. So thanks for coming, and I hope you found it useful.