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Edited Transcript of OMUJ.J earnings conference call or presentation 2-Sep-19 7:30am GMT

Half Year 2019 Old Mutual Ltd Earnings Call

Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Old Mutual Ltd earnings conference call or presentation Monday, September 2, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Casparus Gerhardus Troskie

Old Mutual Limited - CFO & Executive Director

* Clarence Tsakani Nethengwe

Old Mutual Limited - MD of Mass & Foundation Cluster

* Garth L. Napier

Old Mutual Limited - MD of Old Mutual Insure

* Iain George Williamson

Old Mutual Limited - Acting CEO & Director

* Jonas Mushosho

Old Mutual Limited - MD of Rest of Africa segment & CEO of Zimbabwe Operations

* Karabo Morule

Old Mutual Life Assurance Company (South Africa) Limited - MD of Personal Finance Segment

* Nico van der Colff

Old Mutual Limited - Chief Actuary

* Sizwe Ndlovu

Old Mutual Limited - Head of IR

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Conference Call Participants

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* Andrew Sinclair

BofA Merrill Lynch, Research Division - VP

* Francois Du Toit

Citigroup Inc, Research Division - Director

* Greg Wood

Melville Douglas Stanlib Dynamic Strategy Fund - Fund Manager

* Michael Christelis

UBS Investment Bank, Research Division - Director and Insurance Analyst

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Presentation

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Unidentified Participant, [1]

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Good morning, ladies and gentlemen. My name is [Arwani]. I'm from Corporate Property Management. Please allow me to briefly explain to you our health and safety measures. Should an emergency situation arise, please remain calm and take guidance from the evacuation marshal. Please exit through the 2 entrance in the auditorium on the left and the right. Walk towards the main entrance door down the staircase onto a street, proceed down to Stella Road, which is our assembly point. Please remain at this point where everyone would be accounted for by means of a roll call. Our staff are trained to deal with on-site emergency. We request that you give them your full cooperation to ensure your safety and the safety of others. Smoking is not permitted in any part of the building, including the basement. Kindly make use of the designated smoking areas outside. Bathroom facilities are available on the ground floor. Security official will direct you to the closest facility.

Thank you.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [2]

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Good morning, ladies and gentlemen. Welcome to Old Mutual Limited's 2019 Interim Results Presentation, only our second set of interim results since listing in June 2018. My name is Iain Williamson, and I'm the interim group CEO. First up, I'll give an overview of our strategic and operational progress in the 6 months; then our group CFO, Casper Troskie, will give you a detailed update on the group financial performance and how we're tracking against our medium-term targets. After that, I'll provide a few short concluding remarks, including our outlook for the second half of the year. Casper, our senior executive team and I will then be only too happy to answer your questions.

In a moment, I'm going to deal briefly with the background to the results we're presenting, the macro environment in our various markets and how these impacted our strategic delivery. For now though, let me say that the results we are presenting today are solid and demonstrate good progress on achieving our desired outcomes. I'm satisfied that despite strong economic headwinds, our financial delivery remains strong. We've improved operational efficiency and continued on our journey of optimizing our balance sheet. This has allowed us to deliver good returns to our shareholders, which I'll come to in a short while.

Our results from operations at 2% growth is more muted than the 7% we were able to report this time a year ago, shy of our target of nominal GDP growth plus 2% or approximately 7% in total. But H1 2019 was a considerably more challenging half year than 2018. And it is worth noting that across almost all segments, we saw an improvement from quarter 1 to quarter 2. At 10%, the adjusted headline earnings growth is also very positive, and Casper will unpack this.

I'm pleased to say that we remain single-mindedly focused on improving operational effectiveness across the group to create sustainable growth, to ensure that our customer experience is second to none and that we are as efficient as we are effective. We did well in these 6 months to save costs, building on the ZAR 750 million savings we banked last year, and we're well on track to meet the ZAR 1 billion rand target we set ourselves.

On digitalization, we made some very significant strides in the 6 months being discussed today. A recurring theme in my presentation will be the substantial gains we made on our digital migration, on testing, adopting and deploying some quite remarkable, robust technology.

Also pleasing this year was the progress we continued to make on optimizing our balance sheet through a number of corporate actions. These included our South African operations raising ZAR 2 billion in net debt at much improved rates, completing a ZAR 2.5 billion share repurchase program and finalizing the sale of our Latin American business. Casper will elaborate on this.

In line with our disciplined capital management philosophy, at this time last year, we declared an ordinary dividend of ZAR 2.2 billion and a special dividend of ZAR 4.9 billion. Of course, those were exceptional circumstances, and we are obviously not in a position to guide and announce any such largesse. But that capital management philosophy remains unchanged. After considering operational needs and any other opportunities, we will return all surplus cash to shareholders.

So I'm pleased to tell you that in view of the resilience of our balance sheet and our sustainability to generate cash, the Board has deemed it appropriate to declare an interim dividend of ZAR 0.45 per share, the same level as last year. The Board has also approved an additional ZAR 2.4 billion share buyback, bringing the total capital returns to ZAR 7.1 billion in H1 2019.

Throughout the first half, South African equity markets remained below the levels of H1 2018. Behind the most disappointing equity story was an even worse economic performance. While inflation's been kept at less than 5% for some time, the state of the economy in the first 6 months of 2019 has given cause for serious concern. In the fourth quarter, South Africa's GDP shrank by more than 3%, the worst performance in a decade. And as we recently learned in quarter 2, the official unemployment rate reached a very worrying 29%. All of this, coupled with higher fuel prices, translated into mounting pressure on our customers. As they battle to make ends meet, those fortunate enough to have jobs are forced to get by on less, meaning a lower propensity to save.

In Zimbabwe, economic difficulties have only increased. As Casper will explain, the situation of half year inflation and issues of capital portability are the reasons why we have elected to exclude Zimbabwe from our group key metrics from this year.

In Nigeria, the depressed oil price has continued to stifle economic growth. Whereas GDP grew by over 2% in the first quarter, so did unemployment, with inflation remaining stubbornly high at over 11%. There has been however an uptick in productivity during quarter 2.

Only in Kenya did we see some positive macroeconomic trends emerge. As you can see on the graphs on the slide, economic growth in Kenya has recently outpaced inflation and the economy is expected to grow at or near 6% in 2019.

In short then, in most of our key markets, the external environments in which we were challenging to say the least.

The points you see on the left of the slide clustered around strengthen the foundation are the 8 battlegrounds which we've consistently communicated to stakeholders. These battlegrounds are where we are fighting to accelerate growth. Winning the war for talent, refreshing our technology offering and achieving cost efficiency leadership all underpin priorities 1 to 5.

In the following slides, I will unpack where we are on each of these 5 priorities, but I want to now quickly discuss these underpinning elements.

We're determined to attract, empower and retain the very best talent wherever we operate. I'm pleased to report that we're an increasingly attractive place to work and our overall staff engagement levels have again improved year-on-year. We're recruiting an exceptionally high caliber of very diverse talent, great, talented people who want to work at Old Mutual.

Refreshing our technology and digitizing all levels of our business are fundamentally changing Old Mutual. We've made concrete efforts to showcase our partnership with Amazon Web Services and has sponsored several hackathons in communities around artificial intelligence.

On the right-hand side of the slide, we spell out what we believe our long-term success will look like.

At our full year results presentation in March next year, we plan to update stakeholders on the strategic journey which the Board and Executive Committee have been working on.

Here, I want to highlight the importance we are attracting through our digital migration. There are 3 legs to these key focus.

The first is about giving our customers and intermediaries a better experience every time they interact with us. Behind the scenes, we are achieving this by making greater use of robotics to automate our admin processes while we are continuously rolling out digital tools to all our customers. Old Mutual Protect is currently being rolled out in a controlled pilot, and we will further roll this out incrementally over the coming months.

Secondly, we are simplifying our RT estate, our backbone, to be nimble, simpler, more cost-effective, more stable and more effectively future-proofed.

These initiatives support the third pillar you see here, providing highly stable, always-on service.

The system enhancements we have made have allowed us to reduce our downtime thresholds by more than 50%. In addition, we deployed predictive technologies which allow us to be proactive in maintaining our always-on service.

In these 6 months, our robotic process automation drive has achieved tremendous traction. To illustrate that traction, I'd like to share with you a very short video on what some of the brilliant young minds at Old Mutual are achieving on the robotics and the AI front.

(presentation)

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [3]

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A pretty impressive and exciting stuff, I'm sure you will agree.

The South African mass market is a fundamentally important engine for the accelerated growth we believe we will achieve and sustain. But in the current context, it is this market which is feeling the most acute effects of the very severe economic headwinds I've just discussed.

The decline in Life APE sales was driven by lower new business volumes and the decline in sales force productivity in the last quarter of 2018. Despite this, the Mass and Foundation Cluster managed to grow their client cash flow by a very commendable 10%. This was achieved through excellent retention and savings influence. While loans and advances have grown by 9%, we remain cognizant of cyclical deterioration linked to the weaker economic environment. Management have taken actions that will ensure that any future growth is managed responsibly.

We've also invested extensively but strategically in defending and growing our Mass and Foundation market opening 8 new branches, taking our retail footprint to 356; and in new products, like our FutureInvest range, while enhancing the Money Account offering.

On the Money Account, I'd like to highlight the fact that in these 6 months, we grew the number of active accounts by 25% to more than 262,000. Under the circumstances, we believe that our Mass and Foundation Cluster under Clarence Nethengwe recorded a very commendable result.

One other point I'd like to highlight on the slide. You will notice we've singled out the fact that we recently went live with our real-time interface through home affairs. This sort of capability is very important to our customers. Particularly in this business, the ability to pay funeral claims quickly is key, and we are leveraging this interface to pay these claims even faster to the point of doing so in under an hour. That one key element of what we believe our long-term success will look like, driving a culture of delivery, serving the unique core needs of our customers every day and leveraging digital capabilities.

We're committed to cementing and extending our leadership in the corporate market. In these 6 months, I think we achieved a great deal on delivering on that commitment. In particular, we secured a number of stand-alone fund conversions to our SuperFund. Life APE sales are up by an outstanding 24% and funds under management grew by 5%. Results from operations rose by 2%, a performance which we are comfortable with under the circumstances. Recurring premiums from those fund conversions which I've just mentioned are reflected as Life APE sales, but the higher margin single premiums from the back funds will only reflect later once the acquired Section 14 pension fund transfer processes have been completed. It is this reality that the full margin has not yet been recognized because of the effect of Section 14, which explains the drop in the value of new business.

Big focuses for Corporate in H1 were on defending our market despite strong competition from particularly the umbrella funds space and on improving the profitability of our group life assurance book. Again, here I tip my head to the great people working with Clement Chinaka for a job really well done.

As most of you will be aware, our Personal Finance segment disappointed in 2018. Many of you will also be aware that performance derived from an unusual mortality and morbidity experience, one which affected not just ourselves but our competitors to a similar degree. That experience improved this year, and Personal Finance's half year contributions to result from operations reflected a very satisfactory improvement of some 54%.

Net client cash flow was similarly positive, and we grew APE sales by growing recurring premium risk and savings sales. Here, our distribution channels were instrumental, and the very important investments we continue to make in our channels paid handsome dividends. These channels contributed over ZAR 17 billion of gross flows to our Wealth and Investments business and ZAR 2.5 billion to Old Mutual Corporate.

During this half year, Personal Finance delivered some fantastic solutions which support precisely the desired outcomes I mentioned earlier. It must be in a digitally enabled business which meets our customers' core needs every day. Of particular significance is the launch of a mobile app, which is now available to all our target advisers in this business, which enhances their ability to manage their practices. If you'd like to quiz our Personal Finance head, Karabo Morule, on her segment's achievements, she's on hand today to answer your questions.

Improving the competitiveness of our Wealth and Investments business is one of our 8 key battlegrounds. As you can see, gross flows were down by 14%, but this needs to be understood in the context of a stressed economy and domestic equity markets which drove customers towards what they perceive as the safety of income-type solutions. At ZAR 2.4 billion, revenue rose by some 2%. And as you can see, growth in assets was 5% to ZAR 763 billion, a number which speaks to the sustainability of our offering.

Top line growth was constrained in line with the cyclical rotation out of equities. You will, of course, note the 9% decline in Wealth and Investments' result from operations to ZAR 710 million. This was largely driven by one-off expenses incurred in restructuring our asset management boutiques. While we took these costs on a churn in H1, this restructuring will mean important efficiencies going forward.

The lower result from operations in specialized finance derived largely from lower net interest income. Despite this, the business originated a very impressive ZAR 4.2 billion worth of assets in the period and we remain satisfied with the credit quality of our existing asset portfolio with minimum exposure to distressed assets.

The business continues to make good progress in the migration of the IT platform from Quilter plc to Old Mutual International in South Africa, and our advisers in the retail space have also benefited from our digital enablement through our mobile app. Khaya Gobodo and his team at Wealth Investments continue to build a good solid business, which will become even more important to our ability to generate sustainable value.

Most encouragingly, our Africa infrastructure investment fund rose USD 320 million in new capital, which will be available for much-needed wealth-creating infrastructure development across Africa.

(presentation)

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [4]

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We're encouraged by the medium and long-term outlook for Old Mutual Insure given the strong gross written premium performance which was 14% up on H1 2018. In particular, the Specialty division succeeded in writing considerable new business through various new strategic partnerships and we remain comfortable with the quality of the risks that have been written here.

A significant number of claims which fell just under the reinsurance threshold in the commercial and personal lines business put our underwriting results under significant pressure. This impact is reflected in the segment's result from operations and its underwriting results which were disappointing. It's worth mentioning that this is an industry-wide reality that is likely to be reflected in our competitors' results. I'm comfortable that the gross underwriting result of this business has improved over the past 6 months, which confirms that we continue to take on the right risks at the right price.

Our credit guarantee business, which as you -- sorry, the script -- apologies, my script has gone into completely the wrong place.

Our credit guarantee business, which, as you're probably aware, has traditionally been the reliable contributor to profits, experienced several large claims but nevertheless succeeded in generating revenue growth.

Improving our customers' experience remains an absolutely key priority. To date in 2019, our claims division has introduced an improved complaints escalation process across various divisions. And we've demonstrated just how serious we are by enhancing, for instance, the intermediary experience through our new Quick Quote Calculator, automated pricing and much greater use of robotics. I'd like to thank the business head at ExCo, headed by Garth Napier, who have worked hard to continue to differentiate the business, diversify the book and set us up for future sustainable growth.

In discussing the Rest of Africa, do bear in mind that this discussion now excludes Zimbabwe. Old Mutual Limited is obviously a multinational business, and Africa is absolutely at the core of our growth strategy, which is why the all-around performance from the Rest of Africa segment was so very pleasing. And let me emphasize, this was achieved under some very difficult circumstances, in Nigeria and elsewhere, including a Namibian economy which is expected to contract for the third straight year.

At ZAR 214 million, the Rest of Africa contributed 5% to this half's result from operations, a very big increase from H1 '18. We are extremely pleased with this performance, which is built on the solid gains made last year. As you will appreciate, it was once again the Southern African region which contributed the bulk of this overall positive result, thanks largely to good unit trust inflows and a solid banking performance.

In East Africa, I'm pleased to tell you that we're making solid hard-fought gains with encouraging top line growth across all lines, especially Life and Property & Casualty. As well as bearing down structural changes implemented last year, we continue to focus on top line growth efficiencies and enhancing our control environment.

In West Africa, the story is also encouraging. We've rightsized our Ghana operation and our regional businesses are gaining traction under a new management team. Nigeria's Life business reported some very pleasing sales numbers, and our strategically important general insurance arm is gaining traction under a newly recruited seasoned MD.

Our Rest of Africa Managing Director, Jonas Mushosho, is also here today and will I'm sure be able to give you some interesting insights into our Rest of Africa expansion.

Thanks very much for your attention. I'm now going to hand over to Casper for our financial review.

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Casparus Gerhardus Troskie, Old Mutual Limited - CFO & Executive Director [5]

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I'm just making sure that I have a backup. Thank you, Iain, and good morning, everyone.

Given the complexity in our results, I will do my best to give you some insights into the financial results for these 6 months.

Adjusted headline earnings is the best measure for comparing our results to this prior period as it excludes the effects of many separation transactions. Adjusted headline earnings were up 10% on the prior period, reflecting an improved return on sale and investments in South Africa and a resilient operating performance.

Return on net asset value at 16.4% was below our target as a result of higher shareholder net assets and the results from operations coming in below our target growth level. Free surplus generation of ZAR 3.7 billion was more than sufficient to cover normal dividends of ZAR 2.2 billion.

Our group solvency target, calculated after taking into account the interim dividend, was in the upper end of the solvency range. Our return on embedded value at 11.7% was assisted by positive investment variances, masking lower new business value, and negative variance and the subsequent changes.

Firstly, I'd like to deal with our treatment of Zimbabwe given that we have removed the results of Zimbabwe from our key metrics.

We communicated at the year-end that we would consider excluding Zimbabwe from results from operations and adjusted headline earnings if we could not access our capital in Zimbabwe. Not only were we not able to access any capital, but conditions in Zimbabwe's deteriorated sharply with the economy becoming hyperinflationary towards the end of June. We have therefore excluded Zimbabwe results from these measures and are including Zimbabwe as a ring-fence business within IFRS and headline earnings. The impact of restating Zimbabwe's results on a hyperinflationary basis in terms of IAS 29 was in fact quite small.

The bigger impact was as a result of IAS 21, which requires the translation of both the income statement and the balance sheet of a hyperinflationary economy at the closing rates. This avoids some of the distortion noted in our prior year results where the income statement was translated at average rates and the balance sheet at the closing rate. We have taken a prudent view at a group level in assessing the Zimbabwe results, so separately published results might differ from group results.

The net impact of our results in Zimbabwe was a reduction in net asset value to ZAR 1.4 billion from the ZAR 2.4 billion in the prior year, mainly due to currency devaluations. Our local business is resilient and adaptable, having navigated similar economic challenges in the past. That said, we continue to manage our business on the basis of trying to minimize value loss for our policyholder and shareholders, but this is becoming increasingly difficult. Our management team in Zimbabwe is focused on dealing with the issues at hand while trying to manage the impact of hyperinflation on their lives and those of their staff.

Iain has already discussed the performance of our individual segments, and we will be happy to answer any detailed questions you may have on these numbers.

Results from operations were up 2%, falling short of our target of nominal GDP growth plus 2%. Most of our segments in South Africa were affected by the lower-than-expected GDP growth and the impacts of the economy on our customers.

The biggest contributors to shortfall gains target were Old Mutual Insure, with the catastrophe losses that Iain has already referred to, and the negative results from Credit Guarantee Insurance Company as well as lower results from Wealth and Investments and higher costs in other group activities following the transfer of functions from Residual plc. These expenses were lower than expected following [slowest] than expected spend on project costs and additional investment returns on working capital.

Iain has already taken you through the Rest of Africa results, which had a strong improvement over the prior year.

On this slide, we unpack our operating results by line of business. Please note that this is not how we manage the business, but this information is provided to give investors a better understanding of the drivers of earnings.

Overall Life and Savings results from operations were up 7%, a good result in the circumstances. This was despite high new business strain which increased by ZAR 215 million, largely due to a new savings product being launched in Mass and Foundation Cluster to improve the customer value for money and sales volume in Personal Finance and MFC segments not growing by enough to support the increase in distribution and other initial expenses. The results were supported by positive noneconomic experience variances of ZAR 137 million compared to the negative variance of ZAR 200 million in the prior year. Economic variances remained positive and were up substantially from the prior period.

Asset Management earnings were 11% higher, mainly due to an improved performance from Rest of Africa, with lower earnings from Wealth and Investments in South Africa. Banking and Lending earnings were up 13% on the back of strong earnings growth in the Rest of Africa, off a lower base and a lower contribution from OMSFIN. Property & Casualty results from operations were 62% lower due to the reasons previously discussed.

We have discussed the 2% increase in results from operations. Our shareholder investment return were positive with equity markets increasing relative to the client experience in 2018. Finance costs were down because of positive fair value gains on interest rate swaps. Income from associates reflects our share of Nedbank profits as well as a small gain on our China business. Shareholder taxes reduced due to reduction in taxes' provisions following the resolution of tax uncertainties. We are pleased with the growth of 10% given the prudent view we have taken on our investment valuations in the Rest of Africa.

I've included this slide to show you the impact of Managed Separation transactions on our IFRS profits, which reflects a reduction from ZAR 12.9 billion to ZAR 5.8 billion. On 1 January last year, we saw it as the Old Mutual plc group. We then listed Old Mutual Limited, with plc becoming a subsidiary of Old Mutual Limited. In the first half of 2018, we consolidated the earnings from Nedbank and Quilter of ZAR 5.4 billion, which we included as profits from discontinued operations, and we recognized profit on the unbundling and distribution of Quilter of ZAR 4 billion. Then if you compare the Old Mutual Limited perimeter with the current period earnings, you'll be comparing like-for-like. And as you can see, there has been growth in IFRS profits on a like-for-like basis, the most notable variance being the reduction in plc losses of ZAR 1.2 billion.

The purpose of this slide is simply to explain how we get from adjusted headline earnings, which is the basis for our dividend, to the free cash flow generation.

Free surplus generation from our operating segments was 80% after taking into account capital requirements. Capital requirements were higher in the current year mainly due to a decrease in the loss absorbency of deferred tax assets in our Property & Casualty business. We're then adding 50% of the earnings of Nedbank in line with a dividend policy which brings our overall free surplus generation down to 72%, which is more than sufficient to fund the interim dividend pegged at 40% of adjusted headline earnings.

We continue to make good progress on balance sheet optimization. We issued ZAR 2 billion of subordinated debt at favorable rates lowering our overall cost of capital. We completed the sale of Latin America in line with the communicated time line. We completed buybacks of ZAR 2.5 billion at a discount group equity value, and we are pleased to announce an additional share buyback of up to ZAR 2.4 billion.

We [promoted] further dividends from Residual plc to OML in order to support our capital position, and we'll continue to focus on simplifying the balance sheet in respect of plc as well as performing a review of our shareholder investment portfolio.

We reflect here our group solvency position, which is presented on a pro forma basis largely consistent with that used as part of Managed Separation. We are still awaiting designation as an insurance group in terms of the Insurance Act, and this could have had -- this could have an impact on both our targets and actual solvency ratios going forward. OMLACSA's solvency position remains well above its target range at 218%.

The group solvency ratio at 166% is in the upper end of our target range and is calculated after taking into account foreseeable dividends. Our capital position remains sound, but certainty around the group position will allow for more deliberate capital decisions.

We have set out on this slide key movements in our covered business' embedded value. New business value of ZAR 862 million was down 20% on the prior period. South Africa contributed 15% of the drop, with the Rest of Africa contribution of 5%. The 5% was largely due to recessionary pressures in Namibia.

Mass and Foundation Cluster contributed 77% to the drop, which was largely planned due to the launch of a new savings product. It was also due to lower sales volumes in the first quarter.

The Corporate segment also contributed 5% to the drop for the reasons Iain explained. Whilst experience variances were positive, this was offset by some small model and the subsequent changes as well as higher development costs in the period. Investment variances were positive given the positive uplift in markets in the period.

Here, we show you our own estimate of the equity value of the business. We have set arc for each key component the basis we have used for arriving at the value. The group equity value excludes a multiple for the value of new business which should be added to get to fair or appraisal value. The group equity value reduced from the year-end, mainly as a result of the final dividend paid of ZAR 3.3 billion, share buybacks of ZAR 2.5 billion, the devaluation of Zimbabwe of ZAR 1 billion, a decrease in the Nedbank share price from the year-end, a reduction of ZAR 2.1 billion. And this was offset by an increase in the value of our core business. The group equity value at 30 June was substantially higher than the market capitalization at that date.

Finally, we take a brief look at our performance and outlook on our key metrics.

Our RoNAV target is expected to be challenging given risk to the downside in terms of global trade relations, Brexit and the risk of a sovereign downgrade in South Africa. Results from operations remain a challenge in an environment of flat or very low GDP growth and significant pressure on customers. Our cost-efficiency drive remains very much on track. Whilst we expect an improvement in our underwriting margin, this will depend on the lower level of catastrophe losses in the second half. Our capital position is expected to remain strong, which will support cash returns in line with our dividend policy.

Now I hand over to Iain for a few concluding remarks.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [6]

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Thank you, Casper. In conclusion, let me reiterate that the results we've presented today paint a picture of a diversified business, which has once again proven its great resilience. Old Mutual is resilient and well positioned to withstand the economic headwinds which are unlikely to ease substantially in the second half of the year.

Cash generation remains a key strength for the business, and we will leverage this to support good returns to shareholders. We increased our BEE shareholding to 22.84%, and we remain on track to deliver on our listing commitment to achieve a best-in-class level within 5 years.

The current challenges we face will mean that our medium-term growth targets will remain under pressure, but they won't deflect us from our focus on saving costs, improving operational efficiency and boosting our customer experience.

Lastly, I appreciate that many of you will be interested in the litigation being pursued against the company by Mr. Moyo. Less than 2 weeks ago, on the 22nd of August, our Board issued an open letter to shareholders on the issue, and the legal process is underway at present. Given that this matter is awaiting court judgment and that the communication comprehensively covered the key issues, we're not in the position to add anything further today.

Thanks very much to -- for your attention. We look forward to answering any questions you may have on the results.

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Questions and Answers

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [1]

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Okay. We got questions in the room. Michael?

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Michael Christelis, UBS Investment Bank, Research Division - Director and Insurance Analyst [2]

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Mike Christelis from UBS. Three questions, if I can. Just -- I mean I understand the comments around the Moyo litigation. I wonder if you can maybe just give an idea of what's happening in the PF segment, particularly new business in the independent channel and how that's moved since the mass-publicized litigation started. I'm just trying to understand, is there a lack of or loss of support from the independent advisers?

Secondly, your MFC new business volumes in quarter 1 were down 18%. I mean what drove that? Is that capital and funeral policy that's particularly having a pressure impact there? And I mean this is a market that's grown double digits for the last 15 years. I'm just trying to understand whether you think you're losing share there or is it a market effect.

And then lastly, just on Old Mutual Insure, I'm wondering if you can give us an indication of the underwriting margins between personal and commercial or Corporate in South Africa. Just thinking the split you've given before and looked quite strong at all at full year, but it's not in the pack this time around.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [3]

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Okay. Thank you. I'm going to ask the segment heads to answer sequentially, and I might make some closing comments. So Karabo, if you want to pick up the PF question.

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Karabo Morule, Old Mutual Life Assurance Company (South Africa) Limited - MD of Personal Finance Segment [4]

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On the litigation, what we have been seeing is more that a lot of our advisers, regardless of whether they're in the independent space or in the established financial adviser space, obviously, they had questions, but more so they've been focused on what they can do in terms of reassuring their customers more so given the economic environment. So what we've seen in that space is just people battening down the hatches and talking to their customers about what's happening in the economy and how is that going to affect their assets. So we've seen that, that actually in the IFRS space, you will be familiar that more of those advisers write investments business, and so that's the reason why they've been talking to their customers about that. Obviously, we've had some questions and we -- and our Head of Broker Distribution has been out in the field and addressing any questions that any advisers would've had.

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Clarence Tsakani Nethengwe, Old Mutual Limited - MD of Mass & Foundation Cluster [5]

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So I had a bet with Clement that Michael is going to ask me about Capitec, so Clement must have pay up. So there are quite a number of things that happened. So the first one was, in Q4 of 2018, we had a drop in productivity. It was more of an internal issue that we had to deal with. And luckily for us, we're able to overcome it, and I'll give you more color later when we have a conversation on our one-on-one. Then in 2019, we had 2 or 3 things. The first one was we introduced a new savings product, and that's part and parcel of introducing a product. We have to take our financial advisers out on the field to train them on that particular product. And it was sort of a 4-day training, so effectively, there was 0 sales on that particular weekend. On a weekly basis, we do close to ZAR 100 million of APE. So you will understand that if you take people out for that period of time, it will have an impact. Then the second impact was, if you recall, around March, in particular, there was rolling blackouts in South Africa. So because we've got a website model where advisers go to a website and provide advice to customers, the moment there are blackouts in a particular website, they just shut everything down and our advisers are unable to interact with the people there. And it also had an impact on our old branches because when we had blackouts in our branches, we could not provide advice to customers. So those are the things that broadly led to that impact, but we recovered in quarter 2. If you look at it, I mean we're 18% down like you said in Q1, and by end of Q2, we're just 6% down. So it was a massive recovery, and we are planning to keep the momentum going.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [6]

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Garth.

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Garth L. Napier, Old Mutual Limited - MD of Old Mutual Insure [7]

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So the margin for this year in commercial is about 3.2% this year. Last year, it was closer to 7%. And in personal lines, we're under 1% for this year, and last year was closer to 12%. Obviously, first half of last year, we had no catastrophes at all, so that's the biggest difference.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [8]

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Thanks, Garth. Thanks, Karabo and Clement. Other questions in the room? Francois?

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Francois Du Toit, Citigroup Inc, Research Division - Director [9]

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Francois Du Toit from Citi. Just a question for, I guess for Nico. In terms of the free cash flow generation in the period, you do give us the chart showing free cash flow of some ZAR 3.7 billion. But I'm just trying to square that with the reduction in the life company solvency capital requirement ratio. And embedded value also shows I think a ZAR 4 billion, ZAR 4.3 billion increasing the life embedded value. And despite that, your SCR ratio reconciliation shows a reduction in own funds, so that's normally your embedded valuation indication of own funds, and they're moving in the same direction. What happened in this period?

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Nico van der Colff, Old Mutual Limited - Chief Actuary [10]

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So the big noise is things that aren't consistent between the 2. For solvency, we had a number of participations that valuing them on the basis required by the prudential standards meant taking the very technical issue, taking NAVs in rather than fair values, which is inconsistent with the value of the liabilities that they back. So policyholder monies and participations, very technical item. We think we can get some of that fixed into the future. So that's the solvency discussion is not in line with an embedded value discussion that doesn't have that same noneconomic treatment of the same assets. And for the rest, the embedded value picture is still sitting with material free surplus generation kept behind in the Life and Savings entity.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [11]

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Anyone else? Sizwe?

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Sizwe Ndlovu, Old Mutual Limited - Head of IR [12]

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We have one question from the webcast, from [Fenaiah Monzaro] from Deutsche Bank. What is the long-term view on Zimbabwe? Will you continue to exclude it from the numbers? Or are there -- or is there a solution to accessing capital there?

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [13]

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All right. So I'll start on that one and then I'll perhaps ask Casper to chip in and try this as well. We remain committed as a group to fulfilling our customers' requirements and preserving value in Zimbabwe. It's obviously incredibly difficult right now. Inflation at the end of June was at 174%. It since gone up even further. The primary rationale for excluding Zimbabwe from our group numbers is about the fungibility of capital. So we'll continue to assess that. And if that fungibility improves again, then one will take a different decision about how we treat it. Having said that, I think the management team on the ground in Zimbabwe have been through this before. They're a very experienced bench. They know what they're doing, and they almost have a road map from last time around, if I can put it that way, of how to navigate this. So as to the long-term prospects, I guess your guess is as good as mine in terms of how that plays out. We do play a significant influencing role in the economy, and we'll do what we can to try to influence sensible policy and make sure that we do get the country back on a sustainable footing.

Casper, do you want to add anything to that?

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Casparus Gerhardus Troskie, Old Mutual Limited - CFO & Executive Director [14]

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No. Thank you.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [15]

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Jonas?

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Jonas Mushosho, Old Mutual Limited - MD of Rest of Africa segment & CEO of Zimbabwe Operations [16]

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Thank you. The country in (inaudible) is going through some very difficult economic challenges, but the government is implementing a transitional stabilization plan for 2.5 years. If they are consistent in implementing those reforms, which, in the short term produces a lot of pain, one hopes that the economy will start improving. But most specifically to our own business, where we see the value in our business that we have 1.3 million customers, and that's a very solid customer base. And secondly, over the years, we have invested in real assets, solid property and equity investment, including alternative investments. And thirdly, we have a very good skills based in Zimbabwe. So if we keep our staff, given the customers and the assets that we have, when the turnaround happens, we think that the value of that business will come back.

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Sizwe Ndlovu, Old Mutual Limited - Head of IR [17]

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I think there was a question on the line from Andrew Sinclair?

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Operator [18]

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A question from Andrew Sinclair of Bank of America Merrill Lynch.

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Andrew Sinclair, BofA Merrill Lynch, Research Division - VP [19]

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I've got 3 questions, if that's okay. The third one's quite a long one. So firstly, on Personal Finance, on Mass and Foundation, should we expect both of those businesses still to be seasonally stronger in H2 than H1 despite the macro headwinds that you're facing?

Secondly was on the dividend policy. That's not been restated after taking Zimbabwe out of your numbers. Should we now expect that you'll be very much at the lower end of the dividend cover given earnings are far more fungible and closer to cash?

And thirdly is on capital return. But you've got -- you've not returned all the proceeds from LatAm and also you've got ZAR 3.7 billion of economic NAV sitting in Residual plc. I just really wondered, what was the thinking to come to the ZAR 2.4 billion for capital return and for it could lead to further capital returns to come either through the rest of this year or to 2020?

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [20]

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Thanks, Andy. I'm going to ask Karabo and Clarence to answer your first question.

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Clarence Tsakani Nethengwe, Old Mutual Limited - MD of Mass & Foundation Cluster [21]

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So I'll go for the first one. So God, I will broke my crystal ball, so I'm not sure whether in H2, I will be in a position to come back strongly. But there are a few things, just a few things. So the economic conditions are very tough. It's tough out there in the market. The financial advisers are giving us feedback almost on a daily basis. Now the low-income customer is highly, highly constrained. So there's a lot of pressure in there. Having said that, we always plan to come strong each and every second half of the year. So the momentum started building from Q2, like I said to Michael, and the plan is to keep that momentum going up, up until the end of the year. But the reality is that things are very, very tough, and it's quite bleak. And we are quite hopeful that probably the economy will start lifting up towards the end of the year. But my crystal ball, if I had it, I was going to give you everything and tell you that this is how we're going to deliver.

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Karabo Morule, Old Mutual Life Assurance Company (South Africa) Limited - MD of Personal Finance Segment [22]

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Andy, I think similarly, in the PF space, yes, as we outlined in our outlook, the economic challenges I think are what will weigh down on our customers. But at the same time, I think we'll just always focus on what we can do and focusing on the basics that can be resilient in the face of that. So I'm focusing on advisers on the worksites, focusing on advisers within branches. And obviously, for us, I think a big change is the fact that if we -- as we're rolling out the new product in the second half of the year, that will be something that you kind of will see how things play out in the context of new benefits being available to those customers. But there are some pockets which are obviously really performing well from an IOS Life perspective that has been going great. And we're hoping to see also a recovery in our digital sales in the second half of the year. But I think the economic environment is what will weigh out in terms of that effect on our customers and our advisers.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [23]

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And Casper, do you want to pick up that capital and dividend question?

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Casparus Gerhardus Troskie, Old Mutual Limited - CFO & Executive Director [24]

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Yes. So obviously, our interim dividend is pegged at 40% of adjusted headline earnings, so we wouldn't really concern ourselves with the cover range. We do feel that the existing cover range does allow for the exclusion of Zimbabwe, so we would pay at a lower cover relative to the past if we wanted to have the same dividend trajectory. But I think it is something we can look at for the year-end to see if we need to tweak the dividend policy and then bring that back to investors when we announce our results at the end of the year.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [25]

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Thank you. Sizwe, any other questions on the lines or the webcast?

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Sizwe Ndlovu, Old Mutual Limited - Head of IR [26]

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Nothing on my end. Is there anything else on the line?

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Andrew Sinclair, BofA Merrill Lynch, Research Division - VP [27]

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Sorry, you didn't answer my question.

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [28]

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So Andy is following up on...

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Casparus Gerhardus Troskie, Old Mutual Limited - CFO & Executive Director [29]

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Yes. So Andy asked whether we didn't pay out the full LatAm prices as a dividend. As we've stated in the past, we look at our overall capital position, we don't link payouts to specific transactions. And we'll continue to do that. The factors that we took into account in arriving at the size of the share buyback really around the uncertainty of our group capital position and then risk to the downside that we'd like to see what will happen in the second half on Brexits, on the sovereign downgrade in South Africa and in those trades concerned. We do feel that we have a strong capital position, and we'll once again look at that position at year-end and make appropriate decisions. As Iain highlighted, if we don't have projects where we can use the capital appropriately at the right returns, we will return that capital to shareholders.

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Operator [30]

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And gentlemen, there are no further questions on the line. Thank you.

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Greg Wood, Melville Douglas Stanlib Dynamic Strategy Fund - Fund Manager [31]

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Greg Wood from Melville Douglas. Just in terms of Zimbabwe, I know you've answered a lot of questions about the fungibility of earnings. But just going back to previous experiences when -- where you are now, is there any chance that you'll actually have to put capital back into that business?

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Iain George Williamson, Old Mutual Limited - Acting CEO & Director [32]

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So our view is that the in-country balance sheet remains very well-capitalized, and we don't foresee a scenario at this stage where we would need to do that.

Anything else from the room? Sandy, one last check on the lines and the -- nothing? Okay. Ladies and gentlemen, thanks very much. There is tea and coffee and refreshments outside, so please join us for that. Thank you.