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Edited Transcript of SLM.J earnings conference call or presentation 5-Sep-19 7:00am GMT

Q2 2019 Sanlam Ltd Earnings Call

Johannesburg Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Sanlam Ltd earnings conference call or presentation Thursday, September 5, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anton Gildenhuys

Sanlam Limited - Chief Actuary & Group Risk Officer

* Ian Maxwell Kirk

Sanlam Limited - Group CEO & Executive Director

* Sydney Mbhele

Sanlam Limited - Chief Executive of Brand

* Wikus Olivier

Sanlam Limited - Interim CFO

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Conference Call Participants

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* Francois Du Toit

Citigroup Inc, Research Division - Director

* Larissa Van Deventer

Macquarie Research - Analyst

* Peter du Toit;Investment Analysts Society;Board Member

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Presentation

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [1]

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Good morning, ladies and gentlemen. On behalf of the Sanlam Group, I'd like to welcome you here today. My name is Sydney Mbhele. I'm the Chief Executive for Brand at Sanlam. I'd also like to welcome those that are joining us via the webcast and all those viewing this presentation on Business Day TV. Thank you for taking the time to be here for 2019 interim results.

Our Group CEO, Mr. Ian Kirk, and our acting CFO, Mr. Wikus Olivier, will present the results this morning. But before we do that, I'd like to welcome Peter du Toit from the Investment Analysts Society to say a few words. Peter, over to you.

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Peter du Toit;Investment Analysts Society;Board Member, [2]

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Well, good morning, ladies and gentlemen, Mr. Ian Kirk, members of the executive, the Board of Sanlam. The Investment Analysts Society would just like to thank you for hosting us today for the results for the period to June.

I think I'm correct in saying that Sanlam has passed the message on to the South Africans to say that the person -- first person to live to 200 has already been born. While looking at the audience here today, I think Sanlam is going to win the race to get to 200 first. In 1948 or '49, United Nations passed the human rights charter and in that charter said everybody has the right to live. So the medical science industry got going and they're gaining increasing momentum. So today, we can live in expectation that the day will come then we'll live to 200. I don't know what happens after that.

But Sanlam is going to get there first. It's already 101 years old. As a company that is the largest insurance company in South Africa, assurance company, life assurance, insurance and related personal financial services, it's got a market cap of ZAR 168 billion. And it's a company that's shown relative -- tremendous relative strength in a market that has been indifferent for us over the last few years. So it's relatively strong. But it's a company that's a pillar of South African societies -- of this South African society. So Ian, in behalf of all of us, once again, thank you and we look forward to the presentation.

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [3]

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Thank you so much, Peter. As I said, ladies and gentlemen, we'll get a presentation from Ian and Wikus. I will then come back after to facilitate the Q&A session, and I do need to say that a full bench of executive team is here should they need to answer any after questions.

Without further ado, over to you, Ian.

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [4]

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Thank you, Syd, and thank you, Peter. Much appreciated the kind words. Yes. As you say, we're around 101 years and we're building the business for the next 100, and that's -- it's a real honor, real pleasure to present the results here today.

So let me start, do bit of a strategic review and then talk a little bit about the operating environment that we had to face in the first 6 months. Wikus will then take us through the financial review. I'll come back and do priorities and governance, a little bit about the outlook.

So most of you have seen this before. This is the strategy, and we say the strategy has stood the test of time. It sets out the vision for Sanlam in South Africa, which is around leadership in the broadest definition, not just the financial metrics, the vision in Africa supported by India and Malaysia and how we support that through our activities in the developed world around asset management and investment management to support our clients through their diversification activities based in the U.K.

We have our 5 strategic pillars and that's -- those are used by all businesses of which there are over 200 businesses now in the Sanlam Group. And they use those pillars in defining the strategies for the business.

We have a federal model. I think it's worked very well for Sanlam over many years. We have tight principles and loose principles. Loose, not in the loose concept but in terms of the flexibility that we provide our businesses in determining their markets and their strategies and their value propositions for their clients and their go-to strategies. And of course, of late, given that the environment has become more complex and more challenging and more highly regulated, we've really embedded -- within the federal model, we've embedded the concepts of risk management and governance in recognition of the realities of regulation today in financial services. And for a group like ours, that obviously poses systemic risk and it's a systemically important business so we recognize that.

We've continued to deliver shareholder value over the years. This has been a multiyear performance. Again, I think, as Peter indicated, a very good relative performance. Of course, we will always want the absolutes to be stronger. But in the environment and the headwinds that we faced, I think it's a very, very credible performance over many years. I will say that in the first 6 months, the RoGEV, which is a key measure for us at Sanlam, at 10.5%, is slightly behind our target of 13.5%. There are some very specific reasons for that, essentially how we've treated, as appropriate, we think, in the environment we're in, how we've treated the valuation of certain -- some of the key investments and Wikus will explain all that.

And of course, as Sanlam, I have every confidence that we'll put our heads down and we'll work hard to achieve that all of the targets that we are trying to achieve for the financial year will be done. And of course, no one can have to say that a more conducive environment would help, of course. But with the cards are dealt, these are our cards that were dealt to everybody and that's why I always have said over the years we must monitor the relative performance, not just the absolute performance. So again, we're confident on this and these are key components, the RoGEV and the stable dividend.

So when we look to the scorecard for the 6 months, of course, on the downside is the environment and confidence, and I'll talk a little bit about that later. And of course, one has to watch the corporate credit. We have a big book there. So one has to look at those realities. But the capital position, of course, restored now after the BEE credentials, and Wikus will explain the accounting for that through the charge, which obviously affects the earnings per share.

Capitec Bank has just been an extraordinary success, I'll come back to it later. But I've been in the industry now since 1988, I've never experienced something like this. I said it to the Capitec team at one of our workshops with them, it's an extraordinary achievement and very fortunate for us.

We've delivered shareholder value. We've had good solid growth and positive experience, for instance, which people have come to expect. Of course, they're always asking how much, how much, how much of the experience, for instance, so we're always trying to keep it down a little bit. But another very, very good solid performance in the 6-month period on that front.

So this is really the sort of key strategic advantage now that we have as a group, and I've talked about it to you many times as to how we're trying to position ourselves as the go-to market for the corporate investors in the continent and have a very strong local general insurance and life insurance, retail and commercial capability.

We see 2 timetables here. The first timetable is to integrate the SAHAM business that we've done and we're solid there. We're on track, I'll talk about it a bit later. And then, of course, the second timetable, which is to earn out the business return in line with the hurdle rates that we set up at the time. That's probably a 2- to 3-year exercise, but we're fully committed to that and we're confident that we can do that. This is really the positioning of the business.

So on the operating environment, now I mean you've read lots of things about chief executives of late. I'm not going to repeat all that. So we are in a serious situation in South Africa, there's no doubt. I've never believed we're in terminal decline, but I really do think that it's South Africa first. It's time to implement the plans. You've heard that from many. We know what to do whether it's the latest plan out of the treasury that I'll talk a bit about later or whether it's the 14-point plan or whether it's [independent], we've got all the plans. We know what to do. What we've struggled with it is getting done -- to getting it done.

But let's just -- rather than just go through all that, let me say about how does it play out in Sanlam just to clarify that. The first thing, of course, is the intermediary activity is impacted because despite the success we've had in diversifying the distribution right across the group, Sanlam is still today largely an intermediated business. And in the tough times, the intermediaries spend a lot of time on retention. The discretionary money tends to dry up a bit, and you can see that in the Glacier flows and it's just harder for the clients to -- the intermediaries to get to clients to commit to the range of products that we offer, albeit international guaranteed equity plans which you would think would be sort of the type of thing that clients would go into. The psyche is such that they don't necessarily do that. And it's harder for the intermediaries to get the business across the line.

So what we've been doing of course, and we've done it again in the last 6 months, is that we're just growing the business nicely, but we're growing it through the market share gain as opposed to real new money, which is the South African issue.

On the general insurance side, it's also not quite the same but it's impacted by GDP because Santam over the years has grown GDP plus CPI plus about 2% of the developing economy. GDP is 0, whether you take a minus 3 for the first quarter and plus 3, whatever, it's -- if it's a 0.5 plus or if it's 1 plus, whatever it is, is anemic. And that affects the general insurance business.

And of course, corporate credit, as I mentioned, is a tough one. We've got a big corporate credit book, which would have, of course, as a big life company along with all the others and the banks. So you've got to be very careful and the type of things that we've seen, we'd had to do some provisions there and we've consistently raised the provisions another ZAR 142 million and these are the results and that's obviously impacted the investment business.

And then, of course, you have to manage the investment market conditions through volatility, and that's from how you deal with the clients to how your run your business and how you position your portfolios for your clients and for yourself. So it's very hard for Robert and the team to operate in this environment, but these are the cards that we are dealt.

Now as far as Africa is concerned, of course, things are looking a little bit better. Given that we have 34 countries in the portfolio, you have the diversification benefit. One or 2 countries are always going to find it a bit difficult. We had problems in Zimbabwe, but because we kept our exposure to Zimbabwe at the beginning, it wasn't such a big number for us, I think Wikus will explain it was ZAR 188 million knock that we took in the GEV writing down the business. But we've got great businesses, and we believe in time that will recover the real value. It will take time for the country to recover and therefore the value to recover. But we've got great businesses and wonderful people there and we'll bash away and hopefully the value will come back in time.

But there are 2 things I just want to mention that are probably going to be quite important in our desire to ensure that we get penetration of insurance products up in the territories in which we're operating because that's a key component. The first is the Africa free trade agreement where there has been some positive progress. And of course, we believe that free trade is very, very important in growing the economies and in growing Sanlam's business. I don't know that Mr. Trump sees it that way, but we certainly see it that way. And hopefully, Africa now will come through and South Africa is a signatory and Nigeria will make some difference.

The second thing is risk-based capital and that really plays into our hand as a diversified business. We've seen it now in West Africa where they have introduced new capital requirements. And Junior explains to me of the 90 players that are operating there, 48 don't meet the capital requirements. That's a nice opportunity for a business like Sanlam. So those things are important.

The global environment is a tough one. We've had decade-long free trade driving global growth and now we're into a situation where we have populism, we have nationalism, we have protectionism and we have Mr. Trump and Mr. Johnson. So goodness only knows what's going to happen. But we don't necessarily see that as a positive, but at least in Africa where we're playing we can have some positives. Of course, it would be great if we had a little bit more.

So that's it from me. I'm going to hand over now to Wikus to take us through the numbers.

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Wikus Olivier, Sanlam Limited - Interim CFO [5]

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Thanks, Ian. Good morning, ladies and gentlemen. It's my pleasure this morning to take you through another set of solid results for the first half of 2019, which, as Ian mentioned, was achieved facing major headwinds in South Africa. If you look at the features of the economic and underwriting environment, that impacted then our results in the first half of the year.

From an interest rate perspective, we saw long-term interest rates in South Africa, both the 9-year and 5-year yields being lower at the end of June compared to both December 2018 and also end of June 2018. That, of course, also had a consequential positive impact on our risk discount rate, boosting out return on group equity value by 1% and also increasing the growth in our value of new business by 5%.

From an exchange rate perspective, the average rand exchange rate was significantly weaker in the first half of 2019 compared to the same period in 2018, having about a 3% positive impact on our operating profit growth for the period. But if you compare spot to spot exchange rates from end of December to end of June 2019, we actually saw a strengthening of the rand over that period, which had a negative impact on our return on group equity value of about 1%.

From investment return perspective. If you look at the first half of 2019, markets really performing strongly, up about 9% in South Africa, which is a counter of the performance in the first half of 2018 where we saw negative equity market returns. So this contributed to a positive EV investment variances of about ZAR 570 million. But if you look at the average market levels first half last year versus first half this year, the average was down about 6%. So we saw continued pressure on fund-based fee income both in Robert's business and the Sanlam Investment side but also within the SDF business.

From underwriting perspective , you saw the Santam results coming out earlier. The underwriting margin declining from more than 8% to 5.3% in the first half of this year, but still well within the 4% to 8% target range.

On the SAHAM side, unfortunately, weak claims experience continuing with the underwriting margin of 3.2% below their target range.

Looking at the key performance indicators of the group from an earnings perspective. Operating profit up 13% in the first half of the year, which I think is a stellar performance given the environment in which we operate it. Now our net operational earnings, which is a combination of operating profit plus investment return earned in our capital portfolio, also up by 15% supported by the relatively stronger equity market performance.

Business volumes is where we really had a stellar performance from our life businesses with net value of new covered business up 19% to ZAR 942 million. Even if we strip out the impact of lower interest rates, VNB is still up by 15% with the margin also improving from 2.46% to 2.79% in 2019.

Overall new business volumes up 4%. We'll get to the detail in a later slide, but impacted by risk aversion within particularly our mass affluent and affluent market space. But net fund flows increasing from ZAR 19 billion last year to ZAR 23 billion in 2019.

Ian already referred to our return on group equity value, which is softer than what we would have liked with both the actual RoGEV and adjusted RoGEV below our 13.5% hurdle rate.

Taking a look at the Sanlam Personal Finance. New business volumes down 9% on last year, but essentially due to a lower performance in Glacier where we've seen the trends from the second quarter of last year continuing into 2019 with this business really suffering from a lack of investor confidence. You can see both the life and nonlife lines of business down on last year.

Sanlam Sky up 3% in total, but there, we have to look at the different lines of business with the traditional individual life recurring channel up 13% on last year. And I think especially compared to the rest of the peer group, a very good performance.

The Capitec funeral product that Ian has referred to already, reaching sales of almost ZAR 470 million in the first half of 2019.

The Capitec credit life business. Unlike the funeral product, which is we've got a strategic relationship with Capitec, the credit life book is essentially up for renewal every year through a competitive pricing process.

And Sanlam Sky, given the current environment, priced for that and unfortunately proved to be uncompetitive with other players in the market and we lost the scheme this year. But of course, it's up for renewal next year as well as so we hope we'll be able to win that back.

The other channels doing well, up 82% with both group business and South African doing well.

The recurring premium channel is where we actually saw the pressure on disposable income within the middle income market coming through, up only 3%, supported by good demand for retirement annuities and also good growth at MiWay. But essentially, all of the other lines of business on the savings side down on last year and the traditional risk business also flat on 2018.

Net fund flows reflects the lowest single premium volumes written by Glacier.

Net value of new business, up 16% on last year, 11% if I strip out the impact of lower interest rates, essentially a function of the strong growth that we saw in particular on the Sanlam Sky side and also some impact of basis changes that we made at the end of 2018 coming through in the first half result with margins exceeding 3% again, which is particularly satisfactory result.

Net operating profit up 9% on last year. Sanlam Sky increasing its profit by 12% despite higher new business strain incurred due to its strong new business performance. If I exclude new business strain, the profits are up 27% on last year, which reflects the growth in their book over the last number of years, delivering on this growth area for the group.

Recurring premiums subcluster down 9% on last year. Essentially 3 factors impacting on that result, also higher new business strain, lower profits from the older book that's in runoff and also a little bit lower positive risk experience variances in the first half of 2019 after stellar results in 2018.

Glacier, up 33% despite the new business performance. What supported the results in the first half of the year was good fee income on products where Glacier participates in the actual investment return earned on the underlying portfolio. We had relatively stronger market performance in the first half of the year providing some support on that base, but with the core platform business also increasing profit in the high single digits.

Strategic business development up 82% due to a lower expenditure in these businesses but also a one-off ZAR 70 million prior year positive tax adjustment coming through in the first half of 2019.

Group equity value of ZAR 45.6 billion at the end of June with a return of 11.5%, which is well in excess of the hurdle for the business with both life and in nonlife businesses contributing strong returns.

Switching to Sanlam Emerging Markets. New business volumes up 36% on the first half of 2018 with most countries and lines of business achieving good growth. The exceptions were investment business in Namibia and Kenya, which is reflected in the lower new business volumes in Namibia and other African markets. But within the Namibian space, the life business actually did very well with strong growth in both entry level market and also in large single premium group savings mandate we see in the first half of this year.

Botswana business up 34% with growth of more than 40% in the investment business, but also good growth on the life side. But there, we have actually seen a change in business mix to the less profitable products. So when we get to the VNB, you'll see the VNB growth was not as strong.

Within other African operations, up 81%.

SAHAM Finances overall outperformed its targets for the first half of the year, which, together with the impact of the acquisition that we did in the second half of last year, resulted in more than doubling its new business contribution.

Within other emerging markets, up 23% which is a combination of 16% growth in India and more than 40% growth in Malaysia where we've seen this in particularly life business in Malaysia finding very good traction in the first half of the year.

Within India, the general insurance business did very well. The life business unfortunately was impacted by lower disbursements in the credit life businesses in the last quarter of 2018 with consequential lower internal sales to the credit client base.

Net fund flows up from ZAR 3.2 billion to ZAR 5.5 billion with the impact of the execution of SAHAM Finances also providing support there.

Net value of new business, up 17% on last year and Namibia up 39% where the strong growth in the entry level market and then the one-off large savings mandate also providing support.

And Botswana, as I referred to, up only 4% which if we strip out the currency impact, they're actually down in local currency on last year due to the change in business mix.

Within other African operations, I think the highlight we saw there, it's still small within the overall Sanlam context. The improvement in the other African operations was particularly pleasing.

Other emerging markets down 18% on last year, and that's essentially due to lower VNB in India that's linked to the lower sales into the client bases of the credit businesses with the Malaysia business recording really good growth.

New business margins. Only item that I want to highlight is Namibia. We saw slightly lower margins and that's due to the impact of the single premium policy that we wrote in the first half of the year.

From a net operating profit perspective, up 50% on last year. Namibia flat on last year due to a weakening in the claims experience on the general insurance slide, similar to what we've seen in Santam in South Africa. But with the life business particularly showing strong profit growth with a group life risk experience improving from last year.

Botswana up 9%. This is a good result despite some asset mismatch losses that incurred in the annuity portfolio.

Within the other African operations, SAHAM Finances still underperforming targets for the year and that's essentially due to weak multi-claims experience in Morocco. We saw that in the second half of last year and those trends continued. But with the combined ratio of the business still well below the average for the market and then SAHAM also incurred some large one-off claims within Continental Re of some ZAR 70 million related to oil and gas cover and also the cyclone in Mozambique.

Within other emerging markets, India up 74% on last year. The credit businesses, despite the lower disbursements in the last quarter of last year, the books still showed some good growth supporting the profits from the Indian operations -- or from the credit operations and we also saw some improvements in the collections within Sanlam Citi -- or Shriram City Union Finance.

The general insurance business increased its profit contribution by 170% on last year. We have seen a strong improvement in the performance of the third-party book business. It's a combination of factors. The claims frequency has been coming down the last number of years and the business has also put a lot of focus on managing the claims within the business, settling claims earlier, settling out of court and ultimately lower claims cost to the business. So we did see some release of reserves in that business. So the ZAR 570 million is not necessarily a sustainable profit going forward, but we do expect the general insurance business to operate at a higher-than-historic profit level going forward.

Group equity value actually reflecting a negative return of 0.4% in the first half of the year. It's essentially due to the valuation of SAHAM Finances and the Indian businesses. We've -- for both of those businesses, we kept the valuations broadly unchanged from the end of December. In the case of SAHAM Finances, essentially taking cognizance of the current claims experience within the business. In the Indian businesses, despite those business doing very well from an operational perspective, the valuation methodology does take into account the listed values of the credit businesses that's part of our unlisted investment within Shriram Capital and thus share prices were under severe strain in the first half of the year. So we've decided to rather keep those valuations also unchanged.

Looking at Sanlam Investment Group. Net investment flows almost doubling on last year, and you can see most of that is coming from the investment management business in SA, which I also think is really good results given the challenging environment. And we've seen good flows from both the retail and institutional and the alternative businesses with SIG and I think they can really be proud of that result.

Wealth management unfortunately reflecting a small net outflow with that market segment also impacted by a lack of investor confidence similar to the Glacier environment and with international business also experiencing a strong turnaround from the previous year.

The net operating profit up 7% on last year with -- similar to the flows, the investment management business also doing very well, up 61% on last year. Included in the ZAR 197 million of profit is a one-off fee income of ZAR 60 million that the alternatives business earned on the closure of the Climate One Fund and there's also ZAR 38 million of fee income earned by the properties business on property transactions.

Also the international side down 15% on last year due to 2 factors. The one is lower brokerage volumes and then also bad debt provision of ZAR 30 million that we have to make in that business, which more than offset a really strong performance by both Nucleus and the asset management businesses in the international segment.

Ian already referred to the ZAR 140 million corporate credit provisions that we had to make in the first half of the year given the rise in credit risk in the corporate space, which impacted negatively on the Sanfin profits. But I think despite that, only being down by 11% is also a good result.

From a group equity value perspective, the returns of 5.5% is lower than the earlier rate for the business and that's due to us holding back on the valuations of both the SA asset management businesses and also the private wealth businesses given the current challenging environment and the low net flows within the private wealth space.

Santam's results, you've already seen. Net earned premiums up 6% on last year with underwriting surplus down 34%, essentially due to a normalization in the underwriting margin from 8.4% to the 5.3% that I've already mentioned.

The return on group equity value of 3.4% reflects the performance of the listed share price during the 6 months because actually we value Santam at its listed value within our group equity value.

Sanlam Corporate, very strong performance from a new business perspective of 32% with strong flows coming through on the umbrella fund business in particular, but with net fund flows more or less the same level than last year with a good new business performance also reflecting in more than doubling in its value of new life business for the period and with the new business margin also more than doubling, which is a very good performance from this business.

From operating profit perspective, profits down 18% on last year. The 2 biggest businesses in there is Employee Benefits and the health care. On the Employee Benefits side, we did see a weakening in group risk claims experience, which negatively impacted on its profitability. While the health care business was impacted by lower-than-expected growth in its members on the administration and also some one-off expenses coming through the business in the first half of this year. But despite the lower profit contribution, its return on group of equity value of 8.2% is also well in excess of the hurdle rate for the 6 months.

Putting it all together for the Sanlam Group. New business volumes up 4% on last year and net fund flows, as I already mentioned, up from ZAR 19 billion to almost ZAR 23 billion in this year, which is a really good result for the group in total. Net value of new business up 19%, 15% excluding the impact of the lower interest rates.

This slide just gives the trend line over the longer term for VNB where we've seen the trend of strong growth over the years actually continuing in the first half of 2019.

Net result from financial services or net operating profit, up 13% on last year with strong contributions from emerging markets that I've already discussed.

From an income statement perspective, net operational earnings up 15%, combined effect of the 13% growth in operating profit, but then in a relatively strong reinvestment markets in the first half of the year also supporting the investment return that we've earned on the capital portfolios.

IFRS attributable earnings down 32% on last year. And you see the biggest items in there is firstly the IFRS 2 charge of ZAR 1.7 billion that we have to recognize on the conclusion of the 5% share issuance to the Broad-Based Black Economic Empowerment vehicle. That is a one-off and it won't incur or recur in future periods.

The increase in amortization of intangible assets is due to the significant intangible assets that we recognized last year once both SAHAM Finances and Nucleus became group subsidiaries.

The other line item is a combination of the elimination of treasury shares held in our policyholder funds in terms of IFRS with that number volatile. It's essentially dependent on what the movements in the Sanlam share price is.

Group equity value perspective, I've already discussed the individual performance of the businesses, but as mentioned earlier, adjusted RoGEV on a per share basis of 8.9% for the 6 months on an annualized basis, which is below the 13.5% hurdle rate. And as Ian also mentioned, this is a specific focus area going forward. But we are, to some extent, dependent on what the market performance will be in the second half of the year.

Looking at the buildup of group equity value earnings. Total adjusted RoGEV of ZAR 6 billion for the first half of the year with a ZAR 4.7 billion contribution from a life businesses, which is well in excess of our hurdle for the combined life operations. And you can see continuations of positive experience variances and strong VNB also contributing to that performance. The ZAR 1.3 billion contribution by other operations is lower than the hurdle rate and it's essentially due to the low valuations on Shriram Capital, SAHAM Finances and also the low return on the Santam share price that I referred to.

Adjusting from adjusted RoGEV to actual RoGEV, ZAR 414 million. Positive impact on the life business is due to the lower interest rates coming through. And then varied small adjustments for the rest of the life businesses and also the nonlife operations.

Looking at experience variances, this is a number that we've always been very proud of at Sanlam with us producing consistent positive experience over the years. First half of this year, we again achieved ZAR 663 million. It's lower than the ZAR 1.1 billion of last year.

On the right-hand side, you can see there the main components of experience variances with the biggest decline being in the other category, which reduced from ZAR 498 million to ZAR 156 million in the first half of this year. But just to remind you that included in the comparable number was ZAR 290 million one-off release of cost of capital when we reduced the capital allocation to the South African life businesses.

One or 2 other items to highlight is on the credit spread, also down from ZAR 192 million to just about ZAR 100 million and that's where the impact of ZAR 140 million credit provision comes through.

Persistency experience in line with last year. Risk experience also declining by about ZAR 40 million with most of that attributable to the weak claims experience within the EB environment.

Return on group equity value if I look over the longer term. On an actual basis, we -- 0.9% short of the target. But on an adjusted basis, we're still exceeding the target by 2.2% over a 5-year period despite the underperformance in the first half of this year, which is still acceptable performance.

From a diversification perspective, South Africa remains the biggest part of the business, contributing 62% of our group equity value and still about 70% of net operating profit. But if you look at those 2 graphs, you can see there's still some work to do to ensure that the other African operations profit contribution gets closer to the group equity value composition.

Looking at the line of business diversification. A very well-diversified profile across group equity value with life business of 42% and general insurance business of 31%. And this is where the acquisition of the remaining interest in SAHAM Finances made a real difference to our diversification profile. But similar to the geographic picture, if you look at the net operating profit, you can still see there the life business contributing a disproportional component of operating profit with some work required to lift the contribution of the general insurance businesses.

Looking at capital management. We started the year the negative balance of ZAR 3.7 billion. Adding to discretionary capital over the next 6 months was net cash of ZAR 4.5 billion that we raised through the 5% B-BBEE share issuance. That's after allowing for the vendor funding that we provided to the SPV and also the dividend that we paid on the increased number of issued shares over the period.

Capital deployment of -- amounted to ZAR 877 million for the period with the 2 biggest components there capitalization within the CIMA region due to higher minimum capital requirements, which used about ZAR 550 million, and then also some ZAR 170 million payment to Santam to reduce its participation in the African GI businesses from 35% to 10% to be in line with its stake in SAHAM Finances. That leaves us with a discretionary capital balance of about ZAR 570 million at the end of June, which is fully earmarked for transactions that's in the pipeline.

Looking at the solvency position, remaining very strong. You see in the middle of this slide the Sanlam Life covered business standing at 214%, which is still in excess of the upper range of its target, 170% to 210% solvency range with the group solvency also remaining strong at 205%. The reduction in the cover level since the end of December is essentially due to the a more severe equity stress in the standard formula due to the higher market levels at the end of June 2019.

And that's from my side. I'm going to hand you back to Ian.

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [6]

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Thank you, Wikus. Well done. It's amazing. As you can see from the diversification, it's helped us adapt them and deal with the challenges that we face. But of course, it complicates things and over 200 business is now in 44 countries. It absolutely amazes me how Wikus can just talk the figures off the top of the head, which is quite obviously we had with Heinie and we had with (inaudible) before that. So thanks, Wikus. It's not easy. We make life hard for you but you're totally on top of it.

Okay. So just going through now and to the projects and the governance. Dealing first with the group. Now I've talked there about the strategic partnerships. So look, we're not going to partner with everyone. We have a couple of key partners on the retail side and on the institutional side. And I think that's going to be key to our success, Pan African in particular. It takes a long time to build traditional distribution. We're busy with it. Robert and the team are doing that certainly, Robert and Thomas. But you need alternative distribution given the pressure and the huge opportunity, particularly in the retail area. And these partnerships that we've announced with the banks and with the telcos and with some IT businesses are really going to differentiate us. But the other thing that's quite interesting is that they actually help us adapt. I mean what we've learned from partners like Capitec and MTN is really very valuable for us strategically as a business, and it's opened our eyes. And it's a deliberate thing, but it's really been very, very valuable. So I think no matter how big and how strong and how focused you are, you do need partners to avail of those huge opportunities that we see across the content.

Now the other thing I would say here is that, obviously, we have to deal with all the challenges of today around analytics and digital transformation. I think we're really getting our heads around that. We've put in place the necessary infrastructure. And over time, given that it's 101-year business, it's not like you can start it tomorrow. We're adapting very, very well on that, and it's very good.

And people, you've seen we've made a move. Jeanett Modise, she was with us today. Jeanett has been with us for a good few years through Santam, through Sanlam Investments. And now we brought her into the group as a Group HR Director. So -- and it's a deliberate strategy because it shows to -- we've managed to get Sanlam to a position where we can retain our top talent and we can attract our top talent, and that is absolutely critical in our performance. So we're really focused on that. We have to ensure we have the right people in the right role with the right support. That's the message for government by the way to get the job done aligned with the strategy and really purposeful. And you see that obviously with SPA and the development in Africa has been the #1 priority for the group. You see the moves that we've made now to position Junior into the business development and the stakeholder management role, which is what really is something that can untrip -- or trip you up in Africa. So with a full time focus Junior there and then asking how I need to -- which he very kindly agreed to take the full operational responsibility for the emerging market business. I think it sends a very, very strong message around our intent. And Heine, of course, has been with us for many, many years. He knows all the talent available in Sanlam, so he'll know what he needs to help them get the job done. And I think you'll see more moves in that regard. And that really talks to the commitment we have.

Wikus gave the number on SPF, so I won't talk numbers. But I think Jurie and the team, a very, very solid performance. And of course, Capitec, as I mentioned, is an extraordinary achievement. I mean 100,000 policies a month. I've never seen it in my life. I've never experienced anything like this. And of course, it talks to the strength of our partner and the strength of the partnership and building other capabilities that we built up over time and have the things are working very, very well. And of course, we'll take that to the next stage over the next couple of years.

But also, what they've done, they're very, very cleverly as these new initiatives, and we mentioned MiWay Life and Sanlam Indian and BrightRock. And of course, you have to be careful in the times that we're in, in developing. And Jurie and the team have really brought those. It's definitely helped us in the VNB. And we've kept the operating profit strain very much under control as you can see from the figures. So I think that's really fantastic.

And I've talked before about the 4 strategic priorities in South Africa, and it's in the entry-level market under [Carl] (inaudible) guidance that we really have made progress. We were out of the market for many years having sold metropolitan. We've now got -- under [Carl's] guidance, we've now got 3 horses in the race. We've got the Sky business, which is doing very, very well and taking market share as you can see. We've got this wonderful opportunity with Capitec and now we've got African Rainbow Life up and going, which is a different distribution model and really an opportunity for people to come on board and do the business on the Sanlam platform. And with those 3 horses in the race, I think we're really making very, very solid, solid, solid progress.

And of course, Jurie and the team active on digital and the analytics improving the value proposition to clients and the way we run our business. And we even got the robots up and running now in Bellville. So if you want to see Bellville robots, there are the same as other robots. They're not any different because they in Bellville. So -- and they work 24 hours, and they don't get sick and they don't have transport programs.

So on the emerging market side, I've talked about it. And we used the word there, compete. I would rather really say that the integration, which is timetable one is on track. It certainly not complete, but it is on track and in progress. And then as I say, it's a 2- to 3-year earnout on the business case. The deal is done. I think it's in progress. We understand the business case. We've got confidence in the model. We've delivered in the past. We think we can do it. We think we're up to it. The people move, as I referred to, and expect more in the future will really position us well. But on top of that, what's really critical and what I'm really positive about is the way the clusters, the other clusters have come on board in this opportunity. We're not going to be successful just leaving it up to Junior, leaving it up to Heinie, leaving it up to the teams. We have to come on board as all of the clusters. And whether it's Santam, and the corporate and the investment business, I'm really beginning to see that now and that's going to be a -- it's a wonderful capability that we have. And once we get people to -- within the 21,000 people we've got in the group to understand the significance and the wonderful opportunity we've got there. But of course, it's not going to be easy and it's going to go on a straight line. These things, we're realistic. We've been in business long enough to understand that. But delivering on the synergies, building up the life business, growing the general business now under Nadia and her team optimizing the reinsurance to work with Anton and his team are doing on capital optimization. The work that Emmanuel Brule and his team are doing on really positioning us well for the go-to-market on internationals to really deliver on that unique opportunities. So that's the #1 priority, and I think we're in solid position there. It's going to take some time. Not everything is going to go according to plan, we're realistic on that. But this is the story for the next 3 to 5 years for Sanlam. And we have a unique positioning at the moment.

Wikus took us through the numbers on investment. But going forward, it's really around this superior investment case. And I have to say well done to Robert, [Anderson] and the team. They've really positioned us well in the investment performance, and we're very, very solid there, and it's helped us.

The performance from the third-party asset management business and the split that Robert put in place a few years back is really working there. That's an outstanding performance, up -- the profits were up 70%, and that's just -- it's just been great. And it positions that business very, very well because the asset management is a business that's under pressure right around the world, passives and alternatives. And we've invested nicely there. We've got a great passives business. We're building a very strong alternatives business. It's working for us, and we're looking at the scale opportunities that will inevitably come in South Africa because of the pressures that's on this -- on the margins in this business. We're well positioned for that. We're well positioned around our black empowerment deal.

In the U.K., it's all about improving the returns. We know why we need the business, and it's critical for our client value proposition but we need to make sure that we all focus on getting the returns that are necessary out of that business. And Robert and his team are certainly well active and busy on that.

Santam, difficult first quarter, but we know this business we've been in it for many, many years. It's about volatility. At the end of May, Lizé was sort of saying, well, how's it going to be, and then they came through very, very strongly in the month of June. So great business and in the conditions that we're in, very much on track. We've got a new 5-year plan, and we went through that for a day, just last week with them. And it's fantastic for me because I was in that business for 8 years to see how the team has really rallied around Lizé giving her huge support and the confidence that gives me as an investor in that business about making sure that, that business's future fit is dealing with all the challenges and continues to grow the market share. So they also participate actively in our partnerships in South Africa and outside of South Africa, and they're busy with the municipality. So really, really in a good position there.

Sanlam Corporate now, I'm confident. I've seen some of the numbers over the last few months. I think we can turn that profitability. We've really focused on it. We're very much aligned now with Afrocentric strategically. We know what's going on there. We have a very strong position to support that business. And of course, the -- with the defaults, the retailers, opportunity is very, very significant. So I think we're in a very good space there now, and Tinus and the team will build out that business strongly. And that's, of course, in that area, it's really, really critical. Wikus talked about the 2 that -- in that clusters 2 of the 4 areas where we need to get to that leadership position. We've got strong competitors against us. But I think just give us a bit of time, I think we can make solid, solid progress strategically there in closing the gap in those 2 areas.

Okay. I must just say a little bit about governance because this is an important issue from our shareholders, and we've made some really impressive, I think, Board appointments. Elias, well known to all of you. Andrew Birrell, well known certainly to Ian. Andrew and I worked together in the Capital Alliance days, and it's wonderful for me to have Andrew back. But he's got great, great career, great success. That is a real success of his career in South Africa and in the U.K. So it's wonderful to have him back. And of course, Kobus is now -- having done the 3 years compulsory cool off period, Kobus is now back with us on the Board 1st of January. And then as I mentioned bringing Jeanett on Board, showing the -- demonstrating the really important -- the people and the new ways of work and all that sort of stuff.

We've also made solid progress on the broad-based trusts. We'll have that all wrapped up at the end of December. All the criteria is now finalized, and we're working there with our partners in [UV], ensuring that all that is wrapped up by the end of December.

So of course, it's outlook now, and I'm sure you've heard many comments from Chief Executives as to how they see it. But just before I get into that, I just want to talk a little bit about the xenophobic attacks on foreign nationals in South Africa. I think it's appropriate for me as a leading insurer in Africa to make some comments there. So we have a presence, as you know, in 34 countries through the Sanlam Pan Africa business. And we note with deep concern and we condemn the spate of attacks that we've seen in our country against foreign nationals. And of course, we see the reports on retaliatory attacks in businesses in Africa against South African businesses now. That really -- it's just a dreadful situation.

So our business model, as you know, it's based on strong local partnerships with businesses outside of South Africa, and it's managed by locals in those countries. Many -- in many countries, we use our partner brand so you won't -- Sanlam, it's an integral part of how we do that and particularly in the countries where we've had most retaliation. In fact, we're not using the Sanlam brand. It's not to say we're not impacted. Of course, we're impacted. But we're not impacted in the same way as ShopRite or Standard Bank or an MTN. So it is slightly different for us, but really we -- it's the most unfortunate situation. We believe strongly in diversity and inclusion. And staff in the businesses throughout Africa, and we've now got about 12,000 staff in Africa and the 21,000 staff that we have in South Africa. They are most valuable assets, and we strive to provide them with a safe and supportive working environment. So having Junior now fully available to focus on stakeholder management and business development. So Junior and his team are fully focused in on this. He can tell you exactly what's happening in every country. This is his main focus to manage the relationships and do what he can and do what we can to deal with this most difficult situation.

So getting back to South Africa. I've said earlier, I don't think we're in terminal decline. I think South Africa could be fixed. We have a new paper now from the Ministry of Finance towards an economic strategy for South Africa. And very much in line with the NDP, very much in line with the other priority plans that we've had over the last few years, but really, guys and girls, it's now about implementation. And I'm seeing a more and more recognition within the government, well, and certainly parts of the government, let's say, the ones that are more rational side around the real need to focus on implementation and to work with the business sector and to work with labor in getting the job done.

Now implementation of the job is what we do in Sanlam. So we really do understand these things. So it's having alignment around the priorities. And where you don't have alignment, then you have all of these policy, uncertainty. And we don't know what we're doing and we're doing this one day, and we're doing this just another day and how does it all hang together. We're not going to fix South Africa if we don't address that issue. Business has to be more proactive. There's no doubt about that. We have to work on the priorities. But I think the recognition that the state needs to work with the private sector, I'm certainly hearing much, much more of that. And that creates opportunities. Of course, it takes -- it creates challenges for us too because the expectation will be there from government that we come on board and we fix South Africa. But I've said many times, we can't have a successful Sanlam if South Africa doesn't succeed, and we have to work together with business and government for doing that.

So thank you very much for listening to what we had to say. I think the business is in good shape. I would agree with Peter from the beginning. At the beginning when he said, a very, very good relative performance in challenging times. Of course, we would all want the absolute performance to be stronger, but the reality is that you can build and you can make real strategic progress in tough times because the stronger businesses tend to get stronger and the weaker ones just find it difficult -- and find it more difficult with the wind in their face. So we know what we're doing. We've got the capability to implement. We know what this business is about. Our heads are down, and I've got every confidence for the next 6 months. And of course, it would help us if the external environment is a bit more conducive, but some of that is certainly outside of our control. But the things that are within our control, I think we're on top of. So thank you very much.

If I can hand back now to Syd.

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [7]

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Thank you, Ian. Thank you, Wikus. I hope that you all found that informative.

Ladies and gentlemen, we are now going to take some questions. We will start right here in Alice Lane, and then we will go to the telephone line and on the webcast.

If I could please ask that you introduce yourself and where you are from. And as you asked us questions, I will invite Ian, Wikus and Anton, please maybe join us on stage to get ready to take some of the questions. And I already -- as they settle, I already see a hand. Can we get a microphone closer to the gentleman over there?

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Questions and Answers

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [1]

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Over to you. Can you please stand if you can?

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Unidentified Participant, [2]

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I'm [Tato] from Sanlam Private Wealth. Ian, you mentioned obviously the distribution partnerships with Capitec locally and MTN on the continent. Could you perhaps just give us some color over 3- to 5-year view if you have any as well as expectations around business flows or written premiums that you derive from these partnerships as well as future products growth that could be supplied aside from funeral plans that could be supplied by those partnerships.

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [3]

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Yes. I mean it's hard for us at this stage. I'm not really in a position to disclose. But obviously, in the two that you've mentioned and the one or two others, we do have project plans and we do have projections as to what can be achieved. As you've also mentioned, it's not just about 1 product. But you have to start the partnership with something. This is like a marriage. You've got to start with something. So you start with the one thing, and we started with Capitec, for example, with the funeral plan, and we've embedded great success on that. And we have projections on that, and that can make a very, very significant difference to Sanlam, and it can make a very, very significant difference to the positioning of all the players in the mass market there. And I think you already -- I mean the smart analysts are already beginning to work out the sort of winners and losers in this scenario. But it's about a broader and a deeper partnership. It's not just about funeral plans as you say. So we're very, very busy on that. The one thing I would say about Capitec is that one of their criteria for working with us and why they chose us is that we are prepared to disrupt. And so that is one of the key criteria. The product, even though it's a standard funeral product, it's extremely disruptive for various reasons, which I won't go through in the market. And it will be the same with the next range of products that we delivered with Capitec.

The same thing will apply to MTN. We'll start with a particular product, which we've got just about ready to launch. It's a sort of more of a savings investment type of plan around the product that we built in the Sanlam Indie, and we'll take that forward. But it's not really appropriate to go through and tell you what as a percentage, what are our production will be. But if we were sort of 90-10 in terms of intermediaries versus alternatives today, that will be a very, very different picture I would say, Anton, in 3 years' time.

And the partnerships -- I want to mention again, it's not just about the presence that they bring, it's also about the value that they add in improving our ability to adapt to market conditions. We learn a lot from these partners. Hopefully, they would say they learn a lot from Sanlam. And they do tell me that, I hope they'd tell others too. So I don't know, Anton, if you want to...

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Anton Gildenhuys, Sanlam Limited - Chief Actuary & Group Risk Officer [4]

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I'll add -- Now I think the only thing to add would be to allow that the uses of partner will also be different in Africa. And many of the African countries, we have alluded to, that we are going to make more use of partners to get distribution up and running much more quickly than building the traditional distribution force. So I think in that regard, the partnership, they will be different in Africa from South Africa specifically.

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [5]

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Yes. Thank you very much. We've got another question over there.

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Unidentified Analyst, [6]

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(inaudible). In your results, your emerging market, your SAHAM contribution was positive. And given the increased shareholding as well as the weaker rand. If you look through to SAHAM Group and say, in their reporting currency, which presumably is the Moroccan dirham, what was the year-on-year growth rate? It looks like it was around about a 10% decline. Is that in the ballpark or not?

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [7]

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Maybe on the underwriting, but not in the total. Wikus will -- maybe -- just you look focusing on the underwriting, 6-month on 6-month. Wikus, maybe you can...

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Wikus Olivier, Sanlam Limited - Interim CFO [8]

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Yes. I think if you look at the 2 components, the 2 largest components of the earnings, you'll see underwriting result from a GI side where they did see a significant decline from the first half of last year. If you compare the first half '18 and second half '18, the second half was much softer than the first half, and that trend effectively continued into 2019. But on the investment return on the insurance front, they saw about a double-digit, but a very high double-digit increase in those investment returns.

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Unidentified Analyst, [9]

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Just from the group perspective in total, was it a decline year-on-year? For the SAHAM group, the total business.

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Wikus Olivier, Sanlam Limited - Interim CFO [10]

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Are you referring to -- from a top line perspective or...

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Unidentified Analyst, [11]

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No, from a bottom line earnings perspective, the year-on-year growth rate in their reporting currency.

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Wikus Olivier, Sanlam Limited - Interim CFO [12]

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Now if you look at the average rand exchange rate -- I just want to get to that specific slide. If you look at SAHAM Finances, they're up 63% on last year and the currency impact was about 10% over the period. So they were still well up on last year. Now -- but as I mentioned, a large part of that is due to the impact of acquisition that we did last year. I think if you strip out the impact of the acquisitions in total, we're down -- I think that's probably the number you're referring to, down about 7%.

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Unidentified Analyst, [13]

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In the reporting currency.

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Wikus Olivier, Sanlam Limited - Interim CFO [14]

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In the reporting currency, yes.

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [15]

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Okay. We've got another one. Over there?

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Larissa Van Deventer, Macquarie Research - Analyst [16]

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Larissa Van Deventer from Mazi Macquarie. Four questions are all related to your excess capital, please. So on Slide 42, you mentioned excess capital of ZAR 570 million. The 4 questions are, first, you used to have ZAR 1 billion buffer, do you still have a buffer in mind? Or is this -- are you comfortable carrying a buffer of 0?

The second one is you've made several small acquisitions in the U.K. What is the strategy around that? And should we expect more?

The third one is what do you plan to spend it on if it's not the U.K.

And then the last one is you previously mentioned partnering with ARC on the asset management side. And can you please give us an update on that? And is that related to the capital spend?

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [17]

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Good. Let's get the first one.

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [18]

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Okay. So on the capital, as you say, we've restored the capital position. We've got other sources of capital as well outside of share issues, so we're watching that very carefully. So I think we're okay on that one now.

You've mentioned about what are we planning to do. We -- the stuff that we've gone on the list at the moment is fairly small. It's not significant stuff. The big deal has done for us, Larissa, and it's really just the bolt-on stuff. When there's an opportunity in West Africa, that CIMA region, to recapitalize, we'll do that. If there's some bolt-on acquisitions in one or two of the countries, we'll do that. But it's really an organic growth story for Africa. There's not much to be done in South Africa outside of the organic growth. There's nothing big there. So all the stuff will kind of be supplementary, but you've got to remember there's a lot of businesses there to support and they do, of course, need capital from time to time. But the big stuff is done.

As far as the U.K. is concerned, Robert will tell you that again, unfortunately, you have to -- the rand amount of the deals is quite significant because of the pound. But in the -- there's small deals in the U.K., and they really just to improving our value proposition for wealth management and asset management. So we don't see much big stuff going forward there as well.

On ARC asset management, it's just down to the finalization of the fee negotiations. Robert and the team are busy. We've announced it. We now want to bring it in and finalize that. So we would hope to have that done in the second half of the year. But both of us are solid business people, so we're not going to just agree. It is a process to follow. We're both listed now. So one has to give recognition to that, but we're busy with that. And I'm sure -- what was the other one, Larissa?

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Larissa Van Deventer, Macquarie Research - Analyst [19]

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No, that was all of them.

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [20]

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I think you've covered all of them, too, yes.

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [21]

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I remember them all.

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Larissa Van Deventer, Macquarie Research - Analyst [22]

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Yes.

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [23]

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Oh, my goodness.

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [24]

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It doesn't look like -- yes, one more here. Please help with the microphone. We can then come back to you. Let's maybe start here in the front.

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Unidentified Analyst, [25]

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Just to comment, asking us to stand. This is a heavyweight document. Ian, you started off by mentioning the operating environment and you sort of pointed out growth of negative, shrinking of the economy of 3% in the first quarter, offsetting that in the second quarter. But assuming we carry on at around 0% plus or minus with very small margins, do you see that impacting the aim of your targets where you had GDP plus-plus that this can have an impact and you may have to really refocus on the achievements you're hoping to achieve?

And then just one other question if I may, please. You've made a lot about the impression you've had of capital kind of disruptive products that they're able to focus on. Do you see some Sanlam changing in the image that have, always looking at products that are best in breed, but not really necessarily the most innovative or disruptive. Is this a new strategy that you're implementing? Can you give us some more information on that, please?

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [26]

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Okay. Anton, I'm going to ask you to help me on the second one. Okay. So [Ian], you'll remember the last time I presented, you've had a comment, you said, Ian, you said to me, things are very tough. I mentioned it like 20 times or something. So I was absolutely clear not to say it once this time. So whether it's 0 or whether it's 1 or whether it's really anemic, it's not going to do it. So I would say, Ian, that our game will be -- the scenario that we're planning is for a slow recovery. Nine years of damage isn't going to be fixed in 18, 24 months, and that's how we project it. But I think what we've got in Sanlam is the capability to take market share, and we've demonstrated that. And we've got a desire -- we've got a number of horses in the race in all of our various segments. Our federal model makes -- ensures that we have the best people focused on the ground in the businesses, and they can respond quite quickly. We're not making all the decision, making it available. So I think we're confident that we will have a growth scenario in the South African -- in our traditional insurance, in our investment space and in general insurance, largely coming from market share gains. And then hopefully, we'll recover back to where we should be in the emerging market, which is a proper emerging market country. And we all have to do what we have to do to make sure that, that happens.

So what it will mean, of course, which is what you're hinting to is where we will end up in diversification? The growth outside of South Africa will exceed the growth in South Africa. And that won't be a surprise to anybody because we've built the business incrementally around that recognition. We're not focusing on a particular percentage. Wikus showed you what we've achieved with 60% now South Africa, but it's earning 30% of the profitability. We've got plans in place to address that in time in the countries in which we're operating. We think the margins can be even stronger than South Africa, which is more competitive. So I think that's really the sort of guidance that I would give you.

Now the Capitec thing and the best in breed, I would say we've always tried to deliver best-in-breed products. You would've seen when I spoke about SPF that the one area that I do think we can make some progress in is in the savings products because of the way we've developed over many years. I think we have a multitude of savings products. And that's something, I think, that we could perhaps look at.

But on the risk side, I really think we have best-of-breed. And to be honest with you, if we didn't, those partners who go through a strategic -- in a review process, they wouldn't have selected us. They're not just selecting us because we've got an unrivaled footprint. They're not picking us because we've got a strong brand and a capital position and the people. They're picking us because we have this philosophy around doing the right thing for clients. We were a mutual for 80 years, so that sort of deeply ingrained. And they saw our stuff and they saw the innovation, and that's why they picked us. It's the fact that we prepared to disrupt and that we've invested and come up with innovative best-of-breed solutions that the partners have selected us. Anton, maybe you can comment on that.

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Anton Gildenhuys, Sanlam Limited - Chief Actuary & Group Risk Officer [27]

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Yes. I think 2 comments in terms of on the Capitec funeral product. The disruption is in the price. It's simple as that. It's -- disruption doesn't or innovation doesn't necessarily translate into product features and balancing risks and those kind of things. It's really about meeting client needs. And the need is actually quite simple. The Capitec philosophy of having a very simple "what you see is what you get" product in the market and the solid quality offering, that is what we delivered to you as well. And I think it's a very good example of how we should embrace the free market principles in South Africa. That's the model that, over time, delivers the best value for our clients. It's not necessarily through interventional delays, it's actually to allow competition to thrive. The clients are the ultimate beneficiary.

And in terms of savings products, I absolutely agree with Ian. And there, we're also in a fortunate position from a disruption point of view. We actually -- we don't currently focus on savings products in entry-level market because we are struggling to make the equation work to provide good value from our new product to entry-level clients, but we believe the Capitec partnership could provide us with best solution.

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [28]

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And the partnerships with MTN is a different model. And as Anton said, we've been able to disrupt on price. Why? Because the acquisition costs through the distribution arrangement that we have with Capitec is fundamentally better. If you -- and Jurie, you can just correct me here. When you look at the Capitec presentation, they talked about giving ZAR 300 million to ZAR 500 million, am I right, back to the clients, since May, since we've launched May 2018, and that really is what this is about. And sometimes it's tough for our legacy player like Sanlam. But if you don't, I mean you've seen the challenges that the banks are facing. So we're really trying to be proactive on this one.

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [29]

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Okay. Jurie, do you want to anything to add? Happy? Great.

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Ian Maxwell Kirk, Sanlam Limited - Group CEO & Executive Director [30]

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Do I get the number right, Jurie

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [31]

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Good. We had a question at the back.

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Francois Du Toit, Citigroup Inc, Research Division - Director [32]

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It's Francois Du Toit from Citibank. Just a few questions around SAHAM, please, if I may. The investment return on capital looks very low. And if I look through the balance sheet, and thank you for the good additional information that you've disclosed here, it looks like the tangible net asset value is not very high. I know you're also investing a bit of capital. I think you mentioned West Africa that you're sending a bit more capital. Is it related to SAHAM and the balance sheet there? And what do you expect to earn in the future from the capital base? The capital base earnings was very low in this period.

And related to the investment return as well, there's been a big improvement in investment return on the float. Second half of last year, it was very weak. Can you maybe guide us in terms of what we should expect in a normal period then?

And then just one more question around your solvency position in the South African Life business. I think some of your peers have seen significant changes in the capital requirements also in terms of whether how they count participations? Has there been any impact in that regard with you that might explain the lower SCR cover? I'm trying to work out obviously on the new solvency rules, what the free cash flow after free cash flow production of the life business is. So are you comfortable that the cash that you've extracted from the life business in the 6 months is close to a normalized level of free cash flow?

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [33]

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Who's going to attempt? Anton?

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Anton Gildenhuys, Sanlam Limited - Chief Actuary & Group Risk Officer [34]

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All right. I'll try my best to cover them all. In terms of the West African capital, that was a regulatory requirement. So the minimum capital in the CIMA region was lifted to, I think, $5 million, and most of the entities operated below that level. So we actually had to inject additional capital into various entities in the CIMA region on the life and the GI side. So you can see, if you look at the EBITDA disclosures, you can see on both life and GI that they were capital investments made.

On the returns in SAHAM, the returns in Morocco is actually -- the returns are actually quite low compared to South Africa. They're in a much different interest rate environment. If you look at the yield curve in Morocco, the yield curve would start at about 2%. And in the long end, it will peak at about 4%. So the returns against our EV assumptions were actually better in the first half of the year. So the equity market returns were actually quite low in Morocco. But the stocks that we are invested in, in Morocco are defensive stocks, and those stocks performed well. So we are quite happy with the return on the investment on the capital, the shareholder funds in SAHAM in general.

In terms of the float, you're right, the returns are much improved. But there's also a bit of an anomaly. If you look at 2017, the returns were incredibly high, but that's on the interest basis because, in SAHAM, the accounting treatment is based on book value. So to bring it in line with Sanlam's accounting treatment, there was a mark-to-market adjustment. I think it added up to about ZAR 1.7 billion in 2017. And then in 2018, the returns are quite low, but that was on peer mark-to-market. So the delta from 2017 to 2018 looked horrible, but that was a bit of an accounting anomaly. But I think we're back to normal in 2019 as well, we went through an exercise as a result of that to make sure that the investment strategy in SAHAM in the float is appropriate. The float in the general insurance business has quite a substantial allocation to equities, and we've added the disclosure. You can see that now, which is different from South Africa where Santam's float is invested in cash, for example. So that raise questions, should we go back to equities or to cash in Morocco?

The reason why we actually still prefer some equity exposure in there is efficient frontier modeling, and that is driven by the very low yields that's available from fixed interest. So you will see a little bit more volatility in the float returns in Morocco compared to Santam, but it is based in the long term. We believe it is on the efficient frontier.

And on the solvency, as you know, Sanlam doesn't rely on participations to back the capital requirements of the local life business. We separate it out, that's why we've got that internal cover ratio. In terms of stability, the Sanlam Group solvency lever, that's the main solvency that we're starting to focus on, and we've also started disclosing that, which is at 205%. If you strip out the dividend and discretionary capital out of that 205%, it's been incredibly stable at about 198%, 200% over a pretty much 3, 4 years since we've started tracking SAHAM. So yes, there's been some movements in SAHAM. But it's -- overall, the core business, the core group solvency has been incredibly stable. So in terms of free -- of the free cash flow, I think yes, in Sanlam Life for the first 6 months, there wasn't any additional flow of cash from capital requirements, if I understand your question correctly.

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Sydney Mbhele, Sanlam Limited - Chief Executive of Brand [35]

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Good. That's comprehensive. If we don't have any further questions in the room, shall we just check if there's anyone on the line who has a question.

No? No questions. And on the webcast? No questions. Well, clearly, we've come to the end of today's proceedings. Thank you very much, ladies and gentlemen, for joining us. We hope to see you outside for some snacks and tea where we can hopefully further engage. Thank you. Go well.