Old Mutual Limited (OTCPK:ODMUF) Q2 2022 Earnings Conference Call August 30, 2022 5:00 AM ET
Company Participants
Sizwe Ndlovu – Head of Investor Relations
Casparus Troskie – Chief Financial Officer
Clarence Nethengwe – Managing Director of Mass & Foundation Cluster
Garth Napier – Managing Director of Old Mutual Insure
Iain Williamson – Chief Executive Officer
Kerrin Land – Managing Director of Personal Finance & Wealth Management
Maserame Mouyeme – Group Marketing, Public Affairs and Sustainability Director
Nico van der Colff – Chief Actuary
Prabashini Moodley – Managing Director of Old Mutual Corporate
Conference Call Participants
Sizwe Ndlovu
Good morning and welcome to everybody. This is Old Mutual’s 2022 Interim Results. We’re live in Johannesburg today. And to everybody joining us via the webcast, conference call as well as in this room, what a real privilege and pleasure it is to have you join us today.
Before we start, though, a couple of housekeeping items. For those in the room, just a reminder to keep our phones and mobile devices on silent and to avoid as many distractions as possible. And for those of us joining us on the webcast, please feel free to ask questions at any point during the presentation. And if you happen to be on the conference line, you’re also welcome to ask questions, and instructions will be provided to you after the presentation concludes.
On to today’s agenda. We’ll kick off today with a strategic review by Iain Williamson, our Chief Executive Officer. He’ll then be followed by Casper Troskie, who will then do our financial review. And then Iain will return just for a short looking-ahead section before we open up the floor for questions and answers. Thank you again. Over to you, Iain.
A – Iain Williamson
All right. Thank you, Sizwe, and welcome, everybody.
It’s a pleasure and a privilege to be here presenting a really good solid set of results. Particularly pleasing that we’ve got quite a number of people here in the room as well as a number on the webcast and phones. And to not have to talk about COVID for the first time in 2.5 years is really a pleasure from my point of view.
I think the 87% increase we’ve seen in our result from operations speaks to the strong recovery and growth we’ve experienced in our business. And our objective today is to give you a really good sense of the results that we have produced as well as the execution of our strategy, speaking to how we’re starting to shift gears and accelerate growth in our business.
So I’m going to start with a very brief overview of the financial highlights. Casper will obviously give you a lot more detail on this later on.
From a top line perspective, we’ve had Life APE sales showing strong growth in a tough environment, 15% up, maintaining our new business margins within our target range of 2% to 3%, finalizing that margin at 2.2%. Our gross written premiums on the short-term side were up 9%. And we’ve seen our group solvency ratio increase a further 300 basis points to 187%. So a very strong balance sheet.
We’ve seen a small decline in funds under management. That’s partly driven by market volatility, in particular increasing bond yields and, obviously, the value of bonds coming down, but also a small negative net client cash flow, which we’ll talk about in a bit more detail later.
The headline number from the results. Result from operations up 87%. And that really excellent outcome, driving an increase in our return on net asset value up to 9.6%. The Board has agreed to declare an interim dividend per share of ZAR0.25. That’s flat on the prior year interim dividend despite the fact that we distributed our stake in Nedbank during the second half of last year. Casper will provide further update on these and other group KPIs later in the presentation.
By now, I think you’re all familiar with our strategic framework. We set our victory condition in 2019 as being to become our customers’ first choice to sustain, grow and protect their prosperity. And we execute a series of initiatives in pursuit of that goal, and then we prioritize those initiatives utilizing a framework of value drivers: of revenue growth, expanding operating margins, improving competitive strength, efficient execution and delivery and capital optimization.
I spoke at our Capital Markets Day last year about an execution framework around rectify, simplify and amplify. And I’m pleased to say that rectification and simplification are substantially complete, and we’re shifting our focus very much on to amplifying. And we intend to do this by focusing on both growing and protecting our core business and on unlocking new growth engines. And we define the core as being those businesses in South Africa and the SADC countries, which are both very large and where we have relatively dominant market shares in those markets. And you can think about the growth engines as consisting of our East and West Africa businesses, our business in China, our investment in our transactional capability and the NEXT176 plus our [ph] businesses which are focusing on growth in adjacent markets and in — through partnerships. We believe if we execute well against all of this, we will responsibly build the most valuable businesses across the industry sectors that we choose to participate in.
Shared value and sustainable transformation are embedded and integrated into the DNA of Old Mutual and are at the core of how we do business. We became recently the first South African insurer to join the Net Zero Asset Owner Alliance, and our asset manager, OMIG, also joined the Net Zero Asset Manager’s initiative. And our leadership in the investment space of ESG has been confirmed by a multitude of industry awards, including some received during the period under review.
From a transformation perspective, our deals both at Futuregrowth and at the group level, being the Bula Tsela transaction, are landmark transactions that demonstrate our continued leadership in transforming markets. In its core makeup, the Bula Tsela transaction follows our demutualization process from more than 20 years ago, where we provided millions of Old Mutual shares to all of our customers at the time. And this is — sit on the foundation of a fundamental belief that sustainability and inclusive growth are good for our customers and for our business in the long term.
At all of our recent results announcements, I have given you updates on these seven commitments that we have made to our investors and which underpin the execution of our strategy. And I’m pleased to say that we continue to see solid delivery across all of these.
In changing the trajectory of the customer experience, we’ve opened three new channels for customers to initiate claims, giving them choice and ease. These are largely digital in nature, including both WhatsApp and USSD channels.
We’ve also built up further our Old Mutual Rewards program, which now has 1.5 million members. And crucially, from a financial perspective, the members on our rewards program have a higher average needs met per customer and better persistency than our customers who are not members of the rewards program.
We’re on track to meet our commitment to realize ZAR750 million of cost savings by the end of this year. And in the Mass and Foundation Cluster, we continue to regain our competitive advantage. We have entered into a partnership with Bridge Taxi Finance in the period under review. This provides us with access to 300,000 commuters daily. We intend to provide free WiFi in the taxis to help us to gain customer insights and to provide a distribution channel for some of our solutions that are suitable for digital distribution. From a group perspective, it will also provide an incremental ZAR130 million of GWP to Old Mutual Insure. And I think this transaction gives you a sense of how we are thinking about partnerships, trying to approach them from an enterprise perspective with multiple business units benefiting from the relationship.
In Personal Finance and Wealth, we continued to grow our restricted financial adviser numbers, and they grew strongly in the half under review with one of our network brands increasing their adviser network by over 30%.
In our Investment business, we see continued strong momentum in investment performance. At the end of the half, we had 94% of our funds performing above benchmark over a 1-year period and 81% over a 3-year period. These are the best relative performance figures we’ve had in our Investment business for probably a decade.
And finally, in embedding digitalization more firmly in our business, we have now concluded 95% of the migration of our South African technology estate to the cloud. At the end of June, that was sitting at 88%, and by the end of July at 95%. And we intend to complete this process by the end of this year.
I’d like to make a few comments around the operating environment that we faced in the first 6 months of the year. I don’t think it’s a surprise to anyone that it was a particularly challenging macro environment.
There are a few variables that are particularly critical to our business. The first of these is inflation, and particularly consumer price inflation. It’s been trending up globally around the world following the Russia-Ukraine conflict and supply chain disruption around the world. At the end of June, South African CPI came in at 7.4% and trended further upwards in July to 7.8%. We do, however, expect this number to come down in the next 2 months as we expect quite substantial reductions in the petrol price over the coming months. Inflation has also been trending upwards across all the other markets that we operate in.
The unemployment situation in South Africa also continues to worsen, and we have had negative year-on-year income growth. So collectively, this results in consumers that are under a great deal of financial pressure and, for our business, translates into increased headwinds regarding new business, a need for continued vigilance on premium and loan repayment collections, where customers are struggling to meet their obligations.
The final thing I want to talk about in respect to these key variables is the producer price inflation. This is particularly material for the short-term insurance business.
PPI in South Africa has been running at 15% to 20%, so much higher than consumer price inflation. And for Old Mutual Insure, this impacts on the cost of replacement car parts, the price of used cars and has resulted in us needing to critically reevaluate our pricing levels in the short-term insurance business.
Turning now to equity markets, which are the other — or markets in general, which are the other key drivers for our business from a macro perspective.
We believe that equity markets are likely to remain volatile for the foreseeable future as global authorities struggle to get inflation under control and the Ukraine-Russia crisis plays out. The markets with — in South Africa was flat by the end of June on prior year, having enjoyed a period of good performance in the period up to June. And markets across the rest of the continent generally trended downwards over the period. And as I mentioned earlier, bond values are obviously under pressure given increased interest rates. This is relevant for us because we earn a significant proportion of our income from asset-based fees.
I’m now going to comment briefly on the highlights of each of our business units’ performance over the period, starting with the Mass and Foundation Cluster.
The story in the Mass and Foundation Cluster is a really good one, and I think we are on a sustainable recovery trajectory. Momentum has been fantastic with risk sales stronger, improved savings sales and a consistent improvement in productivity across our distribution channels. Life APE sales were up 9%, and the net client cash flow up 14%. We’ve now fully embedded our non-advised funeral product into our Old Mutual Finance branches. The combination of the better volumes and disciplined expense management has resulted in a further expansion of our VNB margin to 7.7%, solidly within the target range for this business.
On the lending side, we’ve been deliberately cautious in our approach to loan book growth, and we have an unchanged loan book period-on-period. Our credit loss ratio is starting to normalize towards the revised long-term range of 6% to 8%, and we’ve revised this long-term range downwards from a 7% to 9% range communicated previously.
We’ve seen a continued higher rate of collections from the performing book and have maintained good credit quality across the whole book. And finally, we are excited by the enterprise-wide opportunities presented by our new partnership with Bridge Taxi Finance.
Moving on to Personal Finance and Wealth. These 2 business clusters delivered ZAR2 billion in net client cash flow in the 6 months, up 85% over the prior year. Our Life APE sales are still 13% above the pre-pandemic levels from H1 of 2019. We’ve delivered further enhancements to our Old Mutual Protect product offering based on feedback from intermediaries and advisers. However, we have seen quite a substantial pressure on our new business margins. And these were impacted by a tilting in the market out of higher-margin guaranteed annuities to living annuities as well as within our risk products from living benefits to the more commoditized death benefit.
We are addressing the VNB decline by a number of concrete actions to boost volumes and to move our mix in the right direction. And these include a continued drive around weekly adviser activity, finishing off the last of the improvements on our risk product proposition to deliver slick processes in the complex risk space, improved and enriched customer data from a variety of sources and integrating our rewards program into our product quote, enabling us to better cross-sell to the existing client base. And we have made changes to management incentivization across our sales channels to drive desired focus areas. We will continue to further push advisor acquisition in the experienced adviser space, where the customer network lies in the appropriate upper middle income segment.
In our Wealth business, we’ve seen improved sales through our independent distribution network as well as through our restricted advice channels. Funds under management have inevitably been somewhat impacted by overall weaker markets. We’ve seen a significantly lower sales on the Old Mutual International sales side given market volatility particularly in the U.S. But this has been more than offset by much increased support on our local platform. We look forward to launching our new savings and income propositions and range of solutions in pilot form in quarter 4 of this year.
Moving on to the investment group. Both annuity and non-annuity revenue were up solidly in the period with assets under management being strong after a buoyant second half of 2021. We have a very healthy, secured, yet-to-flow committed pipeline of business. And we’ve seen outstanding investment performance over the period.
We continue to build on the product innovation that was commenced last year with the launch of the Futuregrowth High Growth Development Fund, which has a venture capital focus. This comes on the back of launching various new funds last year which all have good long-term scale potential. The ownership deals we’ve announced in this space show our commitment to transformation and will provide us with a competitiveness boost as we will be 51% black-owned in both Futuregrowth as well as in the manager of all our listed South African assets.
In Old Mutual Corporate, we’ve seen a resilient, strong, all-round performance in a tough environment, with Life APE sales up and the Group Assurance division being an absolute highlight with pleasing sales, scheme retention and intelligent repricing, driving up the value of new business by 62%. We’ve seen increased quote activity in the market, and our net client cash flow has been boosted by lower benefit payments and fewer terminations relative to the prior period.
We’ve successfully launched the second version now of our SMEgo platform following a successful pilot. And we intend to further complement this proposition following the acquisition of a stake in Preference Capital, an SME lender, which will further cement this offering.
In a tough and fiercely competitive environment, which impacted overall margins, Corporate has worked really hard with growing success. I’m going to play you a short video to illustrate how the customers of the SMEgo platform are experiencing the offering.
A – Iain Williamson
Okay, turning now to Old Mutual Insure. I think this business unit experienced possibly the toughest environment of all of our businesses in the first half of the year and delivered a very creditable outcome. Aside from the macro variables that I described earlier, there was also the KZN floods, which I think we all know about and which resulted in a net impact on our underwriting result after reinsurance of ZAR135 million.
We saw excellent results from CGIC, a recovery in retail and a really solid contribution from the iWYZE business. Non-commission expenses have continued to be managed downwards in line with our strategy, and the business marginally gained market share with gross written premium growth of 5%, still up on H1 2019.
We expect to see a hardening cycle in reinsurance renewals, and our pricing is under review given the PPI pressures in the supply chain that I described earlier.
We’ve made good progress on the consolidation of our acquisition of ONE Financial Services, and we have further boosted our distribution capability through the acquisition of a broker admin services platform. We have — we are also the underwriter in a number of key insurtech partnerships, including both Pineapple and SwiftVee.
I’m encouraged by the continued progress that’s been made in reducing costs, improving efficiencies and focusing on the quality of the book that we have in this business.
Our Africa regions. We’ve renamed in this — literally this week internally our Rest of Africa business to Old Mutual Africa Regions, cementing the central importance of this business to the overall group identity and strategy. We’ve seen a strong turnaround in this business with great top line growth. Life APE sales are up 28%; gross written premiums were up 24%; and the non-life business also experienced significantly higher gross flows, supporting our asset management revenue. In the life business, the pivot to corporate has been really successful, and corporate now accounts for more than 50% of our life sales in both East and West Africa. VNB was up substantially on the back of the higher volumes.
As in South Africa, we’ve continued to take a really cautious approach to lending in this business, and our loan book was down 10% over the period. I’m really pleased with the progress and the hard yards that the team across the portfolio has done in improving the control environment across these businesses, and we are now much more comfortable.
And as we alluded to in our opening video, we have rebranded both our Kenyan and Rwandan operations from UAP Old Mutual to simply Old Mutual in-country. More of our countries in the East Africa region will follow shortly.
Talking now to the new growth engines that I described earlier. And I’m going to talk about this really in 3 pillars: firstly, the portfolio that sits underneath the NEXT176 brand; secondly, the businesses in East Africa, West Africa and China; and finally, in our transactional capability build.
We’ve committed ZAR300 million in capital at this stage to NEXT176. That’s not a 1-year commitment. And to date, about ZAR90 million of that has been deployed. You’ll recall when we announced this that we referred to it as our New Growth and Innovation office, which I think gives a sense of what it’s about.
We’ve branded at NEXT176, alluding to the fact that this business was started when Old Mutual was 176 years old. And it’s deliberately been positioned as a B2B brand aimed at solving customer problems with partnerships to drive growth. It’s intended to supplement the growth of our core business and to be dealt with as a portfolio of opportunities where there will be quite high risk and, no doubt, some failures. But overall, a net contribution to higher growth for the business as a whole.
In East and West Africa, our goal is to be the top 3 in all the territories that we choose to remain in. And if we don’t believe that, that can be achieved, we will exit a particular territory. Our Chinese business is growing very strongly with Life APE sales up more than 100% on the prior year, boosted mainly by the performance of the broker channel.
And finally, we continue to invest in the build-out of our challenger transactional capability, which is a very exciting growth opportunity for us. Essentially, what we’ve done here is to invest in a combination of software licenses and people. There’s a team of approximately 190 people working on this as I speak, and it — where the intention is to offer a modern, cloud-based payments capability, offering a wide range of channel choices to customers, supporting a best-in-class data strategy to future-fit our overall business.
I’m immensely proud of the degree of strategic progress that has been made in delivering against our objectives in the period under review.
And I’m now going to hand over to Casper to take you through the detail of the financials, and I’ll come back later to talk about the outlook. Casper, over to you.
A – Casparus Troskie
Thanks, Iain, and good morning all.
So much has changed in a year. As you may recall last year during our Capital Markets Day, I had to present from home, having contracted COVID. So it’s really great to be here in person.
Post unbundling of our strategic investment in Nedbank in November 2021, we have seen continued positive momentum in our core earnings, core operations, with key metrics relating to earnings and capital improving whilst value metrics were impacted by market volatility and economic pressures. Overall, we were pleased with the recovery in results from operations to ZAR4.1 billion, and we continued to see reduced impacts from COVID-19. Adjusted headline earnings grew 19%, excluding the earnings from the distributed stake in Nedbank from last year’s base, supported by growth from our core business.
Despite weaker market returns, our return on net asset value improved to 9.6%, including the impact of the unbundling of Nedbank, which delivered on our promise to simplify the group’s capital structure and provide a substantial return of capital to shareholders. An interim dividend of ZAR0.25 was declared. The dividend is supported by high levels of free surplus generation as well as a strong balance sheet with the life company’s capital ratio above the upper end of the target range.
Value of new business was down 4%, and the value of new business margin reduced to 2.2%, still within our target range of 2% to 3%. While group equity value reduced by 5%, we achieved a return on group equity value of 1% over the period, adjusting for dividends paid as well as economic variances. I will unpack the value metrics in more detail a bit later.
We started 2022 with a pandemic provision of ZAR2.9 billion. For the first half of ’22, our mortality experience was significantly more favorable due to the easing of the COVID-19 pandemic. As a result, no additional provisions have been raised. We will evaluate the long-term impacts of COVID-19 and increased pressure on persistency, along with assessing all of the remaining COVID-19 provisions at the year-end.
In Mass and Foundation Cluster, results from operations grew 26%, mainly due to continued higher life sales and good cost management. First half profits for Mass and Foundation Cluster include annual premium and cover increases, which are not expected to recur in the second half of the year.
Personal Finance and Wealth Management recovered to ZAR1.3 billion, with Personal Finance recording ZAR1 million in results from operations, up from a loss last year. Mortality losses from excess deaths during the first half of the year were significantly lower than 2021, and we were fully covered by the release of provisions. Wealth Management decreased by 5% to ZAR235 million. And while the underlying operational performance was better than last year, rand volatility significantly impacted the market value of our offshore seed capital investments.
As Iain mentioned earlier, Old Mutual Investments was up 9% largely due to higher annuity and non-annuity revenue. This was partially offset by higher expenses with vacancies being filled and investment into revenue growth initiatives and the refreshing of technology.
Old Mutual Corporates improved substantially by 59% to ZAR727 million. And the first half of 2022 benefited from a strong recovery in underwriting profits, from muted COVID-19 experience and prudent expense management.
Old Mutual Insure declined by 20% to ZAR213 million mainly as a result of an increase in the frequency of general claims and increase in the average claim size brought on by growing inflation rates as well as claims arising from KwaZulu-Natal floods.
We’ve seen strong top line growth in Africa Regions with improved new business margin, reflecting the increased quality of the life book as we continued to pivot to corporate business. The strong sales performance was also supported by improved retention and mortality experience, with the end result being the satisfactory result from operations of ZAR212 million.
Net expenses from central functions increased to ZAR463 million as a result of further investments in growth and innovation initiatives, including NEXT176 and our transactional capability as well as an increase in IFRS 17 budget costs.
Overall, results from operations recovered strongly to ZAR4.1 billion on the back of improved core business performance and muted COVID-19 impacts.
Adjusted headline earnings grew 19%, excluding the earnings from the distributed stake in Nedbank, with strong growth in result from operations exceeding lower investment returns and a higher tax charge. The decrease in investment returns were driven largely by lower equity and bond returns across the group. And despite the volatile and challenging investment environment, the shareholder investment strategy continued to meet the main objective of protecting and preserving shareholder capital.
The increase in finance costs was driven by the increased interest rate environment and by the issuance of OMLACSA of subordinated debt instruments in September 2021 and June 2022.
As part of our simplification process, amounts owed by OMLACSA to one of our trusts was written off, resulting in the release of capital to the group. The write-off itself had no impact on earnings, with the exception of the tax paid on the gain increasing the tax line.
The main movement between adjusted headline earnings to headline earnings is from our operations in Zimbabwe. The results of Zimbabwe remain excluded from adjusted headline earnings due to us not being able to access the majority of our capital. And the increase in Zimbabwe’s profits continue to be driven by an increase in investment returns, with the Zimbabwe Stock Exchange generating an 83% return in the first 6 months of the year against an inflation rate of 119%. Given the material reduction in the rate of exchange, a large negative adjustment of just under ZAR3 billion is reflected in our foreign currency translation reserve.
Overall, IFRS earnings improved 75% to ZAR5.2 billion with the Nedbank unbundling also impacting the 2021 result.
The OML and OMLACSA solvency coverage ratios have improved over the period with the balance sheet remaining strong and resilient to market volatility, enabling the group to continue declaring sizable dividends. The OML coverage ratio was 180%, at the upper end of the target range. And the OMLACSA coverage ratio improved materially to 212%, which is above the target range. The main driver for the improvements is the reduction in the prescribed equity stresses that are set by the regulator. However, given continued elevated macroeconomic risk, the group continues to take a cautious approach to managing capital.
The group’s value of new business margin is slightly lower at 2.2%, with the fall in the Personal Finance margin being offset by gains across all other segments. Increased sales volumes and good cost management led to a sizable margin improvement in the Mass and Foundation Cluster relative to last year.
In Personal Finance and Wealth Management, product mix and volume have shifted with market conditions and consumer sentiment having a negative impact on the value of new business. High-margin guaranteed annuity sales are significantly down. In addition, customer favored cheaper, lower-premium funeral expense benefits over underwritten risk. And lastly, the revision of distribution cost allocation methodology in late 2021 has reduced the margin by 0.3%.
The improved margin in Corporate relative to last year was mainly driven by good cost management and a better mix of business as we wrote more group sales and more sales of higher-margin smoothed bonus products.
In Africa Regions, the margin improved to 2.9%, driven by the higher Life APE sales.
The return on group equity value was 1% over the period driven by strong operating performance and front — life growth in most segments, but pulled back by the impact of economic variables. Lower market returns and higher yields impacted discounted product and asset management fees in the life and asset management businesses. And higher inflation, higher yields and the easing of lockdown restrictions have increased both the number and average size of claims in the Property & Casualty lines of business.
The share price continues to trade at a significant discount to group equity value as well as our regulatory owned funds. We believe that the combination of defending and growing our core and the traction on our new growth engines will ultimately close the gap between our market capitalization and group equity value.
And in summary, we have seen a strong recovery in result from operations and adjusted headline earnings, excluding the distributed stake of Nedbank; and improvement in our return on net asset value to be closer to the cost of equity despite the lower market levels. Our value of new business margin is within our target range of 2% to 3%. And our group solvency ratio remained strong, within the target range of 170% to 200%. And finally, as Iain mentioned earlier, we are delivering on our promise to meet the ZAR750 million of annual run rate cost reductions by 2022 from a combination of non-commission expenses in our life business and noncommission and claims administration expenses in our Property & Casualty business. This target obviously excludes investments in our growth businesses.
And with that, back to you, Iain.
A – Iain Williamson
Thank you, Casper.
Before I conclude and talk to our prospects, I wish to address the issue regarding the visit to our offices by the Competition Commission in South Africa last week.
At this point, the commission is investigating a matter which is an industry-wide issue, and we are cooperating with authorities in the spirit of good corporate governance. I do want to make it clear that we have 0 tolerance for anticompetitive behavior that would be unfair to customers and for any intentional contravention of legislation.
Moving then to our outlook. Casper has already spoken about the H1 outcomes against our key targets. So just to describe them from a more medium-term perspective. Some of these targets will stretch us. But with most, we remain well on track. The big influences around our ability to ultimately deliver against these targets will be GDP growth and market levels. We are not revising our targets at this point and remain committed to delivering against them.
I think we’ve had very strong all-around performance in the first half, building on the momentum seen at the beginning of the year. However, we do face an uncertain domestic and global economic outlook clouded by high inflation and rising interest rates.
Work on amplifying is ongoing and gathering pace. We are well on track to recover our VNB and our net client cash flow, and our results from operations and RoNAV continue — are set to continue recovering into the second half and into 2023.
We are excited by the prospects that are before us as we look ahead. We will grow and protect our core business as we unlock new growth engines at pace. I think I’ve shown you that we are delivering on the commitments that we’ve made to our investors. We are highly cash generative. We have a strong balance sheet and excellent prospects for growth across segments. And we are focused on driving exciting, new and meaningful revenues through partnerships across our portfolio.
We continue to invest in enhancing our customer experience and in generation of shared value for all stakeholders and to build towards our ultimate customer victory condition. We are shifting gears and accelerating growth.
In the final quarter of this year, we intend to host a Capital Markets Day for two reasons. The first will be to discuss the implications of the new accounting standard, IFRS 17, on our group’s numbers. But the real core content will come through into providing further insight into the new growth engines we are unleashing, the core — and the growth prospects that we believe we have in our core business and through partnerships.
So with that, it just remains for me to say thank you very much for your time, interest, attention and support. We will now open for Q&A, and we’ll start with the people here in the auditorium. And then Sizwe will assist with written questions on the podcast and with any questions on the phone lines. Thanks very much.
Question and Answer
Sizwe Ndlovu
A – Iain Williamson
Okay.
Sizwe Ndlovu
Yes.
A – Iain Williamson
Switch to the…
Sizwe Ndlovu
I have paper to do that. Great.
So I have a couple of questions on an additional channel that we have launched in Investor Relations. It’s WhatsApp. So it’s from Michael Christelis. So Michael asks — his first question is, “Did the Board consider either a buyback or special dividend given your strong capital position and high remaining COVID provisions?”
A – Iain Williamson
Okay, I’ll answer that. So I can ask Casper to add if he wishes?
The Board didn’t at this stage. It isn’t — it has been an ongoing, as you would expect, an ongoing debate internally. But as Casper said, we continue to adopt a cautious approach up to now because of the volatility in the macro environment. It is something we will continually evaluate.
Were we to do a capital distribution at this point, I think we would look to a share buyback rather than a special dividend. But that’s not something — we haven’t formally got to a place where we’ve made a decision with our Board on that point at this stage.
Casper, do you want to add something?
A – Casparus Troskie
Iain, the only thing I would add is that we are running our capital levels at slightly higher levels than we’d be comfortable on a sort of through-the-cycle basis, and that’s because of the elevated risk. So that’s the only point I would add.
A – Iain Williamson
Now I think, if I may, maybe the final point to make is, while conceding the point that, based on the experience we’ve seen in the 6 months, our COVID provisions look conservative, we do need to reevaluate our entire valuation basis at the end of this year, and there may be some swings and roundabouts in that exercise.
Sizwe Ndlovu
Great. We’ll continue with Michael. There’s just two more, so we might as well just finish it. And this one is, “How quickly can Personal Finance recover margins realistically in the current environment?” Kerrin.
A – Iain Williamson
I think Kerrin will take that.
Kerrin Land
I think there is always in your VNB margin a volume question and a mix question. I think the volume side of the equation is very dependent on the market conditions and will be tricky to recover. We’re obviously fighting for market share in an intensely competitive environment. And we will seek to get our fair share, but we are constrained by what is out there.
On the mix side, I do believe we can get to some quite rapid turnaround and rapid actions through the actions we’ve put in place. So I would expect it to be improved in the short term but not back to normal levels in the short term.
Sizwe Ndlovu
Thank you, Kerrin. And last one from Michael Christelis at UBS. “Can you please give me more color on the central costs and, in particular, the transactional capability strategy?”
A – Iain Williamson
Casper, can I ask you to take that?
A – Casparus Troskie
Yes, Michael. So as we said, there are — you need to split the NEXT176 cost between the ZAR300 million capital investment that Iain — and the operational costs. So what we have is operational costs sitting for NEXT176. We also have the build costs of the teams that are building the transactional capability. So that’s, I’ll guess, roughly just below ZAR200 million that’s sitting in that line. We then have some project costs that are coming through that line from IFRS 17 which are elevated this year, and there may be still elevated costs next year. And there is a fair value adjustment on our past retirement scheme, small, which also just adds to — which is not expect to be recurring, which is also driving that number. Those are the sort of four impacts in that line. Ranen, anything else? Yes, okay.
Sizwe Ndlovu
Great. Iain, I can continue. I’m going to cross now to Chorus Call before I move to the webcast. We do have questions from Londiwe Buthelezi. I have noted, Londiwe. We will come to you. Is there anybody on the webcast — on the conference call, excuse me?
Operator
[Operator Instructions] First question comes from Andrew Sinclair of Bank of America.
Andrew Sinclair
Three for me, if I may. Firstly was just on the COVID provisions. Sorry to go back to that. Just wondering if you could give us some color on what you expected to be utilized in H1 from where we’re looking at those provisions at the start of the year versus what was actually released in H1, just to give an idea, I guess, of the additional prudence now in the buffers.
Second question is just on MFC. So really impressive figures there. But clearly, the backdrop gets tougher the client base. I just really wondered if you can give us some color on customer behavior changes, retention and your expectations there looking forwards.
And the third question was on the investments group. Just again, really impressive results from operations in H1. But I just wanted to dig a little bit into the flows a bit more, if that’s possible. I see you mentioned that money market outflows drove the net outflows in H1. Just if you could tell us what the flows would have been if you excluded those lower-margin money market outflows. Were the other products able to achieve net inflows? That’s it.
A – Iain Williamson
Okay. So Casper or Nico for regarding COVID, please?
Nico van der Colff
I’m happy to send you the exact number. I’ll have to go look at it up, too, but it was in excess of ZAR1 billion that we expected to be released and compared to the ZAR300 million we actually needed on the COVID claims. You’ll remember that the total provision included a discretionary margin that we were not expecting to release in interims unless experience were worse than expected but which we will also reassess at year-end. And then the rest of the provision was to cover more claims in 2022, but then reducing claims into future years. That was the end-of-year position. And it was expected to start dropping off, but it dropped off materially quicker than we expected. Having said that, clearly the future is uncertain still.
A – Iain Williamson
Okay. And then, Clarence, could we maybe go to you for MFC?
A – Clarence Nethengwe
And just a few things. So from a customer behavior perspective, what we are seeing is customers are starting to buy low. And what I mean by buying low is that we’ve got different type of risk products. And we’ve got low-margin products, which basically are cheaper from a premium perspective. So what we have seen in the first half of the year is that most of those customers are buying those type of products. And most of them are no — or non-advise-related products.
Secondly, we also see customers on the commerce side buying underwritten life, and I think that is related more to COVID. So most people have realized that life is short, anything can happen. And they’re starting to buy underwritten life in our space. So currently, we are doing about 1,200 of underwritten sales in our space on a weekly basis from a 0 base. We never provided it, but that has improved.
From a lending perspective, we see — we do see high footfall into the branches. But unfortunately, we have tightened our lending criteria. So — but if you look at sales this year versus same time last year or 2020, we have almost doubled up in terms of the advances that we’re giving to customers even though we have tried to tighten our lending criteria.
We also see an increase in terms of group sales. And when I talk about group sales, I’m talking about burial societies, I’m talking about funeral parlors that we underwrite. We have seen an increase particularly in the first 2 weeks of July, and you will see that come through when we report our year-end results next year.
And from a persistency perspective, what we have seen, the worsening. And if you read our section, you will see that we have utilized our short-term provision in terms of persistency. And we are monitoring that almost on a monthly basis to see how customers are behaving. But with increased interest rate, inflation, I do see that worsening before it gets better.
Sizwe Ndlovu
Carl [ph]?
Unknown Executive
Cool. Then in terms of the flows, on the negative side, there’s actually three sources. The first source is a consequence of previous success in building the LDI capability, which has attracted approximately ZAR20 billion of flows in the last 4 or 5 years. And you can imagine, in an LDI capability, there’s benefit payments that you — that are a function of the model itself. So that’s about ZAR2.8 billion of benefit payments in the 6-month period. Then there’ the money market that you referred to, so the liquidity-seeking clients given the tough environment that we’re in. And then there’s one other. We’ve got a very large U.S. client where we provide some index solutions to. They did a rebalance of their portfolio. That was about $100 million. That’s on the negative.
On the positive side, in the South African institutional space, we saw quite strong inflows into our local and international ESG propositions. In the alternatives platform, you’ll note we raised just under ZAR3 billion of freshly committed capital into the various funds that we manage there, particularly the first close of our Pan-Africa infrastructure fund. We did a first close at about $220 million.
And then finally, there’s a piece of the flows that aren’t reported in the Investment business. They’re reported in the Wealth business because we use end manager to report our flows rather than start manager — rather, start manager as opposed to end manager. And so those are the retail flows. So the funds, the OMIG funds that sit on the UT platform that are managed and distributed by the Wealth business, that was about ZAR2 billion. So the positive was predominantly very high margin, and the negatives were high single digits, very low, double-digit-margin-type flows.
Sizwe Ndlovu
Thanks. Iain, we’ll now just move to the webcast operator. If you can just note the ones on the call. So Londiwe, I’m going to ask two of her questions. She’s from News24. And she says, “Regarding the Bridge Taxi Finance business, how many taxis will carry this distribution channel? From when? What’s the geographical split? And can you give me more color on how it will work? Will you have sales reps at the taxi ranks?”
Then just following up with that, I’ll just ask it once. Which segment — and this is for Corporate. “Which SME segment are you going to target through your Preference Capital acquisition? And given the competitive developments in that space with banks also buying SME lenders, what makes Old Mutual think it has space to expand into this area?”
A – Iain Williamson
I’ll…
A – Clarence Nethengwe
So let me start with the Bridge Taxi one. So we’re going to have advisers sitting inside taxis roaming around Johannesburg. So we are starting with about 40 taxis that we are putting free WiFi inside of the taxi. We — our intention is not to disrupt the operation of the taxi operators. Just put free WiFi. When customers comes in, they can engage with the free WiFi. And we will also market our solutions in — within that space. And customers have got option also to opt out from receiving any marketing material. They can also buy — ultimately buy online a funeral product. They can open a money account online over time.
We’re starting with 40 because we just want to test the concept in terms of how it works and related stuff. And of course, the Mokoro group, the owners of Bridge Taxi Finance, will also be monitoring this thing to see that it does not disrupt their business and their business model.
Remember, they are not like SA Taxi, who basically finance people to just buy the thing. Theirs is a different model. It’s a lease model. So that’s the reason why we’re able to partner with them to provide all these things. So definitely, you won’t see any agents traveling around selling policies. We are going digital.
A – Iain Williamson
Prabashini, do you want to pick up the SME question? Thanks.
Prabashini Moodley
Thanks. So maybe first, on Preference Capital. Preference Capital currently services small- and medium-sized businesses with funding of up to ZAR20 million. So it’s a range of funding from tens of thousands of rand up to ZAR20 million. So it’s any business that requires that scale of funding.
And then in terms of it being a crowded space, banks have obviously been playing in the space. But I think as Old Mutual, we’ve been servicing SMEs for many years. So Old Mutual Insure guards business has many small- and medium-sized clients. Personal Finance and Wealth business services, many business owners. So this is adding on and talking to what are some of the earlier needs and more pressing needs of SMEs.
And depending on the source one looks at, the funding gap is anything between ZAR200 billion and ZAR300 billion or some state, upwards of ZAR500 billion. So I think even if a few players get into the market, the gap is large enough. We’re not aiming to become the number one SME lender from a volume of loans but to make a meaningful difference. We will take a sector-specific approach, and we’ll build very much in collaboration with the customers and ultimately to provide our other financial services solutions. So I think that’s why we have an opportunity.
Sizwe Ndlovu
Yes? Cool. I’ll carry on. If I can just now go to the conference call. Operator, if there’s anybody after Andy.
Operator
Next question comes from Warwick Bam of Avior Capital.
Warwick Bam
First one probably for Prabashini. Just on Corporate new business APE, if you can just sort of unpack that, if you can add some color. If you look at it relative to 2019, first half 2019, it’s — Life APE is still down 42%. I understand Corporate is traditionally lumpy, but do you believe the market is smaller post COVID? Or could it return to historic activity levels?
Prabashini Moodley
Warwick, I think 2019, we had a couple of very large flows. I’ll double check my notes, but I think we had one very large deal that did flow early on in 2019. So single premium flows, we haven’t seen at the same level as 2019 yet. There are some large potential deals in the market. But like you said, it is lumpy, and we’re waiting some decisions on some of those.
The umbrella market in particular has become incredibly competitive, which is great for customers. And I think that hasn’t returned — or we’ve seen quotes activity, but suddenly we are not back to the umbrella sales that we had in 2019 and previously. So we’ve still got some work to do there.
We did put in a lot of effort on getting the pricing right, the overall methodology and overall strategy around our group assurance business, and we’ve seen quite good retention and growth on that side.
So I think activities picked up to pre-2019 levels. We need to up our game a little bit more on the umbrella side to convert as many of those deals as we did previously.
Warwick Bam
Two more, if I can. Just the first one just regards to the Rest of Africa. It’s quite a drag on your return on equity and return on embedded value. What time horizon are you using to evaluate your strategic ambitions to be the leader in the markets that you’re operating in? Sorry, for Iain.
A – Iain Williamson
Yes. So it’s not — as you’d expect, it’s not a one-size-fits-all answer. It’s very much a country-by-country situation. There are certain countries which we have earmarked for effectively exit in our heads already. We’re not communicating what those are. And there are others where we absolutely have an ambition to grow them to the top 3 kind of positions that I spoke to.
So we haven’t thought about it in the way that you’re framing the question, Warwick, so it’s not as easy to answer it in that way. But suffice to say that one of the critical criteria that we take into account is absolutely exactly what you’re referring to, which is, can we deliver a return in excess of the country-specific cost of equity for that business in a sensible time frame is one of the very critical questions we ask ourselves in evaluating the country-by-country situation.
Warwick Bam
And then last one just probably for Nico. You mentioned introducing various optimization measures to improve your shareholder investment strategy. Can you just give us a sense of how your asset allocation changes might benefit the investment return outcomes on the shareholder funds, some of which I know you’ve already implemented such as Nedbank, but I assume there are some others? You speak about a tactical asset allocation carve-out.
Nico van der Colff
Yes, this is not something new. It’s something that has been done over a couple of iterations already. So the decision was to create a little bit of flexibility inside the shareholder asset portfolio where there’s a target longer-term strategic asset allocation, and then there’s an overlay within that which the asset managers can deliberately argue for a different mix in the shorter term within constraints. So that optimization, I think, is not necessarily something that you’re going to see a major shift between periods in a single direction. It’s much more about hopefully generating a little bit of alpha by being intelligent about the strategic allocation at times when one of the asset classes looks cheap. I’m not sure whether anyone wants to add.
A – Casparus Troskie
Just to mention, Warwick, there’s ongoing work that we need to do. There are pockets of inefficiency in the balance sheet which the team is working on and will bring us back to the market as and when we’ve solved those inefficiencies.
Sizwe Ndlovu
Operator, are there any other questions before I move back to the webcast?
Operator
We have no questions from the lines.
Sizwe Ndlovu
Great. So a couple of questions on the webcast, Iain. These are from Francois Du Toit at Anchor Capital, and he asks three. The first one is, “Can you quantify the impact of business interruption provision releases or — and related reinsurance on Insure profits for the first half of 2022? And can you comment on the level of remaining provisions? Are any further releases likely?” That’s the first question. So I’ll move to the second one so we can do them all together.
A – Iain Williamson
We need to do one than two.
Sizwe Ndlovu
Do one, okay.
A – Iain Williamson
So Old Mutual Insure. Let’s ask Garth to respond.
A – Garth Napier
Cool. Yes, I think the — on the first half, I think the number is about ZAR40 million that was released from the COVID provisions. Remaining provisions, oh, I’ll have to confirm, but I think it’s about ZAR226 million remaining. Again, we don’t think we’ll have to wait and see how we finalize the outstanding claims between now and the end of the year. But we don’t foresee releasing any of that just yet until we finalize those claims.
Sizwe Ndlovu
Great. Thanks, Garth. I’ll move to the next question, also from Francois. And he says, “As in the past, was the value of new business determined using the previous year-end discount rate? Can you quantify what VNB would have been had you used the 30 June 2022 discount rate?”
A – Iain Williamson
That sounds like a Nico question.
Nico van der Colff
Yes, we use opening economics when we do VNB, and then we do the move to closing curves as part of the closing economic variances. Fortunately, the new business is less sensitive, so we do show VNB disclosures to the market quite regularly, just showing what the yield curve picture looks like. But VNB is a lot less sensitive to movements in the yield curve as long as those movements are, let’s say, typically parallel shifts up or down of the yield curve. Because on the earlier periods when reserves are negative, they get offset on protection business by later periods where they’re positive. And so — and shifts in the curve tends to have two offsetting directional impacts on the VNB, so it’s a lot less sensitive than you might expect. It’s not a material number if you did it on closing VNB for us. But yes, I can confirm we still do it on opening as before.
Sizwe Ndlovu
Great. Thanks, Nico. Iain, I’ll move to the next question on the webcast, from [indiscernible]. He asks, “Can you elaborate on your ESG?” And I must assume it means strategy, but he just said, “Can you align your ESG and align it with your margins for the next 5 years?”
A – Iain Williamson
I’m not sure I understand the question, to be honest. I think essentially, our approach to ESG is one of — one guided by embedding that into the various parts of — that are relevant in our business. So from an environmental perspective, the most material impact we can make given the role that we play in the environmental — sorry, in the economic ecosystem is to — is through the influence that we have as an asset manager and through the mandates that we give our asset manager as an asset owner. And that’s the reason for joining the two alliances that I alluded to in the presentation.
We take a view that it’s irresponsible to simply disinvest and that we will play a — more of an active stewardship role and essentially using our influence to influence investee companies to do the right thing from an environmental transition perspective. So that’s the biggest part of E.
Our operational footprint, we work on it. We’ve reduced our operational carbon emissions, water consumption, et cetera, quite substantially over the last 3 or 4 years. But ultimately, that’s a relatively small item relative to what we’re capable of doing from a — through [indiscernible] in the broader system.
And then from a social and governance perspective, I think that mostly talks to how we think about key metrics in the customer space, the employee space and how we think about our governance processes. It’s very difficult to answer that question more specifically in the way that it’s framed. But I would suggest that if you’re really interested in that, please do go and have a look at our integrated report through at least April, which really gives very full detail around our approach in this area.
Sizwe Ndlovu
Thanks, Iain. The final question is from Jaco Visser from Financial Mail. And he asks, “Do you have a figure or percentage of how much less guaranteed annuities value you sold in the first half compared to the same period last year?”
A – Iain Williamson
Kerrin does.
Kerrin Land
Yes. So in our business, it was just over 20% less. We obviously don’t know the industry numbers the competitors report, but we do think, from guidance that competitors have given, that it is down across the industry.
Sizwe Ndlovu
Thanks. And I’m just going to check with the operator before I hand back to you if there’s any questions on the line before we close.
Operator
No, sir, we don’t have any further questions on the lines.
A – Iain Williamson
Anyone else in the room wants an opportunity to ask a question before we close? No? Okay. So then that concludes our — oh, there is a question. And I’m sorry, I can’t see over there.
Unknown Attendee
The question that I’m interested to ask is about the Bula Tsela investment. My question is, why didn’t you include your local branches because it’s meant for plain people? When you go online, it’s quite a hassle to do some of the things like uploading your documents that are needed, which make it very difficult for people who would like to invest to do so, which will make them to just stop or give up in trying to invest. So the question is, why didn’t you put officers in the branches where plain people are going there in a full basis to get healthy?
A – Iain Williamson
There should be people in our branches who are capable of assisting. Maserame do you know any more? Or Clarence for that matter.
Maserame Mouyeme
Yes. And in addition to that, we have a road show that the team goes with to the different shopping malls and explains the process and helps where they can.
Sizwe Ndlovu
Thanks, Iain.
A – Iain Williamson
Okay, if there are no other questions, then thanks, everyone, in the room and on the phones and on the webcast for your time and attention. And we’ll draw the session to a close. Thanks, guys.
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