Old Mutual Limited (OMU) Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to Old Mutual's shareholders update. [Operator Instructions] Please note that this conference is being recorded. I'd now like to hand the conference over to the Chairman of Old Mutual Limited, Mr. Trevor Manuel. Please go ahead, sir.

Thank you very much, Chorus Call. Good afternoon to all of you. It's strange doing a telephone-only call because we've all kind of grown accustomed to video links these days. So it's a useful change and a reminder of what is still possible in the old world. And so thank you for your time. You'd be aware that we advertised the position of Chief Executive in February. It was a process delayed by the numerous instances of litigation. And after the judgment was handed on the appeal in January, the Board decided it appropriate to proceed. Even after that, there were 2 attempted litigation. The one was an attempted interdict to prevent us from proceeding with the process that was struck down. And then there was a petition to the Supreme Court of Appeal that was unsuccessful as well. And we proceeded the -- the applications came in. The Board set up a process of interviews. It was not something that we could have anticipated when we advertised because everything had to be done remotely, and the engagement, so on, took an entirely new term. And so the process was pretty exhaustive. We had applications from outside of South Africa as well as in South Africa. And went through a pretty detailed process. And on Friday, last week, the 3rd of July, the Board announced the decision that we've decided to appoint in Iain Williamson as the Chief Executive. Iain, as you know, is a long-standing employee of Old Mutual. I'll embarrass him if I tell you how long he's been with the company, but he is known and trusted. And when -- after -- as part of the announcement, I spoke to, first, the Exco and then the top 100 in the company. The applause was overwhelming. Everybody turned on their microphones. It was a Microsoft Teams call. And the enthusiasm was palpable. And so that speaks volumes to his ability to take the company forward. He has the support, obviously, of the company in ways where it matters most. And without a shadow of doubt, Iain takes up the position with the fullest backing of the Board. And so it's a good moment for Old Mutual. There's a sense of certainty going forward. There's the ability to put that insecurity that had so dominated communications about Old Mutual for almost a year -- no, for over a year, behind us. And now there's this new start. And so let me hand over to Iain to talk to you. Thank you very much.

Thank you, Chairman. And let me express my gratitude to the Board for having the confidence to entrust me with the privilege of leading Old Mutual into its next phase of growth. And good afternoon to everybody on the call. I'm Iain Williamson, the Group Chief Executive of Old Mutual. And I'm...

That sounds good. Sounds good.

I'm excited to be able to engage with you all today. I appreciate the support that we've had, both myself and the company, from our shareholders over the last year as we've navigated a very challenging time. And I trust that we can continue to count on having robust engagements going forward that ultimately create and grow sustainable shareholder value. In engagements with the investor community and in particular, with our shareholders, I found key concerns about Old Mutual more recently can be categorized into a few headings. The first being the valuation of the stock at the moment. And secondly, our strategic intent and ultimately, whether we have a clear and definitive road map of what our future will look like. More recently, our financial performance and COVID-related impacts on our business has also been an area of sharp focus. So I'd like to use this engagement to cover off a couple of these items. We've been on a strategy refresh journey in organization since 2018. I've led this process for over a year now and I'm excited by the pace, the unity of purpose and the strong execution focus that I've seen in the leadership cohort. On the completion of management separation, we recognized that the 8 battlegrounds in place at the time provided a good framework for the outcomes we were driving, but they tended to be more focused on short to medium term and quite tactical in nature. At the year-end results presentation in March, I introduced the 5 pillars which are building blocks of our future strategy as we head towards 2030. We had set ourselves the objective of ensuring that we become our customers' first choice to sustain and grow their prosperity and that of their families and communities. We believe that, if we deliver on the 5 building blocks, we will be able to achieve this. And we believe that, if we deliver on this, then we will build the most valuable business in the financial services sector. I won't go through this in any detail, except to remind you that the 5 building blocks are as follows: firstly, being always present first to our customers; secondly, to have rewarding digital engagement with our customers; thirdly, to have employees that are fully engaged in the service of our customers; fourthly, to demonstrate that Old Mutual cares in a wider community sense; and fifthly, to ensure that the solutions that we offer our customers are leading in every way. In the last year, we've achieved alignment between the Board, executive management and leaders across the organization. We've got a clear path, nonnegotiable deliverables and set time lines. We'll share more detail on these matters when we deliver our half year results. I'd like to provide some brief commentary relating to trading conditions for the first half and just 1 or 2 comments on directional trends we're seeing since the release of the trading update in May. Obviously, we are in a close period, so our commentary won't discuss any specific financial results, and I'll deal with it at a business unit level. So the Mass and Foundation Cluster, firstly. During the hard lockdown in April, most of our sales channels in this business were unable to sell, and we had a small branch network open, around 62 branches out of 368. Issued sales were down 90% in April. A remote selling capability has been developed for all of the channels. And this, together with the opening of 60 branches per week, has resulted in us seeing an uplift in sales in June. We're back to about 45% of our target at the 30th of June, and this continues to improve on a week-by-week basis. Work sites, which is our primary sales channel typically in this business, are not yet fully active, with only 20% of staff countrywide having returned to work at some of our biggest private sector work sites. And not all public sector work sites are open. Hospitals, for example, are a no-go. Rules are very strict, and access to police stations has also been difficult. In Personal Finance, while not as marked as in Mass and Foundation business, the lockdown also had a significant impact on issued sales activity due to reduced access to customers and customers not making purchase decisions during this time of uncertainty. Issued sales, which are a lead indicator of what we call confirmed sales, were at around 50% of prior year levels in April. That trend has continued into May and June, largely due to lower recurring premium sales. Single premium sales have held up very well during this period. In Corporate, we announced in the trading update that we saw lower recurring premium flows off a high base in quarter 1. This trend has also continued. In order to ensure the issue that's been topical in the short-term insurance industry is that of business interruption, we are assessing claims on a case-by-case basis, in line with the generally accepted legal interpretation of business interruption claims. There are a number of different winning versions in place in the market, and it's impossible to make a blanket statement about all of the possible validity of all the possible claims. We've applied a narrow definition where losses would be covered as business interruption arises from infection in a client's premises rather than from a government-imposed lockdown as a general view. This view's in line with the majority of our counterparts in the insurance, but it could be challenged in a court of law. We will provide an update on exposure at the half year. And our exposure is expected to be within our reinsurance treaty limit. So to bring this all together, I think it's important to state that we remain very well capitalized with a strong balance sheet that's more than able to weather the current storm that we're navigating. I'm also pleased to say that our people remain enthusiastic and are embracing the new direction that we set. I'll be using the framework that I've described in all our future engagements, where more detail will be provided on the progress we're making in executing the strategy. And I'm very proud to be leading such a diverse and talented executive team, which remains one of the most transformed in South Africa and the rest of Africa. Team has been stable over the last few years, and the depth of talent and skill is exceptional. So thank you, and I'll hand back to the operator and to Sizwe to open up for Q&A. Sizwe, over to you.

Good afternoon, ladies and gentlemen. Just some housekeeping before we commence the Q&A session. We do need to close the call promptly at 3:00 p.m., so we do ask that you keep your questions brief. And also we will be taking questions from investors and analysts as indicated in the SENS announcement invitation to everybody here. Operator, over to you.

[Operator Instructions] The first question comes from Francois du Toit of Renaissance Capital.

Iain, can you hear me?

Yes. Thanks, Francois. Okay.

Excellent, Iain. Iain, first of all congratulations, and I'm very glad for you and for Old Mutual. And you've got certainty about this important position. Just quickly on -- you've mentioned there are some nonnegotiable deliverables. Can you maybe discuss that a little bit for us? And also in relation to that, the targets that is in place for management, remuneration targets and targets you've given to shareholders in the past as well, you [indiscernible]. Has that been discussed?

Apology for the interruption. The last 5 seconds, your line distorted.

I just want to know whether you can maybe discuss your targets a little bit for us and that nonnegotiable deliverables you've mentioned. And maybe just your thoughts around past targets and maybe adjusted operating profits and the ability to adjust profits and the impact of basis changes, provision releases and those adjustments on those earnings and whether you would maybe be willing to move to something more objective like dividends and distributable earnings and whether you'd be willing to define the normalization parameters in advance that you're allowed to use for those targets.

Okay. Thanks, Francois. I think -- so what I was referring to was more, at this stage, key critical projects that need to be delivered to progress the delivery of the strategy that I referred to rather than what you seem to be referring to in terms of concrete financial targets, et cetera. We are currently in discussion with our income around our schemes in terms of the reward that you allude to. And I think it's probably a little early still to share the outcome of those conversations. We will share them in due course. But I have heard your comments on this topic in the past, and I do understand where you're coming from.

The next question comes from Michael Christelis of UBS.

Guys, can you hear me?

Yes. Thanks, Mike.

Iain, Congratulations, and it's good to see you finally have some certainty here as Francois alluded to. I think just 2 questions from my side. Firstly, I mean are there -- and maybe it's difficult for you to say, but are there any specific areas around strategy where you disagreed with Peter in the past? I'm thinking about M&A or expansion into Africa. I mean are there any sort of key areas where you felt that Peter was on the wrong track and that we could see perhaps a change in the strategic direction of the business? And then secondly, I guess, a question for both yourself and for Trevor is really around the prospect of any further litigation coming through from Peter. I mean, is there -- do you think this issue is now firmly behind you? Or do you still see further interruption, if I can call it that, from additional court cases and the like?

Okay. Thanks. So on the first point, probably the main area where I probably have very fundamentally different view to Peter was around the likely role of servicing both customers and intermediaries rather than purely customers, if I can use that distinction, certainly, for the foreseeable future. And so what we have done, which is -- so it's not a grand strategy point at the level of M&A or anything like that, but I think it's a fairly fundamental point around how we progress the progress the -- progress particularly in our Personal Finance and Mass and Foundation businesses. I think where our Personal Finance business had perhaps gone a little bit awry up to the end of last year was in an attempt to the focus almost exclusively on the customer requirement to the exclusion of the intermediaries rather than balancing out that value chain and appreciating and valuing the role of the intermediary in the value chain. So I think we've addressed that issue. Quite a number of sort of quick-win changes have been implemented in our Personal Finance business, in particular, as a consequence. On the matter of litigation, I don't think we can categorically rule out that Peter and his legal team won't take forward any of the open matters that are still, at least theoretically, can be taken further in the court of law. Thus far, the track record is that he doesn't appear to have chosen to do so. And in my own view, and it is a personal view, that the prospects of success on some of those things are probably not wonderful, but he would obviously have to exercise his own judgment. Trevor, I don't know if you want to add anything to the particular issue.

Thanks, Iain. Let me -- thanks, Mike. Let me just elaborate. I think that, in the last while, there were 4 pretty decisive actions that went in favor of the company. These were the recusal by Judge Mashile, which happened early December, then there was the appeal that went in favor of Old Mutual in January, followed by the interdict and then the petition to the SCA. I think that takes the bulk of issues out of play. There's one matter that still needs to be resolved, for which a judge has been appointed, but there's a delay because of COVID lockdown, and that relates to an endeavor to have all of the directors declared delinquent. I think it's a pretty tough test to pass even with an individual as we saw recently with [ Dmitry Lapidus ] all of the Board declared delinquent because we opted to dismiss an individual seems to be an issue that we must just get off the table. Now I know that there was a press article that spoke of Peter trying to still petition the constitutional court. But to the best of my knowledge, the deadlines are passed for that. So what that leaves are 2 matters. One matter, I think, has been kicked into test. And that is the contempt of court application that Peter brought against the Board. But because the original judgment was struck down, I don't know how this will work. And I think that the judge has also difficulty with it. And the second, which is our part B. Frequently, these kinds of matters take about 5 years or so. And that relates to his claim to ZAR 250 million for due diligence against the company. And that still remains outstanding. But it is part B of the part A that has been struck down repeatedly. So I think the ball is in his court. But as Iain says, you'll be the judge on the chances of success because I am sure that legal costs are rising at the rate of not -- as you proceed along this path. Thank you.

[Operator Instructions] The next question comes from Andrew Sinclair of Bank of America.

And 2 questions for me, if that's okay. Firstly to Iain, congratulations as well from me. Nice to see a fellow actuary in a senior role. Iain, Old Mutual continues to be perceived as a rather inefficient business. And costs have been an area of focus for recent years. And despite statements on achieving the cost-saving targets, I think your cost/income ratio has actually climbed slightly in recent years. I think we've discussed in the past that you also think cost/income ratios are the best way to evaluate efficiency. I just really wanted to know, do you acknowledge that perception of inefficiency? And how do you propose to tackle that? And then second question is for Mr. Manuel. I believe that the 8 battlegrounds agenda, which was set previously, which had buy-in from the Board and management and even the revolution of it, now was a somewhat reform-focused, shall we say. And I just really wondered why, however, experienced and well-qualified an internal candidate would be seen as the appropriate candidate to pursue something of a reform agenda?

Andrew, you said 3 questions. I heard 2.

Sorry, just 2. I'm sorry. I'm so used to saying 3, but I'll keep it to 2 today.

Okay. Thank you. So on the cost issue, first of all, yes, I am absolutely aware of the perception that you referred to. And I think, as a management team, we understand that and we agree with it. I think the one thing I would say is that, while we are in a -- we are conducting a number of exercises to ensure further efficiency, I think the really quick-win-type things are done. And some of the things we need to do now are a bit more difficult, but it remains an area of absolute focus for us, and we will continue to strive to drive real efficiencies through the business from -- at a value chain level that should result in the cost-to-income ratio coming down over time. So I think let me leave it there. Trevor, back to you for the second question.

I'm sorry, Andy. I didn't hear you very, very distinctly. So would you mind repeating it, please? And call it your third question. It's okay.

Certainly. Apologies, it may be my connection or it could be my Scottish accent. So apologies either way. I was just really saying that the agenda that's been set for Old Mutual over the last few years, it seems to have been something of a reform agenda. And I was just really wondering why, however experienced and well-qualified Iain is, whether -- why an internal candidate should be seen as the most appropriate candidate to pursue a reform agenda?

Well, we didn't set the sights on an internal candidate. We didn't prescribe what kind of candidate we were looking for. And that's why the search was pretty exhaustive. And I think that with Iain just having been pointed, the key questions that confront us now relate to strategy going forward. I think that part of what every company worth its salt will have to do is to take stock of the impact of COVID-19. I know that it's a running saw at the moment, but it is a saw. And so I think that what will be required would be a series of issues that arise in a number of different parts. For instance, what is likely to be the macro impact of COVID-19 where we've seen all of the macro aggregates go out the window in the way that they have. Will the world ever return to a normative kind of Washington consensus, think of a 3% deficit, et cetera, when you've seen these massive injections of capital by states across the globe? And what is the likely impact of that on capital markets going forward? It's something that companies will have to take stock of. At the same time, I think it's also going to be important for companies to take stock of what kind of -- what its offering is by way of product to its customer base. And here, there are going to be a series of issues. I mean, if, for instance, I saw this number and if I didn't see it accurately, pretend Andy, I'm making it up, that the company is across the U.S. health sector, and hospitals are likely to see a loss of something in the order of $244 billion this year, what happens to them next year? And part of those losses are incurred because all elective [ mits ] has been removed from play. So all of these issues will have... [Technical Difficulty]

Apologies. We have just lost the main speaker. Ladies and gentlemen, please remain on the line. Andrew, please remain online. He will be completing his question now.

Andy, I don't know where the call dropped. I'm sorry. Let me take it from the top. Your question was related to the 8 battlegrounds and internal candidate, and the first point I raised was that we didn't prescribe what sort of candidate we were looking for. We actually set out to find the best candidate and the candidate whose performance and intent the Board could back to the hilt. And that's what we found in Iain Williamson. The key issues are taking stock of the impact of COVID. And this is something that every company worth its salt is going to have to do. We're a company that takes savings, manages them and provides for retirement. That's the core of our business. And everything we do is likely to be impacted upon by macro aggregates and personal access issues over the next period. So I think that the circumstances now are compelling a company like Old Mutual to take a fresh view of its strategy across the 8 battlegrounds and the 5 pillars that I described. And we are going to have to give this matter a lot of attention. It's also a matter that requires urgent attention, though the impact of COVID is likely to be felt over the next 12 to 18 months in full.

[Operator Instructions] The next question comes from [ Fabian Manuel of YME Capital ]

My question is -- I think 2 questions. I think the one question is to what happened...

Sorry. I'm going to interrupt you there. Your line is not all that clear. Are you able to move closer to your microphone? Alternatively, use the handset.