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CLI
CLI
CLI - Clientele - Unaudited Summarised Group Results for the six months ended
31 December 2008
Clientele Limited
(Registration number 2007/023806/06)
Share code: CLI
ISIN: ZAE000117438
("Clientele" or "the Group")
UNAUDITED SUMMARISED GROUP RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008
Highlights
* Value of New Business increased to R209 million
* Embedded Value Earnings of R458 million
* Annualised return on Embedded Value of 56%
* Net recurring insurance premiums up by 18%
* Annualised return on average shareholders interest of 55%
* Shareholder`s investment losses limited to 8%
* Policyholder`s investment losses limited to 6%
* Headline earnings per share decreased by 8% from 19.95 cents to 18.32 cents
COMMENTS
Operating Results
Clientele Limited ("Clientele") and its subsidiaries ("the Clientele Group")
have recorded sound results for the six months to 31 December 2008, despite
turbulent markets and economic uncertainty.
Net recurring insurance premiums for the six months are up by 18% from R378.9
million to R445.7 million, other recurring income is up by 34% from R60.9
million to R81.4 million and the progress from our newly established
businesses namely Independent Field Advertisers Limited (Nigeria) ("IFA
Nigeria"), Clientele Legal and Clientele Loans Direct (Proprietary) Limited
("Clientele Loans Direct") has met our initial expectations.
The Group has continued to create value over the last six months. Although
production volumes have been impacted by the state of the economy this has
been countered by improved margins and enhanced premium collections management
resulting in improved lapse experience over the comparable period. The Value
of New Business has increased from R158.6 million for the first six months of
last year to R209.1 million for the six months under review. The corresponding
New Business profit margin increased from 20% to 24%.
The Embedded Value has increased from R1.1 billion (after adjusting for
dividends and related STC) to R1.5 billion at 31 December 2008. This
translates into an annualised Return on Embedded Value of 71%. This return can
be broken down into an annualised return of 56% per annum before allowing for
any economic assumption changes and 15% being the impact of once-off items
(including economic assumption changes) which are expected to be a non
recurring feature and thus have not been annualised.
The risk discount rate of 12.25% has been set in terms of current actuarial
guidance and includes a conservative adjusted beta of 1, an equity risk
premium of 3.5% and an additional risk margin of 1% for general market
conditions for conservatism in the current economic climate. The calculation
is comprehensively explained and a sensitivity analysis is provided under the
Group Embedded Value section of the results.
Investment returns for the six months, although negative, have been limited to
negative 8% for shareholders and negative 6% for policyholders in comparison
to the negative 28% return of the JSE All Share Index for the same period. The
asset allocations within the portfolios have provided the Group with a
reasonable measure of protection during this period of declining market values
and volatility.
This translates into fair value losses on financial assets for the period of
R42.3 million which are R77.7 million lower than the comparative gains of
R35.4 million in the 2007 six month period. These fair value losses include
R5.3 million attributable to shareholders, which is R14.2 million lower than
the gains of R8.9 million attributable to shareholders for the comparable six
months.
Policyholder benefit payments of R97.7 million (2007 : R93.4 million), the
majority of which relate to payments in respect of linked endowment products,
have increased by 5% over the comparable six months.
Policyholder liabilities under insurance contracts have decreased by R9.1
million for the period. This is mainly due to the negative investment
performance pertaining to policyholder funds as a consequence of negative
market returns.
The active ongoing management of expenses has continued to support the growth
in New Business Profit margins and the strong growth in Embedded Value.
Expenses for the six months have increased by 28% due to the inclusion of
expenses related to the new subsidiaries. The increase in expenses prior to
the inclusion of the new ventures amounted to an increase of 15% from R249.6
million to R287.3 million, which is in line with the increase in net insurance
premiums and other income from R439.3 million to R505.9 million, an increase
of 15%.
The effective tax rate for the six month period of 30% (excluding STC) has
increased in comparison to the previous six month period of 29%. This is
primarily due to the change in mix between operating income and investment
income/losses which are taxed at lower rates. The proportion of operating
income in the current period was higher than that of last year resulting in a
higher effective tax rate. It should be noted that the permanent taxation
difference in respect of the SAR scheme expense increases the effective rate
of tax. This increase has been partially compensated for by the reduction in
the corporate taxation rate from 29% to 28%.
Headline earnings for the Group of R59.3 million are 8% less than the headline
earnings of R64.5 million for the corresponding six months. The decrease is
primarily due to the reduction in investment income, start-up costs incurred
within the new ventures and the higher STC charge in respect of the 30%
increase in dividends paid.
Diluted headline earnings per share have decreased by 7% from 19.69 cents for
the six months ended 31 December 2007 to 18.32 cents for the six months ended
31 December 2008.
The three new ventures, which, as budgeted, have incurred start up costs ahead
of income, have together contributed a net loss after tax of R9.2 million
after adjusting for minority interests.
The annualised return on average shareholders` interests for the six months
has decreased from 85% for the corresponding six months to 55% for this period
due to the impact of start-up costs for the new ventures and shareholder
investment losses.
Dividends paid in September 2008 of 39 cents per share increased from 30 cents
per share in the previous year, an increase of 30%.
New Ventures
IFA Nigeria
Clientele launched a new business in Nigeria, IFA Nigeria, in July 2008 and
commenced policy sales from August 2008. From 1 July 2008, IFA Nigeria was
owned by Clientele (75%) and by KC 2008 Limited, a Nigerian company ("KC
2008") (25%). KC 2008 has subscribed for 25% of the issued share capital of
IFA Nigeria for a subscription price of US$8 million (R63.0 million). A
further minimum amount of US$6.5 million (maximum: US$7.5 million) is payable
by KC 2008 on or before 31 December 2010. Should KC 2008 elect not to exercise
their rights, their effective shareholding will reduce from 25% to 15%.
Clientele, via its 100% owned subsidiary, Clientele Life (Netherlands)
Cooperatiewe U.A., has subscribed for its shares in the capital of IFA Nigeria
for a subscription price of US$1 million (R9.9 million). Clientele provides
ongoing management expertise, business systems and support to IFA Nigeria. In
addition, KC 2008 has lent US$2 million (R18.9 million) to IFA Nigeria.
The Embedded Value results for IFA Nigeria have been based on a risk discount
rate of 25% per annum, a long-term investment return of 7% per annum and a
long-term inflation rate of 7% per annum. The Present Value of In-force
Business at 31 December amounts to R22.6 million and Value of New Business
amounts to R13.3 million. The business has a total Embedded Value of R70.7
million. Production is in line with expectations and expenses have been more
favourable than expected; however, collections are lower than expected.
Management believe that controlling and improving the premium collection
process will play an important role in the overall success of IFA Nigeria.
Clientele Legal
The personal lines legal insurance business is performing as expected with a
Value of In-force Business of R41.3 million and a Value of New Business of
R15.9 million.
Clientele Loans Direct
The unsecured personal loans business of which Clientele owns 70% operated in
co-operation with Direct Axis (SA) (Pty) Ltd., is progressing in line with its
conservative credit assessment and lending approach. R6 million has been
advanced in the first four months of operation and experience from the loans
book has been as expected. Direct Axis is a fully integrated and centralised
direct marketing business that offers selected financial products. Direct Axis
has established joint ventures with other insurance and banking partners that
utilise its risk management intellectual property, marketing tools, IT
infrastructure, database and risk assessment expertise, customer management
skills and distribution ability. Direct Axis prides itself on its extensive
loan portfolio management skills acquired since inception in 1995.
Prospects
The past six months has seen the progress of the Clientele Group`s
transformation from a life insurance company to a financial services group. At
the same time its core traditional business continues to enjoy the success it
has achieved in the past. This has paved the way for Clientele to offer other
financial services products to its existing customers and for it to use its
existing direct distribution channels to market these additional products.
Clientele believes that its proven IFA distribution model is well suited to
other African markets and the acceptance of IFA in Nigeria has been
encouraging. The new group intends to leverage off its existing customers and
distribution methods and to remain a highly focused organisation in order to
further enhance the creation of value for shareholders.
By order of the Board
G Q Routledge G J Soll
Chairman Managing Director
Johannesburg
2 March 2009
SUMMARISED GROUP RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008
UNAUDITED
CONDENSED GROUP INCOME STATEMENTS
Six months ended % Audited
31 December Year ended
30 June
(R`000`s) 2008 2007 Change 2008
Revenue
Insurance premium revenue 461 560 394 376 17 815 232
- individual recurring
Reinsurance premiums (15 900) (15 479) (31 195)
Net insurance premiums 445 660 378 897 18 784 037
Other income 81 447 60 887 34 118 395
Fair value adjustment to (42 330) 35 372 >(100) 63 999
financial assets at fair
value through profit and
loss
Total revenue 484 777 475 156 2 966 431
Net insurance benefits (79 766) (80 046) (161 485)
and claims
Claims and policyholder (97 656) (93 353) 5 (194 073)
benefits under insurance
contracts
Insurance claims 17 890 13 307 34 32 588
recovered from reinsurers
Decrease/(increase) in 9 073 (15 532) (40 315)
policyholder liabilities
under insurance contracts
Decrease/(increase) for 9 073 (14 065) (38 848)
the year
Impact of Regulation 5 - (1 467) (1 467)
Decrease in reinsurance (1 140) (4 108) (10 564)
assets
Fair value adjustment to 6 346 (20 673) (31 770)
financial liabilities at
fair value through
profitand loss
Expenses (321 528) (250 668) 28 (522 029)
Results from operating 97 762 104 129 (6) 200 268
activities
Equity accounted earnings 18 95 74
Profit before taxation 97 780 104 224 (6) 200 342
Taxation (41 044) (39 703) 3 (66 136)
Net profit for the period 56 736 64 521 (12) 134 206
Attributable to:
Minority interest - (2 619) - -
ordinary shares
Equity holders of the 59 355 64 521 (8) 134 206
Group - ordinary shares
CONDENSED GROUP BALANCE SHEETS
Six months ended Audited
31 December Year ended
30 June
(R`000`s) 2008 2007 2008
Assets
Intangible assets 3 753 - 3 849
Property and equipment 45 106 19 288 21 475
Owner-occupied properties 126 579 62 000 127 600
Equity accounted investments 541 237 626
Deferred taxation 15 127 2 823 5 966
Inventories 1 718 1 711 712
Reinsurance assets 28 168 29 270 23 795
Financial assets held at fair 1 082 471 1 069 005 1 065 997
value through profit and loss
Loans and receivables 131 490 27 191 45 113
including insurance
receivables
Current taxation receivables - - 1 742
Cash and cash equivalents 88 880 65 543 197 390
Total assets 1 523 833 1 277 068 1 494 265
Total equity and reserves 215 262 139 368 217 789
Liabilities
Policyholder liabilities 529 262 512 571 538 335
underinsurance contracts
Financial liabilities held at 632 886 511 033 490 469
* fair value through profit 583 327 511 033 490 469
and loss
* amortised cost 49 559 - -
Employee benefits 39 805 37 244 65 941
Accruals and payables 92 995 65 074 137 036
including insurance payables
Deferred taxation 12 797 11 381 13 168
Current taxation 826 397 31 527
Total liabilities 1 308 571 1 137 700 1 276 476
Total equity and liabilities 1 523 833 1 277 068 1 494 265
TAXATION
Six months ended Audited
31 December Year ended
30 June
(R`000`s) 2008 2007 2008
Current and deferred taxation (29 892) (30 089) (58 250)
Secondary tax on companies (12 150) (9 288) (9 288)
("STC")
Capital gains tax - (326) (340)
Overprovision in prior years 998 - 1 742
Taxation (41 044) (39 703) (66 136)
The Individual Policyholder Fund has an estimated tax loss of R1.048 billion.
RECONCILIATION OF NET PROFIT TO HEADLINE EARNINGS
Six months ended Audited
31 December Year ended
30 June
(R`000`s) 2008 2007 2008
Net profit for the period 59 355 64 521 134 206
attributable to equity holders
Less: Profit on disposal of (82) - (202)
fixed assets
Headline earnings 59 273 64 521 134 004
RATIOS PER SHARE
Six months ended Audited
31 December Year ended
30 June
2008 2007 2008
Headline earnings per share 18.32 19.95 41.42
(cents)
Diluted headline earnings per 18.32 19.69 41.21
share (cents)
Earnings per share (cents) 18.35 19.95 41.49
Diluted earnings per share 18.35 19.69 41.27
(cents)
Net asset value per share 66.54 43.08 67.32
(cents)
Diluted net asset value per 66.54 42.52 66.98
share (cents)
Weighted average ordinary 323 500 323 500 323 500
shares (`000)
Diluted average ordinary 323 500 327 750 325 157
shares (`000)
On 19 May 2008 the shares of Clientele Limited were subject to a de facto 10:1
share split. The shares, earnings per share and net asset value per share for
2007 have accordingly been restated.
NOTES TO THE RESULTS
The results have not been reviewed or audited by the Group`s auditors
PricewaterhouseCoopers. The decreases/(increases) in policyholder liabilities
have been based on best estimates after providing for compulsory and
discretionary margins and have been actuarially certified by QED Actuaries &
Consultants (Pty) Ltd.
ACCOUNTING POLICIES
Statement of compliance
The accounting policies adopted for the purpose of the Group Financial
statements comply with International Financial Reporting Standards ("IFRS"),
the JSE Limited Listings Requirements and the Companies Act 1973 (Act 61 of
1973) as amended and are consistent with prior years. The results have been
prepared in terms of IAS 34 (Interim Financial Reporting).
The preparation of financial statements in accordance with IFRS requires the
use of certain critical accounting estimates and judgement. The reported
amounts in respect of the Group`s insurance contracts, employee benefits and
unquoted financial instruments are affected by accounting estimates and
judgement.
There was no significant impact due to changes in previous assumptions used in
deriving the amounts referred to above.
Comparatives
As Clientele was incorporated on 23 August 2007 and the restructuring only
being effective from 19 May 2008, Clientele had no former trading history and
thus no comparative financial information. This transaction is accounted for
as a common control transaction. The directors have included the comparative
financial information comprising the balance sheet, income statement,
statement of changes in equity and cash flow statement, which represents the
comparative information of the financial position at 31 December 2007 of the
pre-existing businesses of Clientele Life Assurance Company Limited
("Clientele Life").
The Group accounting policies adopted by Clientele Life have been adopted by
Clientele and are consistent with those used in the Annual Financial
statements for the year ended 30 June 2008. During the year the Group has
transacted with minorities and consequently accounted for these transactions
based on the economic entity model method.
CONDENSED GROUP CASH FLOW STATEMENTS
Six months ended Audited
31 December Year ended
30 June
(R`000`s) 2008 2007 2008
Cash flows from operating (128 200) (19 706) 182 518
activities
Cash generated by operations 116 724 117 734 178 464
Net (acquisition)/disposal of (69 653) (24 904) 113 027
investments
Interest received 9 710 11 714 20 082
Dividends received 17 710 7 680 12 536
Dividends paid (126 165) (96 936) (97 116)
Taxation paid (76 526) (34 994) (44 475)
Cash flows from investing 19 690 (4 446) (74 823)
activities
(Decrease)/increase in cash (108 510) (24 152) 107 695
and cash equivalents
Cash and cash equivalents at 197 390 89 695 89 695
beginning of the period
Cash and cash equivalents at 88 880 65 543 197 390
end of the period
Segment Information
The Group`s results are analysed across two geographical segments which are
South Africa (SA) and Nigeria.
The Group`s main business segments are Long term insurance, Short term
insurance, Investment contract and Long term broking segments. The financial
results of the Loans business are immaterial at this stage.
SEGMENT ASSETS & LIABILITIES
Six months ended Audited
31 December Year ended
30 June
(R`000`s) 2008 2007 2008
Assets
SA - Long term insurance 800 519 766 299 1 004 310
SA - Short term insurance 29 883 1 879 6 662
SA - Investment contract 620 284 508 890 488 375
Nigeria - Long term brokerage 92 423 - -
Inter segment (19 276) - (5 082)
Total Group Assets 1 523 833 1 277 068 1 494 265
Liabilities
SA - Long term insurance 643 366 624 056 778 736
SA - Short term insurance 35 190 2 611 8 342
SA - Investment contract 621 028 511 033 494 480
Nigeria - Long term brokerage 28 263 - -
Inter segment (19 276) - (5 082)
Total Group Liabilities 1 308 571 1 137 700 1 276 476
Clientele and its subsidiaries operated in South Africa and Nigeria during the
period under review. Policies written are in respect of individuals.
SEGMENT INCOME STATEMENTS
(R`000`s) SA Long- SA Short- SA
term term Investment
insurance insurance contract
31 December 2008
Net insurance premiums 432 615 13 045 -
Other income 73 271 552 836
Fair value adjustment to (35 984) - (6 346)
financial assets at fair value
through profit and loss
Segment revenue 469 902 13 597 (5 510)
Segment expenses and claims (357 181) (17 298) 4 443
Net insurance benefits and (79 723) (43)
claims
Decrease in policyholder 9 073
liabilities under insurance
contracts
Decrease in reinsurance assets (1 140)
Fair value adjustments to 1 903 4 443
financial liabilities at fair
value through profit and loss
Expenses (287 294) (17 255)
Results from operating 112 721 (3 701) (1 067)
activities
Equity accounted earnings 18
Profit/(loss) before taxation 112 739 (3 701) (1 067)
Taxation (46 174) 838 299
Net profit/(loss) for the 66 565 (2 863) (768)
period
31 December 2007
Net insurance premiums 378 804 93 -
Other income 60 544 - 343
Fair value adjustment to 14 699 - 20 673
financial assets at fair value
through profit and loss
Segment revenue 454 047 93 21 016
Segment expenses and claims (347 955) (1 111) (21 961)
Net insurance benefits and (80 046)
claims
Increase in policyholder (15 532)
liabilities under insurance
contracts
Decrease in reinsurance assets (4 108)
Fair value adjustment to 1 288 (21 961)
financial liabilities at fair
value through profit and loss
Expenses (249 557) (1 111)
Results from operating 106 092 (1 018) (945)
activities
Equity accounted earnings 95
Profit/(loss) before taxation 106 187 (1 018) (945)
Taxation (40 253) 285 265
Net profit/(loss) for the 65 934 (733) (680)
period
(R`000`s) Nigeria Inter Total
Long-term segment Group
brokerage (revenue)
/expense
31 December 2008
Net insurance premiums - - 445 660
Other income 7 128 (340) 81 447
Fair value adjustment to - - (42 330)
financial assets at fair value
through profit and loss
Segment revenue 7 128 (340) 484 777
Segment expenses and claims (17 319) 340 (387 015)
Net insurance benefits and (79 766)
claims
Decrease in policyholder 9 073
liabilities under insurance
contracts
Decrease in reinsurance assets (1 140)
Fair value adjustments to 6 346
financial liabilities at fair
value through profit and loss
Operating expenses (17 319) 340 (321 528)
Results from operating (10 191) - 97 762
activities
Equity accounted earnings 18
Profit/(loss) before taxation (10 191) - 97 780
Taxation 3 993 - (41 044)
Net profit/(loss) for the (6 198) - 56 736
period
31 December 2007
Net insurance premiums - - 378 897
Other income - - 60 887
Fair value adjustment to - - 35 372
financial assets at fair value
through profit and loss
Segment revenue - - 475 156
Segment expenses and claims - - (371 027)
Net insurance benefits and (80 046)
claims
Increase in policyholder (15 532)
liabilities under insurance
contracts
Decrease in reinsurance assets (4 108)
Fair value adjustment to (20 673)
financial liabilities at fair
value through profit and loss
Operating expenses (250 668)
Results from operating - - 104 129
activities
Equity accounted earnings 95
Profit/(loss) before taxation - - 104 224
Taxation - - (39 703)
Net profit/(loss) for the - - 64 521
period
The figures relating to the Clientele Loans Direct business are not material
and are included in the SA Long-term insurance segment for disclosure
purposes.
CONDENSED GROUP STATEMENT OF CHANGES IN EQUITY
(R`000`s) Share Share Common Sub-total
capital premium control
surplus/
(deficit)
Balance as at 1 July 4 853 4 853
2007
Issue of share 6 470 218 656 (225 126) -
capital
Net profit for the -
period
Ordinary dividend -
paid
SAR scheme allocated -
Balance as at 31 6 470 218 656 (220 273) 4 853
December 2007
Balance as at 1 6 470 218 656 (220 273) 4 853
January 2008
Net profit for the -
period
Transfer to -
contingency reserve
SAR scheme allocated -
Revaluation of owner -
occupied properties
Balance as at 30 June 6 470 218 656 (220 273) 4 853
2008
Balance as at 1 July 6 470 218 656 (220 273) 4 853
2008
Net profit/(loss) for -
the period
Transfer to -
contingency reserve
Ordinary dividend -
paid
SAR scheme allocated -
Currency translation
differences
Shares issued by -
subsidiary
Balance as at 31 6 470 218 656 (220 273) 4 853
December 2008
(R`000`s) Retained SAR scheme NDR: Con- NDR:
earnings reserve tingency Foreign
currency
trans-
lation
reserve
Balance as at 1 July 146 494 2 099 - -
2007
Issue of share
capital
Net profit for the 64 521
period
Ordinary dividend (97 050)
paid
SAR scheme allocated 2 350 -
Balance as at 31 113 965 4 449 - -
December 2007
Balance as at 1 113 965 4 449 - -
January 2008
Net profit for the 69 684
period
Transfer to (246) 246
contingency reserve
SAR scheme allocated 2 295
Revaluation of owner -
occupied properties
Balance as at 30 June 183 403 6 744 246 -
2008
Balance as at 1 July 183 403 6 744 246
2008
Net profit/(loss) for 59 355
the period
Transfer to (1 336) 1 336
contingency reserve
Ordinary dividend (126 165)
paid
SAR scheme allocated 2 433
Currency translation 1 136
differences
Shares issued by
subsidiary
Balance as at 31 115 257 9 177 1 582 1 136
December 2008
(R`000`s) NDR: Attribu- Minority Total
Revalua- table to interest
tion equity
holders
Balance as at 1 July 16 101 169 547 - 169 547
2007
Issue of share - -
capital
Net profit for the 64 521 64 521
period
Ordinary dividend (97 050) (97 050)
paid
SAR scheme allocated 2 350 2 350
Balance as at 31 16 101 139 368 - 139 368
December 2007
Balance as at 1 16 101 139 368 - 139 368
January 2008
Net profit for the 69 684 69 684
period
Transfer to - -
contingency reserve
SAR scheme allocated 2 295 2 295
Revaluation of owner 6 442 6 442 6 442
occupied properties
Balance as at 30 June 22 543 217 789 - 217 789
2008
Balance as at 1 July 22 543 217 789 - 217 789
2008
Net profit/(loss) for 59 355 (2 619) 56 736
the period
Transfer to - -
contingency reserve
Ordinary dividend (126 165) (126 165)
paid
SAR scheme allocated 2 433 2 433
Currency translation 1 136 378 1 514
differences
Shares issued by 45 494 17 461 62 955
subsidiary
Balance as at 31 22 543 200 042 15 220 215 262
December 2008
GROUP EMBEDDED VALUE
Strong returns and value creation
Increased New Business profit margin
Improved collections
Improved lapse experience
Investment losses contained
Successful launch of new ventures
EMBEDDED VALUE
The methodology and assumptions used to determine the Group Embedded Value
have been adjusted to comply with the revised Embedded Value Guidance from the
Actuarial Society of South Africa that applies for reporting periods ending on
or after 31 December 2008.
The Embedded Value represents an estimate of the value of the Group exclusive
of goodwill attributable to future new business. The Embedded Value comprises:
- the Free Surplus plus
- the Required Capital identified to support the in-force business plus
- the Present Value of In-force business less
- the Cost of Required Capital ("CoC")
The Present Value of In-force business is the present value of future after
tax profits arising from covered business in force as at 31 December 2008.
All material business written by the Group has been covered by Embedded Value
Methodology as outlined in Professional Guidance Note, PGN 107 of the
Actuarial Society of South Africa, including:
- all long-term insurance business regulated in terms of the Long-Term
Insurance Act, 1998;
- annuity income arising from non-insurance contracts where Embedded Value
Methodology has been used to determine future shareholder entitlements;
- Legal business written through a cell arrangement, where Embedded Value
Methodology has been used to determine future shareholder entitlements; and
- business conducted via IFA Nigeria (where Embedded Value Methodology has
been used to determine future shareholder entitlements).
The Embedded Value calculations have been certified by the Group`s independent
actuaries, QED Actuaries & Consultants (Pty) Ltd. The Embedded Value can be
summarised as follows:
Six months ended Year ended
31 December 30 June
(R`000`s) 2008 2007 2008
Free Surplus 126 185 91 532 169 279
Required Capital 75 995 47 060 50 001
Adjusted Net Worth ("ANW") of 202 180 138 592 219 280
covered business
Cost of Required Capital (25 557) (16 681) (15 761)
Present Value of In-force business 1 349 209 933 410 1 009 836
("PVIF")
Embedded Value of covered business 1 525 831 1 055 321 1 213 355
before SAR scheme adjustment
SAR scheme adjustment (4 306) (18 284) (11 214)
Embedded Value of covered business 1 521 526 1 037 037 1 202 141
VALUE OF NEW BUSINESS
Total Value of New Business 209 133 158 550 320 602
Present Value of New Business 883 112 792 935 1 548 802
premiums
New Business profit margin % 23.7 20.0 20.7
The Adjusted Net Worth of covered business is defined as the excess value of
all assets attributed to the covered business, but not required to back the
liabilities of covered business. Free Surplus is the Adjusted Net Worth less
the Required Capital attributed to covered business.
Reconciliation of Total Equity to Six months ended Year
Adjusted Net Worth 31 December ended
30 June
(R`000`s) 2008 2007 2008
Total equity and reserves per 215 262 139 368 217 789
balance sheet
Removal of Deferred Profits 5 045 - 2 888
liability (net impact)
Removing minority interests (15 220) - -
Adjusting subsidiaries to Net (2 908) (776) (1 397)
Asset Value
Adjusted Net Worth 202 180 138 592 219 280
The Cost of Required Capital is the opportunity cost of having to hold assets
to cover the Required Capital of R76 million as at 31 December 2008. The
Required Capital has been set at the greater of the Statutory Termination
Capital Adequacy Requirement and 1.5 times the Statutory Ordinary Capital
Adequacy Requirement.
The SAR scheme adjustment recognises the future dilution in Embedded Value, on
a mark to market basis, as a result of the SAR scheme referred to above.
The Value of New Business (excluding any allowance for the Management
Incentive scheme) represents the present value of projected after tax profits
at the point of sale on new covered business commencing during the six months
ended 31 December 2008 less the Cost of Required Capital pertaining to this
business.
Clientele Life`s Statutory CAR cover ratio at 31 December 2008 was 2.2 times
(31 December 2007: 2.7 times and 30 June 2008: 4.4 times) on the statutory
valuation basis.
The New Business profit margin is the Value of New Business expressed as a
percentage of the present value of future premiums (and other annuity fee
income) pertaining to the same business.
Six months ended Year
31 December ended
30 June
2008 2007 2008
Embedded Value per share (cents) 470.33 320.57 371.60
Diluted Embedded Value per share 470.33 316.41 369.71
(cents)
LONG-TERM ECONOMIC ASSUMPTIONS (SOUTH AFRICA)
Six months ended Year
31 December ended
30 June
2008 2007 2008
Risk discount rate % 12.25 14.00 15.00
Overall investment return % 7.75 9.00 11.25
Expense inflation % 5.75 6.50 8.00
Corporate tax % 28.00 29.00 28.00
In terms of current actuarial guidance, the risk discount rate has been set as
the risk free rate plus a beta multiplied by the assumed equity risk premium.
It has been assumed that the equity risk premium (i.e. the long-term expected
difference between equity returns and the risk free rate) is 3.5%. In addition
the Board decided it prudent, in light of the current economic conditions and
the global financial crisis, to add some additional conservatism to the
Embedded Value calculation as at 31 December 2008. This was achieved via the
addition of an explicit 1% margin to the risk discount rate. The beta
pertaining to the Clientele share price is relatively low, which is partially
a consequence of the relatively small free-float of the company shares. After
careful consideration, the Board has opted at this stage to use a more
conservative beta of 1 in the calculation of the risk discount rate.
This means that the risk discount rate utilised for the South African business
as at 31 December 2008 was 12.25%. The theoretical risk discount rate using
this methodology, as at 30 June 2008, would have been 14.75% (a 25 basis point
difference from the risk discount rate that was actually used at that time).
This difference combined with other minor changes to Embedded Value
Methodology required in terms of the latest version of the Actuarial Society
of South Africa`s Guidance Note (PGN107 - version 4) would have made an
immaterial difference to the published Embedded Value results as at 30 June
2008 (less than 0.5% of Embedded Value). Thus these comparative results have
not been restated at this stage. Similarly, the 31 December 2007 results have
not been restated.
LONG-TERM ECONOMIC ASSUMPTIONS (NIGERIA)
Six months ended Year ended
31 December 30 June
2008 2007 2008
Risk discount rate % 25.00 N/A N/A
Overall investment return % 7.00
Expense inflation % 7.00
Corporate and other tax % 33.00
The economic assumptions for Nigeria were set by IFA Nigeria`s independent
external actuary (H.R. Nigeria Limited) and reviewed by the Group`s external
actuaries, QED Actuaries & Consultants (Pty) Ltd. The assumptions were set at
a conservative level which was deemed to be appropriate as this is a new
venture and, as such, is more risky than an established business.
SEGMENT INFORMATION
The Embedded Value can be split between segments as follows:
(R`000`s) Embedded
31 December 2008 ANW CoC PVIF Value
SA - Long-term insurance 207 192 (25 557) 1 320 762 1 502 397
SA - Short-term insurance (8 277) - 41 308 33 031
SA - Investment contract - - 2 038 2 038
Nigeria - Long-term 48 120 - 22 610 70 730
brokerage
Inter segment (49 161) - (37 510) (86 671)
Total 197 874 (25 557) 1 349 209 1 521 526
31 December 2007
SA - Long-term insurance 138 592 (16 681) 965 005 1 086 916
SA - Short-term insurance - - 3 210 3 210
SA - Investment contract - - 1 346 1 346
Nigeria - Long-term - - - -
brokerage
Inter segment (18 284) - (36 152) (54 436)
Total 120 308 (16 681) 933 410 1 037 037
The Value of New Business can be split between segments as follows:
(R`000`s) 31 December 31 December
2008 2007
SA - Long-term insurance 190 932 157 125
SA - Short-term insurance 15 892 2 059
SA - Investment contract 1 942 (634)
Nigeria - Long-term brokerage 13 319 -
Nigeria - Once off set up costs (12 951) -
(incurred in SA)
Total 209 133 158 550
IMPACT OF CHANGES TO PROFESSIONAL GUIDANCE
The Embedded Value of Clientele has been calculated in accordance with the
Actuarial Society of South Africa`s updated Professional Guidance Note PGN
107: Embedded Value Reporting (Version 4). The prior period results for
Clientele have not been restated as the impact of such a restatement would
have been immaterial. This has resulted in a number of changes to the
calculation methodology. In particular,
* The risk discount rate has been determined using a top-down weighted
average cost of capital approach, with the required equity return calculated
using Capital Asset Pricing Model ("CAPM") theory. This change in methodology
has resulted in a reduction in the risk margin (risk discount rate less risk
free rate) from 3.75% previously to 3.5% at 31 December 2008 (prior to the
explicit allowance made for risks in the global markets as a consequence of
the global financial crisis (an additional 1% was added to the risk discount
rate for this - see above)). The Board is of the view that the risk margin
used in calculating the risk discount rate (4.5% = 3.5% + 1% for general
market risk) is significantly more conservative than the approach used by the
rest of the market. Investors may want to consider this in conjunction with
the impact of the change in methodology and form their own view on an
appropriate allowance for the non-financial risks which have not been modelled
explicitly. The sensitivities of the Value of In-force covered business and
the Value of New Business to changes in the risk discount rate are shown
below.
* The Cost of Required Capital has been based on the greater of 1.5 times
the Ordinary Capital Adequacy Requirement and 1 times the Termination Capital
Adequacy Requirement.
SENSITIVITIES
(R`000`s) Embedded Value of New
Value Business
Risk discount rate of 10.25% 1 632 139 228 405
Risk discount rate of 11.25% 1 578 120 218 691
Main risk discount rate of 12.25% 1 521 526 209 133
Risk discount rate of 13.25% 1 463 708 199 513
Risk discount rate of 14.25% 1 406 697 190 406
EMBEDDED VALUE EARNINGS
Six months ended 31 December 2008
Embedded Value ANW CoC PVIF Embedded
earnings for the Value
period (R`000`s)
A: Embedded Value at 197 874 (25 557) 1 349 1 521 526
the end of the period 209
Embedded Value at the 208 066 (15 761) 1 009 1 202 141
beginning of the 836
period
less: Dividends and (138 315) - - (138 315)
STC accrued or paid
B: Adjusted Embedded 69 751 (15 761) 1 009 1 063 826
Value at the beginning 836
of the period
Embedded Value 128 123 (9 796) 339 373 457 700
earnings (A - B)
Impact of once-off (3 587) 1 241 (112 (114 393)
economic assumption 047)
changes
Impact of once-off (44 754) - - (44 754)
attributable capital
injection by minority
interests in Nigeria
Embedded Value 79 782 (8 555) 227 325 298 552
earnings before once-
off items
Annualised Embedded 159 564 (17 109) 454 650 597 105
Value earnings before
once-off items
As a percentage of 56.1%
Adjusted Embedded p.a.
Value at the beginning
of the period - Return
on Embedded Value
Return on Embedded 71.1%
Value including once- p.a.
off items
Six months ended 31 December 2008
Components of Embedded ANW CoC PVIF Embedded
Value earnings Value
(R`000`s)
Value of New Business (75 276) (1 415) 285 824 209 133
at point of sale
Expected return on - (1 141) 75 271 74 131
Covered Business
(unwinding of risk
discount rate)
Expected profit 148 646 - (148 -
transfer 646)
Withdrawal experience (10 748) - 7 720 (3 028)
variance
Claims and reinsurance 11 639 - - 11 639
experience variance
Sundry experience 9 702 (3 368) (2 580) 3 753
variances
Operating assumption 3 215 (2 630) 14 323 14 908
and model changes
Extraordinary non- (3 751) - - (3 751)
recurring
expenses/development
costs
Expected return on ANW 7 959 - - 7 959
SAR scheme dilution 6 908 - - 6 908
Goodwill and medium (18 937) - (3 086) (22 023)
term incentive schemes
Embedded Value 79 358 (8 555) 228 826 299 629
operating return
Investment return (1 722) - - (1 722)
variances on ANW
Attributable capital 44 754 - - 44 754
injection by minority
interest in Nigeria
Effect of foreign 2 147 - (1 501) 646
currency movements
Effect of economic 3 587 (1 241) 112 047 114 393
assumption changes
Embedded Value 128 123 (9 796) 339 373 457 700
earnings
Sponsor:
PriceWaterHouseCooper Corporate Finance (Pty) Ltd
(Registration number 1970/003711/07)
Registered office:
Clientele House, Morningview Office Park, Cnr Rivonia and Alon Roads,
Morningside, PO Box 1316, Rivonia 2128, South Africa
Transfer secretaries:
Computershare Investor Services (Pty) Ltd, 70 Marshall Street, Johannesburg
2001, South AfricaPO Box 61051, Marshalltown 2107, South Africa
Directors:
G Q Routledge BA LLB (Chairman), G J Soll CA(SA) (Managing Director)*, P J A
Cunningham CA(SA), CA(Z), A D T Enthoven BA, PhD (Political Science), I B Hume
CA(SA), ACMA*, B Frodsham BCom*, B W Reekie BSc(Hons), Fia*
Company secretary: W Van Zyl CA(SA) *Executive director
Clientele Limited
(Registration number 2007/023806/06)
Share code: CLI ISIN: ZAE000117438
Website: www.clientele.co.za
E-mail: services@clientele.co.za
Date: 02/03/2009 17:00:01 Produced by the JSE SENS Department.
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