| Thu 31 May 2001, 0:00 | | Sage Group Limited - Preliminary Report |
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SAGE GROUP LIMITED
Preliminary Report 2001
Salient features
- Poor investment markets impact earnings
- Results improve in second half
- Dividends maintained
- Sustained new business growth in core focus areas
- International activities enhance single premium business
- Embedded values increase
- Substantial improvement in Group embedded value profit
- Major joint SA/USA new product initiatives
Overview
The year under review has been characterised by an increasingly challenging
economic environment and by poor performance in equity markets during the
twelve months ended 31 March 2001. In this difficult climate Group earnings
have declined, although a meaningful improvement in results was achieved
during the second half of the year. Financial strength and stability is
reflected in improved embedded values.
The Group's South African business operations have continued to make sound
progress. Internationally, significant strides have been made in the
marketing of innovative offshore investment products, while domestic sales
progress in the United States was temporarily hampered by the sharp reversal
in the equity markets.
Group results
Accounting policies and presentation
As stated in the previous year's annual report and in the interim report for
the review period, the Directors are of the opinion that the new accounting
standard AC132: Consolidated Financial Statements and Accounting for
Investments in Subsidiaries which, inter alia, requires subsidiaries to be
consolidated at net asset values, does not adequately take into account the
issues that apply specifically to a life assurance group and in particular
to one whose capital and free reserves are substantially dedicated to
investments in operating subsidiaries. Consequently, while submitting
financial statements in full compliance with South African Statements of
Generally Accepted Accounting Practice ("GAAP") the Group has prepared its
primary financial statements on the Financial Soundness basis which equates
exactly with the statutorily required Financial Soundness actuarial
valuations applicable to the life assurance industry and adopted by all life
companies as part of their published statements of embedded value. In the
opinion of the directors, this primary basis of accounting reflects the
accurate and realistic value of the Group and its earnings for the year. It
is also consistent with the Group's past financial statements.
Financial results
On the consistent primary financial soundness accounting basis adopted by
the Group as described above, Group headline earnings for the year amounted
to R232,6 million compared to R362,7 million in the previous year, a
reduction of 35,9%. Although disappointing for the full year, the second
half decline of 26,8% represents an improvement over the 50,5% decline at
the interim stage. Headline earnings per share amounted to 164,3 cents per
share (2000: 257,7 cents), reflecting, predominantly, the substantially
lower investment return for the year to 31 March 2001.
Consistent with the declaration at the interim stage and in recognition of a
record of long-term profits, an unchanged final dividend of 81 cents per
share has been declared, bringing the total for the year to 126 cents per
share. The sustainability of a high dividend payment rate will be dependent
on achieving a return to more satisfactory overall profitability. The annual
report will deal more fully with the anticipated prospects for the year and
will designate the areas of operation where satisfactory performance will be
required in order to sustain at least current dividend payments.
On the new AC132 GAAP basis, headline earnings amount to R37,5 million
(2000: R164,1 million) equivalent to 26,5 cents per share (2000: 118,8
cents).
Group structure
Further steps have been taken to substantially simplify the Group structure
and to co-ordinate its operating activities.
The most important features of the revised structure are:
- In anticipation of the unbundling of Universa (Pty) Limited, SSI
Securities (Pty) Limited has been eliminated as the intermediate holding
company of the Group's strategic investment in ABSA Group Limited which is
now directly held by Sage Life Limited.
- Sage Life Holdings Limited, the intermediate holding company of the
Group's operating subsidiaries, is being deregistered.
- The Group's remaining property interests previously held by Sage Property
Holdings Limited have been repositioned directly within Sage Life.
All relevant transactions were carried out at Group net book value, with
effect from 1 January 2001.
Embedded value statements
Sage Life Limited
The actuarial and embedded values reflect the inherent strength and
stability of Sage Life Limited despite poor investment markets. This is
reflected in the 6,3% increase in embedded value to R2,2 billion, and in
particular, the increase of 30,9% in the embedded value of new business
written during the year to R63,0 million. In addition, the excess of assets
over liabilities increased to R1,6 billion and the capital adequacy multiple
strengthened to 3,9. The capital adequacy requirement which provides a
buffer against fluctuations in the underlying valuation assumptions,
amounted to R405,4 million (2000: R427,7 million).
Sage Group Limited
The embedded value of the Group increased by 10,4% to R2,1 billion at 31
March 2001 equivalent to 1 356 cents per share (31 March 2000: 1 265 cents).
The embedded value reflects the current value of the Group's net assets on
its primary basis of accounting and the present value of future profits from
business already written by the life assurance subsidiaries (net of cost of
required statutory capital).
The Group embedded value profit for the year was R323,2 million. The
previous year reflected a loss of R15,8 million after goodwill amounting to
R507,7 million had been written off.
New business
The new business results for the past year show notable achievements in the
core focus areas of individual life and unit trust divisions despite
challenging and intensely competitive conditions.
Total life new business of the Group increased by 33,2% to R1,3 billion.
Individual new business rose by 45,8% to R1,2 billion, with recurring
premiums, which increased by 28,0%, maintaining their growth momentum.
Individual single premiums improved by 53,6% with the benefit of sales in
the first production period in Sage Life of America and a highly successful
launch of the first in a series of offshore investment products drawing on
the diverse resources of the Sage and ABSA Groups in South Africa, Europe,
the United States and Bermuda.
Sage Unit Trusts also achieved significantly increased sales particularly to
institutions, including Group companies, and lower repurchases resulting in
a net inflow of R1,2 billion for the year.
Key factors in new business development in these areas include a significant
improvement in investment performance achieved for clients through the
Group's multi-manager approach. The outstanding example is the performance
of the Group's life and unit trust global equity portfolios reflected in the
exceptional 52% return achieved by Sage Global Fund which earned it the
Standard & Poor's award as the top performing unit trust in South Africa for
the year. Other Sage unit trusts as well as life and employee benefit
portfolios, have moved into the top quartile of their relevant sectors.
Other factors are the launch of unique new products for the South African
market developed jointly by the South African and international operations
and improved support from the distribution channels and strategic alliances
including significant development of reciprocal business initiatives with
the ABSA Group Limited.
The employee benefits division of Sage Life produced disappointing new
business results, reflecting the highly competitive nature of its market
place, however, current investment results should enhance new business
expansion.
International activities
Operations
The Group's international businesses, namely Sage Life Assurance of America
Inc and Sage Life of Bermuda Limited continue to make significant progress
in fully developing their operating infrastructures, product ranges and US
and international distribution networks. The process of licensing sales
representatives and financial planners in the USA remains slower than
originally anticipated due to state licensing backlogs, but is now gathering
momentum.
Distribution contracts concluded with a number of major United States
financial institutions will be progressively implemented during the current
year and will contribute to further reinforcing the integration of marketing
initiatives with the South African company in the offshore market. Progress
during the past year also included a number of new senior executive
appointments to round off the US management team and the launch of several
additional investment funds.
Product sales continue to expand and totalled R398 million for the full year
against R120 million at the interim stage. This is below the original
projections and reflects a sharp downturn in variable annuity sales,
industry wide, in the USA in the wake of the reversal in equity markets
through the first quarter of the year as economic growth stagnated and
impacted corporate results. However, present sales levels support the budget
for the current year which is substantially higher than the original
projections for the year under review.
The growth potential of our USA and offshore businesses is exceptionally
attractive and their development is reflected in a material contribution to
the Group's results based on the adjusted embedded value
Finance
The Group's international activities have been financed in part by the 4,5%
convertible redeemable preference share capital raised in 1997. As a result
of adverse exchange rate and share price movements since the date of issue,
it is anticipated that the entire issue will be redeemed on 30 June 2001 for
approximately R440 million. In its stead, a US dollar-denominated bond issue
with unique characteristics is anticipated to be placed following this
announcement of results. The impact of replacing capital with a debt
instrument will be to reduce the current embedded value of the Group by the
redemption amount of the convertible preference shares.
Audited financial soundness results
(Primary basis of accounting)
Group income statement
Year ended 31 March
% 2001 2000
change R000 R000
South African life assurance
operations
Net premiums received 1 417 459 1 409 692
- recurring 841 845 739 918
- single 575 614 669 774
Investment return 450 260 883 770
- investment income 128 671 234 132
- net realised and unrealised capital gains 321 589 649 638
1 867 719 2 293 462
Outgo (1 458 197) (2 246 013)
Policyholder benefits (1 027 389) (876 066)
Net repayments of discontinued third party
segregated fund - (930 568)
Commissions, expenses and tax (430 808) (439 379)
Operations funded by South African free assets
- USA insurance operations: increase in
embedded value 150 802 128 959
- unit trust operations: operating income
after taxation 25 213 30 409
non-operating investment income
and capital gains 109 385 21 796
(Increase)/decrease in policyholder reserves (429 121) 162 540
Financial soundness headline earnings
of Sage Life Limited (32,0) 265 801 391 153
Financing and other group costs (33 167) (28 429)
232 634 362 724
Exceptional items (note 1) (6 756) -
Financial soundness attributable earnings 225 878 362 724
Adjustment for exceptional items 6 756 -
Financial soundness headline earnings (35,9) 232 634 362 724
Financial soundness headline earnings
per share (cents) fully diluted (note 3) 164,3 257,7
Attributable earnings per share
(cents) fully diluted (note 3) 159,5 257,7
Dividends
- per ordinary share (cents) 126,0 126,0
Dividend cover 1,30 2,05
Ordinary shares
- in issue (000) 144 758 140 274
- weighted average number in issue (000) 141 618 138 139
Compulsorily convertible debentures
- in issue (000) 2 371 2 332
Cumulative convertible redeemable
preference shares (note 2)
- in issue (000) 4,5 4,5
- equivalent number of ordinary
shares on conversion (000) 7 200 7 200
Group balance sheet
31 March 31 March
2001 2000
R000 R000
Assets
Tangible fixed and other non-current assets 65 898 254 445
Intangible assets 57 310 51 589
Investments of life assurance subsidiaries 7 412 352 6 569 604
Current assets 363 344 438 407
7 898 904 7 314 045
Shareholders' funds and liabilities
Total shareholders' interest 1 493 585 1 319 562
- shareholders' interest 1 053 419 959 342
- 2001 redeemable preference shares 440 166 360 220
Redeemable preference shares issued
by subsidiaries 108 500 108 500
Long-term assurance funds 5 950 585 5 521 465
Current liabilities 346 234 364 518
- interest bearing 11 244 11 202
- non-interest bearing 334 990 353 316
7 898 904 7 314 045
Notes
1 Exceptional items
- Donation to the Sage Foundation (6 715) -
- Net deficit on disposal of investments (41) -
(6 756) -
2 Cumulative convertible redeemable preference shares
Sage Group Limited issued 4 500 4,5% cumulative convertible redeemable
preference shares at US$10 000 each on 30 June 1997. The preference shares
are convertible into ordinary shares and have been classified since issue in
1997 as equity in the company's financial statements but, as a result of
adverse exchange rate and share price movements, it is probable that the
shares will be redeemed on 30 June 2001. In their stead, a US$-denominated
bond issue is anticipated to be placed following this announcement of
results.
3 The calculations of earnings per share are based on headline earnings and
earnings attributable to ordinary shareholders respectively and the weighted
average number of shares in issue during the period incorporating
adjustments for the convertible debentures.
Statement of changes in shareholders' funds
Year ended 31 March
2001 2000
R000 R000
Balance at beginning of year 1 319 562 1 344 635
Proceeds from shares/debentures issued 2 476 7 971
Revaluation of investments 73 541 (10 702)
Revaluation and other reserves
transferred from life fund - 227 351
Goodwill written off - (507 728)
Attributable earnings 225 878 362 724
Dividends paid (127 872) (104 689)
Balance at end of year 1 493 585 1 319 562
Summarised Group cash flow statement
Year ended 31 March
2001 2000
R000 R000
Cash flows from operating activities 160 649 335 011
Cash flows of life assurance subsidiaries (413 628) (561 767)
Cash flows from investing activities 241 580 7 512
Cash flows from financing activities 2 548 (88 972)
Net decrease in cash equivalents (8 851) (308 216)
Cash and cash equivalents at beginning
of year 173 858 482 074
Cash and cash equivalents at end of year 165 007 173 858
Salient financial soundness actuarial information
31 March 31 March
2001 2000
R000 R000
Financial soundness valuation
- excess of assets over liabilities 1 565 895 1 462 094
- capital adequacy requirement 405 411 427 656
- capital adequacy multiple (times) 3,9 3,4
- shareholders' surplus 265 801 391 153
Principal assumptions % %
- pre-tax investment returns
equities 14,50 16,25
property 13,50 15,25
fixed interest securities 12,50 14,25
cash 10,50 12,25
- expense inflation 9,50 9,50
- central rate of discount 12,50 14,25
Embedded value statements
Sage Group Limited
31 March 31 March
% 2001 2000
change R000 R000
Embedded value
Shareholders' funds 1 493 585 1 319 562
Present value of future
profits of Sage
Life (net of cost of statutory
capital) 599 149 575 388
Embedded value 10,4 2 092 734 1 894 950
Risk discount rate (%) 14,50 16,25
Embedded value per share
Shares in issue
- ordinary shares 144 758 140 274
2001 preference shares
(assuming conversion) 7 200 7 200
- compulsorily convertible debentures 2 371 2 332
154 329 149 806
Group embedded value per
share (cents) 7,2 1 356 1 265
Embedded value profit
Embedded value - at end of year 2 092 734 1 894 950
Embedded value - at beginning of year 1 894 950 2 007 509
197 784 (112 559)
Dividends paid 127 872 104 689
Increase in capital (2 476) (7 971)
Embedded value profit/(loss) 323 180 (15 841)
Sage Life Limited
31 March 31 March
% 2001 2000
change R000 R000
Embedded value
Shareholders' funds 1 565 895 1 462 094
Present value of future profits
(net of cost of statutory capital) 599 149 575 388
Embedded value 6,3 2 165 044 2 037 482
Risk discount rate (%) 14,50 16,25
Embedded value of new business 30,9 63 034 48 160
Analysis of embedded value movement
Embedded value beginning of year 2 037 482 1 508 490
Investment return on shareholders' funds 285 400 181 164
Return on in-force life business 60 485 281 692
Embedded value of future profits on in-force (119 357) (207 349)
change in risk discount rate 44 685 58 279
experience (129 501) (127 978)
operating assumption changes (34 541) (137 650)
Value of new business 63 034 48 160
future profits 143 119 119 863
strain (80 085) (71 703)
Dividend (162 000) (162 000)
Increase in capital - 387 325
Embedded value end of year 2 165 044 2 037 482
Embedded value profit 289 562 303 667
New business results
Year ended 31 March
% 2001 2000
change R000 R000
Life assurance premiums (gross)
- individual 45,8 1 177 475 807 670
annualised recurring -
South African 28,0 314 937 245 970
- single 53,6 862 538 561 700
- South African 464 950 561 700
International (including
R251,8 million
underwritten by Sage Life of
America & Sage Bermuda Inc) 397 588 -
employee benefits -
South African (18,6) 159 318 195 609
- annualised recurring (38,8) 54 169 88 574
- single (1,8) 105 149 107 035
33,2 1 336 793 1 003 279
South African unit trust sales 40,5 3 736 588 2 659 250
Audited results in terms of SA Statements of Generally Accepted Accounting
Practice (GAAP)
Group income statement (GAAP)
Year ended 31 March
% 2001 2000
change R000 R000
Profit before taxation and
exceptional items (65,5) 102 874 297 828
Exceptional items (8 325) (1 688)
Profit before taxation 94 549 296 140
Taxation 50 869 121 434
Profit after taxation (75,0) 43 680 174 706
Foreign preference dividends 14 509 12 341
Earnings attributable to
ordinary shareholders 29 171 162 365
Adjustment for exceptional items 8 325 1 688
Headline earnings (77,1) 37 496 164 053
Headline earnings per share
fully diluted (cents) 26,5 118,8
Attributable earnings per share
fully diluted (cents) 20,6 117,5
Reconciliation between GAAP and
Financial Soundness Results
GAAP headline earnings 37 496 164 053
Add/(deduct) adjustments in respect of
consolidation of life insurance company's
subsidiaries 195 138 198 671
reversal of investment surpluses on
free assets 153 655 181 925
operating results of subsidiaries net
of foreign exchange differences 37 954 (9 254)
- dividends from subsidiaries 3 529 26 000
Financial soundness headline earnings 232 634 362 724
Group balance sheet (GAAP)
31 March 31 March
2001 2000
R000 R000
Assets
Tangible fixed and other non-current assets 106 550 314 992
Intangible assets 61 563 51 589
Investments of life assurance subsidiaries 6 934 848 5 839 943
Current assets 606 886 687 599
Goodwill 18 572 20 141
7 728 419 6 914 264
Shareholders' funds and liabilities
Total shareholders' interest 904 368 909 291
- shareholders' interest 464 202 549 072
- 2001 redeemable preference shares 440 166 360 219
Redeemable preference shares issued
by subsidiaries 118 500 118 500
Long-term assurance funds 6 327 787 5 521 465
Current liabilities 377 764 365 008
- interest bearing 11 244 11 202
- non-interest bearing 366 520 353 806
7 728 419 6 914 264
The reconciliation to total shareholders'
interest as reflected in the financial
soundness balance sheet is as follows:
Total shareholders' interest per
GAAP balance sheet 904 368 909 291
Add/(deduct) 589 217 410 271
- Adjustment to distributable reserves
- current period 196 707 200 359
- prior periods 498 284 297 925
- minority interest (105 774) (88 013)
Total shareholders' interest per financial
soundness balance sheet 1 493 585 1 319 562
Statement of changes in shareholders' funds (GAAP)
Year ended 31 March
2001 2000
R000 R000
Balance at beginning of year 909 291 1 124 085
Increase in minority interest 17 761 10 638
Proceeds from shares/debentures issued 2 476 7 971
Revaluation of investments 73 541 (10 702)
Revaluation and other reserves transferred
from life fund - 227 351
Goodwill written off - (507 728)
Attributable earnings 29 171 162 365
Dividends paid (127 872) (104 689)
Balance at end of year 904 368 909 291
Summarised Group cash flow statement (GAAP)
Year ended 31 March
2001 2000
R000 R000
Cash flows from operating activities (75 189) 135 390
Cash flows of life assurance subsidiaries (288 583) (159 700)
Cash flows from investing activities 256 595 (42 620)
Cash flows from financing activities 20 309 (1 348)
Net decrease in cash equivalents (86 868) (68 278)
Cash and cash equivalents at beginning of year 419 777 488 055
Cash and cash equivalents at end of year 332 909 419 777
Capitalisation share award with cash dividend election
The directors have resolved to award capitalisation shares to ordinary
shareholders registered in the books of the Company on 22 June 2001. The
terms of the capitalisation share award will be announced on or about 18
June 2001.
Shareholders will be entitled to decline the capitalisation award in respect
of the whole or any part of their shareholding and instead elect to receive
a cash dividend of 81 cents per share for the six months ended 31 March 2001
making a total of 126 cents for the year (2000: 126 cents).
In respect of those shareholders electing to receive the cash dividend,
payment will be made on or about 27 July 2001.
By order of the boardCS CANT Secretary 30 May 2001
Directors HL Shill (Chairman) MP Adonisi Dr DC Cronj JP Davies BJ du
Plessis DM Falck G Griffin JE Henderson Dr BM Ilsley L Kaplan RI
Marsden
Dr DF Mostert B Nackan JH Postmus CD Stein CL van Wyk Adv T van Wyk
WD Winckler
Registered office 11th Floor Sage Centre 10 Fraser Street Johannesburg
2001 PO Box 7755 Johannesburg 2000 Transfer secretaries Fraser Street
Registrars (Pty) Limited Ground Floor Sage Centre 10 Fraser Street
Johannesburg 2001
PO Box 61178 Marshalltown 2107 Sage Group Limited Reg no 1970/01541/06
Website www.sage.co.za
