| Tue 26 Jun 2001, 0:00 | | Capital Alliance - Audited Group Results |
|
CAPITAL ALLIANCE HOLDINGS LIMITED
Registration number: 1952/000756/06
AUDITED GROUP RESULTS
for the year ended 31 March 2001
HIGHLIGHTS
* Individual life new business policy count +71%
* Individual life recurring new business premiums +51%
* Individual life recurring premiums +22%
* Attributable earnings per share +72%
* Compound earnings growth over five years +64%
* Capital adequacy cover in life insurance business 9 times
The following are the audited consolidated results of the company and its
subsidiary companies for the year ended 31 March 2001 together with
comparative figures. Comparative figures have been regrouped and restated
where necessary in order to provide comparable disclosure.
Summarised Group Income Statements
Year ended
31 March 31 March
Notes 2001 2000 Change
R'000 R'000 %
Income before taxation 1 349 074 210 842 65,6
Taxation
Normal company taxation 2 (80 350) (42 809)
Transitional taxation 4 767 (2 923)
Income after taxation 273 491 165 110
Minority interests (16 467) (9 806)
Earnings attributable to ordinary
shareholders 257 024 155 304 65,5
Headline earnings attributable
to ordinary shareholders 3 276 228 189 523 45,7
Attributable earnings per share (cents) 184,1 107,2 71,7
Headline earnings per share (cents) 197,8 130,8 51,2
Dividend per ordinary share (cents) 49,5 45,0 10,0
Dividend cover
(headline earnings, times) 4,0 2,9
Weighted average number of shares
in issue ('000) 139 635 144 866
Total shares in issue ('000) 133 886 141 404
Summarised Group Balance Sheets
as at 31 March 31 March
2001 2000
R'000 R'000
Assets
Investment assets 3 167 963 3 113 909
Intangible assets 16 581 18 723
Computer equipment, office
furniture and other current
tangible assets 12 062 11 418
Current assets 468 056 475 525
Total assets 3 664 662 3 619 575
Equity, reserves and liabilities
Total shareholders' funds 1 101 190 1 007 436
Minority interests 24 110 7 644
Life insurance funds 1 818 523 2 165 605
Deferred taxation (327) 24 186
Non-current liabilities 221 990 64 490
Current liabilities 499 176 350 214
Total equity, reserves and liabilities 3 664 662 3 619 575
Life Insurance Operations
SALIENT FEATURES
Year ended
31 March 31 March
Notes 2001 2000 Change
R'000 R'000 %
Individual life premiums 464 922 323 187 43,9
Net recurring premiums 338 511 276 791
Single premiums 126 411 46 396
Credit life and group funeral
premiums 4 155 294 339 139
Refund of premiums on termination
of funeral reinsurance contract 4 (80 000) -
Employee benefits premiums 89 156 109 962 (18,9)
Net recurring premiums 74 602 86 322
Single premiums 14 554 23 640
Investment income attributable
to shareholders 63 284 86 892 (27,2)
to policyholders 126 362 98 041 28,9
(Loss)/gain on revaluation and
disposal of investments attributable
to shareholders (23 430) 75 004 (131,2)
to policyholders (66 837) 203 250 (132,9)
Policyholders' benefits net of
reassurance 298 300 282 223 5,7
Individual life 153 786 142 918
Employee benefits 63 088 79 114
Employee benefits - scheme
terminations 15 004 58 912
Credit life 61 484 280
Funeral 4 938 999
Credit life experience rebates 4 263 137 -
Commissions
recurring 5 58 480 84 615 (30,9)
exceptional 1 21 999 -
Administration expenses
recurring 79 333 69 472 14,2
exceptional 1 40 499 48 884
Taxation 51 782 37 094 39,6
Transfer (from)/to life funds (347 082) 572 996
in respect of current year operations (189 107) 572 996
release of retained surplus (157 975) -
Notes
1. Included in income before taxation are the following:
A release, in terms of AC130, of surplus retained in the life fund arising
from earnings in prior years, expenses incurred during the year in respect
of the discontinued SDS operation, and a provision in respect of Brait
shares held in terms of an option scheme established for Brait Merchant Bank
employees on the unbundling of Brait in 1997. The provision is based on the
Brait share price of R11,45 at 31 March 2001. There was a minimal provision
during the previous year, and hence the prior figures have not been re-
stated.
80 079 (48 884)
Surplus transferred from life fund 157 975 -
Exceptional items in respect of:
discontinued SDS operation (46 505) (29 350)
Brait share provision (15 398) -
warranty raised on disposal
of Nova Life (15 993) -
Standard General reorganisation - (19 534)
2. Normal tax provision includes STC, and indirect taxes (including VAT and
levies) of R27,8 million (R16,4 million in the prior year).
3. Headline earnings are calculated as the sum of attributable earnings and
non-commission related exceptional items after adjustment for tax, and
amortisation of intangible items.
276 228 189 523
Attributable earnings 257 024 155 304
Adjustment in respect of
exceptional items after tax 17 154 34 219
Adjustment for amortisation
of intangible items 2 050 -
4. Credit life and group funeral premiums include premiums in respect of
credit life and group funeral reinsurance agreements between Stangen (a
subsidiary of African Bank Investments Limited ("ABIL")), and Capital
Alliance Life. The premiums paid in respect of these agreements during the
year ended 31 March 2000 were R325 million. The premiums in respect of the
year ended 31 March 2001 were R140 million, and were lower due to the
termination of the funeral reinsurance agreement (which resulted in the
payment of R80 million to Stangen), and a change in the terms of the credit
life reinsurance agreement. Credit life experience rebates of R263 million
were paid to Stangen due to better than expected experience under the credit
life reinsurance contract, which contributed materially to the reduction in
the life fund at 31 March 2001.
5. The reduction in commission expense relates to the regulatory changes in
the earning of commission over a period of 24 months (previously 12 months),
and to a change in the manner in which Capital Alliance Life pays commission
on new business.
Group Embedded Value
as at
31 March 31 March
2001 2000 Change
R'000 R'000 %
Shareholders' net assets - total 1 101 190 1 007 436
- plus other
group assets 138 521 258 975
Net value of in force life business 203 022 176 850 14,8
Gross value of in force life business 208 281 199 551
Less: opportunity cost of capital
adequacy requirements (5 259) (22 701)
Embedded value 1 442 733 1 443 261
Net asset value per share (Rand) 9,26 8,96 3,4
Embedded value of in force business per
share (Rand) 1,52 1,25 21,2
Embedded value per share (Rand) 10,78 10,21 5,6
Capital adequacy requirement 122 706 115 155
Capital adequacy cover (times) 9 10
Value of New Business
as at 31 March 31 March
2001 2000
R'000 R'000
Net value of continuing
new business operations 20 352 517
Gross value of continuing
new business operations 22 345 5 257
Less: opportunity cost of
capital adequacy requirements (1 993) (4 740)
Net value of discontinued SDS operation (31 488) -
ANALYSIS OF CHANGE IN EMBEDDED VALUE
Change in embedded value
before dividends 65 742
Roll forward 146 972
Investment return on free assets 40 471
Other group profits 72 015
Expected return on life business
in force 34 486
Value of continuing
new business operations 21 872
Gross value of new business 22 345
Cost of Capital Adequacy Requirement (1 993)
Unwinding of risk discount rate 1 520
Non-recurring new business losses (37 741)
Value of SDS new business, after cost
of capital adequacy requirement (31 488)
Unwinding of risk discount rate (2 352)
Non-recurring expenses (3 901)
Changes in assumptions and methodology 60 777
Impact of actual investment performance (24 558)
Changes to share capital (96 999)
Minority earnings (16 467)
Balance of experience profits 11 886
Summarised Group Cash Flow Statements
Year ended
31 March 31 March
2001 2000
R'000 R'000
Cash flow from operating activities 53 403 411 288
Cash flow from investing activities (434 604) (179 601)
Cash flow from financing activities 40 265 42 742
Net movement in cash and
cash equivalents (340 936) 274 429
Cash and cash equivalents at
beginning of year 941 461 667 032
Cash and cash equivalents at
end of year 600 525 941 461
Summarised Statements of Changes in Equity
Year ended
31 March 31 March
2001 2000
R'000 R'000
Share capital and premium 520 308 601 439
Balance at beginning of year 601 439 620 722
Arising from share issue 36 058 37 849
Share issue expenses (90) (93)
Cancellation of share capital (117 099) -
Goodwill in respect of acquisition
of subsidiaries - (57 039)
Share election reserve 39 764 55 632
Balance at beginning of year 55 632 43 683
Prior year share election
reserve reversed (55 632) (43 683)
Transfer to share election reserve 39 764 55 632
Accumulated profits 541 118 350 365
Balance at beginning of year 350 365 258 693
Accumulated profits attributable
to shareholders 257 024 155 304
Dividends (66 271) (63 632)
1 101 190 1 007 436
Summarised Group Commentary
Operating results for the year
The directors are pleased to report satisfactory operating results despite
the difficult trading and investment conditions experienced, features of
which were:
* Continued pressure on customer's disposable income
* Substantial uncertainty resulting from Government's decision to halt
PERSAL insurance and loan deductions, which in turn put pressure on the
commercial sector
* Low growth in the formal sector economy, with continued retrenchments and
restructuring in certain sectors
* Disappointing investment markets, characterised by a high degree of
volatility
Capital Alliance Life/Nova Life
Attributable profit from the group's life insurance businesses, Capital
Alliance Life and Nova Life, increased by 51% on prior year to R262 million.
Although Capital Alliance Life managed to increase the new business policy
count by 71%, and recurring new business premiums written by 51%, this was
as a result of better than expected performance in the bancassurance
distribution channel, which has also achieved a satisfactory level of
persistency. The traditional distribution channels (Commercial division,
Broker division and Southern Distribution Services ("SDS")) performed poorly
in terms of production and persistency, particularly the SDS channel. The
Commercial and Broker divisions have been through a difficult restructuring
exercise over the past two years, and initial indications are that the
benefits of this process are now being realised, particularly with respect
to recent improvements in consultant productivity, production and
persistency. Unfortunately, a comprehensive viability review of SDS carried
out subsequent to the year-end concluded that SDS would not be viable within
an acceptable timeframe, and a decision was taken to close this channel.
Given the group's focus on operating in the commercial sector, the impact of
the Government's announcement to stop the deduction of premiums from PERSAL
in June 2001 was of a secondary nature. The decision had some impact on the
Broker and SDS channels. The group does however have an in-force book of
PERSAL business, of which 8 000 clients are in the "distressed" category,
and plans to retain this book in line with recent Government guidelines are
at an advanced stage.
Individual Life single premium business grew strongly, primarily as a result
of a highly successful product underwritten by Capital Alliance Life and
distributed by Investec IMS.
During the year the group benefits division continued with its re-rating of
unprofitable schemes acquired as a consequence of the Standard General
transaction in 1999. This, together with a change in reinsurance
arrangements, resulted in a decline in net recurring premium income.
Although premiums in respect of the Stangen (a subsidiary of African Bank
Investment Limited ("ABIL")) credit life business were lower than the prior
year, strong growth in non-Stangen related credit life business was
recorded. The premium volumes in group funeral, a new channel, were lower
than planned, and remedial action has been taken to improve the level of
production. The group's new group risk and retirement fund administration
operation, GroupSolutions@CapitalAlliance, continues to show good progress.
Capital Alliance Life continued its focus on managing unit costs, and
managed to show a reduction in both the average new business cost per policy
and the average renewal cost per policy. This achievement had a positive
impact on the group's embedded value, and all efforts will be made to
achieve further reductions in unit costs in future.
Investment conditions over the year were extremely difficult, and
characterised by a high degree of volatility, particularly in the last
quarter of the year. Investment performance was disappointing, and below
benchmark for the year. The independent asset managers have taken corrective
action in order to return performance to more acceptable levels, and it is
the company's ambition to show returns to policyholders, on a comparative
basis, in the upper quartile of managed funds for one, three and five years,
in line with the past investment performance record. Results for the first
quarter of the 2002 financial year are encouraging.
Capital Alliance Finance
This subsidiary recorded an excellent performance, showing growth of 54% in
attributable income, despite a difficult environment for micro-lending
activities after the Government announcement to stop deductions from PERSAL.
The group's partner in the venture, Brait Merchant Bank, continue to provide
wholesale funding to the venture, as well as management expertise. The
administration activities of this subsidiary were integrated onto the
Capital Alliance Life IT platform at the beginning of the year, in line with
the philosophy of running a single operations engine across the group's
activities.
Capital Alliance Health
Capital Alliance Health delivered disappointing results. Although the
occupational health care activities were profitable, the expenses in the
establishment of the medical aid activities gave rise to a small operating
loss. After a thorough review, the Board has concluded that the initiative
has significant potential but will take time and require additional skills
to deliver the expected returns to the group. These additional skills will
be introduced into the group's health care activities by means of a new
shareholding structure in Capital Alliance Health, where the group's
participation will reduce from 100% to 26%. In keeping with this the company
has also entered into a venture with a Black Economic Empowerment
occupational health care partner. It is expected that the negotiations
regarding further partner initiatives, aimed at strengthening the company's
ability to deliver on medical aid activities, will be concluded shortly.
Capital Alliance Holdings
Net investment income of the holding company, pre-tax, was R17,4 million.
Capital Alliance Holdings undertook a share repurchase programme during the
year, under which a total of 11,1 million shares were repurchased at a cost
of R117 million. These shares were subsequently cancelled, leading to a
reduction in the number of shares in issue.
Exceptional items
The group has released surplus of R158 million from the life fund, in line
with the requirements of AC130, as an exceptional item. The surplus arose in
prior years, and represents the difference between the actuarial profit
earned and the recognised profit in those years. The surplus was disclosed
in prior years and incorporated in the embedded value at 31 March 2000. The
costs incurred in respect of the discontinued SDS operation, the provision
in respect of the Brait share scheme and a warranty raised on the disposal
of Nova Life to the Nova Group, have been recorded as exceptional charges.
Towards the end of the financial year it became apparent that there were
profitability problems in the SDS distribution channel. Initial indications
had been that Phase 1 of this operation (the joint venture with Momentum
Life) was achieving reasonable production and persistency at an acceptable
cost. After the implementation of Phase 2 (when Capital Alliance took on
full operational and administrative control), a number of difficulties,
irregularities and problems became apparent. These called the viability of
the channel into question. After a thorough review, the Board took the
difficult decision of closing the channel, based on the view that the
channel would be unable to provide the quantity and quality of business
required to be financially viable within an acceptable timeframe.
The Brait shares are held by Capital Alliance Holdings to cover an option
scheme for Brait employees created at the time of the Brait unbundling from
Capital Alliance Holdings. The scheme closes out in 2005. The provision is
based on the Brait share price of R11,45 at 31 March 2001, however the Brait
share price is trading at a level of R14,60 at the date of this report.
Prospects
The group intends to continue building on the solid base created by the
success of the alternative distribution channels over the past year, and the
re-engineering of the Commercial and Broker operations. Whilst accepting
that traditional selling methods are appropriate in the target market, a
number of valuable lessons have been learnt as a result of the SDS
experience, and the group intends to strongly develop the alternative
channels, along with new products that will offer a better value proposition
to clients.
Management is committed to ongoing development of the financial services
business through:
* strong focus on the lower income market;
* a comprehensive product range, focused on the specific needs of the target
market, which provides real value to clients;
* commitment to client service excellence.
Capitalisation award or cash dividend
The directors have proposed to issue capitalisation shares to ordinary
shareholders registered as such on Friday, 13 July 2001 ("the last date to
register") provided that such shareholders may elect instead to receive a
cash dividend of 49,5 cents per share, declared in respect of the year ended
31 March 2001. The award of capitalisation shares to ordinary shareholders
registered at the close of business on the last date to register will be
determined by the ratio that 49,5 cents multiplied by 1,05 bears to the
weighted average trading price of Capital Alliance ordinary shares on the
JSE Securities Exchange South Africa within 30 calendar days ending at the
close of business on Wednesday, 8 August 2001.
Documentation dealing with the capitalisation share issue and the cash
alternative will be posted to ordinary shareholders on or about 20 July
2001.
The directors have proposed a dividend at a lower level than would otherwise
have been declared, in anticipation of the successful conclusion of the
negotiations relating to the Fedlife transaction, with a resultant
requirement for a higher level of capital.
Further cautionary announcement - Fedsure Life transaction
Shareholders were advised by means of a cautionary announcement issued on 16
March 2001, and renewed on 30 April 2001, that the group had entered into
discussions with Investec Group Limited to acquire the individual life
policy book underwritten by Fedsure Life Limited and Safrican (49,5% held by
Fedsure Investments Limited). The negotiations on the individual life policy
book have reached an advanced stage, and the group is hopeful of a positive
conclusion before the end of July. Accordingly, shareholders are advised to
exercise caution when dealing in their shares. Further announcements will be
published in due course.
Shareholders are advised that the dematerialisation date has been moved from
the 6th August 2001 to a later date, which date will be advised in due
course.
For and on behalf of the board of directors
L M Nestadt (Chairman)
I M Kirk (Chief Executive Officer)
26 June 2001
Directors:
L M Nestadt (Chairman), I M Kirk (Chief Executive Officer) (Irish), B
Gildenhuys, H R Levin, T A Mokhobo
Company Secretary:
W T Green
Registered office:
21 West Street Houghton 2198 PO Box 260362 Excom 2023
Transfer secretaries:
Mercantile Registrars Limited 11 Diagonal Street
Johannesburg 2001 PO Box 1053 Johannesburg 2000
Registration number: 1952/000756/06
