| Mon 27 Aug 2001, 0:00 | | The Reinsurance Of Certain Of The Fedlife By Capit |
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CAPITAL ALLIANCE HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1952/000756/06)
Share code:CPT ISIN code: ZAE000011904
("CAH" or "the company")
Announcement relating to:
* THE REINSURANCE OF CERTAIN OF THE FEDSURE LIFE ASSURANCE LIMITED
("FEDLIFE") INDIVIDUAL LIFE BUSINESS BY CAPITAL ALLIANCE LIFE LIMITED
("CAL"), A WHOLLY-OWNED SUBSIDIARY OF CAPITAL ALLIANCE ("CAH"); AND
* A RENOUNCEABLE RIGHTS OFFER AND THE TERMS THERETO
1 INTRODUCTION
Investec Bank Limited is authorised to announce that agreement has been
reached between CAL and Fedlife in terms of which CAL has reinsured all the
individual life policies issued by Fedlife (other than certain specified
contracts agreed between Fedlife and CAL) ("the individual life book") ("the
reinsurance agreement"). In terms of the reinsurance agreement, CAL will
assume the liabilities in respect of the individual life book. In terms of
an administration agreement entered into between CAL and Fedlife, CAL will
assume responsibility for the administration of the individual life book.
The reinsurance premium arising out of the reinsurance agreement will be
settled in specie by Fedlife transferring approximately R11,2 billion of
assets to CAL. In order to support CAL's resulting statutory capital
adequacy requirements, CAH will raise approximately R717,5 million of new
capital, of which R517,5 million will be raised by way of a renounceable
rights offer ("the rights offer") and R200 million by the issue of non-
participating cumulative redeemable preference shares ("the preference
shares"). Investec Group Limited ("Investec") will underwrite the rights
offer and subscribe for the preference shares.
2 HISTORY AND RATIONALE
CAH was listed in the Insurance - "Life Assurance" sector of the JSE
Securities Exchange South Africa ("JSE") lists in 1995. Since that time, CAL
has established strong credentials as a highly effective integrator of
policy books and as one of the lowest cost insurance administrators in South
Africa.
CAL focuses its own distribution activities primarily on servicing the life
assurance and financial services requirements of the lower income market.
However, based on its successful track record in administering other life
insurance policy books, the company has developed a core competence around
the administration of policy books, regardless of the profile of the
customer base. CAL also successfully supplies insurance products and
administration services to third parties who distribute to the middle and
upper income markets. CAL currently services approximately 475 000
individual life clients, of which approximately 50% represent a similar
profile of client to the Fedlife client base.
CAH management believes that, given the difficult new business environment
in the local life insurance sector at present, conditions are conducive to
enhancing Embedded Value ("EV") through the successful implementation of the
internationally proven business model of integrating existing policy books
as opposed to focusing only on new business EV. The reinsurance agreement
with Fedlife is therefore expected to achieve the following benefits for
CAL:
- enhance EV through the implementation of tighter expense management and
more disciplined investment management;
- bulk up CAL's administration operations to achieve economies of scale and
derive further EV gains on CAL's existing and future new business;
- increase the component of EV represented by the future profits on current
in force business from 15% to approximately 50%;
- position CAL as a more significant player in the life assurance sector
with the most focused exposure to life insurance business in the sector; and
- deploy CAL's capital base appropriately to generate an improved operating
return on capital.
A direct consequence of Investec's commitment to underwrite the rights offer
by CAH, coupled with the irrevocable undertakings which have been received
from CAH shareholders holding in excess of 50% of the issued share capital
of CAH to renounce their rights in the rights offer to Investec, is that
Investec will have a larger shareholding in CAH after the rights offer. It
is expected that the resultant closer relationship between Investec and CAH
will create opportunities to further consolidate the life insurance
industry.
3 THE REINSURANCE AGREEMENT
The reinsurance agreement will be effective from 31 May 2001 ("the effective
date"). In terms of the reinsurance agreement, CAL will reinsure the
individual life book that is in force as at the effective date, as well as
all post-effective date individual life policies that will be issued by
Fedlife. Although CAL will assume liability to Fedlife for all the risks
covered by the individual life book, Fedlife will remain contractually bound
to policyholders in terms of the obligations contained in the policy
contracts. CAL will assume responsibility for the administration of the
policies covered in the reinsurance agreement. In terms of the liabilities
that CAL has assumed from Fedlife, Fedlife has provided CAL with certain
warranties as to the accuracy of the policy data as at the effective date.
CAL management is confident that the key operational issues arising from the
reinsurance agreement, such as managing renewal costs, client service
expectations and system conversion issues, have all been clearly identified
and specific strategies devised to address them. With regard to withdrawal
rates on the individual life book in recent months, CAL is confident that
the level of such withdrawals is in line with expectations and historic
trends, despite the uncertainty and misinformation which has been fed into
the market by certain competitors and intermediaries.
The reinsurance premium will be settled in specie via Fedlife transferring
R11,2 billion ("the effective date reinsurance premium") of assets to the
CAL balance sheet. In order to fund the resultant statutory capital adequacy
requirements, CAH will raise approximately R717,5 million of new capital, of
which R517,5 million will be raised by way of a rights offer and R200
million by the issue of the preference shares.
4 THE RIGHTS OFFER
4.1 Terms of the rights offer
CAH will raise approximately R517,5 million by way of a renounceable rights
offer of approximately 45 million shares at a price equivalent to CAH's
agreed EV as at 31 May 2001 of 1 150 cents per share. Ordinary shareholders
of CAH who are registered as such on the registration date, will have the
right to subscribe for 33 new rights shares for every 100 ordinary shares
held by them on the registration date. Upon their issue, the rights shares
that are allotted in terms of the rights offer will rank pari passu with the
previously issued ordinary shares of CAH.
Investec has received irrevocable undertakings from CAH shareholders
holding in excess of 50% of the issued share capital of CAH that they will
support the rights offer and that they will renounce, in favour of Investec,
their rights in terms of the rights offer. CAH shareholders and/or their
renouncees who subscribe for ordinary shares in terms of the rights offer,
will be entitled to apply for ordinary shares not subscribed for by other
CAH shareholders and/or their renouncees.
The rights offer is subject to the fulfilment of the conditions precedent
set out below. Application has been made to the JSE for the listing of the
renounceable (nil paid) letters of allocation and the listing of the
ordinary shares.
4.2 Underwriting
Investec has underwritten the subscription of all of the rights shares to be
issued in terms of the rights offer.
5 SALIENT FINANCIAL INFORMATION
It is anticipated that the reinsurance agreement will generate material
enhancements in EV for CAH over time. Management has calculated, based on a
number of factors including the potential for CAL to generate meaningful
cost savings by achieving economies of scale, that CAL could achieve an
uplift in its EV per share as at 31 May 2001 of approximately 14% (from 1
150 to 1 315 cents based on the EV of the individual life book of R620
million, as well as the expected enhancement on this EV) as a consequence of
the reinsurance agreement.
6 CONDITIONS PRECEDENT
The rights offer is conditional upon, inter alia;
* CAH shareholders passing an ordinary resolution authorising the directors
to issue their unissued ordinary shares for the rights offer;
* the approval of the JSE;
* the granting by the JSE of the listing of the renounceable (nil paid)
letters of allocation pertaining to the new ordinary shares to be issued
pursuant to the rights offer; and
* the registration by the Registrar of Companies of all documents required
for the rights offer.
7 OPINIONS, RECOMMENDATIONS AND
UNDERTAKINGS
The determination of the Fedlife liabilities reinsured under the reinsurance
agreement and the CAH EV per share at 31 May 2001, are based on valuations
done by independent actuaries and result from investigations undertaken by
the independent actuaries in respect of Fedlife and CAH.
The directors of CAH have considered the terms and conditions of the
rights offer and are of the opinion that they are fair and reasonable to CAH
shareholders and recommend that CAH shareholders vote in favour of the
resolution required, to implement the rights offer at the CAH general
meeting.
The directors of CAH intend to vote in favour of the resolution necessary
to implement the rights offer in respect of the CAH shares beneficially
owned by them or under their control.
Irrevocable undertakings to vote in favour of the rights offer have been
received from institutional shareholders of CAH holding in excess of 50% of
the issued share capital of the company.
8 FURTHER ANNOUNCEMENT
A further announcement reporting on the fulfilment of the conditions
precedent and providing the salient dates of the rights offer will be
published in due course.
Johannesburg
27 August 2001
Merchant bank
Investec Bank Limited
(Registration number 1969/004763/06)
Corporate adviser
HR Levin
Legal adviser
Jowell, Glyn & Marais Inc
(Registration number 1990/000849/21)
Sponsor
Investec Securities Limited
Member of the JSE
Registration No. 1972/008905/06
