| Tue 11 Dec 2001, 0:00 | | Capital Alliance: - Interim Report |
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CAPITAL ALLIANCE HOLDINGS LIMITED
Registration number: 1952/000756/06
ISIN Code : ZAE 000011904
Share code : CPT ISIN: ZAE 000011904
INTERIM REPORT
for the six months ended 30 September 2001
HIGHLIGHTS
* Concluded the reinsurance transaction with Fedsure Life
* Increase in headline earnings per share (fully diluted) + 61%
* Increase in embedded value of new business + 133%
* Increase in embedded value per share + 11%
* Capital adequacy cover in life insurance business, after reinsurance
transaction 2 times
The following are the unaudited consolidated results of the company and its
subsidiary companies for the six months ended 30 September 2001 together
with comparative figures. Comparative figures have been regrouped and
restated where necessary in order to provide comparable disclosures.
Summarised Group Income Statements
Unaudited 6 months ended 30
September
Reinsurance Ordinary life
Notes transaction business Total Total
2001 2001 2001 2000
R'000 R'000 R'000 R'000
Income 14 750 294 643 415 15 393 709 388 497
Premiums net of
reinsurance premiums 460 275 417 211 877 486 300 755
Reinsurance premium 1 14 051 678 14 051 678
Investment income 292 144 111 438 403 582 107 130
Gain/(loss) on
revaluation and disposal
of investments (53 803) 114 766 60 963 (19 388)
Outgo 15 325 294 545 151 15 870 445 306 071
Policyholders' benefits
net of reinsurance 300 133 300 133 367 755
Reinsurance claims 2 1 071 755 1 071 755
Commissions 2 914 39 137 42 051 30 788
Administration
expenses 35 500 46 353 81 853 44 099
Exceptional items 3 9 498 9 498 4 860
Taxation 16 168 16 168 39 334
Transfers to/(from)
life funds 14 215 125 133 862 14 348 987 (180 765)
Life insurance and
pensions business (575 000) 98 264 (476 736) 82 426
Other income
attributable to
shareholders 30 718 17 589
Before taxation 40 185 27 232
Taxation (9 467) (9 643)
(Loss)/profit
after taxation (446 018) 100 015
Minority interests 4 (10 993) (8 627)
Attributable (loss)/profit
to ordinary shareholders
- including reinsurance
transaction (457 011) 91 388
- excluding reinsurance
transaction 117 989 91 388
Headline earnings
attributable to
ordinary shareholders 5 170 573 95 118
Attributable earnings
per share (cents)
- fully diluted including
reinsurance transaction (273) 61
- fully diluted excluding
reinsurance transaction 70 61
Headline earnings per
share (cents) including
reinsurance transaction
- fully diluted 102 63
- based on shares
in issue 124 63
Pro forma weighted
average number of
shares in issue ('000) 6 167 414 150 325
Pro forma total
shares in issue ('000) 6 182 332 141 275
Notes
1. Reinsurance premium represents the best estimate liabilities at 31 May
2001 of R11 247 million plus policyholder loans of R2 709 million and an
adjustment to the annuity portion of the reinsurance premium of R95,5
million.
2. Reinsurance claims are gross of loans. In order to arrive at a net
reinsurance claims figure, an amount of R135 million in respect of loans
must be deducted from the gross claims of R1 071 million.
3. Exceptional items relate to the one-off costs in respect of the
restructuring of the CAL Commercial and SDS sales divisions.
4. Minority interests include a dividend paid of R4,1 million.
5. Headline earnings are calculated as:
R'000
Attributable loss (457 011)
Plus: exceptional reserving strain on reinsurance transaction
at 31 May 2001 620 000
Amortisation of intangible assets 935
Exceptional items after tax 6 649
170 573
Represented by:
Earnings in respect of the reinsurance transaction
from 1 June 2001 45 000
Earnings in respect of ordinary Capital Alliance Holdings business 125 573
170 573
6. The pro forma figures assume that the 45 million rights shares at R11,50
for a total consideration of R517,5 million issued on 24 October 2001 were
issued on 1 June 2001. There were actually 137,3 million shares in issue at
30 September 2001 and the actual weighted average number of shares in the
period equalled 137,3 million.
The statement of changes in equity, balance sheet, cash flow statement and
embedded value statement have been prepared on a pro forma basis, assuming
that the R517,5 million capital raised in the rights issue was received on 1
June 2001. In order to calculate the actual statement of changes in equity,
balance sheet, cash flow statement and embedded value statement, it is
necessary to adjust the relevant lines by the R517,5 million capital raised
(indicated by*).
Summarised Statement of Changes in Equity
Unaudited pro-forma Audited
six months ended year ended
Notes 30 September 2001 31 March 2001
R'000 R'000
Share capital and premium 1 269 295 520 308
Balance at beginning of period 520 308 601 439
Arising from share issue* 7 748 987 36 239
Cancellation of share capital - (117 370)
Share election reserve - 39 764
Balance at beginning of period 39 764 55 632
Movement in share
election reserve (39 764) (15 868)
Accumulated profits 84 105 541 116
Balance at beginning of period 541 116 350 365
Accumulated profits
attributable to shareholders (457 011) 190 751
1 353 400 1 101 188
Notes
7. The change in share capital and premium can be analysed as follows:
R'000
Arising from the issue of capitalisation shares 31 487
Arising from the issue of preference shares 200 000
Arising from the rights issue 517 500
748 987
Summarised Group Balance Sheets
Unaudited pro forma Audited
as at 30 September 31 March
2001 2001
R'000 R'000
Assets
Investment assets* 18 086 470 3 167 964
Intangible assets 12 816 16 581
Computer equipment, office furniture
and other current tangible assets 9 384 12 062
Current assets 536 906 468 381
Total assets 18 645 576 3 664 988
Equity, reserves and liabilities
Total shareholders' funds* 1 353 400 1 101 188
Minority interests 30 980 24 110
Life insurance funds 16 167 510 1 818 523
Non-current liabilities 252 007 221 990
Current liabilities 841 679 499 177
Total equity, reserves and liabilities 18 645 576 3 664 988
Life Insurance Operations
Unaudited 6 months ended 30 September
Reinsurance Ordinary life
transaction business Total Total
2001 2001 2001 2000
Notes R'000 R'000 R'000 R'000
Premiums net of
reinsurance
Individual
- single premiums 50 958 50 958 94 436
- recurring premiums 460 275 181 552 641 827 159 547
Group
- lump sums 6 104 6 104 7 177
- other premiums 50 055 50 055 40 693
Credit life
- Standard General 118 975 118 975 76 840
- other 7 869 7 869 2 062
Group funeral premiums 1 698 1 698 (80 000)
460 275 417 211 877 486 300 755
Policyholders' benefits net
of reassurance
Individual life 2 1 071 755 120 115 1 191 870 72 704
Employee benefits 57 851 57 851 39 331
Credit life
- Standard General 12 179 12 179 3 050
Credit life
- experience rebate 8 104 539 104 539 227 283
Credit life - other 3 855 3 855 1 000
Group funeral - death
and disability benefits 1 594 1 594 24 387
1 071 755 300 133 1 371 888 367 755
Notes
8. Experience rebate in respect of positive experience on the credit life
reinsurance contract with The Standard General Insurance Company relating to
the period 1 April 2001 to 30 September 2001.
Group Embedded Value
Reinsurance Ordinary Total Total
as at transaction life 30 September 31 March
business
2001 2001 2001 2001
R'000 R'000 R'000 R'000
Shareholders'
net assets
- total* 1 353 400 1 353 400 1 101 188
- less preference
shares (200 000) (200 000) -
- plus other group
assets 181 581 181 581 138 523
Net value of in
force life business 592 083 257 356 849 439 203 022
Gross value of in
force life business 714 347 279 013 993 360 208 281
Less: opportunity
cost of capital
adequacy
requirements (122 264) (21 657) (143 921) (5 259)
Embedded value 592 083 1 592 337 2 184 420 1 442 733
Capital adequacy requirement (CAR) 672 042 122 706
Capital adequacy cover (times) 2,0 9,0
Net asset value per share (Rands) 7,32 9,26
Embedded value of in force business per
share (Rands) 4,66 1,52
Embedded value per share (Rands) 11,98 10,78
Valuation Basis Economic Assumptions
Reinsurance Ordinary
At 30 September 2001 transaction life business
Risk discount rate
- for Financial Soundness Valuation 13% 14%
- for opportunity cost of capital 14% 14%
Equity return (before capital gains tax) 13% 13%
Fixed interest return (before tax) 11% 11%
Cash return (before tax) 8% 9%
Expense inflation rate per annum 6,5% 4% year 1
6% year 2
8% thereafter
Summarised Group Cash Flow Statements
Unaudited
pro forma Unaudited
six months six months
ended ended
30 September 30 September
2001 2000
R'000 R'000
Cash flow from
operating activities 14 091 568 (36 244)
Cash flow from
investing activities* 747 517 (59 684)
Cash flow from
financing activities (13 068 341) (71 785)
Net movement in cash
and cash equivalents 1 770 744 (167 713)
Cash and cash equivalents
at beginning of period 600 525 941 461
Cash and cash equivalents
at end of period 2 371 269 773 748
Value of New Business
Ordinary
business
30 September 30 September
as at 2001 2000
Notes R'000 R'000
Gross value of new
life insurance business 19 362 10 673
Less: impact of
non-recurring items - (2 955)
Less: opportunity
cost of capital
adequacy requirements 9 (3 126) (758)
Net value of new life
insurance business 10 16 236 6 960
Notes
9. The opportunity cost of CAR has increased substantially due to:
- the change in the asset mix backing the CAR. Previously the target
allocation for investment of the CAR was 100% in equities, and now the
target allocation is 65% in equities and 35% in bonds, and
- the introduction of capital gains tax, which has reduced the prospective
return on equities
10. The net value of new business excludes costs of R5.6 million (after tax)
incurred in respect of closure costs of the discontinued SDS division
Summarised Group Commentary
1. Operating results for the period
The directors are pleased to report highly satisfactory results for the six
months ended 30 September 2001. Even though the environment that the group
operates in was characterised by substantial volatility in investment
markets and operating difficulties, the group retained a strong focus on
managing the embedded value drivers of the business. Features of the period
were:
* the successful conclusion of a reinsurance transaction between Capital
Alliance Life and Fedsure Life Assurance Limited ("Fedlife") on 24 August
2001;
* the successful conclusion of the capital raising exercise required in
order to meet statutory capital requirements resulting from the reinsurance
transaction. A total of R717,5 million was raised by means of the issue of
R517,5 million of ordinary shares at R11,50 per share, under a fully
underwritten rights offer, and R200 million of preference shares;
* a 133% increase in the net value of new business during the period, and a
27% increase in the net value of in force life business in Capital Alliance
Life (excluding the reinsurance transaction);
* a 29% increase in attributable profit, excluding the reinsurance
transaction, to R118 million;
* a 61% increase in headline earnings including the reinsurance transaction,
on a fully diluted pro forma basis, to R170,6 million.
2. Capital Alliance Life
Capital Alliance Life concluded a reinsurance agreement with Fedlife on 24
August 2001, effective from 31 May 2001. The results of the business covered
under this reinsurance agreement (which are for a period of four months) are
disclosed separately, in order to allow for meaningful comparison to be made
between the other business (the "ordinary life business") conducted in
Capital Alliance Life during this period, and the period ended 30 September
2000.
Ordinary life business
The attributable profit from the ordinary life business grew by 19% over the
previous period to R98,2 million. This is considered an excellent
performance given the difficult new business environment and the volatility
in equity markets, particularly in the period post 11 September 2001.
Distribution activities have been re-engineered over the past three years,
and the embedded value of new business showed a substantial increase over
the previous period. This was driven by an increase of 86% in the number of
new policies issued, an increase of 66% in the new recurring annual premium
income written, a reduction in acquisition costs as a result of
restructuring, and an improvement in persistency. The new distribution
channels developed over the past two years performed strongly. The CAL
Commercial division continued to show improvement. Residual costs of R9
million were incurred in the period with respect to the closure of the SDS
channel, in line with the announcement in June 2001 that the channel would
not meet the required viability criteria within an acceptable time frame.
Group risk new business premiums were below budget during the period,
although subsequent to the period end substantial volumes of new business
were written, bringing the division back in line with budget. The increase
in net group risk premiums was driven primarily by revised reinsurance
arrangements. Whilst credit life new business showed very strong growth,
group funeral new business remains a problem, given the unsustainably low
rates currently being quoted in the market. The group will not chase new
business volumes at uneconomic rates.
Investment performance over the period showed an improvement over the
prior period, despite volatility caused by the events of September 2001.
Indications are that corrective action taken by the group's asset managers
subsequent to the below benchmark returns to 31 March 2001 is having a
beneficial effect on the investment performance of the portfolios.
Reinsurance transaction
At 31 May 2001 the reinsurance transaction gave rise to an initial reserving
strain on the Financial Soundness Valuation basis of R620 million, since the
transaction was based on a best estimate valuation basis. This reserving
strain reduced to an amount of R575 million at 30 September 2001, as a
result of the profit in the period being an amount of R45 million. This is
considered highly satisfactory at this stage, and well within expectations.
The critical issues in the success of the reinsurance transaction are:
* improvement in the service levels offered to policyholders
* improvement in the investment returns earned for policyholders
* retention of business above the valuation assumptions
* reducing the costs associated with the administration of the business.
Considerable improvement in the service levels offered to policyholders
has been achieved in the short term since concluding the reinsurance
transaction. However, the main improvement will arise from the successful
conversion of the policy database to the Capital Alliance platform. Good
progress is being made with the conversion project, which is currently
performing ahead of expectations.
An improvement in the level of investment returns earned for policyholders
is expected as a result of the change in asset managers, substantial changes
made to the investment process, and the fact that assets are now better
matched to liabilities. Interim bonus rates for all individual policyholder
portfolios are currently on par with the market, with the exception of the
Fedlife individual deposit administration business, on which an interim
bonus rate of 0% was declared before the conclusion of the reinsurance
transaction. As a consequence of the investment performance pursuant to the
changes outlined above, the interim bonus rate on Fedlife individual deposit
administration business has been increased from 0% to 5% with retrospective
effect from 1 January 2001, for all relevant policies in force on 1 December
2001.
The retention of business is receiving much focused attention, and
currently the level of terminations and surrenders is well within the
actuarial assumptions utilised at the time of concluding the reinsurance
transaction.
Interested parties can refer to the presentation available on the Capital
Alliance website (http://www.captall.co.za) for further information on the
integration project.
3. Capital Alliance Finance
A decision was taken to scale down the new business activities in the
savings and loans businesses, given concerns about the level of credit
extension in the industry, and the current collection risk in respect of new
commercial and existing PERSAL business. A consequence of this decision was
a lower rate of profit growth than in the past. Attributable income was R15
million for the period, compared to R10 million in the period ended 30
September 2000.
4. Capital Alliance Holdings
Net other income of the holding company, pre-tax, was at a level of R13,1
million compared to R7,5 million in the period ended 30 September 2001.
Capital Alliance Holdings issued 45 million shares at R11,50 for R517,5
million on 24 October 2001 in terms of the fully underwritten rights issue,
and R200 million preference shares. The additional capital raised was
required to recapitalise Capital Alliance Life, in order to ensure that all
statutory capital requirements could be met post the reinsurance
transaction, as is demonstrated by the CAR cover of 2 times as at 30
September 2001, on a pro forma basis.
5. Dividends
The declaration of dividends is considered at the year-end.
6. Prospects
Management is committed to ongoing enhancement of the value offered to
current Capital Alliance Life policyholders, current Fedlife policyholders,
prospective policyholders and shareholders through:
* a strong focus on providing excellent customer service;
* an innovative product range, focused on the specific needs of the target
market and which provides real value to clients;
* rapid conclusion of the conversion project to move Fedlife policies fully
onto the Capital Alliance platform, providing both service and financial
benefits;
* better investment returns via the improved investment process;
* committed action to further enhance the value of new and in force
business.
The new business and operating results for the period since 1 October 2001
have been positive, and further organic growth is expected for the period
ending 31 March 2002.
For and on behalf of the directors
L M Nestadt (Chairman)
I M Kirk (Chief Executive Officer)
11 December 2001
Johannesburg
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 Share code: CPT ISIN: ZAE 000011904
