| Wed 29 May 2002, 0:00 | | Sage Group Limited Preliminary Report 2001/2002 |
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SAGE Group Limited Preliminary Report 2001/2002
SAGE Group Limited
Preliminary report for the year ended 31 March 2002
Salient features
- Strong operating performance
- Headline earnings per share reduction of 25,1% impacted by temporary
decline in value of major ABSA investment
- Continued rapid expansion of international activities
- Sustained organic growth in South Africa
- Record new business achievements
- Solid embedded value results
- Significant growth of SA and international assets
Overview
The year under review was characterised by a significant slowdown in global
economic growth and, in the aftermath of September 11, by disruptive
volatility in investment and currency markets. In this environment, the
financial industry has experienced uncertain conditions and generally
sluggish business growth. Nonetheless, the very satisfactory Group operating
results reported at the interim stage, have continued in the second half of
the year and also reflected the vigorous new business expansion domestically
and internationally.
The Group`s interim report cautioned that earnings for the full year would
inevitably be heavily influenced by market conditions during the remainder
of the year. In the event, the Group`s strong operating performance has
been distorted by two factors - the significant temporary reduction in the
value of the major investment in ABSA Group Limited at the year-end,
substantially recovered at the date of this report, and exchange rate
movements which influenced the international operations, now a material
component of the Group.
The Group`s inherent strength is again reflected throughout the embedded
value statements.
Group Results
Accounting policies and presentation
Consistent with past policy, the Group`s primary financial statements are
presented on the Financial Soundness basis which equates with the
statutorily required Financial Soundness actuarial valuations utilised by
all life companies as part of their published statements of embedded value.
This primary basis of accounting reflects the accurate and realistic value
of the Group and its earnings for the year and is in line with the principle
of fair value accounting which is rapidly gaining ground in the life
insurance industry internationally.
In addition, the Group provides financial statements in full compliance with
South African Statements of Generally Accepted Accounting Practice (GAAP),
despite the shortcomings of this standard in a life assurance group and
particularly one whose capital and free reserves are substantially dedicated
to investments in operating subsidiaries.
Financial results
On the primary Financial Soundness accounting basis, Group headline earnings
for the year amounted to R180,6, million compared to R232,6 million in the
previous year, a reduction of 22,3%. While the operating performance of the
South African and International operations displayed a satisfactory and
positive trend, earnings were negatively impacted specifically by the
temporary decline at the year-end in the price of ABSA. This temporary
setback, amounting to approximately R130 million, directly impacting the
South African life assurance results, had been substantially recovered at
the date of this report. Fully diluted headline earnings per share amounted
to 123,1 cents, a reduction of 25,1% on the previous year.
On the GAAP basis of accounting, which consolidates all subsidiaries
predominantly at net asset values, and which is reported in addition to the
primary Financial Soundness basis, the Group showed a headline loss for the
year of R240,5 million or 163,9 cents per share, compared to headline
earnings of R55,3 million (39,0 cents per share) in the previous year. The
difference between these results and the Financial Soundness basis
illustrates the distortion caused predominantly by ignoring realistic or
fair values of investments and assets. The GAAP financial statements are
accompanied by a reconciliation of the differences which apply between the
balance sheets and income statements of the two accounting bases.
Group assets at the year-end, including international, amounted to R11,4
billion, an increase of 37,3% over the year. Unit trust assets managed
totalled R5,5 billion.
Embedded Value Statements
Sage Group Limited
The embedded value of the Group at 31 March 2002 amounted to R1,7 billion,
equivalent to 1 117 cents per share, after recognising future servicing
costs until July 2005 of R166,3 million on the $65 million equity linked
note issued during the year (31 March 2001: R1,6 billion - 1 118 cents).
This basis measures the current value of the Group`s net assets on the
primary basis of accounting together with the present value of future
profits from business already written by the life assurance operations (net
of cost of capital).
Group embedded value earnings for the review period amounted to R168,5
million compared with R235,1 million in the previous year.
Sage Life Limited
Sage Life`s embedded value increased by 16,8% to R2,5 billion
notwithstanding volatility in investment and currency markets. The major
components of embedded value show positive trends - the excess of assets
over liabilities increased by 13,7% to R1,8 billion and the present value of
future profits from existing business, net of cost of capital, rose by 24,2%
to R744 million.
Embedded value earnings increased materially to R420,9 million from R289,6
million in the previous year.
Sage Life`s capital adequacy multiple remains unchanged at 3,9. The capital
adequacy requirement, which provides a buffer against fluctuations in the
underlying valuation assumptions, amounted to R462,9 million at the year-end
(March 2001: R405,4 million).
New Business Results
In a year characterised by sluggish new business growth in the life
assurance sector in South Africa in general, Sage Life produced impressive
new business results. Total new business (domestic and international)
increased by 122,5% from R1,3 billion to a record R3,0 billion, in sharp
contrast to the muted industry trend. Single premiums increased by 167,5%
and recurring premiums by a satisfactory 4,8%.
Sage Life`s achievements in the single premium field in South Africa have
been particularly notable with total individual single premiums increasing
by 95,5% to R1,2 billion. The company has become a market leader in meeting
the demand for international investment products catering to the R750 000
foreign exchange allowance. Total individual recurring new business reached
a record R320,7 million compared to R314,9 million in the previous year.
The strong individual business results have been matched by a resurgence in
the Employee Benefits division where total new business increased by 39,6%
to R222,4 million. Recurring premiums in this division rose by 22,0% and
single premiums by 48,7%.
Total new business (individual and employee benefits) generated within South
Africa was R1,7 billion, 60,0% ahead of the previous year. This reflects a
combination of continuing product innovation, the ongoing success of the
company`s distribution strategies and in particular, competitive investment
performance results achieved for clients by the Group`s asset management
team.
Sage Life`s sustained new business growth is reflected in its growing market
share in South Africa. Measured against the country`s large life offices,
Sage Life`s single premium market share shows a four-fold increase over the
past 5 years while recurring premium market share has more than doubled over
the period.
South African unit trust sales for the year totalled R2,9 billion, 23% below
the previous year. In line with the trend throughout the unit trust
industry, sales were substantially diluted by a high level of repurchases,
resulting in only a modest net inflow of R79,4 million for the period.
International Activities
The Group`s international businesses, namely Sage Life Assurance of America
Inc and Sage Life (Bermuda) Limited have made significant progress during
the past year despite an operating environment which has inhibited the
growth of the US variable annuity market. The rapid expansion of the Group`s
offshore activities has helped to compensate for the effects of consumer
investment reticence in the United States market.
International product sales for the review period - the first full year of
trading - totalled R2,0 billion, a five-fold increase on total product sales
of R398 million in the previous financial year. This incorporates the R762,4
million generated through Sage Life South Africa`s Bermuda branch which
together with the international Bermuda subsidiary generated 54% of total
international sales. An important current initiative in the US variable
annuity market is the introduction by Sage of a unique and highly innovative
sector rotation investment concept launched in association with Standard &
Poor`s.
Sage Life of America has now achieved significant penetration of its
selected distribution channels, namely independent financial planners,
regional brokerages and banks. There are 40 active selling agreements, many
as a preferred provider, now in operation providing access to 25 000 brokers
of whom 3 700 have already been licensed with the company. In addition,
important offshore distribution contracts have been
concluded with leading global financial institutions including JP Morgan
Chase, First Union and HSBC. Offshore product distribution via the Sage Life
Bermuda branch is well entrenched.
Sage Life of America`s premier ratings from two leading global insurance
rating agencies have been renewed, namely "A" Excellent by AM Best and "AA-"
(Very strong) by Fitch.
The potential of the international businesses remains exceptionally
attractive and their achievements form a meaningful part of the Group`s
results and a material component of premiums, assets and embedded values.
Following the current actuarial appraisal produced by Milliman USA, the
international activities are reflected at fair value in the Group Financial
Soundness results on a consistent basis with previous years at a carrying
value of R1,2 billion ($104 million), equating to embedded value plus 15% of
the value of projected future business. Against this value, the Group has
applied a charge of R213 million, being a provision against foreign exchange
exposure at the balance sheet date on the $65 million Equity Linked Note
which funds the international business.
In the interim report, it was indicated that investigations were underway
into funding alternatives to deal with the increased capital requirements of
the burgeoning international business. The Group is currently actively
pursuing various opportunities revealed by a thorough probe of appropriate
international capital markets. The strategy is to introduce a strategic
partner or partners either at the Sage Group level or by offering equity in
a new holding company which will control both the USA and Bermuda
operations. It is planned at this stage to introduce sufficient capital
during the coming financial period to meet expansion for a number of years,
while being sufficiently funded in the meantime from existing resources.
South African Operations
The continued expansion and market share growth of Sage Life in South Africa
is reflected in the 47,6% growth in gross premiums received to R2,4 billion.
Net premiums received rose by 13,6% to R1,6 billion which excludes the
significant business written in South Africa for the Bermuda branch, fully
reinsured with Sage Life Bermuda Limited. The company`s total investment
return for the year increased by 37,6% to R1 billion, benefiting from
significantly improved investment performance in a more buoyant overall
domestic investment environment but impacted at the year-end by the
temporary decline in value of ABSA, subsequently substantially recovered.
Sage Life`s shareholder`s surplus for the year nevertheless increased to
R276,1 million from R265,8 million in the previous year. This reflects inter
alia a substantially improved operating surplus. Policyholder benefits of
R1,1 billion were only marginally higher than in the previous year.
Sage Unit Trusts produced satisfactory results given a difficult industry
environment and the contribution from unit trust activities increased to
R28,3 million from R25,2 million in the previous year. As reported at the
interim stage, the value of the company has been written down by R70 million
to R300 million to reflect prevailing conditions in the unit trust industry.
As indicated in the interim report in November 2001, Sage Life successfully
completed the further rationalisation of its property interests during the
review period through the amalgamation of its managed property unit trusts
CBD and Pioneer with Pangbourne Properties Limited and the disposal of the
management company, Sage Property Trusts Managers Limited. Sage Life retains
a focused portfolio of commercial properties and industrial and residential
land holdings directly managed for various life company portfolios.
ABSA Investment
The Group continues to hold its strategic investment in ABSA Group Limited
through Universa (Pty) Limited together with Remgro Limited and the Mines
Pension Funds. In a consortium, Universa and Sanlam Limited currently
control approximately 47% of ABSA.
Protracted negotiations between the consortium members regarding the
proposed unbundling of Universa and the future ABSA shareholding
relationship, will hopefully soon make progress so that the complex
relationship among the consortium members vis--vis ABSA will be clarified.
The financial results of ABSA for the year ended 31 March 2002 have recently
been announced and disclose headline earnings per share of 291,1 cents
compared with 377,2 cents in the previous year. While ABSA`s core retail and
corporate banking and other financial services activities continue to
perform very well, its results have been impacted for the year by their
micro-lending organisation Unifer, formerly separately managed. Unifer is to
be operationally integrated following a proposed Scheme of Arrangement
whereby ABSA will become the owner of the entire share capital of that
company.
The Group`s holding in ABSA is accounted for as an investment which is
marked to market.
Change of the Financial Year-
end and Dividend Payment Dates
It was announced on 13 March 2002 that the directors had resolved to change
the Group`s financial year-end from March to December, effective 31 December
2002, bringing the Group into line with the statutory reporting date of its
rapidly expanding international insurance subsidiaries and its South African
listed peer companies. Consequently, the next interim reporting period will
be the three months ending 30 June 2002 followed by audited results for the
nine months ending 31 December 2002.
Dividend declaration and payment dates have been aligned with the change in
year-end and future declarations will be in respect of the reporting periods
ending 30 June and 31 December respectively. Consequently, the next dividend
will be considered in or about the last week of August 2002 at the time of
announcing the Group results for the period ending 30 June 2002.
By order of the board
CS Cant
Secretary
28 May 2002
Financial soundness results (Primary basis of accounting)
Group income statement
Audited
Year ended 31 March
2002 2001
% change R000 R000
Financial soundness earnings
South African operating activities 67 800 17 322
- Insurance 38 033 (19 599)
- Unit trusts 28 281 25 213
- Other 19 273 6 905
- Taxation (17 787) 4 803
International operating activities 174 028 150 802
- Value added by international
assurance operations 83 131 35 992
- Net foreign exchange gains 90 897 114 810
Gain on translation of foreign
investments 304 338 114 810
Provision for loss on translation of
equity linked notes (213 441)
Other net earnings on free assets 34 279 97 677
South Africa
- Income 15 534 -
- Unrealised capital revaluations
- listed investments (30 616) 97 677
- unlisted investments (70 000) -
International
- Net surplus on disposal of free assets 119 361 -
Sage Life Limited financial soundness
headline earnings 3,9 276 107 265 801
Group net financing costs, overheads
and secondary tax
on companies (refer analysis) (95 459) (33 167)
Group financial soundness headline
earnings (22,3) 180 648 232 634
Exceptional items - (6 756)
Group financial soundness attributable
earnings (20,0) 180 648 225 878
GROUP Financial soundness headline
earnings per share (cents)
(basic and fully diluted) (25,1) 123,1 164,3
GROUP Financial soundness attributable
earnings per share (cents)
(basic and fully diluted) (22,8) 123,1 159,5
Dividends per ordinary share (cents)
- interim 30,0 45,0
- final (note 1) - 81,0
Ordinary shares
- in issue (000) 147 730 144 758
- weighted average number in issue (000) 146 739 141 618
Compulsorily convertible debentures
- in issue (000) 2 371 2 371
Group balance sheet
Audited
31 March 31 March
2002 2001
R000 R000
Assets
Non-current assets 119 737 123 208
Investments of life assurance subsidiaries 8 518 289 7 412 352
Current assets 355 515 363 344
8 993 541 7 898 904
Shareholders` funds and liabilities
Total shareholders` interest 1 099 598 1 053 419
Redeemable preference shares issued by
subsidiaries 98 500 108 500
Non-current liabilities (note 2) 739 863 440 166
Long-term assurance fund 6 688 704 5 950 586
Current liabilities 366 876 346 233
- interest bearing 11 904 11 244
- other 354 972 334 989
8 993 541 7 898 904
Separate account assets of international
assurance operations 2 546 060 579 571
Notes
1 The Group`s financial year-end has been changed from March to December,
effective 31 December 2002 bringing the Group into line with the statutory
reporting date of its rapidly expanding international assurance operations.
Consequently the next interim reporting period will be the three months
ending 30 June 2002 followed by audited results for the nine months ending
31 December 2002.
Dividend declaration and payment dates have been aligned with the change in
year-end and future declarations will be in respect of the reporting periods
ending 30 June and 31 December respectively. Consequently, the next dividend
will be considered in or about the last week of August 2002 at the time of
announcing the Group results for the period ending 30 June 2002.
2 The 4,5% cumulative convertible redeemable preference shares, previously
treated as equity, were not converted into ordinary shares and were redeemed
on 30 June 2001 out of the proceeds of a $65 000 000 8% unsecured Equity
Linked Note issue, redeemable 31 July 2005. For purposes of balance sheet
comparison, the preference shares have been reclassified as a non-current
liability at 31 March 2001. No adjustment has been made to the income
statement.
Audited
Year ended 31 March
Analysis of Group net financing costs, 2002 2001
overheads and secondary tax on companies R000 R000
Foreign preference dividends (8 142) (14 509)
Net financing costs (65 034) (8 273)
- Equity linked notes (49 449) -
- Other (15 585) (8 273)
Net Group overheads (5 660) (971)
Secondary tax on companies (16 623) (10 237)
(95 459) (33 990)
Income from subsidiaries now held directly
by Sage Life Limited - 823
(95 459) (33 167)
Statement of changes in equity
Audited
Year ended 31 March
2002 2001
R000 R000
Balance at beginning of period 1 053 419 959 343
Proceeds from shares/debentures issued - 3 020
Share issue costs (268) (544)
Appropriation for redemption of 2001
preference shares (2 211) (79 946)
Revaluation of investments (3 636) 73 541
Attributable earnings 180 648 225 878
Dividends paid (135 629) (127 872)
Other 3 (1)
Balance at end of period 1 099 598 1 053 419
Summarised Group cash flow statement
Audited
Year ended 31 March
2002 2001
R000 R000
Cash flows from operations 7 318 160 523
Cash flows of life assurance subsidiary
including investing activities (370 151) (171 922)
Cash flows from financing 287 878 2 548
Net decrease in cash equivalents (74 955) (8 851)
Cash and cash equivalents at beginning
of period 165 007 173 858
Cash and cash equivalents at end of period 90 052 165 007
Embedded value statements
Sage Group Limited
31 March 31 March
2002 2001
% change R000 R000
Group embedded value
Shareholders` funds 1 099 598 1 053 419
Present value of future profits
of Sage Life (net of cost of
capital) 743 989 599 149
Future financing costs (166 263) (8 142)
Embedded value 2,0 1 677 324 1 644 426
Group embedded value per share
Shares in issue
- ordinary shares 147 730 144 758
- compulsorily convertible debentures 2 371 2 371
150 101 147 129
Group embedded value per share (cents) 1 117 1 118
Year ended 31 March
2002 2001
R000 R000
Group embedded value earnings
Embedded value - at end of period 1 677 324 1 644 426
Embedded value - at beginning of period 1 644 426 1 534 731
32 898 109 695
Dividends paid 135 629 127 872
Increase in capital - (2 476)
Embedded value earnings 168 527 235 091
Sage Life Limited
31 March 31 March
2002 2001
% change R000 R000
Embedded value
Shareholder`s funds 1 784 028 1 565 895
Present value of future profit
(net of cost of capital) 743 989 599 149
Embedded value 16,8 2 528 017 2 165 044
Financial soundness valuation
- capital adequacy requirement 462 929 405 411
- capital adequacy multiple (times) 3,9 3,9
Year ended 31 March
2002 2001
R000 R000
Embedded value earnings
Embedded value at end of period 2 528 017 2 165 044
Embedded value at beginning of period 2 165 044 2 037 482
362 973 127 562
Dividends declared 125 000 162 000
Increase in capital (67 026) -
Embedded value earnings 420 947 289 562
Components of embedded value earnings
142 019 115 233
New business 65 857 65 190
Expected return 89 311 96 882
Operating experience variations 18 101 (20 819)
Operating assumption changes (31 250) (26 020)
278 928 174 329
Investment return on shareholder`s funds 238 074 285 400
- income 19 110 14 015
- capital appreciation and forex gains 218 964 271 385
Economic assumption changes 40 854 (111 071)
Embedded value earnings 420 947 289 562
Principal actuarial assumptions % %
Risk discount rate 15,50 14,50
Pre-tax investment returns
- equities 15,50 14,50
- property 14,50 13,50
- fixed interest securities 13,50 12,50
- cash 11,50 10,50
Expense inflation 8,50 8,50
Sage Life Limited results
New business
Year ended 31 March
2002 2001
% change R000 R000
Life assurance premiums (gross)
Individual 133,8 2 748 656 1 175 846
- annualised recurring
- South African 1,8 320 704 314 937
- single 182,0 2 427 952 860 909
- South African local 423 674 463 321
- Sage International
(including R1 237,2 million,
underwritten by Sage Life
Assurance of America Inc & Sage
Life of Bermuda Limited
(2001- R251,8 million)) 2 004 278 397 588
Employee benefits - South African 39,6 222 435 159 318
- annualised recurring 22,0 66 079 54 169
- single 48,7 156 356 105 149
Total new business 122,5 2 971 091 1 335 164
South African unit trust sales (23,1) 2 872 242 3 736 588
Operating results
Net premiums received 13,6 1 609 582 1 417 459
- recurring 992 322 841 846
- single 617 260 575 613
Investment return 40,2 1 012 195 735 660
- investment income 341 074 263 269
- net realised and unrealised
capital gains 671 121 472 391
2 621 777 2 153 119
Outgo (1 607 552) (1 458 197)
Policyholder benefits (1 072 439) (1 027 389)
Commissions, expenses and tax (535 113) (430 808)
1 014 225 694 922
Increase in policyholder reserves (738 118) (429 121)
Shareholder`s surplus 276 107 265 801
Results in terms of South African Statements of Generally
Accepted Accounting Practice (GAAP)
Group income statement (GAAP) Audited
Year ended 31 March
2002 2001
R000 R000
Profit/(loss) before taxation and
exceptional items (131 913) 120 664
Exceptional items (3 228) (9 865)
Profit/(loss) before taxation (135 141) 110 799
Taxation (100 455) (50 869)
Profit/(loss) after taxation (235 596) 59 930
Foreign preference dividends (8 142) (14 509)
Earnings/(loss) attributable to
ordinary shareholders (243 738) 45 421
Adjustment for exceptional items 3 228 9 865
Headline earnings/(loss) (240 510) 55 286
Headline earnings/(loss) per share
(cents)
(basic and fully diluted) (163,9) 39,0
Attributable Headline earnings/
(loss) per share (cents)
(basic and fully diluted) (166,1) 32,1
Reconciliation between GAAP and
financial soundness results
GAAP headline earnings/(loss) (240 510) 55 286
Adjustments in respect of consolidation
of life insurance company`s subsidiaries 421 158 177 348
- reversal of investment surpluses on
free assets 443 705 153 655
- operating results of subsidiaries net
of foreign
exchange differences (62 151) 20 164
- dividends from subsidiaries 39 604 3 529
Group financial soundness headline earnings 180 648 232 634
Group balance sheet (GAAP)
Audited
31 March 31 March
2002 2001
R000 R000
Assets
Non-current assets 222 648 212 097
Investments of life assurance subsidiaries 9 499 461 6 934 848
Current assets 731 394 606 886
10 453 503 7 753 831
Shareholders` funds and liabilities
Total shareholders` interest 97 669 487 868
- ordinary shareholders` interest 5 282 398 016
- minority shareholders 92 387 89 852
Redeemable preference shares issued by
subsidiaries 108 500 118 500
Non-current liabilities
(refer note 2 to financial soundness
results) 739 863 440 166
Long-term assurance funds 9 061 009 6 327 787
Current liabilities 446 462 379 510
- interest bearing 11 904 11 244
- other 434 558 368 266
10 453 503 7 753 831
The reconciliation to total shareholders` interest as reflected in
the financial soundness balance sheet is as follows:
Audited
31 March 31 March
2002 2001
R000 R000
Ordinary shareholders` interest per
GAAP balance sheet 5 282 398 016
Reinstatement of adjustment to fair
value of subsidiary
companies` net assets 1 094 316 655 403
- current period 421 158 177 348
- prior periods 655 403 466 858
- amortisation of goodwill and USA
preference dividend 17 755 11 197
Total shareholders` interest per
financial soundness balance sheet 1 099 598 1 053 419
Statement of changes in equity (GAAP)
Audited
Year ended 31 March
2002 2001
R000 R000
Balance at beginning of period 398 016 492 485
Proceeds from shares/debentures issued - 2 476
Appropriation for redemption of 2001
preference shares (2 211) (79 947)
Revaluation of investments - 73 541
Attributable earnings (243 738) 45 421
Dividends paid (146 174) (135 960)
Other (611) -
Balance at end of period 5 282 398 016
Summarised Group cash flow statement (GAAP)
Audited
Year ended 31 March
2002 2001
R000 R000
Cash flows from operations (433 005) (63 868)
Cash flows of life assurance subsidiaries
including investing activities 124 427 (31 861)
Cash flows from financing 290 414 8 861
Net decrease in cash equivalents (18 164) (86 868)
Cash and cash equivalents at beginning
of period 332 909 419 777
Cash and cash equivalents at end of period 314 745 332 909
Directors HL Shill (Chairman) MP Adonisi Dr DC Cronje 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 Computershare Services Limited 2nd Floor
Edura House 41 Fox Street Johannesburg 2001
PO Box 61051 Marshalltown 2107
Sage Group Limited
Reg no 1970/01541/06
Share code SGG ISIN code ZAE000006623
Website www.sage.co.za
