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Capital Alliance - Interim Results
CAPITAL ALLIANCE
(Registration number: 1952/000756/06)
Share Code: CPT
ISIN: ZAE000011904
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2004
Highlights
* Proposed acquisition by Liberty Group Limited
* Acquisition of Rentmeester and reinsurance of IEB Group Risk Benefits
* Successful ALIS implementation and per policy cost reductions in Australia
* Increase in embedded value per share to R16.09, after 92 cents dividend paid
* Increase in net profit before taxation of 29%
* Increase in headline earnings per share of 18%
* Annualised RoE of 23% achieved
* Increase of 183% in new business embedded value in South Africa to
R26 million
The following are the unaudited consolidated results of Capital Alliance
Holdings Limited and its subsidiary companies for the six months ended 30
September 2004 together with comparative figures:
summarised group income statements
Unaudited Unaudited
for the six months ended 30 September 30 September
2004 2003
Notes R`000 R`000
Income 2 343 288 2 119 138 11%
Net premium income on
insurance contracts 1 183 826 838 313
Net premium income from
reinsurance
arrangements (7 779) (38 991)
Policy fees on investment
contracts 6 832 5 135
Investment income, net gain
on revaluation
and disposal of investments 1 155 263 1 292 461
Other income 5 146 22 220
Outgo 2 039 591 1 883 375 8%
Net policyholder benefits
relating to
insurance contracts 1 402 117 1 296 765
Commission on insurance
contracts 176 613 60 885
Administration expenses 222 948 112 380
Amortisation of intangible
assets 1 6 103 8 324
Minority share of profits 5 404 -
Transfer s to policyholder
liabilities under
insurance contracts 226 406 405 021
Net profit before taxation 2 303 697 235 763 29%
Taxation (67 913) (32 110)
Net profit after taxation 235 784 203 653 16%
Preference dividend (8 212) (11 378)
Attributable earnings to
ordinary
shareholders 227 572 192 275
Headline earnings attributable
to ordinary shareholders 3 233 675 200 599 16%
Attributable earnings per
share (cents)
Basic 126.9 106.2 19%
Fully diluted 126.1 106.2
Headline earnings per share
(cents)
Basic 130.3 110.8 18%
Fully diluted 129.5 110.8
Weighted average number of
shares in issue (`000) 179 397 180 999
Fully diluted number of
shares in issue (`000) 180 402 181 104
Total shares in issue (`000) 176 576 179 485
2. Net profit before taxation
split as: R`000 R`000
Operating Income 164 251 181 917
Policy fees on investment
contracts 6 832 5 135
Shareholder s` investment
income on life
investments 50 065 48 882
Shareholder s` net gain on
revaluation and
disposal
of life investments 81 508 (20 239)
Other income net of
administration expenses 1 041 20 068
303 697 235 763 29%
3. The headline earnings are
calculated as:
Attributable earnings for the
period 227 572 192 275
Add: amortisation of
intangible assets 6 103 8 324
Headline earnings for the
period 233 675 200 599 16%
summarised group balance sheets
Unaudited Audited
as at 30 September 31 March
2004 2004
R`000 R`000
Assets
Investment assets 18 281 465 18 196 119
Intangible assets 140 035 121 382
Property, plant and equipment 43 240 45 485
Deferred taxation 197 705 164 828
Current assets 882 097 752 118
Total assets 19 544 542 19 279 932
Equity, reserves and liabilities
Total shareholder s` funds 2 162 773 2 103 316
Minority interests` 143 584 149 617
Outside shareholder s` interests in respect
of preference shares 200 000 200 000
Net policyholder liabilities 15 836 185 15 643 518
- under insurance contracts 14 271 672 14 048 663
- under investment contracts 1 564 513 1 594 855
Non-current liabilities 913 104 480
Deferred taxation 103 933 68 446
Current liabilities 1 097 154 1 010 555
Total equity, reserves and liabilities 19 544 542 19 279 932
valuation basis: economic assumptions
for the period ended 30 September 31 March
2004 2004
Risk discount rate 12,0% 12,5%
Equity return (before capital gains tax) 11,5% 12,0%
Property return (before tax) 10,5% 11,0%
Fixed interest return (before tax) 9,5% 10,0%
Cash return (before tax) 7,5% 8,0%
Average investment return (before tax) 9,9% 10,9%
Expense inflation rate per annum 5,5% 6,0%
life insurance operations
Unaudited Unaudited
for the six months ended 30 September 30 September
2004 2003
Notes R`000 R`000
Net premium income on
insurance contracts
Individual life
Single premiums 187 034 124 722
Recurring premiums 842 492 671 079
Gross individual life
premiums 1 029 526 795 801
Reinsurance premiums (143 537) (77 369)
885 989 718 432 23%
Group benefits
Single premiums 3 640 5 659
Recurring premiums 478 997 151 939
Funeral - single
premiums 11 320 2 519
Gross group benefits
premiums 493 957 160 117
Reinsurance premiums (213 740) (63 233)
280 217 96 884 189%
Credit life
Single premiums 20 241 24 586
Reinsurance premiums (2 621) (1 589)
17 620 22 997
Net premium income on
insurance contracts 1 183 826 838 313 41%
Net premium income
from reinsurance
arrangements (7 779) (38 991)
Investment income, net
gains on revaluation
and disposal of investments
(net of administration fees)
Insurance contracts
and shareholder assets
Investment income 507 342 577 374
Realised gain on
disposal of
investments 179 533 152 536
Unrealised gain on
revaluation of
investments 407 511 681 179
Foreign exchange
translation net gain
on conversion of foreign
subsidiary 84 907 (97 156)
Investment
administration fees (24 030) (21 472)
1 155 263 1 292 461
Investment contracts
before fair value
adjustment
Investment income 43 579 49 460
Realised loss on
disposal of
investments (4 842) (1 350)
Unrealised gain on
revaluation of
investments 72 273 39 010
Investment
administration fees (774) (1 915)
110 236 85 205
Total investment
income, net gains on
revaluation and
disposal of
investments
before fair value
adjustment 1 265 499 1 377 666
Fair value adjustment
relating to investment
policyholder
liabilities (110 236) (85 205)
Total investment
income, net gains on
revaluation and
disposal of
investments 1 155 263 1 292 461
Net policyholder
benefits relating to
insurance
contracts
Individual life 4 1 260 919 1 209 901 4%
Death and disability
benefits 296 966 192 786
Maturities 458 934 441 498
Annuities 308 826 292 297
Surrenders 328 325 360 635
Gross individual life
claims 1 393 051 1 287 216
Reinsurance claims (132 132) (77 315)
Group benefits 131 006 76 364 72%
Death and disability
benefits 253 490 129 867
Maturities 446 1 659
Member withdrawals 3 283 2 650
Scheme terminations
and investment
withdrawals 5 444 1 491
Group funeral - death
and disability
benefits 5 104 3 173
Gross group benefits
claims 267 767 138 840
Reinsurance claims (136 761) (62 476)
Credit life 10 192 10 500 (3%)
Death and disability
benefits 10 043 11 282
Reinsurance claims 149 (782)
1 402 117 1 296 765 8%
Note:
4. Policyholder benefits are stated gross of policy loans. In order to arrive
at an estimate of net cash outflow in respect of benefits paid, R273 million
in respect of policy loans must be deducted from the individual life claims
of R1 261 million.
summarised statement of changes in equity
Unaudited Audited Unaudited
six months year six months
ended ended ended
30 September 31 March 30 September
2004 2004 2003
R`000 R`000 R`000
Share capital and premium 1 005 220 1 001 030 1 043 101
Balance at beginning of period 1 001 030 1 018 347 1 018 347
Arising from share issue - 28 572 28 571
Share issue expenses written off (55) (6 530) (71)
Holding company shares
disposed/(acquired)
by group companies 4 245 (39 359) (3 746)
Non-distributable reserve 1 775 1 775 600
Balance at beginning of period 1 775 600 600
Revaluation of owner-occupied
proper ties - 1 175 -
Foreign currency translation
reserve (26 477) (16 675) -
Balance at beginning of period (16 675) - -
Foreign currency translation
reserve arising
on translation of foreign
subsidiaries (9 802) (16 675) -
Retained earnings 1 182 255 1 117 186 827 758
Restated balance/balance at
beginning
of period 1 117 186 785 316 785 316
Balance at beginning of period
as
previously reported 643 922 643 922
Adjustment for change in
accounting policy
Accounting for fair value of
embedded
derivative in terms of AC133 142 302 142 302
Deferred tax thereon (908) (908)
Net income for the period 235 784 501 651 203 653
Dividends declared (170 715) (169 781) (161 211)
2 162 773 2 103 316 1 871 459
summarised group cash flow statement
Unaudited Unaudited
for the six months ended 30 September 30 September
2004 2003
R`000 R`000
Cash flow from operating activities (491 878) (691 015)
Cash flow from investing activities 794 382 225 888
Cash flow from financing activities 4 190 8 235
Net movement in cash and cash equivalents 306 694 (456 892)
Cash and cash equivalents at beginning of
period 1 734 085 1 764 086
Foreign exchange effect on cash (32 301) -
Cash and cash equivalents at end of period 2 008 478 1 307 194
summarised segment information
South African Australian
insurance insurance
and other and other
unaudited for the six months operations operations Total
ended 30 September 2004 R`000 R`000 R`000
The primary segments of the
group are the
geographic operations:
Income statement extracts
Net premium income on
insurance contracts 851 313 324 734 1 176 047
Investment income, net gains
on
revaluation and disposal of
investments
(net of administration fees) 1 138 358 16 905 1 155 263
Losses from changes in
shareholdings - (4 854) (4 854)
Other income 6 193 10 639 16 832
Net policyholder benefits on
insurance
contracts (1 330 396) (71 721) (1 402 117)
Commissions on insurance
contracts (64 065) (112 548) (176 613)
Administration expenses (119 672) (103 276) (222 948)
Amortisation of intangible
assets (3 330) (2 773) (6 103)
Minority share of profits - (5 404) (5 404)
Transfer to policyholder
liabilities under
insurance contracts (188 856) (37 550) (226 406)
Net profit before taxation 289 545 14 152 303 697
Taxation (63 479) (4 434) (67 913)
Net profit after taxation 226 066 9 718 235 784
Preference dividends (8 212) - (8 212)
Attributable earnings to
ordinary
shareholder s 217 854 9 718 227 572
Adjustment for amortisation
of intangible
assets 3 330 2 773 6 103
Headline earnings 221 184 12 491 233 675
Balance sheet extracts
Total carrying amount of
segment assets
excluding capital additions
and deferred
tax assets 18 232 661 1 081 675 19 314 336
Capital additions 28 743 3 758 32 501
Deferred tax assets 133 367 64 338 197 705
Total carrying amount of
segment assets 18 394 771 1 149 771 19 544 542
Segment liabilities
excluding deferred
tax liabilities 16 576 014 701 822 17 277 836
Deferred tax liabilities 51 841 52 092 103 933
Total segment liabilities 16 627 855 753 914 17 381 769
group embedded value
as at 30 September 31 March
2004 2003
R`000 R`000
Shareholder s` net assets
- total 2 162 773 2 103 316
- less: Saambou intangible asset (3 330) (6 659)
Net value of South African in force life business 681 782 681 183
Gross value of South African in force life
business 819 926 820 920
Less: opportunity cost of capital adequacy
requirements (138 144) (139 737)
Embedded value 2 841 225 2 777 840
Capital adequacy requirement (`CAR`) 966 244 931 412
Capital adequacy cover (times) 2.4 2.5
Net asset value per share (Rand) 12.23 11.90
Embedded value of in force business per share
(Rand) 3.86 3.87
Embedded value per share (Rand) 16.09 15.77
value of new business
as at 30 September 30 September
2004 2003
R`000 R`000
Net value of new life insurance
business written
in South Africa 26 418 9 329 183%
Gross value of new life insurance
business written
in South Africa 28 113 11 318
Less: opportunity cost of capital
adequacy requirements (1 695) (1 989)
analysis of growth in embedded value
for the period ended 30 September 31 March 30 September
2004 2004 2003
R`000 R`000 R`000
Embedded value at end of period 2 841 225 2 777 840 2 456 472
Embedded value at star t of
period 2 777 840 2 380 180 2 380 180
Growth in embedded value 63 385 397 660 76 292
Less: Changes in share capital (4 190) (16 142) (24 754)
Adjustment for AC133 - (41 782) (41 782)
Plus: Dividends declared or paid 170 715 169 781 161 211
Embedded value earnings 229 910 509 517 170 967
Analysed as:
Roll forward 186 322 252 892 88 792
Investment return on life
insurance
net assets 131 573 136 234 48 701
Expected return on in force
business 54 749 116 658 40 091
Value of new business 26 418 40 405 9 329
Expected return on new business 725 2 412 583
Change in economic assumptions 12 319 (9 185) 12 172
Change in non-economic
assumptions
and basis (62 091) 127 772 32 338
Investment experience
variations* 87 951 24 579
Other experience variations (21 734) 70 642 27 744
Embedded value earnings 229 910 509 517 170 958
*included in other experience variations at 30 September 2003
composition of shareholders` net asset value
as at 30 September 31 March
2004 2004
R`000 R`000
Equity 655 012 731 472
Cash 792 400 377 473
Interest bearing 611 687 983 025
Property 57 919 44 567
Other 45 755 (33 221)
2 162 773 2 103 316
new business annual premium income by source
for the six months ended 30 September 30 September
2004 2003
R`000 R`000
South African individual life
recurring premiums 46 937 48 857
CAL Commercial 13 897 12 526
Broker - 456
Distribution partners 33 040 35 875
South African group benefits recurring
premiums 36 460 28 287
Group risk 31 546 27 079
Funeral 3 617 1 208
Credit life 1 297 -
Total South African new recurring
premiums 83 397 77 144 8%
South African single premiums
Individual life 170 655 104 582
Annuities 24 001 18 695
Credit life 2 355 2 954
Pensions investment - 1 575
Total South African single premiums 197 011 127 806 54%
Australian new recurring premiums
Individual life 27 995
Group risk 8 196
Total Australian new recurring premiums 36 191
SUMMARISED GROUP COMMENTARY
1. ACCOUNTING POLICIES AND METHODS
The accounting policies adopted by the group comply in all material respects
with South African Statements of Generally Accepted Accounting Practice as well
as the South African Companies Act of 1973. These accounting policies are
consistent with those applied at 31 March 2004 except for the implementation of
the South African Statement of Generally Accepted Accounting Practices AC140:
Business Combinations, which has been applied from 1 April 2004. This statement
requires that goodwill is no longer amortised but is subject to an annual
impairment test. This interim report is in compliance with AC127 : Interim
Financial Reporting.
2. REVIEW OF OPERATING RESULTS FOR THE PERIOD
The results for this period include the consolidated income statement and
balance sheet of the group`s Australian subsidiary, PrefSure Holdings Limited
(`PrefSure Holdings`) (previously Capital Alliance Holdings Australia
Proprietary Limited) from 1 April 2004. The comparative figures are in respect
of South African business only. Further detailed commentary on the Australian
operations is provided below.
Net profit before taxation increased by 29% over the comparative period. Net
profit after taxation and headline earnings increased by 16% over the prior
period to R236 million and R234 million respectively. Headline earnings per
share increased by 18% over the prior period to R1.30. The group has once again
maintained its unbroken record of growth in headline earnings and accordingly
the directors believe that this result is most satisfactory. Of particular note
is the continued growth in embedded value per share to R16.09, post the dividend
per share payment of R0.92 during the period. Embedded value per share grew by
an annualised 16.3% over the period, after adding back the dividend paid,
excluding the uplift in PrefSure Holdings. The Return on Equity (`RoE`),
calculated on an annualised basis, was 23.1%, a continuation of the group`s
record of achieving a high RoE.
2.1 South African life insurance businesses
In looking at the South African results in the period, it must be noted that
there was no significant integration activity during the period. This contrasts
to the prior period, where the final benefits of the Fedsure / Norwich Life
integration were brought to account.
The following were considered noteworthy in respect of the South African life
insurance businesses.
* Client retention activities have focused on quality of service delivered and
level of investment returns. The group has continued to successfully retain
funds, particularly under matured policies, as is evidenced by the substantial
increase in single premium volumes over the prior period.
* Equity portfolios continued to outperform their benchmarks and benefited from
the strong performance of local equity markets, particularly in the period post
1 July 2004.
* The absolute return portfolio has had an excellent performance in the period,
substantially outperforming the benchmark of CPI + 8%
* Bond performance was muted in comparison to the prior year and in line with
the All Bond Index Benchmark. Cash portfolios outperformed their benchmark and
the annuity portfolio made an investment profit.
* As a consequence of the weighting in bonds and cash relative to equities and
lower interest during the period, total policyholder investment income was lower
than in the prior period.
* New business results showed a substantial increase in the embedded value of
new business written over the prior year. This was primarily as a result of:
- CAL Commercial, which showed volume growth of 11% over the prior period,
whilst maintaining acceptable persistency;
- Group Risk new business, which in another strong performance, achieved a 29%
increase in new risk premiums over the prior period;
- Distribution Partner business, which despite an 8% lower volume of business,
achieved a better margin due to re-pricing of business and a reduction in
overhead expenses for this channel. Although the overall volumes in the
Distribution Partner business fell short of target, there was an encouraging
recovery in sales volumes during the last 2 months of the period, which has
continued subsequent to the period end; and
- The continued level of support from independent financial advisers in the
middle and upper income market with respect to maturity extension products.
* The taxation charge increased substantially as last year the deferred
taxation assets were raised in terms of accounting practice.
* Other experience items were largely within expectation.
2.2 Australian life insurance businesses
* The final phases of the integration of PrefSure Life and Lumley Life were
successfully concluded during the period with the implementation of the group`s
ALIS administration platform in Australia. The ALIS system went live on 1 August
2004, in line with the project plan for the implementation. The group
anticipates considerable savings to emerge in future from this implementation,
commencing in the second half of the current financial year.
* PrefSure Holdings is presently carried at the original acquisition value in
the balance sheet, since this currently approximates the fair value of the
business. The results do not separately include the value of in force on the
Australian book in the value of in force figures, or the value of new business
written in Australia in the embedded value of new business figures. As
previously indicated, the group intends to implement full South African based
embedded value reporting for the in force book and new business at the year end.
* PrefSure Life has continued to win new business in the retail and group risk
markets. In particular, growth in the group risk market has continued at a high
rate. The new recurring premium information per the table above only shows
premiums in respect of new schemes and not new premiums in respect of existing
schemes.
* Good progress has been made in terms of expense reductions and the group is
confident of achieving the reduced cost per policy target by 31 March 2005.
* Attributable earnings of R9,7 million have been recorded for PrefSure
Holdings in the period, influenced by the integration and ALIS implementation
costs carried during the period. It is anticipated that the attributable
earnings in the second half of the year will be greater than in the first half
and the group will account for the increased embedded value in PrefSure Holdings
at 31 March 2005.
3. EMPOWERMENT
The group has continued to focus on its five pillars of empowerment and the
further implementation of its empowerment strategy. Accordingly the group
currently complies with most of the Financial Sector Charter requirements ahead
of deadlines.
4. DIVIDENDS
Declaration of dividends is considered at the year-end.
5. POST BALANCE SHEET EVENTS
5.1 Acquisition of Rentmeester Assurers Limited (`Rentmeester`)
The group announced the acquisition of 100% of the shares and loan accounts in
Rentmeester on 25 November 2004. Rentmeester has approximately 200 000 life
insurance policies and group funeral schemes with Annual Premium Income of R150
million in force. Rentmeester has traded for a considerable period of time in
the lower income insurance market and has accordingly built up substantial brand
awareness in this market. This transaction will increase the group`s presence in
the funeral insurance market and allow the group an opportunity to obtain
synergies from integrating the respective administrative operations. The
transaction is subject to various approvals, including, inter alia, the approval
of the relevant Competition authorities, the Registrar of Long-Term Insurance
and the shareholders of Rentsure Holdings Limited, in general meeting. Further
information on the progress of this transaction will be released in due course.
5.2 Reinsurance of Investec Employee Benefits Group Risk business (`IEB`)
The group has concluded Heads of Agreement with IEB to reinsure the Group Risk
insurance business with effect from 31 December 2004. The IEB Group Risk
business sells risk insurance products to employers and pension funds and has
been stabilised and enhanced under IEB`s control after the acquisition of
certain of the financial services interests of Fedsure Holdings Limited by
Investec Group Limited in 2001. The combination of CAL and IEB`s Group Risk
books will position the group well for future growth in this market. This
transaction is subject to various approvals and further information will be
released in due course.
6. JOINT ANNOUNCEMENT RELATING TO PROPOSED LIBERTY GROUP TRANSACTION
The group would like to draw the attention of shareholders to the joint
announcement relating to the proposed acquisition, via a scheme of arrangement,
of the issued share capital in the group by Liberty Group Limited (`the
acquisition`). The board has received an offer from Liberty Group Limited, will
appoint independent advisers to evaluate the offer and will revert to
shareholders in due course. The board will continue to act in the best interests
of shareholders at all times and will evaluate the Liberty Group Limited
proposal in this light. The acquisition will be subject to various approvals
including, inter alia, the approval of the relevant Competition authorities, the
Registrar of Long-Term Insurance and the group`s shareholders in terms of the
proposed scheme. Further information will be made available in due course.
7. PROSPECTS
The group has made considerable progress in its initiatives to increase the
number of policies under administration, through new business activities and the
acquisition of local and foreign books of business. The group`s experience in
Australia proves that the group can integrate books of policies acquired outside
of South Africa and the group is actively pursuing a number of initiatives in
Australia and the United Kingdom.
The group believes that further industry consolidation in the South African
market is inevitable, as evidenced by the Rentmeester and IEB transactions and
the proposed acquisition by Liberty Group Limited referred to above.
Given reasonable investment markets and a stable currency the board is confident
that growth in earnings can be achieved in the second half of the year.
For and on behalf of the board of directors of Capital Alliance Holdings Limited
L M Nestadt (Chairman) I M Kirk (Chief Executive Officer)
1 December 2004
Johannesburg
Directors: L M Nestadt (Chairman), M P Malungani (Deputy Chairman),
I M Kirk (Chief Executive Officer) (Irish), B Gildenhuys,
H R Levin, T A Mokhobo
Company Secretary: W T Green
Registered office: 162 Anderson Street
Johannesburg 2001
PO Box 261813 Excom 2023
Transfer secretaries: Computershare Investor Services 2004 (Pty) Limited
70 Marshall Street
Johannesburg 2001
PO Box 61051
Marshall Town 2107
To receive information electronically register on IPROXY
www.capitalalliance.co.za
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