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FIRST RAND INSURANCE GROUP
RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30 JUNE 1999
("THE INSURANCE GROUP")
- INCREASE IN GROUP OPERATING PROFIT OVER PRO FORMA +73%
- INCREASE IN GROUP HEADLINE EARNINGS OVER PRO FORMA +19%
- FUNDS RECEIVED FROM CLIENTS INCREASED BY 31% TO R33 BILLION
- ASSETS UNDER MANAGEMENT AND ADMINISTRATION INCREASED BY 15% TO R114 BILLION
- ESTIMATED SUSTAINABLE GROUP COST SAVINGS RESULTING FROM THE MERGER OF R260
MILLION PER ANNUM
- EMBEDDED VALUE OF NEW BUSINESS R311 MILLION FOR THE GROUP
INTRODUCTION
INTRODUCTION
THIS ANNOUNCEMENT RELATES TO THE INSURANCE INTERESTS OF THE FIRSTRAND LIMITED
GROUP OF COMPANIES (THE FIRSTRAND GROUP) AND SHOULD BE READ IN CONJUNCTION WITH
THE REPORT ON FIRSTRAND LIMITED.
THE ACTIVITIES OF THE FIRSTRAND INSURANCE GROUP INCLUDE THE OPERATIONS OF
MOMENTUM LIFE, SOUTHERN LIFE, MOMENTUM EMPLOYEE BENEFITS, MOMENTUM
ADMINISTRATION SERVICES (MAS), FIRSTRAND ASSET MANAGEMENT AND DISCOVERY HEALTH.
SUMMARISED GROUP INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE
1999 1998
(AUDITED) (AUDITED)
RM RM
HEADLINE EARNINGS ATTRIBUTABLE TO
ORDINARY SHAREHOLDERS 631 192
HEADLINE EARNINGS RECONCILIATION
NET INCOME AFTER TAX ATTRIBUTABLE TO
ORDINARY SHAREHOLDERS 638 187
ADD: PORTION OF GOODWILL WRITTEN OFF 2 -
ADD: LOSS ON DISPOSAL OF SUBSIDIARY AND
JOINT VENTURE 6 5
LESS: RELEASE OF PROVISIONS MADE ON
DISPOSAL OF AEGIS (15) -
HEADLINE EARNINGS ATTRIBUTABLE TO
ORDINARY SHAREHOLDERS 631 192
SUMMARISED GROUP BALANCE SHEET AT 30 JUNE
1999 1998
(AUDITED) (AUDITED)
RM RM
ASSETS
INVESTMENT ASSETS 55 177 53 937
GOVERNMENT AND PUBLIC AUTHORITY STOCKS 5 234 7 032
MORTGAGES, DEBENTURES AND OTHER LOANS 5 574 3 628
EQUITY INVESTMENTS 31 409 32 579
PROPERTY INVESTMENTS 3 388 3 974
POLICY LOANS 507 547
FUNDS ON DEPOSIT 9 065 6 177
FIXED ASSETS 165 139
CURRENT ASSETS 2 201 1 649
TOTAL ASSETS 57 543 55 725
LIABILITIES AND SHAREHOLDERS' FUNDS
CURRENT LIABILITIES 2 353 2 413
LONG-TERM LIABILITIES 274 272
LIFE INSURANCE FUND 51 708 50 303
OUTSIDE SHAREHOLDERS' INTEREST 125 178
SHARE CAPITAL AND RESERVES 3 083 2 559
TOTAL LIABILITIES AND SHAREHOLDERS' FUNDS 57 543 55 725
TOTAL ASSETS UNDER MANAGEMENT
AND ADMINISTRATION 113 695 98 938
SUMMARY OF ACTUARIAL VALUATIONS AT 30 JUNE
1998
1999 (PRO FORMA)
RM RM
FINANCIAL SOUNDNESS EXCESS OF ASSETS
OVER LIABILITIES 5 731 5 682
EMBEDDED VALUE 8 340
FINANCIAL OVERVIEW
GENERAL
THE TOTAL HEADLINE EARNINGS AFTER TAX OF THE FIRSTRAND INSURANCE GROUP AMOUNTED
TO R631 MILLION FOR THE YEAR TO 30 JUNE 1999. THIS COMPARES WITH THE ACTUAL
INSURANCE GROUP HEADLINE EARNINGS FOR 1998 OF R192 MILLION. THE REASON FOR THE
SIGNIFICANT INCREASE IS THAT THE 1998 FIGURE REPRESENTS THE MOMENTUM LIFE GROUP
AND ONLY INCLUDES THREE MONTHS OF THE SOUTHERN LIFE GROUP FROM 1 APRIL 1998 TO
30 JUNE 1998. THE 1999 FIGURE COMPRISES THE GROUP EARNINGS OF MOMENTUM LIFE AND
SOUTHERN LIFE FOR A FULL TWELVE MONTH PERIOD.
THESE RESULTS ARE GRATIFYING CONSIDERING THE SIGNIFICANT DEMANDS OF THE MERGER
OF THE MOMENTUM LIFE AND SOUTHERN LIFE GROUPS, AS WELL AS THE ADVERSE IMPACT ON
THE RESULTS OF THE AUGUST 1998 MARKET CRASH. THE MAJOR MERGER MILESTONES
REFERRED TO ELSEWHERE IN THIS REPORT PROVIDE AN INDICATION OF THE ENORMOUS
PROGRESS MADE WITH THE MERGER.
TO AFFORD A MORE MEANINGFUL COMPARISON, PRO FORMA COMPARATIVE FIGURES HAVE BEEN
CALCULATED IN RESPECT OF THE YEAR ENDED 30 JUNE 1998. THESE PRO FORMA FIGURES
COMPRISE THE AUDITED FINANCIAL INFORMATION OF THE MOMENTUM LIFE GROUP TO 30
JUNE 1998, AS WELL AS THE UNAUDITED FINANCIAL INFORMATION OF THE SOUTHERN LIFE
GROUP FOR THE TWELVE MONTHS ENDED 30 JUNE 1998. THE PRO FORMA EARNINGS FOR 1998
ASSUME THAT THE FINAL CAPITAL ALLOCATION OF THE FIRSTRAND RIGHTS ISSUE PROCEEDS
TO THE INSURANCE GROUP AND THE CORRESPONDING EARNINGS THEREON, HAD BEEN
ALLOCATED FOR THE ENTIRE YEAR.
PROFIT RECOGNITION BASIS
DURING THE YEAR, WE ALIGNED THE PROFIT RECOGNITION APPROACH AND METHODOLOGY OF
SOUTHERN LIFE WITH THE MORE CONSERVATIVE PROFIT RECOGNITION APPROACH USED FOR
MOMENTUM LIFE. THE DISCLOSED LIFE INSURANCE PROFITS CONSIST OF THE OPERATING
SURPLUSES RELEASED BY THE FINANCIAL SOUNDNESS VALUATION PLUS THE INVESTMENT
INCOME ON FREE RESERVES. CAPITAL APPRECIATION OR DEPRECIATION ON FREE RESERVES
DOES NOT FORM PART OF THE DISCLOSED PROFITS. THE 1998 PRO FORMA EARNINGS
CALCULATED FOR SOUTHERN LIFE ARE CONSISTENT WITH THIS PROFIT RECOGNITION
APPROACH.
GROUP HEADLINE EARNINGS
THE TOTAL HEADLINE EARNINGS OF THE INSURANCE GROUP INCREASED BY 19% TO R631
MILLION COMPARED TO THE PRO FORMA EARNINGS. THE MAIN COMPONENTS OF THIS
INCREASE ARE:
ACTUAL PRO FORMA
1999 1998 %
RM RM CHANGE
HEADLINE EARNINGS FROM:
GROUP OPERATING PROFIT 405 234 73
INVESTMENT INCOME ON FREE RESERVES 226 297 -24
GROUP HEADLINE EARNINGS 631 531 19
A MORE DETAILED ANALYSIS OF THE GROUP HEADLINE EARNINGS IS PROVIDED IN THE
FOLLOWING TABLE:
ACTUAL PRO FORMA
1999 1998 %
EARNINGS SOURCE RM RM CHANGE
OPERATING PROFIT FROM:
INDIVIDUAL LIFE 127 51 >100
EMPLOYEE BENEFITS 78 60 30
OPERATING PROFIT FROM
LIFE INSURANCE 205 111 85
ASSET MANAGEMENT 136 87 56
HEALTH INSURANCE 64 36 78
GROUP OPERATING PROFIT 405 234 73
INVESTMENT INCOME ON
FREE RESERVES 226 297 -24
GROUP HEADLINE EARNINGS 631 531 19
FUNDS RECEIVED FROM CLIENTS
DURING THE YEAR, FUNDS TOTALLING R33,4 BILLION WERE RECEIVED BY THE INSURANCE
GROUP . THIS REPRESENTS A 31% INCREASE OVER THE COMPARABLE PRO FORMA FIGURE FOR
1998. THE GROWTH IN INDIVIDUAL SINGLE PREMIUMS, THE SURGING HEALTH INSURANCE
BUSINESS, AS WELL AS THE GROWTH IN NEW SEGREGATED FUNDS PLACED WITH THE
INSURANCE GROUP'S ASSET MANAGERS, WERE PARTICULARLY PLEASING.
ACTUAL PRO FORMA
1999 1998 %
FUNDS RECEIVED RM RM CHANGE
INDIVIDUAL LIFE PREMIUM INCOME 5 497 4 863 13
SINGLE PREMIUMS (1) 2 709 2 154 26
RECURRING PREMIUMS 2 788 2 709 3
EMPLOYEE BENEFIT PREMIUM
INCOME 2 807 2 754 2
SINGLE PREMIUMS 1 485 1 467 1
RECURRING PREMIUMS 1 322 1 287 3
HEALTH INSURANCE PREMIUM
INCOME 1 848 1 114 66
LINKED PRODUCT SALES (2) 3 728 3 083 21
UNIT TRUST SALES 3 977 3 667 8
NEW SEGREGATED THIRD PARTY
FUNDS 15 570 9 974 6
TOTAL FUNDS RECEIVED 33 427 25 455 31
1 SINGLE PREMIUMS EXCLUDE FUNDS RETAINED THROUGH THE EXTENSION OF THE ORIGINAL
POLICY TERM, AMOUNTING TO R364 MILLION (1998: R307 MILLION).
2 INCLUDES SALES OF PRODUCTS ON THE LIFE INSURANCE BALANCE SHEET, AMOUNTING TO
R1,6 BILLION (1998: R0,8 BILLION).
ALL TRANSFERS BETWEEN ON AND OFF-BALANCE SHEET FUNDS HAVE BEEN EXCLUDED FROM
THE ABOVE.
PAYMENTS TO CLIENTS
THE INSURANCE GROUP PAID OUT A TOTAL OF R20,7 BILLION TO CLIENTS DURING THE
YEAR TO 30 JUNE 1999, AN INCREASE OF 2% OVER THE EQUIVALENT 1998 FIGURE. IT IS
ENCOURAGING TO NOTE THAT EMPLOYEE BENEFIT WITHDRAWALS EXPERIENCED DURING 1998
HAVE BEEN REDUCED SUBSTANTIALLY. THE HIGH LEVELS OF SWITCHING IN THE UNIT TRUST
MARKET ARE EVIDENCED BY INCREASED REPURCHASES OF UNIT TRUST FUNDS AS WELL AS
LINKED PRODUCT WITHDRAWALS DURING 1999.
ACTUAL PRO FORMA
1999 1998 %
PAYMENTS TO CLIENTS RM RM CHANGE
INDIVIDUAL LIFE 5 045 4 566 10
EMPLOYEE BENEFITS 4 791 7 579 -37
HEALTH INSURANCE 1 418 741 91
LINKED PRODUCTS (1) 2 043 756 >100
UNIT TRUSTS 3 631 2 109 72
SEGREGATED THIRD PARTY FUNDS 3 816 4 522 -16
TOTAL PAYMENTS TO CLIENTS 20 744 20 273 2
1 INCLUDES OUTFLOWS RELATING TO PRODUCTS ON THE LIFE INSURANCE BALANCE SHEET
AMOUNTING TO R0,3 BILLION (1998: R0,2 BILLION).
ALL TRANSFERS BETWEEN ON AND OFF-BALANCE SHEET FUNDS HAVE BEEN EXCLUDED FROM
THE ABOVE.
ASSETS UNDER MANAGEMENT
TOTAL ASSETS MANAGED OR ADMINISTERED BY THE INSURANCE GROUP AMOUNTED TO R113,7
BILLION COMPARED TO R98,9 BILLION A YEAR AGO, AN INCREASE OF 15%. THE MOST
PLEASING ASPECT OF THIS INCREASE WAS THE 37% INCREASE IN ASSETS MANAGED ON
BEHALF OF THIRD PARTIES.
ASSETS UNDER MANAGEMENT 1999 1998 %
AND ADMINISTRATION RM RM CHANGE
ON-BALANCE SHEET ASSETS 57 543 55 725 3
ASSETS MANAGED ON BEHALF
OF THIRD PARTIES 45 698 33 448 37
UNIT TRUST FUNDS MANAGED 4 765 4 572 4
ASSETS UNDER MANAGEMENT 108 006 93 745 15
LINKED PRODUCT ASSETS UNDER
ADMINISTRATION (1) 5 689 5 193 10
TOTAL ASSETS UNDER MANAGEMENT
AND ADMINISTRATION 113 695 98 938 15
1 EXCLUDES BUSINESS WRITTEN BY THE INSURANCE GROUP'S LINKED PRODUCT SUPPLIER
ON THE LIFE COMPANY'S BALANCE SHEET, AS THESE ASSETS ARE REFLECTED UNDER
ON-BALANCE SHEET ASSETS ABOVE.
ACTUAL PRO FORMA
1999 1998 %
NEW BUSINESS RM RM CHANGE
ANNUALISED RECURRING PREMIUMS 1 684 1 209 39
INDIVIDUAL LIFE 483 520 -7
EMPLOYEE BENEFITS 125 107 17
HEALTH INSURANCE 1 076 582 85
LUMP SUM INFLOWS 27 469 20 345 35
INDIVIDUAL LIFE PREMIUM INCOME 2 709 2 154 26
EMPLOYEE BENEFITS PREMIUM
INCOME 1 485 1 467 1
LINKED PRODUCT SALES (1) 3 728 3 083 21
UNIT TRUST SALES 3 977 3 667 8
NEW SEGREGATED THIRD PARTY FUNDS 15 570 9 974 56
TOTAL NEW BUSINESS INFLOWS 29 153 21 554 35
1 INCLUDES SALES OF PRODUCTS ON THE LIFE INSURANCE BALANCE SHEET AMOUNTING TO
R1,6 BILLION (1998: R0,8 BILLION).
ALL TRANSFERS BETWEEN ON AND OFF-BALANCE SHEET FUNDS HAVE BEEN EXCLUDED FROM
THE ABOVE.
OPERATIONAL RESULTS
THE OPERATIONAL RESULTS WERE EXCELLENT GIVEN THE SIGNIFICANT ADDITIONAL
WORKLOAD RESULTING FROM THE MERGER. THE CRASH IN STOCK MARKETS ADVERSELY
AFFECTED INVESTMENT RETURNS AND ALSO HAD A NEGATIVE IMPACT ON FEE INCOME BASED
ON ASSET VALUES. AN OPERATIONAL REVIEW PER BUSINESS AREA, COMPARED TO THE PRO
FORMA 1998 FIGURES, IS DETAILED BELOW.
INDIVIDUAL LIFE
WE ARE PLEASED WITH THE INCREASE IN THE OPERATING PROFIT FROM LIFE INSURANCE,
WHICH MORE THAN DOUBLED TO R127 MILLION. THIS IS MAINLY DUE TO THE IMPACT OF
EXPENSE SAVINGS RELATING TO THE RATIONALISATION INITIATIVES FOLLOWING THE
MERGER.
THE MANAGEMENT STRUCTURES AND OPERATIONS OF MOMENTUM LIFE AND SOUTHERN LIFE
HAVE BEEN TOTALLY INTEGRATED FOLLOWING THE MERGER. ANNUAL SAVINGS OF R80
MILLION IN EXPENDITURE RESULTING FROM THE MERGER HAVE ALREADY BEEN ACHIEVED
DESPITE CERTAIN DISCONTINUING COSTS INCURRED IN THIS YEAR. THE SUSTAINABLE COST
SAVINGS ARE PROJECTED TO TOTAL R230 MILLION PER ANNUM FOR LIFE INSURANCE
OPERATIONS, RESULTING IN A BUDGETED RATIO OF LIFE INSURANCE MANAGEMENT EXPENSES
TO NOTIONAL PREMIUM INCOME OF 10% BY JUNE 2001. THIS COST SAVING IS MORE THAN A
THIRD OF THE INDIVIDUAL LIFE MANAGEMENT EXPENSES. THE PROJECTED COST SAVINGS OF
R230 MILLION EXCLUDE THE SAVINGS IN RESPECT OF MAS AND ASSET MANAGEMENT, WHICH
ARE REFLECTED ELSEWHERE IN THIS REPORT.
TOTAL INDIVIDUAL LIFE PREMIUM INCOME INCREASED BY 13% TO R5,5 BILLION FOR 1999,
BOOSTED BY A SUBSTANTIAL INCREASE OF 26% IN SINGLE PREMIUM INCOME. THE INCREASE
IN NEW BUSINESS WAS AS A RESULT OF THE CONTINUED SUCCESS OF MOMENTUM
DISTRIBUTION SERVICES, THE INSURANCE GROUP'S HIGHLY EFFECTIVE BROKER
DISTRIBUTION CHANNEL. THE MOST POPULAR PRODUCTS CONTRIBUTING TO THIS GROWTH
WERE SINGLE PREMIUM PRODUCTS WITH GUARANTEED INVESTMENT RETURNS AND OFFSHORE
INVESTMENTS THROUGH THE RESERVE BANK'S ASSET SWAP MECHANISM.
RECURRING PREMIUM INCOME INCREASED MARGINALLY, DESPITE THE DEMANDS OF THE
MERGER AND THE SWEEPING REPOSITIONING AND RESTRUCTURING OF THE DISTRIBUTION
CHANNELS OF SOUTHERN LIFE. THE EFFECT OF THIS RESTRUCTURING CAN BE SEEN IN THE
DECLINE OF 7% IN NEW ANNUALISED RECURRING PREMIUM INCOME FROM R520 MILLION TO
R483 MILLION. THIS REPRESENTS A COMBINATION OF A SATISFACTORY INCREASE OF 6% IN
BROKER RECURRING PREMIUM PRODUCTION AND A REDUCTION OF 46% IN FIELD FORCE
PRODUCTION. THE LATTER DECLINE WAS AS A RESULT OF THE SOUTHERN LIFE FIELD FORCE
BEING REDUCED BY HALF, THE SOUTHERN LIFE NAMIBIAN OPERATION BEING CLOSED AND
BUSINESS LINES OF SOUTHERN LIFE THAT ARE NOT VIABLE, BEING DISCONTINUED.
LINKED PRODUCTS
MAS GENERATED A POSITIVE CONTRIBUTION TO INSURANCE GROUP EARNINGS, WHICH HAS
BEEN INCLUDED IN THE INDIVIDUAL LIFE EARNINGS. DURING THE FIRST QUARTER OF THE
FINANCIAL YEAR, MAS SUCCESSFULLY COMPLETED THE MERGER WITH SOUTHERN'S
INVESTMENT MANAGEMENT COMPANY. SAVINGS OF R15 MILLION IN ANNUAL EXPENSES WERE
REALISED THROUGH THE MERGER.
DESPITE THE DECLINE IN STOCK MARKETS DURING THE FIRST HALF OF THE FINANCIAL
YEAR, MAS MANAGED TO ATTRACT NEW FUNDS OF R3,7 BILLION DURING THE YEAR UNDER
REVIEW, AN INCREASE OF 21% OVER THE 1998 FIGURE. MAS ADMINISTERED ASSETS OF
R8,0 BILLION AT FINANCIAL YEAR-END, INCLUDING THE BUSINESS WRITTEN ON THE LIFE
COMPANY BALANCE SHEET, WHICH TOTALLED R2,3 BILLION.
MAS WAS THE FIRST LINKED PRODUCT COMPANY TO INTRODUCE WRAP FUNDS, AND AT THE
FINANCIAL YEAR-END HAD WRAP FUNDS UNDER MANAGEMENT OF R1,3 BILLION.
EMPLOYEE BENEFITS
MOMENTUM EMPLOYEE BENEFITS HAD A GOOD YEAR AND CONTRIBUTED R78 MILLION (1998
PRO FORMA: R60 MILLION) TO THE INSURANCE GROUP EARNINGS, AN INCREASE OF 30%.
RISK BUSINESS WAS THE MOST SIGNIFICANT CONTRIBUTOR TO THIS PERFORMANCE.
MOMENTUM EMPLOYEE BENEFITS SUCCESSFULLY COMPLETED THE MERGER OF THE EMPLOYEE
BENEFITS INTERESTS OF MOMENTUM AND SOUTHERN DURING THE FIRST QUARTER OF THE
FINANCIAL YEAR. THE BUSINESSES WERE LARGELY COMPLEMENTARY IN NATURE.
TOTAL EMPLOYEE BENEFITS PREMIUM INCOME, INCORPORATING INVESTMENT ONLY BUSINESS,
HAS BEEN MAINTAINED AT 1998 PRE-MERGER LEVELS. THE RATIONALISATION OF SMALL
SCHEMES AS WELL AS INCREASED COMPETITION IN THE AREA OF INDIVIDUALISED PENSION
FUND MANAGEMENT PLACED PRESSURE ON NEW BUSINESS VOLUMES. HOWEVER, THE LARGE
AMOUNT OF FUND TRANSFERS TO OTHER INVESTMENT MANAGERS EXPERIENCED IN THE
PREVIOUS YEAR HAS BEEN SUBSTANTIALLY REDUCED.
ASSET MANAGEMENT
FIRSTRAND ASSET MANAGEMENT IS THE HOLDING COMPANY OF THE INSURANCE GROUP'S
ASSET MANAGEMENT OPERATIONS, COMPRISING RMB PROPERTIES, RMB ASSET MANAGEMENT
(RMBAM), SOUTHERN ASSET MANAGEMENT (SAM) AND THEIR RESPECTIVE UNIT TRUST
COMPANIES. SUBSEQUENT TO 30 JUNE 1999, RMBAM AND SAM HAVE ANNOUNCED THAT THEY
WILL FULLY INTEGRATE THEIR OPERATIONS AND WILL IN FUTURE OPERATE UNDER A SINGLE
BRAND, BEING RMB ASSET MANAGEMENT.
THE NET INCOME AFTER TAX GENERATED BY FIRSTRAND ASSET MANAGEMENT'S OPERATING
COMPANIES INCREASED BY 56% TO R136 MILLION. THIS WAS THE RESULT OF A
SIGNIFICANT GROWTH OF 37% IN OFF-BALANCE SHEET ASSETS UNDER MANAGEMENT AND A
REDUCTION IN EXPENSES AS A RESULT OF THE MERGER. THESE PROFITS RESULT FROM FEES
EARNED ON ASSETS MANAGED ON BEHALF OF THIRD PARTIES, AS WELL AS FEES RELATING
TO ASSETS MANAGED ON THE INSURANCE GROUP BALANCE SHEET. SAVINGS OF R15 MILLION
IN ANNUAL EXPENSES WERE REALISED AS A RESULT OF THE MERGER.
RMB PROPERTIES, RESPONSIBLE FOR THE MANAGEMENT OF THE INSURANCE GROUP'S
PROPERTY PORTFOLIO OF AROUND R3 BILLION, PLAYED A KEY ROLE IN OPTIMISING THE
PROPERTY REQUIREMENTS OF THE BROADER GROUP, AND MADE A SUBSTANTIALLY HIGHER
CONTRIBUTION TO PROFITS COMPARED WITH THE PRIOR YEAR.
HEALTH INSURANCE
DISCOVERY HEALTH, WHICH IS DUE TO BE LISTED ON THE JSE IN OCTOBER 1999,
PERFORMED EXTREMELY WELL DURING THE YEAR UNDER REVIEW. DISCOVERY EARNED NET
INCOME AFTER TAX OF R91 MILLION (1998: R54 MILLION), A 69% INCREASE OVER THE
PREVIOUS FINANCIAL YEAR. THE FIRSTRAND INSURANCE GROUP'S SHARE OF THIS TOTALLED
R64 MILLION.
NEW BUSINESS INCREASED BY 85% TO R1,1 BILLION FROM R0,6 BILLION IN 1998.
PREMIUM INCOME, NET OF REINSURANCE, INCREASED BY 66% TO R1,8 BILLION COMPARED
TO R1,1 BILLION IN THE PREVIOUS YEAR. THE COMPANY NOW PROVIDES HEALTH CARE
COVER TO MORE THAN 500 000 PEOPLE.
THE CURRENT FINANCIAL YEAR SAW THE PROMULGATION OF THE NEW MEDICAL SCHEMES ACT.
DISCOVERY HEALTH HAS WORKED CLOSELY AND CONSTRUCTIVELY WITH THE DEPARTMENT OF
HEALTH TO HELP FORMULATE THE REGULATIONS THAT DEFINE THIS ACT. DISCOVERY HEALTH
HAS THE REQUISITE SKILLS AND CONTROLS REQUIRED TO OPERATE IN THIS NEW
ENVIRONMENT AND IS WELL POSITIONED TO CONTINUE TO GROW ITS BUSINESS.
INVESTMENT INCOME ON FREE RESERVES
THE INVESTMENT INCOME ON FREE RESERVES WAS EARNED MAINLY ON THE RIGHTS ISSUE
PROCEEDS ALLOCATED TO THE INSURANCE GROUP. THE REASON FOR THE REDUCTION
COMPARED TO THE PRO FORMA EARNINGS OF 1998 IS THAT THE CALCULATION OF THE PRO
FORMA EARNINGS ASSUMES INTEREST ON RIGHTS ISSUE CAPITAL OF R2,9 BILLION
ALLOCATED TO THE INSURANCE GROUP FOR A FULL YEAR, AT AN AFTER-TAX YIELD OF 10%
PER ANNUM. THE ACTUAL ALLOCATION OCCURRED LATER THAN ORIGINALLY ANTICIPATED,
AND WHILE THERE WAS NO LOSS OF INCOME TO THE FIRSTRAND GROUP, THE LATER
ALLOCATION RESULTED IN ACTUAL EARNINGS ON THE RIGHTS ISSUE PROCEEDS BEING LOWER
IN THE INSURANCE GROUP.
THE CAPITAL INJECTED INTO THE INSURANCE GROUP HAS REPLACED THE CROSSHOLDING OF
13,3% THAT SOUTHERN LIFE HELD IN FNB HOLDINGS. THE CAPITAL INJECTION IS
CURRENTLY INVESTED IN A COMBINATION OF R2 BILLION IN CASH AND FIXED INTEREST
INSTRUMENTS, AND R0,9 BILLION IN A BALANCED PORTFOLIO. THE INSURANCE GROUP
STRATEGY IS TO INVEST A SIGNIFICANT PORTION OF SHAREHOLDERS' FREE RESERVES IN
GROWTH ASSETS. THE EMPHASIS IS THEREFORE NOT ON ACHIEVING A HIGH INCOME YIELD,
BUT RATHER A SUPERIOR COMPOSITE YIELD COMPRISING CAPITAL GROWTH AND INCOME. IT
IS THE INTENTION TO REASSESS THE DEPLOYMENT OF THE R2 BILLION CURRENTLY IN CASH
AND FIXED INTEREST INSTRUMENTS, AND TO ACTIVELY SEEK ATTRACTIVE GROWTH ASSETS.
THIS STRATEGY COULD RESULT IN LOWER EARNINGS ON FREE RESERVES IN FUTURE
COMPARED TO THE RETURN ON CASH AND FIXED INTEREST INSTRUMENTS. HOWEVER, THE
EMBEDDED VALUE WILL REFLECT THE ENHANCED SHAREHOLDER VALUE THAT GROWTH ASSETS
WILL BRING ABOUT.
RESULTS OF THE ACTUARIAL VALUATIONS
FINANCIAL SOUNDNESS VALUATION RESULTS
DURING THE PAST FINANCIAL YEAR, THE FINANCIAL SOUNDNESS VALUATION METHODOLOGY
AND APPROACH USED FOR MOMENTUM LIFE AND SOUTHERN LIFE WERE ALIGNED. THE EXCESS
OF ASSETS OVER LIABILITIES OF FIRSTRAND INSURANCE ON THE FINANCIAL SOUNDNESS
BASIS WAS CALCULATED AS R5 731 MILLION AS AT 30 JUNE 1999 (1998 PRO FORMA: R5
682 MILLION). THE EXCESS OF ASSETS OVER LIABILITIES REFLECTS THE CAPITAL
POSITION OF THE RESTRUCTURED FIRSTRAND INSURANCE GROUP.
THE CAPITAL ADEQUACY REQUIREMENTS OF FIRSTRAND INSURANCE WERE CALCULATED AS R3
293 MILLION AS AT 30 JUNE 1999. THE CAPITAL ADEQUACY REQUIREMENTS WERE COVERED
1,7 TIMES BY THE EXCESS OF ASSETS OVER LIABILITIES. FIRSTRAND INSURANCE IS
THEREFORE IN A SOUND FINANCIAL POSITION AND ADEQUATELY CAPITALISED FOR THE
FORESEEABLE FUTURE.
EMBEDDED VALUE
AN EMBEDDED VALUE CALCULATION WAS PERFORMED FOR THE FIRST TIME FOR MOMENTUM
LIFE AND SOUTHERN LIFE RESPECTIVELY AS AT 30 JUNE 1999. NO COMPARATIVE NUMBERS
AS AT 30 JUNE 1998 WERE CALCULATED. AN EMBEDDED VALUE IS AN ESTIMATE OF THE
ECONOMIC VALUE OF A COMPANY, EXCLUDING ANY GOODWILL THAT MAY BE ATTRIBUTED TO
THE COMPANY AS A RESULT OF THE VALUE OF FUTURE NEW BUSINESS.
THE EMBEDDED VALUE CALCULATION INCLUDES FIRSTRAND INSURANCE'S ATTRIBUTABLE
PORTION OF THE EMBEDDED VALUE OF DISCOVERY HEALTH, WHICH IS REFLECTED AS PART
OF SHAREHOLDERS' NET ASSETS. THIS ATTRIBUTABLE PORTION AMOUNTS TO R0,9 BILLION.
THE EMBEDDED VALUES OF THE NEW BUSINESS PRODUCED BY THE INDIVIDUAL LIFE BROKER
DIVISION OF R135 MILLION AND DISCOVERY HEALTH OF R318 MILLION ARE PARTICULARLY
PLEASING.
THE SOUTHERN LIFE FIELD FORCE, WHICH CURRENTLY PRODUCES 15% OF INDIVIDUAL LIFE
NEW RECURRING PREMIUM BUSINESS, SUFFERED AN EMBEDDED VALUE LOSS OF R60 MILLION
ON THE PAST YEAR'S NEW BUSINESS. STEPS HAVE BEEN TAKEN WHICH IMPROVED THE
POSITION COMPARED TO PREVIOUS YEARS, AND FURTHER IMPROVEMENTS ARE EXPECTED IN
THE YEAR AHEAD.
WOODROW MILLIMAN, AN INTERNATIONAL CONSULTING FIRM OF ACTUARIES, HAVE REVIEWED
IN DETAIL THE METHODOLOGY AND ASSUMPTIONS UNDERLYING THE CALCULATION OF THE
EMBEDDED VALUE OF FIRSTRAND INSURANCE AND THE VALUE OF NEW LIFE INSURANCE
BUSINESS. THEY ARE SATISFIED THAT, BASED ON THE INFORMATION SUPPLIED TO THEM BY
FIRSTRAND INSURANCE, THE METHODOLOGY AND ASSUMPTIONS ARE APPROPRIATE FOR THE
PURPOSE OF DISCLOSING THE EMBEDDED VALUE IN THE ANNUAL REPORT. INTERNATIONAL
CONSULTING ACTUARIES, HYMANS ROBERTSON, REVIEWED THE CALCULATION OF THE
EMBEDDED VALUE AND THE VALUE OF NEW BUSINESS OF DISCOVERY HEALTH.
GROUP EMBEDDED VALUE AT 30 JUNE 1999 RM
SHAREHOLDERS' NET ASSETS 5 731
NET VALUE OF IN-FORCE BUSINESS 2 609
GROSS VALUE OF IN-FORCE BUSINESS 3 019
LESS: OPPORTUNITY COST OF CAPITAL ADEQUACY
REQUIREMENTS (410)
EMBEDDED VALUE 8 340
VALUE OF NEW BUSINESS RM
LIFE INSURANCE (BEFORE OPPORTUNITY COST OF CAPITAL) 119
BROKER DISTRIBUTION CHANNEL 135
FIELD FORCE DISTRIBUTION CHANNEL (60)
EMPLOYEE BENEFITS 44
LESS: OPPORTUNITY COST OF CAPITAL ADEQUACY
REQUIREMENTS (15)
LIFE INSURANCE 104
DISCOVERY HEALTH (1) 207
VALUE OF NEW BUSINESS 311
1 REPRESENTS THE PORTION ATTRIBUTABLE TO FIRSTRAND INSURANCE. THE TOTAL
EMBEDDED VALUE OF DISCOVERY HEALTH'S NEW BUSINESS AMOUNTED TO R318 MILLION.
DIVIDEND
IT IS THE INTENTION OF THE INSURANCE GROUP TO GROW DIVIDENDS IN LINE WITH
EARNINGS GROWTH. A TOTAL DIVIDEND OF R291 MILLION FOR THE YEAR WAS PAID BY THE
INSURANCE GROUP TO FIRSTRAND LIMITED. THIS RESULTED IN A DIVIDEND COVER OF 2,2
TIMES.
YEAR 2000 COMPLIANCE
THE INSURANCE GROUP YEAR 2000 PROGRAMME IS ON TRACK, WITH ALL WORKING GROUPS
PROVIDING FEEDBACK ON A REGULAR BASIS TO THE VARIOUS BOARD COMMITTEES.
THE SOUTHERN LIFE SYSTEMS ARE BEING CONVERTED TO THE MOMENTUM LIFE IT PLATFORM.
THIS WILL RESULT IN CERTAIN OF THE MISSION CRITICAL SYSTEMS BEING FINALISED
DURING THE FINAL QUARTER OF THE 1999 CALENDAR YEAR. YEAR 2000 TESTING IS
UNDERTAKEN AS PART OF THE OVERALL TESTING OF SYSTEMS BEING CONVERTED. THE COST
OF COMPLIANCE IS NOT CONSIDERED MATERIAL IN RELATION TO THE RESULTS OF THE
INSURANCE GROUP. BUSINESS CONTINGENCY PLANS ARE BEING PUT IN PLACE TO ENSURE
THAT THE YEAR 2000 RISK IS MINIMISED.
NO MATERIAL NON-COMPLIANCE HAS COME TO OUR ATTENTION THAT WOULD INDICATE THAT
BUSINESS PARTNERS AND AGENTS THAT ARE CRITICAL TO THE CONTINUATION OF THE
INSURANCE GROUP BUSINESS WILL NOT BE YEAR 2000 READY.
TRANSFER OF INSURANCE BUSINESS
THE INSURANCE BUSINESS OF MOMENTUM LIFE AND SOUTHERN LIFE WILL BE MERGED IN
TERMS OF SECTION 37 OF THE INSURANCE ACT, TO CREATE FIRSTRAND INSURANCE
LIMITED. THE INTENDED EFFECTIVE DATE IS 1 JULY 1999, SUBJECT TO APPROVAL BY THE
HIGH COURT OF SOUTH AFRICA. THIS WILL NOT AFFECT OUR BRANDING STRATEGY, WHICH
IS TO USE OUR STRONG BRANDS IN THE MARKETS WHERE THEY ARE CONSIDERED
APPROPRIATE.
PROSPECTS
THE EXCELLENT RESULTS ACHIEVED BY THE INSURANCE GROUP ARE A TRIBUTE TO THE
COMMITMENT, ENTHUSIASM AND WORK ETHIC OF OUR STAFF. THE MERGING OF THE MOMENTUM
LIFE GROUP AND THE SOUTHERN LIFE GROUP HAS BEEN SUBSTANTIALLY COMPLETED. THE
IMMEDIATE MERGER OBJECTIVES WERE ACHIEVED AND THE FOCUS WILL NOW MOVE TO
EXPLOITING THE ENHANCED STRENGTHS OF THE COMBINED GROUP.
THE COMPETITIVE LANDSCAPE WILL CONTINUE TO CHANGE OVER THE NEXT FEW YEARS. WE
ARE WELL POSITIONED TO TAKE ADVANTAGE OF THESE CHANGES. OUR INITIATIVES INCLUDE
DEVELOPING PRODUCTS THAT ADDRESS THE SHORTCOMINGS OF TRADITIONAL PRODUCTS,
EXPLORING NEW DISTRIBUTION OPPORTUNITIES INSIDE AND OUTSIDE THE FIRSTRAND
GROUP, PURSUING JOINT INITIATIVES BETWEEN GROUP COMPANIES TO TAKE ADVANTAGE OF
THE BLURRING OF TRADITIONAL BOUNDARIES BETWEEN INDUSTRIES, AS WELL AS ENTERING
SUITABLE NEW MARKETS FOR OUR PRODUCTS AND SERVICES.
IN THE YEAR AHEAD, GREATER EMPHASIS WILL BE PLACED ON RETURN ON CAPITAL AS THE
PRIMARY BENCHMARK FOR PERFORMANCE MEASUREMENT OF BUSINESS UNITS.
L L DIPPENAAR H P MEYER
CHAIRMAN MANAGING DIRECTOR
POSTAL ADDRESS
PO BOX 7400, CENTURION, 0046. TELEPHONE (012) 671-8911
MAJOR MERGER MILESTONES
THE MERGER OF MOMENTUM LIFE AND SOUTHERN LIFE IS THE BIGGEST INSURANCE MERGER
EVER IN SOUTH AFRICA. IT WAS AN OBJECTIVE TO BED DOWN THE MERGER AS QUICKLY AS
POSSIBLE TO PREVENT A PROLONGED INWARD FOCUS. THE MERGER WAS LARGELY COMPLETED
WITHIN ONE YEAR AFTER IT WAS ANNOUNCED. SEVERAL NOTABLE MILESTONES WERE
RECORDED:
MANAGEMENT STRUCTURES AND OPERATIONS OF THE TWO GROUPS WERE FULLY INTEGRATED
WITH PROJECTED SUSTAINABLE EXPENSE SAVINGS OF R260 MILLION PER ANNUM
SOUTHERN LIFE'S DATA AND PROGRAMS ARE BEING SUCCESSFULLY TRANSFERRED TO
MOMENTUM LIFE, IN THE BIGGEST EVER LIFE INSURANCE IT CONVERSION IN SOUTH AFRICA
THE COMBINED MARKET SHARE OF MOMENTUM LIFE AND SOUTHERN LIFE WAS MAINTAINED FOR
NEW RECURRING LIFE BUSINESS AND INCREASED FOR ALL OTHER PRODUCT LINES DESPITE
THE DEMANDS OF THE MERGER. NEW PRODUCT RANGES WERE SUCCESSFULLY LAUNCHED FOR
BOTH MOMENTUM LIFE AND SOUTHERN LIFE
SOUTHERN LIFE ADMINISTRATION HAS BEEN CENTRALISED IN CAPE TOWN WITH THE CLOSURE
OF THE ADMINISTRATION UNIT IN THE CENTRE OF JOHANNESBURG AS WELL AS THE CLOSURE
OF THE SOUTHERN LIFE NAMIBIAN OPERATION
AN EXIT STRATEGY TO ELIMINATE SMALL, UNPROFITABLE GROUP SCHEMES WAS
SUCCESSFULLY IMPLEMENTED AT MOMENTUM EMPLOYEE BENEFITS
THE UNIT LINKED COMPANIES WERE MERGED, AND CLIENT RECORDS CONSOLIDATED IN
RECORD TIME ON THE SUPERIOR MOMENTUM ADMINISTRATION SERVICES (MAS) SYSTEMS
THE TRANSFORMATION OF THE SOUTHERN LIFE FIELD FORCE IS ON TRACK. THE MANAGEMENT
STRUCTURE WAS STREAMLINED, THE NUMBER OF AGENTS REDUCED BY HALF AND POOR
QUALITY BUSINESS LINES DISCONTINUED
THE SOUTHERN LIFE PROFIT RECOGNITION BASIS WAS CHANGED TO THE MORE CONSERVATIVE
BASIS OF MOMENTUM LIFE, THE SOPHISTICATION OF FINANCIAL MEASUREMENT WAS
IMPROVED, AND THE EMBEDDED VALUE OF THE COMBINED INSURANCE GROUP WAS DETERMINED
AN OPTIMAL CAPITAL STRUCTURE WAS PUT IN PLACE FOR THE INSURANCE GROUP
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