ZURICH INSURANCE COMPANY S A LTD - Unaudited interim Group results for the six months ended 30 June 2014

Release Date: 01/08/2014 11:51
Code(s): ZSA
 
Wrap Text
Unaudited interim Group results for the six months ended 30 June 2014

Zurich Insurance Company South Africa Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1965/006764/06)  
Share code: ZSA   ISIN: ZAE000094496
Income tax number: 9325210715 
("Zurich South Africa" or "the Group" or "the Company")

Unaudited interim Group results for the six months ended 30 June 2014

Comments:

A number of initiatives aimed at improving long-term profitability were accelerated in Q4 2013 and are starting to yield positive results. These initiatives target 
specific elements in the claims and underwriting capabilities of the organisation. 

These initiatives have resulted in the contraction of premium volumes due to targeted cancellation and non-renewal of underperforming portfolios within the Personal and 
Commercial segments. As a result, premium volumes declined by 4% from R2.05 billion in the first six months of 2013, to R1.96 billion.

The underwriting result is a deficit of R199 million compared to a deficit of R150 million during the comparative period. The general insurance result is a deficit of 
R154 million, compared to R106 million in the comparative period.

Claims expenses have increased by 6% to R1.24 billion (2013: R1.17 billion), largely due to an increase in the frequency and severity of large losses in the property 
and marine portfolios. The deterioration of the rand also continues to negatively impact on the cost of motor claims during the period.

Commissions increased marginally by 1% to R332 million (2013: R328 million). Operating expenses increased by 6% to R312 million (2013: R294 million), significantly impacted 
by the payment of binder and outsourcing fees and by the costs associated with the investment in turnaround and in growth initiatives.

Attributable investment income increased by 5% to R46 million (2013: R44 million), positively impacted by proactive cash management initiatives and increasing interest 
rates. Net realised gains increased to R43 million (2013: R30 million) due to the sale of investments to rebalance the equity portfolio.

At 56.4% (2013: 63.7%), the international solvency margin exceeds the targeted solvency levels of between 45% and 50%. The Group's balance sheet remains strong with a net 
asset value of R149 per share (2013: R160 per share).

The Board has decided to pass the payment of an interim dividend pursuant to its strategy of investing in turnaround and profitability initiatives, as well as its business 
transformation programme scheduled for commencement in Q4 2014.

Changes in Directorate
S Mered resigned as a Non-executive Director with effect from 1 January 2014. P Manley was appointed as a Non-executive Director on 14 February 2014.

Audit
The information set out in this announcement has not been audited or reviewed by the Company's auditors, PricewaterhouseCoopers Inc.

Compliance
The Group complies in all material respects with the King Code of Governance Principles for South Africa 2009 and the Listings Requirements of the JSE Limited.

By order of the Board

31 July 2014
Johannesburg

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE 
for the six months ended 30 June 2014

                                                                                               Six months ended          Six months ended                    Year ended
                                                                                                   30 June 2014              30 June 2013                   31 Dec 2013
Rand thousands                                                                                        Unaudited                 Unaudited      % change         Audited

Gross written insurance premium                                                                       1,957,483                 2,048,909           (4%)      4,084,625
Insurance premium ceded to reinsurers                                                                  (350,219)                 (487,709)                     (856,203)
Net written insurance premium                                                                         1,607,264                 1,561,200            3%       3,228,422
Net insurance premium earned                                                                          1,609,048                 1,553,513                     3,230,185
Reinsurance commission earned                                                                            51,823                    64,254                       132,244
Investment income                                                                                       117,168                   110,041                       217,682
Other income                                                                                              2,742                     1,129                         4,417
Net realised gains on available-for-sale financial assets                                                43,149                    29,768                       105,609
Net income                                                                                            1,823,930                 1,758,705            4%       3,690,137
Net insurance claims                                                                                  1,236,335                 1,166,476                     2,553,317
Acquisition costs                                                                                       332,215                   328,406                       691,666
Administrative and other operating expenses                                                             312,613                   294,304                       662,122
Investment expenses                                                                                       2,333                     2,967                         5,923
Impairment of available-for-sale financial assets                                                             -                     4,989                         4,989
Expenses                                                                                              1,883,496                 1,797,142            5%       3,918,017
Loss from operating activities                                                                          (59,566)                  (38,437)                     (227,880)
Finance costs                                                                                            (7,944)                   (6,375)                      (20,469)
Share of (loss)/profit in associates                                                                        (83)                      155                        (3,832)
Loss before tax                                                                                         (67,593)                  (44,657)                     (252,181)
Income taxation                                                                                          27,564                    24,928                        88,057
Loss for the period                                                                                     (40,029)                  (19,729)         103%        (164,124)
Earnings per share
Basic and diluted (cents)                                                                                  (329)                     (162)                       (1,348)

CONDENSED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
for the six months ended 30 June 2014

                                                                                               Six months ended          Six months ended                    Year ended
                                                                                                   30 June 2014              30 June 2013                   31 Dec 2013
Rand thousands                                                                                        Unaudited                 Unaudited      % change         Audited

Loss for the period                                                                                     (40,029)                  (19,729)                     (164,124)
Other comprehensive income net of tax*                                                                   15,713                   (30,207)                       59,425
Exchange differences on translating foreign operations                                                        -                     1,087                         7,945
Realised gains on available-for-sale financial assets recycled to the 
statement of financial performance                                                                      (43,149)                  (29,768)                     (105,609)
Impairment losses transferred to statement of financial performance                                           -                     4,989                         4,989
Net realised and unrealised gains on available-for-sale financial assets                                 78,000                   (10,120)                      141,085
Income taxation relating to components of other comprehensive income                                    (19,138)                    3,605                        11,015
Total comprehensive loss for the period                                                                 (24,316)                  (49,936)         (51%)       (104,699)

*All other comprehensive income will be subsequently classified to profit/(loss) when specific conditions are met.

CONDENSED CONSOLIDATED CASH FLOW STATEMENT 
for the six months ended 30 June 2014

                                                                                                Six months ended          Six months ended                   Year ended
                                                                                                    30 June 2014              30 June 2013                  31 Dec 2013
Rand thousands                                                                                         Unaudited                 Unaudited     % change         Audited

Cash effect from operating activities                                                                   (154,422)                   76,981                      118,527
- Cash flows from operations                                                                            (270,372)                  (20,098)                     (64,503)
- Dividend and interest income                                                                           109,224                   103,666                      197,213
- Taxation refunded/(paid)                                                                                 6,726                    (6,587)                     (14,183)
Cash effect from investing activities                                                                     (6,981)                  (39,996)                        (591)
Cash effect from financing activities                                                                    (24,359)                  (24,359)                     (36,539)
Net movement in cash and cash equivalents                                                               (185,762)                   12,626                       81,397
Exchange gains/(losses) on cash and cash equivalents                                                         114                     1,120                          (63)
Cash and cash equivalents at beginning of the period                                                     693,279                   611,945                      611,945
Cash and cash equivalents at end of the period                                                           507,631                   625,691         (19%)        693,279

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 30 June 2014

                                                                                                Six months ended          Six months ended                   Year ended
                                                                                                    30 June 2014              30 June 2013                  31 Dec 2013
Rand thousands                                                                                         Unaudited                 Unaudited     % change         Audited

Assets
Land, buildings and equipment                                                                             45,694                    61,063                       56,217
Intangible assets                                                                                         57,054                    47,585                       55,191
Investments in associates                                                                                  5,555                     9,624                        5,637
Deferred taxation asset                                                                                  113,155                    31,837                      102,463
Financial instruments                                                                                  3,466,870                 3,193,578                    3,261,914
Prepayment of defined-contribution fund                                                                  112,155                   125,822                      127,694
Deferred acquisition costs                                                                                91,767                   100,297                       85,596
Reinsurance assets                                                                                       584,438                 1,072,267                      657,987
Income taxation asset                                                                                      1,157                     1,841                       11,610
Cash and cash equivalents                                                                                507,631                   625,691                      693,279
Total assets                                                                                           4,985,476                 5,269,605          (5%)      5,057,588
Equity and liabilities
Total equity                                                                                           1,813,709                 1,945,440                    1,869,252
Employee benefit obligation                                                                               42,919                    40,753                       56,869
Reinsurance liability under cell management                                                               72,911                   107,657                       68,292
Insurance liabilities                                                                                  2,122,982                 2,407,684                    2,096,873
Deferred reinsurance commission                                                                           27,919                    38,481                       24,959
Income taxation liability                                                                                    413                     1,075                        1,874
Trade and other payables                                                                                 888,542                   718,335                      893,646
Provisions                                                                                                16,081                    10,180                       45,823
Total equity and liabilities                                                                           4,985,476                 5,269,605          (5%)      5,057,588

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
as at 30 June 2014

                                                                                                Six months ended          Six months ended                   Year ended
                                                                                                    30 June 2014              30 June 2013                  31 Dec 2013
Rand thousands                                                                                         Unaudited                 Unaudited      % change        Audited

Stated capital                                                                                             4,650                     4,650                        4,650
Translation reserve                                                                                      (31,690)                  (38,548)                     (31,690)
Revaluation reserve                                                                                      421,844                   323,358                      406,131
Share-based payment reserve                                                                              (16,111)                        -                       (9,243)
Statutory contingency reserve                                                                             38,854                    35,801                       37,610
Retained income                                                                                        1,396,162                 1,620,179                    1,461,794
Balance at end of the period                                                                           1,813,709                 1,945,440          (7%)      1,869,252

NOTES

These Group results have been prepared under the supervision of the Chief Financial Officer, Pieter Bezuidenhout, CA(SA), in compliance with the requirements of the 
Companies Act of South Africa.

1. Accounting policies and basis of preparation
   These condensed interim financial results for the six months ended 30 June 2014 have been prepared in accordance with International Financial Reporting Standards, 
   the preparation and disclosure requirements of IAS 34 – Interim Financial Reporting, the Listings Requirements of the JSE Limited and the requirements of the South 
   African Companies Act, 71 of 2008, as amended. The preparation of interim financial statements requires management to make judgements, estimates and assumptions that 
   affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. 
   The policies used in the presentation of the unaudited results for the period ended 30 June 2014 are consistent with those applied in the Annual Financial 
   Statements for the year ended 31 December 2013 and in accordance with International Financial Reporting Standards.

2. Risk management
   The Group is exposed to a variety of financial risks: liquidity risk, market risk (price risk, interest rate risk, currency risk) and credit risk. Insurance 
   activities expose the Group to insurance risk as well as operational, reputational and strategic, legal as well as regulatory risk. The capital risk management 
   philosophy is to maximise the return on shareholders' capital within the Group's risk framework. The interim condensed consolidated financial statements do not 
   include all risk management information and should be read in conjunction with the Group's Annual Financial Statements as at 31 December 2013. There have been no 
   changes in the risk management policies since year-end.

3. Segment information
   The segments disclosed are reviewed on a monthly basis and are representative of the internal structure of the Group.

4. Financial highlights

                                                                                                 Six months ended         Six months ended                   Year ended
                                                                                                     30 June 2014             30 June 2013                  31 Dec 2013
Rand thousands                                                                                          Unaudited                Unaudited      % change        Audited

Loss for the period                                                                                       (40,029)                 (19,729)                    (164,124)
Adjusted for:                                                                                                 
Losses/(gains) on disposal of property, plant and equipment                                                   459                      529                         (611)
Gains on disposal of available-for-sale financial assets                                                  (43,149)                 (29,768)                    (105,609)
Impairment of available-for-sale financial assets                                                               -                    4,989                        4,989
Impairment of associate                                                                                         -                        -                        5,124
Restructuring provision                                                                                         -                        -                       38,470
Tax effect                                                                                                  7,166                    4,527                        7,169
Headline losses                                                                                           (75,553)                 (39,452)          92%       (214,592)
Headline losses per share (cents)                                                                            (620)                    (324)                      (1,762)
Earnings per share (cents)                                                                                   (329)                    (162)                      (1,348)
Ordinary dividends declared per share (cents)                                                                   -                      100                          300
Dividends paid per share (cents)                                                                              200                      200                          300
Number of shares in issue                                                                              12,179,500               12,179,500                   12,179,500
Net asset value per share (cents)                                                                          14,891                   15,973          (7%)         15,348
Surplus asset ratio                                                                                          1.65                     2.07         (20%)           1.90
International solvency margin (%) – annualised                                                               56.4                     63.7         (11%)           57.9
Combined ratio (%)                                                                                         (112.4)                  (109.6)          3%          (114.1)

5. Segmental information

Gross written insurance premium
Property                                                                                                  687,253                  798,575                    1,535,451
Transport                                                                                                  73,444                   77,551                      140,669
Motor                                                                                                     870,087                  868,885                    1,777,580
Engineering                                                                                               151,508                  161,386                      334,396
Guarantee                                                                                                  16,907                    1,259                       23,947
Liability                                                                                                  91,119                   75,522                      138,496
Accident and health                                                                                        67,165                   65,731                      134,086
Total insurance premium income                                                                          1,957,483                2,048,909          (4%)      4,084,625
Net Income                                                                                                522,510                  524,157                    1,056,990
Property
Transport                                                                                                  50,300                   50,441                      105,449
Motor                                                                                                     860,155                  842,305                    1,763,907
Engineering                                                                                               127,313                  129,297                      261,641
Guarantee                                                                                                  15,452                      159                       15,899
Liability                                                                                                  37,347                   39,750                       80,855
Accident and health                                                                                        47,795                   31,658                       77,688
Investment income and other                                                                               163,058                  140,938                      327,708
Net income                                                                                              1,823,930                1,758,705           4%       3,690,137
General insurance result
Property                                                                                                  (99,128)                 (81,365)                    (208,999)
Transport                                                                                                 (11,631)                  (3,893)                     (19,084)
Motor                                                                                                     (71,527)                 (83,727)                    (262,532)
Engineering                                                                                               (15,855)                  (5,772)                      (1,758)
Guarantee                                                                                                   1,825                    3,471                      (26,731)
Liability                                                                                                  (5,835)                   6,396                       28,580
Accident and health                                                                                         2,789                   15,235                       35,197
Net underwriting result                                                                                  (199,362)                (149,655)         33%        (455,327)
Attributable investment income                                                                             45,839                   43,605                       83,372
General insurance result                                                                                 (153,523)                (106,050)         45%        (371,955)

6. Gross written premium by company
                                                                                                 Six months ended         Six months ended                   Year ended
                                                                                                     30 June 2014             30 June 2013                  31 Dec 2013
Rand thousands                                                                                          Unaudited                Unaudited      % change        Audited

Zurich Insurance Company South Africa Limited                                                           1,837,397                1,895,476                    3,805,906
Zurich Insurance Company Botswana Limited                                                                  99,380                  121,495                      237,265
Zurich Risk Financing SA Limited                                                                           17,707                   31,822                       41,268
Zurich Life SA Limited                                                                                      2,999                      116                          186
Total insurance premium income                                                                          1,957,483                2,048,909          (4%)      4,084,625

7. Gross written premium by customer segment

Corporate                                                                                                 142,945                  235,820                      358,850
Commercial                                                                                              1,326,448                1,299,021                    2,675,982
Personal                                                                                                  488,090                  514,068                    1,049,793
Total insurance premium income                                                                          1,957,483                2,048,909          (4%)      4,084,625

8. Supplementary income statement

Gross written insurance premium                                                                         1,957,483                2,048,909                    4,084,625
Insurance premium ceded to reinsurers                                                                    (350,219)                (487,709)                    (856,203)
Net written insurance premium                                                                           1,607,264                1,561,200           3%       3,228,422
Net insurance premium earned                                                                            1,609,048                1,553,513                    3,230,185
Net insurance claims                                                                                   (1,236,335)              (1,166,476)                  (2,553,317)
Net commission incurred                                                                                  (280,392)                (264,152)                    (559,422)
Administrative and other operating expenses                                                              (291,683)                (272,540)                    (572,773)
Net underwriting result                                                                                  (199,362)                (149,655)         33%        (455,327)
Attributable investment income                                                                             45,839                   43,605                       83,372
General insurance result                                                                                 (153,523)                (106,050)         45%        (371,955)
Impairment of available-for-sale-financial assets                                                               -                   (4,989)                      (4,989)
Non-technical expenses                                                                                    (18,188)                 (20,635)                     (84,932)
Other investment income                                                                                    63,302                   60,216                      110,009
Investment expenses                                                                                        (2,333)                  (2,967)                      (5,923)
Net realised gains on disposal of investments                                                              43,149                   29,768                      105,609
Loss before tax                                                                                           (67,593)                 (44,657)         51%        (252,181)
Income tax                                                                                                 27,564                   24,928                       88,057
Loss for the period                                                                                       (40,029)                 (19,729)        103%        (164,124)

9. FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS
The Group's financial instruments measured at fair value have been disclosed using a fair value hierarchy. The hierarchy has three levels that reflect the significance of 
the inputs used in measuring fair value. These are as follows:

Level 1 includes financial instruments that are measured using unadjusted, quoted prices in an active market for identical financial instruments. Quoted prices are 
readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly 
occurring market transactions on an arm's length basis.

Level 2 includes financial instruments that are valued using techniques based significantly on observable market data. Instruments in this category are valued using:
a) quoted prices for similar instruments or identical instruments in markets which are not considered to be active; or
b) valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable market data. These inputs 
include interest rates, yield curves, bids, offers and reference data.

Level 3 includes financial instruments that are valued using valuation techniques that incorporate information other than observable market data and where at least 
one input (which could have a significant effect on instruments' valuation) cannot be based on observable market data.

The Group's equity investment in a foreign unlisted insurance company consists of a 9.0% holding of the entity's common shares. During the period under review, the 
fair value of the common shares held was derived using the dividend yield valuation approach. In applying this approach, the Group reviewed the historical dividend 
payments, expected future dividend flows and the general future profitability of the Group and industry. The Group also adjusted the indicated fair value (risk-free rate)
to give effect to the lack of liquidity compared to the publicly traded peer group, as well as adjusting the fair value to give effect to political and business risk 
associated with the foreign exposure. The valuation as determined was further compared to the net asset value of the Group to determine the reasonability thereof. 
The valuation techniques used during the period under review are consistent with those applied in the Annual Financial Statements for the year ended 31 December 2013.

The valuation of all Level 3 instruments is performed on a recurring basis and reviewed by the Asset/Liability Management Investment Committee.

                                                                           Total           Level 1            Level 2          Level 3
Rand thousands
December 2013                                                             
Hierarchy
Land and buildings                                                         3,538                                3,538
Financial instruments - available for sale
- Debt                                                                 1,177,258                            1,177,258
- Equity                                                                 708,600           578,153             93,300           37,147
Financial instruments - fair value through income                        477,558                              477,558
Total                                                                  2,366,954           578,153          1,751,654           37,147

June 2013
Hierarchy
Land and buildings                                                         3,382                                3,382
Financial instruments - available for sale
- Debt                                                                 1,197,950                            1,189,784
- Equity                                                                 621,221           519,347             93,025           17,015
Financial instruments - fair value through income                        466,546                              466,546 
Total                                                                  2,289,099           519,347          1,752,737           17,015

June 2014
Hierarchy
Land and buildings                                                         3,449                                3 449 
Financial instruments - available for sale
- Debt                                                                 1,208,317                            1,208,317
- Equity                                                                 740,269            599,651            93,359           47,259
Financial instruments - fair value through income                        491,483                              491,483
Total                                                                  2,443,518            599,651         1,796,608           47,259

Level 3 reconciliation                                                   Opening          Purchases           Closing 
                                                                         balance         and issues           balance
                                                                           
Financial instruments - available for sale                                                         
- Debt                                                                    37,147             10,112            47,259
Total classified at Level 3                                               37,147             10,112            47,259

During the period, no investments were transferred between the different categories.

Board of Directors
DD Mokgatle (Independent Non-executive Chairman), JE O'Neill (Chief Executive Officer), P Bezuidenhout (Chief Financial Officer), JPM Deiss (Non-executive), 
P Manley (Non-executive) – appointed 14 February 2014, MN Mbekeni (Independent Non-executive), SG Morris (Independent Non-executive), JM Vice (Independent Non-executive)

Transfer Secretaries
Computershare Investor Services (Proprietary) Limited, 70 Marshall Street, Johannesburg, 2001

Group Company Secretary and Registered Office
T Heydenrych, Zurich Insurance Company South Africa Limited
Registration number 1965/006764/06
15 Marshall Street, Ferreirasdorp, Johannesburg, 2001
(PO Box 61489, Marshalltown, 2107)

Sponsor
RAND MERCHANT BANK
(A division of FirstRand Bank Limited)
1 Merchant Place, Cnr Fredman Drive and Rivonia Road, Sandton, 2196

www.zurich.co.za

The results were released on the Stock Exchange News Service on 1 August 2014.
Date: 01/08/2014 11:51:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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