Wrap Text
Condensed consolidated unaudited results for the six months ended 28 February 2014
CONDUIT CAPITAL LIMITED
Incorporated in the Republic of South Africa
(Registration number: 1998/017351/06)
Share code: CND ISIN: ZAE000073128
(“Conduit” or “Conduit Capital” or “the Group”)
CONDENSED CONSOLIDATED UNAUDITED RESULTS FOR THE SIX MONTHS ENDED
28 FEBRUARY 2014
CHIEF EXECUTIVE OFFICER’S REPORT
Through 3 reporting cycles (this being the 4th), we have progressively unpacked important themes to assist
current and prospective investors in understanding our business and determining their investment course.
Initially, we focused our attention on value and creating a reliable tool for calculating the underlying part-by-
part ‘Embedded value’ of our Group come year-end (August 2013: 186.6 cents per share). We now turn our
attention to matters operational and delve deeper into the fundamentals of our core underwriting and
investment activities - previously only reported on a globular basis. To keep you from nodding off, we have
purged this commentary of needless waffle and industry jargon.
Investment strategy
Objectively, we recognise that any investment strategy is unavoidably subjective and lends itself to all manner
of praise, criticism and alternate hypotheses. To understand and do our model justice therefore necessitates
that we outline some philosophical values and explain a few basic insurance and regulatory principles;
principles that inform our capital allocation and very precise approach to underwriting and investment risk.
An assortment of practice
In a purist sense, the business of an insurer is to underwrite risk with the primary objective of making a
sound underwriting profit. In pursuit of achieving a satisfactory investment return to complement
underwriting, most insurers depend (to a greater or lesser extent) on the substantial profits that can be
generated by investing Insurance float and Shareholder funds in an appropriate blend of asset classes. In an
interplay between underwriting and investments, the two 'tango' through investment and underwriting cycles,
each having their turn to lead. That is the theory at least. In practice, insurers generally fall into one of two
categories.
Interestingly, the first category is represented by some of the most well established brands in the industry.
They are the monoliths of the insurance world, taking in enormous volumes of marginal or loss making
premium in order to generate vast amounts of insurance float (effectively free loan capital) on which they rely
to deliver an overall profit - underwriting losses and patchy investment returns regularly ensue!
On the other side of the spectrum sits a more purist sort, distinguished by their exceptional underwriting
discipline and focus. With a natural skew toward profitable underwriting, these guys excel at underwriting and
understandably adopt a more passive approach to investing - some of South Africa’s direct insurers are
examples of this rare breed.
Our own philosophy pays respect to a further category of enterprise that manages to straddle the two, yet
excel in both. We believe our attitude to insurance and investing are marked by similar sober qualities!
The 4 money pots: Why cash isn’t always king!
Rather than reproduce the entire investment policy in all its insurance and investment lingo glory, we have
instead created a rather simple, self-explanatory, table to explain exactly how we go about dividing, allocating
and investing group capital across the 4 ‘money pots’. Beyond its initial purpose - which is to orientate and
inform - we will produce a version of the table in future reports so as to provide a yardstick for performance
and to keep you apprised of where your (and our) capital is invested at all times. As 2014 marks the only
serious redistribution of capital in a while, the benefits of the investment strategy will be realised as capital is
deployed: hence the current distinction between capital allocated and capital deployed. At each year-end the
table will include an additional column presenting the actual investment returns for the period under review.
Note the distinct characteristics of each pot, chiefly informed by its risk-adjusted weight and status.
Time Actually
horizon invested at
Money Investment Benchmark / (rolling Allocation at 28 Feb ‘14
Pot Objective Strategy Target periods) 28 Feb ‘14 * **
Pot 1 Daily Cash deposits with top 5 Current account Daily R26.7m R26.7m
operational SA banks or equivalent rates +2%
cash flow
Pot 2 Insurance 50% allocated to cash Short-Term Fixed 1 month – R41.7m R42.3m
float deposits with top 5 SA Interest Index 4 years
(Policyholder banks or equivalent. (“STeFI”) + 1%
liabilities Other 50%: medium-term Sufficient to 3-5 years R41.7m R41.7m
plus insurance growth, multi-asset class, ensure an overall
liabilities absolute return mandates, investment return
less insurance single asset fund equal to CPI + 3%
assets) mandates and strategic p.a. after expenses
investments
Pot 3 Minimum Cash, money market, STeFI + 1.5% 1 month – 4 R139.6m R128.3m
regulatory corporate bonds years
capital (“CAR”)
ratio
Pot 4 Surplus assets Medium-term growth, Sufficient to 3-5 years R105.0m R11.3m
multi asset class and ensure an overall
strategic investments investment return
equal to CPI + 3%
p.a. after
expenses
To be allocated (for the time being housed in enhanced-yield funds, call accounts, etc.) - R104.4m
R354.7m R354.7m
* Allocation at 28 Feb ’14 refers to the amounts calculated and in turn allocated to each pot based on the published accounts
** Actually invested at 28 Feb ’14 refers to amounts physically deployed as at 28 February 2014
As it is only possible to accurately calculate the exact capital allocation for each pot after finalisation of any
given month-end, it follows that there will always be a discrepancy between the Actually invested amount
and the Allocated amount at interim and year-end reporting dates. This is to be expected and is well within
a tolerable margin. Where any meaningful amount falls short of the Allocation, it is likely a result of a truly
unallocated amount that remains to be invested in terms of the relevant Pot mandate - Pot 4 being a case in
point. The exact match in certain of the pots is a function of allocating capital in a descending cascade based
on its rank in the working capital and regulatory food chain.
Investment performance
Investment income of R12.6 million compares favourably with R15.2 million for the corresponding 6-month
period to February 2013. To contextualise the positive investment performance one must strip away the
outsized (and ultimately temporary) pre-tax mark-to-market gain of R8.0 million recorded for Amalgamated
Electronic Corporation Limited (“Amecor”) at February 2013 and contrast it with the R2.0 million booked on
disposal of the asset in November 2013. Not only is the ‘true’ result better, it is far more sustainable.
Underwriting – the business of RISK
Under the leadership of Robert Shaw, our insurance business is in very qualified hands. Having spent roughly
43 years in Insurance and Reinsurance (50/50), Robert possesses an uncommon blend of entrepreneurial
talent, technical ability and insurance expertise, vital to positioning the Constantia Insurance Group to
meet the demands of an increasingly competitive environment. His bold (and realistic) ambitions for the
business certainly have the attention of our competitors.
Our attitude to underwriting is no more negotiable than our approach to disciplined investing. In aggregate,
our 3 insurers (1 short and 2 long-term) take in approximately a billion Rand in annual premium, retaining
around a third for net account (after reinsurance). A good portion of the outward reinsurance relates to
various high-volume, low-risk arrangements that leave us with a neat margin but little exposure. The rest of
the risk premium is ceded (laid-off in bookmaking speak) as proportional reinsurance, where our reinsurers
simply follow our fortunes, sharing losses and profits in the same proportion as they share premium; in return
we receive a reinsurance commission to cover direct delivery costs and, if all goes well, a profit commission
down the line. To further protect downside risk, we purchase additional reinsurance cover to limit the loss
from any single event to a maximum of 1% of our capital base – it is money well spent!
The underwriting model
Over time, our business has morphed into something of a hybrid between the traditional broker, underwriting
agency and direct models. Taking care not to tread on our own toes, our model allows us to selectively
procure business through the channel most appropriate to the opportunity and where the relevant expertise
and potential for above average profitability will always trump the temptation to write for volume. While our
ultimate objective is to take in more premium than we pay out in claims, commissions and related costs, we
only know our final cost of sales after the fact. Odd as this inverted relationship may seem, profitable
underwriting is by no means a blind pursuit and requires a certain finesse to harvest the desired result:
impartial technical analysis, precise actuarial modelling, good old-fashioned business sense and - dare I say -
a little luck, all play their part.
The fact that our portfolio is heavily reinsured completely distorts the traditional underwriting margin
metric (Underwriting Surplus divided by Gross Premium Income (“GPI”)) used by other insurers to evaluate
performance. We do not therefore suggest investors rely on prior period GPI comparisons as an evaluation
tool. To reinforce our take on quality vs quantity it is instructive to note that Robert’s performance and
financial incentive are (at his insistence) judged solely on underwriting result and not premium growth
or investment income!
The balancing act
For each Rand of GPI we retain for net account, the Financial Services Board (“FSB”) requires us to hold a
minimum level of capital, varying according to the perceived risk in each class of business: this ratio of Capital
to Risk is referred to as the Capital Adequacy Ratio or CAR. Whilst in reality the FSB expects a considerable
buffer to minimum CAR (all of our insurers operate well above the minimum) we choose rather to judge
underwriting achievement by calculating the return based on the actual required regulatory minimums
(Pot 3), which we express as Return on Regulatory Capital (“RoRC”). Any capital in excess of the stated
minimum is then viewed as surplus and falls into the surplus asset pot (Pot 4).
Part of the challenge in producing stable and consistent underwriting returns lies in achieving sufficient scale
and portfolio diversity to withstand a material loss in any one class of business - without disproportionately
impacting the overall Insurance result. A blunt reminder of our susceptibility to an aberration in the result was
recently served up in one fell and mainly weather related swoop, putting a sizeable (R11.9 million) dent in our
motor and property portfolio. The weather losses occurred over too long a stretch for all of it to be captured
within our catastrophe reinsurance protections and were unfortunately taken for net account - marring an
otherwise pleasing overall performance. Absent deep pockets and sizeable premium volume, the solution lies
not in joining the feeding frenzy typified by mainstream, cluttered markets - where the chances of making a
profit, let alone a suitable return on capital, are often remote - but rather in a steady and measured approach
that rewards quality premium with above average return. With that as a backdrop and at the risk of death by
table, we unbutton our typical globular underwriting result to reveal the condensed RoRC by insurance class:
Target Actual
annualised annualised
Capital RoRC RoRC *
allocated (pre-tax) (pre-tax)
Insurance Class Examples of insurance types R’000 % %
Property Property, homeowners content, cell phones, computers 12,371 28 12.4
Motor Motor, HCV, motorcycles 21,272 20 (13.0)
Accident/ health Gap cover, medical evacuation, Hospital cash plans 59,194 28 40.9
Guarantee Solvency, Court and Construction bonds 6,396 28 91.8
Miscellaneous Legal cover, credit shortfall, motor warranties 20,023 28 30.2
Long-term Funeral 20,000 28 1.4
Total 139,256 26.8 25.2
* Actual annualised RoRC: Year-to-Date Gross Underwriting Surplus minus Administration Costs multiplied by 12 months
and divided by 6 months.
Note: The figures quoted above are based on IFRS financial reporting requirements, which differ from the regulatory reporting
format.
Solvency Assessment and Management (“SAM”)
We are fairly certain that the implementation of SAM in January 2016 will place further capital demands on
existing and new portfolios, though the burden is unlikely to exceed the Group’s current capital capacity. Once
there is absolute clarity, we shall have ample time to fine-tune our reinsurance program and investment
strategy to ameliorate any potential impact on profitability.
Dividends: To declare or not to declare
Between the lengthy explanations of capital allocation, underwriting doctrine and investment strategy,
hopefully you have a better idea of why it is we approach dividends with such caution. To view us exclusively
as a growth stock would imply that growth and appetite for capital must follow the same trajectory,
indefinitely. Moreover, it would do a terrible disservice to our true dividend test. Above all other subjective
measures, the decision is informed almost entirely on whether or not we can reasonably expect current
capital plus profits to meet regulatory requirements and exceed growth expectations over the next 24
months. If the answer is anything but an unequivocal YES - on both fronts - we are left with no practical
alternative but to bide our time, knowing that we are better off with the capital remaining in the business. In
the meanwhile, take comfort in the fact that your money is invested right alongside ours; in a business so
strictly regulated (and increasingly demanding) that it offers a built-in capital protection hardly rivalled by any
other industry. That said, early indications of our SAM position suggest a positive dividend front.
Underwriting result
Despite the weather related losses, our insurance companies turned in a respectable Gross Underwriting
Surplus of R34.6 million (February 2013: R29.9 million). After deducting Administration Costs, the Net
Underwriting Surplus amounted to R17.6 million (February 2013: R13.0 million).
Key performance measures
The 6-month period to February 2014 concludes Conduit’s 18th consecutive profitable reporting period.
At year-end we announced that with effect from 1 September 2013, our 40% interest in credit recovery
specialist Anthony Richards and Associates Proprietary Limited (“ARA”), would be accounted for as an
associate, doing away with the Direct segment entirely. As a subsidiary, accounting convention required us to
maintain the value of our share in ARA at historical cost, only increasing it incrementally by our share of
profits, less dividends received (book value as at 31 Aug ’13: R19.1 million). Naturally, this grossly
undervalued an asset, which in 2013 alone produced after tax profits of R31.7 million (our share R12.7
million). The change in accounting treatment has precipitated a more realistic valuation (albeit unintentional)
and resulted in a fair value adjustment through our statement of comprehensive income. In determining the
fair value, we applied the same valuation model utilised for the purpose of calculating the underlying
“Embedded value” of ARA at year-end. The outcome is an after-tax fair value gain of R75.6 million or 29.5
cents per share resulting in attributable earnings of R97.8 million or 38.1 cents per share for the 6 months to
28 February 2014 (28 Feb ’13: R25.0 million or 9.7 cents per share).
To make comparison with the corresponding period meaningful, the 28 February 2013 result has been
adjusted to account for ARA as if it were an associate at the time. Excluding the fair value gain, profit before
tax came in at R28.1 million (adjusted 28 Feb ’13: R25.4 million). As there has been no change in
shareholding, the effect is merely cosmetic and limited to gross income and expenditure lines; the net result
is of course identical.
The boost to headline earnings in the six months to 28 February 2013 arising out of changes in the Capital
Gains Tax rate was not repeated in 2014. The anomaly accounts for the obvious disconnect between higher
profits before tax and marginally lower headline earnings (28 Feb ’13: R25.0 million vs 28 Feb ’14: R21.6
million). Tax normalised, headline earnings would have easily eclipsed 2013. Tangible net asset value per
share - comprising mainly cash and liquid investments – climbed 9.1 cents to 113.3 cents, repeating a strong
pattern of converting earnings to cash. Net asset value, after the fair value adjustment relating to ARA,
increased to R411.8 million or 160.6 cents per share. The remaining debt of R2.7 million at year-end was
extinguished, leaving the Group entirely debt free.
Credit Rating
Global Credit Ratings (”GCR”) has affirmed Constantia Insurance Company Limited’s rating of A-(ZA); Outlook
Positive.
“The positive outlook is based on Constantia’s notably improved underwriting trend over the past three years.
GCR views this to be reflective of the operational improvements and streamlining exercises undertaken over
the review period, combined with a targeted business line focus. Consequently, GCR views the insurer’s
strengthened earnings capacity to be indicative of sustained underwriting profitability going forward.” -
Global Credit Rating, 12 May 2014.
Conclusion
The apparent trend of better first than second half earnings is little more than coincidence and there is in fact
no real correlation between performance and period. We nonetheless relish the opportunity to “buck the
trend”.
Outside of our large annuity income base, we have an extraordinary pipeline of opportunity not seen for quite
some time. How much of it we ultimately succeed in converting - or have an appetite for eating - is not yet
certain and will fall to the skill and good judgment of an experienced team.
“I do not think that there is any other quality so essential to success of any kind as the quality of
perseverance. It overcomes almost everything, even nature.”
If John D Rockefeller was right, then frankly I fancy our prospects now more than ever!
For and on behalf of the Board
Jason D Druian
Chief Executive Officer
Johannesburg
14 May 2014
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In anticipation of obtaining approval to transfer our listing from the Speciality Finance to the Insurance sector
(JSE Main board), we have significantly expanded the February 2014 statement of comprehensive income to
include certain insurance specific information. Additionally, the ARA result - historically consolidated under the
Direct division - now appears as a single line of Equity accounted income in the Corporate and Investment
Services segment.
For ease of comparison, we have provided 2 additional columns: a Reported column, which simply presents
the 28 February and 31 August 2013 reported results in the “new look” format and a Reformatted column
that does the same but accounts for ARA as if it were an associate at the time.
Unaudited Reformatted Reported
six months six months Reformatted six months Reported
ended ended year ended ended year ended
28 Feb 2014 28 Feb 2013 31 Aug 2013 28 Feb 2013 31 Aug 2013
R’000 R’000 R'000 R’000 R'000
Gross written premium 492 567 580 623 1 039 463 580 623 1 039 463
Reinsurance premium (326 944) (438 863) (727 308) (438 863) (727 308)
Net written premium 165 623 141 760 312 155 141 760 312 155
Net change in provision for unearned
premium 1 850 1 018 423 1 018 423
Net premium income 167 473 142 778 312 578 142 778 312 578
Reinsurance commission received 256 126 322 317 532 366 322 317 532 366
Income from insurance operations 423 599 465 095 844 944 465 095 844 944
Net claims and movement in claims
reserves (69 251) (90 282) (174 512) (90 282) (174 512)
Insurance contract acquisition costs (107 311) (236 520) (402 715) (236 520) (402 715)
Agency fees (212 392) (108 347) (199 365) (108 347) (199 365)
Gross underwriting surplus 34 645 29 946 68 352 29 946 68 352
Administration costs (17 064) (16 986) (28 851) (16 986) (28 851)
Net underwriting surplus 17 581 12 960 39 501 12 960 39 501
Non-insurance revenue 2 860 3 147 5 448 67 906 128 702
Other expenses (14 466) (13 402) (38 021) (54 570) (118 224)
Operating profit 5 975 2 705 6 928 26 296 49 979
Equity accounted income 7 021 7 049 13 218 184 522
Investment income 11 676 15 178 22 665 15 452 23 268
Other income 97 551 680 2 734 680 3 719
Finance charges (282) (198) (462) (198) (462)
Profit before taxation 121 941 25 414 45 083 42 414 77 026
Taxation (24 131) (440) (5 392) (7 140) (18 293)
Profit for the period 97 810 24 974 39 691 35 274 58 733
Other comprehensive income - - - - -
Total comprehensive income 97 810 24 974 39 691 35 274 58 733
Attributable to:
Equity holders of the parent 97 769 24 951 39 625 24 951 39 625
Non-controlling interest 41 23 66 10 323 19 108
Total comprehensive income 97 810 24 974 39 691 35 274 58 733
Headline earnings 21 625 24 991 39 980 24 991 39 980
Earnings per share (cents)
- Basic 38.1 9.7 15.5 9.7 15.5
- Diluted 38.1 9.7 15.5 9.7 15.5
- Headline 8.4 9.8 15.6 9.8 15.6
- Diluted headline 8.4 9.8 15.6 9.8 15.6
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME PER SEGMENT
CORPORATE AND INVESTMENT SERVICES
Unaudited Reformatted Reported
six months six months Reformatted Reported
year ended six months
ended ended ended year ended
28 Feb 2014 28 Feb 2013 31 Aug 2013 28 Feb 2013 31 Aug 2013
R’000 R’000 R'000 R’000 R'000
Gross written premium - - - - -
Reinsurance premium - - - - -
Net written premium - - - - -
Net change in provision for unearned
premium - - - - -
Net premium income - - - - -
Reinsurance commission received - - - - -
Income from insurance operations - - - - -
Net claims and movement in claims reserves - - - - -
Insurance contract acquisition costs - - - - -
Agency fees - - - - -
Gross underwriting surplus - - - - -
Administration costs - - - - -
Net underwriting surplus - - - - -
Non-insurance revenue 5 824 5 258 8 031 5 258 8 031
Other expenses (8 779) (7 561) (14 698) (7 561) (14 698)
Operating profit (2 955) (2 303) (6 667) (2 303) (6 667)
Equity accounted income 6 069 6 865 12 696 - -
Investment income 2 656 7 038 16 626 7 038 16 626
Other income (expenses) 93 858 (26) (14) (26) (14)
Finance charges - (2) (3) (2) (3)
Profit before taxation 99 628 11 572 22 638 4 707 9 942
Taxation (18 515) 159 (42) 158 (42)
Profit for the period 81 113 11 731 22 596 4 865 9 900
Other comprehensive income - - - - -
Total comprehensive income 81 113 11 731 22 596 4 865 9 900
Attributable to:
Equity holders of the parent 81 101 11 722 22 585 4 856 9 889
Non-controlling interest 12 9 11 9 11
Total comprehensive income 81 113 11 731 22 596 4 865 9 900
Headline earnings 5 551 11 748 22 599 4 883 9 903
Earnings per share (cents)
- Basic 31.6 4.6 8.8 1.9 3.9
- Diluted 31.6 4.6 8.8 1.9 3.9
- Headline 2.2 4.6 8.8 1.9 3.9
- Diluted headline 2.2 4.6 8.8 1.9 3.9
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME PER SEGMENT
(continued)
INSURANCE AND RISK SERVICES
Unaudited Reformatted Reported
six months six months Reformatted Reported
year ended six months
ended ended ended year ended
28 Feb 2014 28 Feb 2013 31 Aug 2013 28 Feb 2013 31 Aug 2013
R’000 R’000 R'000 R’000 R'000
Gross written premium 492 567 580 623 1 039 463 580 623 1 039 463
Reinsurance premium (326 944) (438 863) (727 308) (438 863) (727 308)
Net written premium 165 623 141 760 312 155 141 760 312 155
Net change in provision for unearned
premium 1 850 1 018 423 1 018 423
Net premium income 167 473 142 778 312 578 142 778 312 578
Reinsurance commission received 256 126 322 317 532 366 322 317 532 366
Income from insurance operations 423 599 465 095 844 944 465 095 844 944
Net claims and movement in claims reserves (69 251) (90 282) (174 512) (90 282) (174 512)
Insurance contract acquisition costs (107 311) (236 520) (402 715) (236 520) (402 715)
Agency fees (212 392) (108 347) (199 365) (108 347) (199 365)
Gross underwriting surplus 34 645 29 946 68 352 29 946 68 352
Administration costs (17 064) (16 986) (28 851) (16 986) (28 851)
Net underwriting surplus 17 581 12 960 39 501 12 960 39 501
Non-insurance revenue 2 768 3 033 5 225 3 033 5 225
Other expenses (11 419) (10 261) (31 131) (10 261) (31 131)
Operating profit 8 930 5 732 13 595 5 732 13 595
Equity accounted income 952 184 522 184 522
Investment income 9 931 8 140 15 945 8 140 15 945
Other income (expenses) 2 782 (20) 2 748 (20) 2 748
Finance charges (282) (194) (459) (194) (459)
Profit before taxation 22 313 13 842 32 351 13 842 32 351
Taxation (5 616) (598) (5 350) (598) (5 350)
Profit for the period 16 697 13 244 27 001 13 244 27 001
Other comprehensive income - - - - -
Total comprehensive income 16 697 13 244 27 001 13 244 27 001
Attributable to:
Equity holders of the parent 16 668 13 230 26 946 13 230 26 946
Non-controlling interest 29 14 55 14 55
Total comprehensive income 16 697 13 244 27 001 13 244 27 001
Headline earnings 16 074 13 243 27 287 13 243 27 287
Earnings per share (cents)
- Basic 6.5 5.2 10.5 5.2 10.5
- Diluted 6.5 5.2 10.5 5.2 10.5
- Headline 6.3 5.2 10.7 5.2 10.7
- Diluted headline 6.3 5.2 10.7 5.2 10.7
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME PER SEGMENT
(continued)
DIRECT
Unaudited Reformatted Reported
six months six months Reformatted Reported
year ended six months
ended ended ended year ended
28 Feb 2014 28 Feb 2013 31 Aug 2013 31 Aug 2013
28 Feb 2013
R’000 R’000 R'000 R’000 R'000
Gross written premium - - - - -
Reinsurance premium - - - - -
Net written premium - - - - -
Net change in provision for unearned
premium - - - - -
Net premium income - - - - -
Reinsurance commission received - - - - -
Income from insurance operations - - - - -
Net claims and movement in claims reserves - - - - -
Insurance contract acquisition costs - - - - -
Agency fees - - - - -
Gross underwriting surplus - - - - -
Administration costs - - - - -
Net underwriting surplus - - - - -
Non-insurance revenue - - - 64 759 123 254
Other expenses - - - (41 168) (80 203)
Operating profit - - - 23 591 43 051
Equity accounted income - - - - -
Investment income - - - 274 603
Other income - - - - 985
Finance charges - - - - -
Profit before taxation - - - 23 865 44 639
Taxation - - - (6 700) (12 901)
Profit for the period - - - 17 165 31 738
Other comprehensive income - - - - -
Total comprehensive income - - - 17 165 31 738
Attributable to:
Equity holders of the parent - - - 6 865 12 696
Non-controlling interest - - - 10 300 19 042
Total comprehensive income - - - 17 165 31 738
Headline earnings - - - 6 865 12 696
Earnings per share (cents)
- Basic - - - 2.7 5.0
- Diluted - - - 2.7 5.0
- Headline - - - 2.7 5.0
- Diluted headline - - - 2.7 5.0
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Unaudited Unaudited Audited
28 Feb 2014 28 Feb 2013 31 Aug 2013
R’000 R’000 R’000
ASSETS
Non-current assets 450 322 160 964 167 599
- Property, plant and equipment 10 209 14 452 14 102
- Intangible assets 35 171 47 058 46 865
- Loans receivable 18 642 3 789 12 801
- Deferred taxation 14 826 13 701 13 625
- Investment properties 3 978 3 850 3 978
- Investment in associates 121 185 395 323
- Investment in jointly controlled entities 286 3 665 3 566
- Investments held at fair value (Note A) 246 025 74 054 72 339
Current assets 641 834 866 406 860 262
- Insurance assets 382 623 435 877 389 895
- Loans receivable 1 496 10 158 4 707
- Trade and other receivables 146 101 157 613 183 120
- Taxation 2 930 2 527 6 091
- Cash and cash equivalents (Note A) 108 684 260 231 276 449
Total assets 1 092 156 1 027 370 1 027 861
EQUITY AND LIABILITIES
Capital and reserves 412 438 319 096 327 625
- Ordinary share capital and share premium 176 704 176 703 176 704
- Inter-group funding - - -
- Retained earnings 235 123 122 681 137 354
Equity attributable to equity holders of the parent 411 827 299 384 314 058
Non-controlling interest 611 19 712 13 567
Non-current liabilities 49 733 31 158 32 365
- Policyholder liabilities under insurance contracts 19 214 19 051 19 214
- Interest-bearing borrowings - 2 675 2 695
- Deferred taxation 30 519 9 432 10 456
Current liabilities 629 985 677 116 667 871
- Insurance liabilities 446 832 505 136 454 147
- Trade and other payables 178 336 168 776 207 412
- Taxation 4 817 3 204 6 312
Total equity and liabilities 1 092 156 1 027 370 1 027 861
Capital expenditure 214 2 056 3 504
Net asset value per share (cents) 160.6 116.8 122.5
Tangible net asset value per share (cents) 113.3 98.4 104.2
Note A: The movement between cash and cash equivalents and investments held at fair value relates to the shift from
pure cash to highly liquid, low-risk investments (money market instruments, bank and corporate paper and government
bonds), expected to generate returns in excess of call rates. The programme is hedged against downside risk in the
underlying instruments.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION PER SEGMENT
CORPORATE AND INVESTMENT SERVICES
Unaudited Unaudited Audited
28 Feb 2014 28 Feb 2013 31 Aug 2013
R’000 R’000 R’000
ASSETS
Non-current assets 124 082 39 782 36 875
- Property, plant and equipment 79 156 84
- Intangible assets 15 29 28
- Loans receivable - - -
- Deferred taxation 4 936 5 115 4 943
- Investment properties - - -
- Investment in associates 119 052 - -
- Investment in jointly controlled entities - 597 414
- Investments held at fair value - 33 885 31 406
Current assets 47 968 5 719 15 551
- Insurance assets - - -
- Loans receivable - - -
- Trade and other receivables 5 179 1 551 829
- Taxation 110 97 94
- Cash and cash equivalents 42 679 4 071 14 628
Total assets 172 050 45 501 52 426
EQUITY AND LIABILITIES
Capital and reserves 147 044 42 466 44 953
- Ordinary share capital and share premium 176 704 176 703 176 704
- Inter-group funding (111 513) (122 394) (124 938)
- Retained earnings 81 668 (12 014) (6 986)
Equity attributable to equity holders of the parent 146 859 42 295 44 780
Non-controlling interest 185 171 173
Non-current liabilities 18 492 - -
- Policyholder liabilities under insurance contracts - - -
- Interest-bearing borrowings - - -
- Deferred taxation 18 492 - -
Current liabilities 6 514 3 035 7 473
- Insurance liabilities - - -
- Trade and other payables 6 436 2 955 7 406
- Taxation 78 80 67
Total equity and liabilities 172 050 45 501 52 426
Capital expenditure - - -
Net asset value per share (cents) 57.3 16.5 17.5
Tangible net asset value per share (cents) 24.1 16.5 17.5
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION PER SEGMENT (continued)
INSURANCE AND RISK SERVICES
Unaudited Unaudited Audited
28 Feb 2014 28 Feb 2013 31 Aug 2013
R’000 R’000 R’000
ASSETS
Non-current assets 333 870 107 609 112 740
- Property, plant and equipment 10 130 10 308 10 413
- Intangible assets 37 519 37 665 37 663
- Loans receivable 23 910 3 789 7 595
- Deferred taxation 9 889 8 365 8 684
- Investment properties 3 977 3 850 3 977
- Investment in associates 2 133 395 323
- Investment in jointly controlled entities 286 3 068 3 151
- Investments held at fair value (Note A) 246 026 40 169 40 934
Current assets 600 835 822 521 825 862
- Insurance assets 382 623 435 877 389 895
- Loans receivable 1 496 10 158 15 119
- Trade and other receivables 147 892 140 283 169 824
- Taxation 2 819 2 430 5 615
- Cash and cash equivalents (Note A) 66 005 233 773 245 409
Total assets 934 705 930 130 938 602
EQUITY AND LIABILITIES
Capital and reserves 273 024 236 685 252 917
- Ordinary share capital and share premium - - -
- Inter-group funding 116 780 110 826 113 370
- Retained earnings 155 818 125 432 139 147
Equity attributable to equity holders of the parent 272 598 236 258 252 517
Non-controlling interest 426 427 400
Non-current liabilities 31 240 31 158 32 166
- Policyholder liabilities under insurance contracts 19 213 19 051 19 213
- Interest-bearing borrowings - 2 675 2 695
- Deferred taxation 12 027 9 432 10 258
Current liabilities 630 441 662 287 653 519
- Insurance liabilities 446 832 505 136 454 147
- Trade and other payables 178 869 154 423 193 127
- Taxation 4 740 2 728 6 245
Total equity and liabilities 934 705 930 130 938 602
Capital expenditure 214 1 111 1 909
Net asset value per share (cents) 106.3 92.2 98.5
Tangible net asset value per share (cents) 91.7 77.5 83.8
Note A: The movement between cash and cash equivalents and investments held at fair value relates to the shift from
pure cash to highly liquid, low-risk investments (money market instruments, bank and corporate paper and government
bonds), expected to generate returns in excess of call rates. The programme is hedged against downside risk in the
underlying instruments.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION PER SEGMENT (continued)
DIRECT
Unaudited Unaudited Audited
28 Feb 2014 28 Feb 2013 31 Aug 2013
R’000 R’000 R’000
ASSETS
Non-current assets - 15 937 15 144
- Property, plant and equipment - 3 989 3 607
- Intangible assets - 11 727 11 537
- Loans receivable - - -
- Deferred taxation - 221 -
- Investment properties - - -
- Investment in associates - - -
- Investment in jointly controlled entities - - -
- Investments held at fair value - - -
Current assets - 38 639 29 745
- Insurance assets - - -
- Loans receivable - - -
- Trade and other receivables - 16 251 12 952
- Taxation - - 382
- Cash and cash equivalents - 22 388 16 411
Total assets - 54 576 44 889
EQUITY AND LIABILITIES
Capital and reserves - 42 308 32 118
- Ordinary share capital and share premium - - -
- Inter-group funding - 11 568 11 568
- Retained earnings - 11 626 7 553
Equity attributable to equity holders of the parent - 23 194 19 121
Non-controlling interest - 19 114 12 997
Non-current liabilities - - 199
- Policyholder liabilities under insurance contracts - - -
- Interest-bearing borrowings - - -
- Deferred taxation - - 199
Current liabilities - 12 268 12 572
- Insurance liabilities - - -
- Trade and other payables - 11 872 12 572
- Taxation - 396 -
Total equity and liabilities - 54 576 44 889
Capital expenditure - 945 1 595
Net asset value per share (cents) - 9.0 7.5
Tangible net asset value per share (cents) - 4.5 3.0
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited Unaudited
six months six months Audited
ended ended year ended
28 Feb 2014 28 Feb 2013 31 Aug 2013
R’000 R’000 R'000
Net cash flows from operating activities 18 927 (6 207) 13 609
Net cash flows from investing activities (164 955) 706 1 695
Net cash flows from financing activities (5 326) (4 240) (8 827)
Total cash movement for the period (Note A) (151 354) (9 741) 6 477
Cash at the beginning of the period 276 449 269 972 269 972
Cash disposed of (Note B) (16 411) - -
Total cash at the end of the period 108 684 260 231 276 449
Note A: The movement between cash and cash equivalents and investments held at fair value relates to the shift from
pure cash to highly liquid, low-risk investments (money market instruments, bank and corporate paper and government
bonds), expected to generate returns in excess of call rates. The programme is hedged against downside risk in the
underlying instruments.
Note B: “Cash disposed of” refers to the deconsolidation of ARA’s cash reflected in the Group’s accounts at 31 August
2013 (due to its reclassification as an associate)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Share
capital and Non-
share Retained Other controlling
premium earnings reserves interest Total
R'000 R'000 R'000 R'000 R'000
Balance at 1 September 2012 175 917 97 694 182 14 504 288 297
Total comprehensive income for the period - 24 951 - 10 323 35 274
Reversal of equity options - 36 (36) - -
Equity options exercised 786 - (146) - 640
Loans repaid to non-controlling shareholders - - - (5 100) (5 100)
Dividends paid - - - (15) (15)
Balance at 28 February 2013 176 703 122 681 - 19 712 319 096
Total comprehensive income for the period - 14 674 - 8 785 23 459
Equity options exercised 1 (1) - - -
Loans repaid to non-controlling shareholders - - - (18) (18)
Dividends paid - - - (14 912) (14 912)
Balance at 31 August 2013 176 704 137 354 - 13 567 327 625
Total comprehensive income for the period - 97 769 - 41 97 810
Reclassification of subsidiary to associate - - - (12 997) (12 997)
Balance at 28 February 2014 176 704 235 123 - 611 412 438
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of preparation
The accounting policies applied in the preparation of these condensed consolidated unaudited financial
statements for the six months ended 28 February 2014 (“interim results”) are based on reasonable
judgements and estimates and are in accordance with International Financial Reporting Standards
(“IFRS”) and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and
Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council. These
accounting policies are consistent with those applied in the annual financial statements for the year ended
31 August 2013. The interim results have been prepared in terms of IAS 34 – Interim Financial Reporting,
the Companies Act, 71 of 2008 as amended, and the Listings Requirements of JSE Limited (“the JSE”)
under the supervision of Mr Lourens Louw, the Financial Director and have not been audited or reviewed
by the Group’s auditors.
Due to the early adoption of IFRS 9 - 13, IAS 27 - 28 and the amendments to IFRS 7 and IAS 32 during
the previous financial year, there is no requirement to restate prior years’ results.
2. Changes in share capital
Details of the shares in issue as at the reporting dates are as follows:
28 Feb 2014 28 Feb 2013 31 Aug 2013
’000 ’000 ’000
Number of shares 256 377 256 377 256 377
- Shares in issue 256 380 256 380 256 380
- Shares held as treasury shares (3) (3) (3)
Weighted average number of shares 256 377 255 982 255 982
- Shares in issue 256 380 256 380 256 380
- Shares held as treasury shares (3) (398) (398)
Diluted weighted average number of shares 256 377 255 982 255 982
- Shares in issue 256 380 256 380 258 380
- Shares held as treasury shares (3) (398) (398)
3. Transactions with non-controlling interests
At year-end we confirmed that with effect from 1 September 2013 Conduit’s 40% interest in credit
recovery specialist ARA would no longer be accounted for as a subsidiary, but rather as an associate. This
resulted in a reduction of R13.0 million in the carrying amount of non-controlling interest.
4. Associated companies
Effective 1 November 2013 the Group, through its subsidiary Constantia Insurance Holdings Proprietary
Limited (“CIH”), acquired a 40% interest in Administration Plus Proprietary Limited for a consideration of
R1.1 million.
ARA’s reclassification from a subsidiary to an associate resulted in a non-headline profit of R75.6 million.
5. Disposal of jointly controlled company
Effective 1 January 2014 the Group, through CIH, sold its 50% interest in Catalyst Insurance Consultants
Proprietary Limited for R4.0 million, resulting in a non-headline profit of R594 000.
6. Financial instruments
Fair value estimation
The financial assets valued at fair value through profit and loss in the statement of financial position are
grouped into the fair value hierarchy as follows:
Level 1 Level 2 Level 3 Total
Financial assets R’000 R’000 R’000 R'000
Listed investments 241 452 - - 241 452
Unlisted investments - 4 573 - 4 573
241 452 4 573 - 246 025
There have been no transfers between levels 1, 2 and 3 during the reporting period.
The methods and valuation techniques used for the purpose of measuring fair value are unchanged
compared to the previous reporting period:
- Financial assets classified in Level 1 have been valued with reference to quoted prices and market
rates (unadjusted) in active markets for identical assets or liabilities; and
- Financial assets classified in Level 2 have been valued by an independent third party according to a
formula (using the fair market values of the underlying assets in the investment) in terms of which
the investment could have been liquidated as at the reporting date.
7. Reconciliation of headline earnings
Unaudited Unaudited
six months six months Audited
ended ended year ended
28 Feb 2014 28 Feb 2013 31 Aug 2013
R’000 R’000 R'000
Profit attributable to ordinary equity holders of Conduit 97 769 24 951 39 625
Net loss on revaluation of investment properties - - 43
Net loss on disposal of intangibles, property, plant and
equipment 4 45 66
Profit on revaluation of associates (93 862) - -
Profit on disposal of jointly controlled entities (912) - -
Impairment of associates and jointly controlled entities - - 267
Tax on the items above 18 626 (5) (21)
Headline earnings 21 625 24 991 39 980
8. Contingent liabilities
The Group is not aware of any current or pending legal cases that would have a material adverse effect
on its results.
9. Directors
There were no changes to the board of directors of Conduit Capital (“the Board”) during the period under
review.
10. Dividends and other distributions
The Board has not recommended any dividend payment to ordinary shareholders for the six months
ended 28 February 2014 (2013: Nil).
11. Post balance sheet events
There were no material post-balance sheet events.
Directors:
Executive directors: Jason D Druian (Chief Executive Officer), Lourens E Louw (Financial Director),
Robert L Shaw, Gavin Toet
Non-executive directors: Reginald S Berkowitz (Chairman)*, Richard Bruyns*, Scott M Campbell*, Günter
Z Steffens OBE*
* Independent
Company secretary:
Probity Business Services Proprietary Limited
Third Floor, The Mall Offices, 11 Cradock Avenue
Rosebank, 2196
Registered address:
Unit 7 Tulbagh, 360 Oak Avenue
Randburg, 2194
PO Box 97, Melrose Arch, 2076
Telephone: 011 686 4200
Facsimile: 011 886 0206
Transfer secretaries:
Computershare Investor Services Proprietary Limited
Ground Floor, 70 Marshall Street, Johannesburg, 2001
Sponsor:
Merchantec Capital
Date: 14/05/2014 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
Sharenet Sites 
