Wrap Text
Condensed consolidated audited results for the year ended 31 August 2014 and cash dividend
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” or “the Company”)
CONDENSED CONSOLIDATED AUDITED RESULTS FOR THE YEAR ENDED 31 AUGUST 2014 AND CASH DIVIDEND
CHIEF EXECUTIVE OFFICER’S REPORT
The introduction of a 4th investment theme brings to life a new and tangible aspect to the Conduit investment
proposition. There has been much to absorb over the past few reports and having them handy as you digest
this one might prove helpful in appreciating the connectivity between the 3 established themes (Embedded
value, Investments, Underwriting) and the newcomer. For the convenience of the less adventurous, certain
important elements have been extracted from the Interim results commentary and replicated. We would
encourage you to devote sufficient time to each theme, hopefully not surrendering to the impulse of allowing
any single measure to dominate your decision. Complete with the usual pinch of subjective commentary, we
present what is perhaps Conduit’s most instructive report to date.
INVESTMENTS (Theme 1)
As Regulatory capital structures take shape and more of our historically lazy cash (from Pots 2b and 4 –
detailed below) is deployed into equities, one would assume a stronger correlation of returns to equity
markets. Well, not entirely. In reality, within each pot resides a distinct investment personality, primarily
defined by the nature of the capital within the pot (regulatory or surplus) and the appropriate appetite for risk
established at the time of setting performance benchmarks. Interestingly, of the R330+ million in investable
assets, R203 million (from Pots 1; 2a and 3) is confined to highly liquid fixed income instruments (cash,
money market, corporate and government bonds). For the rest, there is a greater degree of flexibility and -
without betting the bank – it is here we ferret out opportunities for enhanced yield.
We do not purport to possess any inspiring hedging strategies, nor homemade crystal ball to help time our
investments so perfectly as to escape the vagaries of the market. What we do have is a systematic, kick-the-
tyres approach; one grounded in a mentality of thorough first-hand research and where a cup of tea with
management ranks as high up the investment ladder as any Integrated Annual report – you’d be surprised
how many great ideas make better investments on pulp than in person (and vice versa)!
We remain acutely aware that to some extent our portfolio will have a degree of naked exposure, yet we’re
comfortable in our own skin. There is additional comfort in knowing that our investment personality is
infinitely better suited to basing decisions on solid fundamentals rather than the investment fantasy that plays
itself out through market chatter and these days – believe it or not – social media.
In the February results announcement we undertook to expand on the investment table by including a column
setting out the actual returns for the full 12-month period. On reflection, given the considerable reallocation
and deployment of capital across the 4 money pots (spread over the year), this addition alone would have
been of limited benefit. Whilst it would take account of any movement between asset classes, it would offer
no insight into the time spent in each of those classes and therefore no indication of the true returns in each
pot. In favour of a much-improved and certainly more meaningful version, we’ve skipped straight ahead to
Version 2 below.
The 4 money pots – Benchmarks and objectives
Money Time horizon
pot Objective Investment strategy Benchmark / Target (rolling periods)
Pot 1 Daily operational Cash deposits with top 5 SA banks or Current account rates Daily
cash flow equivalent (fixed income) +2%
Pot 2a 50% allocated to cash deposits with top Short-Term Fixed Interest 1 month – 4 years
5 SA banks or equivalent. Index (“STeFI”) + 1%
Pot 2b Insurance float* Other 50%: medium-term growth, multi- Sufficient to ensure an 3 – 5 years
asset class, absolute return mandates, overall investment return
single asset fund mandates and strategic equal to CPI + 3% p.a.
investments after expenses
Pot 3 Minimum Cash, money market, corporate bonds STeFI + 1.5% 1 month – 4 years
regulatory capital
(“CAR”) ratio
Pot 4 Surplus assets Medium-term growth, multi asset class Sufficient to ensure an 3 – 5 years
and strategic investments overall investment return
equal to CPI + 3% p.a.
after expenses
*Insurance Float = Policyholder liabilities plus Insurance liabilities less Insurance assets
The 4 money pots – Performance relative to benchmarks and objectives (actual and time weighted)
By March 2014 the fixed income and equity programmes were underway. Owing to a modest pick-up in both,
investment returns in the second half of the year outpaced the first - ending 11.3% up year-on-year
(31 Aug ’14: R25.9 million vs 31 Aug ’13: R23.3 million). Ironically, the recent volatility in equity markets has
been to our benefit, stripping the fat off some interesting, but to our mind previously prohibitively expensive,
stocks and making way for some carefully considered opportunity.
Actually Average Time-
Allocated invested deployed Benchmark Benchmark Actual Actual weighted
Money 31 Aug '14 31 Aug '14 over year Days target target return return return
pot R'000 (1) R'000 (2) R'000 deployed R'000 avg % R'000 (3) avg % avg %
Pot 1 27 835 27 835 26 970 365 543 2.0% 574 2.1% 2.1%
Pot 2a 37 483 37 483 41 099 289 2 699 6.6% 2 037 5.0% 6.3%
Pot 2b 37 483 37 483 40 004 365 5 143 12.9% 7 646 19.1% n/a
Pot 3 139 034 139 034 134 649 296 9 531 7.1% 6 927 5.1% 6.4%
Pot 4 94 985 37 026 33 685 273 4 331 12.9% 5 251 15.6% n/a
Pot 4 (excess) - 57 959 68 900 365 8 858 12.9% 2 062 3.0% n/a
TOTAL 336 819 336 819 345 308 320 31 105 9.0% 24 496 7.1% n/a
1) Allocated 31 Aug ’14 refers to the amounts calculated and in turn allocated to each pot based on the published accounts.
2) Actually invested 31 Aug ’14 refers to amounts physically deployed as at 31 August 2014.
3) The difference between the Actual return of R24.5 million (reflected above) and the Investment income of R25.9 million (in the Statement of
Profit or Loss and Other Comprehensive Income) relates to R1.2 million in income derived from third party loans and a minor profit on the
revaluation of investment properties amounting to R0.2 million.
A portion of the unallocated assets in Pot 4 resides in a USD denominated Customer Foreign Currency (“CFC”)
account flowing from the Group’s African activities. As the account is non-interest bearing and the balance
fluctuates considerably throughout the year, returns tend to be lumpy. Account flows are managed by Group
treasury and are drawn on as and when required. The R57.96 million (comprising the unallocated portion of
Pot 4) will earn modest returns until suitable investments are identified.
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.
Dimly lit corners and crevices
The idea of establishing another deep value investment fund – of which there is no shortage - is neither novel
nor interesting. Forming one with an investment philosophy anchored in the principles of value investing but
as at home in the “dimly lit corners and crevices” as it is in the mainstream, begins to sound a great deal
more appealing - and why it is we did just that. Mid-way through September 2014 we impregnated the
Cannon Asset Managers - Conduit Capital (yet unnamed) fund with R10 million in capital, equally funded by
Peregrine Holdings Limited (Cannon’s parent company) and our Surplus Asset Pot 4. The fund has as its
Investment Principals, Cannon’s Chief Investment Officer, Dr Adrian Saville - a thoroughbred asset manager
(he’ll cringe when he reads this) - and a self-appointed one, me. All investment decisions are required to be
unanimous and being patient investors (with skin in the game), until the initial capital is deployed and Adrian
and I are satisfied that the mix and quality of assets meet a few important stress tests (including time),
access to outside investors will be limited. Ultimately, the intention is to migrate the portfolio into a
permanent capital structure open to retail and institutional investors.
UNDERWRITING (Theme 2)
The end of the 2014 financial year coincided with Robert Shaw’s first completed year (in his second tenure) at
the helm of the Constantia Insurance Group. Robert has the difficult task of having to marry relatively short-
term financial objectives with a longer-term, purist insurance mind-set. Admittedly, having to report to
shareholders twice a year hardly allows for the volatility and short-term knocks, which almost always
accompany a portfolio reaching for scale. That said, it is encouraging that even at the risk of upsetting the
delicate balance between shareholder interference and influence, Robert openly invites our participation in
matters of importance, be they strategic or operational. The significance of this is illustrated in the events below.
The dreadful November 2013 weather patterns and consequent R11.9 million negative impact on our Interim
numbers, left a sizeable dent in the 2014 underwriting result; ultimately precipitating the decision (post year-
end) to significantly reduce our exposure to the traditional Property and Motor class. Though an obvious
aberration, the event(s) exposed vulnerabilities in parts of our portfolio, incapable of being remedied by any
reasonable short-term measure. Insurance is a business where no quick (sticky tape and chewing gum) fix
can patch, repair or mask a portfolio’s failure to meet a number of non-negotiable underwriting criteria, viz.
scale, effective delivery cost, market differentiation and most importantly Return on Regulatory Capital
(“RoRC”).
It is seldom, if ever, a comfortable process to terminate a book or class of business let alone gift it to
competitors. Then again, to betray our underwriting principles and - like the Greek mythological King Sisyphus
- endure the punishment of having to repeatedly haul a boulder up a hill, only to watch it roll down again,
would seem a rather pointless pursuit.
While the contraction in premium will result in a temporary release of capital to the surplus asset Pot, it will
be quickly absorbed by replacement premium. The significant reduction in service and delivery costs is likely
to be of a more permanent nature, taking root in the second half of 2015.
Gross vs Net Premium
Our 3 insurers (1 short and 2 long-term) retain around a third of Premium written (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 limited exposure. The rest of the risk premium is ceded (laid-off in bookmaking speak) as
proportional reinsurance, where our reinsurers 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!
At first blush the 5% growth in Net Premium Income (“NPI”) would seem at odds with the 15% reduction in
Gross Premium Income (“GPI”). Don’t be perturbed. It matters not what we “take” but what we “keep” and
what appears to be a dramatic movement between the two is in fact only a function of business mix and a
well thought out reinsurance programme. This is best explained through the numbers. Of the R1.04 billion in
GPI written in 2013, some R463.0 million (or 44.5%) related to the aforementioned neat margin
arrangements; largely reinsured. In 2014, the same business accounted for R338.5 million (or 38.3%) of the
R883.0 million total, yet NPI grew to R332.9 million (31 Aug ’13: R312.2 million). The traditional underwriting
margin metric used by other insurers (Underwriting Surplus divided by Gross Premium Income) is distorted by
our reinsurance programme and therefore of no value. Prior period GPI comparisons are similarly worthless as an evaluation tool.
In the latter part of the year we added 8 new Underwriting Managers (5 long-term and 3 short-term) to the
fold. Those that are not already writing business into the Group are expected to be doing so by half year. The
portfolios vary in premium type, volume and profitability: some small but lucrative, others more significant but
tighter on margin (i.e. fixed) as a consequence of our growing aversion to volatility. Each will take time to
mature and develop and while Robert and his team are hard at work in diversifying the portfolio, the
emphasis is - as it always has been - on quality not quantity!
Underwriting result
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 the RoRC. Any capital in excess of the stated minimum is then viewed as
surplus and falls into the surplus asset pot (Pot 4).
Return on Regulatory Capital for 2014
Target Actual
Average
capital RoRC RoRC
allocated (pre-tax) (pre-tax)
Insurance Class Examples of insurance types R’000 % %
Property Property, homeowners content, cell phones, computers 13 211 28 0.1
Motor Motor, HCV, motorcycles 18 183 20 14.2
Accident/ health Gap cover, medical evacuation, Hospital cash plans 65 116 28 25.8
Guarantee Solvency, Court and Construction bonds 7 329 28 28.6
Miscellaneous Legal cover, credit shortfall, motor warranties 14 981 28 30.1
Long-term Funeral 20 000 28 1.7
Total 138 820 27.0 19.0
Actual RoRC: Gross Underwriting Surplus minus Administration Costs
The figures quoted above are based on IFRS financial reporting requirements, which differ from the regulatory reporting format
In aggregate the 3 insurance companies registered a Gross Underwriting Surplus of R58.6 million (31 Aug ’13:
R68.4 million), falling short of expectations; particularly since the severe losses were experienced in the first
half of the year. After deducting Administration Costs, the Net Underwriting Surplus amounted to R26.3
million (31 Aug ’13: R36.1 million). Evidently, the quest for a more stable and predictable underwriting result
is not yet over.
EMBEDDED VALUE (Theme 3)
This section picks up where the 2013 Embedded value theme left off and should ideally be read together. The
Surplus cash line within the table has been modified to accommodate the shift from pure cash to highly liquid,
low-risk investments (money market instruments, bank, corporate and government bonds/paper). But for the elimination
of the Direct segment and its incorporation into Corporate and Investment Services, the assumptions and methodology
remain largely unchanged. Other than where the face value of the asset represents its actual value, a Discounted
Cash Flow model (using modest assumptions) has been applied to determine the fair value. The table itself is self-explanatory
and our notes have been narrowed accordingly.
Apart from the obvious value in the tangible assets, the calculation is also only as good as the quality of the
assumptions and inputs attributed to the intangibles. Critically, the value should reflect the realistic amount
shareholders might expect to receive or consider fair, either (A) in the event of an offer to minorities, or (B)
were the Company to dispose of its underlying assets and distribute the proceeds. Though the table
considers both, it is only in the latter scenario that we estimate the aggregate Capital Gains Tax charge across
the asset base and deduct it from the total.
August 2014 August 2013
Corporate
and Insurance
Investment and Risk Reformatted
Services Services Total total
Part R'000 R'000 R'000 R'000
1 RISK: Cash and Investments - 174 306 174 306 160 498
- Surplus cash (including fixed income instruments) - 113 766 113 766 119 564
- Investments held at fair value - 60 540 60 540 40 934
2 RISK: Insurance float - 47 818 47 818 48 390
3 RISK: Insurance operations - 158 359 158 359 138 624
4 NON-RISK 122 007 22 270 144 277 132 481
- Investment in associates 122 007 3 498 125 505 113 248
- Investment in joint ventures - 698 698 3 565
- Operations - 4 177 4 177 -
- Surplus cash - 13 897 13 897 15 668
5 OTHER 4 978 13 718 18 696 23 861
- Investments held at fair value 7 606 - 7 606 31 406
- Operations (2 628) - (2 628) (20 863)
- Properties - 13 718 13 718 13 318
TOTAL (A) 126 985 416 471 543 456 503 854
Embedded value per share (A) 49.5 162.5 212.0 196.5
TOTAL A b/f 126 985 416 471 543 456 503 854
Deferred capital gains tax (18 398) (13 078) (31 476) (25 560)
TOTAL (B) 108 587 403 393 511 980 478 294
Embedded value per share (B) 42.4 157.3 199.7 186.6
Number of shares in issue, net of treasury shares ('000) 256 377 256 377 256 377 256 377
Part 1 - Cash and Investments
The redistribution of capital through the fixed income and equity programme accounted for a pronounced
movement between Surplus cash and Investments held at fair value. The aggregate face value of these
investments at 31 August 2014 amounted to R174.3 million (31 Aug ’13: R160.5 million).
Part 2 - Insurance float (Policyholder liabilities plus Insurance liabilities less Insurance assets)
The reduction in Insurance float from R83.5 million in 2013 to R75.0 million in 2014 relates primarily to the
run-off of liabilities in the Wheels Underwriting Managers Heavy Commercial Vehicle portfolio. The improved
investment yield (see Investment Return table Pots 2a and b) partly offset the negative movement in float
and resulted in a slight downward revision in value to R47.8 million (31 Aug ’13: R48.4 million). As nice as it is
to have the benefit of an insurance float - which amounts to an interest free loan – it is only a by-product of
the type and volume of premium we write. From year-to-year the float will fluctuate and follow the fortunes
of our investment account and it would be a rare circumstance indeed, where the promise of investment
return outweighs the rotten risk in writing sub-quality premium.
Part 3 - Insurance operations
Notwithstanding a weaker 2014 overall underwriting performance, the consistent utilisation of 36 months of
rolling underwriting data removes the peaks and troughs of performance. In this instance, the data nudged
the valuation of the Insurance book upward to R158.4 million (31 Aug ’13: R138.6 million).
Part 4 - Non-risk
The inclusion of our 40% interest in Anthony Richards and Associates Proprietary Limited (“ARA”) under the
Corporate and Investment Services segment accounts for R122.0 million (31 Aug ’13: R113.0 million) of the
R125.5 million in the value of Investments in associates. Cash of R13.9 million, plus our minority interests in
several insurance intermediaries, represents the balance of the R144.3 million in value attributed to the NON-
RISK section.
Part 5 - Other
With the elimination of the DIRECT segment, last year’s Part 6 has become Part 5. As before, OTHER
constitutes nothing more than a basket of equities (owned by Group and accounted for at market), fixed
property (owned by the insurance companies and independently valued) and the Net Present Value liability of
unallocated operating costs that have no obvious home elsewhere in the Group. Cash received on the sale of
a large equity position considerably decreased Investments held at fair value and reduced the Capitalised
operating costs liability - terribly confusing, we know! While the operating costs would remain in a takeover
scenario (A), they would not in a ‘break up’ (B) and the value of OTHER would then improve substantially.
Key performance measures
The trend of explaining away performance anomalies and distortions in profitability through normalised
earnings comparisons appears - by many companies’ accounts - to have gained some recent momentum. As
with most explanations that require too much explaining, they often invite more questions than answers.
Having myself uttered the dreaded “normalised” word, it is entirely appropriate (perhaps even necessary) that
I should defend its responsible use, more so where a true result (be it good, bad or indifferent) is hidden in
the depths of IFRS accounting. Which brings me to now over-explain the reformatted statement of
comprehensive income presented in our interim results, and now here again.
As previously reported, with effect from 1 September 2013 our interest in credit recovery and debt
management specialist, ARA, would be accounted for as an associate - doing away with the Direct segment
entirely. The change in accounting treatment required that we fair value our 40% interest in the company and
bring to book R75.6 million (29.5 cents per share) in earnings and net asset value. Whilst we view the
resultant contribution to 2014 EPS as cosmetic (and rightly excluded from HEPS), we are satisfied that the
identical one-off adjustment to NAV reveals a more realistic valuation of the asset.
Where headline earnings for the first half of the year trailed the comparative period by 14.3% (largely as a
result of an anomaly in the 2013 tax line), by year-end the shortfall was eliminated and - above all the
accounting and tax clutter - headline earnings of R40.16 million narrowly eclipsed last year’s R39.98 million.
In 2013, as a subsidiary, the ARA results were consolidated. In 2014, as an associate, the earnings were
equity accounted and skewed by the fair value adjustment. To make comparison with the corresponding 12-
month period more meaningful, were we to disregard the ARA revaluation and include our share of ARA’s
profits on a like-for-like equity accounted basis in 2013 and 2014, the resultant profit before tax of R47.1
million for 2014 would compare favourably with the R45.1 million posted in 2013.
Net asset value, including the ARA fair value adjustment, advanced to R430.45 million or 167.9 cents per
share. Tangible Net Asset Value (“TNAV”) increased 16.4 cents to 120.6 cents (R309.27 million). A profit on
the disposal of a joint venture asset (excluded from headline earnings) accounts for the difference between
HEPS and the increase in TNAV. The Group remains completely debt free.
Gearing
While the security of having a fortress for a balance sheet should make for easy sleep, it is much less peaceful
than one might expect. With it comes great expectation. Being unburdened by the weight of debt and the
gaze of lenders and their covenants carries a different, but no less demanding load. Other than the interest
free funding from the insurance float, having no gearing simply means we don’t get to make money off other
people’s money. And, unless we borrow money, find a suitable place to invest it and make more on it than we
pay for using it, we’re better off without it.
Credit Rating
Global Credit Ratings (”GCR”) affirmed Constantia Insurance Company Limited’s rating of A-(ZA); moving it
from a Neutral to Positive outlook.
“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.
DIVIDENDS (Theme 4)
This element is not entirely new to investors but its inclusion as a theme represents a positive and ideally
sustainable investment attribute. The portion of the February commentary entitled Dividends – to pay or not
to pay outlined the complexity of the dividend issue. Though none could argue the importance of hoarding
capital in expectation of the onerous Solvency Assessment and Management (“SAM”) regime in 2016, the
suggestion of a positive dividend front did allude to our intentions. In April, alongside our external Actuaries,
we completed the Quantitative Impact Study 3 (QIS3) and then in October the SAM Light Parallel Run (“LPR”)
for all 3 of our insurers – basically an “as if” model of our capital adequacy under SAM – giving us sufficient
clarity to properly assess our future capital structure.
With that as a backdrop, the Board resolved to initiate a dividend programme, commencing with a cash
dividend of 5 cents per ordinary share, payable out of retained earnings. The use of Secondary Tax on
Company credits (amounting to the full 5 cents per ordinary share) will result in the dividend being exempt
from dividend tax.
The decision to proceed comes with a margin of safety wide enough to drive a bus through (maybe a mid-
sized one). The insurance disclaimer attached to the bus does however require that in order to sustain an
uninterrupted annual dividend, our current capital, together with anticipated profits (looking 24 months out)
must continue to exceed our working capital and regulatory needs.
Conclusion
Between the 4 investment themes, the Interim results commentary and what is presented above, Conduit has
now laid itself bare for all to see and assess.
Jason D Druian
Chief Executive Officer
Johannesburg
27 November 2014
CONDENSED CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Having obtained approval to transfer our listing from the Speciality Finance sector to the Insurance sector of
the JSE Main Board, we have significantly expanded the Statements of Profit or Loss and Other
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 two additional Reformatted (but unaudited) columns which
compare the two periods as if they were accounted for on a like-for-like basis, i.e. excluding the ARA
revaluation for 2014 and accounting for it as if it were an associate in 2013.
Reformatted Reformatted
Audited Audited unaudited unaudited
year ended year ended year ended year ended
31 Aug 2014 31 Aug 2013 31 Aug 2014 31 Aug 2013
R’000 R'000 R'000 R'000
Gross written premium 882 998 1 039 463 882 998 1 039 463
Reinsurance premium (550 080) (727 308) (550 080) (727 308)
Net written premium 332 918 312 155 332 918 312 155
Net change in provision for unearned premium (2 622) 423 (2 622) 423
Net premium income 330 296 312 578 330 296 312 578
Reinsurance commission received 413 076 531 854 413 076 531 854
Income from insurance operations 743 372 844 432 743 372 884 432
Net claims and movement in claims reserves (142 097) (174 512) (142 097) (174 512)
Insurance contract acquisition costs (189 206) (242 671) (189 206) (242 671)
Agency fees (353 453) (358 897) (353 453) (358 897)
Gross underwriting surplus 58 616 68 352 58 616 68 352
Administration costs (32 293) (32 260) (32 293) (32 260)
Net underwriting surplus 26 323 36 092 26 323 36 092
Non-insurance revenue 5 775 128 702 5 775 5 448
Other expenses (30 145) (114 815) (30 145) (34 612)
Operating profit 1 953 49 979 1 953 6 928
Equity accounted income 16 162 522 16 162 13 218
Investment income 25 889 23 268 25 889 22 665
Other income 97 375 3 719 3 513 2 734
Finance charges (387) (462) (387) (462)
Profit before taxation 140 992 77 026 47 130 45 083
Taxation (24 508) (18 293) (6 200) (5 392)
Profit for the year 116 484 58 733 40 930 39 691
Other comprehensive income - - - -
Total comprehensive income 116 484 58 733 40 930 39 691
Attributable to:
Equity holders of the parent 116 383 39 625 40 829 39 625
Non-controlling interest 101 19 108 101 66
Total comprehensive income 116 484 58 733 40 930 39 691
Headline earnings 40 162 39 980 40 162 39 980
Earnings per share (cents)
- Basic 45.4 15.5 15.9 15.5
- Diluted 45.4 15.5 15.9 15.5
- Headline 15.7 15.6 15.7 15.6
- Diluted headline 15.7 15.6 15.7 15.6
CONDENSED CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME PER SEGMENT
CORPORATE AND INVESTMENT SERVICES
Reformatted Reformatted
Audited Audited unaudited unaudited
year ended year ended year ended year ended
31 Aug 2014 31 Aug 2013 31 Aug 2014 31 Aug 2013
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 13 973 8 031 13 973 8 031
Other expenses (15,834) (14 698) (15 834) (14 698)
Operating profit (1 861) (6 667) (1 861) (6 667)
Equity accounted income 13 592 - 13 592 12 696
Investment income 4 527 16 626 4 527 6 720
Other income (expenses) 22 (14) 22 (14)
Finance charges (302) (3) (302) (3)
Profit before taxation 15 978 9 942 15 978 12 732
Taxation (125) (42) (125) (42)
Profit for the year 15 853 9 900 15 853 12 690
Other comprehensive income - - - -
Total comprehensive income 15 853 9 900 15 853 12 690
Attributable to:
Equity holders of the parent 15 847 9 889 15 847 12 679
Non-controlling interest 6 11 6 11
Total comprehensive income 15 853 9 900 15 853 12 690
Headline earnings 15 852 9 903 15 852 12 693
Earnings per share (cents)
- Basic 6.2 3.9 6.2 5.0
- Diluted 6.2 3.9 6.2 5.0
- Headline 6.2 3.9 6.2 5.0
- Diluted headline 6.2 3.9 6.2 5.0
CONDENSED CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME PER SEGMENT (continued)
INSURANCE AND RISK SERVICES
Reformatted Reformatted
Audited Audited unaudited unaudited
year ended year ended year ended year ended
31 Aug 2014 31 Aug 2013 31 Aug 2014 31 Aug 2013
R’000 R'000 R'000 R'000
Gross written premium 882 998 1 039 463 882 998 1 039 463
Reinsurance premium (550 080) (727 308) (550 880) (727 308)
Net written premium 332 918 312 155 322 918 312 155
Net change in provision for unearned premium (2 622) 423 (2 622) 423
Net premium income 330 296 312 578 330 296 312 578
Reinsurance commission received 413 076 531 854 413 076 531 854
Income from insurance operations 743 372 844 432 743 372 844 432
Net claims and movement in claims reserves (142 097) (174 512) (142 097) (174 512)
Insurance contract acquisition costs (189 206) (242 671) (189 206) (242 671)
Agency fees (353 453) (358 897) (353 453) (358 897)
Gross underwriting surplus 58 616 68 352 58 616 68 352
Administration costs (32 293) (32 260) (32 293) (32 260)
Net underwriting surplus 26 323 36 092 26 323 36 092
Non-insurance revenue 5 475 5 225 5 475 5 225
Other expenses (27 586) (27 722) (27 586) (27 722)
Operating profit 4 212 13 595 4 212 13 595
Equity accounted income 2 570 522 2 570 522
Investment income 21 226 15 945 21 226 15 945
Other income 3 491 2 748 3 491 2 748
Finance charges (387) (459) (387) (459)
Profit before taxation 31 152 32 351 31 152 32 351
Taxation (6 075) (5 350) (6 075) (5 350)
Profit for the year 25 077 27 001 25 077 27 001
Other comprehensive income - - - -
Total comprehensive income 25 077 27 001 25 077 27 001
Attributable to:
Equity holders of the parent 24 982 26 946 24 982 26 946
Non-controlling interest 95 55 95 55
Total comprehensive income 25 077 27 001 25 077 27 001
Headline earnings 24 310 27 287 24 310 27 287
Earnings per share (cents)
- Basic 9.7 10.5 9.7 10.5
- Diluted 9.7 10.5 9.7 10.5
- Headline 9.5 10.7 9.5 10.7
- Diluted headline 9.5 10.7 9.5 10.7
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME PER SEGMENT (continued)
DIRECT
Reformatted Reformatted
Audited Audited unaudited unaudited
year ended year ended year ended year ended
31 Aug 2014 31 Aug 2013 31 Aug 2014 31 Aug 2013
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 - 123 254 - -
Other expenses - (80 203) - -
Operating profit - 43 051 - -
Equity accounted income - - - -
Investment income - 603 - -
Other income - 985 - -
Finance charges - - - -
Profit before taxation - 44 639 - -
Taxation - (12 901) - -
Profit for the year - 31 738 - -
Other comprehensive income - - - -
Total comprehensive income - 31 738 - -
Attributable to:
Equity holders of the parent - 12 696 - -
Non-controlling interest - 19 042 - -
Total comprehensive income - 31 738 - -
Headline earnings - 12 696 - -
Earnings per share (cents)
- Basic 0.0 5.0 0.0 0.0
- Diluted 0.0 5.0 0.0 0.0
- Headline 0.0 5.0 0.0 0.0
- Diluted headline 0.0 5.0 0.0 0.0
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION PER SEGMENT
CORPORATE AND
GROUP INVESTMENT SERVICES
Audited Audited Audited Audited
31 Aug 2014 31 Aug 2013 31 Aug 2014 31 Aug 2013
R’000 R’000 R’000 R’000
ASSETS
Non-current assets 444 553 167 599 35 774 36 875
- Property, plant and equipment 9 985 14 102 80 84
- Intangible assets 35 113 46 865 15 28
- Loans receivable 17 721 12 801 - -
- Deferred taxation 9 364 13 625 4 844 4 943
- Investment properties 4 173 3 978 - -
- Investment in associates 124 931 323 27 912 -
- Investment in joint ventures 93 3 566 - 414
- Investments held at fair value Note A 243 173 72 339 2 923 31 406
Current assets 572 787 860 262 47 399 15 551
- Insurance assets 345 605 389 895 - -
- Loans receivable 376 4 707 - -
- Investments held at fair value Note A 4 683 - 4 683 -
- Trade and other receivables 128 743 183 120 11 452 829
- Taxation 4 418 6 091 115 94
- Cash and cash equivalents Note A 88 962 276 449 31 149 14 628
Total assets 1 017 340 1 027 861 83 173 52 426
EQUITY AND LIABILITIES
Capital and reserves 431 053 327 625 81 336 44 953
- Ordinary share capital and share premium 176 704 176 704 176 704 176 704
- Inter-group funding - - (111 961) (124 938)
- Retained earnings (Accumulated losses) 253 737 137 354 16 414 (6 986)
Equity attributable to equity holders of the parent 430 441 314 058 81 157 44 780
Non-controlling interest 612 13 567 179 173
Non-current liabilities 48 468 32 365 - -
- Policyholder liabilities under insurance contracts 20 522 19 214 - -
- Interest-bearing borrowings - 2 695 - -
- Deferred taxation 27 946 10 456 - -
Current liabilities 537 819 667 871 1 836 7 473
- Insurance liabilities 400 049 454 147 - -
- Trade and other payables 137 081 207 412 1 744 7 406
- Taxation 689 6 312 92 67
Total equity and liabilities 1 017 643 1 027 861 83 172 52 426
Capital expenditure 624 3 504 60 -
Net asset value per share (cents) 167.9 122.5 31.7 17.5
Tangible net asset value per share (cents) 120.6 104.2 27.6 17.5
Note A: The movement between Cash & cash equivalents and Investments held at fair value primarily relates to the shift
from pure cash to highly liquid, low-risk investments (money market instruments, gilts, bank and corporate paper),
expected to generate returns in excess of call rates.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION PER SEGMENT (continued)
INSURANCE AND RISK
SERVICES DIRECT
Audited Audited Audited Audited
31 Aug 2014 31 Aug 2013 31 Aug 2014 31 Aug 2013
R’000 R’000 R’000 R’000
ASSETS
Non-current assets 317 280 112 740 - 15 144
- Property, plant and equipment 9 905 10 413 - 3 607
- Intangible assets 37 461 37 663 - 11 537
- Loans receivable 17 721 7 595 - -
- Deferred taxation 4 520 8 684 - -
- Investment properties 4 173 3 977 - -
- Investment in associates 3 157 323 - -
- Investment in joint ventures 93 3 151 - -
- Investments held at fair value Note A 240 250 40 934 - -
Current assets 536 396 825 862 - 29 745
- Insurance assets 345 605 389 895 - -
- Loans receivable 376 15 119 - -
- Investments held at fair value Note A - - - -
- Trade and other receivables 128 298 169 824 - 12 952
- Taxation 4 303 5 615 - 382
- Cash and cash equivalents Note A 57 814 245 409 - 16 411
Total assets 853 676 938 602 - 44 889
EQUITY AND LIABILITIES
Capital and reserves 276 526 252 917 - 32 118
- Ordinary share capital and share premium - - - -
- Inter-group funding 111 961 113 370 - 11 568
- Retained earnings 164 129 139 147 - 7 553
Equity attributable to equity holders of the parent 276 090 252 517 - 19 121
Non-controlling interest 436 400 - 12 997
Non-current liabilities 30 160 32 166 - 199
- Policyholder liabilities under insurance contracts 20 522 19 213 - -
- Interest-bearing borrowings - 2 695 - -
- Deferred taxation 9 638 10 258 - 199
Current liabilities 546 990 653 519 - 12 572
- Insurance liabilities 400 049 454 147 - -
- Trade and other payables 146 344 193 127 - 12 572
- Taxation 597 6 245 - -
Total equity and liabilities 853 676 938 602 - 44 889
Capital expenditure 564 1 909 - 1 595
Net asset value per share (cents) 107.7 98.5 0.0 7.5
Tangible net asset value per share (cents) 93.1 83.8 0.0 3.0
Note A: The movement between Cash & cash equivalents and Investments held at fair value primarily relates to the shift
from pure cash to highly liquid, low-risk investments (money market instruments, gilts, bank and corporate paper),
expected to generate returns in excess of call rates.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Audited Audited
year ended year ended
31 Aug 2014 31 Aug 2013
R’000 R'000
Net cash flows from operating activities (11 975) 13 609
Net cash flows from investing activities (156 534) 1 695
Net cash flows from financing activities (2 567) (8 827)
Total cash movement for the year (Note A) (171 076) 6 477
Cash at the beginning of the year 276 449 269 972
Cash disposed of (Note B) (16 411) -
Total cash at the end of the year 88 962 276 449
Note A: The considerable cash movement primarily relates to the shift from pure cash to highly liquid, low-risk
investments (money market instruments, gilts, bank and corporate paper)
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 year - 39 625 - 19 108 58 733
Reversal of equity options - 35 (35) - -
Equity options exercised 787 - (147) - 640
Loans repaid to non-controlling shareholders - - - (5 118) (5 118)
Dividends paid - - - (14 927) (14 927)
Balance at 31 August 2013 176 704 137 354 - 13 567 327 625
Total comprehensive income for the year - 116 383 - 101 116 484
Reclassification of subsidiary to associate - - - (12 997) (12 997)
Dividends paid - - - (59) (59)
Balance at 31 August 2014 176 704 253 737 - 612 431 053
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of preparation
The accounting policies applied in the preparation of these condensed consolidated provisional audited
financial statements for the year ended 31 August 2014 (“audited 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 audited results have been prepared in terms of IAS 34 – Interim Financial Reporting,
the South African Companies Act, 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.
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:
31 Aug 2014 31 Aug 2013
’000 ’000
Number of shares 256 377 256 377
- Shares in issue 256 380 256 380
- Shares held as treasury shares (3) (3)
Weighted average number of shares 256 377 255 982
- Shares in issue 256 380 256 380
- Shares held as treasury shares (3) (398)
Diluted weighted average number of shares 256 377 255 982
- Shares in issue 256 380 258 380
- Shares held as treasury shares (3) (398)
3. Transactions with non-controlling interests
As previously reported, with effect from 1 September 2013 Conduit’s 40% interest in ARA would be
accounted for as an associate. This resulted in a reduction of R13.0 million in the carrying value of Non-
controlling interest.
4. Associated companies
4.1. ARA’s reclassification from a subsidiary to an associate resulted in a non-headline profit of R75.6
million and a corresponding increase in the carrying value of the Investments in Associates.
4.2. Constantia Insurance Holdings Proprietary Limited (“CIH”), a subsidiary of the Group, acquired a
40% interest in Administration Plus Proprietary Limited for a consideration of R1.1 million,
effective 1 November 2014.
5. Disposal of jointly controlled company
Effective 1 January 2014 CIH disposed of its 50% interest in Catalyst Insurance Consultants Proprietary
Limited for R3.9 million, resulting in a non-headline profit of R0.4 million.
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
2014
Listed investments 243 042 - - 243 042
Investment properties - 4 173 - 4 173
Unlisted investments - 4 814 - 4 814
243 042 8 987 - 252 029
2013
Listed investments 68 059 - - 68 059
Investment properties - 3 978 - 3 978
Unlisted investments - 4 280 - 4 280
68 059 8 258 - 76 317
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
Audited Audited
year ended year ended
31 Aug 2014 31 Aug 2013
R’000 R'000
Profit attributable to ordinary equity holders of Conduit 116 383 39 625
Net (profit) loss on revaluation of investment properties (65) 43
Net loss on disposal of intangibles, property, plant and equipment 5 66
Net revaluation profit on reclassification from subsidiary to associate (93 862) -
Profit on disposal of jointly controlled entities (937) -
Impairment of associates and jointly controlled entities - 267
Tax on the items above 18 638 (21)
Headline earnings 40 162 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
The Board of Directors resolved to initiate a dividend programme, commencing with a gross cash dividend
of 5 cents per ordinary share, payable out of retained earnings. The use of Secondary Tax on Company
credits will result in the dividend being exempt from dividend tax and result in a 5 cents per share net
dividend. The salient dates are as follows:
Last day to trade cum-dividend: Thursday, 11 December 2014
Shares trade ex-dividend: Friday, 12 December 2014
Record date: Friday, 19 December 2014
Payment date: Monday, 22 December 2014
Share certificates may not be dematerialised or rematerialised between Friday, 12 December 2014 and
Friday, 19 December 2014 (both days inclusive). Conduit’s income tax number is 9490439032 and there
are 256 379 818 ordinary shares in issue at the date of declaration of the cash dividend.
11. Events after reporting period
There were no events that resulted in a material impact on the Group between the reporting date and the
date of publication of this report.
12. Audit opinion
Grant Thornton has audited the Group’s results and their unqualified audit report is available for
inspection at the Group's registered office.
The auditor’s report does not necessarily cover all of the information contained in this
announcement/financial report. Shareholders are therefore advised to obtain a copy of the audited Group
annual financial information from the registered office of the Company.
13. Directors’ responsibility
The directors take full responsibility for the preparation of the provisional report and the financial
information has been correctly extracted from the underlying Group financial statements.
The provisional report is extracted from audited information, but is not itself audited.
14. Change of Company Secretary
On the 6 June 2014, shareholders were advised on SENS that following the acquisition of the business of
Probity Business Services Proprietary Limited by Computershare Investor Services Proprietary Limited
(“Computershare”), CIS Company Secretaries Proprietary Limited, a subsidiary of Computershare, was
appointed as the company secretary of Conduit Capital with effect from 5 June 2014.
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:
CIS Company Secretaries Proprietary Limited
70 Marshall Street
Johannesburg, 2001
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: 27/11/2014 05:23:00 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.
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