PRELIMINARY RESULTS PRESENTATION TO THE INVESTMENT ANALYSTS SOCIETY FOR THE YEAR ENDED 31 MARCH 2002...

PRELIMINARY RESULTS PRESENTATION

TO THE INVESTMENT ANALYSTS SOCIETY

FOR THE YEAR ENDED 31 MARCH 2002

June 2002

PRESENTATION OUTLINE

CAPITAL ALLIANCE DEFINED

2002 – CHALLENGES, PRIORITIES & ACHIEVEMENTS

2002 - FINANCIAL RESULTS

POSITIONING & PRIORITIES FOR THE FUTURE

OUR AMBITION

To create substantial shareholder value in the

medium to long term by:

– integration / consolidation of policy books

– continually identifying new methods of doing business

within our target market

– managing shareholder value drivers in order to

maximise return on capital & embedded value

– supporting our business partners with innovative

products & operational excellence

WHY WE EXIST

To offer

– Life insurance on the Capital Alliance brand to the

lower income commercial market

– Life insurance products to selected markets primarily

through branded distribution partners

– Our primary products and services cover:

– Individual insurance

– Group insurance

– Retirement fund products & administration services

WHY WE EXIST

Efficient consolidator of life insurance business

Maximise retention & onsell to existing customers

Partner of choice to branded distributors

Over time, provide better value proposition to

selected markets (price, benefits, service) via

focus on efficiency & cost leadership (bottom

quartile new business & renewal cost)

CORE COMPETENCIES

Efficient cost effective operations engine

Integration expertise

Innovative product factory to support distribution

partners

CAPITAL ALLIANCE AS RETAIL DISTRIBUTOR

Provide life insurance products and services to:

– people employed in the commercial sector

– earning less than R6 000 household income per month

– via CAL Commercial

CAPITAL ALLIANCE AS WHOLESALER

Provide life insurance products & services to

branded distribution partners who have access &

profile in selected markets

WHY?

– access new markets

– acquire new customers

– increase policy volumes under administration

HOW?

– leverage off our cost leadership, industry focus &

expertise, independence, with minimal channel conflict

OUR DISTRIBUTION PHILOSOPHY

LOWER INCOME MARKET

DISTRIBUTION PARTNERS

CAL COMMERCIAL

PRODUCT FACTORY

OPERATIONS ENGINE

MIDDLE / UPPER INCOME MARKET

DISTRIBUTION PARTNERS

CapitalAllianceHealth

CAPITAL ALLIANCE HOLDINGS

Product Factory

Single Operations Engine

CapitalAlliance

Life

50%

Nova Group

33% 26%

Individual Life

GroupSolutions @

CapitalAlliance

CAPITAL ALLIANCE BUSINESS UNITS

AllianceFinance

Capital

GroupRisk

CapitalAllianceHealth


Product Factory


CapitalAlliance

Life

50%

Nova Group

GroupRisk

33% 26%

Individual Life

GroupSolutions @

CapitalAlliance


AllianceFinance

Capital


CapitalAlliance

LifeNova Group

GroupBusiness

33%

Individual Life


Product Factory


OUR STRATEGY IN SUMMARY

Primarily a ‘wholesaler & integrator’ strategy

A customer service & cost-effective culture

Committed to our distribution partners

Focused on embedded value enhancement in

everything we do

CHALLENGES FACED IN 2002

Over capacity squeezes new business margins

Pressure on disposable income

Low growth in formal sector employment

Public sector - Persal rationalisation ongoing

Increased regulation & more to come

Marked decline in recurring premium income

Impact of AIDS on retail market volumes & mortality charges

ISSUES ACTIONS Recognise short-term pressure

on new business margins - anticipate proper margins will return over time

With Persal we have 11 717 distressed policies in force, are required to rationalise by 31 December 2002, and have achieved 43% (target 40%) with minimal EV impact

Product design & pricing

CHALLENGES FACED IN 2002

Volatile investment markets

Heightened consumerism

Problems with second tier financial institutions

ISSUES ACTIONS Assets / liability matching

Investment performance critical

Stick with trusted professionals

Focus on consumer education

New product solutions / value propositions needed

Improved service delivery to all sectors

Focus on embedded value enhancement & financial soundness

Don’t try to manage the share price - concentrate on the business

OUR PRIORITIES FOR F02

Fedsure transaction & integration

Administration efficiency to deliver EV

enhancement & prove our business model

Enhance new business profitability, primarily in a

wholesaling role

FEDSURE TRANSACTION

Reserving strain of R620m arose on 1/6/2001

Operating profit of R126m achieved on Fedsure & increased our value of inforce business by R475m (net) in 2002

Potential inforce EV enhancement of R200m+ now created for 2003 & thereafter

Integration of all aspects of the Fedsure / Norwich business well ahead of plan & previous experience in the SA market

Platform created for further growth by way of integration - locally & internationally - in time

OPERATIONAL EXCELLENCE

Now administer >1 million IL contracts on 1

application platform in Johannesburg

The contracts we administer cover the full

spectrum of IL products and all market sectors

Our new business cost of R157 & renewal cost of

R77 (CAL) are the lowest in our industry

Eliminated all inherited Fedsure / Norwich

backlogs & have achieved adherence to service

level agreements at 95%+, in record time


Confident that further improvements in service

levels & renewal cost are possible in 2003

Achieved considerable improvements in our group

business administration systems & are now

preparing for further integration with our single

operations engine

ENHANCED NEW BUSINESS PROFITABILITY

Terminated the SDS joint venture, effective 30 May 2001 which delivered negative EV of R31.4m in 2001

Improved gross EV on continuing operations from R22.3m to R25.2m

Improved– new business case count by 45%

– new business API by 32%

Reduced acquisition cost per policy from R227 to R157

ENHANCED NEW BUSINESS PROFITABILITY

Achieved persistency in CAL Commercial of 78% &

79% with our distribution partners

Concluded distribution agreements with 5 new

partners with potential, over the year

In 2002 a substantial part of our new business was

generated in the wholesaler role, through our

distribution partnerships

In 2003 we anticipate 90% of our new business will

pay commission as and when, not upfront

WHAT WE HAVE ACHIEVED

Our 2002 financial result & the potential of enhancing EV of inforce business in 2003 has validated our business model

We have core competence in consolidating life insurance business onto the Capital Alliance platform– Lessons

Only 1 infrastructure

Speed of integration is critical

Focus on service levels to current policyholders

Work hard on culture, attitude & the softer issues


Our position on profitable new business growth in

SA in short term has been validated by certain

competitor results

We remain convinced that now is not the time for

ambitious new business initiatives based on an

outdated model (high initial cost & upfront

commission)


We now have a quality operations engine

– Infrastructure scalable to 10 million IL contracts

– Capacity to efficiently administer full range of IL

contracts on 1 platform

– Ability to retain business & reduce costs

simultaneously

– Ability to deliver on demanding service levels

– Very experienced integration team with capacity

(Fedsure / Norwich had 5 main systems & administered

very complex IL products)


Outstanding Work in Queues as at 19 June 2002

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

09/01/2002 30/01/2002 20/02/2002 13/03/2002 03/04/2002 24/04/2002 15/05/2002 05/06/2002

Altstech Loans & Surr Renewal CSC CSC values


Outstanding Work in Queues as at 19 June 2002

0

500

1 000

1 500

2 000

2 500

3 000

09/01/2002 30/01/2002 20/02/2002 13/03/2002 03/04/2002 24/04/2002 15/05/2002 05/06/2002

Claims Mat Annuities Pol Alts Docs

SUMMARISED GROUP INCOME STATEMENTS

Reinsurancetransaction

2002R' 000

Income 16 028 535

Premiums net of reinsurance premiums 1 134 252Reinsurance premium 13 887 185Investment income 555 341

disposal of investments 451 757

Outgo 16 522 384

Policyholders' benefits net of reinsurance Reinsurance claims 2 804 404Commissions 62 655Administration expenses 76 588Exceptional items 18 146Taxation 9 989Transfers to/(from) life funds 13 550 602

Life insurance and pensions business (493 849)

Gain/(loss) on revaluation and

Ordinarylife business

2002R' 000

1 569 353

1 019 8460

226 880

322 627

1 324 763

591 7580

82 229117 297

17 7008 518

507 261

244 590

Audited year ended 31 March 2002


Total2001

R' 000

728 751

629 3720

189 646

(90 267)

459 501

561 4370

58 480105 701

62 49818 467

(347 082)

269 250

Total2002

R' 000

17 597 888

2 154 09813 887 185

782 221

774 384

17 847 147

591 7582 804 404

144 884193 885

35 84618 507

14 057 863

(249 259)


Income

Premiums net of reinsurance premiumsReinsurance premiumInvestment income

disposal of investments

Outgo

Policyholders' benefits net of reinsuranceReinsurance claimsCommissionsAdministration expensesExceptional itemsTaxationTransfers to/(from) life funds

Life insurance and pensions business

Gain/(loss) on revaluation and


Life insurance & pensions business (493 849) 244 590 (249 259) 269 250

Before taxation 12 917 34 204

Minority interests 0 (16 467)

Headline earnings attributable to

Ordinary lifebusiness

2002R' 000

Total2001

R' 000


2002R' 000

Total2002

R' 000

ordinary shareholders 402 795 288 252 40%40%


Other income attributable 6 962 16 265

Taxation (5 955) (17 939)

(Loss)/profit after tax (242 297) 285 515

(242 297) (269 048)


Attributable earnings per share (cents) (155) 188

Total2001

R' 000

Total2002

R' 000

28% 28%Headline earnings per share (cents) 258 201

Dividend per ordinary share (cents) 70.0 49.5

Dividend cover (headline earnings, times) 3.7 4.1

Weighted avg. number of shares in issue (’000) 155 931 143 080

Total shares in issue (’000) 175 290 133 886

41% 41%



Attributable (loss)/profit

Plus : Except. reserving strain on reinsurance trans. at 31 May 2001

Amortisation of intangible assets

Exceptional items after tax

Represented by :

Earnings in respect of the reinsurance transaction from 1 June 2001

Earnings in respect of ordinary Capital Alliance Holdings business

2002R' 000

(242 297)

620 000

0

25 092

402 795

138 853

263 942

402 795

2001R' 000

269 048

0

2,050

17 154

288 252


CHANGES IN EQUITY – SUMMARISED

Balance at beginning of year 520 308 601 439Arising from share issue 544 226 36 239Cancellation of share capital (66 422) (117 370)

Non-distributable reserve 600 0

Balance at beginning of year 0 0Movement during the year 600 0

Accumulated profits 295 539 620 413

Balance at beginning of year previously disclosed 541 118 350 365

Accumulated profits attributable to shareholders (242 297) 269 048

1 294 251 1 140 721

year ended31 Mar 2001

R' 000


R' 000

AuditedAudited

Share capital and premium 998 112 520 308

Dividends paid – preference and ordinary (82 577) (63 632)


Restatement in respect of change in accounting policy 79 295 64 632Restated accumulated profits at beginning of year 620 413 414 997

SUMMARISED GROUP BALANCE SHEET


R' 000


R' 000

AuditedAuditedas at

ASSETS Investment assets 17 518 509 3 167 964

Computer equipment, office furniture & other current tangible assets 18 857 12 062Current assets 907 688 468 381

EQUITY, RESERVES AND LIABILITIESTotal shareholders' funds 1 294 251 1 140 721

Minority interests 0 24 110Life insurance funds 15 876 386 1 818 523Non-current liabilities 185 646 221 990Current liabilities 888 771 459 644TOTAL EQUITY, RESERVES AND LIABILITIES 18 445 054 3 664 988

Intangible assets 0 16 581

TOTAL ASSETS 18 445 054 3 664 988


Outside shareholders' interests 200 000 0

SUPPLEMENTARY INFORMATION


2002R' 000

Total2001

R' 000


2002R' 000

Total2002

R' 000LIFE ASSURANCE OPERATIONS

Premiums net of reinsurance

Individual - recurring premiums 381 961 1 448 676 338 5111 066 715

Group - lump sums 11 710 11 710 14 5530

Group - other premiums 109 271 109 271 74 6020

Credit life - Standard General 220 519 220 519 140 0600

Credit life - other 22 835 22 835 9 8110

Group funeral - single premiums 13 479 13 479 (74 577)0

1 019 846 2 154 098 629 3721 134 252

Individual - single premiums 260 071 327 608 126 41267 537




2002R' 000

Total2001

R' 000


2002R' 000

Total2002

R' 000LIFE ASSURANCE OPERATIONS

Policyholders' benefits netof reassurance

Individual life 2 804 404 215 056 3 019 460 153 786

Employee benefits 0 137 378 137 378 78 092

Credit life - Standard General 0 229 190 229 190 320 319

Credit life - other 0 6 929 6 929 4 301

Group funeral - death & disability 0 3 205 3 205 4 938

2 804 404 591 758 3 396 162 561 436



Risk discount rate 15.5% 16.5%

Equity return (before capital gains tax) 15.5% 15.5%

Fixed interest return (before tax) 13.5% 13.5%

Cash return (before tax) 11.5% 11.5%

Expense inflation rate per annum 9.0% 2% year 1

4% year 2

9% thereafter

Ordinarylife business


VALUATION BASIS: ECONOMIC ASSUMPTIONS AT 31 MARCH 2002

6% year 3




2002R' 000

31 March2001

R' 000


2002R' 000

31 March2002

R' 000GROUP EMBEDDED VALUE

Total

Shareholders' net assets

0 1 494 252 1 494 252 1 140 721- total

0 (200 000) (200 000) 0- less preference shares

- plus other group assets 0 160 496 160 496 138 523

Net value of in force life business 475 411 191 547 666 958 203 022

Gross value of in force life business 629 072 207 400 836 472 208 281

Embedded value 475 411 1 646 295 2 121 706 1 482 266

Less: opportunity cost of(153 661) (15 853) (169 514) (5 259)capital adequacy requirements


as at


31 March2001

R' 000GROUP EMBEDDED VALUE

Capital adequacy requirement ("CAR") 708 511 122 706

Capital adequacy cover (times) 2.1 9.3

Net asset value per share (Rands) 8.30 9.55

Embedded value of in force business per share (Rands) 3.80 1.52

Embedded value per share (Rands) 12.10 11.07

31 March2002

R' 000

Total


as at


Gross value of new life insurance business 25 193 22 345

Less: opportunity cost of capital adequacy requirements (3 635) (1 993)

Net value of new life insurance business 21 558 20 352

VALUE OF NEW BUSINESS

31 March2002

R' 000

Ordinary Business31 March

2001R' 000


as at



2002R' 000

Total2001

R' 000

business2002

R' 000ANALYSIS OF CHANGE IN EMBEDDED VALUE

Unwinding of risk discount rate 74 059 31 468 105 527

Change to non-economic assumptions & basis (40 785) (40 585) (81 370)

Non-recurring profits 35 422 82 682 118 104

Subtotal 133 706 69 462 203 168

Changes in economic assumptions (110 656) (7 804) (118 460)

Balance of return on group assets 0 88 502 88 502

New Business Value 0 19 431 19 431


Ordinary life

Experience variations 65 010 (23 534) 41 476

Investment experience profits 20 512 4 902 25 414

Investment return on life shareholders funds (62 000) 112 437 50 437

Subtotal (152 144) 198 037 45 893

Total (18 438) 267 499 249 061


Equity 561 709 43%

Cash 508 828 39%

Bonds 324 230 25%

Property 23 574 2%

Other * (124 090) (9%)

%COMPOSITION OF SHAREHOLDERS NAV


R' 000

31 March2002

Year-ended

1 294 251 100%* Assets backing Negative Rand reserves R177m, net current liabilities R301m


Broker 61 806 34%

CAL Commercial 29 056 16%

Bancassurance & other 89 546 50%

%INDIVIDUAL RECURRING NEW BUSINESS BY DIST. CHANNEL


R' 000

31 March2002

Year-ended

180 408 100%

HEADLINE EARNINGS


Review since March 1999

147 417

288 252

402 795

0

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000

450 000

1999 2000 2001 2002

0%

10%

20%

30%

40%

50%

60%

Headline earnings

29%

52%

40%

% growth

189 523

HEADLINE EARNINGS


Review since March 1999

109131

201

258

35 45 5070

0

50

100

150

200

250

300

1999 2000 2001 2002

0%

10%

20%

30%

40%

50%

60%

Headline earnings per share (cents) Dividends per share (cents)

28%

53%

20%

%growth %growth

41%

10%

29%

PREMIUM GROWTH


Premium growth trends

0 500 000 1 000 000 1 500 000 2 000 000 2 500 000

Individual – recurring (excl Reinsurance)

Individual – recurring (incl Reinsurance)

1999 2000 2001 2002

Premiums net of reinsurance (adjusted)(excl Reinsurance)

Premiums net of reinsurance (adjusted)(incl Reinsurance)

NEW BUSINESS PRODUCTION

2002 change2001

Individual business - recurring 180 136 32.4%

Group risk business 47 40 17.5%

Group funeral 2 8 (75.0%)

Credit life - Other 27 19 42.1%

Single premiums * 285 140 103.8%

Credit life - Stangen 219 140 56.4%

R m

* (excludes R68m from Fedsure Life)

RANGE OF NEEDS : INVESTMENT RETURNS

CAL needs to create real returns across a range of

portfolios and products

– market linked portfolios

– smooth bonus portfolios

– shareholder funds

– asset liability matched portfolios

INVESTEC ASSET MANAGEMENT

Investec Asset Management appointed in 1994– leading SA investment manager

– provider of specialist domestic & international investment skills

– leading provider of 3rd party investment services

Investec Asset Management has shown consistency in meeting both shareholder & client objectives– Capital Alliance Pensions Guaranteed Portfolio has

been the top performing fund over 3, 5, 7 and 10 years*

* Alexander Forbes Guaranteed Fund Survey 2000: partially vesting funds

MANAGED FUND & COMPETITOR RETURNS

Source Large Manager Watch Survey

15.4

22.4

16.8

13.5

16.4

21.3

16.0

12.4

15.0

20.9

16.8

12.6

0

5

10

15

20

25

6 Months 1 Year 3 Years 5 Years

House (Domestic only) Low Resources Bal Bmrk Dom only

Median Dom only

Fully Discretionary relative to Competitor Median & Benchmark (Domestic only) ending 31 Mar 2002

MANAGED FUND & COMPETITOR RETURNS

17.9

25.2

16.7

13.916.4

24.1

14.617.2

23.3

16.8

13.1

16.6

0

5

10

15

20

25

30

6 Months 1 Year 3 Years 5 Years

House (Fully Discretional) Low Resources Bal Bmrk with Int'l

Median with Int'l

Fully Discretionary relative to Competitor Median & Benchmark (& International) ending 31 Mar 2002


GLOBAL MANAGED FUND PERFORMANCE

FUND PERFORMANCE

MARKET PERFORMANCE

% Out performance 0.2%1.1%3.0%(1.8%)0.0%

MSCI 17.6%11.9%36.3%38.7%(5.7%)

Salomon 22.0%30.8%42.5%21.1%(7.6%)

Benchmark Return 19.1%19.2%39.0%32.4%(6.3%)

19.3%20.3%42.0%30.6%(6.3%)Global Managed Fund

3 Yrs p.a.2 Yrs p.a.1 Yr6 Mths3 Mths

Solid medium term returns

Rand return for the period to 31 March 2002

CORE BOND FUND

Performance to 30 April 2002 – 6 Month Returns

-2.0

-0.6

-2.5 -2.0 -1.5 -1.0 -0.5 0.0

All Bond Index

Core Bond

INVESTEC BOND PERFORMANCE

22.0%

-1.5%

12.0%

19.4% 19.4%17.7%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

6M 1Y 2Y ann 3Y ann 5Y ann

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Portfolio Index Active

As at May 2002


ABSOLUTE RETURN FUND

Performance for year to 31 March 2002 – 12 Month Returns

15.5

19.9

0.0 5.0 10.0 15.0 20.0 25.0

CPIX + 8%

Fund

RISK / RETURN MATRIX

Annualised Standard Deviation

An

nu

ali

se

d R

etu

rn

10%

13%

16%

19%

22%

25%

5% 10% 15% 20% 25% 30%

Investec Opportunity

ALBI

ALSI

5 years to 31 May2002

INVESTEC OPPORTUNITY FUND

No negative return over any rolling 12 month period

0%

10%

20%

30%

40%

50%

60%

70%

Ap

r-98

Jun

-98

Au

g-9

8

Oct

-98

Dec

-98

Feb

-99

Ap

r-99

Jun

-99

Au

g-9

9

Oct

-99

Dec

-99

Feb

-00

Ap

r-00

Jun

-00

Au

g-0

0

Oct

-00

Dec

-00

Feb

-01

Ap

r-01

Jun

-01

Au

g-0

1

Oct

-01

Dec

-01

Feb

-02

INVESTEC OPPORTUNITY FUND

Compelling Cumulative Returns

50

100

150

200

250

300

350

May

-97

Jul-

97

Sep

-97

No

v-97

Jan

-98

Mar

-98

May

-98

Jul-

98

Sep

-98

No

v-98

Jan

-99

Mar

-99

May

-99

Jul-

99

Sep

-99

No

v-99

Jan

-00

Mar

-00

May

-00

Jul-

00

Sep

-00

No

v-00

Jan

-01

Mar

-01

May

-01

Jul-

01

Sep

-01

No

v-01

Jan

-02

Mar

-02

May

-02

SA 3m T-Bill Headline Inflation (1m lag) ALBI ALSI Investec Opportunity

MANAGEMENT EXPENSES

782

632

433392

463

229157

89 74 74 77 87 79 77

0

100

200

300

400

500

600

700

800

900

1996 1997 1998 1999 2000 2001 2002

New Business Renewal

New Business and Renewal cost trend

CLIENT RETENTION

CAL Commercial 78%

Bancassurance 79%

Group risk 92%

RETURN ON CAPITAL

Calculated as headline earnings divided by capital

employed

Assumes all capital employed in Life business for 2002

33% for 2002


INDIVIDUAL LIFE

Leverage our operations engine & integration

capabilities - locally & internationally

We consider there is scope for further industry

consolidation

Enhance EV on inforce business by retention

& onselling strategies

SAAMBOU LIFE TRANSACTION

Reached agreement with Saambou Holdings to acquire

100% of Saambou Life wef 1 April 2002

Underwrites 450 000 credit life contracts and 32 000 IL

contracts

Purchase consideration of R109m = NAV @1 April

Consider EV upliftment potential considerable over 3

years & in line with previous transactions


INDIVIDUAL LIFE Further enhance new business EV through

selected new product / distribution initiatives where value proposition to customer is

enhanced & product is bought not sold, leveraging off our low acquisition cost

Will achieve this by building on product factory positioning & core competency in admin.

The products offered will encompass:- funeral - retirement annuity- education / endowment - life / term


INDIVIDUAL LIFE We have segmented the market into 4 sectors:

Income DemographicLower PrudentsUpper Aspirants

Align our marketing mix primarily around product

Work hard on customer retention & onsell opport.

Maximise synergy between Group business & IL

We will not be all things to all people

We will continue to position Capital Alliance primarily in a wholesaler role as opposed to a full service provider of retail products


GROUP BUSINESS

Complete integration to our single operations

engine to improve scalability, efficiency &

service levels (Group Risk & Retirement Fund

admin)

Grow our market share organically & look for

selected acquisitions to achieve critical mass

BEE TRANSACTION

Long recognised importance of appropriate BEE

positioning for integration & organic growth

strategies

Investec have facilitated transaction whereby Peu

Investment Group will acquire significant interest

in Capital Alliance

All parties have followed a thorough process along

entirely commercial lines to ensure alignment of

interests and value creation mechanism

PRELIMINARY RESULTS PRESENTATION TO THE INVESTMENT ANALYSTS SOCIETY FOR THE YEAR ENDED 31 MARCH 2002...

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Transcript of PRELIMINARY RESULTS PRESENTATION TO THE INVESTMENT ANALYSTS SOCIETY FOR THE YEAR ENDED 31 MARCH 2002...