| |
 |
| Mike
Ilsley |
|
Grant
Stobart |
|
Deon
Viljoen |
|
|
| |
| Overview |
Alexander Forbes produced revenues
of R5,4 billion for the year under review, exceeding
R5 billion for the first time and up 11%
from the previous year. Trading results from operations
increased to R791 million for the year. The International
Risk Services business continued to experience
difficult trading conditions during the current
year. Excluding the reduced profit contribution
from this business, the trading results of the
group’s other operations increased 15% in
comparison with the previous year.
Headline earnings per share declined from 111
cents to 4 cents per share, having been impacted by: |
| – |
the proposed client settlements
for the historical bulking practices totalling
R380 million; |
| – |
the provision for any
additional historic exposures that could
arise from the wider review of the SA businesses
currently in process of R100 million; and |
| – |
the R81 million reported
loss caused by the accounting mismatch resulting
from accounting for policyholder investments
as treasury shares under IFRS (refer additional
commentary later in this report). |
|
| |
| |
 |
| |
| |
After excluding the above items,
core earnings per share increased by 3% to 116
cents for the year. Excluding the reduced profit
contribution from International Risk Services,
core earnings per share increased 15% reflecting
the strong trading performance across most of
the group’s operations.
Notwithstanding the decline in headline earnings,
the inherent financial strength of the group and
continued strong cash flows from operations have
enabled the group to make a 59 cents per share
distribution to shareholders. |
| |
| Regional
contribution to trading results |
| |
Income from
operations |
Trading results
of operations |
| |
March
2006 |
% |
March
2005 |
March
2006 |
% |
March
2005 |
| International Risk Services
|
129,6 |
(1) |
131,5 |
1,6 |
(81) |
8,5 |
| Other international
operations |
101,1 |
26 |
80,3 |
9,6 |
33 |
7,2 |
| International region
– £m |
230,7 |
9
|
211,8 |
11,2 |
(29) |
15,7 |
| R/£ conversion
rate |
11,3 |
(1) |
11,5
|
10,8 |
(6) |
11,5
|
| International region
– Rm |
2 608 |
7
|
2 427 |
121 |
(33) |
180 |
| Africa region – Rm
|
2 761 |
14
|
2 431
|
670 |
13
|
592 |
| Total group – Rm |
5 369 |
11
|
4 858
|
791 |
2
|
772 |
|
| |
| The international operations
continue to contribute approximately half of the
group’s total revenues. This contribution
reduces to 16% (2005: 23%) at the trading results
level having been impacted by the reduced profits
of the International Risk Services business, as
well as further Rand strength which reduced international
earnings when reported in Rands. The Rand/Sterling
conversion rate applied to the trading results
of international operations deteriorated by 6%
in comparison to the previous year. |
| |
 |
| |
Detailed commentary on the
trading results of each of the group’s businesses
is provided in the Review of Operations.
Overall the group achieved 11% growth in revenue
and 2% growth in trading results from operations
for the year. |
| |
| Analysis of operating
profit |
| The 2% growth in the group’s
trading results reduces to a 53% decrease in operating
profit after taking account of the items shown
in the table below. |
| |
| |
March
2006
Rm |
% |
March
2005
Rm |
| Trading results
of operations |
791 |
2
|
772
|
| Profit from direct marketing
entity in run-off |
41 |
|
68
|
| Consolidation of group
cell captive insurance arrangements |
(1) |
|
23 |
| Impairment and other
capital items |
(19) |
|
(21) |
| Exceptional gains and
losses |
(466) |
|
(106)
|
| Operating profit
|
346 |
(53)
|
736
|
|
| |
| |
| Profit from UK direct
marketing entity in run-off |
| As previously advised to shareholders,
the Media Insurance Services business ceased all
new direct marketing campaigns in November 2002,
but continues to receive trail commission income
on in-force policies. This trail commission will
reduce over time as policies lapse and renewal
commission expires. |
| |
| Consolidation of
group cell captive insurance arrangement |
| Following the adoption of IFRS,
the group’s attributable interests in a
cell captive insurance licensed entity operated
by a third party are now included in the consolidated
financial statements of the group. Previously,
the group recognised only the premiums paid to
the insurer as an operating expense. The inclusion
of the results of the cell captive insurance facility,
which insures the first layer of the group’s
Errors & Omissions insurance risk, in the
group accounts has increased the potential for
greater volatility in reported earnings. For this
reason, the consolidated results of the cell captive
facility are shown on a separate line in the income
statement. |
| |
| Impairment and other
capital items |
| The impairment charge for the
current year comprises the write off of goodwill
in respect of the Bloodstock division of International
Risk Services (R12 million) and the write off
of goodwill balances in respect of a number of
small historical acquisitions which have subsequently
been absorbed into the group’s operations.
The Bloodstock division was disposed of in the
current year, realising a small capital loss. |
| |
| Exceptional gains
and losses |
| Exceptional gains
and losses are made up as follows: |
| |
| |
March
2006
Rm |
March
2005
Rm |
| Proposed client settlements
in respect of historical bulking practices
|
(380) |
- |
| Provision for additional
exposures that could arise from the wider
review of SA businesses |
(100) |
- |
| Non-recurring restructuring
costs incurred by International Risk Services
|
|
|
| – Restructuring in 2005
financial year |
- |
(111) |
| – Net release of provisions
in 2006 financial year |
14 |
- |
| Non-trading foreign
currency gain on loan swop arrangement |
- |
5 |
| Total exceptional
gains and losses |
(466) |
(106) |
|
| |
The R14 million net release
of provisions raised in the 2006 year, in respect
of the restructuring of the International Risk
Services business, relates primarily to the release
of an onerous lease provision following the negotiation
of an early settlement of a lease over unoccupied
premises in the current year.
The non-trading foreign currency gain arose on
translation of foreign currency denominated borrowings
which were repaid during the 2005 financial year.
The group plans to finance the proposed client
settlements in respect of historical bulking practice
through additional bank borrowings. |
| |
| |
 |
| |
| |
| Profit before taxation |
| |
March
2006
Rm |
% |
March
2005
Rm |
| Operating profit
|
346 |
(53) |
736 |
| Net interest and investment
income |
(5) |
|
(63) |
|
– Finance costs: exchangeable bonds |
- |
|
(40) |
|
– Finance costs: bank borrowings |
(52) |
|
(57) |
|
– Other net interest and investment income
|
47 |
|
34 |
Net fair value gain (offset
by taxation expense
attributable to policyholders) |
18 |
|
9 |
Effect of accounting
for policyholder investments
as treasury shares under IFRS |
(81) |
|
(30) |
| Share of net profits
of associates |
17 |
|
5 |
| Profit before
taxation |
295 |
(55) |
657 |
|
| |
| |
| Net interest and
investment income |
The group realised a R40 million
interest saving in comparison to the previous
year resulting from the repurchase of exchangeable
bonds in September 2004.
Finance costs on bank borrowings reduced by R5
million to R52 million as a result of the reduction
of overall bank borrowings and the year-on-year
reduction of South African interest rates.
Other net interest and investment income increased
by R13 million to R47 million, reflecting the
increased overall cash levels within the group
during the year. |
| |
| Net fair value gain |
| Following the adoption of IFRS,
the group is required to separately reflect in
the income statement the fair value gain arising
in the policyholders’ funds within Investment
Solutions and the directly related taxation expense
attributable to policyholders. Previously, these
amounts were netted off in the income statement.
There is no net effect on the profits reported
by the group. |
| |
| Effect of accounting
for policyholder investments as treasury shares
under IFRS |
As advised to shareholders
in the SENS statement issued on 3 April 2006,
the group’s multi-manager investment subsidiary,
Investment Solutions, holds investments on behalf
of its policyholders. Third parties manage the
various Investment Solutions’ portfolios
and the asset managers have full discretion to
buy and sell shares and exercise the voting rights
over these shares. From time to time, asset managers
may hold Alexander Forbes shares within their
portfolios. Given these specific circumstances,
there was uncertainty as to whether these shares
should be classified and accounted for as treasury
shares in Alexander Forbes’ consolidated
financial statements.
After time-consuming research, both locally and
internationally, and after extensive consultation
with the group’s external auditors, it was
concluded that in terms of IFRS as presently constituted,
Alexander Forbes shares held by the group’s
multi-manager investment subsidiary for policyholders
(“the shares”) are required to be
accounted for in the group financial statements
as follows: |
| – |
The shares are required
to be classified as treasury shares under
IAS32 and, as such, are required to be reclassified
from policyholder assets to an equity deduction
from share capital in the group balance
sheet. Consequently, movements in the value
of the shares resulting from changes in
the Alexander Forbes share price are not
permitted to be accounted for as expenses
or gains in the group income statement; |
| – |
Notwithstanding the change
in classification of the shares from policyholder
assets to an equity deduction, the corresponding
obligation to policyholders in respect of
the shares remains in the group balance
sheet as a liability. Any movements in the
liability resulting from changes in the
Alexander Forbes share price are accounted
for as expenses or gains in the group income
statement. |
|
| |
| The above accounting treatment
resulting from this application of IFRS results
in a mismatch between the asset and liability
movement, which does not reflect the economic
substance of the transactions. The result of this
mismatch is that an accounting expense or gain
will be reported in the group income statement,
whereas no actual economic loss or gain will ever
be realised by the group. In addition, the resulting
mismatch is counter-intuitive. For example: |
| – |
If the share price of
Alexander Forbes decreases, the resulting
decrease in policyholder assets will not
be accounted for in the group’s consolidated
balance sheet and income statement. However,
the corresponding decrease in policyholder
liabilities will remain, resulting in a
net increase in the consolidated profit
and net assets of the group; |
| – |
Conversely, if the share
price of Alexander Forbes increases, there
will be a net decrease in the consolidated
profit and net assets of the group. |
|
| |
This additional accounting
change resulting from the adoption of IFRS is
required to be adopted with full retrospective
effect. The effect for the year ended 31 March
2006 of this additional accounting change as a
result of the adoption of IFRS is: a reduction
in equity shown in the group balance sheet of
R184 million (2005: R161 million); a reduction
in reported profits of R81 million (2005: R30
million); and a reduction in the weighted average
number of Alexander Forbes shares in issue of
19 million shares (2005: 15 million). These 19
million shares represent 4% of the weighted average
number of Alexander Forbes shares in issue, however,
the effect of the mismatch on reported profits
is amplified by the 31% increase in share price
over the year.
It is of concern that the mismatch resulting from
this application of IFRS results in reporting
which does not reflect the economic substance
of the transactions. In order to provide meaningful
reporting to shareholders, the group has published
its financial statements in full compliance with
IFRS (including reporting headline earnings per
share and net asset value per share in conformity
with IFRS), but has also provided an adjusted
measure of headline earnings per share and net
asset value per share which exclude the effects
of the mismatch detailed above and so accurately
reflect the underlying economic substance of the
transactions. |
| |
| |
 |
| |
| |
| Share of net profits
of associates |
Following the adoption of IFRS,
the equity accounted contribution from associates
is reflected in a single line item in the income
statement. Previously, the groups’s share
of the pre-tax headline profits, taxation and
headline adjusting items of associates was included
in separate lines in the income statement. R14
million of the R17 million contributed by associates
in the current year relates to the group’s
share of the net profit reported by the Medscheme
associate in respect of the sale of its Sovereign
business concluded in the current year.
As previously advised to shareholders, the group
is in the process of selling its effective 20% shareholding
in Medscheme for an initial cash consideration
of R50 million. The group could receive a maximum
additional deferred consideration of R30 million
dependent upon the outcome of future uncertain
events. |
| |
| Profit
attributable to ordinary shareholders |
| |
March
2006
Rm |
% |
March
2005
Rm |
| Profit before
taxation |
295 |
(55) |
657
|
| Taxation |
|
|
|
|
– Taxation expense |
(220) |
16
|
(190) |
– Attributable to policyholders' funds
(offset by net fair value
gain) |
(18) |
|
(9) |
| Profit after
taxation |
57 |
(88) |
458
|
| Minority interests
|
(45) |
|
(45)
|
| Profit attributable
to ordinary shareholders |
12 |
(97)
|
413
|
|
| |
| Effective tax rate |
| The group’s effective
tax rate for the current year is 27% (2005: 27%)
calculated as follows: |
| |
| |
March
2006
Rm |
% |
March
2005
Rm |
| Profit before
taxation |
295 |
(55) |
657 |
| Adjustment for items
with no or uncertain tax effects: |
|
|
|
| Impairment and other
capital items |
19 |
|
21 |
Effect of accounting
for policyholder investments as
treasury shares |
81 |
|
30 |
| Provisions for client
settlements |
468 |
|
- |
Net fair value gain (offset
by tax expense attributable
to policyholders) |
(18) |
|
(9) |
| Share of net profits
of associates (stated net of taxation) |
(17) |
|
(5) |
| Adjusted profit
before taxation (a) |
828 |
19 |
694 |
| Taxation expense
(b) |
220 |
16 |
190 |
| Effective tax
rate (%) (b)/(a) |
27 |
- |
27 |
|
| |
| |
| Minority interests |
| Minority interests in the group’s
profits are R45 million for the current year and
are the same as those reported for the previous
year. The increase in minority interests resulting
from the profit growth reported by Lane Clark
& Peacock is offset by the decrease in minority
interests resulting from the anticipated reduced
profit contribution from the UK Direct Marketing
entity in run-off and the buy-out of minority
shareholdings in various South African subsidiaries,
namely Alexander Forbes Compensation Technologies,
Faranani Risk Solutions and Meridian C&I.
These are now all wholly-owned subsidiaries of
Risk & Insurance Services in South Africa.
|
| |
| Core earnings attributable
to ordinary shareholders |
| An adjusted measure of headline
earnings per share, core earnings per share, has
been presented in order to facilitate a proper
assessment of the group’s performance in
comparison to the previous financial year. This
adjusted measure: |
| – |
excludes the anticipated
reduced profit contribution from the UK
Direct Marketing entity in run-off (and
the related taxation effects); |
| |
excludes one-off exceptional
charges and gains (and any related taxation
effects); |
| – |
excludes the financial
effects caused by the mismatch resulting
from accounting for policyholder investments
as treasury shares under IFRS (as explained
earlier in this report); |
| – |
reflects the position
had the equity issue associated with the
repurchase of exchangeable bonds in September
2004 occurred at the commencement of the
previous financial year (and the related
taxation effects). |
|
| |
| (A reconciliation of the
calculation of core earnings per share is shown
in the notes to the group financial statements.)
|
| |
| Core earnings per share totalled
116 cents for the current year, representing a
3% increase in comparison with the previous year.
Growth was adversely impacted by the reduced profits
reported by International Risk Services. Excluding
the results of International Risk Services, core
earnings per share increased 15%, reflecting the
strong trading performance across most of the
group’s operations. |
| |
| |
 |
| |
| |
| Cash flows during
the year |
| An analysis of the group’s
cash flows during the year is provided below. |
| |
| Profits matched
by cash flows |
| The group continues to be highly
cash generative with profits reported in the income
statement matched by cash flows from operations
as shown in the table below. |
| |
| |
March
2006
Rm |
% |
March
2005
Rm |
| Cash from trading
operations (a) |
958 |
3
|
931
|
| Trading results of operations
(per income statements) |
791 |
2
|
772
|
| Cash items not included
in trading results: |
|
|
|
| – Consolidation of group
cell captive insurance arrangements |
(1) |
|
23
|
| – Dividends received
from associates |
13 |
|
6
|
| Main non-cash expenditure
item: |
|
|
|
| – Depreciation and
amortisation |
113 |
|
122
|
| Adjusted "cash
profit" (b) |
916 |
(1) |
923
|
| Cash versus
profit (a) – (b) |
42 |
|
8
|
|
| |
| |
| Cash expended in
investing activities |
The group expended R931 million
in investing activities during the year (2005:
R198 million). Of this amount, R750 million was
expended by the Homeplan division of the South
African Financial Services business on housing
loans provided to members of retirement funds
secured by their retirement funds assets. This
part of the R2,1 billion Homeplan loan book has
been funded through a securitisation programme
implemented in the current year.
Of the remainder of the cash expended in investing
activities, R92 million was spent on capital expenditure
to maintain operations, R64 million was spent
on subsidiaries and businesses acquired and R38
million was invested in financial assets. |
| |
| Cash raised from
financing activities |
| The group raised R453 million
from financing activities during the year (2005:
R123 million outflow). Of this amount, R750 million
was raised through a securitisation programme
implemented in the current year to fund part of
the Homeplan loan book, offset by R71 million
net proceeds on shares issued and accounting for
treasury shares, R24 million applied to premium
financing extended to clients of the South African
Risk & Insurance Services business, R82 million
in cash settlements relating to the retirement
benefit obligations of the group, R52 million
distribution to minority shareholders and R68
million net repayment of borrowings. |
| |
| Cash balances |
| The group’s total cash
balances increased by R175 million over the year
(2005: R272 million) and totalled R2 803 million
at yearend (2005: R2 628 million). It is important
to note that a large part of these cash balances
is not available for use by the group in its operations.
An analysis of the group’s cash position
is provided in the table below. |
| |
| |
March
2006
Rm |
March
2005
Rm |
| Cash and cash
equivalents |
2 803 |
2 628
|
| Add: Available
financial assets |
80 |
21
|
| Less: Net
current payables |
(2 152) |
(1 531)
|
| Net cash and
cash equivalents |
731 |
1 118
|
| Capital adequacy and
solvency requirements |
(489) |
(567) |
| Restricted cash, minority
interests and other adjustments |
(78) |
(37)
|
| Free cash resources
|
164 |
514
|
| Less: Working
capital/liquidity buffer |
(214) |
(227) |
| Add: Committed
undrawn borrowing facilities |
365 |
307
|
| Available cash
resources |
315 |
594
|
|
| |
| |
 |
| |
| |
| Financial position |
| The group is in a sound financial
position as reflected by the gearing ratio and
interest cover position shown in the table below.
|
| |
| |
March
2006
Rm |
March
2005
Rm |
| Total bank borrowings
(a) |
678 |
760 |
| Total equity |
1 613 |
2 097 |
Adjusted for policyholder
investments accounted for
as treasury shares and deducted from equity
under IFRS |
184 |
161 |
| Adjusted total equity
(b) |
1 797 |
2 258
|
| Gearing ratio
(a)/(b) |
38% |
34% |
| Trading results of operations
(c) |
791 |
772 |
| Net interest costs
(d) |
5 |
63 |
| Interest cover
(c)/(d) |
158 times |
12 times
|
|
| |
| |
| Distribution to
shareholders |
Notwithstanding the reduction
in earning resulting from the reduced profits
reported by International Risk Services and the
one-off exceptional charges incurred during the
year, the inherent financial strength and cash-generative
nature of the group have enabled the directors
to recommend an annual distribution to shareholders
of 59 cents per share. This equates to a 2 times
dividend cover based on core earnings per share.
Subject to shareholder approval at the annual
general meeting to be held on 8 August 2006, the
59 cent distribution to shareholders is to be
paid by way of a reduction in share premium in
order to minimise the tax effects of the distribution
for the company. |
| |
| |
 |
| |
| |
| Concluding remarks |
| Financial personnel across
the group have made a significant contribution
to the successful implementation of IFRS during
the current year and to the continued improvement
in financial reporting processes and controls
across the group. This has been achieved while
dealing with a number of special projects progressed
during the year. I thank you all for your efforts.
|
| |
| |
 |
| Mike Ilsley |
| Group Finance Director
|
| |
