Annual Financial Statements 2016

Directors' Report
for the year ended 31 March 2016

The board of directors is pleased to present the results of the Alexander Forbes Group for the year ended 31 March 2016.

Nature of business

Alexander Forbes Group Holdings Limited (AFGH) is the ultimate holding company of the Alexander Forbes group of companies (the group).

Review of operations

Consolidated operating income net of direct expenses
Operating income net of direct expenses (hereinafter referred to as ‘operating income’) represents gross revenue net of direct product costs. The group’s gross revenue is derived from fees charged for consulting, administration and the management of investments through multi-manager portfolios. In addition, operating income includes the net result from both long-term and short-term insurance operations.

The group produced operating income from continuing operations of R5.4 billion for the year ended 31 March 2016, up 11% on the prior financial year. The growth in revenue was significantly enhanced by the weakening rand exchange rate applied to international earnings; excluding the international operations, the operating income for Africa grew by 4% to R3.5 billion.

Africa income was significantly impacted by weaker markets where 34% of the group’s revenue is linked to the assets under administration and management. More significantly, clients moved assets within the group’s diversified investment product range to balanced portfolios and index/passive portfolios, both of which result in lower margins earned by the group. Investment Solutions is well positioned to offer this flexibility and it is an integral part of the group’s value proposition to clients. In future, the group may benefit from any market reversion where specialist mandates become more sought after.

Growth in African operating income excluding asset-based fees was 7%, which is commendable in the current economic climate.

Consolidated profit from operations
Operating profit from continuing operations, before non-trading and capital items, increased by 6% to R1.2 billion when compared to the previous financial year. The divisional performance review is reflected below. Excluding the International operations, which were positively impacted by the weakening rand exchange rate, the growth for Africa was 1%, resulting in an operating profit of R924 million.

Operating expenses of R2.6 billion for the Africa region were 5% higher than the previous year. These expenses include accounting for the share-based long-term incentive scheme which was provided through a direct shareholding structure prior to listing. Operating expenses, including the International operations, attributed to continuing operations (excluding non-trading and capital items) amounted to R4.2 billion, an increase of 12% compared to the previous year (impacted by exchange rates).

The overall group operating margin on operating income is 22.5% compared to the 23.4% for the previous financial year. The reduction in operating margin is largely impacted by the absolute value of assets under management and the margin impact experienced from institutional clients particularly in Investment Solutions.

Non-trading and capital items
Non-trading and capital items of R137 million (2015: R355 million) include the ongoing accounting amortisation of intangible assets amounting to R124 million (2015: R131 million) as well as the results of the cell-captive insurance facility which are consolidated into the group’s results. The accounting for amortisation has no impact on the cash flows of the group. Included in prior year non-trading and capital items are the transaction costs relating to the listing.

Investment income
Investment income of R294 million (2015: R226 million) includes R197 million (2015: R103 million) related to individual policyholder funds in Investment Solutions that are liable for fund level taxes and for which an equal tax expense is raised. This income should, theoretically, be excluded when assessing the group’s own investment income which largely relates to return on assets backing regulatory capital adequacy requirements. Excluding the policyholder income, the group’s investment income amounts to R97 million (2015: R123 million) for the year.

Finance costs
Finance costs for the period amount to R71 million compared to the R119 million for the previous year. The finance costs relate largely to the revolving credit facility provided to the group and have declined significantly due to the partial repayment of this facility over the period.

Accounting for Alexander Forbes shares held in policyholder investment portfolios
In terms of International Financial Reporting Standards (IFRS) as presently constituted, any Alexander Forbes Group Holdings Limited shares acquired by underlying asset managers and held by the group’s multi-manager investment subsidiary for policyholders (the shares) are required to be accounted for in the group’s consolidated financial statements as treasury shares and results in the elimination of any fair value gains or losses made on the shares. Refer to note 11.

This accounting treatment has the effect that fair value movements in respect of linked investment policy assets and liabilities that would normally be offset (and economically should be offset) are not being matched in the income statement. The resultant mismatch between the asset and liability movement does not reflect the economic substance of the transactions. The result of this mismatch is that an accounting profit or loss will be reported in the group’s consolidated income statement, whereas no actual economic profit or loss will ever be realised by the group. The reported profit of R59 million arising from the accounting for policyholder investments as treasury shares for the reporting period is separately disclosed on the face of the income statement.

Profit before and after tax from continuing operations
After non-trading items, finance charges and the effect of the policyholder investments explained above, the group’s profit before taxation from continuing operations of R1 359 million, shows a 57% increase from the R866 million of the previous financial year.

The effective tax rate compared to profit before tax appears high as a result of taxation expense relating to policyholders being included in the income tax expense line (refer to the investment income discussion above as well as note 8). The tax rate on normalised results is 25%; this is largely impacted by the lower UK tax rate and applied only to the group’s share of the partnership earnings from LCP. Profit after tax was R891 million for the year ended 31 March 2016 compared to R505 million in the previous year.

Items to consider when analysing the group results
There are certain significant items which affect the reported results of the group. These items are correctly reported under IFRS; however may not necessarily reflect the economic substance of the results. Investors are requested to consider the following items when preparing an analysis of the results.

  • Accounting for property lease – The accounting treatment for long-term leases, particularly at the Sandton head office, continues to have a small positive impact on profit from operations. The impact of the IFRS accounting for property leases is isolated in the segmental analysis.
  • Capitalisation of intangible assets and the related amortisation – Non-trading and capital items include the ongoing accounting amortisation of intangible assets amounting to R124 million for the year ended 31 March 2016 and R131 million in the prior financial year. The accounting for amortisation has no impact on the cash flows of the group.
  • Accounting for Alexander Forbes shares held in policyholder investment portfolios – The reported profit of R59 million arising from the accounting for policyholder investments as treasury shares for the year is separately disclosed on the face of the income statement. The profit is as a result of the mismatch between the asset and liability movement as explained above and does not reflect the economic substance of the transactions.
  • Investment income and taxation expense relating to policyholders – Investment income and income tax expense include investment income and taxation expense on behalf of policyholders (refer to the investment income discussion as well as note 8).

Investors are directed to the results presentation which is available on the group’s website ( where the above items are further analysed.

Discontinued operations
The business results reflected as discontinued operations include LCP Belgium and Alexander Forbes Compensation Technologies (AFCT). The disposal of the LCP Belgium operation was completed by year-end and the effects of the disposal are included in the results for 31 March 2016. The completion of the disposal of AFCT is considered imminent. The results of discontinued operations are further detailed in note 22.

Divisional review of operations

Operating income

Profit from operations

31 March


31 March

31 March


31 March

Institutional Cluster

Financial Services

1 287


1 254




Investment Solutions







AF Insurance







1 948


1 962




Retail Cluster

Financial Services







Investment Solutions







AF Insurance







1 196


1 103




AfriNet (Africa excluding SA)







Total Africa

3 490


3 356




Total International (GBPm)







Total International (Rm)

1 886


1 495




Total group (Rm)

5 376


4 851

1 210


1 137

For the purpose of the cluster commentary operating income refers to operating income net of direct expenses and profit from operations refers to profit from operations before non-trading and capital items.

During the year the group started the process of refining the organisational structure to align with the group’s strategy. The divisional performance reflected in the table above is aligned with the new group clusters, and differs from the segmental report provided in the consolidated results. The changes to the new organisational structure include the movement of various product lines between AF Financial Services and Investment Solutions as well as between the retail cluster and institutional cluster. In addition, costs allocated to the divisions have been refined. From 1 April 2016 the group will report on the above clusters only.

The following is a brief summary of divisional trading results for the year ended 31 March 2016.

Institutional Cluster
The cluster comprises consulting and administration services to both standalone and umbrella retirement funds, actuarial and asset consulting, healthcare actuarial and consulting, insurance consulting, beneficiary trust consulting services and group risk insurance through Alexander Forbes Life.

In addition, investment management and consulting to institutional investors, through our multi-manager Investment Solutions, is included in this cluster.

  • (i) Financial Services

    The institutional division of Financial Services delivered R1 287 million of operating income which is 3% higher than the prior year. The growth in operating income was muted due to a decrease in the group risk underwriting result year on year and the loss of a significant client in the health management solutions division.

    Financial Services’ core retirement fund consulting, actuarial, and operations and administration business units delivered credible results in a difficult economic climate. The number of active member records administered within the institutional businesses increased marginally despite negative employment growth and retrenchment activity in its client base, to just over one million members. Operating income earned from consulting, actuarial and administration services to retirement funds, in terms of both annuity and fee income, grew by 5% year on year, despite these constraints. With strong expense management and operational efficiency achieved, the profit from operations for these business units increased by 12% year on year.

    Financial Services is continuing to develop and improve its flagship umbrella retirement fund, the Alexander Forbes Retirement Fund, providing relevant and cost-effective solutions to the South African market. Its other institutional umbrella funds, being Alexander Forbes Coreplan and AF Access, showed strong growth in the year, albeit off a smaller base. The total assets under management in the institutional umbrella funds increased by 9% year on year to R65.3 billion. The number of active member records administered by the institutional umbrella funds is now above 304 000 (up 9% year on year) with 1 320 umbrella fund clients (participating employers) up 16% year on year.

    Gross annualised premium income of AF Life Group Risk totalled R397 million for the year ended 31 March 2016, an increase of 24% from the prior year. The business has been effective in achieving good new business success with R75 million of new annualised premium income for the year ended 31 March 2016. The claims experience in the Group Risk business was, however, negatively impacted by increased numbers of disability claims and lower-than-expected rehabilitation of disability claimants. This is largely a factor of the broader economic climate. The related underwriting result for this business declined by 24% from 2015. With high regulatory, compliance and technical costs, the profit from operations for AF Life Group Risk decreased year on year.

    The healthcare consulting business had pleasing growth in operating income of 6% year on year due to a combination of good new business, improved client retention and an increase in the regulated cap for commission income for broking services. The fee income earned by the health management solutions division declined by 4% year on year as a result of the loss of a client in the public sector. Specific management actions have been put in place to minimise the impact of this loss in revenue in the forthcoming year.

    The public sector division increased revenue for the year by 4% to R216 million. Although this was below the division’s desired growth rate the division made good progress in building its brand within the sector and strengthening strategic networks and relationships.

    The overall increase in expenses for the cluster was 4%, a pleasing outcome in the current environment and was as a direct result of strong management focus. As a result profit from operations decreased by 2% to R183 million for the year ended 31 March 2016.

  • (ii) Investment Solutions

    The institutional Investment Solutions division experienced a decrease in operating income on the back of a tough operating environment in the South African market. This decrease is despite the continued successes in new business as it recorded new flows of R13 billion during the current reporting period.

    The decline in operating income can be attributed to:

    • higher-than-expected ongoing cash outflows which exceeded recurring cash inflows by R13.5 billion, mostly related to the decreasing employment rate in South Africa;
    • an increasing switch by clients to low-cost investment options given the prevailing market environment; and
    • the trend of lowering margin in the investment and savings value chain in the South African market.

    Closing institutional assets under management (including assets under administration) increased by 3.4% to R282.4 billion as at 31 March 2016, of which R230.2 billion are institutional assets under investment management. Average assets under management increased by 5.4% compared to the previous financial year. Capital markets remained volatile during the period with low returns across major asset classes.

    Despite good new business cash flows the business has experienced higher-than-expected net outflows of R4.5 billion. A summary of the institutional cash flows is reflected below:









    New business




    Ongoing contributions








    Outflows due to client losses




    Withdrawals for benefit payments




    Net cash flows




    The financial performance was muted with operating income declining by 8% to R641 million and operating expenses were 2% lower for the year ended 31 March 2016 when compared with the prior year. Profit from operations declined by 15% to R279 million. The business remains focused on disciplined cost management as part of responding to a difficult trading environment, which is expected to prevail in the South African market into the foreseeable future.

    Investment Solutions continues to provide a wide range of portfolios, customised to its clients’ needs with risk-adjusted returns which are ahead of peers and benchmark. Over the past rolling 36 months ended 31 March 2016, 68% of funds were ahead of benchmark. The investment team continuously focuses on improving and deepening expertise across the business in order to serve its clients better and add value towards their retirement savings and wealth creation while managing the risk of unusual and challenging economic environments.

  • (iii) AF Insurance

    The institutional division of the short-term insurance business has seen significant success this reporting period with gross written premiums increasing by 55% to R67 million, albeit off a small base. This division focuses on short-term insurance cover for the SME market. Operating income grew by 67% over the prior year and resulted in the profit from operations more than doubling to R5 million for the year ended 31 March 2016.

Retail Cluster (individual clients)
The retail cluster has made significant progress in creating an operating environment that is client-centric with the creation of an integrated distribution model that allows the business to deliver holistic solutions to the individual client. These solutions are developed based on specific client needs and address financial planning and wealth management, as well as short-term and long-term risk-based products. The establishment of a business and distribution enablement division allows the retail cluster to provide training and tools to its distribution channel, ensuring that its consultants are world-class, identifying customer needs, creating value propositions to address these needs and driving focused campaigns to the market.

The retail focus remains on accessing the institutional member base. However, the strategy in this area has evolved into a more streamlined, solution-driven and client-focused approach. As a result, the businesses within retail are being realigned to reflect the value proposition to the client. As such, the wealth management businesses of retail, incorporating the AF Individual Client Administration, AF Preservation Fund and Investment Solutions Retail, will be combined to form the Wealth and Investment division. AF Insurance and AF Life, the short-term and long-term insurance providers, will remain as separate lines of business.

Proposed regulation impacting the financial services industry, including product offerings and pricing, is being closely monitored. The retail business continues to proactively change various service offerings and products, and continues to adapt its business and advice offered to clients in line with legislation and prevailing market and economic conditions.

  • (i) Financial Services

    The retail division of the SA Financial Services business incorporates Financial Planning Consultants, AF Individual Client Administration, AF Preservation Fund and the AF Life individual life insurance businesses.

    The growth in operating income was 8% to R615 million when compared to the year ended 31 March 2015 of which 56% is asset-based income and a further 43% relates to consulting and advisory fees linked to asset values. This growth is commendable in light of market performance for the year under review and is a result of the growth in retail assets under advisement and the number of clients.

    The businesses with income related to asset values, being all of the above businesses excluding AF Life, have experienced volatile markets, resulting in clients moving to more conservative portfolios. In addition the economic environment has seen increased withdrawals from retirement funds into cash, rather than preservation, and an increase in annuity payments to fund income requirements.

    Assets under advisement grew by 9% over the 12 months to total R62.2 billion at 31 March 2016. Assets under administration grew by 8% to R52.2 billion.

    Financial Planning Consultants delivered an increase in number of clients by 8% to 46 292 clients at 31 March 2016. Importantly, there was an increase in the proportion of assets, in respect of members exiting funds administered by the division, being advised by the Financial Planning Consultants division. Further, the percentage of Financial Planning Consultants business written to Alexander Forbes products has increased from 84.7% to 89.5%. The focus will continue to be on accessing the institutional client base while maintaining consistently high client satisfaction rates.

    The AF Life individual life insurance business accounts for 1% of the Retail Financial Services’ operating income and is a strategic growth area from its relatively small base. The company increased distribution channels and product innovation which has enabled an increase in the number of policyholder clients for life cover by 61%.

    Profit from operations increased 12% to R207 million on the back of a 6% growth in operating expenses.

  • (ii) Investment Solutions

    Retail assets under management by Investment Solutions increased by 7% to R49.2 billion off the back of good new business cash flows. This was off-set by the negative impact of volatile markets, an increase in withdrawals, as well as annuity payments. While the majority of the growth in assets under management is still through financial planning consultants, newer distribution channels have shown good growth with assets under management from these channels growing by 36% over the prior year.

    Operating income increased by 7% to R150 million when compared to the prior year. Cost management initiatives have resulted in an increase in profit from operations of 10% to R68 million for the year ended 31 March 2016.

  • (iii) Alexander Forbes Insurance

    Alexander Forbes Insurance continued the trend of strong growth with a number of months delivering record new business numbers. Gross written premium increased by 11% to R1.4 billion. The business continues to grow ahead of competitors based on an enhanced valuable product offering and superior service.

    Alexander Forbes Insurance initiated a number of client-servicing and underwriting interventions aimed at improving the client churn. A number of these have yielded positive results, assisting with a reduction in the client churn rate to 18% (2015: 20%). A number of specific high-value weather-related claims had a detrimental effect on the claims for the year, resulting in a loss ratio of 76% for the motor household business which was higher than the prior year, although within the long-term target range.

    Operating income net of direct expenses increased by 9% to R431 million. Expenses increased 8%, driven in part by an ongoing commitment to increase sales capacity and the impact of the weakening rand on claims procurement.

    Profit from operations increased by 14% to R108 million.

  • (iv) AfriNet (covering all operations in Africa outside of South Africa)

    Operating income increased by 19% to R346 million for the year ended 31 March 2016 and profit from operations grew by 23% to R74 million. This performance is consistent with history and entirely organic. The ‘capital light’ approach, together with disciplined operating leverage (the difference between operating income growth and cost growth), is a cornerstone under which trading profits are delivered at AfriNet and this approach is proving to be an appropriate business formula for roll-out to new geographies.

    An effective operating leverage of 2% assisted in achieving the profit from operations growth of 23% in an environment where operating income grew by 19% and costs by 16%. Since personnel costs and technology comprise more than 65% of the cost base, management has been disciplined in ensuring cost benefits from automation expenditure are realised. Automation of certain labour-intensive support processes, together with effective performance management processes, has resulted in positive yielding cost management benefits over the last year, culminating in a margin improvement (inclusive of corporate overheads) from 20.6% to 21.4%.

    It is pleasing to note that East Africa and retail are now consistent and larger contributors to the overall AfriNet growth. From a geographical perspective, East Africa now contributes 23% of operating income and 14% of profit from operations, whilst southern Africa remains a dominant contributor with 74% of operating income and 86% of profit from operations. West Africa still remains a key focus area for expansion. The Nigerian business contributes 3% to overall AfriNet operating income and is presently experiencing a very difficult economic environment.

    The retail business lines offered now include financial planning advice (wealth management), short-term insurance and life insurance, and contribute 19% to operating income. Further buildout of wealth management in Uganda is scheduled for the current financial year.

    Despite the current market conditions, the pensions reform wave remains a valid underpin for growth prospects of the Alexander Forbes Group in the sub-Saharan region. In particular, there is renewed interest from governments in developing local pensions markets, as international funding for asset classes like infrastructure become more difficult to source.

International Financial Services
The continuing operations of the International Financial Services business comprise the consulting actuarial business of Lane Clark & Peacock (LCP) with operations in the United Kingdom, Ireland and the Netherlands.

Operating income increased by a very pleasing 8% to £90.6 million for the year ended 31 March 2016 and profit from operations increased by 11% to £13.7 million. Revenue growth across the operations continued to grow in real terms, albeit those clients continue to manage their expenditure reflecting pressure on charge out rates. This revenue growth, combined with strong cost management, resulted in the achievement of good operating leverage. The businesses continue gaining new clients and capitalising on the demand for employer and trustee employee benefit and actuarial consulting, investment consulting, including de-risking solutions, and general insurance actuarial consulting. Market dominance in de-risking solutions continues.

LCP continues to provide the group with a rand hedge. The 31% growth in rand profit from operations to R286 million for the year ended 31 March 2016 resulted from the 23% deterioration in the average rand/sterling exchange rate.

Financial position and dividends

Financial position and capital requirements

The financial position of the group remains strong and all regulated entities within the group comply with current solvency, liquidity and regulatory capital adequacy requirements.

The group is appropriately positioned for the pending introduction of consolidated supervision by the regulators. Based on representation made by the Financial Services Board the effective date of implementation of the formal framework for group-wide supervision is now expected to be 1 January 2017 however current reporting requirements to the regulator already incorporate the expected formal framework.

As at 31 March 2016 the theoretical consolidated regulatory capital position, using the measures and interpretations under the solvency assessment and management (SAM) standard, is a surplus of R416 million (before the proposed dividend distribution). The Investment Solutions internal model for risk-based capital adequacy assessment is established. The business will continue to refine the model and will seek regulatory approval once the legislative environment is established.

A dividend declaration has been considered, taking into account the group’s current and projected regulatory position as well as the highly cash-generative nature of the group. The investment into modernising technology will demand additional capital investment; however, this is expected to be provided for through ongoing earnings.

Notice is hereby given that the directors have declared a final gross cash dividend of 22 cents (18.70 cents net of dividend withholding tax) per ordinary share for the year ended 31 March 2016.

The dividend has been declared from income reserves. A dividend withholding tax of 15% will be applicable to all shareholders who are not exempt. The issued number of shares at the date of declaration is 1 341 426 963.

The salient dates for the dividend will be as follows:

Last day of trade to receive a dividend

Tuesday, 19 July 2016

Shares commence trading ‘ex’ dividend

Wednesday, 20 July 2016

Record date

Friday, 22 July 2016

Payment date

Monday, 25 July 2016

Share certificates may not be dematerialised or rematerialised between Wednesday, 20 July 2016 and Friday, 22 July 2016, both days inclusive.


The year has been challenging for Alexander Forbes’s executive management team, as the South African business environment and economic fundamentals have negatively affected key business drivers and worked against efforts to show traction on the group’s strategic goals.

The group’s key focus will continue to align with its higher purpose objectives set a number of years back: to create, grow and protect client wealth, and in doing so, help its clients achieve peace of mind through securing their financial well-being.

Leadership remains confident that the group’s strategic intent is sound and its focus in the coming year will remain on driving top line growth while optimising operational expenses and ensuring organisational integrity.

As such, the group aims to:

  • improve asset capture in the intuitional core business by providing tailored product options suited to clients’ needs; deepening investment knowledge and enhancing investment performance; and by granting its clients easier access to investment choices including lower cost investment portfolios;
  • continue to access the institutional member base to provide appropriate holistic financial advice and relevant value adding products to retail clients;
  • use the expertise gained in South Africa to drive growth in the rest of the continent;
  • drive modernisation in the group’s technology environment including the digital interface with clients; and
  • continue to challenge itself and find efficiencies in the operating environment.

Share capital

The authorised share capital of the company comprises 2.5 billion ordinary shares and 45 million B preference shares.

The company issued an additional 39 million shares to the Alexander Forbes Employee Share Option Plan, as communicated to shareholders in a circular dated 13 May 2015. At year-end the group had issued shares of 1 341 426 963.

In the prior year the company issued an additional 44 million shares as part of the listing on the JSE Limited on 24 July 2014 and a further 7.7 million shares were issued as part of the exit transaction incentive detailed in the listing documents at that time. The group redeemed the B preferences shares at the time of the listing for R178 million as detailed in note 23.


A list of significant shareholders is included in Annexure A.

Borrowing powers

In terms of the memorandum of incorporation the borrowing powers of the company are unrestricted and the directors may exercise all the powers of the company to borrow money.

Subsidiaries, joint ventures and associates

Details of subsidiaries, joint ventures and associates, which are considered material to the group, and in respect of which the group has a continuing interest, are provided in note 48: Consolidated and unconsolidated entities to these financial statements.

Significant resolutions

Significant resolutions for the year included:

  • Approval of 2.9% broad-based black economic empowerment equity ownership transaction – 1 June 2015
  • Amendment of Alexander Forbes Long-Term Incentive Share Plan (Forfeitable and Restricted Share Scheme 2015) Rules – 12 June 2015


The directors at the date of approval of this report are:

Independent directors
MD Collier¹
RM Kgosana (appointed 21 April 2015)
D Konar
BJ Memela (appointed 1 July 2015)
HP Meyer

Non-executive directors
MS Moloko (chairman)
DJ Anderson² (appointed 10 October 2014)
WS O’ Regan¹ (appointed 31 July 2014)

¹ British
² Australian

Executive directors
DM Viljoen

Group chief executive (interim) and group chief financial officer

E Chr Kieswetter

Resigned 8 February 2016

Directors’ interests in shares and contracts

The directors’ interests in the ordinary shares of the company and details of transactions with directors are disclosed in the related party note to these financial statements.

Directors’ emoluments

Directors’ emoluments are disclosed in the related party note to these financial statements.

Company secretary

The company secretary at the date of publication of this report is Mrs JE Salvado.

Registered office

Details of the registered office of the company are as follows:

Physical address:
Alexander Forbes
115 West Street
South Africa

Postal address:
PO Box 787240
South Africa

The company’s registration number is 2006/025226/07.

Events subsequent to reporting date

No matter which is material to the financial affairs of the company has occurred between the balance sheet date and the date of approval of the financial statements.


PricewaterhouseCoopers Inc.