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The board of directors is pleased to present the results of the Alexander Forbes Group Holdings Limited for the year ended 31 March 2017.
Alexander Forbes Group Holdings Limited (AFGH) is the ultimate holding company of the Alexander Forbes group of companies (the group).
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 R3 435 million for the year ended 31 March 2017, up 1% when compared to the previous financial year.
Consolidated profit from operations
Operating profits from continuing operations before non-trading and capital items increased by 3% to R933 million when compared to the previous financial year. The divisional performance review is reflected below. This result reflects the significant efforts made to reduce costs and drive efficiencies in the operations.
Operating expenses of R2 502 million were 0.5% higher than the previous year. Given the inflationary environment and contractual escalations inherent in certain costs, the cost containment is considered commendable.
The overall group trading margin on net revenue is 27.2% compared to the 26.7% for the previous financial year. The increase in trading margin further emphasises the group’s efforts to enhance operational efficiencies and reduce costs.
Non-trading and capital items
Non-trading and capital items of R137 million (2016: R140 million) include the ongoing accounting amortisation of intangible assets amounting to R117 million (2016: R124 million), once-off costs incurred in defining the group’s strategy 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.
Investment income
Investment income of R156 million (2016: R93 million income) is generated from the corporate cash balances managed through the group’s treasury department. The significant cash balances recorded at 31 March 2017 arise from the sale of our international consulting practice, Lane Clark & Peacock LLP (LCP), and through the subscription of shares by African Rainbow Capital.
Investment income related to policyholder investments includes R22 million (2016: R70 million) related to individual policyholder funds in AF Investments (previously Investment Solutions) that are liable for fund level taxes and for which an equal tax liability is raised. This income (and related tax expense) should theoretically be excluded when assessing the group’s own investment income.
Finance costs
Finance costs for the year ended 31 March 2017 increased to R89 million from R69 million in the prior year. The increase is largely due to a drawdown on the revolving credit facility and increases in the JIBAR interest rate during the year. In addition to the revolving credit facility, other finance costs include interest accrued on various liabilities.
Accounting for Alexander Forbes shares held in policyholder investment portfolios
In terms of International Financial Reporting Standards (IFRS) any Alexander Forbes 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 Alexander Forbes’s consolidated financial statements as treasury shares and result 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 impact of this mismatch results in an accounting profit or loss that is reported in Alexander Forbes’s consolidated income statement, whereas no actual economic profit or loss will ever be realised by the group. The reported loss of R2 million (2016: R59 million profit) arising from the accounting for policyholder investments as treasury shares for the year is separately disclosed in 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 R887 million for the year ended 31 March 2017 is 4% lower than the previous financial year.
The tax rate excluding the policyholder tax is 28.2%, resulting in profit after tax of R621 million for the year ended 31 March 2017.
Discontinued operations
The business results reflected as discontinued operations comprise Lane Clark & Peacock LLP together with its subsidiaries in Ireland and the Netherlands (LCP), Alexander Forbes’s Kenyan operations and Alexander Forbes Insurance Consulting Practice. The disposal of LCP was concluded on 19 December 2016 and the effects of the disposal are included in the results for the year under review. The results of discontinued operations are further detailed in note 22.
Items to consider when analysing the group’s results
There are certain significant items which affect the reported results of the group. These items are correctly reported under IFRS, however they 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.
(a) Accounting for property lease.
(b) Capitalisation of intangible assets and the related amortisation
(c) Accounting for Alexander Forbes shares held in policyholder investment portfolios
(d) Investment income and taxation payable on behalf of policyholders
Group segmental income and profit analysis
| Operating income net of direct expenses | Profit from operations before non-trading and capital items | |||||
|---|---|---|---|---|---|---|
| Rm | 2017 | % | 2016 | 2017 | % | 2016 |
| Institutional clients | ||||||
| Consulting | 802 | (2) | 818 | 74 | (9) | 81 |
| Retirements | 421 | 12 | 375 | 100 | 27 | 79 |
| Investments | 640 | – | 641 | 276 | – | 277 |
| Group risk | 57 | (24) | 75 | 15 | (40) | 25 |
| 1 920 | 1 | 1 909 | 465 | 1 | 462 | |
| Retail clients | ||||||
| Wealth and investments | 797 | 5 | 758 | 378 | 15 | 329 |
| Retail insurance | 477 | 4 | 458 | 88 | (4) | 92 |
| 1 274 | 5 | 1 216 | 466 | 11 | 421 | |
| Emerging markets | 241 | (11) | 270 | 32 | (51) | 65 |
| Total group before items below | 3 435 | 1 | 3 395 | 963 | 2 | 948 |
| Accounting for property leases | (26) | (30) | ||||
| Accounting for conditional share scheme costs | (4) | (13) | ||||
| Total group | 3 435 | 1 | 3 395 | 933 | 3 | 905 |
The segmental analysis provided reflects the operating structure under which management currently reports. The table reflects a change in presentation from the segmental report presented in the prior year’s results. Owing to the change in structure and the reallocation of certain business lines, the prior year’s numbers have been represented to provide the appropriate comparative numbers.
The following is a brief summary of divisional trading results for the year ended 31 March 2017.
Institutional clients
The institutional clients division delivered R1 920 million of operating income, which is 1% higher than the prior year. Business units within this division include:
Expenses were prudently managed at a 1% growth year on year, a very pleasing outcome in the current economic environment and was as a direct result of strong management focus on cost and operational efficiencies. As a result profit from operations increased by 1% to R465 million for the year ended 31 March 2017.
(i) Consulting
New business opportunities were impacted across this business unit as a result of delayed decision-making at trustee and corporate levels. We firmly believe that our value proposition remains relevant and we see strong momentum in clients continuing to value our expertise and experience as a trusted adviser in delivering favourable outcomes and experiences across their financial well-being as the outlook improves. In line with this, we launched AFRIS (Alexander Forbes Retirement Income Solutions in April 2017), which is our institutional living annuity solution available to standalone retirement fund clients.
The operating income from the consulting and administration business to standalone retirement funds contracted by 3% when compared to the previous financial year. This was impacted by a 7% decrease in the number of active member records due mainly to the loss of a large standalone retirement fund client which has chosen to insource its administration. The cost base in administration was reduced accordingly for this lost client. The operating income from the healthcare consulting business increased by 1% when compared to the previous financial year. Healthcare broking income increased 10% year on year as a result of an increase in the regulated cap for commission income for broking services and new business wins. Health management solutions income reduced year on year on the back of the loss of a public sector client, with the cost base being reduced accordingly.
(ii) Retirements
The Alexander Forbes Retirement Fund (AFRF) continues to be a market leader in the umbrella fund industry, providing relevant and cost-effective solutions to the South African market and the Alexander Forbes Coreplan umbrella fund continues to be innovative and provides low-cost simple solutions with a strong growth trajectory. In October 2016 we launched a number of new innovative offerings to our umbrella funds, including an in-fund preservation and in-fund living annuity solution. In February 2017 we launched a group retirement annuity solution, further demonstrating our commitment to providing members with cost-effective solutions to preserve their retirement fund savings.
The umbrella fund operating profit increased by 7% from the previous financial year. This is supported by the increase in the number of active member records for our umbrella retirement funds which increased by 4% from the previous year and the increase in the number of umbrella fund clients (participating employers) by 5% from the previous year. Closing assets under management (AuM) for the umbrella funds increased by 5% year on year to R68.4 billion at 31 March 2017. This was higher than the market growth in AuM of 3.6% in the year thanks to new business wins and portfolio performance.
Included in the retirements division is beneficiary fund consulting and administration, the latter being a service offering we launched in June 2016. The operating income for the combination of umbrella fund and beneficiary fund consulting and administration services increased by 12% from the previous financial year. Strict cost management and operational efficiencies had profit from operations increasing by 27% from the previous year.
(iii) Investments (previously Investment Solutions)
The operating income for the Investments segment was marginally down at 0.2% for the year ended 31 March 2017. The low return environment persisted with all major asset classes’ returns being below inflation. Net negative ongoing cash flows were also experienced, which is prevalent in the retirement fund industry. Although the segment delivered strong new business flows of R9.9 billion for the year ended 31 March 2017, these flows were offset by net ongoing client cash outflows of R14.1 billion (the difference between ongoing contributions and benefit payments) and client losses of R3.1 billion for the same period.
Closing institutional assets under management (including assets under administration) slightly decreased by 1.2% to R284.8 billion as at 31 March 2017, of which R235.8 billion are institutional assets under investment management.
A summary of the institutional investments’ cash flows is reflected below:
| Rbn | 2017 | % | 2016 |
|---|---|---|---|
| Inflows | 37.8 | 10 | 34.4 |
| New business | 9.9 | 13.0 | |
| Ongoing contributions | 27.9 | 21.4 | |
| Outflows | (45.1) | 16 | (38.9) |
| Outflows due to client losses | (3.1) | (4.0) | |
| Withdrawals for benefit payments | (42.0) | (34.9) | |
| Net cash flows | (7.3) | 62 | (4.5) |
Operating expenses were flat year on year, resulting in profit from operations increasing by 0.6% to R276 million for the year ended 31 March 2017.
Representing R700 billion in retirement assets, the Investments division continues to focus on providing a wide array of investment services ranging from investment portfolios to advice-led solutions and alternative opportunities. The investment philosophy revolves around outcome-based investing with a clear mission to help clients secure their financial well-being while managing the risk of uncertain and challenging economic environments.
(iv) Group risk
AF Life group risk grew annualised premium income by 11% to R439 million at 31 March 2017. Despite the pleasing increase in new business, claims experience was negatively impacted by the continued trend in disability claims with disabilities having a longer rehabilitation period owing to the nature of the disabilities experienced, including an increase in mental health and cancer-related disabilities. The underwriting result before interest earnings was impacted by the increased claims and required increased reserving.
Retail clients
The retail clients division delivered R1 274 million of operating income, which is 5% higher than the previous year. Business units within this division include:
(i) Wealth and investments
Growth in operating income increased 5% to R797 million for the year ended 31 March 2017. The operating income split was 64% from asset-based income and 36% from consulting and advisory fees also linked to asset values.
Over the period assets being preserved on exit and retirement declined marginally from 46% to 45%. The FPC business saw improved traction with an improved capture rate of exit and retirement flows from 33% to 35%.
Assets under advisement grew by 4% to R64.7 billion at 31 March 2017. Assets under administration grew by 2.9% to R59.8 billion. Assets under management grew by 7% to R51.6 billion. The flows from FPC to AF products remained constant at 89%. The business’s focus continues to be on servicing the institutional client base while expanding the business’s footprint in discretionary assets and expanding the distribution channels to include independent financial advisers.
Profit from operations increased by 15% to R378 million on the back of a 2% reduction in operating expenses.
(ii) Retail insurance businesses
Gross written premium in the Alexander Forbes short-term insurance business increased by 8% to R1.5 billion for the year ended 31 March 2017, with the business continuing to grow based on enhanced product offerings and good service levels. The loss ratio for the AF Insurance business ended on 71.5% for the year, slightly below the target of 72%. This represents a significant improvement on the 76.3% reported in the prior year.
To address adverse claims experience in the prior year and the first half of the current year, decisive management action was taken to reduce the loss ratio.
The AF Life individual insurance business accounts for 1% of the retail clients’ business operating income. Over the period the business increased its focus on distribution channels and product innovation, which led to an increase in new life policy sales by 33%. The business launched an internal call centre and introduced a non-underwritten product, which is proving very successful and has contributed to the increase in the life policyholder book. The business remains subscale and as a result incurred an operating loss for the year.
The combined retail insurance businesses produced operating income net of direct expenses of R477 million, an increase of 4% over the prior year. Expenses rose by 6% over the prior year, resulting in profit from operations decreasing by 4% to R88 million.
Emerging Markets (previously known as AfriNet and covering all operations in Africa outside South Africa)
Alexander Forbes Emerging Markets (AFEM) currently operates in five countries across Africa – Namibia, Botswana, Zambia, Uganda and Nigeria. Economic growth in all these markets subdued and is well below the longer-term potential.
AFEM’s total profit from ongoing operations declined by 51% to R32 million for the year ended 31 March 2017.
Operations in Kenya have been classified as discontinued.
With the Government of Botswana insourcing its Botswana Public Officers Pension Fund (BPOPF) in 2016 AFEM lost one of its largest clients and operating income consequently declined by 11% for the year. Downsizing and redundancy costs in Botswana mainly contributed to the overall cost growth of 2%. Members under administration naturally decreased as a result of the client loss in Botswana. Excluding the BPOPF impact, operating income grew at 2%. Further measures to improve the operating leverage in Botswana included reducing overheads alongside a buildout of retail consumer lines to enhance the revenue. The impact of these initiatives will be felt in the next financial year.
In line with the stated target to grow the share of retail business lines in AFEM, Namibia increased retail revenue by 10% year on year. The development of assets under management remained resilient, increasing by 2%.
Conditions in Nigeria continued to be challenging, with a systemic shortage of foreign currency hampering business progress alongside a steady devaluation of the local currency against the rand depressing the consolidated result in our home currency. Our business operations in Nigeria remain small for the time being.
AFEM has defined a multi-hub continental growth strategy with operating structures in Namibia and Botswana. This operating structure will enable sound organic and inorganic growth in the coming financial years. The pension reform agenda pursued by many governments across the African continent in view of the general demographic development and the continued urbanisation underpin the increasing relevance of our existing and future markets to Alexander Forbes in our endeavour to become a globally distinctive pan-African financial services leader.
Operations and technology
On 7 April 2017 the group announced a significant contractual agreement with a leading technology provider, Sapiens. Under this agreement Sapiens will provide a wide range of offerings – including key components of the Sapiens Digital Suite – to power Alexander Forbes’s client proposition and enhance its digital capability through a modern technology platform with an improved customer experience. The financial commitment relating to this contract amounts to $51 million over the next four financial years. The costs of development will be capitalised and depreciated over the expected useful life of the system. More significantly, the single host system will allow for rationalisation of our current disparate systems and is expected to deliver a net reduction in costs over the next five years.
The group has entered into a foreign currency hedge contract which substantially reduces the foreign currency risk associated with the US dollar-based commitments. The average rate achieved over the hedge period was R13.88 to the US dollar.
Financial position and capital requirements
In December 2016 the group disposed of its investment in LCP. The sale proceeds amounted to £75.4 million, of which £69 million was received and repatriated to South Africa during the year under review and the balance is to be received in the next financial year. In addition the group entered into an agreement with African Rainbow Capital (ARC) in terms of which ARC subscribed for 10% of the equity in the African operations for R753 million. These two transactions have resulted in the group having significant cash on hand as at the year-end.
The board has considered and approved a capital allocation strategy with regard to this cash available which includes the following:
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. The current reporting requirements to the regulator already incorporate the expected formal framework.
As at 31 March 2017 the theoretical consolidated regulatory capital position, using the measures and interpretations under the Solvency Assessment and Management (SAM) standard, is a surplus of R2.3 billion (before the proposed dividend distribution). The surplus estimation above does not include any benefit that may be achieved from the Investments division or the group using an approved internal model for capital determination.
Final dividend
A dividend declaration has been considered, taking into account the group’s current and projected regulatory position, the available cash in the group as well as the highly cash-generative nature of the group and the investment into modernising technology.
Notice is hereby given that the directors have declared a final gross cash dividend of 23 cents (18.4 cents net of dividend withholding tax) per ordinary share for the year ended 31 March 2017. In addition the directors have declared a special dividend of 23 cents (18.4 cents net of dividend withholding tax) per ordinary share for the year ended 31 March 2017.
Both dividends above have been declared from income reserves. A dividend withholding tax of 20% 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:
Share certificates may not be replaced with electronic ones or be converted to paper ones between Wednesday, 5 July 2017 and Friday, 7 July 2017, both days inclusive.
The group’s strategy, Ambition 2022, is focused on helping customers achieve a lifetime of financial well-being and security. This is delivered through a five-pillar strategy supporting the group’s ambition of becoming a globally distinctive pan-African financial services leader.
Under Ambition 2022 the group has focused on accelerating its strategy to be a trusted partner for financial solutions for every stage, successfully shifting towards operating as a leaner, more focused group that is no longer ‘siloed’ into different businesses and that offers a clear value proposition.
In summary, Ambition 2022 will focus on the following:
The group also completed two significant transactions: selling its 60% interest in the UK-based consulting business, Lane Clark & Peacock, for R1.3 billion and African Rainbow Capital acquiring a 10% shareholding in Alexander Forbes Limited (a wholly-owned subsidiary of the group) as a strategic empowerment partner. Together these transactions provide capital for investments and acquisitions.
The group is emerging as a leaner, customer-focused business that is well positioned to create substantial value for shareholders in its next growth phase as a leading financial services group in South Africa and other select emerging markets with a diversified portfolio and profitable business serving end consumers.
Authorised
The authorised share capital of the company comprises 2.5 billion ordinary shares and 45 million B preference shares.
Issued
There were no ordinary shares issued during the year under review. In the prior year the company issued 39 million shares to the Alexander Forbes Employee Share Option Plan, as communicated to shareholders in a circular dated 13 May 2015. The total number of ordinary shares in issue at year-end remains unchanged from the prior year at 1 341 426 963.
A list of significant shareholders is included in Annexure A.
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.
Details of subsidiaries 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 for the year include the following:
Mr AA Darfoor was appointed on 1 September 2016 as group chief executive. Mr DM Viljoen, who fulfilled the role of interim group chief executive prior to Mr Darfoor and group chief financial officer, resigned and stepped down from the board on 30 April 2017. Mr BP Bydawell has been appointed as acting group chief financial officer. The board extends its heartfelt thanks to Mr Viljoen for his dedication and service to the group over the past 14 years.
The directors at the date of approval of this report are:
Independent directors
MD Collier1
RM Kgosana
D Konar
BJ Memela
HP Meyer
Non-executive directors
MS Moloko (chairman)
DJ Anderson2
WS O’ Regan1
Executive directors
AA Darfoor1 (appointed 1 September 2016)
Position: group chief executive
DM Viljoen (resigned 30 April 2017)
Position: group chief financial officer
BP Bydawell (appointed 30 April 2017)
Position: acting group chief financial officer
1. British.
2. Australian.
The directors’ interests in the ordinary shares of the company and details of transactions with directors are disclosed in note 44: Related party disclosure.
Directors’ emoluments are disclosed in note 44: Related party disclosure.
Capital commitment
On 7 April 2017 the group announced a significant contractual agreement relating to system and process development. The financial commitment relating to this contract amounts to $51 million over the next four financial years of which $11 million will be paid within 12 months, and the costs of development will be capitalised and depreciated over the expected useful life of the system. The group has entered into a foreign currency hedge contract in order to reduce the currency risk associated with this contract. The hedge is designed to cover 75% of the commitment at an effective exchange rate of R13.88 to the US dollar.
Sovereign downgrade
In April 2017 Standard & Poor’s (S&P) and Fitch downgraded South Africa’s foreign currency rating to sub-investment grade, commonly referred to as ‘junk status’. Moody’s, however, retained its foreign currency rating at a lower medium grade, but lowered its outlook from negative to negative watch. The local currency rating has not yet been downgraded by Moody’s. The group has considered the impact of the downgrade with specific reference to the valuations of its financial and non-financial assets and liabilities. Whilst the economic impact on future earnings cannot yet be determined there is no reported revaluation required on the reported assets and liabilities subsequent to this announcement.
In addition to a review of the financial and non-financial assets, the group considered its capital requirement and established that the downgrade increased the group’s solvency capital requirement by R60 million. The group reported a surplus in regulatory capital of R2.3 billion at 31 March 2017.
Details of the registered office of the company are as follows:
Physical address
Alexander Forbes
115 West Street
Sandown, Sandton
2196
South Africa
Postal address
PO Box 787240
Sandton
2146
South Africa
The company’s registration number is 2006/025226/06.
The company secretary at the date of publication of this report is Ms JE Salvado.
PricewaterhouseCoopers Inc.
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