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

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Presentation on theme: "PRELIMINARY RESULTS PRESENTATION TO THE INVESTMENT ANALYSTS SOCIETY FOR THE YEAR ENDED 31 MARCH 2002 June 2002."— Presentation transcript:

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

2 PRESENTATION OUTLINE  CAPITAL ALLIANCE DEFINED  2002 – CHALLENGES, PRIORITIES & ACHIEVEMENTS  FINANCIAL RESULTS  POSITIONING & PRIORITIES FOR THE FUTURE

3 PRESENTATION OUTLINE  CAPITAL ALLIANCE DEFINED  2002 – CHALLENGES, PRIORITIES & ACHIEVEMENTS  FINANCIAL RESULTS  POSITIONING & PRIORITIES FOR THE FUTURE

4 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

5 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

6 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)

7 CORE COMPETENCIES  Efficient cost effective operations engine  Integration expertise  Innovative product factory to support distribution partners

8 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

9 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

10 OUR DISTRIBUTION PHILOSOPHY LOWER INCOME MARKET DISTRIBUTION PARTNERS CAL COMMERCIAL PRODUCT FACTORY OPERATIONS ENGINE MIDDLE / UPPER INCOME MARKET DISTRIBUTION PARTNERS

11 Capital Alliance Health CAPITAL ALLIANCE HOLDINGS Product Factory Single Operations Engine Capital Alliance Life 50% Nova Group 33% 26% Individual Life Group Capital Alliance CAPITAL ALLIANCE BUSINESS UNITS Alliance Finance Capital Group Risk

12 Capital Alliance Health CAPITAL ALLIANCE HOLDINGS Product Factory Single Operations Engine Capital Alliance Life 50% Nova Group Group Risk 33% 26% Individual Life Group Capital Alliance CAPITAL ALLIANCE BUSINESS UNITS Alliance Finance Capital

13 CAPITAL ALLIANCE HOLDINGS Capital Alliance Life Nova Group Group Business 33% Individual Life CAPITAL ALLIANCE BUSINESS UNITS Product Factory Single Operations Engine

14 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

15 PRESENTATION OUTLINE  CAPITAL ALLIANCE DEFINED  2002 – CHALLENGES, PRIORITIES & ACHIEVEMENTS  FINANCIAL RESULTS  POSITIONING & PRIORITIES FOR THE FUTURE

16 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 ISSUESACTIONS  Recognise short-term pressure on new business margins - anticipate proper margins will return over time  With Persal we have 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

17 CHALLENGES FACED IN 2002  Volatile investment markets  Heightened consumerism  Problems with second tier financial institutions ISSUESACTIONS  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

18 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

19 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

20 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

21 OPERATIONAL EXCELLENCE  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

22 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 countby 45% –new business APIby 32%  Reduced acquisition cost per policy from R227 to R157

23 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

24 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

25 WHAT WE HAVE ACHIEVED  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)

26 WHAT WE HAVE ACHIEVED  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)

27 OPERATIONAL EXCELLENCE Outstanding Work in Queues as at 19 June /01/200230/01/200220/02/200213/03/200203/04/200224/04/200215/05/200205/06/2002 AltstechLoans & SurrRenewalCSCCSC values

28 OPERATIONAL EXCELLENCE Outstanding Work in Queues as at 19 June /01/200230/01/200220/02/200213/03/200203/04/200224/04/200215/05/200205/06/2002 ClaimsMatAnnuitiesPol AltsDocs

29 PRESENTATION OUTLINE  CAPITAL ALLIANCE DEFINED  2002 – CHALLENGES, PRIORITIES & ACHIEVEMENTS  FINANCIAL RESULTS  POSITIONING & PRIORITIES FOR THE FUTURE

30 SUMMARISED GROUP INCOME STATEMENTS Reinsurance transaction 2002 R' 000 Income Premiums net of reinsurance premiums Reinsurance premium Investment income disposal of investments Outgo Policyholders' benefits net of reinsurance Reinsurance claims Commissions Administration expenses Exceptional items Taxation9 989 Transfers to/(from) life funds Life insurance and pensions business( ) Gain/(loss) on revaluation and Ordinary life business 2002 R' Audited year ended 31 March 2002

31 SUMMARISED GROUP INCOME STATEMENTS Total 2001 R' (90 267) ( ) Total 2002 R' ( ) Audited year ended 31 March 2002 Income Premiums net of reinsurance premiums Reinsurance premium Investment income disposal of investments Outgo Policyholders' benefits net of reinsurance Reinsurance claims Commissions Administration expenses Exceptional items Taxation Transfers to/(from) life funds Life insurance and pensions business Gain/(loss) on revaluation and

32 SUMMARISED GROUP INCOME STATEMENTS Life insurance & pensions business( ) ( ) Before taxation Minority interests0(16 467) Headline earnings attributable to Ordinary life business 2002 R' 000 Total 2001 R' 000 Reinsurance transaction 2002 R' 000 Total 2002 R' 000 ordinary shareholders % Audited year ended 31 March 2002 Other income attributable Taxation(5 955)(17 939) (Loss)/profit after tax( ) ( )( )

33 SUMMARISED GROUP INCOME STATEMENTS Attributable earnings per share (cents)(155)188 Total 2001 R' 000 Total 2002 R' % Headline earnings per share (cents) Dividend per ordinary share (cents) Dividend cover (headline earnings, times) Weighted avg. number of shares in issue (’000) Total shares in issue (’000) % Audited year ended 31 March 2002

34 SUMMARISED GROUP INCOME STATEMENTS 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 2002 R' 000 ( ) R' , Audited year ended 31 March 2002

35 CHANGES IN EQUITY – SUMMARISED Balance at beginning of year Arising from share issue Cancellation of share capital (66 422) ( ) Non-distributable reserve Balance at beginning of year 0 0 Movement during the year Accumulated profits Balance at beginning of year previously disclosed Accumulated profits attributable to shareholders ( ) year ended 31 Mar 2001 R' 000 year ended 31 Mar 2002 R' 000 Audited Share capital and premium Dividends paid – preference and ordinary(82 577)(63 632) Audited year ended 31 March 2002 Restatement in respect of change in accounting policy Restated accumulated profits at beginning of year

36 SUMMARISED GROUP BALANCE SHEET year ended 31 Mar 2001 R' 000 year ended 31 Mar 2002 R' 000 Audited as at ASSETS Investment assets Computer equipment, office furniture & other current tangible assets Current assets EQUITY, RESERVES AND LIABILITIES Total shareholders' funds Minority interests Life insurance funds Non-current liabilities Current liabilities TOTAL EQUITY, RESERVES AND LIABILITIES Intangible assets TOTAL ASSETS Audited year ended 31 March 2002 Outside shareholders' interests

37 SUPPLEMENTARY INFORMATION Ordinary life business 2002 R' 000 Total 2001 R' 000 Reinsurance transaction 2002 R' 000 Total 2002 R' 000 LIFE ASSURANCE OPERATIONS Premiums net of reinsurance Individual - recurring premiums Group - lump sums Group - other premiums Credit life - Standard General Credit life - other Group funeral - single premiums (74 577) Individual - single premiums Audited year ended 31 March 2002

38 SUPPLEMENTARY INFORMATION Ordinary life business 2002 R' 000 Total 2001 R' 000 Reinsurance transaction 2002 R' 000 Total 2002 R' 000 LIFE ASSURANCE OPERATIONS Policyholders' benefits net of reassurance Individual life Employee benefits Credit life - Standard General Credit life - other Group funeral - death & disability Audited year ended 31 March 2002

39 SUPPLEMENTARY INFORMATION Risk discount rate15.5%16.5% Equity return (before capital gains tax)15.5% Fixed interest return (before tax)13.5% Cash return (before tax)11.5% Expense inflation rate per annum9.0%2% year 1 4% year 2 9% thereafter Ordinary life business Reinsurance transaction VALUATION BASIS: ECONOMIC ASSUMPTIONS AT 31 MARCH % year 3 Audited year ended 31 March 2002

40 SUPPLEMENTARY INFORMATION Ordinary life business 2002 R' March 2001 R' 000 Reinsurance transaction 2002 R' March 2002 R' 000 GROUP EMBEDDED VALUE Total Shareholders' net assets total 0( ) 0- less preference shares - plus other group assets Net value of in force life business Gross value of in force life business Embedded value Less: opportunity cost of ( )(15 853)( )(5 259)capital adequacy requirements Audited year ended 31 March 2002 as at

41 SUPPLEMENTARY INFORMATION 31 March 2001 R' 000 GROUP EMBEDDED VALUE Capital adequacy requirement ("CAR") Capital adequacy cover (times) Net asset value per share (Rands) Embedded value of in force business per share (Rands) Embedded value per share (Rands) March 2002 R' 000 Total Audited year ended 31 March 2002 as at

42 SUPPLEMENTARY INFORMATION Gross value of new life insurance business Less: opportunity cost of capital adequacy requirements (3 635) (1 993)Net value of new life insurance business VALUE OF NEW BUSINESS 31 March 2002 R' 000 Ordinary Business 31 March 2001 R' 000 Audited year ended 31 March 2002 as at

43 SUPPLEMENTARY INFORMATION Reinsurance transaction 2002 R' 000 Total 2001 R' 000 business 2002 R' 000 ANALYSIS OF CHANGE IN EMBEDDED VALUE Unwinding of risk discount rate Change to non-economic assumptions & basis(40 785)(40 585)(81 370) Non-recurring profits Subtotal Changes in economic assumptions( )(7 804)( ) Balance of return on group assets New Business Value Audited year ended 31 March 2002 Ordinary life Experience variations65 010(23 534) Investment experience profits Investment return on life shareholders funds(62 000) Subtotal( ) Total(18 438)

44 SUPPLEMENTARY INFORMATION Equity % Cash % Bonds % Property % Other *( )(9%) % COMPOSITION OF SHAREHOLDERS NAV Audited year ended 31 March 2002 R' March 2002 Year-ended % * Assets backing Negative Rand reserves R177m, net current liabilities R301m

45 SUPPLEMENTARY INFORMATION Broker % CAL Commercial % Bancassurance & other % % INDIVIDUAL RECURRING NEW BUSINESS BY DIST. CHANNEL Audited year ended 31 March 2002 R' March 2002 Year-ended %

46 HEADLINE EARNINGS Audited year ended 31 March 2002 Review since March % 10% 20% 30% 40% 50% 60% Headline earnings 29% 52% 40% % growth

47 HEADLINE EARNINGS Audited year ended 31 March 2002 Review since March % 10% 20% 30% 40% 50% 60% Headline earnings per share (cents) Dividends per share (cents) 28% 53% 20% %growth 41% 10% 29%

48 PREMIUM GROWTH Audited year ended 31 March 2002 Premium growth trends Individual – recurring (excl Reinsurance) Individual – recurring (incl Reinsurance) Premiums net of reinsurance (adjusted) (excl Reinsurance) Premiums net of reinsurance (adjusted) (incl Reinsurance)

49 NEW BUSINESS PRODUCTION 2002change 2001 Individual business - recurring % Group risk business % Group funeral28(75.0%) Credit life - Other % Single premiums * % Credit life - Stangen % R m * (excludes R68m from Fedsure Life)

50 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

51 INVESTEC ASSET MANAGEMENT  Investec Asset Management appointed in 1994 –leading SA investment manager –provider of specialist domestic & international investment skills –leading provider of 3 rd 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

52 MANAGED FUND & COMPETITOR RETURNS Source Large Manager Watch Survey Fully Discretionary relative to Competitor Median & Benchmark (Domestic only) ending 31 Mar 2002

53 MANAGED FUND & COMPETITOR RETURNS Fully Discretionary relative to Competitor Median & Benchmark (& International) ending 31 Mar 2002 Source Large Manager Watch Survey

54 GLOBAL MANAGED FUND PERFORMANCE FUND PERFORMANCE MARKET PERFORMANCE % Out performance0.2%1.1%3.0%(1.8%)0.0% MSCI17.6%11.9%36.3%38.7%(5.7%) Salomon22.0%30.8%42.5%21.1%(7.6%) Benchmark Return19.1%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

55 CORE BOND FUND Performance to 30 April 2002 – 6 Month Returns

56 INVESTEC BOND PERFORMANCE 22.0% -1.5% 12.0% 19.4% 17.7% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 6M 1Y 2Y ann3Y ann 5Y ann -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% PortfolioIndexActive As at May 2002 Source Large Manager Watch Survey

57 ABSOLUTE RETURN FUND Performance for year to 31 March 2002 – 12 Month Returns

58 RISK / RETURN MATRIX Annualised Standard Deviation Annualised Return 10% 13% 16% 19% 22% 25% 5%10%15%20%25%30% Investec Opportunity ALBI ALSI 5 years to 31 May2002

59 INVESTEC OPPORTUNITY FUND No negative return over any rolling 12 month period 0% 10% 20% 30% 40% 50% 60% 70% Apr-98 Jun-98 Aug-98 Oct-98 Dec-98 Feb-99 Apr-99 Jun-99 Aug-99 Oct-99 Dec-99 Feb-00 Apr-00 Jun-00 Aug-00 Oct-00 Dec-00 Feb-01 Apr-01 Jun-01 Aug-01 Oct-01 Dec-01 Feb-02

60 INVESTEC OPPORTUNITY FUND Compelling Cumulative Returns May-97 Jul-97 Sep-97 Nov-97 Jan-98 Mar-98 May-98 Jul-98 Sep-98 Nov-98 Jan-99 Mar-99 May-99 Jul-99 Sep-99 Nov-99 Jan-00 Mar-00 May-00 Jul-00 Sep-00 Nov-00 Jan-01 Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 SA 3m T-BillHeadline Inflation (1m lag)ALBIALSIInvestec Opportunity

61 MANAGEMENT EXPENSES New Business and Renewal cost trend

62 CLIENT RETENTION  CAL Commercial 78%  Bancassurance 79%  Group risk 92%

63 RETURN ON CAPITAL  Calculated as headline earnings divided by capital employed  Assumes all capital employed in Life business for 2002  33% for 2002

64 PRESENTATION OUTLINE  CAPITAL ALLIANCE DEFINED  2002 – CHALLENGES, PRIORITIES & ACHIEVEMENTS  FINANCIAL RESULTS  POSITIONING & PRIORITIES FOR THE FUTURE

65 POSITIONING & PRIORITIES FOR THE FUTURE 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

66 SAAMBOU LIFE TRANSACTION  Reached agreement with Saambou Holdings to acquire 100% of Saambou Life wef 1 April 2002  Underwrites credit life contracts and IL contracts  Purchase consideration of R109m = April  Consider EV upliftment potential considerable over 3 years & in line with previous transactions

67 POSITIONING & PRIORITIES FOR THE FUTURE 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

68 POSITIONING & PRIORITIES FOR THE FUTURE INDIVIDUAL LIFE  We have segmented the market into 4 sectors: IncomeDemographic LowerPrudents UpperAspirants 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

69 POSITIONING & PRIORITIES FOR THE FUTURE 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

70 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

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73 INVESTEC ENHANCED INDEX Cumulative Outperformance - Institutional Fund: Active Returns -2% 0% 2% 4% 6% 8% 10% May-99 Aug-99 Nov-99 Feb-00 May-00 Aug-00 Nov-00 Feb-01 May-01 Aug-01 Nov-01 Feb-02 Monthly Active ReturnCumulative Active Return


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