Group restructuring

Having obtained the requisite shareholder and regulatory approval, RMB Holdings Limited ("RMBH") implemented a far reaching restructuring on 7 March 2011. In the context of Rand Merchant Insurance Holdings Limited ("RMI Holdings"), this included, inter alia, the following steps:

After the restructuring and further subsequent acquisitions, the interests of RMI Holdings comprise an investment portfolio of South Africa's premier insurance brands:

RMI Holdings was incorporated on 24 March 2010. The effective date of the transfer of the investments from RMBH was 1 March 2011. Thus, while this maiden financial report of RMI Holdings covers the fifteen month period to 30 June 2011, it was effectively dormant for the first eleven months of the period and its financial results only include income from the underlying investments for the four months ended on that date.

Overview of results

Global economic growth started to moderate in the first half of 2011, particularly in highlyindebted, developed economies and sentiment was further dampened by increased concern over the fiscal health of certain peripheral Eurozone nations.

Factors that weighed on global economic activity included the devastating Japanese earthquake (resulting in the disruption of global supply chains); political unrest in North Africa and the Middle East; adverse weather conditions; and growing demand from emerging market economies (pushing oil and grain prices upwards).

Against this uncertain global economic backdrop, the South African economy continued on its tentative recovery path, registering quarterly growth rates above 2,5% during the financial year. South African consumers, who benefited from low debt service costs and robust real income growth, were the main drivers behind this expansion. In addition, increased global commodity prices provided support to the South African export sector. However, employment growth, demand for credit and investment spending by the private sector remained sluggish. Inflation tracked within the South African Reserve Bank's ("SARB") target band.

Notwithstanding such economic uncertainty, all of the businesses in which RMI Holdings are invested, produced excellent results, with strong positive to exceptional growth being recorded in (unaudited) core or normalised earnings:

• Discovery +31% to R2 028 million  
• MMI +12% to R2 588 million  
• OUTsurance +39% to R807 million  
• RMB-SI >100% to R92 million  

In this, its maiden financial report, RMI Holdings only accounts for income from its investments for the four months ended 30 June 2011. Consequently, it is not possible to present full year results (or comparatives) at group level. The following outcome arises:

    Cents per  
  R million   share  
Attributable earnings 570   115,6c  
Headline earnings 525   106,4c  
Normalised earnings 636   128,4c  

RMI Holdings already held its investments in the underlying entities at the stage that the interim dividends were paid. Accordingly, shareholders receive the benefit of both interim and final dividends for the period. Total ordinary dividends payable to RMI Holdings shareholders for the period ended 30 June 2011 amounts to 56,5 cents per share.

The group's underlying intrinsic value at 30 June 2011 can be compared to its market value as follows:

    Cents per  
  R million   share  
Intrinsic value 19 579   1 318c  
Market Capitalisation 18 348   1 235c  
Discount    (6,3%) 

Sources of income

Predominantly sourced from Southern Africa, RMI Holdings' well-diversified income stream is drawn from the full spectrum of insurance business:

Group borrowings and capital position

At the end of June 2011, RMI Holdings' net borrowings at holding company level amounted to some R 0,53 billion. We anticipate that the borrowings which was raised in part to finance the acquisition of our enlarged interest in OUTsurance, can be maintained at this level.

The intrinsic value of the RMI Holdings' investments at 30 June 2011 was as follows:

  R million  
Market value of interest in:  
– Discovery 5 707  
– MMI 6 654  
Directors valuation of interest in:  
– OUTsurance 7 500  
– RMB-SI 254  
Total market and directors valuation 20 115  
Net borrowings (536) 
Total Intrinsic Value 19 579  
Per RMI Holdings' share (cents) 1 318c 

At 30 June 2011, RMI Holdings' market capitalisation amounted to R18 348 million or 1 235c per share, representing a 6,3% discount to the group's underlying intrinsic value.

Dividend payment

We have continued with our stated practice of paying out to shareholders substantially all dividends received from our underlying investments, after servicing funding and other commitments that we may have at the centre.

Consequently, the Board resolved to declare a final dividend of 33,7 cents per share. Such final dividend, together with the interim dividend of 22,8 cents brings the total dividends for the period to 30 June 2011 to 56,5 cents. Such dividend is covered 2,3 times by the normalised earnings 128,4 cents of per share.

A shareholder who has retained both his RMBH and RMI Holding shares would have received the following ordinary dividends post the unbundling:

        2011   2010   %  
  Interim   Final   Total   Total   change  
RMBH 42,7   58,3   101,0   124,0     
RMI Holdings 22,8   33,7   56,5   –     
Total 65,5   92,0   157,5   124,0   +27%  

Industry and regulatory environment

The South African insurance market is set to undergo significant regulatory changes in the medium term with considerable policy debate taking place at present.

Solvency Assessment and Management ("SAM") will be the new regulatory regime to be adopted by the Financial Services Board ("FSB") from 2014 which will govern the economic capital requirements of the group's insurance undertakings as well as prescribe certain minimum standards of risk management and governance. Significant effort is being expended throughout the group to ensure that all the companies in which we are invested are adequately prepared to meet the new capital regime.

The FSB also plans to introduce a "Treating Customers Fairly" regulatory framework which is aimed at ensuring that customer relationships are managed on an unbiased and reasonable manner. Given the high standards being envisaged by FSB, it can be expected that the industry as a whole will have differing levels of maturity in this regard. The group is in a period of self assessment to ensure that we will be able to move towards the level of outcomes desired.

The Department of Health has released a green paper on National Health Insurance providing more information on the scheme which will be phased in over a number of years. While the proposals could have far reaching effects on the health businesses in which we are invested, we remain confident that our businesses will have a continuing role to play in this emerging environment.

Our regulatory teams are well positioned to ensure that the group entities will comply with the changing regulations. Our management also engages on the various industry and FSB forums to positively contribute to the outcome of new regulations.

Outlook for the coming year

Significant disquiet in global markets results in a highly uncertain outlook. We expect that domestic economic conditions will remain subdued in the current financial year. It is evident that the path toward economic recovery will be protracted with the fair likelihood of experiencing further recessionary dips in economic activity along the way. The South African economy has unfortunately not escaped the contagion of slow growth, high unemployment and continued high levels of consumer indebtedness, factors which directly impede on the growth of the industry sectors in which we are invested.

However, the quality of our operating franchises and their respective strategies, domestically and outside South Africa, should underpin the group's ability to provide us, as shareholders, with sustainable superior returns.

For and on behalf of the Board

GT Ferreira P Cooper
Chairman Chief executive officer
14 September 2011