Management of financial risk
for the period ended 30 June 2011

The group is exposed to various financial risks in connection with its current operating activities, such as market risk, currency risk, credit risk, liquidity risk and capital adequacy risk. These risks contribute to the key financial risk that the proceeds from the group's financial assets might not be sufficient to fund the obligations arising from insurance and investment policy contracts.

To manage these risks the subsidiary and associate boards established sub-committees to which it has delegated some of their responsibilities in meeting its corporate governance and fiduciary duties. The sub-committees include an audit committee, a compliance committee, an investment committee, an actuarial committee and a remuneration committee. Each committee adopted a charter, which sets out the objectives, authority, composition and responsibilities of the committee. The boards approved the charters of these committees.

Additional information on the management of financial risks is provided below.

Market risk – the risk that the fair value or future cash flow of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk.

Currency risk

Currency risk is the risk that the value of the financial instrument denominated in a currency other than the reporting currency may fluctuate due to changes in the foreign currency exchange rate between the reporting currency and the currency in which such instrument is denominated.

The group's exposure to currency risk is mainly in respect of foreign investments made. The group had invested in foreign subsidiaries operating in Ireland, Mauritius and Australia.

The operations as described expose the group to foreign currency risk. The board monitors these exposures on a quarterly basis. Any significant changes in the foreign currency balances are followed up throughout the period and are reported to the board.

The table below lists the group's exposure to foreign currency risk:

As at 30 June 2011 - R million Rand Australian
Dollar
United
States
Dollar
Euro Total
Total assets 18 224 1 115 40 6 19 385
Total liabilities 7 519 539 24 - 8 082
Exchange rates:          
Closing rate at 30 June   7,260 6,779 9,380  
Average rate for the period   6,950 6,960 9,546  
 
 

Interest rate risk

Interest rate risk is when the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The group makes use of asset managers and internal resources to invest in securities exposed to interest rate risk. The securities managed by asset managers are contractually agreed with specific risk levels. The internally managed money market investments are managed in line with the mandate approved by the investment committee. The investment committee monitors the performance of all the investments and reports to the board on a quarterly basis.

The group's financial instruments, other than policyholders' assets, are exposed to interest rate risk. A change in interest rates would have an impact on the profit before tax of the group as set out below. Policyholders' funds are exposed to interest rate risk and the capital loss on fixed rate instruments would be for the policyholders' account as the liability is calculated with reference to the value of the assets.

The table below reflects the shareholders' exposure to interest rate risk. An increase or decrease in the market interest rate would result in the following changes in the profit before tax of the group:

  200bps 
Increase 
2011 
R million 
200bps 
Decrease 
2011 
R million 
Financial assets    
  Unlisted preference shares 15  (15)
  Money market instruments 26  (26)
Cash and cash equivalents 49  (49)
     
Financial liabilities    
  Preference shares (9)
  Interest bearing loans (5)

The table below lists the policyholders' funds exposure to interest rate risk. An increase or decrease in interest rates of 200bps could result in the following changes in the fair value of interest rate instruments.

  2011 
R million 
200bps 
Increase 
2011 
R million 
200bps 
Decrease 
2011 
R million 
Financial assets      
  Unlisted preference shares 77  79  76 
Listed preference shares      
     Fixed rate 277  283  272 
     Variable rate 765  780  749 
 

 

Other price risk

Equity risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices, whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.

Equity securities are mandated to stockbrokers and asset managers. Asset managers' mandates include benchmarks by which performance is measured based on fee structures. The investment committee monitors the performance for each asset manager against benchmarks and reports to the board on a quarterly basis.

All equities are split between listed and unlisted securities. Listed equities which relates to linked policies do not require a sensitivity analysis as the liability is not guaranteed and will be determined solely by reference to the value of the assets. These assets do not expose the group to any risks.

The table below reflects the shareholders' exposure to equity price risk. A hypothetical 10% increase or decrease in the equity prices would result in the following changes in the profit before tax of the group:

 
  10% 
Increase 
2011 
R million 
10% 
Decrease 
2011 
R million 
Financial assets    
     Listed preference shares 45  (45)
     Collective investment scheme 86  (86)
     Listed equity shares 10  (10)
 
 

Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The key areas where the group is exposed to credit risk are:

  • Unlisted preference shares with put options to the large banks;
  • Debt securities;
  • Loans and receivables including insurance receivables; and
  • Cash and cash equivalents.

Significant concentrations of credit risk, if applicable, are disclosed in the financial statements. The credit exposure to any one counter party is managed by the board in accordance with the requirements of the Short-term Insurance Act of 1998 and Longterm Insurance Act of 1998 and by setting transaction/exposure limits, which are reviewed at each board and audit committee meeting. The credit worthiness of existing and potential clients is monitored quarterly at the board meeting and bi-annually by the actuarial committee and investment committee. The table below provides information on the credit risk exposure by credit ratings at the period end (if available):

R million  AAA  AA  BB  BBB+  Not rated  Total 
At 30 June 2011                      
Equity securities – preference shares                      
– available-for-sale – unlisted  –  –  33  –  15  60  108 
– available-for-sale – listed  80  238  97  33  –  –  448 
Collective investment scheme  247  525  90  –  –  –  862 
Money market instruments  376  560  344  –  –  21  1 301 
Debt securities                      
– available-for-sale – unlisted  –  498  240  –  –  17  755 
– held-to-maturity  –  –  –  –  –  77  77 
– at fair value through profit or loss                      
  – fixed rate  –  –  103  –  83  91  277 
  – variable rate  –  –  –  670  93  765 
Loans and receivables  –  –  –  523  526 
Cash and cash equivalents  10  983  1 247  –  153  63  2 456 
Total  714  2 806  2 156  33  921  945  7 575 

The ratings were obtained from Fitch. The ratings are based on long-term investment horizons. Where long-term ratings are not available, the financial instruments are categorised according to short-term ratings. The ratings are defined as follows:

 

Long-term Investment grade:

AAA The financial instrument is judged to be of the highest credit quality, with minimal credit risk and indicates the best quality issuers that are reliable and stable.
AA The financial instrument is judged to be of high quality and is subject to a very low credit risk and indicates quality issuers.
A The financial instrument is considered upper-medium grade and is subject to low credit risk although certain economic situations can more readily affect the issuers' financial soundness adversely than those rated AAA or AA.
BB Speculative quality. 'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
BBB+ The financial instrument is subject to moderate credit risk and indicates medium class issuers, which are currently satisfactory.
   
Short-term Investment grade:

F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments.
   
Not rated

The credit exposure for the assets listed above is considered acceptable by the board even though certain assets do not have a formal rating.

 

Fair value

The carrying amounts of the following categories of financial assets and liabilities approximate fair value:
  • Amounts receivable from policyholders;
  • Other amounts receivable;
  • Cash and cash equivalents;
  • Financial assets – debt securities held-to-maturity;
  • Unlisted preference shares investments;
  • Accounts payable and accruals; and
  • Provisions for liabilities and charges.

Liquidity risk and asset liability matching

The group is exposed to daily calls on its available cash resources from claims arising. Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The group's liabilities are matched by appropriate assets and it has significant liquid resources to cover its obligations. The group's liquidity and ability to meet such calls are monitored quarterly at the board meeting and bi-annually by the investment committee.

30 June 2011 – R million  Total  0 – 6 
months 
7 – 12 
months 
1 – 5 
years 
>5 
years 
No 
liquidity 
risk 
Liabilities             
Insurance contracts  4 018  1 630  254  642  –  1 492 
Financial liabilities             
  Convertible debentures  15  –  –  –  15  – 
  Preference shares  2 072  54  54  1 964  –  – 
  Interest bearing loans  239  239  –  –  –  – 
  Policyholders’ interest   415  415  –  –  –  – 
  Contingency reserves  –  –  –  – 
  Financial liabilities at fair value             
  through profit or loss  73  73  –  –  –  – 
  Investment contracts at fair value             
  through income  1 046  1 046  –  –  –  – 
Deferred acquisition reserve  17  –  –  –  –  17 
Provisions  36  36  –  –  –  – 
Trade and other payables  446  446  –  –  –  – 
Deferred taxation liabilities  220  –  –  –  –  220 
Taxation  25  25  –  –  –  – 
Total liabilities  8 626  3 964  308  2 606  15  1 733 

 

Capital management

Capital adequacy risk is the risk that there are insufficient reserves to provide for variations in actual future experience that is worse than what has been assumed in the financial soundness valuation. The group must maintain a capital balance that will be at least sufficient to meet obligations in the event of substantial deviations from the main risk assumptions affecting the group's business. This is used to determine required capital levels that will ensure sustained solvency within an acceptable confidence level.

The group's objectives when managing capital are:

  • to comply with the insurance capital requirements required by the regulators of the insurance markets where the group operates;
  • to safeguard the group's ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and
  • to provide an adequate return to shareholders by pricing insurance commensurately with the level of risk.

In each country in which the group operates, the local insurance regulator specifies the minimum amount and type of capital that must be held by each of the subsidiaries in addition to their insurance liabilities. The minimum required capital must be maintained at all times throughout the period. The group is subject to insurance solvency regulations in all the territories in which it issues insurance and investment contracts, and where it has complied with all the local solvency regulations.

Management regard share capital, share premium, retained earnings, contingency reserves, preference shares and borrowings as capital when managing capital.

The table below summarises the minimum required capital across the group and the regulatory capital against each of them. These figures are an aggregate number, being the sum of the statutory capital and surplus for each insurance subsidiary in each country subject to local regulatory requirements, which may differ from jurisdiction to jurisdiction:

RMBSI’s insurance operations: Jurisdiction Statutory solvency requirement Actual
solvency
2011
RMB Structured Insurance Limited South Africa Minimum 15% of additional assets 370%
RMB Financial Services Limited Ireland 100% 161%
RMB Structured Insurance Limited PCC Mauritius Minimum 15% of prior year’s 150%
    premium  
RMB Structured Life Limited South Africa 100% 625%
       
      Actual
      solvency
OUTsurance’s insurance operations: Jurisdiction Statutory solvency requirement 2011
OUTsurance Insurance Company Limited South Africa Minimum 25% of net earned 40%
    premiums  
Momentum Short-Term Insurance Company Limited South Africa Minimum 25% of net earned 44%
    premiums  
OUTsurance Insurance Company of Namibia Limited Namibia Minimum 25% of net earned 35%
  (Associate)   premiums  
Youi (Proprietary) Limited Australia A$18,7 million A$61 million
OUTsurance Life Insurance Company Limited South Africa R10 million R58,3 million

   

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