GT Ferreira / Chairman   Peter Cooper / Chief Executive Officer
     
GT Ferreira  
Chairman  
  Peter Cooper  
Chief executive officer / Financial director  
     

Executive review

Notwithstanding an uncertain economic environment, all the businesses in which RMI Holdings is invested produced good results, with exceptional growth in normalised earnings being recorded by OUTsurance in particular.

Group restructuring in prior year

Shareholders are reminded that RMBH implemented a far reaching restructure during March 2011. In the context of RMI Holdings this included, inter alia, the following steps:
• the separation of RMBH’s insurance and banking interests through
  the transfer of RMBH’s insurance interests to RMI Holdings
  (then a wholly-owned subsidiary); and
• the unbundling of RMI Holdings to RMBH’s ordinary shareholders on a one-for-one basis and the separate listing of RMI Holdings on the JSE as an
  insurance-focused investment entity.

After the restructuring and subsequent transactions, the interests of RMI Holdings comprise an investment portfolio of South Africa’s premier insurance brands:
• 25% of Discovery;
• 25% of MMI;
• 83% of OUTsurance; and
• 76% of RMBSI.

The effective date of the transfer of the investments from RMBH to RMI Holdings was 1 March 2011. Thus, for the prior period ended 30 June 2011, RMI Holdings’ financial results only included income from the underlying investments for the four months ended on that date.

Economic environment

The ongoing legacy of the 2008 financial crisis is one of significant macroeconomic uncertainty. Such uncertainty in the major developed economies, combined with high levels of government indebtedness, ongoing stress in the European banking system and households continuing to rebuild balance sheets, weighed on economic activity. This weakness spilled over into the major emerging economies and growth in countries such as China, India and Brazil slowed markedly during the latter part of the financial year.

The South African economy was not immune to the global developments and, although growth picked up in the latter part of 2011, it moderated again at the start of 2012. Slowing export growth and falling business confidence reflected muted global economic activity. Supply-side constraints, such as labour action in the mining sector and limited electricity supply, also weighed on macroeconomic performance. This contributed to subdued private sector investment spending.

While employment levels improved in some sectors, overall indebtedness remained high, causing overall consumer confidence to be fragile.

South African investment markets remained challenging. Equity market volatility continued, albeit with a positive bias, while long bond rates decreased, mainly during the last quarter of the financial year.

Overview of results

Notwithstanding such an uncertain background, all of the businesses in which RMI Holdings is invested produced good results, with exceptional growth in normalised earnings being recorded by OUTsurance in particular.

  For the year ended 30 June  
R million   2012    Restated 
2011  
% change  
Discovery   2 316   2 028   14  
MMI   2 955   2 648   12  
OUTsurance   1 157   871   33  
RMBSI   96   92   4  


As a result, the normalised earnings derived by RMI Holdings from its investments in these companies were as follows (results for 2011 only reflect four months):

R million   Year ended  
30 June  
2012  
Restated  
Period  Ended  
30 June  
2011  
Normalised earnings from:        
Discovery   579   165  
MMI   746   228  
OUTsurance   1 010   220  
RMBSI   74   48  
   2 409   661  
Funding and holding company costs   (39)  (10) 
Normalised earnings   2 370   651  

On a per share basis (with the prior period outcome weighted by the number of shares in issue for the four months that RMI Holdings was in existence) the following exceptional growth was realised:

Cents Year ended  
30 June  
2012  
Restated  
Period Ended  
30 June  
2011  
% change  
Earnings per share:      
Attributable earnings  151.8   119.1   27  
Headline earnings   162.8   110.0   48  
Normalised earnings   159.5   131.5   21  

RMI Holdings regards normalised earnings from continuing operations as the appropriate basis to evaluate business performance as it eliminates the impact of non-recurring items and accounting anomalies. A reconciliation of the adjustments made to derive normalised earnings is presented on normalised earnings.

Group borrowings and capital position

At the end of June 2012, RMI Holdings’ net assets at holding company level amounted to some R0.2 billion (2011: net borrowings of (R0.5 billion)), in the main comprising:
• a portfolio of cash and medium term advances, totalling some R1.7 billion, used to support the OUTsurance executive group transaction and to fund Youi’s
  Australian expansion; funded by
• redeemable preference share funding of R1.5 billion.
The intrinsic value of RMI Holdings’ investments at 30 June 2012 was as follows:

  As at 30 June  
R million   2012    Restated 
2011  
% change  
Market value of interest in:      
– Discovery 7 699   5 707   35  
– MMI 7 050   6 654   6  
       
Group valuation of interest in unlisted subsidiaries 10 506   7 754   35  
Total group valuation 25 255   20 115   26  
Net assets/(liabilities) of holding company 214   (536)   >100  
Total intrinsic value 25 469   19 579   30  
Intrinsic value per RMI Holdings share (cents) 1 714   1 318   30  

At 30 June 2012 RMI Holdings’ market capitalisation amounted to R25.8 billion (2011: R18.3 billion) or 1 737 cents per share (2011: 1 235 cents), representing a 1.3% premium (2011: 6.3% discount) to the group’s underlying intrinsic value.

Dividend payments

The board is of the opinion that RMI Holdings is adequately capitalised at this stage and that the company will be able to meet its obligations in the foreseeable future after payment of the final and special dividends as set out below. The board is also of the view that at present the level of borrowings that the group carries at the centre is appropriate.

We have continued with our stated practice of paying out to shareholders dividends received from our underlying investments, after servicing any funding commitments that we may have at the centre. Consequently, the board resolved to declare a final dividend of 50.0 cents per share. Such final dividend,
together with the interim dividend of 30.0 cents brings the total dividends for the year ended 30 June 2012 to 80.0 cents (2011: 56.5 cents). Such dividend is covered 2.0 times by the normalised earnings of 159.5 cents per share.

Consistent with its policy of not retaining surplus resources at the centre, the board has also decided to return the proceeds of the special dividends declared by MMI and OUTsurance to shareholders. Accordingly, the board of RMI Holdings has resolved to declare a special dividend of 55.0 cents per share.

From 1 April 2012 dividend withholding tax (“DWT”) at a rate of 15% is levied on dividends paid to shareholders who are not exempt from DWT. RMI Holdings has accumulated prior year secondary tax on companies (“STC”) credits that have been used to reduce such DWT liability. The position of a non-exempt share holder may be illustrated as follows:

  Cents   Cents  
Gross final and special dividend declared     105.0  
DWT at 15%   (15.8)   
Reduction in DWT as a result of STC credits utilised   3.5    
Net liability for DWT   (12.3)  (12.3) 
Net dividend receivable     92.7  


Outlook for the coming year

The macro environment will remain challenging during the 2013 financial year. The global economy is likely to register below average growth and will continue to face significant downside risk.

Economic activity in South Africa will remain under pressure. GDP growth is currently expected to be 2.5% for the 2013 financial year, and although interest rates are expected to remain flat for the rest of the year, there is downside risk if economic growth slows further.

Growth in insurance new business volumes will remain largely dependent upon the economic environment, including a recovery in employment and stronger disposable income levels.

All of the groups in which RMI Holdings is invested face both opportunities and threats posed by the highly regulated environment in which they operate, including evolving capital regimes as well as the national health insurance and social security reform proposals.

Both OUTsurance and RMBSI foresee that the exceptionally favourable claims experience of the recent past can be expected to normalise in future. Con se quently these groups’ earnings growth may be muted.

Notwithstanding such uncertain and fragile environment, RMI Holdings believes that our investee companies have appropriate strategies in place to unlock superior shareholder value over time.

In April 2012, our fellow director MH Visser passed away after a tragic car accident. Our friendship and business relationship predated Thys’ joining the board. His wise counsel and valued input on strategic matters will be sorely missed at board level.

During the year Royal Bafokeng Holdings increased its shareholding to 15% of the group. We are pleased that they have seen fit to entrust us with their capital and we extend them a special welcome.

For and on behalf of the board.

 

GT Ferreira
Chairman

P Cooper
Chief executive officer

 

Sandton
12 September 2012

 

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