Management of financial risks
for the year ended 30 June

To manage these risks, the subsidiary and associate boards established subcommittees to which it has delegated some of its responsibilities in meeting its corporate governance and fiduciary duties. The subcommittees include an audit and risk 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:

30 June 2012
R million   Rand   Australian  
Dollar  
United States  
Dollar  
Euro   Total  
Total assets   20 251   2 059   30   7   22 347  
Total liabilities   7 361   1 155   21   –   8 537  
Exchange rates                     
Closing rate       8.360   8.308   10.438     
Average rate      8.080   7.774   10.397     

A hypothetical appreciation of 10% in the exchange rate would have resulted in a 0.07% lower comprehensive income for the group and a 10% depreciation in the exchange rate would have resulted in a 0.7% increase in comprehensive income for the group.

30 June 2011
R million   Rand   Australian  
Dollar  
United States  
Dollar  
  Euro   Total  
Total assets   18 088   1 115   40   6   19 249  
Total liabilities   7 032   539   24   –   7 595  
Exchange rates                     
Closing rate       7.260   6.779   9.380     
Average rate      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. Policyholder 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, which represents a cash flow risk. An increase or decrease in the market interest rate would result in the following changes in the profit before tax of the group:

    30 June 2012   30 June 2011  
   200 bps  
increase  
R million  
200 bps  
decrease  
R million  
200 bps  
increase  
R million  
200 bps  
decrease  
R million  
Financial assets              
Unlisted preference shares (impact on other              
comprehensive income)   17   (17)  15   (15)  
Government, municipal and public utility securities   2   (2)  3   (3) 
Money market instruments   41   (41)  23   (23) 
Cash and cash equivalents   49   (49)  49   (49) 
Financial liabilities              
Preference shares   (11)  11   (9)  9  
Interest bearing loans   –   –   (5)  5  

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

    30 June 2012  30 June 2011
  Carrying  
value  
R million  
200 bps  
increase  
R million  
200 bps  
decrease  
R million  
Carrying  
value  
R million  
200 bps  
increase  
R million  
200 bps  
decrease  
R million  
Financial assets                    
Unlisted preference shares   79   80   77   77   79   76  
Listed preference shares                    
  Fixed rate   284   289   278   277   283   272  
  Variable rate   857   875   840   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:

    30 June 2012   30 June 2011  
   10%  
increase  
R million  
10%  
decrease  
R million  
10%  
increase  
R million  
10%  
decrease  
R million  
Financial assets              
  Listed preference shares (impact on other              
  comprehensive income)   53   (53)  45   (45) 
  Collective investment scheme   54   (54)  86   (86) 
  Listed equity shares (impact on other              
  comprehensive income)   11   (11)  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; and
  • Cash and cash equivalents.
Significant concentrations of credit risk, if applicable, are disclosed in the financial statements. The credit exposure to any one counterparty is managed by the board in accordance with the requirements of the Short-term Insurance Act of 1998 and Long-term Insurance Act of 1998 and by setting transaction/exposure limits, which are reviewed at each board and audit committee meeting. The creditworthiness 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 year-end (if available):

30 June 2012
R million   AAA   AA   A   BBB   BB   Not  
rated  
Total  
Equity securities – preference shares                       
– available-for-sale – unlisted   –   40   –   –   –   13   53  
– available-for-sale – listed   –   428   73   –   28   5   534  
Equity securities – ordinary shares                       
– available-for-sale – listed   –   –   –   –   –   108   108  
– at fair value through profit or loss – listed   –   –   –   –   –   1 625   1 625  
– at fair value through profit or loss                       
– unlisted   –   –   –   –   –   25   25  
Collective investment scheme   –   483   57   –   –   –   540  
Money market instruments   26   1 492   496   17   –   –   2031  
Debt securities                       
– available-for-sale – unlisted   –   607   244   –   –   21   872  
– held-to-maturity   –   –   –   –   –   79   79  
– at fair value through profit or loss                       
– fixed rate   166   32   53   20   –   24   295  
– variable rate   115   82   5   750   –   489   1 441  
Loans and receivables   –   10   1   –   –   987   998  
Reinsurance contracts   168   70   21   –   –   14   273  
Cash and cash equivalents   –   1 789   412   261   –   –   2 462  
Total   475   5 033   1 362   1 048   28   3 390   11 336  


30 June 2011
R million   AAA   AA   A   BBB   BB   Not  
rated  
Total  
Equity securities – preference shares                       
– available-for-sale – unlisted   –   –   33   15   –   60   108  
– available-for-sale – listed   80   238   97   –   33   –   448  
Equity securities – ordinary shares                       
– available-for-sale – listed   –   –   –   –   –   101   101  
– at fair value through profit or loss – listed   –   –   –   –   –   1 576   1 576  
– at fair value through profit or loss                       
– unlisted   –   –   –   –   –   17   17  
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   –   –   2   670   –   93   765  
Loans and receivables   1   2   –   –   –   523   526  
Reinsurance contracts   168   54   8   –   –   9   239  
Cash and cash equivalents   10   983   1 247   153   –   63   2 456  
Total   882   2 860   2 164   921   33   2 648   9 508  

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 thebest 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 indicatesquality issuers.
   
A The financial instrument is considered upper-medium grade and is subject to low credit risk although certaineconomic situations can more readily affect the issuers’ financial soundness adversely than those rated AAA or AA.
   
BBB The financial instrument is subject to moderate credit risk and indicates medium class issuers, which arecurrently satisfactory.
   
BB Speculative quality. ‘BB’ ratings indicate that there is a possibility of credit risk developing, particularly as theresult of adverse economic change over time; however, business or financial alternatives may be available toallow financial commitments to be met. Securities rated in this category are not investment grade.

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.

The unlisted preference shares are redeemable with a notice period ranging from thirty days to three years. Dividend yields range from 50.8% to 70% of the prime overdraft rate. To mitigate credit risk, the unlisted preference share investments are secured by put options to the major South African banks. The fair value of the preference shares which are redeemable within one year from the reporting date is deemed to equal the redemption value. The fair value of the preference shares with a maturity date of longer than one year is calculated on a discounted cash flow basis with the discount rate adjusted for changes in credit risk of the ultimate counterparty, being one of the large South African banks. Due to the redeemable nature, the preference shares are deemed to be debt securities. The other assets listed above have a maturity value of less than one year, and the difference between the fair value and carrying value of the debt securities held-to-maturity is insignificant.


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 2012
R million   Total   Call to  
6 months  
7 to 12   months   1 to   5  years   >5 years   No  
liquidity  
risk  

Assets

                 
Property and equipment   413   121   –   292   –   –  
Intangible assets   50   –   –   –   –   50  
Investments in associates   9 864   –   –   –   9 864   –  
Financial assets                    
Equity securities                    
– available-for-sale   695   160   –   535   –   –  
– fair value through profit or loss   1 650   1 650   –   –   –   –  
Debt securities                  –  
– available-for-sale   872   418   –   454   –   –  
– held-to-maturity   79   –   –   –   79   –  
– fair value through profit or loss   4 307   2 738   733   836   –   –  
Loans and receivables including                    
insurance receivables   998   998   –   –   –   –  
Deferred acquisition cost   32   4   1   –   –   27  
Reinsurance contracts   273   268   3   2   –   –  
Deferred taxation   441   –   –   –   –   441  
Disposal group held for sale   211   211   –   –   –   –  
Cash and cash equivalents   2 462   2 462   –   –   –   –  
Total assets   22 347   9 030   737   2 119   9 943   518  


30 June 2012
R million   Total   Call to  
6 months  
7 to 12   months   1 to   5  years   >5 years   No  
liquidity  
risk  

Liabilities

                 
Insurance contracts   3 710   2 187   174   120   –   1 229(1)  
Financial liabilities                    
  Convertible debentures   15   –   –   –   15   –  
  Preference shares (undiscounted)   1 961   59   58   1 844   –   –  
  Interest-bearing loans   272   272   –   –   –   –  
  Policyholders’ interest   685   685   –   –   –   –  
  Financial liabilities at fair value                    
  through profit or loss   115   115   –   –   –   –  
Investment contracts at fair value                    
through profit or loss   1 145   1 145   –   –   –   –  
Deferred acquisition reserve   8   –   –   –   –   8  
Provisions   36   36   –   –   –   –  
Trade and other payables   656   653   3   –   –   –  
Deferred taxation liabilities   324   –   –   –   –   324  
Taxation   14   14   –   –   –   –  
Disposal group held for sale   59   59   –   –   –   –  
Total liabilities   9 000   5 225   235   1 964   15   1 561  
1. The majority of this amount comprises unearned premiums and there is no obligation of payment.


30 June 2011
R million   Total   Call to  
6 months  
7 to 12   months   1 to   5  years   >5 years   No  
liquidity  
risk  

Assets

                 
Property and equipment   211   –   211   –   –   –  
Intangible assets   32   –   –   –   –   32  
Investments in associates   9 274   –   –   –   9 274   –  
Financial assets                    
Equity securities                    
– available-for-sale   657   108   –   549   –   –  
– fair value through profit or loss   1 593   1 593   –   –   –   –  
Debt securities                    
– available-for-sale   755   484   –   271   –   –  
– held-to-maturity   77   –   –   –   77   –  
– fair value through profit or loss   3 205   2 129   579   497   –   –  
Loans and receivables including                    
insurance receivables   526   526   –   –   –   –  
Deferred acquisition cost   44   8   2   –   –   34  
Reinsurance contracts   239   239   –   –   –   –  
Deferred taxation   180   –   –   –   –   180  
Cash and cash equivalents   2 456   2 456   –   –   –   –  
Total assets   19 249   7 543   792   1 317   9 351   246  



30 June 2011
R million   Total   Call to  
6 months  
7 to 12   months   1 to   5  years   >5 years   No  
liquidity  
risk  

Liabilities

                 
Insurance contracts   3 531   1 359   193   487   –   1 492(1)  
Financial liabilities                    
  Convertible debentures   15   –   –   –   15   –  
  Preference shares (undiscounted)   2 072   54   54   1 964   –   –  
  Interest bearing loans   239   239   –   –   –   –  
  Policyholders’ interest   415   415   –   –   –   –  
  Contingency reserves   4   –   –   –   –   4  
  Financial liabilities at fair value                    
  through profit or loss   73   73   –   –   –   –  
Investment contracts at fair value                    
through profit or loss   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   8 139   3 964   308   2 606   15   1 733  
1. The majority of this amount comprises unearned premiums and there is no obligation of payment.



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, preference shares and borrowings as capital when managing capital.

The tables below summarise 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:


OUTsurance’s insurance operations:

       Jurisdiction     Statutory solvency  
  requirement  
Actual  
solvency  
2012  
Actual  
solvency  
2011  
OUTsurance Insurance  Company Limited     South Africa     Minimum CAR cover of 1 times        
2.2   1.6  
Momentum Short-term  Insurance Company Limited     South Africa     Minimum CAR cover of 1 times        
2.1   1.8  
OUTsurance Insurance Company  of Namibia Limited (Associate)     Namibia     Minimum 25% of net earned    
  premiums  
     
40%   35%  
Youi Proprietary Limited     Australia     Minimum CAR cover of 2 times   2.8   4.4  
OUTsurance Life Insurance  Company Limited     South Africa     Minimum CAR cover of 1 times        
1.9   4.6  


RMBSI’s insurance operations:

       Jurisdiction     Statutory solvency  
  requirement  
Actual  
solvency  
2012  
Actual  
solvency  
2011  
RMB Structured Insurance Limited     South Africa     Minimum CAR cover of 1 times   4.5   3.7  
RMB Financial Services Limited     Ireland     Minimum CAR cover of 1 times   1.1   1.6  
RMB Structured Insurance  Limited PCC     Mauritius     Minimum 15% of prior year’s  
  premium  
     
272%   150%  
RMB Structured Life Limited     South Africa     Minimum CAR cover of 1 times   5.6   6.3  

 

 

   

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