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Tuesday, August 1, 2000
Continued growth despite higher tax

Sage Group says the new basis of taxation is “manifestly inequitable for life assurers and their clients,” noting that it suffered a R289m tax impact on its financial and embedded value results for the latest financial year to March 31 2000, and this was a “gross and disproportionate imposition.”

The new basis for taxation is particularly punitive on newer, smaller and medium-sized companies that no longer have the benefit of being able to deduct the proportionately higher expenses encountered in developing companies, it comments. “We believe this new basis could seriously impair smaller companies and create a barrier for new life assurers.
“In a country that is dependent on the success of small to medium-sized enterprises this is the most retrogressive step,” say the directors. “To the extent that life assurers are forced to increase premium rates to at least partially absorb much higher taxation, the new tax regime will in effect be an added indirect tax on the long-term savings of policyholders.
“The new tax basis, together with the added fiscal drain on retirement funds and the proposed introduction of capital gains tax, will have a distinctly negative effect on the national need to encourage savings and investment.”

Life company

Nevertheless the group continued to prosper, reporting that the latest year was no exception to its uninterrupted growth in profitability for over 20 years.
Life assurance remains the dominant source of profitability and the increase in the contribution from this area reflects the strong growth achieved by Sage Life in South Africa, as well as the United States following their repositioning during the year.
Sage says its success is achieved by its “clear focus on core life assurance and unit trust activities within two divisions, national and international.”
In particular Sage Life bases its successful strategy on its “chosen core focus” of individual recurring premiums which leaped 30,6% during the period under review from R188,3m in 1999 to R246m. According to figures from the Life Offices’ Association Sage Life’s market share has expanded considerably, especially as far as recurring business is concerned, from 1,7%, in 1996 to 4% currently.
Recurring business is a more reliable measure of a company’s success, given it comprises regular premium contributions through assurance contracts. On the other hand, single premiums, by their nature, can be quite volatile. For example, individual single premium business actually fell 4% during the period under review; on the other hand, employee benefit single premium business rocketed 96,3%.
Single premium new business marginally exceeded the previous year’s record levels while unit trust sales of R2,7 billion declined from the previous year’s record level of R3,3 billion,  reflecting competitive pressures.
Investment returns for the year reflect the substantial positive turnaround in the financial markets over this period. Investment income rose by 12,8% to R399,1m while realised and unrealised surpluses on investments amounted to R665,8m compared with deficits of R543,1m in the previous year.
The financial soundness valuation produced an excess of assets over liabilities of R1,5 billion, a 72,8% increase on the previous year.
Overall, the life company’s assets rose 8,8% from R6,8 billion to R7,4 billion. This is despite repayment of a large ‘segregated fund’, mentioned below.

Group

Group balance sheet assets reduced by about R400m to R7,3 billion, after it had to absorb almost R2 billion of financial adjustments. This was in respect of the repayment of a low margin segregated third party fund of R1,4 billion which was terminated; and a write-off of R507,7m of goodwill against share premium and non-distributable reserves in anticipation of new requirements of the SA Statements of Generally Accepted Accounting Practice. The goodwill relates to the group’s investment in its associate company, ABSA.
Group profit before taxation increased by 54,5% in the review period to a record R492,2m. Although the change in the taxation basis applicable to South African life assurers had a significant negative effect, group headline earnings attributable to ordinary shareholders increased by 28,6% to R362,5 million and fully diluted headline earnings per share rose by 22,1% to 257,7 cents.
Group operating results reflect an 89,3% contribution from the predominant life assurance interests, 7,5% from unit trust activities and the balance of 3,2% from other financial services including property.

America

Significant progress has been made in the development of Sage Life of America in the review period. Following the attainment of an AM Best “A” (Excellent) rating and further strengthening of the strategic partnership with Swiss Re Life of North America, the company’s marketing programme has gathered momentum.
It has successfully launched its variable insurance products nationally in the US and to date, agreement has been reached with 17 major banks and bank distributors, providing preferential access to some 2 000 sales representatives in organisations with a track record in variable annuity sales in excess of US$2 billion per annum. The company is in active negotiations with numerous additional banks and distributors and a number of important strategic initiatives are being implemented with retail and financial planning distribution groups.
Sales of variable annuities commenced in March and, as the process of licensing bank representatives and financial planners gathers pace, product sales projections are in excess of $100m for the current year.
The regulatory process for the establishment of a New York subsidiary is continuing and the company has entered the offshore market with the establishment of Sage Life of Bermuda, which will market the company’s product range through US based and international distributors.
As previously reported, the Group’s US subsidiaries were transferred at their book value to Sage Life Limited, effective April 1 1999. The issue of new ordinary shares in Sage Life Limited, further strengthening its capital base, funded this transaction. The US activities are accounted for as an investment of Sage Life Limited and as such contribute to its investment results, embedded value and shareholder’s surplus.

Copyright © Insurance Times and Investments® Vol:13.7 1st August, 2000
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