2014 ANNUAL INTEGRATED REPORT prescribe specific key performance indicators, APPROACH TO measurement methods or the disclosure of individual matters. Therefore, judgment needs to be exercised in the determination of material INTEGRATED matters to be disclosed and the manner in which they are disclosed. REPORTING RMI Holdings’ approach to integrated reporting will evolve over time in line with the framework. Integrated reporting had led to a more cohesive approach to reporting by connecting the information provided in the financial statements, corporate governance report, sustainability report and other management commentary. An integrated report explains how an organisation’s strategy, governance, performance We are mindful of the fact that every page we and prospects lead to the sustainable creation of add to this annual report results in five thousand value. Although a wide range of stakeholders additional pages being printed. Significant will benefit from the information contained in elements of the disclosure have already been an integrated report, it is mainly aimed at the made by our subsidiaries and associates and providers of financial capital. rather than replicating the information, we have chosen to refer stakeholders to the annual The International Integrated Reporting Council integrated reports of our investee companies. released the International Integrated Reporting Framework in December 2013 in order to establish Certain statements in this integrated report may guiding principles that govern the overall content be regarded as forward-looking statements of an integrated report and to explain the or forecasts. These statements have not been fundamental concepts that underpin them. The reviewed and reported on by the group’s external framework is principles-based and does not auditors. RMI HOLDINGS’ APPROACH TO INTEGRATED REPORTING WILL EVOLVE OVER TIME IN LINE WITH THE FRAMEWORK. SECTION 1 2 3 CONTENTS 2 WHO WE ARE 3 FINANCIAL HIGHLIGHTS 4 OUR STRUCTURE 5 OUR TRACK RECORD 6 NORMALISED EARNINGS 7 EXECUTIVE REVIEW 12 GROUP OVERVIEW 1 21 CORPORATE GOVERNANCE REPORT 38 SUSTAINABILITY REPORT 40 DIRECTORATE 51 GROUP ANNUAL FINANCIAL STATEMENTS 2 179 SEPARATE ANNUAL FINANCIAL STATEMENTS 3 203 SHAREHOLDERS’ INFORMATION 1 WHO WE ARE RAND MERCHANT INSURANCE HOLDINGS LIMITED (“RMI HOLDINGS”) IS A SEPARATELY LISTED INVESTMENT HOLDING COMPANY THAT HOLDS A DIVERSIFIED PORTFOLIO OF SOME OF SOUTH AFRICA’S PREMIER INSURANCE BRANDS. The objective of creating RMI HOLDINGS is to give RMI Holdings’ investments include: shareholders greater flexibility and transparency in Discovery Limited (“Discovery”), managing their insurance investments originally MMI Holdings Limited (“MMI”), held by RMB Holdings Limited (“RMBH”). OUTsurance Holdings Limited (“OUTsurance”) and RMB-SI Investments Proprietary Limited (“RMBSI”). THESE INVESTMENTS PROVIDE A DIVERSIFIED EARNINGS BASE FOR AN INVESTOR IN THE SOUTH AFRICAN INSURANCE SECTOR ASSET MANAGEMENT 4% LIFE 45% SHORT HEALTH 11% TERM 40% 2 Annual integrated report 2014 SECTION 1 2 3 NORMALISED FINANCIAL EARNINGS HIGHLIGHTS +18% to 203.4 cents ORDINARY DIVIDEND +14% to 108.0 cents MARKET VALUE + 30% 3 278 cents 3 OUR STRUCTURE RMI Holdings is a significant investor in some of South Africa’s most prominent insurance groups. Our interests include: Discovery services the healthcare funding MMI was formed from the merger of and insurance markets in South Africa, Momentum and Metropolitan, both sizeable the United Kingdom, United States, insurance-based financial services players in China and Singapore. It is a pre-eminent South Africa. The core businesses of MMI are developer of integrated financial services long-term insurance, asset management, products and operates under the investment, healthcare administration and Discovery Health, Discovery Life, employee benefits. Product solutions are Discovery Insure, Discovery Invest, provided to all market segments. MMI DiscoveryCard, Vitality, PruHealth, operates in 12 countries outside of South PruProtect, Ping An and AIA Africa. It provides for the insurance Vitality brand names. needs of individuals in the lower-, 25% middle- and upper-income I N A L T E markets, principally under U R the Momentum 25%T E C S and Metropolitan T A brand names. OUTsurance is a direct RMBSI holds both A T personal lines and small C S short-term and life T E business short-term 83% U insurance licences. It A E R insurer. As pioneers of the L I N T creates bespoke insurance OUTbonus concept, it has 76% and financial risk solutions grown rapidly by applying a for South Africa’s large scientific approach to risk corporations by using selection, product design and claims sophisticated risk techniques and management. Its South African direct life innovative financial structures. In addition, insurance business has gained significant it partly owns a portfolio of underwriting traction during the year. Youi, the group’s management agencies. direct personal lines initiative in Australia, achieved the necessary scale to run profitably. RMI Holdings’ actual interest in these group entities is different from the effective interest as a result of the following consolidation adjustments (refer to note 42 on page 163): • treasury shares held by these entities; • shares held in them by their staff share incentive trusts; • “deemed” treasury shares arising from BEE transactions entered into; and • “deemed” treasury shares held in them by policyholders and mutual funds managed by them. 4 Annual integrated report 2014 SECTION 1 2 3 OUR TRACK RECORD Normalised earnings (R million) Dividends per share (cents) 3 500 160 EARNINGS, 3 000 140 DIVIDENDS AND 120 SHARE PRICE 2 500 100 2 000 80 1 500 60 1 000 40 500 20 0 0 2012 2013 2014 2012 2013 2014 Normal Special Share price (cents) 3 500 3 000 2 500 2 000 1 500 1 000 500 0 2011 2012 2013 2014 TOTAL 3 Years 2 Years 1 Year SHAREHOLDERS’ Annual compound RETURN growth rate 46% 42% 34% 5 NORMALISED EARNINGS COMPUTATION OF NORMALISED EARNINGS FOR THE YEAR ENDED 30 JUNE Restated 2014 2013 % R million Audited Audited change Headline earnings attributable to equity holders 2 879 2 242 28 RMI Holdings’ share of normalised adjustments made by associates: 189 341 Amortisation of intangible assets relating to business combinations 173 171 Net realised and fair value gains on shareholders' assets (136) (85) Fair value adjustment to puttable non-controlling interest financial liability 50 33 Corporate restructuring expenses 43 15 Basis and other changes and investment variances 40 92 Finance costs raised on puttable non-controlling interest financial liability 39 41 Non-controlling interest adjustment if no put options (20) (10) Recapture of reinsurance – 84 Group treasury shares (46) (17) NORMALISED EARNINGS ATTRIBUTABLE TO EQUITY HOLDERS 3 022 2 566 18 SOURCES OF NORMALISED EARNINGS FOR THE YEAR ENDED 30 JUNE Restated 2014 2013 % R million Audited Audited change Normalised earnings from: • Discovery 866 699 24 • MMI 899 803 12 • OUTsurance 1 219 1 031 18 • RMBSI 78 70 11 3 062 2 603 18 Funding and holding company costs (40) (37) (8) NORMALISED EARNINGS 3 022 2 566 18 COMPUTATION OF NORMALISED EARNINGS PER SHARE FOR THE YEAR ENDED 30 JUNE Restated 2014 2013 % Audited Audited change Weighted average number of shares in issue (millions) 1 486 1 486 Normalised earnings per share (cents) 203.4 172.6 18 Diluted normalised earnings per share (cents) 201.3 171.3 18 Dividend cover (relative to normalised earnings) 1.9 1.8 6 Annual integrated report 2014 SECTION 1 2 3 “NOTWITHSTANDING A CHALLENGING ECONOMIC ENVIRONMENT, ALL OF THE BUSINESSES IN WHICH RMI HOLDINGS ARE INVESTED PRODUCEDED SATISFYING RESULTS.” GT FERREIRA Chairman EXECUTIVE REVIEW ECONOMIC ENVIRONMENT Local operating conditions were economically challenging and highly competitive. Equity markets The operating environment remained difficult increased strongly throughout the year, while throughout the financial year. This was largely as interest rate volatility continued. Consumer a consequence of uncertainty in the global macro- confidence remained fragile with ongoing labour economic arena combined with subdued domestic challenges, unemployment, indebtedness and demand growth and protracted industrial action inflation reducing disposable and investable in the mining sector. income. Economic activity in the United States experienced While some of these headwinds also affected the a gradual recovery. This allowed the US Federal rest of the sub-Saharan region, GDP growth in Reserve to taper its asset purchases. The expected many African countries, however, is proving to increase in US interest rates impacted on foreign be resilient, with some economies continuing to capital flows to emerging markets. South Africa, expand at a brisk pace. In those countries, domestic with its large current account deficit, was demand – fuelled by credit growth and investment negatively impacted by the slow-down in capital in infrastructure development – remained the flows. This led to the further weakening of the major catalyst. Rand, which translated into higher domestic inflation and triggered the start of a higher interest rate cycle. 7 EXECUTIVE REVIEW continued HERMAN BOSMAN Chief executive offi cer “RMI HOLDINGS’ AIM OVERVIEW OF RESULTS IS TO BE A VALUE-ADDING, Notwithstanding such a challenging background, all of the businesses in which RMI Holdings are ACTIVE ENABLER OF invested produced satisfying results, with strong LEADERSHIP AND growth in normalised earnings being recorded by Discovery and OUTsurance, driven