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Hermanus Bosman, Rand Merchant Investment Holdings CEO

As at 31 December 2016, RMI’s investments included Discovery Limited (Discovery), MMI Holdings Limited (MMI), OUTsurance Holdings Limited (OUTsurance), RMB-SI Investments Proprietary Limited (RMB Structured Insurance), RMI Investment Managers Group Proprietary Limited (RMI Investment Managers), AlphaCode Proprietary Limited (AlphaCode) and AlphaCode’s first investment, Merchant Capital Advisory Services Proprietary Limited.

The sale of RMI’s investment in RMB Structured Insurance, excluding its stake in Truffle Capital Proprietary Limited (Truffle), is expected to be completed by mid-March 2017.

The results of RMB Structured Insurance, excluding Truffle, are disclosed as a discontinued operation in the RMI group results.

Effective 1 March 2017, RMI acquired a 29.9% stake in Hastings Group Holdings plc (Hastings).

RMI will account for its stake in Hastings as an investment in associate from the effective date. RMI funded the acquisition through debt (a combination of preference shares and loans) in terms of its domestic medium-term note and preference share programme.

Economic environment

The economic environment for the period under review remained challenging. The inflation rate remained well above the South African Reserve Bank’s 6% upper-range, preventing interest rate relief for generally highly-indebted South African households. Increasing inflation, rising levels of unemployment and low consumer confidence contributed to muted household spending.

The ongoing local political uncertainty has also negatively impacted investor confidence.

This was compounded by increased global political uncertainty following the result of the US election. On the positive side, a decrease in the trade deficit provided support to the Rand.

Overview of results

In this difficult economic and business environment, the group delivered a 12% increase in normalised earnings from continuing operations for the six months ended 31 December 2016.

Discovery’s 3% increase in normalised earnings was driven by the performance of its three established South African businesses, Discovery Health (up 12%).

Discovery Life (up 13%) and Discovery Invest (up 21%), as well as VitalityHealth in the UK (up 53%). Earnings growth was strained by a decrease in investment income attributable to equity holders and an increase in finance charges.

The investment income in the prior period included interest earned on the rights issue cash before it was deployed into the business. The increased finance charges emanated from the funding of the new business acquisition costs incurred at VitalityLife and an increase in the utilisation of Discovery’s bank syndicated loan programme to fund new initiatives.

MMI recorded a 5% decrease in normalised earnings, mainly due to lower morbidity profits, lower health administration revenue and the impact of weak investment markets on asset-based fee income. MMI’s expense optimisation project, which targets annual expense savings of ZAR750 million by the 2019 financial year, remains on track. The embedded value amounted to ZAR42.5 billion as at 31 December 2016, reflecting an annualised return of 4.5%.

Normalised earnings from OUTsurance increased by 23%. This strong result was driven by a significant improvement in the cost-to-income ratio across the group, but in particular at Youi due to scale benefits and cost efficiencies.

There was also a significant reduction in the start-up loss at Youi New Zealand due to premium growth and a significant reduction in the claims ratio. The OUTsurance group achieved a return on equity of 39%, a claims ratio of 53.9% and a cost-to-income ratio of 25.0%.

RMI Investment Managers completed its first 18 months of operations in the period under review and in line with expectations, reduced its loss to ZAR8 million from ZAR12 million in the comparative period. The investment performance of the affiliates continues to improve with most of their funds in the first or second quartile of their peer group over one and three years.

The financial performance remains on track with most of the affiliates at or slightly below their financial targets as low absolute returns from the South African equity and global markets in Rand terms resulted in lower performance fees for those products that have absolute return benchmarks.

Merchant Capital continued its strong operational performance, as well as investing in its core operations and product development.

Normalised earnings from RMB Structured Insurance, excluding Truffle, decreased from ZAR15 million to ZAR3 million.

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