Sage says capital adequacy is perfectly adequate

Posted On Monday, 26 August 2002 02:00 Published by
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Respected SA firm says it needs 'flexibility' on its Absa holding but some say it is in over its head, writes Richard Stovin-Bradford
Sage chairman Louis Shill this week played down analysts' concerns about the real reasons for his group's decision not to participate in a new shareholder agreement binding to Absa's major shareholders.

The investment community has waited four years for financial services group Sanlam and Universa to agree on how to restructure their dominant stakes in Absa.

Financial services group Sanlam has a 22.8% stake in Absa while Universa - a shareholding vehicle created by financial services group Sage, industrial holding company Remgro and the Mines Pension Funds (MPF) - holds 23.7%.

Sanlam and Universa members are bound by shareholder agreements governing pre-emptive and voting rights dating from Absa's creation in 1991.

This week, Sanlam and former Universa members Remgro and the MPF, signed a new shareholder agreement and agreed collectively to reduce their Absa stake to about 36%.

But, amid the excitement greeting this latest move to streamline Absa's anchor shareholder base, Sage's decision not to join the party caught analysts' attention.

The MPF, Remgro, Sage, Sanlam and Absa said Sage had opted for the 'absolute flexibility and liquidity it considers desirable for its ongoing direct shareholder and policyholder investments in Absa shares'.

Major investment bank analysts say Sage has capital adequacy problems and is battling to fund its international start-ups.

But Sage chairman Louis Shill angrily dismisses their liquidity concerns as 'absolute nonsense', stressing that no one can say Sage has a cash crunch of any sort.

'We publish a capital adequacy cover of 3.9 times the regulatory requirement. Even when you exclude our American operations, we still have very good cover.'

But Shill accepts the investment community is looking for capital adequacy of a more liquid nature. This is why Sage held out for flexibility regarding its Absa shares. 'The authorities feel more comfortable if we have a more easily realisable investment.'

'Should we choose to sell our Absa shares for shareholders, for capital adequacy reasons, we can. More importantly, for our policyholders, we're able to move our Absa investment to create more balance in our portfolio.'

Financial Services Board deputy executive officer André Swanepoel confirms the FSB is looking at Sage's capital adequacy buffer. But he stresses this is a routine review. The insurance industry regulator routinely goes over all life assurance company data with a fine-tooth comb.

It reviews valuation assumptions used and instigates corrective action where necessary, such as recommending the use of reinsurance when the capital adequacy buffer looks tight.

Shill accepts Sage's US business requires additional capital, noting: 'It's not easy to raise the right kind of capital at the moment and we wish to make the business self-sufficient.'

Insurance analysts are mostly unwilling to speak on the record. Investec Securities and UBS Warburg have recently ceased coverage of Sage.

A Merrill Lynch research report released in June typifies analysts' concerns. 'Although we believe that the group has made significant progress on the US operations, and this is encouraging, we believe the local liquidity issues and the international capital requirements overshadow any benefits at this stage.'

Further: 'The South African life operations have a limited amount of capital with the only liquid investment backing the life company being the Absa investment.'

But Shill says: 'A large part of our property portfolio is of a liquid nature . . . we could realise our whole property portfolio tomorrow if necessary.

'Our strategy is to have our excess capital invested in operating entities such as our unit trust business, property operations and international activities.'

Other analysts say the main assets backing Sage's capital adequacy ratio are the capitalised expenses of the group's US start-up costs, the group's Absa stake, and the value Sage places on its unit trust business.

Shill says: 'They don't want to accept that the basis of accounting for our US development is backed by auditors, actuaries and investment bankers.'

Sage produces its accounts on two bases: its favoured financial soundness basis and GAAP. Under the financial soundness basis, it puts its own externally verified valuations on its businesses.

Shill says: 'The authorities accept the way we value our business on a financial soundness basis - which is the laid-down, statutory basis. We don't, for instance, smooth our profits.'

One analyst says: 'This company is not a mature, established South African life assurance company any more, it's a risky US start up and it does not have the capital to fund itself.'

Shill admits having to look for creative funding methods to sustain its US expansion.

Sage estimates it will need US150-million over the next five years and could take four years to break even, needing US3-billion of assets under management to do so. 'This has been more than achieved by competitors in a similar period in the US. Sage is only aiming at between 1% and 2% of its chosen market.'

Merrill Lynch says: 'Should a suitable equity partner not be found, the US operations may indeed grind to a halt.'

Shill has already indicated Sage could sell them if it cannot raise the cash, but does not believe this will be necessary.

Absa chairman Danie Cronjé says: 'We don't feel under pressure to do anything with our investment.

'Without wishing to sound arrogant, the size of the investment is not that big in our life and it's something we can deal with.

'We have a good business relationship with Sage and we do a lot of business together.'

Sunday Times

Publisher: Sunday Times
Source: Sunday Times

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