Risk report

APPROACH TO RISK MANAGEMENT

TRANSACTION CAPITAL DEFINES RISK AS UNCERTAIN FUTURE EVENTS THAT COULD INFLUENCE ITS ABILITY TO ACHIEVE ITS OBJECTIVES.

Risk is a condition in which the possibility of loss is inextricably linked to uncertainty, and is quantified by the combination of the probability of an event occurring and the consequence thereof. Thus, a detailed framework for managing risk is required to facilitate rational decision-making.

Risk management entails the deliberate planning, arranging and controlling of activities and resources to minimise the negative impact of all risks to tolerable levels, and to maximise the potential opportunities and positive impacts of all risks in the pursuit of achieving the group's strategic objectives.

Risk tolerances on key performance and strategic metrics are determined by the group's divisions and approved and monitored by the ARC committee.

RISK FRAMEWORK AND THE GOVERNANCE OF RISK

The board is ultimately responsible for the governance of risk. The board delegates the responsibility for managing risk to respective board committees, divisional boards and management, and monitors risk identification and management quarterly.

In terms of the enterprise-wide risk management framework, the board itself retains responsibility for monitoring reputational and sustainability risk. The monitoring of risks is assigned to sub-committees with continuous board oversight, in line with the overall governance structure.

The risk framework specifically identifies the risk categories that comprise the group's risk universe. These risk categories, and the respective committees to which oversight responsibility is mandated, are illustrated below.

RISK UNIVERSE

Risk Universe

Risk management committees are in place for each division, significant business functions (such as the capital markets team) and for the group as a whole. These committees are responsible for maintaining detailed risk registers, including mitigating factors and management's responses thereto. The individual risk registers are reported and discussed at divisional board meetings, with material risks and mitigations reviewed by the ARC committee and board, where appropriate.

In addition, monthly credit committee meetings take place at SA Taxi and Transaction Capital Business Solutions, quarterly insurance advisory committee meetings take place at SA Taxi, and investment committee meetings take place at Transaction Capital Risk Services (TCRS) as required with regards to the acquisition of purchased book debts. These committees also include non-executive directors as members where relevant.

The profile of each risk details the nature of the threats faced by the group, their impact on the business (taking into account financial and non-financial impacts) and the likelihood of occurrence. The profile also incorporates information pertaining to the level of controls in place and the corrective actions either required or in place.

The group considers financial risk against targets according to a return on equity (ROE) model, which is considered appropriate as the group's sustainability is founded on profit measures coupled with appropriate capital structures. In this regard, the group's capital structure is managed centrally by the executive, capital markets, risk and cash management teams, and is monitored by the asset and liability committee (ALCO).

Ongoing engagement with stakeholders ensures that external views are represented in the risk identification process. For this purpose, stakeholders are prioritised according to their influence, the time and effort the group invests in managing these relationships, and the group's dependency on them. Transaction Capital's sustainability policy sets out the responsibility for overseeing the relationship with each stakeholder group.

Engagement with stakeholders is considered and discussed at divisional and group board level. Group-wide stakeholder engagement is reported on at each social and ethics committee meeting, the minutes of which are included in the board packs ahead of quarterly board meetings. A stakeholder engagement report is submitted to divisional and group boards bi-annually.

SIMPLIFIED RISK FRAMEWORK

 
ESTABLISH OBJECTIVE
  • Link to strategy
  • Set financial and non-financial targets and timelines
 
IDENTIFY RISK
  • Stakeholder engagement
  • Risk workshops
  • Understand key revenue/loss points
  • Relevant data
 
QUANTIFY RISK
  • Event description
  • Likelihood assessment (per approved risk quantification framework)
  • Impact assessment (per approved risk quantification framework)
 
MITIGATE RISK
  • Existing controls
  • Required improvements, including responsibilities and timelines
  • Monitoring
  • Opportunity maximisation
 
DETERMINE ADDITIONAL CAPITAL HELD FOR RISK PURPOSES
  • Risk exposure quantified
  • Simple 'rule of thumb' calculations
  • Mathematical simulations using actual loss data
  • Market guidance on capital levels including existing investors and/or credit rating agents

TOP RISKS

TOP RISKS ARE IDENTIFIED THROUGH AN ENTERPRISE RISK MANAGEMENT (ERM) PROCESS. THE GROUP'S TOP RISKS, MITIGATING ACTIONS AND RELATED STAKEHOLDER CONCERNS ARE AS FOLLOWS:

RISK 01

Funding and capital risk, relating to:

  • A challenging debt and capital raising environment due to market events (such as the potential for further sovereign ratings downgrades and generally challenging market conditions).
  • Inappropriate deployment of capital.

Stakeholder concerns

  • Maintaining appropriate access to funding in an environment where funding may be difficult to obtain.
  • Increased costs of funding impacting net interest margin earned.
  • Inappropriate allocation of capital resulting from sub-optimal capital management.
 
MITIGATION

A dedicated capital markets team manages the group's funding requirements, including a diversified fundraising strategy and a focussed strategy for each funding source. The group's funding strategy seeks to diversify funding sources on the basis of:

  • Geography (local and international funders).
  • Funder type (including banks, asset managers, institutional investors, development finance institutions, impact investors and hedge funds).
  • Individual investors.
  • Structure type (including securitisation, note programmes, syndicated loan programmes and bespoke funding structures).
  • Instrument (such as rated or unrated, listed or unlisted, bilateral and syndicated loans, and bespoke debentures).

Quarterly ALCO meetings provide rigorous monitoring and oversight of concentration, roll-over, interest rate, counterparty, liquidity and regulatory risks. ALCO has approved and established policies and tolerances to manage these risks while providing the flexibility needed to maintain agility in responding to changing economic and business conditions.

The above-mentioned measures have led to SA Taxi fulfilling its annual debt requirements for the 2019 financial year, and TCRS raising adequate funding facilities to fund its book buying aspirations.

In terms of the South African National Taxi Council (SANTACO) equity transaction, SA Taxi will raise net proceeds of approximately R1.2 billion from the issue of shares to SANTACO. Of this, SA Taxi will use approximately R1 billion to settle external and shareholder debt, with the remainder retained by SA Taxi to fund growth. As a result, SA Taxi's balance sheet will be strengthened, rebasing its gearing to lower levels. In addition, SA Taxi's interest expense will reduce dramatically due to the reduction of interest-bearing debt by approximately R1 billion. As a result, SA Taxi's net interest margin is expected to increase commensurately.

From a group perspective, the group executive office's balance sheet will be free of debt post the transaction, with approximately R1 billion of excess cash.

In 2019 and beyond, SA Taxi and TCRS will continue to focus on reducing their cost of borrowing further through the various fundraising strategies mentioned above.

Rigorous investment criteria are adhered to (see risk 2 and 3 that follow), with active treasury management of excess funds.

See the Q&A with Mark Herskovits, executive director: capital management , for further detail.

RISK 02

Acquisition risk, including the ability to identify, implement and integrate potential acquisitions, and the potential for disproportionate demands on executives' time.

Stakeholder concerns

  • Inappropriate identification of targets and the ineffective subsequent integration thereof adversely affecting the returns and value proposition of the group.
 
MITIGATION

Acquisitions are assessed against Transaction Capital's acquisition strategy and stringent investment criteria.

Collectively, the board applies its mind to the funding of acquisitions to ensure an appropriate combination of debt and equity funding to maintain appropriate risk-adjusted returns.

In addition, appropriate board approval is required to conclude transactions. Rigorous implementation processes ensure that Transaction Capital's governance and reporting requirements are adequately met, the progress of which is monitored by the divisional and group boards.

Transaction Capital executives are actively involved in the management and ongoing affairs of acquisitions after a transaction is completed.

See strategic objective 4 for Transaction Capital's acquisition strategy and investment criteria.
See Transaction Capital's investment case.

RISK 03

Risk of reduced ROE following recent acquisitions.

Stakeholder concerns

  • Transaction Capital's inability to generate returns on invested capital to meet shareholder requirements.
 
MITIGATION

In line with the strict acquisition criteria discussed under risk 2, the group's recent acquisitions by TCRS have been ROE accretive.

In particular, TCRS' recent acquisitions have reduced the group's concentration risk by further diversifying business activity across collection, transactional and value-added services, as well as across geography and product.

Group executives oversee the successful integration and implementation of acquisition strategies. Skilled employees are recruited or relocated to augment the existing staff complement. With the operational integration of the recent acquisitions substantially complete, the businesses are expected to yield an enhanced return on future revenues.

While SA Taxi's ROE is expected to reduce due to the SANTACO equity transaction, its balance sheet has been strengthened and the division is poised for growth.

Transaction Capital maintains active and appropriate representation on the boards of the acquired companies, and regular reporting to the Transaction Capital board is implemented.

RISK 04

Uncertain regulatory environment, including the volume of new or amended regulations being promulgated, and the potential for unintended consequences of pro-consumer regulations.

Stakeholder concerns

  • Transaction Capital's ability to effectively and efficiently respond to regulatory uncertainty and change.
  • The impact of regulatory uncertainty and change on the profitability of the business.
 
MITIGATION

Ongoing engagement with regulators and appropriate representation on industry bodies is maintained to gain an early understanding of proposed legislation and position Transaction Capital appropriately for change.

Compliance functions are embedded within the divisions that have high levels of regulatory compliance requirements, to act as a resource for regulatory compliance information and provide guidance to avoid regulatory breaches.

The group legal function partners with the divisions to provide guidance on the interpretation of legal and regulatory requirements, and facilitates the process of obtaining independent views from attorneys and senior counsel, where doubt exists in the interpretation of regulatory requirements.

Mitigation efforts have resulted in Transaction Capital being largely unaffected by regulatory developments.

RISK 05

The ability to acquire a sufficient number of non-performing loan (NPL) portfolios at an acceptable price, and to then generate sufficient yield from these acquired portfolios (applicable to Transaction Capital Recoveries (TCR)).

Stakeholder concerns

  • Inappropriate return on funds invested to acquire purchased books.
 
MITIGATION

Operational initiatives include:

  • Substantial investment in and development of technology infrastructure to further improve collections.
  • Continuous enhancement of analytics capabilities to leverage superior data and determine the appropriate pricing of NPL portfolios. Generally, the price offered for purchased NPL portfolios has reduced in line with the difficult economic environment, ensuring that the returns achieved on collections remain robust.
  • Centralised call centre infrastructure to ensure consistent and efficient collections performance.
  • Obtaining appropriate group and divisional executive approval for potential purchases.
  • Initiating and concluding exclusive negotiations with several of its larger clients, ensuring high-quality purchases and enabling bespoke purchase agreements while providing structured solutions for clients.
  • Engaging with clients to acquire portfolios earlier in the credit cycle to further enhance the quality of collections.
See the Financial director's report for performance in acquiring NPL portfolios.

RISK 06

The impact of difficult economic conditions and stringent regulatory requirements on revenue; in particular, the lower levels of consumer credit extension (applicable to TCRS).

Stakeholder concerns

  • Lower growth in revenue.
 
MITIGATION
  • TCRS' strategy is to deepen its penetration in its traditional market segments (across retailers, banks and specialist lenders) and grow revenue from adjacent sectors (across insurance, telecommunications and public sectors).
  • Revenue streams continue to be developed by innovative, bespoke product offerings and solutions.
  • TCRS continues to focus on its performance, being ranked either as the best or second-best recoveries agent.
  • Recent acquisitions by TCRS have further enhanced the diversification of its product offering and geographic footprint.

RISK 07

Public sector finances are generally in a poor state, making it a class of counterparty that needs to be managed closely to ensure payments are received timeously (applicable to TCR).

Stakeholder concerns

  • Non-adherence to payment terms and working capital strain.
 
MITIGATION

Management engages regularly with relevant parties in the public sector to ensure compliance with agreement terms.

RISK 08

The ability to diversify revenue streams beyond minibus taxis into other market segments, to ensure growth over the longer term (applicable to SA Taxi).

Stakeholder concerns

  • Constraints to long-term sustainable growth.
 
MITIGATION

SA Taxi is strategically positioned to deepen its vertical integration in its current market segment while leveraging its existing competencies. This includes expanding its direct sales retail channel, enhancing its telematics services and expanding its insurance offering.

See SA Taxi's divisional review, which includes the Q&A with Terry Kier, for more information on how the division is expanding beyond the financing of minibus taxis.

RISK 09

Market forces beyond the group's control (interest rates, exchange rates, fuel prices, limited fare increases, increases in vehicle prices) impacting the affordability of monthly instalments (applicable to SA Taxi).

Stakeholder concerns

  • Protest action from within the South African taxi industry.
  • Credit quality of the book and of new business may be negatively impacted.
  • Muted collections performance and/or origination activity due to affordability.
 
MITIGATION
  • Credit policies are adjusted appropriately and adhered to stringently, with credit vintages being consistently monitored.
  • The ability to grant credit to creditworthy customers not being serviced by traditional credit providers to secure an under-served market segment.
  • The efficiency of SA Taxi's ability to repossess, refurbish and resell vehicles assists in maintaining low levels of ultimate credit loss.
  • Intensive and continuous engagement and collaboration with key industry stakeholders and associations to ensure the sustainability of the taxi operator and industry as a whole, including concluding the SANTACO equity transaction.
  • Focus on ensuring maximum reach on collection activity.
  • The effectiveness of SA Taxi's ability to manage this risk is reflected in its credit performance.
  • The development of the pre-owned market as a source for cheaper quality vehicles, which aids affordability.
Further detail on SA Taxi's credit performance.

RISK 10

Original equipment manufacturers (OEMs) as suppliers of vehicles and parts (applicable to SA Taxi).

Stakeholder concerns

  • Reliance on OEMs for the supply of vehicles and parts.
  • Limited monthly supply of vehicles not being sufficient to meet market demand.
 
MITIGATION
  • Ongoing engagement with OEMs to secure a consistent supply of vehicles, product offering and parts into the market.
  • Promoting pre-owned vehicles as a viable alternative for customers.
  • The opening of Taxi Auto Parts (TAP) to ensure a consistent and cheaper source of parts.

KEY RISKS

Key risks are those risks that require specific and ongoing operational, governance and strategic management. They differ from top risks (set out above ) as key risks are anticipated to be ongoing due to the strategy and business model of the group; top risks are identified through the ERM process.

Transaction Capital's key risks are as follows:

CREDIT RISK

Credit risk, or default risk, relates to the lender's risk of loss arising from a borrower who does not pay their full contractual instalment. In the case of Transaction Capital, and as a result of its target market, the risk of non-payment is higher than for traditional lenders. This heightened credit risk is controlled through substantial operational capacity, coupled with a higher risk-adjusted yield.

IFRS 9 was early adopted in the 2015 financial year, resulting in a higher quality of earnings due to a more conservative provisioning methodology against loans and advances, and the amortisation profile of purchased book debts being better aligned with the collection profile. This early adoption reduced balance sheet risk for Transaction Capital and removed uncertainty relating to the implementation of IFRS 9 on future financial results and ratios.

The loss allowance for a financial instrument is measured against expected credit losses over its lifetime if the credit risk on that financial asset has increased significantly since initial recognition. If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the group measures the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses. Purchased NPL portfolios are considered credit-impaired assets that are specifically impaired (stage 3) and are measured using lifetime expected credit losses from the onset. These assets remain in stage 3 for the duration of the financial instrument.

Loan portfolios are divided into performing loans and NPLs. As the group's assets are developmental in nature, in terms of the traditionally under-served market segments it lends to, a higher than average level of arrears is expected, which may not necessarily result in credit loss. The group's impairment provision models take into account both contractual default and recent payment history. Provisions are held against financial assets to cover expected losses in terms of IFRS 9.

At group level, credit risk is monitored by the ARC committee, while SA Taxi and Transaction Capital Business Solutions (TCBS) have their own credit committees responsible for credit risk (of which membership includes group executives), which meet at least quarterly.

Aspects of credit risk that are monitored include changes to origination strategies and channels (including consideration of credit granting criteria), new business approvals, collections strategy and performance.

Credit risk is managed operationally at the time of origination and in terms of collections thereafter. While SA Taxi services the minibus taxi industry exclusively, it has limited exposure to a single counterparty, with the largest exposure to a single borrower being negligible as a percentage of assets exposed to credit risk. Repeat customers represent approximately 31% of origination value, which assists in appropriate credit profiling of repeat customers. In addition, loans originated through SA Taxi's dealership perform better from a credit performance perspective.

SA TAXI

The cost of the risk relating to SA Taxi at 30 September is detailed below.

  2018    2017   
Interest income – % average gross loans and advances  22.3     22.7    
Interest expense – % average gross loans and advances  (11.3)    (11.3)   
Net interest income – % average gross loans and advances (net interest margin) 11.0     11.4    
Impairment expense – % average gross loans and advances (cost of credit) (3.3)    (3.2)   
Risk-adjusted net interest income – % average gross loans and advances  7.7     8.2    

In line with its credit strategies implemented during the year, SA Taxi progressed substantially in its efforts to provide finance to lower-risk grade customers, which resulted in 'interest income – % average gross loans and advances' reducing over the period. This is in line with the weighted average interest rate at origination reducing to 23.6% (2017: 24.4%). However, 'interest expense – % average gross loans and advances' remained consistent with the prior period, with SA Taxi's foreign-based funding contributing to interest costs remaining at similar levels to 2017, despite SA Taxi's balance sheet de-gearing slightly.

The credit loss ratio increased marginally to 3.3%. As a result the factors detailed above, the risk-adjusted net interest income margin remained robust at 7.7%.

SA Taxi's provisions and NPLs are set out below.

      2018   2017  
Non-performing loan ratio %   17.7   17.1  
Provision coverage %   4.0   5.2  
Credit loss ratio %   3.3   3.2  

As detailed above, the credit loss ratio increased marginally to 3.3% and remains at the bottom end of the division's risk tolerance of 3% to 4%. This increase was partly due to SA Taxi electing to dispose of a portion of repossessed vehicles via auction or salvage as opposed to refurbishment and refinance.

Enhancing the value of vehicles through refurbishment enables SA Taxi to recover more than 73% of the loan value on the sale of repossessed vehicles. The division operates the largest minibus taxi repair facility in Africa, and with the launch of TAP in March 2018, the average cost to repair repossessed vehicles was reduced further in the year.

However, difficult economic conditions combined with high minibus vehicle prices and escalating fuel costs resulted in an increase in SA Taxi's NPL ratio to 17.7%. The marginally higher NPL ratio was offset by the reduced average cost to refurbish repossessed vehicles and higher recoveries on the resale of these vehicles, which resulted in the division reducing provision coverage to 4.0%. At this level, SA Taxi's after-tax credit loss remains covered at 1.7 times.

The business continues to rely on Toyota minibus taxis for new vehicle originations, with potential shortages of these vehicles presenting a risk. The dominance of Toyota supports a stable market value for the sale of repossessed refurbished vehicles, which underpins SA Taxi's credit model.

SA Taxi is continually diversifying its product lines to counter the reliance on Toyota minibus taxis, including working with Nissan and Mercedes (with the Mercedes Sprinter mainly used for long-distance routes) to ensure the division's minibus taxi vehicle market is sustainable. SA Taxi is also increasing the supply of repossessed refinanced (i.e. pre-owned) Toyota minibus vehicles to meet supply shortfalls.

 
See risk 5 for details on initiatives to mitigate risk in the acquisition of NPL portfolios.

TCRS

In TCR, purchased NPL portfolios have inherent credit risk that is reflected in the heavily discounted purchase price to face value. TCR has its own investment committee responsible for credit risk, which meets as required when portfolios are being considered for acquisition. The approval of an investment in a new NPL portfolio involves the divisional executives and group executive directors, depending on whether its value falls above a certain threshold.

The current economic climate and TCRS' data, scale and capital position favour the acquisition of NPL portfolios in South Africa from risk averse clients who prefer an immediate recovery against their NPLs.

TCRS acquired 37 portfolios with a face value of R13.6 billion for R662 million during the year. TCRS now owns 239 principal portfolios (including 11 Australian portfolios) with a face value of R22.4 billion, valued at R1.4 billion at 30 September 2018. TCRS' strong balance sheet, which has been augmented with available debt facilities, positions it to acquire a strong pipeline of NPL portfolios coming to market. As a result, TCRS' cost of funding increased slightly to 9.8% in the period.

      2018   2017  
Asset turnover ratio %   51.5   52.1  
Estimated remaining collections (120 months) Rm   2 989   1 867  

TCBS remains disciplined, being cognisant of higher risk in the small- and medium-sized enterprises (SME) lending environment. TCBS has intentionally curbed book growth to maintain risk tolerance and ensure high-quality earnings from its SME lending activities.

LIQUIDITY RISK

Liquidity risk arises when a borrowing entity within the group does not possess adequate cash resources to meet its payment obligations as they fall due, or where it can only access liquidity on materially disadvantageous terms.

Liquidity risk in the group is primarily controlled through cash-flow matching. This is achieved through setting the duration and repayment terms of debt facilities at the time of issue to suit the projected cash inflows from assets, and through careful monitoring and management of the maturity of debt that has a lump-sum payment due at maturity, where these exist.

The group's positive liquidity mismatch is favourable to debt investors, where asset receipts occur in advance of debt payments, resulting in reduced liquidity risk.

 
See the Q&A with Mark Herskovits, executive director: capital management, for more detail on diversification by funding category and funding structure.

The group's funding strategy is directed by the funding requirements established in the divisional budgets and forecasts, and approved by the divisional and group boards. The capital markets team is mandated to raise sufficient capital, taking into account business needs, the specific demands and the state of the debt markets, and the requirements of debt investor mandates. This results in a well-diversified funding base.

CAPITAL RISK

Capital risk is the risk that the group will have insufficient capital to absorb its losses and fund its growth.

The divisions of the group are not subject to regulatory capital adequacy requirements. Capital is managed using internally generated capital adequacy models, taking into account targeted growth rates, ROE, contractual financial covenants, stress testing and targeted credit ratings.

Equity capital is raised at group level where necessary and then allocated to the divisions based on the capital requirements for each funding structure. Goodwill is not included in assets and is deducted from capital in line with market practices when calculating the capital adequacy ratio.

Following the equity transaction with SANTACO, the group will have excess cash of approximately R1 billion, which will provide the flexibility for immediate cash settlement of any future acquisitions. In addition, Transaction Capital's net asset value per share is estimated to increase by approximately 105 cents per share immediately after the implementation of the transaction.

PERFORMANCE

PERFORMANCE

The dividend policy has been maintained at a cover ratio of 2 to 2.5 times (previously 2.5 to 3 times), with the 2018 dividend cover approximating 2.2 times. This supports the strong quality of earnings as evidenced by high cash conversion rates and low balance sheet risk, the stable capital requirements of the group, and the ungeared net position of the holding company. These factors allow for a higher sustainable dividend policy going forward.

INTEREST RATE RISK

Interest rate risk is the risk that arises from fluctuating interest rates.

The group's general interest rate risk management strategy is to match the repricing characteristics of assets to liabilities; thus, if a division originates floating-rate assets, it should issue floating-rate debt or hedge accordingly.

However, each division can deviate from this policy, subject to ALCO approval. In this instance, ALCO reviews the decisions of management and can exercise its discretion to change these decisions if it considers the risk to be out of line with the group's risk tolerance and interest rate forecast. Strategies, including hedging, are used to limit losses arising from interest rate basis risk or to take advantage of structurally low rates. Hedge accounting is applied to remove unnecessary volatility from the income statement.

Furthermore, the group typically manages interest rate risk through risk-adjusted excess spread, where asset yields are sufficient to absorb movements in interest rates, as well as interest rate risk strategies.

The group prepares an interest rate forecast quarterly for budgets, forecasts and interest rate decision-making purposes. ALCO monitors the sensitivity of the group's net interest income in response to a parallel yield curve shift. Hedges are considered where undue volatility in earnings can materialise. In addition, loans denominated in foreign currency are all fully hedged as Transaction Capital does not take exchange rate risk.

INSURANCE RISK

Insurance operations form an integral part of the group's and SA Taxi's income and profits. Insurance risks may include claims exceeding premiums and/or the insurance cover over loan security being inadequate or from an inappropriate party.

A quarterly insurance advisory committee has been established, which includes non-executive and executive directors of the group and SA Taxi, as well as independent insurance specialists. SA Taxi utilises a Guardrisk cell captive for insurance operations. In conjunction with Guardrisk, the insurance advisory committee reviews the performance of the insurance operations, its capital requirements and provisioning adequacy, the results of which are reported to the ALCO and ARC committees.

SA Taxi's insurance business is the main driver of non-interest revenue, growing faster than the vehicle financing business. SA Taxi continues to broaden its client base and product offering. More than 85% of SA Taxi's financed clients are insured by SA Taxi, with the remainder insured by other reputable insurers. In addition, SA Taxi continues to grow its base of open market insurance clients (that is, insurance clients not financed by the division). SA Taxi initiated its broker network strategy during 2018, with more than 100 brokers participating.

The insurance claims ratio is rigorously managed. Significant investments have been made into TAP and its salvage operations, and capacity in SA Taxi's combined autobody and mechanical refurbishment facility has been increased accordingly. These initiatives continue to improve insurance claims ratios.

 
See the Q&As with Terry Kier and David McAlpin for further details in this regard.
INFORMATION AND TECHNOLOGY RISK

The group manages and maintains a significant volume of confidential personal information in its daily operations. Through the consideration of relevant International Organization for Standardization standards and best practice, the group has executed appropriate measures to protect this information against loss, damage, destruction and unlawful access. In addition to physical security, key interventions implemented include state-of-the-art firewalls enabled for deep packet inspection, encryption technology, rigorous scanning processes to detect viruses and malware, and ongoing external vulnerability testing. The group has adopted a paperless policy, and employee training programmes geared towards IT security and awareness are conducted regularly.

The group invests heavily in IT to ensure that its businesses are efficient and to reduce the risk of disruption.

OPERATIONAL RISK, INCLUDING PEOPLE RISK

To manage operational risk, the group adopts specific operational risk practices that assist management to understand the risks and reduce the risk profile, in line with the group's risk appetite. The objective in managing operational risk is to increase the efficiency and effectiveness of the group's resources, minimise operational losses and exploit opportunities.

People risk relates to the risk of inadequate management of human capital practices, policies and processes, resulting in the inability to attract, manage, develop and retain competent resources. People risk management includes recruitment procedures for screening employees, training and change management programmes, and human resource and succession planning policies.

 
See the Remuneration report for more information on the group's remuneration policy and implementation.

The group's human capital statistics and policies are reviewed by the social and ethics committee. This includes employment equity, fair remuneration, equal work for equal pay, public health and safety, and the protection of human rights.

Succession planning is performed by each division, with the nominations committee (and ultimately the board) reviewing succession plans at least annually.

TRANSFORMATION RISK

As a responsible corporate citizen, the group supports transformation objectives in South Africa that seek to address historical imbalances. The group views the principles of economic and social transformation in South Africa as an integral component of our business. The group has adopted a transformation and B-BBEE policy (as a sub-policy of its sustainability policy) to specifically address the group's commitment to transformation and the spirit of B-BBEE.

Many of the group's businesses are required to maintain minimum B-BBEE scores to retain clients. In this regard, TCR, Principa and Road Cover have appropriate ownership transactions with the iThemba Trust to augment their B-BBEE scorecards.

While it is not a specific B-BBEE transaction, the SANTACO equity transaction is transformative to SA Taxi, the taxi industry and its constituents. The transaction is expected to be beneficial to SA Taxi's B-BBEE scorecard in the future.

Transformation risk is monitored by the social and ethics committee, as well as the divisional and group boards.

COMPLIANCE RISK
 
See the Governance report for applicable legislation.

Compliance risk is the risk of legal or regulatory sanctions, financial loss or damage to reputation the group may suffer as a result of failure to comply with laws, regulation and similar standards and/or internal group policies, authority levels, prescribed practices and ethical standards applicable to its subsidiaries.

Compliance risk is monitored by the ARC committee. Each division with high levels of regulatory compliance requirements has a suitably experienced compliance officer, who remains abreast of all existing and emerging regulations and similar standards applicable to that specific division.

The group retains central legal advisory resources while compliance governance levels at each business remain appropriate. Ongoing engagement with regulators and appropriate representation on industry bodies is maintained to gain early understanding of proposed legislation and to appropriately position the group for change.