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Liberty adds concrete to its business foundations

10 August 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

On 5 August 2010, local life insurance giant Liberty Group published interim results for the six months to 30 June. The group believes they’ve met their short term goals by ensuring sustainability at all business units and establishing a sound platform for future growth and diversification. Liberty couldn’t have timed their release better – any financial services result looked good when compared against interims (or trading updates) from three of South Africa’s ‘big four’ banks, released in the same week.

The problem with financial sector results is they make difficult reading. Too many of us focus on the first couple of paragraphs in the press release, without delving into the confusing mess of numbers in the company’s income statement, balance sheet and cash flow statement. If we stick with this ‘superficial’ approach all we get is what Liberty wants us to know. They say, for example, that “persistency experience across all business lines has improved.” Fair enough – that’s good news if you’re in the life business – as is “LibFin’s balance sheet management delivering intended results” and “containment of costs well below inflation...”

Overall the company reported headline earnings in excess of R1 billion, positive cash inflows of R11.5 billion, embedded value (EV) per share of some R84.62 and capital adequacy of 2.8 times cover. The bad news is the value of news business was down 5% to R115 million.

The ‘fine tooth’ comb approach

But this ‘headlining’ tells us nothing about the business on an operational level. We have to gloss over these financial highlights to get to grips with the nuts and bolts of this financial services industry stalwart. To make our life slightly easier we’ll focus on the three divisions making the largest contribution to Liberty’s R1 007 million BEE-normalised headline earnings. Top of the pile is the Retail SA Insurance division, with R472 million in the half year. Second is LibFin, with R164 million from its Investments unit and R194 million from Markets. And third is StanLib, with R164 million.

The insurance business remains the backbone of the Liberty group. Our concern, as we read the detailed review, is the continued focus on retaining existing policies. This suggests the insurer is still very much in defensive mode. “The total number of risk policies lapsed in the first six months of 2010 showed a decrease of 27% on the same period in 2009,” they say. The number of policies lapsed in June 2010 is the lowest on record since January of 2007. So less people are dumping their policies; but what about new business?

We’re not getting a good feeling from this area. The company line: Liberty has spent the past twelve months shifting the emphasis from volume to quality of acquisition and retention… Does this mean the 1.6% decline in indexed new business to R1 857 billion is a good thing? And if the new business is of such good quality, why then has the new business embedded value profit margin fallen to 1.3% from the 1.5% recorded at 31 December 2009? Management says this is due to “proportionately higher sales of lower margin investment products…”

Liberating performance from LibFin

Liberty is squeezing the best possible value from its asset and credit management businesses. LibFin Investments held a shareholder investment portfolio of approximately R16 billion over the period, achieving a 2% positive return despite difficult market conditions. LibFin Markets enjoyed a good period too – with R1.3 billion of high yielding quality credit assets originated by its credit business over the period.

Fund managers have been particularly hard hit by recent market turbulence. While they still attract new funds to manage, their performance fees – often the bulk of earnings – are  fractions of the amounts earned during the last bull market rally. The company boasts net cash inflows of some R6.5 billion for the period – though it suffered a once off withdrawal of the same amount as the government pension fund moved investments to more ‘empowered’ managers. Total assets under management (including inter-company life funds) increased to R321 billion, compared to R318 billion at year end.

StanLib may be the largest unit trust manager by market share, but there’s plenty of work to be done at the business. The incoming chief executive, Thabo Dloti, has the tough task of retaining talent and hopefully reducing the number of funds under the StanLib brand.

A happy chief executive

Liberty chief executive, Bruce Hemphill is pleased with the interim performance. “I am satisfied with both the operational delivery and financial performance of the business relative to our assumptions,” he said. The group will focus on three areas in the coming months. First – strengthening Liberty’s insurance business, with specific emphasis on persistency and increased sales productivity. Second – striving for excellence in both balance sheet and capital management. And third – continue diversification in terms of geography and business line.

Editor’s thoughts: Liberty’s latest half-year results were better than the prior period, but still some way from perfect. The good news is management seems to have things under control. Do you think it’s important for financial services intermediaries to ‘study’ product providers’ results? Add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Vernon Cloete, 10 Aug 2010
In order to succeed long term Liberty Life needs to restructure its sales force. The main reason for lapses, is because these policies are being replaced by salespeople promoting other Life Insurance Company products. Life Insurance is never bought but always sold. Liberty was the most aggressive Insurance Company in the 70's and 80's, but is now, is as the article suggests defending instead of attacking. This strategy will lead to its demise, it is possible that they become a takeover target by a company like Discovery Holdings.
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