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Liberty delivers strong growth; record first half sales for retail business

02 August 2012 Liberty
Liberty Group CEO Bruce Hemphill

Liberty Group CEO Bruce Hemphill

Liberty delivered another pleasing set of results for the first half of this year.

Salient features

· Focused strategy drives Retail SA’s record first half sales performance

o 23% growth in indexed insurance sales

o Cash flows increased by 95% to R2,7 billion

o 14% increase in earnings adjusted for assumption changes

o Value of new business increased to R203 million up 51% on last year

· STANLIB achieved solid earnings with net cash inflows of R7,4 billion as it continues to benefit from the embedding of the multi-franchise model

· Libfin delivered an exceptional R920 million headline earnings result, in a tough economic environment and low interest rates

· New affinity attracted to the direct service capabilities

Financial summary:

  • BEE normalised headline earnings up 41% to R1,7 billion
  • BEE normalised group equity value per share increased 11% to R104,31
  • BEE normalised return on group equity value at the top end of target at 15.6%
  • Interim dividend per share increased 5.5% to 192 cents
  • Retail gross sales improve 26% to R8,6 billion
  • Capital adequacy cover stable at 2.9 x regulatory requirements

Liberty Group today announced a first half performance ahead of expectation, with an increase in BEE normalised headline earnings of 41% to R1,7 billion for the six months to June 2012, on the back of a 23% increase in indexed new business for retail, as well as strong net inflows of R7,4 billion in asset management.

Commenting on the results, Liberty Group CEO Bruce Hemphill said:

We have delivered another pleasing set of results for the first half of this year. This was done despite difficult market conditions. Consistent focus on our value creation strategy has placed Liberty on a sustainable growth path. We are seeing the benefits of the quality foundation built within our retail business, where we are growing and taking market share. This is on the back of stronger risk management, an improved acquisition and retention model that combines a compelling value proposition for our financial advisors and a strong product mix which includes market leading innovation. Our asset management business, STANLIB, is showing the benefits of the multi-franchise model, which has attracted significant inflows, as investment performance continues to go from strength to strength. Our capital adequacy cover of 2.9 reflects the strength of our balance sheet management.

Our strategic focus remains unchanged which in summary entails:

· managing the core South African insurance operations within acceptable sustainable long-term assumption sets, whilst profitably growing greater market share through delivery excellence to our customers

· managing the balance sheet within Board approved risk appetite limits;

· improving asset management capability, to ensure a larger share of the retail and institutional fund flows; and

· achieving the business cases of the recent investments in diversification initiatives.”

Overview

Headline earnings adjusted for assumption and modelling changes for the six months ended 30 June 2012 are 14% up on the comparative period in 2011. The decrease in operating earnings before adjustments is also attributable to the investment in build initiatives across the businesses for future growth.

Operational review:

South African long-term insurance

Retail SA

Highlights of the Retail SA performance include the continued growth in gross sales at a significant 26% to R8.7billion, while indexed new business lifted 23% to R2,4 billion. The increased volume of quality sales combined with the focus on retention has resulted in an improvement in new business margin of 1,7%. Net customer cash inflows remain strong and almost doubled in the period under review from R1,4 billion in the prior year to R2,7 billion in 2012.

Headline earnings was R648 million. After normalising for modelling and assumption changes, headlines earnings increased 14% from R544 million to R618 million.

Management has built a strong foundation over the past 24 months and is focused on growth including product innovation and expanding distribution channels. The business has been able to deliver increased risk and persistency variances which is pleasing.

Liberty remains the largest writer of business in the retail affluent space as well as the having the largest market share of life and disability sales in the South African market.

Corporate

Corporate headline earnings at R42 million indicate an improved risk claims experience, however cost ratios remain high due to the transitional related costs.

The business is on track with the process of transition it started in 2011, to migrate its client base to more cost efficient umbrella funds and establish a service capability to larger corporates and retirement funds. In light of this, costs related to the transition put headline earnings under pressure. In addition, the business achieved a 4% increase in indexed new business, including higher enhancement and sales to existing umbrella clients.

LibFin

LibFin continues to create value for the group through superior risk management capability. LibFin Markets delivered headline earnings of R99 million which flowed mainly from higher credit margins on asset backed annuities, guaranteed capital bonds and lower implied volatilities. It posted a gross return of 6,4% for its conservative balanced shareholder investment portfolio which is ahead of benchmark under volatile markets and the continuing uncertainty on the European debt concerns. LibFin continues to be successful investing in acceptable illiquid premium assets, leveraging off the ability to hold longer term assets, with the key objectives of steadily increasing net earnings and improving the competitiveness of policyholder investment product proposition. LibFin Investments returned a stellar R821 million. The business directly manages R29 billion of asset portfolios as at 30 June 2012, up from R25 billion on 31 December 2011.

STANLIB

STANLIB continues to benefit from the multi-specialist franchise system implemented in 2010, while the migration of Liberty Property Asset Management has progressed well and strengthened STANLIB’s existing investment franchises.

STANLIB generated strong net inflows of R7,4 billion with total assets under management increasing to R392 billion from the restated R368 billion for the same period in the prior year, as a result of strong inflows and an increase in underlying asset values resulting from market growth. Headline earnings for the six months to 30 June 2012 were flat at R200 million.

STANLIB is the third largest asset manager in South Africa and has the strategic advantage of access to both the Liberty and Standard Bank tied distribution networks. Investment performance for the past three years is delivering top quartile performance in the majority of funds.

STANLIB will continue to leverage and enhance existing as well as new investment capabilities and ensure they deliver their contribution to and diversify the bottom line.

Liberty Properties

Liberty Properties has consistently performed well, with performance driven by the growth in property management fees supported by increases in rental areas at the flagship shopping centres. First half headline earnings decreased to R25 million due to higher costs of investment in development capabilities and reduced development fee income as a result of delays in securing development mandates. The focus for the remainder of 2012 remains on increasing our third party development mandates in key markets in Africa.

Liberty Holdings has entered into agreements to sell its 50% joint venture in Fountainhead Property Trust Management Limited and Evening Star Trading 768 (Pty) Limited to Redefine Properties Limited for R330 million. Whilst approval has been received from the Competition Tribunal of South Africa, the sale was subject to outstanding regulatory approvals as at 30 June 2012.

Growth initiatives

Liberty Africa

Liberty Africa is making good progress in line with expectations with the business posting headline earnings of R16 million for the reporting period. East and Southern Africa (outside of South Africa) delivered solid performances from the various interests in asset management and insurance businesses. Investment markets in the East Africa region have improved in the first half of 2012 and offer further opportunities which should benefit both the insurance and asset management businesses in the second half. Assets under management remain substantial at R39 billion. Management’s focus is to drive operational improvement, grow the opportunities of bancassurance and to secure additional investment mandates.

Liberty Health

Sales of health risk products in the rest of Africa continues to grow, increasing the in-force book to 79,000 lives (December 2011: 68,000). Remedial actions taken on pricing and risk management have improved the medical claims loss ratio to 93% (2011 full year: 114%) during the period. Whilst operational efficiencies at Liberty Health are being evidenced, the business does not yet have the critical mass to leverage the investment in systems and processes, resulting in a headline loss of R45 million for the period. Managements’ focus for the remainder of 2012 will be on client acquisition, which includes delivering growth in South Africa and the rest of Africa.

Direct Financial Services (incorporating FRANK.NET)

Taking advantage of the solid performance of FRANK.NET since its launch in 2011, the capabilities built for FRANK.NET are now being leveraged to support a broader direct strategy for the Direct Financial Services. This initiative has contributed R20 million net set up costs to the R36 million losses for the period under review. Two significant affinity partners were signed during this period, being the largest cellular network in South Africa, Vodacom, and the largest bank in Africa, Standard Bank.

Bancassurance

Liberty’s Bancassurance agreement with Standard Bank continues to deliver value with strong performance across most channels and countries. STANLIB’s net services fees on assets under management grew by 9% to R191million. Liberty’s share of the value of in-force contracts grew by 18% to R1,2 billion. The bancassurance agreement with Standard Bank represents a strong strategic advantage in South Africa and Africa, and both partners are focused on delivering value and growth over the short and long term.

Concluding, Bruce Hemphill said:

“The balance sheet is well managed and positioned for the lower interest rate environment; we have made significant investment in new and existing capabilities; our operating earnings have demonstrated good growth, achieved during volatile economic circumstances and the business is well diversified across channel, product line and geography. Liberty is well positioned for sustained growth, within acceptable risk parameters.”

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