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Liberty Holdings - 15% increase in adjusted core operating earnings; strategies reaping rewards

01 March 2012 Liberty

The Liberty group delivered strong financial and operational performance in 2011 and saw its strategy of strengthening its key operating units reaping rewards.

Salient Features

•Excellent operational and financial delivery in Retail SA insurance business
o46% increase in earnings
oStrong new business sales
oSubstantial increase in net customer cash flows
oContinued delivery on customer retention strategy
•Good earnings contribution from Stanlib; implementation of the new operating model for delivering material improvement in investment performance
•Balance sheet risk management capability demonstrated resilience in the face of market volatility, delivering investment returns in line with benchmark
•Positive delivery from our bancassurance partnership with Standard Bank


Financial Summary

•Adjusted core operating earnings up 15%
•BEE normalised group equity value up 10% to a record R100 per share
•Basic earnings per share up 9% to 997,6 cents
•BEE normalised headline earnings of R2,663billion for the year ended 31 December 2011
oRetail SA earnings up 46%, STANLIB earnings up 15%
•Retail SA gross sales up 28%; long term insurance indexed new business up 19 % to R5.1 billion
•Liberty Group capital adequacy cover further strengthened to 2.89 times above regulatory requirements (Liberty Group Limited only)


Highlights


The Liberty group delivered strong financial and operational performance in 2011 and saw its strategy of strengthening its key operating units reaping rewards.

In particular Retail SA, the core life business, delivered a substantial 46% improvement in earnings to R1.3billion on the back of a strategy of focusing on value creation through policyholder persistency, product innovation and distribution strength. STANLIB’s headline earnings jumped 15% as it improved margins. Liberty’s share of Africa’s contribution increased more than 100% despite a difficult operating environment in East Africa and Swaziland.

Despite volatile markets, Libfin delivered in line with benchmark and contributed investment earnings in excess of R1billlion, a good achievement in difficult market conditions.

New business growth has been very strong and Retail SA gross sales from the distribution channels were up 28%. Net customer cash flows increased substantially from less than R1billion in 2010 to R4.8billion. The SA emerging consumer market business is gaining traction with the average premium size increasing by 15%, following management action taken to improve quality of new business.

Long-term insurance indexed new business across all businesses was up 19% to R5.2billion. The business is in a strong position and has weathered a difficult operating environment well.

Liberty has no plans to change the dividend policy at this point in time but given the very recent changes to the law on dividend taxation, has declared a partial dividend, with a further announcement to be made after 1 April 2012.

Commenting on the results for the period Liberty Holdings Chief Executive Bruce Hemphill said:

“In the past three years we have been focusing on value creation primarily by strengthening the insurance and investment businesses and building excellence in balance sheet management, while seeking diversification of revenue streams for longer term growth. Consistent focus on these objectives has produced stellar results for the year under review.

The excellent operational performance of the Retail SA insurance business is undoubtedly the key success of 2011. These results are underpinned by the turnaround in persistency and a strengthened sales proposition. The implementation of the multi-franchise system in Stanlib is translating into substantially improved operating and investment performance and this business is well positioned to grow as a prominent third party manager. Our risk management capability has continued to safeguard our balance sheet in volatile market conditions and create value for policyholders and shareholders. We have made good progress in Africa and Bancassurance has made a positive contribution to the business, demonstrating the advantage we have in our association with Standard Bank, and we continue to invest in our direct capability and health businesses.“


Operational overview:

RETAIL SOUTH AFRICA – LONG-TERM INSURANCE

Retail SA continued to deliver on its objectives for 2011 which included the continuation of the retention programme, management of mortality and morbidity and operational efficiency. The Retail SA business produced an excellent performance with a 46% improvement in headline earnings compared to 2010. A key contributor to this result was the persistency turnaround and a continued focus on quality business and improving profitability.

Management interventions driving productivity and retention across all sales channels saw an increase in long-term insurance indexed new business of 18%, while gross sales for the channels amounted to a 28% uplift. Net customer cash flows were very strong during the period at R4,8 billion, underpinned by sales of single premium investment products and the extension of maturing policies.

CORPORATE

Liberty Corporate is undergoing a significant transition which involves developing a system that will see its client base migrating to more cost efficient funds as well as establishing a service capability to larger corporate and retirement funds. The new system is aimed at gearing Corporate for future growth and driving administrative efficiencies. The business achieved an 18% increase in indexed new business and negative net customer cash outflows of R661 million for the year were a significant improvement from the equivalent 2010 net outflow of R1, 5 billion.

LIBFIN

Despite turbulent market conditions, driven by the European debt crisis, LibFin produced good results that were reflective of the broader investment return environment. Returns were in line with benchmark, demonstrating an ability to manage in volatile conditions. LibFin Investments generated headline earnings of just under R1 billion for the year, making a valuable contribution to Group earnings. LibFin Markets produced headline earning of R155 million, boosted by the improvement in credit margins on assets backing annuities and guaranteed capital bonds.

STANLIB

STANLIB’s headline earnings were up 15%, generating a total of R414 million for the period. This is reflective of the successful delivery of a new operating model, the multi-specialist franchise system which was implemented last year as well higher performance fees. The changes to the operating model have translated into a material improvement investment performance, with 1st quartile performance over 1 and 2 year periods. Going forward, Stanlib will continue to build on its existing investment capabilities and aim to diversify its revenue streams successfully.

LIBERTY PROPERTIES

Liberty Properties is a consistently solid performer, with the business producing yet another set of excellent results for its policyholders and shareholders alike. Headline earnings for the business totaled R96million. Several developments were initiated and concluded during the year including the refurbishment of Sandton City, extension of Liberty Promenade as well as the Levy Business and Retail Park in Lusaka, Zambia. As we head into the new financial year, the key focus areas for this division will be to leverage its expertise and capitalise on opportunities on the continent.

DIRECT FINANCIAL SERVICES

Frank.net has performed reasonably well in the year since its launch, proving that there is a compelling business case for diversification into the direct insurance market. Frank.net has achieved brand presence in the market, demonstrated by alignment to new business sales targets. The strength in the platform capability is a competitive advantage and is expected to drive affinity opportunities in the future. A successful white label joint venture with Standard Bank was launched in the latter part of 2011 and showing good initial results.

HEALTH

2011 was aimed at addressing the operational changes within Liberty Health and a new management team was appointed that will focus on sustainability and future growth. A number of one off costs associated with operational issues affected the earnings performance of the business. Liberty Health generated an increase of 22 000 IT lives over the period.

AFRICA

In 2011 Liberty finalised the acquisition of a 57% interest in CfC Insurance Holdings, expanding the Group’s footprint in East Africa. Liberty Africa’s asset management operations continued to attract good positive net customer cash inflows of R5,4 billion for the period bringing assets under management to R39 billion. Liberty’s share of headline earnings of R21 million are substantially up on 2010, reflecting the CfC contribution as well as a pleasing improvement in earnings from asset management.

BANCASSURANCE

Liberty has long maintained that the unique commercial bancassurance contract with Standard Bank provides a distinct competitive advantage to the group and is a core component of the diversification strategy. The agreement provides opportunities for Liberty to leverage expertise, products and services across geographies. Following the revision of the bancassurance agreement with Standard Bank last in 2011, Liberty has experienced a significant contribution from bancassurance. SA Insurance’s embedded value of in-force contracts was R1.1 billion up 11% and STANLIB, net service fees on AUM R357 million, up 7%.

In conclusion, Bruce Hemphill states:

“We are in a strong position to deliver on our value creation objectives. Our focus for 2012 will be on further enhancing the customer experience, increasing new business sales and margins, realising the opportunities in the growth cluster as well as continuing to deliver superior investment returns within our asset management businesses.”

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