Liberty Holdings Updates

01 April 2009 Liberty Holdings

Liberty Holdings CEO discusses the group’s growing Property portfolio

In the Liberty Holdings 2008 Annual Report Chief Executive Bruce Hemphill (pictured) says that Liberty Properties’ restructured model and strong financial performance is an important contribution to the Liberty Holdings’ growth and diversification strategy.

Hemphill writes, “Liberty Properties is a core contributor to the group’s transformation into a broadly based wealth management business dedicated to Africa-wide growth. In accordance with this strategic vision, the structure and operating model of Liberty Properties have been reviewed and expanded.”

During 2008, Liberty Properties continued its strong financial performance, recording a 26% increase in headline earnings, while re-inventing itself from a core competence as a property management company with one of South Africa’s premiere portfolios, to a cluster of property businesses, involving management, development and asset management. The value Liberty properties brings to the group exceeds R300 million in fees per year.

Strategic highlights from 2008

Hemphill highlighted Liberty Properties’ key transactions during 2008:

  • The R231 million acquisition of the 22.97% interest in Sandton’s Nelson Mandela Square previously held by Transnet Pension Fund, creating full ownership
  • Acquisition of 50% of Fountainhead Property Trust Management (a Johannesburg-based property management company) from Standard Bank
  • Investment of R939 million in properties at Eastgate Shopping Centre and Liberty Promenade (Mitchell’s Plain) and the building of a regional Liberty Life head office in Durban
  • Planned investment of R1.77 billion in Sandton City expansion and refurbishment
  • Development of Alberton City Extension at a cost of R 184 million

Liberty Properties’ development pipeline was increased to over R3billion, of which R1 billion related to property development outside of South Africa. Commenting on the progress made in 2008, Liberty Properties Chief Executive, Samuel Ogbu, said: “An additional highlight was the commencement of Liberty Properties’ growth into Africa with the R1,1 billion mixed-use development on a prime site in Lusaka – a third-party project in association with the owner-investor, Zambia’s National Pension Scheme Authority.”

Performance in 2008

The gross return of Liberty Properties’ direct property portfolio outperformed the South African Property Owners Association and the Investment Property Databank (SAPOA /IPD) Index for 2008 by 2.9%. This is a particularly pleasing result given the challenges faced by the retail sector in 2008.

Outlook for 2009

The strategic re-positioning of the Properties business unit into three business opportunities is beginning to pay off and is expected to gain momentum in 2009. Samuel Ogbu commented: “Liberty Properties is successfully transitioning from being a property division of a South African insurer to an emerging property brand”.

Key focus areas for 2009 are as follows:

• Transition from a single-stranded property management business to a property-focused wealth brand, with multiple customers and earning streams focusing on emerging markets.
• Creation of an Africa-wide property franchise deriving earnings across the property spectrum.
• Increase in assets under management without straining the group financial position.
• Maximising opportunities across the Standard Bank African footprint through collaboration.
• Working in partnerships with other players in the property market to secure third party business.
• Substantially increasing development activity in South Africa and the rest of Africa.

Liberty Holdings continues rapid expansion into Africa

During 2008, Liberty Holdings pursued its strategy of expanding into the rest of Africa with Liberty Africa being used as the vehicle to build a leading wealth management company across the continent.

Notwithstanding the current economic environment, which put pressure on asset inflows, Liberty Africa delivered satisfactory performance with significant growth in assets under management, cash flows, sales and new business. The investment business units in the rest of Africa continued to target major funds and were successful in obtaining new mandates whilst building on the existing ones. Gross cash asset inflows and gross sales for segregated funds ended the year well above projections, with unit trust sales receiving a boost during the last quarter of the year.

Bernard Katompa, Chief Executive Liberty Africa said, “Despite global financial market turmoil we are optimistic about the future of Africa. The continent presents huge opportunities which, if effectively and efficiently captured, can unlock significant value for our stakeholders. Combining our technical expertise with local knowledge and innovation will enable us to become truly pan-African and lead the way in wealth management on the continent.”

A significant milestone is the R1 billion Liberty Property development in Lusaka, Zambia. This mixed use complex is the first development contract outside South Africa. Liberty Africa’s insurance operations delivered satisfactory performance with new business and net cash flows being higher than the previous year. The vision for Liberty Africa Health is to be a pan African Health business, providing technology health solutions in growing health markets. The growth will be driven initially through the management and distribution of two pan African products, namely Liberty Health Blue and Optimum Global. Liberty Health Blue was established to provide health insurance benefits to employees of multi-national companies in Africa and the key innovations are the standardised contributions and benefits across the continent. Optimum Global is an international evacuation product underwritten by Aviva. Liberty Health has an exclusive arrangement to distribute and manage this offering in Africa.

Notable achievements made by Liberty Africa during 2008:

· The Head office of the Southern Region was successfully relocated from Johannesburg to Windhoek.
· Two green-field long-term insurance operations were launched in Botswana and Swaziland;
· Charter Life Namibia was rebranded as Liberty Life Namibia and Liberty Life Assurance Uganda was officially launched;
· The Information Technology infrastructure and business processes as required by various countries were developed and delivered

Strategic Outlook for 2009

· Expand a regional presence in East Africa anchored out of Nairobi, Kenya and in West Africa anchored out of Lagos, Nigeria;
· Enhance sales productivity through expansion of distribution channels;
· Understand the needs of customers in each of Liberty Africa’s markets and develop the necessary products to satisfy demand;
· Aggressively market the existing asset management competencies to various government pension funds thus positioning the investment business for higher asset allocations.

LibFin limits the effect of the market volatility

The establishment of Liberty Financial Services (LibFin) during 2008 has uniquely positioned the group to mitigate both capital risk and earnings impacts, through effective capital management. LibFin was able to efficiently manage market, credit and liquidity risk as the global economic crisis unfolded. As a result, the group’s capital position improved by 30%, and earnings volatility has been reduced by 50%.

Liberty’s “3-manager model”- separating liability management, strategic balance sheet management and asset management – provides a risk and capital management framework that enables the group to more effectively align risk management with capital requirements across the group’s businesses.

Commenting on the establishment of Libfin, Libfin Chief Executive, Giles Heeger, said:

“Market conditions during 2008 were extraordinarily challenging and look to continue unabated in 2009. This includes extreme volatility and price movements, the likes of which have not been seen for many decades. It is precisely to address such an environment that LibFin has been established and we are excited about rising to the challenge of such conditions and remain committed to ensuring that the capital and earnings impact on the group arising from these markets remain tightly controlled.”

Review of 2008 performance

“A great deal was achieved by LibFin during 2008, considering that the unit was only formally constituted in June, with significant momentum being gained during August once the majority of the staffing requirements had been filled,” said Heeger.

The most important achievement was obtaining a sufficient understanding by Libfin of the overall group market risk to ensure solvency was protected and earnings consequences essentially contained during the collapse of the global market in the last quarter of 2008.

Significant focus was placed on the asset liability matching operations initially, until the market conditions allowed a shift towards strategic asset allocation in the fourth quarter of 2008.

Outlook for 2009

LibFin will continue to focus on market risk position management. The business unit will continue to look for ways to reduce the risk associated with the overall shareholders’ portfolio, in order to minimise the risk of possible capital losses and to increase the sustainability and consistency of earnings arising from shareholder commitments.

This would include a significant focus on systems build and improvements in process efficiency.

In addition, LibFin intends to more fully develop, implement and operationalise its asset allocation function. This will better equip the business unit to meet its objectives of generating improved long-run performance through greater focus on strategic asset allocation.

Key focus area for 2009 are as follows:

  • Provide earnings protection, generate additional profits and assist management in moving within the stated risk appetite;
  • Complete staffing up the unit, in order to generate the capacity to fully achieve its mandate;
  • Monitor and control strategy effectiveness as the markets move and affect the financial position; and
  • Generate long-run outperforming balanced portfolios through strategic asset allocation with a focus on performance against the liability set rather then the market (specifically for pension liabilities).

Liberty Chief Executive Bruce Hemphill said:

“During 2008, I believe we demonstrated our ability to manage our current operations effectively in a challenging environment, while simultaneously building the future of the business. Despite this, Liberty is well capitalised, our approach in 2008 stood us in good stead and we will continue to focus on risk and capital management and prudently continue with our diversification strategy in 2009.

“We look forward to improving on that success in 2009 and beyond, as business conditions normalise.”

Liberty Holdings – managing the current environment; building for the future

In the Liberty Holdings 2008 Annual Report, Chief Executive Bruce Hemphill focuses on the group’s overall performance and its ability to mitigate business risk and protect shareholders’ capital; Kevin Lings, STANLIB Economist talks about the sharply weakening global economy and the impact on South Africa; and Chairman, Saki Macozoma discusses the group’s continued focus on dealing with the current investment market volatility and managing the key exposures, risks and financial impacts.

CEO Bruce Hemphill talks about the overall performance of the group

“South Africa has – to an extent – been insulated from the worst effects of the international market melt-down. But I do believe that global investor confidence in the various financial sectors will be at a premium for some time, and in this regard, the ability to mitigate business risk and protect shareholders’ capital is a vital management priority.

“With dire global economic conditions as a backdrop, Liberty produced a good set of annual results for 2008 and the following key points should be noted:

  • Our primary responsibility as Liberty’s executive team is to actively manage the group’s current operations through a challenging business environment. Twelve months prior to the crisis, we implemented a strong risk and capital management framework, resulting in better decision-making on critical capital issues. This, coupled with the establishment of Liberty Financial Solutions (LibFin) in mid-2008, placed the group in a strong position to protect capital, and mitigate earnings impacts.
  • Our strategic growth plan is unchanged, and we made significant progress in diversifying our business in terms of wealth solutions, geography and distribution. If anything, the market conditions experienced in 2008 confirm that diversification is a business imperative.
  • Although falling markets took an inevitable toll on our 2008 earnings, our overall business performance last year was strong. Of particular interest is our capital position which, through management action, has improved by 30% despite the collapse in asset prices globally. Overall, I believe our financial results exceeded market expectations.”

Outlook – short term pressures continue

The economic outlook remains uncertain, both internationally and locally. And while the South African banking system has up to now escaped the worst ravages of the global financial crisis, Liberty is not immune to the wider economic fall-out.

Local macro indicators confirm that the South African economy is under pressure. Recent statistics for GDP, the manufacturing sector and inflation all confirm a sharp

slowdown in activity. Although infrastructural investment should limit the extent of any recession, both consumers and corporates will continue to be impacted negatively in the short term.

While current conditions make it difficult to forecast even short-term business outcomes with any certainty, Liberty remains capable of responding to the changing demands of a most unsettled business environment.

“During 2008, I believe we demonstrated our ability to manage our current operations effectively in a challenging environment, while simultaneously building the future of the business. We look forward to improving on that success in 2009 and beyond, as business conditions normalise.”

Talking about the global recession and the impact on South Africa, Kevin Lings, STANLIB Economist said:

Against the backdrop of a sharply weakening global economy, economic activity in South Africa has slowed substantially in recent months; especially consumer

spending and export activity. Furthermore, the outlook for the next few quarters points to ongoing weakness, with the current slowdown expected to broaden across most components of the economy as world trade shrinks and access to credit dwindles.

Many companies are facing earnings pressure given increased costs and slowing revenue growth. Under these circumstances there is a growing concern that the economy will experience significant job losses. Hopefully, given South Africa’s substantial skills shortage, most companies will be hesitant to cut employment extensively.

Fortunately, consumer inflation is expected to fall-off significantly during the course of 2009. The sharp drop in the oil price, together with the slowdown in domestic demand, has significantly eased domestic inflationary concerns. This should allow for further meaningful cuts in interest rates in South Africa during the course of 2009.

The South African Reserve Bank started to reduce interest rates in December 2008.

Importantly, interest rate cuts take time to take effect and it is unrealistic to expect a significant response to the monetary stimulus before the end of 2009. In addition, the

increased fiscal stimulus, in the form of personal tax cuts and increased government spending, announced in the February 2009 National Budget, is probably not sufficient to ensure a broad-based pick-up in economic activity before 2010.

Fortunately, over the past few years the Minister of Finance has substantially curtailed the build-up of government’s debt, as well as generating a fiscal surplus.

This generally healthy fiscal position should ensure that government can increase spending without having to increase taxes. This is despite the fact that tax revenue is slowing sharply, with further risk to the downside.

The current economic, business and investment environment remains extremely challenging. In that regard, the main concern currently is the escalation in job losses, which has the potential to substantially worsen an already dire situation. The global recession is occurring in “fast forward”. Fortunately massive policy support is now being provided to try and lift the global and local economy. Realistically, output declines are likely to persist for most of 2009, but hopefully the current policy stimulus allows for at least a modest economic recovery during 2010.

Saki Macozoma, Chairman of Liberty Holdings concluded by saying:

Against the backdrop of a sharply weakening global economy, economic activity in South Africa has slowed substantially in recent months, particularly consumer spending and export activity. With the outlook for the next few quarters indicating ongoing weakness, 2009 will undoubtedly be an extremely challenging year.

Management will continue to focus on dealing with the current investment market volatility and managing the key exposures, risks and financial impacts so as to preserve the profitability and capital of the group.

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