Liberty produces a solid increase in earnings with strong net customer cash flows
Thabo Dloti, CEO of Liberty.
Liberty Holdings Limited has produced solid results for the year ended 31 December 2015.
Financial highlights
• Net customer cash inflows are R15.2 billion
• BEE normalised return on equity 19.5%
• BEE normalised operating earnings up 7%
• Assets under management (AUM) R668 billion up 6%
• BEE normalised group headline earnings up 4%
• BEE normalised headline earnings per share up 4%
• Capital adequacy ratio strong at 3,03 times statutory requirement
• The Shareholder Investment Portfolio gross return of 9,6% was substantially ahead of benchmark
Overview
Liberty Holdings Limited has produced solid results for the year ended 31 December 2015, supported by good growth in operating earnings from Individual Arrangements, Liberty Corporate and LibFin Markets, driven by positive net customer cash flows, good cash generation from the insurance book and efficient capital management.
The challenging consumer environment was reflected in the slight decline in new business margins (from 2,1% to 1,8%) mainly as a result of the increase in the risk discount rate of 193 basis points as well as a change in the product mix to lower margin products. The insurance business continues to be managed well within the long term actuarial expense and policyholder behaviour assumptions.
Announcing the group’s results today in Braamfontein, CEO Thabo Dloti said: “This is a solid performance, delivered against the backdrop of an increasingly difficult operating environment and a slowdown in equity markets. We have delivered operational growth without sacrificing capital efficiency. At the same time we have been evolving our business model to ensure we are favourably positioned for the future.”
Group BEE normalised headline earnings of R4 128 million were 4% higher, representing 7% growth in operating earnings and a 2% decrease in earnings from the Shareholder Investment Portfolio (SIP). The SIP gross performance of 9,6% (2014: 10,3%) was substantially ahead of benchmark, supported by good contributions from developed market equities, investments in infrastructure assets and direct property. The BEE normalised return on equity at 19,5% (2014: 20,4%) reflects ongoing efficient capital management.
The group was managed within the board approved risk appetite and the capital position of the group’s main long-term insurance licence, Liberty Group Ltd (LGL) remained strong with the capital adequacy ratio at 3,03 (2014:3,07) times the regulatory minimum. This has been achieved despite higher capital requirements arising from the increased exposure to credit assets and the impact of the sovereign credit downgrade of South Africa.
Individual arrangements
Headline earnings from the group’s South African retail insurance operations were 11% up on the prior year to R1 869 million. The main contributors to the good earnings performance were returns on a higher asset base together with on-going positive persistency and risk variances. Net customer cash flows were positive at R7,8 billion (including the Gateway LISP). The challenging consumer environment has led to indexed new business sales growing marginally by 1% over 2014 with risk sales volumes most impacted.
The innovative Evolve product range continued to attract strong sales volumes. The new Agile product launch proved very successful in the last quarter of the year attracting R157 million in flows within the first three months of launch. Value of new business of R654 million was 17,5% below prior year and the 30 basis point decline in the new business margin was mainly due to higher acquisition costs and the increase in the risk discount rate.
Group arrangements
Liberty Corporate
Earnings of R219 million are 29% up on 2014. The strong increase in earnings was attributable to good underwriting experience, higher fee income and lower new business strain following significantly lower large single premium liability driven solutions business. Indexed new business of R790 million was down 34% on the prior period with net cash outflows of R891 million.
Liberty Africa Insurance
Earnings of R25 million were below the prior year of R59 million, negatively impacted by poor East African investment market performance in both the long-and short-term insurance businesses. Earnings from the life insurance operations were slightly up on 2014, however the short-term insurance business was impacted by high claims on the retail motor book and tax legislation changes. Indexed new business in the life businesses was 39% up at R304 million following significant contributions from Zambia, Namibia, Uganda, Botswana and Kenya. The value of new business was up 67% to R45 million with the increase in new business margin to 6,6% supported by sales of higher margin products mainly through bancassurance and affinity channels. The group continues to evaluate business opportunities for acquisitions throughout the sub-Saharan African region.
Liberty Health
Liberty’s share of Liberty Health’s headline loss reduced significantly to R19 million, on the previous year (2014: R30 million). Results were assisted by good contributions from the risk business, aided by rand weakness, which offset the underperformance in the South African administration business due to lower growth in the serviced medical aid schemes.
Effective 1 August 2015, Liberty acquired the remaining non-controlling interest in Total Health Trust Limited in Nigeria for R142 million.
Balance sheet management
LibFin Investments – Shareholder Investment Portfolio
The SIP comprises the group’s investment market exposure to the 90:10 book of business and the assets backing capital in the insurance operations. The portfolio produced a gross return of 9,6% (2014: 10,3%) which was substantially ahead of benchmark for the year.
The portfolio contributed R1 356 million (2014: R1 382 million) to the group’s headline earnings, ahead of expectation.
Asset management
STANLIB
Challenging economic conditions, extreme market volatility, particularly towards the end of the year, and lower than anticipated market growth resulted in headline earnings of R629 million being 5% lower compared to the prior year.
Net customer cash flows (excluding inter-group) have shown a marked improvement from outflows of R7,3 billion in 2014 to inflows of R8,4 billion in 2015. This result was mainly driven by improved flows from group channels, better retention in the STANLIB Retail business, an increase in passive investment mandates secured and the launch of the Fahari I-REIT in Kenya.
Total assets under management increased to R579 billion (2014: R551 billion) reflecting the net external customer inflows.
Liberty Properties joint venture
Liberty entered into a strategic partnership with the retail division of JHI combining the collective property management service capabilities under a new joint venture entity, JHI Retail (Pty) Ltd. The transaction was effective 1 May 2015 with Liberty’s interest in JHI Retail being 49%. Earnings attributable to the joint venture are included in STANLIB’s earnings.
Bancassurance
The commercial bancassurance joint venture relationship with Standard Bank, which is applicable across the group’s asset management and insurance operations, continues to make a considerable contribution to new business volumes and earnings. The total indexed new business premiums sold under the agreement amounted to R2,9 billion (2014: R2,8 billion).
Strategy 2020
There has been good progress made in evolving Liberty’s operating model to support the recently adopted strategy. Key elements of this strategy are:
• A greater focus on customer centricity – with three customer facing units now formed, namely Individual Arrangements, Group Arrangements and Asset Management, with the LibFin balance sheet management competency being retained as a specialist unit;
• Recognising the significant changes in the regulatory environment and government’s social agenda in South Africa which is likely to lead to a higher demand for products and services of Group Arrangements;
• Managing the core South African insurance operations within sustainable long-term assumption sets;
• Launching innovative new products to service targeted customer segments and profitably capture greater market share;
• Optimising the balance sheet within board approved risk appetite limits;
• Accelerating the asset management strategy into increasing our alternative asset franchise offerings and capturing a greater share of flows into Africa;
• Expanding our geographical footprint into expected high growth regions of sub-Saharan Africa; and
• Maximising opportunities under the Standard Bank bancassurance agreement.
Outlook
Dloti concluded: “As a group we are well positioned from a solvency and capital perspective and we remain actively focused on adapting our business model to accommodate a number of significant regulatory developments while increasing our responsiveness to opportunities in our chosen markets.”
