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Long-term insurer takes massive revenue hit

11 August 2009 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The latest half-year has been tough for local insurer Liberty Holdings. Revenue fell 25%, from R12.8bn in the fist half of 2008 to just R9.6bn in the six months to 30 June 2009. Liberty posted a net attributable loss of R1.3bn and a headline loss of 483.3c/share. What were the root causes of this loss?

Liberty singles out three unrelated events for the poor performance. The group ‘lost’ R520m as it struggled to reduce equity exposure to protect capital, had to make additional provisions for “policyholder withdrawal, paid up and lapse assumptions” and suffered an unrealised loss of R530m on foreign currency investments due to the rand’s unexpected strength. Under these circumstances it comes as no surprise that shares in Liberty Holdings (JSE: LBH) have missed out on the recent market rally – declining since mid-July – and closing at 6100c/share last week.

Slowing domestic economy to blame

The sharp drop in revenue is largely due to the decline in the disposable income of local consumers. Policyholder persistency is under pressure as consumers are forced to reduce their monthly household expenditure. Liberty noticed a negative trend in persistency in the latest half-year, blaming the situation on tough economic conditions and “certain internal business structures.” The group doesn’t elaborate on these structures, except to say that they are being dealt with. “Various operational initiatives have been implemented to arrest the rate of policy withdrawals in Individual Life, which are producing positive results,” said Liberty. But shareholders will have to wait 12 to 18 months for the initiatives to have a significant effect. The group’s investment performance has been sub-par too as declining equity prices impacted the mark-to-market values calculated for the half-year report.

Despite the disappointing half-year performance, Liberty says the group remains operationally strong. In their operational and strategic update the group indicates that “new business sales and cash flows are satisfactory and management expenses have been well controlled.”

Feeling the pinch – South African long-term business disappoints

But management’s upbeat assessment for future reporting periods cannot hide the poor performance in the first half of 2009. The South African long-term insurance division reported a R75m attributable loss (against R605m profit in the previous period). Indexed new business in the Individual Life category grew a paltry 0.8% and the group admitted that “whilst good growth was recorded in risk and entry level products, individual investment product sales [were] down 13.6%!” New business was less profitable due to alterations to withdrawal, paid up and lapse assumptions and the 175 basis point in crease in the risk discount rate.

There was some good news. Liberty reported that their risk claim experience remained positive and that no changes to mortality assumptions were made at the half year.

Diversifying into the future

Tough times or not, Liberty still has its sights set on becoming a “leading wealth management company in Africa,” The group hopes to achieve this goal by continuing its push into other African countries and expanding its products and services. During the period Liberty Health acquired a 35% interest in Nigeria’s Total Health Trust Limited. The group also launched its Liberty Blue and Optimum Global medical insurance products for multi nationals operating in the rest of Africa. The Health Division lost money in the latest six months but remains on track. Liberty reported 461 000 lives under administration and 1.192m lives under software licence fees. The group’s push into the African asset management space was more successful. Liberty Africa benefited from R2.720bn net cash inflows in the six months. Group earnings from this division came in at R14m.

An insurers’ main responsibility is to protect policyholders’ funds. Liberty has followed its listed peers in this regard by de-risking interest rate and equity risks since the last quarter of 2008. As a result Liberty still boasts a robust capital adequacy level, “2.5 times cover in the group’s main life licence.” Management’s near-term focus will be on reversing persistency trends and managing market risk. They will strive to “protect policyholder funds and [maintain] the strength of the group’s balance sheet.”

Editor’s thoughts:
Liberty Holdings’ quest for growth through product and geographical diversification is similar to many of its listed peers. Of course there are still plenty of opportunities to expand to currently under serviced sectors in the domestic economy. Do you think South African insurers are doing enough to offer insurance product to all sectors of the domestic market? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Reap-what-yoy-sow, 12 Aug 2009
The "market segmentation" exercise and arrogant dismissal of the "smaller brokers" have had the obvious result- the smaller broker found better service elsewhere. You cannot outsource your "business-relationships" to consultants.
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Added by Ex Liberty Client, 12 Aug 2009
Liberty will no longer be able to make huge profits from RA expense accounts attracting interest at 90% of the market growth. There is no market growth, people are becoming wiser and accredited advisors will no longer push their pathetic products called investments as they will be held accountable. Good luck, maybe the rest of Africa is stupid enough to buy your products.
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Added by Disappointed, 11 Aug 2009
To a large extent the extremely poor performance of some of Liberty's fund mangers that saw unit trust and policy values plummet to the bottom of their respective rankings undermined confidence in their ability to manage funds. Proberly the wrong time to switch, but people withdrew funds or did not invest further.
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