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Bracing for regulatory change

29 February 2008 Gareth Stokes

Liberty Group’s 2007 annual results were strong despite pressure on its investment earnings due to a shaky third quarter on the JSE. The group’s headline earnings (BEE normalised earnings per share) were up 18.3% for the year to December 2007. Total new b

Two key long-term challenges in the coming year

Liberty identified two regulator challenges for the coming year. The first is the often talked about Social Security and Retirement Reforms. Although little was said in the latest budget, the industry is waiting for Treasury’s next paper on the topic, expected at the half-year mark. The second challenge will have a significant impact on Liberty Group and other companies in the life insurance industry. All players in this space are waiting for the introduction of new commission regulations. At present not much is know about the form these regulatory changes will take. “We expect the implementation of the commission regulations to be completed during the latter part of 2008, and are confident that they will have little impact on the group’s new business volumes,” said Liberty. They are actively engaged with various industry bodies to participate in the regulatory process and ensure the changes are not detrimental to their core business activities.

As we worked on this article we noticed a story in Business Report which reveals that government (National Treasury) has fired the next salvo in the life industry commission debate. It seems “draft regulations, published by finance minister Trevor Manuel for comment, propose cutting upfront commissions and increasing from two to five years the period in which commission payments can be reversed, if a policy is terminated.” We expect the issue to be hotly debated in coming months, and will carry full details of the draft proposal in our FAnews Online newsletter on Monday next week. Make sure you are signed up for this free newsletter – simply go to click here to register or click on the black banner, top right of your screen on the FAnews homepage to register.

Retirement annuity business suffers

The commission debate is more important than many in the industry realise. Liberty reveals that whilst good growth was recorded in risk and annuity products in 2007, the personal retirement annuity business continued to suffer. Liberty believes this is due to lower commissions paid by the group on such products! Could this be a sign of things to come – and how will this affect the R10trn insurance gap that currently besets South Africa? It has long been argued that insurance is ‘sold’ and not ‘purchased’. So when commission incentives are removed – insurance sales are likely to be hit hard.

Regulation and compliance is not only affecting life insurance business. Liberty reveals that: “regulatory compliance in corporate benefits continues to impact service delivery, however significant improvement was made over the course of the year.” This necessitated a “full strategic review of the corporate benefits business in the light of social, security and retirement reform as well as the evolving consumer landscape.”

Despite these regulatory concerns, Liberty increased earnings from overall insurance operations to R1.798bn – a 28.9% improvement over the previous period. The contribution of insurance to the total group earnings is close to 60%

Asset management delivers strong performance

Convergence in the life insurance industry is always a hot topic. Liberty Group’s asset management results include earnings from StanLib and Liberty Properties. The group notes that the purchase of StanLib (finalised in January 2007) contributed R387m to headline earnings. Operating profit before interest and taxation (R599m) was 19.6% higher than 2006. Total assets under management now stand at R340bn.

The group believes the improvement in the asset management business can be attributed to “a combination of higher assets under management and an increase in performance fees. Performance fees which comprise 5% of total revenue remain a small component of StanLib’s earnings.” And a results summary would not be complete without a look at the highlights for the year. StanLib was rewarded for its investment performance, winning a Raging Bull award for the best domestic unit trust management company for 2007... The group continues to benefit from its decision to convert StanLib into 15 focused franchises.

Liberty is acutely aware that the strong equity market performance in the last three years has come to an end. They note that the weighted average investment return was 33.0% at the end of 2006, 31.9% annualised at the end of June 2007 and only 14.8% at year end. This is closer to the normalised equity market return, which stands nearer 18% in the long term.

Editors’ thoughts:
We state in today’s article that insurance products are ‘sold’ not ‘purchased’. How serious an impact will a change to the commission structure have on insurance sales going forward? Add your comments below, or send them to

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