Liberty Life Presentation to Investment Analysts Society of
Liberty Life Presentation to Investment Analysts’ Society of Southern Africa 2 March 2005 www. liberty. co. za
Agenda What we said What we’ve done Operating climate Operations Financial results Focus areas for next twelve months Questions
What we said … more of the same • People • Customer service • Business structure and efficiency • Capital management • Product development • Financial Sector Charter implementation • Domestic operations/other market segments and Africa • Distribution channels • Implement BEE transaction
What we’ve done … people Executive management Previous New Roy Andersen Myles Ruck Mark Bloom Deon de Klerk Dave Nohr Andrew Lonmon-Davis Ron Mitchell Ian Cadby Jim Mc. Lean Roger Corlett Craig Lawrence Audrey Mothupi Peter Laburn Not replaced Mike Jackson Not replaced Themba Gamedze Not replaced Dan Pienaar Not replaced Rex Tomlinson Bruce Hemphill Bobby Malabie Mohale Ralebitso
What we’ve done … people More new names John Sturgeon Divisional director: Corporate finance Christo Landman Divisional director: Tax Caswell Rampheri Divisional director: Properties Jeff Hubbard Divisional director: Financial accounting Craig Pilgrim Divisional director: Internal audit Stewart Rider Group executive: Investor relations and strategic analysis David Jewell Divisional director: Group actuarial
What we’ve done … people • 251 people taken on in October 2003 as part of IEB acquisition • IT outsourcing - reduction of 70 people • HR restructuring - reduction of 25 people • 16 Graduates employed under new scheme 3600 3472 3500 3400 3353 3320 3300 3221 3200 3069 3100 3000 2900 2800 Dec 02 Mar 03 Jun 03 Sep 03 Liberty excluding IEB Dec 03 Mar 04 Jun 04 Liberty including IEB Sep 04 Dec 04
What we’ve done … customer service • Customer service campaign • Internal ombudsman and MD of customer service • Internal campaign to staff • Noticeable improvement, but a long way to go
What we’ve done … business structure and efficiency Implemented during 2004 - benefits not yet fully realised: • Group HR • IT • Group Finance • Central Group product development unit formed • Central Group customer service unit formed Implemented in 2003 - benefits evident in 2004: • Liberty Healthcare rationalised into LPB • STANLIB restructure
What we’ve done … capital management • Capital management committee • Long-term shareholder portfolio established • Successful Liblife B. V. bond redemption • Application to the FSB to issue debt - Conditional approval received • BEE transaction successfully implemented • Offer made for Capital Alliance • Dividend policy introduced
What we’ve done … Financial Sector Charter implementation • Board transformation sub-committee established • Favourable progress against scorecard • Need more black senior managers • Black managers’ ownership scheme should help • Sizwe. Ntsaluba VSP appointed - FSC auditors - STANLIB entities – more to follow
What we’ve done … domestic operations, other market segments and Africa • Repositioning of Charter Life (now Liberty Active) • Bobby Malabie and team developed project Khula during 2004 • A build strategy (as opposed to buy) has been developed • Expected R 50 m to R 100 m investment in the next 18 to 24 months • We have some time to get the model right
What we’ve done … domestic operations, other market segments and Africa • Namibian operation small, but profitable • Investigating opportunities in Uganda and Kenya • Liberty Life offshore model discontinued • Capital Alliance closed book offshore model will be considered in due course
What we’ve done … distribution channels • Continued focus on broker relationships • We’re working on it campaign • Regional head office in Cape Town being established • Individual life bancassurance model continues to deliver • Restructured corporate benefits bancassurance model implemented • Focused on productivity of agency and franchise in 2004 - will recruit and develop in 2005 • Well established, stable agency force
What we’ve done … BEE transaction • Implemented on 8 November 2004 • Community/educational trust to be finalised in 2005 • Black management allocations done • General staff scheme in place • Timing was good – R 1 251 m now R 1 677 m • Capital repayments could commence in 18 months
Operating climate Increasingly we’ve been dealing with: • More compliance and regulatory requirements • Low interest rate/low inflation environment • Strengthening of the Rand • Volatile investment markets • Risk averse investors • Poor perception of industry (media and consumers)
Operating climate (continued) Some positives are emerging: • Industry has started recognising its shortcomings • Emerging middle class - a reality, but net spenders • South African economy - a success story • Investors becoming more bullish • Good local investment returns • Cash being accumulated by investors = opportunity
Deon De Klerk
Operational features – 2004/2003 Rm 2004 2003 % 13 440 11 667 +15 Indexed new business 4 186 3 808 +10 Indexed new business excl contractual increases 3 340 3 060 +9 Value of new business 815 609 +34 New business margin 24% 20% 3 640 4 497 Total new business Net cash inflows from insurance operations * * Maturity of R 2 090 m in respect of one large client. Excludes STANLIB and Ermitage net cash inflows. -19
Life insurance operations New business premiums Indexed new business premiums • Total +15% to R 13 440 m • Total +10% to R 4 186 m • Individual life +22% to R 11 374 m • Individual life +11% to R 3 544 m • Corporate benefits -12% to R 2 066 m • Corporate benefits +3% to R 642 m 12000 +22% 12000 10000 8000 6000 4000 -12% 2000 0 Rm 2001 2002 2003 2004 Individual life +11% 2000 0 Rm +3% 2001 2002 Corporate benefits 2003 2004
Life insurance operations Embedded value of new business New business EV margins • Total +34% to R 815 m • Total = 24% • Individual life +43% to R 819 m • Individual life = 28% • Corporate benefits -110% to -R 4 m • Corporate benefits = -1% 900 800 700 600 500 400 300 200 100 0 -100 Rm R 819 m 30% +28% 25% 20% 15% 10% 5% 0% -R 4 m 2001 2002 2003 2004 Individual life -5% Rm -1% 2001 2002 Corporate benefits 2003 2004
Life insurance operations Net cash inflows from insurance operations • Total -19% to R 3 640 m • Individual life +76% to R 5 492 m • Corporate benefits -234% to -R 1 852 m 6000 R 5 492 m 5000 4000 3000 2000 1000 -R 1 852 m 0 -1000 -2000 Rm 2001 2002 2003 Net cash inflows from individual life business Net cash inflows from corporate benefits business 2004
Life insurance operations New individual business market share (including Liberty Active) % 35 30 25 20 23 24 25 27 26 25 20 20 17 15 15 10 5 0 Recurring individual Year ended 31 December 2000 Year ended 31 December 2002 Source: LOA market share statistics for all life offices Single individual Year ended 31 December 2001 Year ended 31 December 2003 Nine months ended 30 September 2004
Other operations STANLIB: assets under management and funds under administration Rbn 2004 2003 % Life funds 72 59 +22 Segregated funds 66 55 +20 Unit trusts 51 40 +28 Structured products and other 34 24 +42 223 178 +25 16% 14% Total AUM and FUA Money market as % of total • Net cash inflows of R 15, 3 billion • Normalised earnings after tax of R 192 m up 62%
Other operations STANLIB: net cash inflows % 2004 2003 62 72 8 18 Equity 29 16 Other 1 -6 Total 100 Money market and flexi-cash Fixed interest funds
Other operations Ermitage: assets under management US$m 2004 2003 % Hedge funds 1 500 1 131 +33 Long-only funds 1 382 1 060 +30 762 600 +27 3 644 2 791 +31 41% 39% Money funds Total AUM Third party funds as % of total funds • Net cash inflows of US$572 m +160% (R 3 681 m) • Headline earnings of £ 4 m +11% (R 46 m)
Financial results – 2004/2003 Rm 2004 2003 % Headline earnings per share (cents) 460, 4 346, 4 +33 Embedded value per share (Rand) * 67, 25 57, 58 +17 Capital adequacy requirement (times covered) 2, 1 2, 6 Final dividend per share (cents) 153 116 +32 Total dividend per share (cents) 315 278 +13 * BEE normalised embedded value per share = R 65, 69 up 14%
Headline earnings Rm 2004 2003 % Operating profit from insurance operations net of tax 929 720 +29 Operating profit from shareholders’ funds 323 230 +40 Headline earnings 1 252 950 +32 Headline eps (cents) 460, 4 346, 4 +33
Operating profit from life insurance operations – major influencing factors • Shareholders’ 10% participation and higher asset base • Investment guarantee reserve • Expenses - Costs per policy - Non-recurring expenses • Liberty Corporate Benefits
Gross investment returns 25 22, 7% 20 15 12, 5% 10 5 0 -5 -10 -15 Jan Feb Mar Apr Year-to-date return 2003 May Jun Jul Year-to-date return 2004 Aug Sep Oct Nov Actuarial assumption 2004 Dec
Main factors affecting the guarantee reserves Rm Change in reserve Economic basis change 313 Better than expected overall investment performance in 2004 (44) 269 Volatility basis change (set up as a second-tier margin) = R 148 m
Expenses Rm 2004 2003 % Total group expenses per AFS 2 036 1 860 +9 IEB expenses incurred since October 2003 (93) (32) BEE transaction expenses (before tax) (15) Total group expenses 1 928 Including non-recurring expenses 1 828 +5
Non-recurring expenses of R 137 m in 2004 (2003 : R 111 m) Rm 2004 2003 35 11 2 30 Non-capitalised renovation costs 13 10 Systems impairments 37 15 BEE transaction 15 - Discontinued salaries (50%) 14 15 Various other 21 30 137 111 Retrenchment costs Pension contribution shortfall Policyholders’ non-recurring: R 116 m (2003: R 84 m) Shareholders’ non-recurring: R 21 m (2003: R 27 m)
Expenses Costs per policy 2004 2003 % Assumption Individual maintenance costs per policy Liberty Life R 248 R 240 +3, 5 +5, 5 Liberty Active R 154 R 162 -4, 9 +5, 5 R 74 m after tax release to profit
Operating profit from shareholders’ funds Rm Financial services operations Listed investments Other 2004 2003 % 265 200 +33 81 33 +145 (23) (3) >100 323 230 +40
Embedded value Rm 2004 2003 % Shareholders’ funds 8 494 8 782 -3 Net value of life business in-force 7 607 6 494 +17 766 541 +42 16 867 15 817 +7 67, 25 57, 58 +17 Fair value adjustment Total Embedded value per share (Rand) BEE normalised embedded value per share = R 65, 69 up 14%
Financial services subsidiaries fair value adjustment Rm 2004 2003 Liberty Group Properties 240 216 Liberty Ermitage Jersey 290 140 STANLIB 345 307 (109) (122) 766 541 Carrying value of in-force business acquired from IEB
Capital adequacy cover 2004 2003 3 954 3 403 Times covered 2, 1 2, 6 Times covered without BEE impairment 2, 5 Capital adequacy requirement (Rm)
Dividend policy Objectives: • Predictable growth • Less volatility • Leave room for new business growth • Strong capital adequacy
Dividend policy Policy: • Yield on EV per share of approximately 4, 75% • Going forward – aligned to medium term growth of EV • Taking into account: - economic conditions; and - CAR cover >1, 5 • Interim dividend at 40% of previous full year
Dividend Cents per share 2004 2003 % Interim 162 - Final 153 116 +32 315 278 +13
Conclusion
Focus areas for next twelve months Exciting opportunities • Operational restructuring opportunities • Capital Alliance - new business - efficiency • Products • Capital structuring • Liberty Active and, as always. . . people. . . service … costs
Focus areas for next twelve months Liberty’s business is conceptually simple and generic • We develop products • We sell products • We receive money • We invest the money according to product specification • We administer according to product specification • We pay benefits
Focus areas for next twelve months Exciting opportunities • Operational restructuring opportunities • Capital Alliance - new business - efficiency • Products • Capital structuring • Liberty Active and, as always. . . people. . . service … costs
Questions Panel Myles Ruck Chief Executive Andrew Lonmon-Davis Statutory Actuary Deon de Klerk Chief Financial Officer
Appendices
Embedded value (EV) reconciliation 2004 Yr end Rm Investment return on shareholders funds 2004 ROEV Build up (%) 2004 1 H Rm 2004 2 H Rm 1, 243 7. 9 335 908 Expected return on life business 723 4. 6 362 Investment experience 653 4. 1 -219 872 -9 -0. 1 -11 2 377 2. 4 -88 465 Changes in non-economic assumptions -357 -2. 3 -223 -134 Changes in mix of assets backing CAR -300 -1. 9 Change in modelling -139 -0. 9 -149 10 815 5. 2 330 485 3, 006 19. 0 336 2, 670 Other experience Changes in economic assumptions New business EV Profit -300 ROEV (6 month annualised) 19. 0% 4. 3% 36. 4% Return on shareholder net assets 34. 2% 7. 8% 68. 8%
Financial services and subsidiaries 2004 Fair Value Adjustment Liberty Group Properties 2003 Total Goodwill Carrying Tangible net of Fair Value Tangible value in % Change NAV amortis. Uplift NAV EV excl ation VIF Goodwill Total net of Fair Value Carrying amortis. Uplift value in EV ation excl VIF 4 0 244 11% 4 0 216 220 Liberty Ermitage Jersey 375 69 290 734 23% 375 81 140 596 Stanlib 387 0 345 732 9% 365 0 307 672 Carrying value of VIF business acquired from IEB 109 0 -109 n/a 122 0 -122 0 875 69 766 1, 710 15% 866 81 541 1, 488 1% -15% 42% 15% % change 0* * the value of the IEB business is included in the group's estimates of the VIF
New business excluding contractual increases Recurring Premiums Rm 2004 2003 Single Premiums 2004 2003 Total Premiums 2004 % Change 2003 Individual 2, 064 1, 946 8, 700 6, 808 10, 764 8, 754 23% Corporate 248 241 1, 582 1, 924 1, 830 2, 165 -15% 2, 312 2, 187 10, 282 8, 732 12, 594 10, 919 15% 3, 060 9% Total new business % Change Indexed new business 6% 18% 15% 3, 340
Effect of the BEE transaction on headline earnings 2004 Headline earnings per AFS 1, 252 Costs of transaction included in headline earnings net of tax 1 18 Preference shares accrued 2 13 2003 950 32% 35% Headline earnings including preference dividends 1, 283 950 Weighted average number of shares in issue (millions) 271. 9 274. 0 Reinstatement of weighted average number of shares reduced for BEE transaction (millions) 3 % Change 3. 8 Weighted average number of shares after reinstatement of the transaction shares (millions) 275. 7 274. 0 BEE adjusted headline earnings 465. 4 346. 7 34% 1. Costs associated with the Black Economic Empowerment transaction comprise: - R 11 million (net of taxation) in respect of the general staff scheme under which each staff member who does not participate in the ownership transaction or the Liberty Group incentive scheme, will receive 100 Liberty Group Limited shares each. This amount has been included in management expenses; and - R 7 million (net of taxation) in respect of the general staff scheme under which each Liberty Life agent who does not participate in the ownership transaction or the Liberty Group incentive scheme, will receive 100 Liberty Group Limited shares. This amount has been included in commissions. - Professional fees amounting to R 22 million have been written off directly against reserves (retained surpluses). 2. As a consequence of utilising Liberty Life’s own cash flows (in the form of ordinary dividends paid) to service the empowerment transaction financing structure (in the form of dividends on preference shares), the dividends received on the empowerment preference shares will be accounted for directly in reserves, thereby offsetting the dividends so received against the ordinary dividends paid by the company. 3. Due to the fact that the Black Economic Empowerment transaction is effectively accounted for as a share buy back (until such time that all funding is repaid), the weighted average number of shares in issue for 2004 has been reduced by 3 805 988 shares. The transaction was implemented on 8 November 2004 (25 796 143 x 54/366 = 3 805 988). Headline earnings for 2004 include R 51 million representing the income return on assets utilised to fund the Black Economic Empowerment transaction up to the date of implementation – 8 November 2004. The weighted average number of shares in issue for 2004 has been reduced from this date. Preference dividends received on the empowerment preference share at 65% of prime since the date of implementation amounting to R 13 million were not accounted for in income.
Effect of the BEE transaction on EV per share Rm EV per EV statement Costs of transaction included in headline earnings net of tax & debited against reserves 1 Reinstatement of impaired empowerment preference shares Preference dividends accrued Embedded value before impairment Total number of shares in issue (millions) Reinstatement of number of shares reduced for BEE transaction (millions) 2 2004 2003 % Change 16, 867 15, 817 7% 18, 171 15, 817 15% 250. 8 274. 7 40 1, 251 13 25. 8 Total number of shares after reinstatement of the transaction shares (millions) 276. 6 274. 7 BEE adjusted headline earnings 65. 69 57. 58 14% 1. Costs associated with the Black Economic Empowerment transaction comprise: - R 11 million (net of taxation) in respect of the general staff scheme under which each staff member who does not participate in the ownership transaction or the Liberty Group incentive scheme, will receive 100 Liberty Group Limited shares each. This amount has been included in management expenses; and - R 7 million (net of taxation) in respect of the general staff scheme under which each Liberty Life agent who does not participate in the ownership transaction or the Liberty Group incentive scheme, will receive 100 Liberty Group Limited shares. This amount has been included in commissions. - Professional fees amounting to R 22 million have been written off directly against reserves (retained surpluses). 2. Due to the fact that the Black Economic Empowerment transaction is effectively accounted for as a share buy back (until such time that all funding is repaid), the total number of shares in issue for 2004 has been reduced by 25 796 143 shares at 31 December 2004
Claims & policyholder benefits Group Rm Individual 2004 2003 % Change 10, 867 10, 436 4% Death & disability 1, 895 1, 721 10% Policy maturity claims 3, 427 3, 976 -14% Policy surrender claims 4, 005 3, 336 20% Annuity payments 1, 540 1, 403 10% Group 6, 047 3, 189 90% Death & disability 489 357 37% Scheme terminations 276 339 -19% 1, 448 1, 104 31% 251 217 16% 3, 583 1, 172 206% 16, 914 13, 625 24% Scheme member withdrawals Annuity payments Investment only terminations and withdrawals Total claims & policyholder benefits
Non-recurring management expenses 2004 Rm Total 2003 Policyholders Shareholders Total Policyholders Shareholders BEE transaction costs -15 0 0 0 Systems impairments -37 0 -15 0 Retrenchment costs -35 0 -11 0 50% of discontinued salaries -14 0 -15 0 Building renovation costs not capitalised -13 0 -10 0 -2 -1 -1 -30 -15 -21 -16 -5 -30 -18 -12 -137 -116 -21 -111 -84 -27 Pension contribution shortfall Various other items Non-recurring expenses
New business by distribution channel Recurring Premiums Rm Individual 2004 2003 Single Premiums 2004 Total Premiums 2003 2004 2003 2, 674 2, 504 8, 700 6, 808 11, 374 9, 312 Broker 979 961 3, 365 2, 737 4, 344 3, 698 Bancassurance 863 640 2, 694 1, 994 3, 557 2, 634 Agency 537 519 1, 760 1, 388 2, 297 1, 907 Franchise & other 295 384 881 689 1, 176 1, 073 Corporate 484 431 1, 582 1, 924 2, 066 2, 355 Broker 209 200 401 968 610 1, 168 15 24 36 1 51 25 171 151 224 345 395 496 89 56 921 610 1, 010 666 3, 158 2, 935 10, 282 8, 732 13, 440 11, 667 Bancassurance Agency Franchise & other Total new business
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