The Liberty ship turns slowly

Article written by Sasha Planting, MoneyWeb

After a year in the hot seat Liberty CEO David Munro appears to have succeeded in stabilising the company, at the very least. His challenge now is to grow new business volumes in an economic climate that is not supportive of growth.

The financial services company delivered normalised operating earnings up by 18% to R958 million, supported by increased earnings from its South African insurance operations and Stanlib businesses. However, weak investment markets detracted from the shareholder investment portfolio earnings (which delivers a return on shareholder funds invested) resulting in normalised headline earnings increasing by just 5% over the prior period.

“The results for the half year [to June 30th] were good, but not good enough,” Munro told Moneyweb. “They reflect a stabilisation of our business, but we are still some distance from where we need to be.”

Efforts to restore the financial performance of the SA retail insurance business, improve the investment performance of Stanlib, simplify the group’s overall organisational design, expand its relationship with the Standard Bank Group, and optimise investments in growth businesses have gained traction, but the financial metrics are not reflecting this yet.

This is visible via Munro’s key “measures of progress” which shine a light on current and future performance. According to these measures new business is being written at a margin of 0.7% (almost a giveaway); the return on equity is unchanged at 12% and growth in embedded value is 5%. “All of these metrics are better than the baseline established in December, so there has been change,” says Munro. In December the new business margin was 0.4% (the target is 1% to 1.5%) and growth in embedded value was 1% (the target is 12% plus). The return on equity (ROE) target is 15% minimum.

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Source: Liberty results presentation

To be fair, these targets are to be achieved by 2020 – but Munro is in a hurry and wants to see visible signs of change. For instance, while on the surface the 5% growth in normalised headline earnings is acceptable, when you drill into the operating numbers there are some disappointments, which is why the ROE remained flat, he says.

The first of these is that while the value of new insurance business grew by an impressive 57%, this was thanks to cost cutting, efficiencies and better product design rather than new insurance business written. “We are doing the right things, but we need to see an improvement in the volume of new business coming in,” says Munro. “That will be our focus in the second half.”

The performance of Liberty Health and Liberty Africa Insurance, which returned losses of R45 million and R5 million, was also disappointing. “You absolutely have to make money from your financial services businesses,” he says. “It is critical. These are good businesses, with growth potential. But they lack scale.”

In addition, while much work has been done to improve investment performance within asset manager Stanlib’s multi-asset and equity franchises, with increased third-party net customer cash inflows into non-money market portfolios, it is a long-run game, Munro says. Stanlib South Africa saw net customer cash inflows increase to R8.4 billion from R5.6 billion in the prior period. Stanlib Africa however experienced outflows of R7 billion, mainly related to the termination of one large institutional mandate.

“These results suggest that Liberty’s turnaround is on track,” says Adrian Cloete, a portfolio manager at PSG Wealth. “They started the process of turning Stanlib around and the business is contributing positively to earnings and individual arrangements [the South African retail insurance business] is showing positive results. I think they are doing the right things.”

Liberty share performance

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One area that requires attention, he says, is the bancassurance agreement with Standard Bank, which sees Standard Bank selling Liberty insurance, health, and investment products through its distribution network. The total indexed new business premiums sold under the agreement increased by a disappointing 3% on the prior period.

Liberty also needs to improve its new business margin. “Liberty’s share price is currently trading at a 15% discount to its group equity value, which is R138.66cps,” says Cloete. “But if they can bump up margins and grow enterprise value by about 12% a year, the market will reward them. But it needs the evidence.”

To put it in perspective, MMI trades at a 38% discount to group equity value, while Sanlam trades at a 26% premium. “The market is cautious, but has already given Liberty some credit for changes made,” he says.

Liberty has declared an interim dividend of 276 cents per ordinary share.