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Focus on its SA business pays off for Liberty

Both insurance and asset-management businesses perform well; interim dividend unchanged.

NOMPU SIZIBA: Insurance player Liberty released their interim results for the six months ended June 2019 today [Thursday] and, as mentioned with David Shapiro, they produced robust results. They reported normalised headline earnings per share up 51% to 2 013 cents. Shareholders are said to get an interim dividend of 276 cents/share, which is unchanged from the year prior.

My colleague Ryk van Niekerk spoke with Liberty’s CEO, David Munro.

RYK VAN NIEKERK: David, welcome to the show. Your profits rose by 51%, but you kept your dividend unchanged. Is that not a bit stingy?

DAVID MUNRO: Good evening, Ryk and good evening to your listeners. To give a bit of perspective, these are interim results, so it’s a very good print to generate a 51% increase in normalised headline earnings. But we are running halfway through the year and an interim dividend in our policy is really just a mechanical calculation of 40% of the prior year’s dividend. Once we have completed the full year and delivered the figures for the full year, then we’ll assess the full-year dividend, and that’s where, if we feel that we want to make a change, we’ll make it in the full-year dividend.

RYK VAN NIEKERK: We have seen many companies battle in the current poor economic climate, so it must be good for you to see a positive response flowing from the difficult decisions you took a few years ago.

DAVID MUNRO: Ryk, I think what our numbers reflect is the intense focus that we’ve brought back to the South African business. I heard you say Liberty is built on a South African retail affluent market segment; it’s where we are very strong.

In the years up until the decline in Liberty, we really lost focus on the South African market. So, we as the leadership team have brought our focus right back to South Africa. We’ve been intense in making sure that we are competitive, listening to and responding to our clients’ needs in this market, and helping to drive the productivity of our financial advisors. So, I feel that this result is really a result of the intense focus that we brought to our business here in South Africa.

RYK VAN NIEKERK: Speaking of your local operations, you are a diverse financial services group. But which operations performed the best?

DAVID MUNRO: We run two really stellar businesses. The first is what we call the SA retail business; it’s the insurance business, and that is the core of Liberty’s offering and what most people would know Liberty to be – a life insurance company that offers investment insurance products.

We also run a big asset-management company called Stanlib. Stanlib performed very well in the first half, as well. I think earnings were up 20% in that business. And the retail business earnings up 11%.

Those two combined are the lion’s share of Liberty’s earnings capability, and the driver of Liberty’s earnings. If you look at the two combined, plus some of our other smaller operations, we generated an increase in what we call “operating earnings”, which reflects the businesses that we run – those earnings are up 13.9% for the half year.

RYK VAN NIEKERK: We also saw really depressed financial markets last year. There was an improvement during the first six months of this year. Of course, that has a massive impact on your business, but it’s largely out of your hands. Since June we’ve given back some of the profits we’ve made during the first half. How does that impact your business?

DAVID MUNRO: Ryk, the way that you have to run a long-term insurance business like ours, is you have to hold a substantial amount of capital to underpin our obligations to our policyholders. That capital is then invested in what we call the “shareholders’ investment portfolio”. We run that portfolio as a balanced portfolio. It means it has an exposure to local equities, local bonds and foreign equities – and therefore currency exposure as well.

So, when you look at the performance of financial markets, either with the last six months year to view, or subsequently really it’s the performance of balanced portfolios that one needs to think about. We also don’t try and think about this in short intervals. We position that portfolio to perform over a long period of time, and hence you see this variability there in reporting cycles. So, last year earnings generated by the investment portfolio was relatively low; this year in the first half we’ve done quite well, and we are now subject to the volatility of the next six months. There are many factors for volatility, and that will impact on this portfolio.

That’s how we differentiate between operating earnings and normalised headline earnings, which then includes that volatility.

RYK VAN NIEKERK: Liberty and Discovery are currently involved in a legal dispute, which relates to Liberty’s use of the Vitality brand. What is this all about?

Read: Liberty says it is not using Discovery brand unlawfully

DAVID MUNRO: Let me give you a little bit of perspective here, Ryk. We spent a lot of time thinking about the insights that we generate through running this life insurance business that we have over a long period of time, and it’s very clear that people are living longer and healthier lives. So we have repositioned out Liberty Lifestyle Protector, which is our flagship product, to not just protect and provide cover for people when they die, but more to give them protection for life events, for the medical costs that they increasing suffer, income protection if you lose your job, or suffer an incapacitating accident, actually giving people protection for their lifestyle during life.

Now, a key part of lifestyle is living a healthy life. And so we spent some time working with our advisor community and also with some of our clients to understand what it is that really reflects their needs. We got two insights out of this process. Firstly, clients do like to be rewarded for what they do. And, secondly, there is no real space for another rewards programme. That was the first insight.

The second one was that clients would like the freedom to choose their wellness programme, independent of the provision of other services, particularly financial services. They want to be given the choice to get the credit for their healthy lifestyles – where they choose and not have it dictated to them. So, we launched something called the Liberty Wellness Programme, which basically says we will reward our customers for their healthy lifestyles, but we won’t impose upon them a particular wellness programme without having to disclose to us if they can’t have a wellness programme that’s offered by someone else. Disclose to us your status on that wellness programme, and we’ll interpret that. If we recognise that programme, we’ll interpret it and we’ll give you a reward for that. That’s the product and future of our Lifestyle Protector that’s at stake here.

RYK VAN NIEKERK: But Discovery would allege that you are using their innovation in your calculation of premiums and how you treat your clients.

DAVID MUNRO: They’ve alleged in court papers that they’ve submitted to the High Court that we’ve infringed their trademark, and they’ve alleged something called “unlawful competition”. We will vigorously defend the matter. We have already come up with our own court papers. We think that this matter really highlights two critical principles. Firstly, we see them [as] trying to prevent us from allowing and giving clients benefit from their wellness status. We think that this is an attempt to limit competition in our market, and we think that therefore needs to be defenced.

And secondly, and perhaps more profoundly, this is a question about whose data it is, anyway. We believe that client data – and in this instance a wellness status – actually belongs to the client, and not to the company, and that the clients therefore shouldn’t be prevented from using their own data to secure a benefit from somebody else. In this instance, a status and allowance programme is what we call a risk proxy. It will either paint for us the risk of a life, or of somebody risking his health, just like a smoker’s status would be a risk proxy. And so we are using very simply the clients’ disclosure of their status in the wellness programme.

Now, we are therefore giving them a reward for what we think that means in terms of the [risk].

NOMPU SIZIBA: Our thanks to David Munro.

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My preservation fund and my RA with Liberty has not grown for the 3 years plus. Expensive management fees still being charged though. I know we are told to look at long term but just to see small progress brings with confidence that for sure by the time I retire, my money would have grown enough to support me.
Currently I see it working for Liberty and not for me!!!

They should be doing better. My company pension fund with Alex Forbes did 5.3% annualized over the last 3 years to 1-Aug-2019. It could have been above 8% if I had switched to the banker portfolio.

Private RA on the AG Platform did 2.6% while ROE did -1.4%.

Will have to do better once I leave the world of regulation 28.

There is huge uncertainty waiting in global equity and the ZAR.
Asset allocation decisions will be a huge challenge.

@KCD, you signed for the management fees, therefore you need to speak to your broker, who SHOULD have done a Risk Profile Analysis for your Preservation Fund. This Analysis should be the basis of your investment strategy to be reviewed on a regular basis. To blame Liberty makes no sense as you should blame your Broker.

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