One could argue that life insurance groups are more susceptible to the effects of the Covid-19 crisis than businesses in most other industries. Not only are operations impacted by higher costs and lower productivity while business activity declines due to the difficult economic environment, but the core business is affected by earlier claims on policies.
It was thus not surprising that David Munro, chief executive of Liberty Holdings, focused a lot of attention on the effects of the pandemic in his presentation of the group’s interim results during a webcast on Wednesday morning.
“The world is facing a significant humanitarian crisis, with the virus continuing to spread exponentially across the globe and in SA,” he said. “Government-imposed lockdowns have been introduced in all countries in which Liberty operates, resulting in recessionary economic environments in these countries. Millions have been infected and thousands have succumbed to the disease to date.”
Death rate up, and not just due to coronavirus
Management specially noted in its commentary to the interim results announcement that Covid-19-related deaths in SA have increased to more than 8 000 to date. Liberty also mentioned its concerns that SA’s total excess death rate from all causes has increased lately.
Both Munro and group financial director Yuresh Maharaj mentioned that SA was already in a recession when it entered 2020, and then things got worse.
“The first six months of 2020 are unprecedented in Liberty’s 62-year history. The emergence of the Covid-19 global crisis created uncertain health-, economic- and financial challenges,” noted management.
Financial markets mirrored this uncertainty and impacted Liberty’s figures for its first half to the end of June.
A look at the balance sheet shows financial resilience without any specific item really worth drawing attention to, except for a decline in long-term policyholders’ assets from R6.6 billion a year ago to R5.7 billion at the end of June due to normal market movements and a drop in the value of investment properties of R4 billion to R32 billion.
However, the value adjustment to assets of a negative R4.1 billion impacted severely on the income statement, with total income declining to R19.2 billion in the six months, compared with R47.6 billion in the same period of the previous year when value adjustments to assets delivered a positive R24 billion.
R3.1bn interim loss
The end result is that Liberty reported a loss of R3.1 billion for the six months to end June, compared with a profit of R2.1 billion in the first half of 2019. This translates to a loss of 902 cents per share compared with earnings per share of just below 699 cents in the first half of the previous financial year.
Management says the R3 billion provision raised for its response to the Covid-19 pandemic is one of the main reasons for the loss; it would have reflected a profit of R633 million if one excludes the provision of R2.1 billion net of tax.
Liberty’s disclosure of earnings by each business segment shows that SA retail insurance operations – still the most important division in the group by far – suffered the worst during the six months under review.
Earnings fell by 41% to R458 million compared with R782 million a year ago.
Munro mentioned that earnings were affected by unforeseen expenses, such as relief to advisors, personal protection equipment, IT equipment and enhanced communication and connectivity capabilities to facilitate remote working.
Sales of new policies and investment products were also affected, with Liberty reporting a decline in new business of very close to 6%.
“The Covid-19 pandemic has had a material impact on sales of single and recurring premium business due to its impact on the economy, clients and the difficulty of doing business,” says Munro in his commentary to the results.
Meanwhile, total death and disability claims increased by 5%.
Interestingly, Liberty noted that claims arising from accidental deaths declined due to various lockdown measures.
Equally interesting is that Liberty has not experienced a significant increase in claims due to coronavirus deaths as yet. However, Munro noted that claims related to the Covid-19 pandemic are starting to increase, mostly within the funeral policy books in both the SA retail business segment and the corporate business segment.
Usually not worth a second glance, the statement with regards to the directors’ assessment of the group’s status as a going concern is worth reading. The directors assure stakeholders that the group is well capitalised taking all risks into consideration. That is, after all, an insurer’s business.
It notes that Liberty took great care in modelling different scenarios, but the interesting bit is that Liberty says the pandemic can reasonably be defined as a one in 100-year event.
In view of this, management’s prediction that the pandemic will affect the economy, consumers and businesses for the next 12 to 18 months is telling.
“We expect continued pressure on new business volumes and margins, given the extended lockdown period and the financial distress that is prevalent in SA,” says Munro.
Listen: David Munro spoke to Nompu Siziba about the group’s interims
It seems the loss did not come as a big surprise to investors. The share was largely unchanged at R68 after the announcement of the results on Wednesday morning.
In fact, the warning of a loss in a trading statement a few weeks ago and Liberty’s announcement of the R3 billion reserve to ride out the pandemic at the time also had little effect on the share price then.
Investors already discounted the damage in December 2019 when the share fell from around R120 to a low of R55, before recovering to the current levels. That Liberty is passing its interim dividend was probably not a big surprise either.