Liberty Holdings in need of attention and love
New CEO David Munro has his work cut out for him to fix the shambolic insurer and asset manager
You can’t say that Standard Bank isn’t putting its best resources into helping Liberty. The bank’s former CEO, Jacko Maree, barely had time for his first post-retirement golf game before he was strong-armed into taking the chairman’s role at the troubled life office. And David Munro gave up his job as head of Standard Bank’s massive and highly successful corporate and investment banking business to become the new CEO in June. Though he is going to a smaller business, it is clear that the hours won’t be shorter and the working day will be a lot less fun.
Munro admits that both of Liberty’s large businesses, retail life and asset manager Stanlib, "need attention". Retail life, known internally as Individual Arrangements, is Liberty’s original business.
A strong new product pipeline has helped sales: a more conservative client public was attracted to its guaranteed investment plan, as well as its Bold living annuity, which also includes guarantees. But a tough climate has also meant higher policy surrenders, and many of these products had higher margins than the ones that replaced them — the net inflows of R774m were disappointing. And the business is practically being given away: the new business margin has fallen from 1.6% to 0.4%.
Stanlib needs to generate consistent investment performance in its key equity and balanced franchises if it is going to attract a higher share of institutional and retail flows. It recently recruited a new CEO, Derrick Msibi from Investment Solutions, to drive this.
Almost all of these funds are in the bottom quartile over one and three years. Munro adds that operational write-offs will be unacceptable during his tenure. Stanlib incurred costs when it reversed its institutional administration outsourcing programme. In sales Stanlib had a good period, with nonmoney market inflows up almost 70% to R5.4bn while outflows in money market funds were turned to a R732m inflow.
Unfortunately, Stanlib’s products, especially money funds, are nowhere near as profitable as the life policies. And they did little to help Stanlib’s bottom line, which fell by more than 50% to R115m.
At least many of the numbers for the six months to June, though sharply down on the same period last year, are well up on the second half of 2016. Headline earnings were up 80% over that time, though all the focus has been on the 30% fall compared with the six months to June 2016.
Headline earnings aren’t a good indicator of the health of a life office. Finance director Casper Troskie, another Standard Bank old boy, points to Liberty’s strong capital position. It still has 2.8 times as much capital as the regulator requires.
Like sharks, life insurers need to keep on moving to survive. Liberty’s highly rated agency and franchise forces have come to the party, and gross insurance sales were up 10% to R14.1bn. But Troskie says the sales mix and cost led to painfully thin margins. The value of new business fell from R257m to R86m — barely more than half that achieved by Nedbank’s far smaller in-house life insurer.
Munro promises that, with his connections in Standard Bank, he will be able to put Liberty’s Africa strategy back on track. It certainly looks a shambles, with a R118m loss from Stanlib Rest of Africa and a R19m loss from Liberty Health, which operates across the continent.
Troskie says Stanlib increased provisions to improve the operational and control environment. The guaranteed cash mandate business in Kenya, which must have been money for jam, was curtailed by legislation.
But Stanlib Africa is a sizable business, with R53bn under management. If Liberty can’t make it work, Standard Bank will probably absorb it. But Liberty Health, which generates risk profits and not just administration fees, could prove to be a long-term winner.
Munro gives Liberty Health and the small but profitable Liberty Africa Insurance a passing grade. He also calls Liberty Corporate’s results satisfactory, even though its headline earnings were down 10% to R80m.
Munro’s predecessor, Thabo Dloti, considered this business to be a growth driver — there is a land grab for members of umbrella funds across the life offices and other pension fund administrators. There were lower asset-based fees but higher risk and administration fees. Liberty can’t afford not to be in this business, however peripheral its profits seem to the group today.
Liberty’s relationship with Standard Bank should improve, not only because Munro is a bank insider, but also because there is a more energetic approach to bancassurance sales.
The head of the bank’s Wealth business, Margaret Nienaber, unlike her predecessors Bruce Hemphill and Steven Braudo, isn’t treating the job as a short sabbatical on the way to another employer. The profit on bancassurance, or bank branch-based sales of insurance products, is skewed heavily towards the bank, but it is an important contributor to new business — indexed sales (taking 100% of recurring premiums and 10% of single premiums) were R1.6bn. It now generates more recurring premium business than the tied channels, such as agency and franchise, and more than the independent brokers.
The Liberty Holdings group equity value, which is a combination of net worth plus the actuaries’ valuation of the life book, was almost unchanged (2% down) at R143.16/share. So at a share price of R105.50, it is at a discount of more than 25%, significantly worse than its peers. It looks tempting, but hold off from buying until Munro’s blueprint has been unveiled.