Life offices have much to sort out
Liberty is well covered, with a 2.92 capital adequacy ratio, but MMI is in better health
Both Liberty and MMI are paying lip service to the back-to-basics approach.
Liberty CEO David Munro, who was parachuted in by controlling shareholder Standard Bank last June, says there will be no acquisitions on his watch, at least for another couple of years. He has pulled the plug on the ambitious Nigerian life insurance acquisition, where negotiations have been taking place for three years. This, he says, was driven as much by the need to keep management time focused on local needs as by the cost.
The capital involved was just another consideration. Liberty is certainly well covered with a 2.92 capital adequacy ratio, or almost three times the minimum required capital.
It will probably be the easiest of Munro’s tasks to maintain this, especially with the freeze on acquisitions. But Liberty is not prepared to follow the example of new MMI CEO Hillie Meyer, who plans to buy R2bn of shares instead of paying dividends.
Both life offices trade at a 20%-25% discount to embedded value (net asset value plus the present value of the life book), and it makes sense to buy back shares at these levels.
But Standard Bank clearly wants its dividend from Liberty and would take a long-term view on reducing the embedded-value discount.
Munro says there were too many new ventures, adding complexity, which distracted the business from the basic task of delivering life insurance and investments to affluent clients.
Poor investment performance from Stanlib has not helped the competitiveness of the product range. Many of Liberty’s legacy products are uncompetitive as they are much more expensive than the other products to run — and for clients to buy.
Liberty’s margin of its value of new business is just 0.5%. Munro aims to increase this to 1%-1.5%, the range achieved by MMI which, like Liberty, also focuses predominantly on the retail affluent market.
MMI, under Meyer and new finance director Risto Ketola, has numerous challenges, but it is at least in better health than Liberty. It has diversified into the mass market through Metropolitan, where it enjoys a healthier 4.5% margin.
Liberty’s short-term insurance business is only just being set up, with the bank taking a generous share of the profits. Momentum’s short-term insurance business is a year or two from turning a profit. And while Liberty has no SA health business any more, MMI administers the Government Employees Medical Scheme and has a 155,000-strong open scheme.
Munro has been able to turn around the net client cash flows into the group: there were outflows of R665m in the first half and inflows of R2.3bn in the second half. The management team has increased sales of retail death and disability policies.
But there were outflows in Liberty Corporate’s umbrella funds. Industry-wide this sector is growing as corporates dismantle their standalone funds. Munro says the aim is to convert the sizeable number of corporate clients to retail clients in their own right.
Liberty still has a respectable individual life business, with earnings up 8% at R1.2bn in the year to December. Momentum’s earnings fell by 10% in the half-year to R567m, and Metropolitan’s by 15% to R317m in the half-year.
At least Liberty had products suitable for tough times, such as the Guaranteed Investment Plan, which offers a fixed amount on maturity, and the Bold Living Annuity to prop up equity funds in weak markets. MMI is breaking ground through its joint venture with African Bank, allowing it to offer loans to clients as well as funeral and life policies through bank branches.
Liberty’s group cluster of companies barely seems worth keeping. Only Liberty Africa Insurance grew profits, but is it worth maintaining an Africa-wide network for R45m (probably as much as Liberty makes from its Hermanus office)? The local Liberty Corporate was hit primarily by a spike in income-protection claims.
Munro admits that Liberty Health remains subscale, which helps explain the R54m loss. He says it offers a challenge, as Liberty does not have a health insurer in SA.
There are two prongs to growing this business — one is a joint venture with Bupa, the British health insurer (and a competitor to Discovery in the UK), the other is through Standard Bank Africa, a relationship which has not yet been exploited.
Stanlib was a big disappointment, with the combined SA and Rest of Africa result coming in at just R48m. It might seem to be ticking along with R4.2bn on net inflows, but Liberty has been throwing managers into the Stanlib fire, recruiting Derrick Msibi from Alexander Forbes, sending in Giles Heeger from the LibFin unit and recruiting Mark Lovatt, an experienced fund manager from the UK. Munro says Lovatt will bring deep knowledge of global markets.
Stanlib now has a very low share of the third-party institutional business — just R47bn, excluding money market. It has been in the bottom quartile for balanced portfolios over one, three and five years; just the Stanlib Core Bond Fund is in the top quartile over three years.
Stanlib has one more chance to reboot its equity business under Herman van Velze and Theo Botha, but it will be a long time before it rebuilds credibility.
Momentum has abandoned its traditional single manager, once known as RMB Asset Management. The new Momentum Investments runs a few asset classes such as property and fixed income in-house, but no longer manages equities. It is early days, but portfolios such as its Factor 6 and Factor 7 have had good returns.