At last, some sign of life at Liberty
David Munro hasn’t had an easy year, but he’s going in the right direction, and the full-year results should look strong
About a year after David Munro was parachuted into the CEO position at Liberty, he is starting to resolve the numerous issues at the life insurance and asset management group.
The biggest problem was that Liberty was virtually giving away its insurance business on a margin of 0.4%.
With repricing of products and tighter expense management, this has increased to 0.7% in the six months to June, still below both the internal target of 1%-1.5% and the 2.5% levels enjoyed by Old Mutual and Sanlam.
But the margin improvement was enough to increase SA Retail’s earnings 18% to R704m. Higher prices contributed to the decline in sales, with new recurring premiums down 2% to R3.3bn and new single premiums down 6% to R10.6bn. Almost as important as margin is the ability to retain business, and there was a change here as net client cash flows turned from a negative R665m to a positive R262m.
A real growth in sales was never on the cards. But Munro’s boss, Standard Bank CEO Sim Tshabalala, is not preoccupied with short-term numbers. He sees Liberty as an essential component in the group’s ambition to become a universal financial services organisation.
Munro is adamant that Liberty’s strategy will continue to revolve around the broker, as he believes that in the retail affluent market there is a demand for human contact. Even bancassurance, simple products sold in the bank branches, involves some contact with bank staff. Of course neither of Liberty’s excursions into online sales, MyLife and Frank.net, was a roaring success.
But Munro says that rather than having a sales and marketing silo dealing with the advisers, all business units should put intermediaries at the heart of their business. Like many new CEOs, Munro has changed the business unit structure: the clunky Individual Arrangements and Group Arrangements names have been dropped. SA Retail is the core business, and in effect the group now has a series of options in what it calls the "business development" portfolio. The real hospital pass will go to the executive in charge of the emerging consumer sector and direct: two areas where the Liberty record is dismal. And even after decades Liberty Corporate provides barely a 10th of the earnings generated by the retail business. Corporate’s earnings were down 4% to R77m.
It is probably worth persevering with this business, however, as it has a decent share of the business moving into umbrella funds and its group risk (death and disability) underwriting has been satisfactory.
Much more concerning is the cash drain in the rest of Africa, with health losses more than doubling to R45m and Liberty Africa Insurance going into the red with an R8m loss.
The only good news was that the R118m loss in Stanlib Africa turned into a R10m profit, though only after shutting a number of operations. If there is ever a time for Standard Bank to show it is a supportive shareholder it is now — it needs to work much harder to ensure that Liberty can leverage the bank’s pan-African network.
Liberty’s 18% increase in operating profit perhaps gives a misleading impression of the speed of recovery. It might be time for Liberty to follow MMI and de-gear its shareholder’s portfolio. Liberty’s NAV remains closely tied to the vagaries of the stock market. The earnings of its equity-heavy shareholder’s portfolio fell 17%, almost wiping out the gains from operations.
It is too early to say what the effect of the mid-June cyberattack has been on Liberty’s retentions and sales. Munro was quite open at the time, though he has since acquired the CEO’s skill of talking a lot but not saying much.
In his update on the attack he said the affected data was "unstructured" — e-mails and attachments — not clients’ personal or medical data. He said no customer suffered financial loss, though presumably if they did Liberty or its insurers would make up for it.
Munro was more impressive in his disclosures about retirement funds. Unlike the cyberattack issue he didn’t have to bring it up.
He said Liberty is tracing 75,000 people who have not claimed benefits due to them on retirement or resignation or to their heirs on death. If the administrators are unsuccessful in finding beneficiaries, the government could decide to swallow up the capital for the fiscus.
Liberty has the most registered funds under administration of all the SA institutions, but some of those funds have just 12, six or even one member.
Munro said it was rather overeager when it deregistered 4,600 funds, assuming none had any assets. It turned out 130 funds had R100m in assets in total and it has had to reverse the process. None of Munro’s peers has been as candid, so that’s a challenge to Peter Moyo at Old Mutual and Ian Kirk at Sanlam.
Liberty’s full-year results to December should look strong, if only because asset manager Stanlib has to have had a better year. Its earnings were up 52% to R175m in the half-year, and net inflows of R8.4bn were impressive in view of its mediocre performance — the sales channels came to the party.
Liberty trades on a discount of close to 20% to embedded value, which is its its net worth plus the valuation of its life book — and it has a 6% dividend yield. It is cheap e but perhaps for good reason — it might be worth revisiting what progress it has made in a year’s time, or perhaps scoop it up if it falls below R100 a share.