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Liberty Holdings

Liberty Life Association of Africa Limited - Preliminary results for the year ended 31 December 1999

Liberty Life Association of Africa Limited
(Incorporated in the Republic of South Africa)
Registration Number 57/02788/06)

Highlights – continuing operations Features
  • New business sales up 33%
  • New business recurring premiums up 18%
  • Value of new business up 48% to R366 million
  • Life fund operating earnings up 23%
  • Headline ROE increases from 8% to 19%
  • Headline earnings up 14%
  • Capital reduced via unbundlings
  • Group structure simplified
  • Strong investment returns
  • Shareholder funds available for redeployment R3 billion

  Continuing operations Unbundled operations Total operations
Summarised group
income statement
1999
Rm
1998
Rm
%
Change
1999
Rm
1998
Rm
1999
Rm
1998
Rm
Life fund operating surplus
Revenue earnings attributable to shareholders’ funds
1 379
30
1 120
116
23
(74)
-
227
-
461
1 379
257
1 120
577
Headline earnings

Investment surpluses attributable to shareholders’ funds

1 409

765

1 236

(731)

14

-
227

166

461

725

1 636

931

1 697

(6)

Total earnings including investment surpluses 2 174 505 331 393 1 186 2 567 1 691
Headline earnings per share (cents)
Number of ordinary shares in issue (000’s) Weighted average number of ordinary shares in issue (000’s)
523

270,2


269,3

464

267,8


266,5

13

-


-

-

-


-

-

-


-

608

270,2


269,3

637

267,8


266,5


 

Pro forma (1)

   
Summarised group
balance sheet
1999
Rm
1998
Rm
%
Change
1998
Rm
Capital, reserves and liabilities
Shareholders’ funds
Minority interests
Life funds
Convertible bonds
Retirement benefit obligation
Deferred taxation
Other liabilities
Current liabilities
9 092
2
56 184
1 566
98
193
-
2 136
4 963
1
43 818
1 489
81
-
-
2 103
83
100
28
5
21
-
-
2
18 270
15 815
64 131
3 697
81
-
7 077
4 433
- 69 271 52 455 32 113 504
Assets
Investments
Office furniture, computer and other tangible assets
Deferred taxation
Current assets
64 991
316
-
3 964
48 748
280
81
3 346
33
13
-
18
104 619
309
67
8 509
Total assets 69 271 52 455 32 113 504
Assets under management by subsidiaries 29 678 27 585 8 45 620
Total assets under management 98 949 80 040 24 159 124

(1) As if Liberty International and Stanbic had been unbundled at 31 December 1998.

- 31 December
Statement of changes in shareholders’ funds 1999
Rm
1998
Rm
Shareholders’ funds at beginning of year
Dividends in specie (Pro forma value at 31 December 1998)

Liberty International PLC
Standard Bank Investment Corporation Limited

Reduction in net asset value in respect of contingent liabilities assumed by Liberty International shareholders

18 270

(7 512)
(5 570)

(225)

17 256
Shareholders’ funds at beginning of year (1998 Pro forma)
Retirement benefit costs
Goodwill on acquisition of subsidiary companies
Dividends in specie (movement in carrying value of investments from 31 December 1998 to date of unbundling )

Liberty International PLC
Standard Bank Investment Corporation Limited

Exchange difference in respect of contingent liabilities assumed by Liberty International shareholders
Earnings including investment surpluses attributable to shareholders’ funds
Ordinary dividends
Subscriptions for shares
Transfer from life fund contingency and other reserves

4 963


198
(364)

5

2 567
(762)
170
2 315

17 256
(54)
(52)

1 691
(1 237)
666

Shareholders’ funds at 31 December 1999 9 092 18 270

    Pro forma (1)  
Embedded value and value of new business 1999
Rm
1998
Rm
1998
Rm
Risk discount rate
Shareholders’ net assets (2)
Value of contingency and other reserves
Net value of life business in force
16,25%
9 092
            -
            4 756
17,5%
4 963
2 390
4 727
17,5%
18 270
2 390
4 727
Value of life business in force
Cost of solvency capital
4 765
(9)
4 734
(7)
4 734
(7)
Total embedded value 13 848 12 080 25 387
Value of new business

Previous tax dispensation - long term expense relief
New tax dispensation

385
366

248
-

248
-

(1) As if Liberty International and Stanbic had been unbundled at 31 December 1998.

(2) The value for shareholders’ net assets reflects the value of the tangible net assets as shown in the balance sheet. No attempt has been made to place a fair value on the financial services subsidiaries of Liberty.

Embedded value profits 1999
Rm
Embedded value at the end of the year
Less Embedded value at the beginning of the year (proforma)
Plus Dividends declared
Less New capital raised
13 848
(12 080)
762
(170)
Embedded value profits 2 360
Return on shareholders’ net assets
Return on embedded value
32,1%
19,5%

Analysis of embedded value profits 1999
Rm
Investment return on shareholders’ net assets and contingency reserves
Expected return on value of life business in force
Investment experience variations on life business
Other experience variations
Changes in assumptions
Impact of new tax basis
Allowance for current and future STC
Value of new business
1 682
845
967
(376)
(332)
(643)
(168)
385
Embedded value profits 2 360

Bases and assumptions
The principal bases and assumptions used have been:
(i) Future investment returns on the major classes of investments were set with reference to the market yield on medium-term South African government stock.
Investment returns used: 1999
%
1998
%
Government stock
Equities
Property
14,25
16,25
15,25
16,5
17,5
16,5
(ii) The risk discount rate has been set equal to the investment return on equity assets 16,25 17,5
(iii) Taxation allowed for in the calculation of the embedded value of in force business at 31 December 1998 was on the four fund tax basis applicable on that date with tax rates of 30%. At 31 December 1999 tax was allowed for on the revised four fund tax basis applicable from 1 January 2000 with tax rates of 30%. Full tax relief under each applicable tax dispensation was assumed. No account has been taken of the recently announced capital gains tax likely to be introduced with effect from April 2001.

The impact of the change in the tax dispensation is a reduction in embedded value of R643,2 million. This comprises the additional tax payable on transition to the revised tax basis of R214,0 million plus a R429,2 million reduction in value of future profits derived from policyholder funds. This reduction reflects lower expense relief and higher tax payable on transfer of profits offset where relevant by recoveries from policyholder funds.

(iv) Other bases, bonus rates and assumptions:
Parameters reflect best estimates of future experience.

The Liberty Group achieved highly satisfactory growth in new business sales, competitive investment returns for policyholders and a sustained high level of income attributable to shareholders, notwithstanding the difficult economic conditions which prevailed during the first half of 1999.

Rising equity markets proved to be an opportune background against which to re-establish Liberty Asset Management as premier fund managers. By year-end, most of the Company’s managed funds had achieved top-quartile status. The Group’s largest managed portfolio delivered a pleasing investment return of 45%, with the equity component yielding 65%.

The domestic economy appears to have entered a recovery phase with business and consumer confidence levels increasing appreciably. Lower interest rates have increased discretionary income for most consumers. This has been further boosted by the recent reduction in marginal rates of personal income tax. These factors augur well for the Liberty Group’s business prospects for the 2000 financial year and are especially significant for Standard Bank Investment Corporation Limited (Stanbic) and the Liberty Group to continue to advance in their exciting collaborative bancassurance efforts.

Capital restructuring and unbundling

The past year has seen significant changes to the ownership and capital structure of the Liberty Group, with control of the Group changing from joint control between Liberty Investors Limited and Stanbic to sole control by Stanbic. At 31 December 1999 Stanbic held 54,8% of Liberty Holdings Limited, which in turn owned 55,4% of Liberty.

The unbundling of the shareholders’ entire 23% interest in Stanbic removed the previous complex cross-shareholding relationship between Liberty and Stanbic. The distribution to shareholders of the majority of the shareholders’ interest in Liberty International PLC, together with the distribution of the shareholders’ entire stake in Stanbic, has resolved the Group’s previous overcapitalised position by reducing stated shareholders’ funds at 31 December 1998 from R18,3 billion to R5,0 billion.

A further advantage of these unbundlings has been to reduce the entry points to the Liberty Group from four to two, with only Liberty Life and Liberty Holdings remaining.

Asset disposals

The investment in SAB plc (SAB) and Beverage and Consumer Industry Holdings Limited (Bevcon) at R4,0 billion constituted a disproportionately large portion of the Group’s reduced capital and reserves. The decision was taken to sell back to SAB a significant portion of our shareholders’ stake in SAB which helped to remove the perceived market overhang in SAB shares. This transaction realised R1 209 million. Further assets held on shareholders’ account were disposed of resulting in total cash of R2,0 billion at year-end. With the anticipated proceeds of the sale of Guardian National and other investments, shareholders will have cash resources approaching R3,0 billion by mid 2000. These resources will be used for strategic growth as well as operational improvement in such fields as: e-commerce; expanding the Corporate Benefits and Liberty Healthcare business units; implementing the Blueprint Online project; expanding distribution; and developing our offshore asset management capability.

Return on equity (ROE)

As a result of unbundlings and the outstanding return generated by the life insurance operations, the headline ROE has increased dramatically from 8% in 1998 to 19% in 1999 for continuing operations. Taken together with the investment surpluses not included in headline ROE, the total ROE for the year has increased to 30%.

Financial results

Basis of preparation and disclosure

The income statement for the 12 months to 31 December 1999 shows separately under "unbundled operations" the income arising from the interests in Liberty International and Stanbic, which were unbundled to shareholders during the year. The column headed "continuing operations" reflects on a comparable basis the operational activities of the Group’s life insurance and financial services operations, together with the investment income and surpluses on residual and ongoing shareholder investments. The "total" column therefore does not produce meaningful comparisons with 1998 results because the 1999 totals only include income up to the unbundling dates.

Treatment of life fund contingency and other reserves

In order to conform with developing life insurance accounting practice, the holding of contingency and other reserves in the life fund has been discontinued with effect from 31 December 1999. The life fund liability now reflects only the actuarial liabilities under unmatured policies.

Of the closing balance of contingency and other reserves at year-end of R2 965 million, R650 million has been transferred to life fund actuarial liabilities representing second-tier margins ( e.g. AIDS and extra mortality reserves). The balance of R2 315 million has been transferred to shareholders’ retained surplus and other reserves. The income attributable to the assets underlying the contingency reserves has been accounted for in life fund operating surplus during 1999 as the transfer only occurred on 31 December 1999. With effect from financial 2000, income on the assets transferred to shareholder-retained surplus and other reserves will be accounted for in revenue attributable to shareholders’ funds. This income amounted to R82 million for 1999.

Tax and valuation basis changes

During November 1999, changes were promulgated to the four fund basis of taxation for life insurance companies. These changes manifest themselves both in additional taxation payable on transition from the old basis to the new and an increased cost of taxation for the 2000 year onwards. Although these changes are only effective from 1 January 2000, the additional tax of R214 million payable on transition from the old basis to the new has been fully provided for at 31 December 1999. At the same time, valuation basis changes led to a net decrease in actuarial liabilities of R221 million. The net effect on headline earnings of the non recurring valuation and tax basis changes resulted in a small release of R7 million.

Embedded value

The Group’s embedded value has increased from R12 080 million (on a proforma basis adjusted for unbundlings) to R13 848 million. Shareholders’ net assets have increased by R1 739 million, reflecting the increases in the market values of shareholder investments, as well as headline earnings retained after dividends paid. The net value of life business in force has increased marginally to R4 756 million despite being reduced by R643 million as a result of the capitalised effect of the change in the four fund basis of taxation including the additional tax payable on transition of R214 million.

Embedded value profit of R2 360 million for 1999 reflects the healthy performance of the underlying insurance operations with the profits emanating from investment returns in excess of assumptions largely offsetting the effect of the taxation basis change. The embedded value profits represent a total return on embedded value of 19%; and disregarding the impact of the non-recurring change in taxation, the embedded value profit of R3 billion represents a return of more than 40% on shareholders’ net assets.

Results of operations

The Group increased headline earnings on continuing operations by 14% to R1 409 million, with headline earnings per share increasing by 13% to 523 cents. Life fund operating surplus increased by 23% to R1 379 million from R1 120 million in 1998. The life fund operating surplus for 1998 of R1 120 million included a non recurring contribution of R333 million as a result of valuation basis changes, while the 1999 result includes a comparable contribution (from valuation and tax basis changes) of only R7 million. Excluding contributions to earnings from these non-recurring sources, life fund operating surplus increased by 74% from R787 million in 1998 to R1 372 million.

Revenue earnings attributable to shareholder funds decreased from R116 million to R30 million largely as a result of Liberty Healthcare’s start-up losses of R21 million (1998: losses of R6 million), reduced income from Liberty Asset Management and Liberty Unit Trusts (Guardbank) and Secondary Tax on Companies of R87 million (1998: R41 million) incurred on declaration of cash interim and final dividends.

Premium income increased by a highly satisfactory 22% to R11 440 million, surpassing the R10 billion mark for the first time. Total recurring premiums reflect satisfactory growth of 11% to R 5 518 million.

Claims and policyholder benefits, including lapses and surrenders, decreased year-on-year by 2% from R10 016 million to R9 818 million largely as a result of fewer group scheme terminations during 1999, which decreased by 62% from R2 292 million in 1998 to R869 million in 1999. This decrease pleasingly reflects the immediate market reaction to our dramatically improved relative investment performance in 1999. Individual surrenders and maturity claims increased by 20% as a result of high interest rates, difficult economic conditions and increased levels of policy replacement by intermediaries. This rate of increase was at its lowest level for the year during the fourth quarter and reflects a reduction in the incidence of surrenders and lapses from the peak of fourth quarter 1998 which resulted from the worldwide weakness in equity markets.

Premium/benefit net cash flows for 1999 show a marked improvement:

-

1999

Rm

1998

Rm

Percentage

change

Total premium income

11 440

9 387

22

Total claims and policyholders benefits

9 818

10 016

(2)

Net premium/benefit cash flow

1 622

(629)

-

New business

The inflow of new business of R7 874 million for 1999, including single premiums, was gratifying. On a comparative basis, this inflow is a 33% gain on 1998’s R5 911 million. Especially pleasing is the increase in recurring premiums of 18% to a record R1 560 million. Income from single premiums increased even more sharply by 38% to R6 315 million.

The value of new business has increased by an outstanding 48% to R366 million and on a comparable tax basis with that of 1998, would have increased by 56%. This performance was driven by strong commitment to maintaining margins within new product design, as well as efficient control over selling costs. The increase in new business performance is attributable largely to renewed commitment by the expanded sales force, continuing good and innovative product development, highly competitive relative investment performance and the economic recovery which appears to be set to continue into 2000.

Sales and marketing

The Group’s marketing and sales operations performed well, with almost all targets being achieved or exceeded. A major contributing factor was a focused programme to expand the number of directly controlled sales people by 21% to 1 376 during the year, with strong growth of 59% coming from the Franchise Division, offset by a 10% reduction in the Agency Division as a result of the strategy of providing opportunities for agency management to become franchise principals. The Group exceeded its targeted increase in the number of contracted independent financial advisors ending the year at 4 800. A further highlight was the rollout of a formal accreditation system for sales intermediaries. Sales growth targets for 2000 have been set at the demanding level of inflation plus 12%.

Dividends

In keeping with the commitment to maintaining stable dividend cover linked to medium-term trends, total normal dividends for 1999 have been based on a two times dividend cover on continuing operations (1998: 1,78 times). A final dividend of 140 cents a share has been declared, bringing total dividends for 1999 to 282 cents a share. Comparison of the total Liberty dividends declared during 1999 with the previous year is not meaningful as shareholders will have received dividends directly from their unbundled Liberty International and Stanbic shareholdings.

Business highlights


Business unit structure


During 1999 the   Group transformed its previously centralised structure into a decentralised, flatter and more entrepreneurial business unit structure. This has led to an increase in proactive decision-making, flexibility, responsiveness and initiative in support of aggressive business development and growth.

 

Bancassurance

The acquisition by Stanbic of full ownership of the Group’s ultimate holding company, Liblife Controlling Corporation (Proprietary) Limited, has opened the way to further cross-selling and cost-saving opportunities. Stanbic and the Liberty Group have an extensive client base complemented by highly effective distribution channels, most notably Stanbic’s branch network, commercial suites, financial consultants, telecentres and electronic banking network.

As an example of the success achieved, 65 000 funeral insurance policies were sold through the Standard Bank between 1 April and 31 December 1999. Monthly volumes are now approaching 7 500 policies. Insurance sales emanating from Stanfin and placed with the Liberty Group have increased substantially, with a 53% increase in recurring premium business and a 63% increase in single premium business.

Liberty Healthcare

Liberty Healthcare successfully completed its first full financial year and achieved its business development objectives. At the previous year-end the company had established a client base of 100 employer groups. One year later this complement had grown to more than 3 000 groups representing about 17 000 principal members, which is particularly significant given the uncertainty accompanying the dramatic regulatory changes to the South African healthcare sector during 1999. Liberty Healthcare has established the infrastructure, technology, redeveloped products and overall capacity to take advantage of the new regulatory environment for healthcare funding. The redeveloped ProVia Medical Aid Scheme has attracted considerable interest because it offers comprehensive value for money and is backed by superb service.

Charter Life Insurance Company

Charter Life Insurance Company markets a growing range of life insurance products through Standard Bank as well as an expanding network of contracted independent brokers. Charter Life closed the year with new business premium income of R1,33 billion, a 70% increase on the previous year. The company’s assets under management are now approaching R5 billion. Having established a sound foundation through bancassurance, Charter Life is now building a wider market niche. To support this, the company expanded its broker network to about 600 independent brokers.

Rebranding

A formal change to the name of the company is to be proposed at the annual general meeting. It is proposed that the name "Liberty Life Association of Africa Limited" be changed to the " Liberty Group Limited " in order to more aptly reflect the company as a financial services provider rather than solely as a life assurer.

Strategic objectives for 2000

Objectives for 2000 include:

  • redeploying cash on hand to support the core financial services focus
  • focusing on the upper-income market
  • leveraging the research-oriented investment process in Libam
  • increasing market share of the employee benefits market
  • acquiring further distribution capacity in the emerging middle-income markets
  • further evolving the Liberty-Stanbic bancassurance relationship
  • implementing structures to provide innovative, cost-effective international products to clients
  • developing a differentiated e-commerce initiative
  • achieving critical mass in Liberty Healthcare

Nedcor bid for Stanbic

The Liberty Group will continue to pursue all available avenues to ensure that the interests of its shareholders, policyholders and staff are in no way compromised by any possible anti-competitive behaviour in relation to Nedcor/Old Mutual’s publicised intention to make an offer for control of Stanbic.

Conclusion and Prospects

The Liberty Group has entered the 2000 financial year with confidence, entrepreneurial drive and the spirited resolve to build on the excellent groundwork achieved during our 1998 and 1999 financial years. Our core goal remains the need to pursue and realise optimum value for our shareholders, policyholders and other valued stakeholders.

The 1999 year has been characterised by excellent investment performance across a broad range of investment portfolios which has as a consequence produced a significantly higher level of life fund operating surplus. Earnings from this source are strongly correlated to the performance of investment markets and inevitably the level of headline earnings for 2000 will reflect this. Liberty has established itself as a highly profitable and entrepreneurial financial services organisation and we face the year ahead with confidence in our abilities.

Declaration of the 1999 final ordinary dividend of 140,0 cents per share

Notice is hereby given that final ordinary dividend No. 68 of 140,0 cents per share (1998: 260,0 cents) has been declared in respect of the year ended 31 December 1999 payable to shareholders registered in the books of the Company at the close of business on Friday, 31 March 2000.

Dividend cheques payable in South African currency will be posted on or about 7 April 2000.

Derek Cooper
Chairman

Roy Andersen
Group Chief Executive

14 March 2000

PO Box 1053, Johannesburg, 2000. Tel: (011) 370-5000

Investor

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