A number of once-off events have compounded the negative impact of tough trading conditions on financial services group Liberty’s first half results.
Two sets of modelling changes – one based on increased life expectancy of policyholders and the other on strengthening the reserves of its business – impacted the group’s earnings by over R120 million during the six months to June 30 2016. “Reserving just means that we are putting away more, it is not really a loss that is written. Clearly, that is prudence. It ensures that if the experience is obviously worse than what we thought it was, we have provided for it. If it turns out that it is actually not as bad as that, that’s going to be released back into profits,” Thabo Dloti, chief executive officer of Liberty Group, told Moneyweb.
The group reported a 9 percent decline in BEE normalised earnings to R1.8 billion, driven by a 15 percent decline in BEE normalised operating earnings. A 4 percent increase in earnings from its LibFin Investments Shareholder Investment Portfolio acted as somewhat of a buffer. However, the portfolio’s overweight exposure to foreign assets combined with the rand strengthening over the six-month period, saw its gross performance of 4 percent fall below the benchmark. As a result of lower earnings, the group’s return on equity deteriorated to 16.4 percent from 19.4 percent.
Net customer cash flows fell to R500 million from R13.8 billion, with the long-term insurance business reporting net customer cash outflows of R400 million compared with inflows of R2.9 billion previously.“We have seen an increase in maturities that are not invested. Previously when people’s policies matured they would reinvest the money; [now] they are taking it away…We are seeing an increase in some of the lapses. They are still within our assumption set – clearly in our book we assume a certain portion of our policies are going to lapse – but that has steadily [gone] up, reflective of where the economy is at,” Dloti said of how increased financial burdens on consumers have affected Liberty’s customer cash flows.
He added that the group saw an increase in scheme terminations by corporates and a fall in the number of people covered by the same employer – both of which are reflective of jobs being shed. Indexed new business in group’s long-term insurance operations increased by 1 percent to R3.57 billion, while recurring premium business rose by 4percent. New business margins fell to 1.4 percent from 2 percent.
The group said positive market returns offset net external customer outflows and resulted in a moderate increase in total assets under management to R679 billion, from R688 billion as at December 31 2015. It reported equity value profits of R2 billion. Dloti said macroeconomic headwinds will continue into the second half of the year and that the group remains well positioned to benefit from a turn in conditions.