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LGL
LIBU
LGL - Liberty Group Limited - Audited results for the year ended 31 December
2007
Liberty Group Limited
Incorporated in the Republic of South Africa
(Registration number: 1957/002788/06)
Alpha code: LGL
Issuer code: LIBU
ISIN code: ZAE000057360
Audited results for the year ended 31 December 2007
Liberty Group year end results
Financial Performance Indicators
for the year ended 31 December 2007
December December
2007 % change 2006
Group
BEE normalised headline earnings per
share (cents) 1 100,4 18,3 930,2
BEE normalised embedded value
per share (R) 94,44 14,4 82,55
BEE normalised return on
embedded value (%) 19,5 (12,9) 22,4
Capital reductions in lieu of
dividends/dividends per share (cents)(3) 410 10,8 370
Net cash inflows/(outflows) (Rm) 17 387 >100 (2 156)
Capital adequacy requirement
cover (times covered) 2,07 2,27
Insurance operations
Indexed new business (including
contractual increases) (Rm) 5 597 14,0 4 908
Indexed new business (excluding
contractual increases) (Rm) 4 351 15,7 3 762
New business margin (%) 2,5 2,5
Net cash inflows (Rm) 4 280 18,0 3 627
Normalised recurring management expenses
for life operations (Rm) 2 143 3,6 2 068
STANLIB (1)
Assets under management (Rbn) 340 15,6 294
Net cash inflows/(outflows) excluding
money market (Rm) 9 509 >100 (1 864)(2)
Net cash inflows/(outflows) (Rm) 13 107 >100 (5 783)
(1) Excludes withdrawal of PIC investment in December 2006.
(2) Restated due to refinements in definition of categories.
(3) Represents total declarations in relation to the financial year.
Relevant Definitions
BEE normalised headline earnings per share and embedded value per share
This measure reflects the economic reality of the Black Economic Empowerment
(BEE) transaction as opposed to the required technical accounting treatment
that reflects the BEE transaction as a share buy back. Dividends received on
the group`s BEE preference shares (which are recognised as an asset for this
purpose) are included in income. Shares in issue relating to the transaction
are reinstated.
Indexed new business
Is a measure of new business in insurance operations representing annualised
recurring premium business (at the first year`s monthly premium value) and one
tenth of a single premium deposit.
New business margin
Is the embedded value of new business as a percentage of the present value of
future expected premiums.
Normalised recurring management expenses for life operations
Represents recurring expenses incurred to administer insurance operations and
excludes non-recurring expenses, such as restructuring and integration.
Commentary on Results
Progress in shaping the future of Liberty
The past year has seen the Liberty group producing very satisfactory financial
results whilst laying the foundations to fulfil its vision of becoming a
market-leading wealth management company in Africa and other select emerging
markets. The growth strategy approved by the directors in 2006 will see the
group growing both its geographic and distribution footprints, while expanding
its product offerings into a more comprehensive range of non-banking financial
services in wealth creation and protection.
Strategy development and implementation is facilitated through a focus at three
levels:
Optimising existing operations - "Business as Usual"
Core businesses are focussed on customer service, operational excellence and
cost management.
Developing current opportunities - "Leverage and Build"
Opportunities to take aspects of the group`s business to new levels by building
on existing competencies and operations.
Exploring new horizons - "Extend and Grow"
Opportunities to expand the geographic footprint and the product manufacturing
and distribution capabilities, either organically or by acquisition.
This report primarily reflects the results of improvements put in place during
the past 2 years in "Business as Usual" i.e. the group`s Individual Life,
Corporate Benefits, and Asset Management businesses. Particularly pleasing has
been the benefit received by our policy and unit holders from the much improved
investment performance achieved by STANLIB.
Following the acquisition of STANLIB, management prioritised the leveraging of
all sales and distribution capabilities by consolidating them into the
Marketing and Distribution business unit.
Of equal importance has been the focus on positioning the group to take
advantages of opportunities to leverage off its current operations and
competencies, while looking to extend its capacity to deliver growth. New
leadership and organisational structures have been introduced to ensure
capacity to facilitate growth, while extensive management time was invested in
engaging the commitment of our people as partners in building and executing our
strategy. It is this combination of strategy and partnership that we believe
provides the Liberty Group with a platform from which to deliver increasing
value to shareholders.
As part of the "Extend and Grow" component, three new teams have been formed:
Liberty Africa, to advance the group`s strategies in the rest of Africa;
Liberty Health to advance the Health strategy; and Strategic Ventures
which is focussed on creating partnerships intended to extend our distribution
footprint.
Increased levels of volatility in financial markets coupled with changes in
accounting and actuarial treatment mean that insurance companies face increased
levels of volatility in reported earnings and embedded value. A key "Leverage
and Build" initiative is the re-assessment of the group`s appetite for risk,
particularly market risk, so as to ensure the delivery of returns expected by
shareholders over the medium term. A risk appetite statement, which will be
used to guide and direct the group`s operations, will employ economic capital
and earnings volatility measures as key metrics. Significant resources have
been invested in further understanding the group`s risk based economic capital
needs. The intention is to embed the risk based capital practices within the
business units to ensure that risk adjusted returns on capital are maximised.
2007 in brief
A four-year period of strong equity market performance showed signs of abating
towards the end of the year. Markets were particularly volatile at the end of
2007 and into the first few weeks of 2008. The weighted average investment
return, used as a proxy in relation to the policyholder bonuses on portfolios
where shareholders have a 10% participation, ended the year at 14,8%, compared
to 31,9% annualised at the half year and 33,0% at the end of 2006. Consequently,
as compared to the position at the half-year, the group`s earnings were
negatively impacted including lower investment earnings on the shareholder asset
base.
Despite lower investment returns, the group`s headline earnings showed pleasing
growth, with BEE normalised earnings per share 18,3% up on 2006. BEE normalised
return on embedded value of 19,5%, is well ahead of the group`s medium-term
guidance of 14,5% to 15,5%. BEE normalised embedded value per share was R94,44
at 31 December 2007. Group total new business production increased by 16,0% to
R135,2 billion. Group net cash flows increased significantly to R17,4 billion
from a R2,1 billion net cash outflow in 2006.
The group`s individual life and corporate benefits businesses continued to
enjoy strong asset based fee income in 2007, however, this was to some extent
offset by weaker risk profits. STANLIB`s earnings were also boosted by higher
asset levels.
The group has delivered on its intention, notified to the market in November
2005, to generate a value uplift of R676 million as a part of the group`s
restructuring and re-organisation initiatives. The group has managed to deliver
a value uplift of R835 million over the period November 2005 to the end of
2007. The group managed to reduce costs by 1,7% in real terms in 2007, the
third successive year in which group costs have shown a reduction in real
terms. However, while cost management remains a focus and a key driver of our
"Business as Usual" component, we are also cognisant of the need to invest in
the growth of the business.
Two key regulatory challenges facing the group are the proposed Social Security
and Retirement Reform, and the introduction of new commission regulations.
Despite insufficient clarity regarding the former, the group is actively
participating in the reform process through various industry bodies. We expect
the implementation of the commission regulations to be completed during the
latter part of 2008, and are confident that they will have little impact on the
group`s new business volumes.
Commentary on Results
(continued)
Contribution to BEE normalised headline earnings
December December
2007 2006 % change
Rm Rm
Insurance operations 1 798 1 395 29
Asset management operations 455 247 84
Shareholders` funds 661 859 (23)
Net income on BEE preference shares
accounted for in equity 100 88 14
Defined benefit pension fund employer
surplus 115
Total 3 129 2 589 21
Individual Life and Corporate Benefits
Indexed new business of R5 597 million (including contractual increases),
increased by 14,0%.
Individual indexed retail sales increased by 15,6% (17,7% excluding contractual
increases). Whilst good growth was recorded in risk and annuity products, very
strong growth was seen in individual investment products. It would appear that
personal retirement annuity business continues to suffer as a result of lower
commission rates paid by the group.
The corporate market, which represents 16,0% of total new business, grew
indexed new business by 6,3% (2,6% excluding contractual increases). Recurring
premiums showed strong growth for the period increasing by 16,7% (22,7%
excluding contractual increases). Regulatory compliance in Corporate Benefits
continues to impact service delivery, however significant improvement was made
over the course of the year.
The new business embedded value profit margin has remained at 2,5% despite being
adversely affected by the increase in implied equity volatilities. New business
profits increased by 15,3% to R700 million. The margin has benefited from a more
profitable mix of new business combined with the higher new business volumes.
Net cash flows for 2007 increased by 18,0% to R4 280 million. The net cash flow
includes a single premium transfer of the Investec Employee Benefit (IEB)
closed book purchased in 2003, but for which court approval was effective in
January 2007. The transfer resulted in a R4 487 million single premium
inflow with subsequent net outflows of R635 million during 2007. Excluding the
IEB closed book, Corporate Benefits experienced a net outflow of R1 480 million
and Individual Life a net inflow of R1 908 million. Net cash flow pressure has
resulted from higher average value policyholder claims as a result of higher
investment returns.
Recurring maintenance expenses for the year are marginally higher, increasing
by 2,0% and on a cost per policy basis increasing by a normalised 1,6%.
Management is currently undertaking a full strategic review of the Corporate
Benefits business in the light of both the social, security and retirement
reform as well as the evolving consumer landscape.
Total insurance operations` headline earnings increased by 28,9% to R1 798
million, representing 59,4% of the group`s headline earnings for the year.
Economic assumption changes to the investment guarantee reserve, in particular
the removal of retirement funds taxation and the increase in interest rates,
offset to some extent by the increase in implied equity market volatility, led
to a net reduction in the investment guarantee reserve and contributed R117
million to the increase in headline earnings.
Based on the annual experience investigations performed in the second half of
each year, it was considered necessary to strengthen the persistency
assumptions within the valuation basis of certain risk and investment products.
The negative effect on earnings was largely offset by positive changes to
mortality assumptions on most in-force risk contracts. In 2008 retention
initiatives will focus not only on maturing policies, but on all customer
withdrawals.
In order to further leverage our current operations, additional spend on
technology transformation and capital management projects of R189 million after
taxation, has been provided for in the policyholder liability valuation.
Asset management operations
Asset management includes earnings from STANLIB and Liberty Properties.
STANLIB, which was wholly owned from January 2007, contributed R387 million to
the group`s headline earnings. Operating profit before interest and taxation
was R599 million which is 19,6% higher than the R501 million achieved in 2006.
This results from a combination of higher assets under management and an
increase in performance fees. Performance fees which comprise 5% of total
revenue remain a small component of STANLIB`s earnings. Assets under management
increased by 15,6% to R340 billion. Sales excluding money market, increased by
18,2% to R50 396 million. Net cash inflows for the period recovered strongly to
R13 107 million compared to outflows of R5 783 million in 2006.
STANLIB continued to improve its investment performance against its peers and
was awarded the Raging Bull best domestic unit trust management company for
2007. The decision to convert STANLIB into 15 focussed franchises has not only
delivered superior investment performance, but has also delivered strong
financial results.
Commentary on Results
(continued)
Liberty Properties, which earns development and management fees from managing
the group`s property portfolio, saw earnings after taxation increase by 24,3%
to R46 million.
Shareholders` funds
The group`s capital management committee manages capital not specifically held
to match policyholder liabilities or in asset management operations. The
management process balances the needs for qualifying regulatory capital,
liquidity risk and an effective investment portfolio to maximise returns for
shareholders. Expenses related to shareholder corporate activity, including
those relating to dividend and capital flows, are netted off these investment
returns.
South African equity markets returned 19% in 2007, well below the 41% returned
in 2006. Despite having an additional R2,0 billion of assets invested,
shareholders` fund headline earnings of R661 million were 23,1% lower than those
reported in 2006. Realised and unrealised capital gains, net of capital gains
taxation, on the shareholder portfolio`s were R281 million compared to R705
million in 2006.
Group embedded value
The group`s BEE normalised embedded value per share has increased 14,4% from
the R82,55 reported at 31 December 2006 to R94,44 at 31 December 2007.
Increased fair value adjustments on financial services subsidiaries, improved
new business, good investment performance, and related earnings growth, are the
main positive contributors to the reported annualised BEE normalised return on
embedded value of 19,5%. These positive impacts were to some extent offset by
the increased risk discount rate arising from higher bond yields and a
deterioration in persistency.
Acquisition of STANLIB Limited
At a general meeting on the 29 January 2007 shareholders approved, for a
consideration of R1 686 million, the acquisition of 62,6% of the issued
ordinary shares in STANLIB Limited. STANLIB is now a wholly owned subsidiary of
Liberty Group Limited.
Capital adequacy requirement (CAR)
The statutory capital adequacy requirement of Liberty Group Limited was covered
2,07 times at 31 December 2007 compared to the 2,27 times at 31 December 2006.
After taking into account the group`s final cash distribution and expected
strategic spend, the CAR cover is in line with the group`s target of 1,7 times.
As previously stated, the goodwill associated with the STANLIB acquisition does
not qualify as statutory capital and consequently resulted in a 0,33 times
reduction in the CAR cover at the January 2007 acquisition date.
The R500 million ordinary share buy back programme announced in August 2007,
was completed during November 2007. The average purchase price was R87,72 per
ordinary share which compares favourably to the BEE normalised embedded value
of R94,44 per ordinary share at the end of 2007.
Dividends and capital reduction
In terms of the authority granted to the directors at the 2007 annual general
meeting and in accordance with the group`s dividend policy, the directors have
approved a capital reduction of 266 cents per ordinary share in lieu of the
final dividend. This capital reduction will be paid from the share premium
account.
Subject to the Financial Services Board approval, which is expected prior to 11
March 2008, the important dates pertaining to the capital reduction of 266 cents
per ordinary share are as follows:
Last date to trade cum capital reduction on the JSE Wednesday, 19 March 2008
First trading day ex capital reduction on the JSE Thursday, 20 March 2008
Record date Friday, 28 March 2008
Payment date Monday, 31 March 2008
Prospects
Pursuant to the global tightening in the credit markets during 2007, there has
been a sharp increase in market volatility. This reflects increased uncertainty
in both the global and South African economic outlook. The group`s earnings and
embedded value are strongly correlated to the performance of local capital
markets, and the group`s new business is broadly influenced by sustainable
individual disposable income and employment growth.
We expect this volatility and credit sensitivity to continue in the short term
but remain confident about the future prospects for the markets in
which we operate. We are therefore confident that the group should meet its
actuarial assumptions over the medium term, which in turn should lead to real
growth in BEE normalised embedded value.
Bruce Hemphill Saki Macozoma
Chief Executive Chairman
27 February 2008
Commentary on Results
(continued)
Accounting policies and presentation
The results have been prepared in accordance with International Financial
Reporting Standards (IFRS).
As a result of the STANLIB transaction the group adopted an accounting policy
in respect of business combinations involving businesses under common control.
There were changes to the accounting policies in respect of measurement of
investment guarantees to a market consistent basis and certain liability
valuation models used for the lifestyle series of products. In addition the
group adopted IFRS 7: Financial Instruments: Disclosures, which deals mainly
with disclosure of financial instruments and the related quantitative and
qualitative risks.
There are no prior year restatements to the group`s assets, liabilities or
equity as a consequence of the new policies. All other accounting policies are
consistent with those applied for the year ended 31 December 2006.
Restatement of 31 December 2006 comparatives
Comparatives for the year ended 31 December 2006 have been restated to separate
pledged assets from financial instruments in terms of IFRS 7 disclosure
requirements. There is no impact on shareholder earnings, net asset value or
statement of changes in shareholders` funds.
Audit opinion
The auditors, PricewaterhouseCoopers Inc., have issued their opinion on the
group`s financial statements and embedded value report for the year ended 31
December 2007. They have issued unmodified audit opinions. A copy of their
audit reports are available for inspection at the company`s registered office.
Share certificates
Share certificates may not be dematerialised or rematerialised between
Thursday, 20 March 2008 and Friday, 28 March 2008 both days inclusive. Where
applicable, distributions in respect of certificated shareholders will be
transferred electronically to shareholders` bank accounts on payment date. In
the absence of specific mandates, distribution cheques will be posted to
shareholders. Shareholders who have dematerialised their shares will have their
accounts with their CSDP or broker credited on Monday, 31 March 2008.
Transfer Secretaries
Computershare Investor Services 2004 (Pty) Limited
(Registration number: 2004/003647/07)
Ground Floor, 70 Marshall Street, Johannesburg, 2001
PO Box 61051, Marshalltown, 2107
Telephone +27 11 370 5000
Sponsor
Merrill Lynch
Group Balance Sheet
as at 31 December 2007
2007 2006
Audited Rm Rm
Assets
Equipment and properties under development 519 564
Owner-occupied properties 1 276 867
Investment properties 14 937 13 200
Intangible assets 1 137 1 331
Defined benefit pension fund employer surplus 162
Deferred acquisition costs 325 308
Interests in joint ventures 295 736
Reinsurance assets 820 1 065
Operating leases - accrued income 1 180 1 164
Pledged assets 5 209 3 600
Interests in associates - mutual funds 10 297 7 157
Financial instruments 176 860 162 539
Deferred taxation 51 40
Prepayments, insurance and other receivables 3 528 3 188
Cash and cash equivalents 4 659 5 237
Total assets 221 255 200 996
Liabilities
Policyholders` liabilities 186 137 168 898
Insurance contracts 131 552 122 875
Investment contracts with DPF 3 353 1 719
Financial liabilities under investment contracts 51 232 44 304
Financial liabilities at amortised cost 2 418 2 261
Third party financial liabilities arising on
consolidation of mutual funds 8 040 8 559
Employee benefits 524 388
Deferred revenue 95 80
Deferred taxation 3 447 3 262
Provisions 60 72
Operating leases - accrued expense 238 252
Derivative financial instruments 66 96
Insurance and other payables 5 970 4 242
Current taxation 1 100 393
Total liabilities 208 095 188 503
Equity
Ordinary shareholders` interests 11 029 10 665
Share capital 29 28
Share premium 1 790 1 361
Retained surplus 10 205 9 892
Other reserves (995) (616)
Minority interests 2 131 1 828
Total equity 13 160 12 493
Total equity and liabilities 221 255 200 996
Group Income Statement
for the year ended 31 December 2007
2007 2006
Audited Rm Rm
Revenue
Insurance premiums 23 709 20 843
Reinsurance premiums (693) (777)
Net insurance premiums 23 016 20 066
Service fee income from policyholder investment
contracts 837 764
Investment income 10 396 9 300
Hotel operation sales 597 506
Investment gains 14 390 28 627
Management fees on assets under management 1 005 18
Defined benefit pension fund employer surplus 162
Total revenue 50 403 59 281
Claims and policyholders` benefits under insurance
contracts (20 739) (17 059)
Insurance claims recovered from reinsurers 610 578
Change in policyholders` liabilities under insurance
contracts (10 554) (21 659)
Insurance contracts (8 838) (21 599)
Investment contracts with DPF (1 634) (179)
Reinsurance assets (82) 119
Fair value adjustment to policyholders` liabilities
under investment contracts (6 281) (8 276)
Fair value adjustment on third party mutual fund
interests (189) (1 480)
Acquisition costs (2 894) (2 413)
General marketing and administration expenses (4 293) (3 684)
Finance costs (392) (215)
Preference dividend in subsidiary (274) (184)
Profit on sale of subsidiaries 6 374
Equity accounted earnings from joint ventures 51 150
Profit before taxation 5 454 5 413
Taxation (2 049) (2 249)
Total earnings 3 405 3 164
Attributable to:
Equity holders 3 035 2 875
Minority interests 370 289
3 405 3 164
Earnings per share
Total (cents) 1 173,5 1 138,3
Diluted (cents) 1 119,1 1 091,4
Dividends per share (cents)(1) 230 364
Capital reduction per share (cents)(1) 144 360
(1) Represents the cash payments in the year.
Headline earnings
for the year ended 31 December 2007
2007 2006
Audited Rm Rm
Reconciliation of headline earnings
Total earnings attributable to equity holders 3 035 2 875
Profit on disposal of subsidiaries (6) (374)
Headline earnings(1) 3 029 2 501
Net income on BEE preference shares accounted
for in equity 100 88
BEE normalised headline earnings 3 129 2 589
BEE normalised weighted average number of shares in
issue (`000) 284 409 278 341
Headline earnings per share Cents Cents
Basic 1 171,3 990,4
Fully diluted 1 116,9 949,5
BEE normalised 1 100,4 930,2
(1) Liberty has elected to early adopt the long-term insurance industry
exemption contained in the addition to circular 8 of 2007 dated 22 February 2008
which allows for no headline earnings adjustment in respect of realised or
unrealised remeasurements of investment properties.
Condensed Statement of changes in Group Ordinary
Shareholders` funds
for the year ended 31 December 2007
2007 2006
Audited Rm Rm
Balance at 1 January 10 665 9 434
Total earnings 3 035 2 875
Excess purchase price over net asset value of STANLIB (2 198)
Ordinary dividends (642) (1 013)
Capital reduction (416) (912)
Subscriptions for shares 846 52
Black Economic Empowerment transaction 98 89
Share-based payments 54 51
Owner-occupied properties - net fair value adjustments 86 35
Treasury shares (515) 6
Foreign currency translation movement on subsidiaries 16 48
Ordinary shareholders` funds 11 029 10 665
Condensed Group Cash Flow Statement
for the year ended 31 December 2007
2007 2006
Audited Rm Rm
Cash generated from/(utilised in):
Operating activities 8 189 5 125
Investing activities (8 572) (11 423)
Financing activities (320) (916)
Net decrease in cash and cash equivalents (703) (7 214)
Cash and cash equivalents at the beginning of the year 5 237 12 451
Cash acquired on acquisition of STANLIB Limited 166
Cash disposed of on sale of Saambou Life Assurers
Limited (41)
Cash and cash equivalents at the end of the year 4 659 5 237
Condensed segment results
for the year ended 31 December 2007
2007
Group Individual
Partici- Non-partici-
Risk Non-risk pating pating Prudential
Rm Rm Rm Rm Rm
Segment revenue 1 787 6 794 31 031 5 607 1 830
Segment expenses (1 561) (6 700) (28 561) (4 694) (1 663)
Segment result 226 94 2 470 913 167
Profit before
taxation 226 92 2 460 632 167
Taxation (62) (27) (1 359) (219) (112)
Total earnings 164 65 1 101 413 55
2006
Segment revenue 1 776 7 430 38 184 5 554 2 631
Segment expenses (1 514) (7 293) (35 950) (4 872) (2 424)
Segment result 262 137 2 234 682 207
Profit before
taxation 262 135 2 275 496 207
Taxation (77) (73) (1 504) (176) (150)
Total earnings 185 62 771 320 57
Other
Asset
manage- Shareholder Mutual
ment operations funds Total
Rm Rm Rm Rm
Segment revenue 1 417 1 390 385 50 241
Segment expenses (666) (110) (385) (44 340)
Segment result 751 1 280 - 5 901
Profit before
taxation 627 1 250 5 454
Taxation (205) (65) (2 049)
Total earnings 422 1 185 3 405
2006
Segment revenue 123 1 880 1 703 59 281
Segment expenses (3) (234) (1 703) (53 993)
Segment result 120 1 646 - 5 288
Profit before
taxation 221 1 817 5 413
Taxation (25) (244) (2 249)
Total earnings 196 1 573 3 164
Embedded Value and Value of new business
as at 31 December 2007
2007 2006
Rm Rm
Audited
Group embedded value
Risk discount rate 11,0% 10,5%
Net worth 11 867 9 437
Ordinary shareholders` funds on published basis 11 029 10 665
Adjustment of ordinary shareholders` funds from
published basis (1) (2 197) (1 470)
Financial services subsidiaries fair value adjustment(2) 4 124 1 406
Adjustment for carrying value of in-force business
acquired (3) (789) (908)
Allowance for fair value of share options/rights (300) (256)
Net value of life business in-force 13 755 12 420
Value of life business in-force 14 655 13 163
Cost of solvency capital (900) (743)
Embedded value 25 622 21 857
Embedded value per share information
Number of shares in issue less shares in respect of the
BEE transaction (`000) 257 773 253 032
Embedded value per ordinary share (R) 99,40 86,38
Embedded value before BEE impairment (Rm) 26 781 23 016
Number of shares including shares in respect of the BEE
transaction (`000) 283 569 278 828
BEE normalised embedded value per share (R) 94,44 82,55
2007 2006
Rm Rm
Value of new business and new business margins
Gross value of new business 749 647
Cost of solvency capital (49) (40)
Net value of new business written in the year 700 607
Individual 671 572
Group 29 35
Present value of future expected premiums 28 337 24 588
New business margin 2,5% 2,5%
New business index excluding contractual increases 4 351 3 762
Embedded Value Profits
for the year ended 31 December 2007
Embedded value BEE normalised
2007 2006 2007 2006
Audited Rm Rm Rm Rm
Embedded value at the end
of the year 25 622 21 857 26 781 23 016
Less capital raised (846) (52) (846) (52)
Plus impact of share buy backs 583 583
Less share options exercised (68) (68)
Plus net capital reduction paid 416 912 416 1 004
Plus dividends paid 544 924 642 1 013
Less embedded value at the
beginning of the year (21 857) (19 153) (23 016) (20 404)
Embedded value profits 4 394 4 488 4 492 4 577
Return on embedded value 20,1% 23,4% 19,5% 22,4%
Analysis of Embedded Value Profits
for the year ended 31 December 2007
Value of
life business
Net worth in-force
Audited Rm Rm
Embedded value profits for the year
Embedded value at the end of the year 11 867 14 655
Less capital raised (846)
Plus impact of share buy backs 583
Less share options exercised (68)
Plus net capital reduction paid 416
Plus dividends paid 544
Less embedded value at the beginning of the year (9 437) (13 163)
Embedded value profits 3 059 1 492
Components of embedded value profits
Value of new business written in the period (830) 1 579
Expected return on value of life business 1 447
Expected net of tax profit transfer to net worth 1 867 (1 910)
Operating experience variances (10) (12) (222)
Operating assumption changes (52) 8
Technology transformation and capital
management projects (11) (164) (25)
Other(12) 112 33
Embedded value profits from operations 973 902
Investment return on net worth 1 919
Exchange rate movements 16
Investment variances(13) 509 182
Changes in economic assumptions(14) (98) (37)
Changes in modelling methodology(15) (216) 334
Value of in-force business acquired(16) 111
Change in allowance for fair value of share
options/rights (17) (44)
Total embedded value profits 3 059 1 492
Cost of
solvency Embedded
capital value
Audited Rm Rm
Embedded value profits for the year
Embedded value at the end of the year (900) 25 622
Less capital raised (846)
Plus impact of share buy backs 583
Less share options exercised (68)
Plus net capital reduction paid 416
Plus dividends paid 544
Less embedded value at the beginning of the year 743 (21 857)
Embedded value profits (157) 4 394
Components of embedded value profits
Value of new business written in the period (49) 700
Expected return on value of life business (90) 1 357
Expected net of tax profit transfer to net worth 43
Operating experience variances (10) (234)
Operating assumption changes (44)
Technology transformation and capital
management projects (11) (189)
Other(12) 145
Embedded value profits from operations (96) 1 779
Investment return on net worth 1 919
Exchange rate movements 16
Investment variances(13) 691
Changes in economic assumptions(14) (9) (144)
Changes in modelling methodology(15) (51) 67
Value of in-force business acquired(16) (1) 110
Change in allowance for fair value of share
options/rights (17) (44)
Total embedded value profits (157) 4 394
Bases, Assumptions and Additional Information
for the year ended 31 December 2007
1. The amounts of R2 197 million and R1 470 million, reflected as the
adjustment of shareholders` funds from the published basis, represent the
change in these assets as a result of moving from a published valuation basis
to the statutory valuation method. This is largely due to the elimination of
certain negative rand reserves on the statutory valuation basis. The reduction
in net worth results in a corresponding increase in the value of in-force.
2. The published value of financial service subsidiaries is enhanced for
embedded value purposes to hold these subsidiaries at a multiple of net after
tax earnings. This adjustment is shown as the "financial service subsidiaries
fair value adjustment".
This adjustment consists of the following:
2007 2006
Rm Rm
Liberty Group Properties (Proprietary) Limited 400 350
Liberty Jersey 140
STANLIB Limited 3 724 916
4 124 1 406
For STANLIB Limited a multiple of 10 was used, less the embedded value of its
life business which has been included in the value of life business in-force.
In 2006 STANLIB Limited was valued at Liberty`s share of the excess of the
transaction value over the net carrying value. For Liberty Group Properties
(Proprietary) Limited a multiple of 10 was used (same as in 2006).
Liberty Jersey are asset managers of certain group offshore investment
portfolios arising from the sale of Liberty Ermitage Jersey Limited. In 2006 a
multiple of 5 was used. In 2007 Liberty Jersey is included in the value for
STANLIB Limited.
3. The carrying value of business acquired by Liberty (analysed below) has been
deducted from shareholders` funds in order to avoid double counting. For
embedded value purposes the value in respect of this amount is included in the
net value of life business in-force.
2007 2006
Rm Rm
Investec Employee Benefits (71) (85)
Capital Alliance Holdings Limited (CAHL) (679) (775)
Business previously acquired by CAHL (39) (48)
(789) (908)
4. Future investment returns on the major classes were set with reference to
the market yield on medium-term South African government stock. The investment
returns used are:
Investment return p.a.
2007 2006
Government stock 8,5% 8,0%
Equities 10,5% 10,0%
Property 9,5% 9,0%
Cash 7,0% 6,5%
5. The risk discount rate has been set equal to 0,5% in
excess of the investment return on equity assets 11,0% 10,5%
6. Maintenance expense inflation rate 5,0% 4,5%
Bases, Assumptions and Additional Information
for the year ended 31 December 2007 (continued)
7. The expected return on the value of life business is obtained by applying
the previous year`s discount rate to the value of life business in-force at the
beginning of the year and the current year`s discount rate for half a year to
the value of new business.
8. Taxation has been allowed for at rates and on bases applicable to section
29A of the Income Tax Act. Full taxation relief on expenses to the extent
permitted was assumed. Capital gains taxation has been taken into account in
the embedded value. Allowance has been made for future secondary taxation on
companies at 10%. No allowance has been made for the likely replacement of STC
with a withholding tax on shareholders or the taxation changes announced in the
Budget on 20 February 2008.
9. Other bases, bonus rates and assumptions:
Parameters reflect best estimates of future experience, consistent with the
valuation bases used by the statutory actuaries, excluding any compulsory or
discretionary margins. However, in contrast to the assumptions in the valuation
bases, the embedded value does make allowance for automatic premium and benefit
increases.
10. The amount of R234 million shown for operating experience variances arises
from worse than expected persistency experience on the individual life
business, offset by actual risk experience being better than expected.
11. The amount of R189 million in respect of technology transformation and
capital management projects relates to expected expenditure on strategic
systems and IT build as well as risk based capital and associated projects.
12. Included in the R145 million shown for other operating assumption changes
are strengthening of the withdrawal basis on certain classes of business,
offset by a change in the mortality basis to better reflect recent experience.
In addition allowance was made for the reduction in STC from 12,5% to 10% (R113
million) as well as the removal of retirement funds tax (RFT) (R132 million).
13. The amount of R691 million shown for investment variances includes an
amount of R117 million in respect of investment guarantees.
14. The amount of R144 million shown for changes in economic assumptions arises
from the change to a higher level of economic assumptions.
15. The amount of R67 million shown for changes in modelling methodology
arises mainly from a rewrite of the Prophet valuation models for Liberty
individual business plus allowance for a change in modelling of certain
open-ended policies reflecting actual business experience.
16. The R110 million shown for value of in-force business acquired relates to a
book of life business within STANLIB which is consolidated for the first time
in 2007.
17. The amount of R44 million in respect of the change in the fair value of
share options arises from the change in the number of shares under option and
the increase in the market value of the Liberty Group Limited share price over
the reporting period.
18. The assets backing the capital adequacy requirement (CAR) are assumed to be
60% equities, 10% cash, 25% preference shares and 5% gilts (previously 60%
equities, 20% cash, 15% preference shares and 5% gilts).
New Business
for the year ended 31 December 2007
2007 2006
Rm Rm
Insurance operations including contractual increases
Individual 15 767 14 121
Single 12 294 11 172
Recurring 3 473 2 949
Group 2 108 2 556
Single 1 348 1 905
Recurring 760 651
Insurance operations total new business 17 875 16 677
Insurance operations indexed new business including
contractual increases 5 597 4 908
Insurance operations excluding contractual increases
Individual 14 902 13 317
Single 12 294 11 172
Recurring 2 608 2 145
Group 1 727 2 214
Single 1 348 1 905
Recurring 379 309
Insurance operations total new business 16 629 15 531
Insurance operations indexed new business excluding
contractual increases 4 351 3 762
STANLIB (1)
Retail sales excluding money market 37 463 29 705
Institutional sales excluding money market 12 932 12 939
Total sales excluding money market 50 395 42 644
Money market 65 902 56 918
Total STANLIB new business 116 297 99 562
(1) Excludes intercompany life fund sales.
Net Cash Inflows/(Outflows)
for the year ended 31 December 2007
2007 2006
Rm Rm
Insurance operations
Individual 1 908 3 608
Inflows and premiums 23 812 21 810
Claims and benefits (21 904) (18 202)
Group 2 372 19
Inflow on IEB transfer(1) 4 487
Inflows and premiums 5 907 6 092
Claims and benefits (7 387) (6 073)
Net outflow relating to IEB book (1) (635)
Net cash inflows from insurance operations 4 280 3 627
STANLIB (2) (3)
Retail net cash inflows 12 615 3 323
Institutional net cash outflows (3 106) (5 187)
Net cash inflows/(outflows) before money market 9 509 (1 864)
Money market inflows/(outflows) 3 598 (3 919)
Net STANLIB cash inflows/(outflows) 13 107 (5 783)
(1) The inflow represents a single premium transfer of the IEB closed book
purchased in 2003, the net outflows refer to the movement on that book for the
year ended 31 December 2007.
(2) Excludes withdrawal of PIC investment of R32,6 billion in December 2006,
and intercompany life fund cash flows.
(3) Restated due to refinements in definition of categories.
STANLIB: assets under management (AUM) and funds
under administration (FUA)
as at 31 December 2007
2007 2006
Rbn Rbn
Life funds 138 122
Segregated funds 67 65
Unit trusts 81 63
Linked investment and structured products 42 36
Rest of Africa 12 8
Total AUM and FUA 340 294
Analysis of Ordinary Shareholders` funds invested
for the year ended 31 December 2007
Group funds Contribution
invested to earnings
2007 2006 2007 2006
Rm Rm Rm Rm
Insurance operations 789 908 1 798 1 395
Insurance operating surplus 2 341 1 822
Present value of in-force business
acquired 789 908 (119) (117)
Liberty Active preference dividend (274) (184)
Working capital charge(1) (150) (126)
Financing of insurance operations 808 (1 722) (39) (68)
Fixed assets and working capital 2 808 478 150 126
Callable capital bonds and
preference share liabilities (2 000) (2 200) (189) (194)
Asset management 255 525 455 247
Liberty Group Properties 18 35 46 37
STANLIB 196 459 387 133
Liberty Jersey 20 36
Other operations 41 31 2 41
Investments 9 177 10 954 632 561
Listed equity investments 2 945 2 418 112 95
Interest bearing deposits 3 073 4 275 300 286
Preference shares 1 191 1 361 119 40
Mutual funds 802 1 460 30 40
Share of pooled portfolios 607 943 39 77
Unlisted investments 559 497 32 23
Administration expenses -
shareholder allocation (198) (192)
Defined benefit pension fund
employer surplus 162
Normal taxation excluding insurance
operations 22 (57)
Secondary tax on companies (84) (90)
Capital gains taxation on specific
shareholder assets
Net investment gains 281 705
Headline earnings 11 029 10 665 3 029 2 501
Loss on disposal of Prefsure
Holdings (23)
Profit on disposal of Liberty
Ermitage Jersey 397
Profit on disposal of Saambou Life
Assurers 6
Total shareholders` funds 11 029 10 665 3 035 2 875
Group investment
gains/(losses)
2007 2006
Rm Rm
Insurance operations
Insurance operating surplus
Present value of in-force business
acquired
Liberty Active preference dividend
Working capital charge(1)
Financing of insurance operations
Fixed assets and working capital
Callable capital bonds and preference
share liabilities
Asset management
Liberty Group Properties
STANLIB
Liberty Jersey
Other operations
Investments 284 793
Listed equity investments 102 592
Interest bearing deposits 8
Preference shares 32 (14)
Mutual funds 71 90
Share of pooled portfolios 29 104
Unlisted investments 42 21
Administration expenses - shareholder
allocation
Defined benefit pension fund employer
surplus
Normal taxation excluding insurance
operations
Secondary tax on companies
Capital gains taxation on specific
shareholder assets (3) (88)
Net investment gains (281) (705)
Headline earnings
Loss on disposal of Prefsure Holdings
Profit on disposal of Liberty Ermitage Jersey
Profit on disposal of Saambou Life Assurers
Total shareholders` funds
(1) With effect from 1 July 2005 Liberty Group Limited established a working
capital funding loan between insurance operations and shareholder assets,
subsequently supported by the callable capital bonds issue. Inter-divisional
interest is charged at 8,77% nacm which is equivalent to the callable capital
bond`s interest rate.
Capital Commitments
as at 31 December 2007
2007 2006
Rm Rm
Audited
Capital commitments 1 090 1 987
Business acquisitions(1) 386 1 575
Equipment 216 101
Investment and owner-occupied property 488 311
Under contracts 25 139
Authorised by the directors but not contracted 1 065 1 848
1 090 1 987
Funding for the 31 December 2007 commitments will be from shareholders` funds
and where applicable with proportionate recovery from minority interests.
(1) The board has approved certain business acquisitions related to its
stated strategy of broadening the group`s financial service offerings. These
acquisitions are in the final state of negotiation and separate announcements
are expected within the next few months from the date of this report. In light
of the sensitive nature of the negotiations and certain required regulatory
approvals it is not practical to provide financial details with respect to the
transactions. However, the transactions are not likely to have a material
impact on the group`s earnings and capital structure.
Related Parties
as at 31 December 2007
The acquisition of STANLIB Limited is a significant related party transaction
which was approved by shareholders on 29 January 2007. The consideration paid
to the group`s ultimate holding company, Standard Bank Group Limited for their
37,4% of the shares was R384 million in cash and the issue of 7 246 005 Liberty
Group Limited ordinary shares. As a result of this acquisition, STANLIB is now
a 100% held subsidiary and any transactions between Standard Bank and STANLIB
are now related party transactions from a Liberty perspective. These
transactions currently are:
Asset management fees of R32 million were paid to STANLIB Asset Management
Limited by The Standard Bank Group Retirement Fund;
STANLIB makes use of banking facilities provided by Standard Bank, in the
normal course of business at prevailing market rates.
There have been no further significant changes to the nature of the related
party transactions as described in note 42 to the 31 December 2006 annual
financial statements.
Summary of movement in investments in ordinary shares held by the group in the
group`s holding companies is as follows:
Number Market value Ownership
`000 Rm %
Liberty Holdings Limited
Balance at 31 December 2006 2 724 572 5,55%
Purchases 301 66
Sales (206) (45)
Fair value adjustments 44
Balance at 31 December 2007 2 819 637 5,74%
Standard Bank Group Limited
Balance at 31 December 2006 38 588 3 647 2,83%
Purchases 10 123 1 092
Sales (7 529) (785)
Fair value adjustments 168
Balance at 31 December 2007 41 182 4 122 3,00%
Retirement Benefit Obligations
as at 31 December 2007
As at 31 December 2007, the fully provided Liberty group post retirement
medical aid benefit liability was R293 million (31 December 2006: R261
million).
The apportionment of the surplus within the Liberty Pension Fund between the
employer and the members was approved on 31 August 2007 by the Registrar of
Pension Funds in terms of the Pension Fund Second Amendment Act, 39 of 2001.
The employer surplus of R162 million has been measured as the approved amount
allocated at 1 January 2003 (date of apportionment) adjusted for subsequent
related net investment gains to 31 December 2007. The amount will be recovered
through future reductions in employer contributions to the plan.
Date: 28/02/2008 07:30:01 Produced by the JSE SENS Department.
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