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Liberty Group Limited - Audited Preliminary Results For The Year Ended 31
Release Date: 02/03/2005 07:58:01 Code(s): LGL
Liberty Group Limited - Audited Preliminary Results For The Year Ended 31
December 2004
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 PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004
LIBERTY GROUP LIMITED AUDITED RESULTS
Financial performance
2004 2003 % Change
New business (Rm) 13 440 11 667 +15
New business margin (%) 24 20
Headline earnings per share (cents) 460,4 346,4 +33
Total earnings per share (cents) 663,4 424,0 +56
Net cash inflows from insurance
operations (Rm) 3 640 4 497 -19
Management expenses (Rm) 2 036 1 860 +9
Management expenses ignoring
BEE and IEB (Rm)1 1 928 1 828 +5
Embedded value per share (R)2 67,25 57,58 +17
Capital adequacy requirement
cover (times covered) 2,1 2,6
Final dividend per share (cents) 153 116 +32
Total dividend per share (cents) 315 278 +13
1 Ignoring the costs incurred in respect of the Black Economic Empowerment
transaction implemented in November 2004 and ignoring the expenses
for both part of 2003 and 2004 in respect of the Investec Employee Benefits
business acquired during the year ended 31 December 2003. Includes
non-recurring expenses as detailed later in this report.
2 BEE normalised embedded value per share, which ignores the legal substance
of the BEE transaction and adjusts the accounting treatment adopted for
statutory financial statement purposes to reflect the economic reality of
the transaction, increased by 14% from R57,58 at 31 December 2003 to R65,69
at 31 December 2004.
Summarised group balance sheet as at 31 December 2004
Rm 2004 2003
ASSETS
Investments 104 072 91 508
Owner-occupied properties 757 725
Goodwill 69 81
Intangible assets 203 196
Tangible assets 343 363
Current assets 4 154 3 685
Total assets 109 598 96 558
CAPITAL, RESERVES AND LIABILITIES
Shareholders` funds 8 494 8 782
Minority interests 1 1
Policyholder liabilities 98 049 83 840
Liabilities under investment contracts 32 128 27 544
Liabilities under insurance contracts 65 921 56 296
Redeemable bonds - 1 500
Retirement benefit obligation 160 155
Deferred taxation 636 313
Current liabilities 2 258 1 967
Total capital, reserves and liabilities 109 598 96 558
Capital adequacy requirement 3 954 3 403
Capital adequacy requirement: times covered 2,1 2,6
Summarised group income statement for the year ended 31 December 2004
Rm 2004 2003 % Change
Operating profit from insurance operations net
of taxation 929 720 +29
Operating profit from shareholders` funds 323 230 +40
Headline earnings 1 252 950 +32
Goodwill amortisation and impairment (12) (78) -85
Realised investment gains (net of capital
gains tax) attributable to
shareholders` assets 564 290 +94
Total earnings 1 804 1 162 +55
Headline return on average equity (%) 15 11
Total return on average equity (%)1 20 12
1 Includes net of tax unrealised gains or losses taken directly to equity.
Summarised group cash flow statement for the year ended 31 December 2004
Rm 2004 2003
Cash flows from operating activities 3 554 4 225
Cash flows from investing activities (124) (4 179)
Cash flows from financing activities (2 731) 39
Net increase in cash and cash equivalents 699 85
Cash and cash equivalents at beginning of year 345 274
Foreign exchange movements on cash balances (11) (14)
Cash and cash equivalents at end of year 1 033 345
Summarised Statement of changes in shareholders` funds
Rm 2004 2003
Shareholders` funds at 1 January 8 782 8 496
Total earnings 1 804 1 162
Unrealised investment reserve movements on shareholders`
assets net of capital gains tax (57) (130)
Ordinary dividends accounted for in the current year (766) (761)
Translation difference relating to equity component of
the redeemable bonds - (24)
Repayment of redeemable bonds (79) -
Subscriptions for shares 83 39
Black economic empowerment transaction (1 273) -
Shareholders` funds at 31 December 8 494 8 782
Analysis of shareholders` funds
Group
funds invested
Rm 2004 2003
Liberty Active (excluding operating
profit from insurance operations) 1 125 886
Financial services operations 1 205 1 137
Trading portfolio 423 380
Liberty Ermitage Jersey 375 375
Liberty Group Properties 4 4
STANLIB 387 365
Other 16 13
Listed investments 2 019 1 304
Edcon 91 39
GoldFields 113 154
Metoz 242 232
SABMiller 919 655
Other 654 224
Other investments 4 145 5 455
Cash, preference shares and
unit trusts 1 412 2 096
Foreign assets - 1 560
Convertible bonds - (1 500)
Unlisted investments 121 77
Fixed assets and working capital 1 230 1 709
Share of pooled portfolios 1 382 1 513
Management expenses
Normal taxation
8 494 8 782
Preference dividend in subsidiary
Secondary tax on companies
8 494 8 782
Contribution
to headline earnings
Rm 2004 2003
Liberty Active (excluding operating
profit from insurance operations) 44 49
Financial services operations 221 151
Trading portfolio 68 46
Liberty Ermitage Jersey 46 43
Liberty Group Properties 25 25
STANLIB 77 39
Other 5 (2)
Listed investments 81 33
Edcon 2 5
GoldFields 1 8
Metoz 30 -
SABMiller 22 19
Other 26 1
Other investments 266 304
Cash, preference shares and
unit trusts 149 128
Foreign assets 65 100
Convertible bonds (83) (119)
Unlisted investments 3 7
Fixed assets and working capital - -
Share of pooled portfolios 132 188
Management expenses (111) (91)
Normal taxation (11) (40)
490 406
Preference dividend in subsidiary (102) (95)
Secondary tax on companies (65) (81)
323 230
Group investment
gains/(losses)
Rm 2004 2003
Liberty Active (excluding operating
profit from insurance operations) 148 48
Financial services operations (85) 3
Trading portfolio - -
Liberty Ermitage Jersey (45) (34)
Liberty Group Properties - -
STANLIB (39) 38
Other (1) (1)
Listed investments 504 128
Edcon 53 94
GoldFields (32) (52)
Metoz 40 13
SABMiller 264 70
Other 179 3
Other investments 113 (14)
Cash, preference shares and
unit trusts 54 98
Foreign assets (32) (443)
Convertible bonds 37 470
Unlisted investments 23 (52)
Fixed assets and working capital - -
Share of pooled portfolios 31 (87)
Management expenses
Normal taxation
680 165
Preference dividend in subsidiary
Secondary tax on companies
Commitments
Group Company
Rm 2004 2003 2004 2003
Operating lease commitments 97 48 19 28
Within 1 year 26 13 12 5
1 to 5 years 44 32 7 23
5 to 10 years 27 3 - -
Capital commitments
Capital Alliance Holdings Limited (CAHL)
acquisition
The board of directors has approved
the purchase of
the entire issued share capital of
Capital Alliance
Holdings Limited 1 3 094 - 3 094 -
Tangible assets 203 165 200 111
Under contracts 178 148 178 94
Authorised by the directors but
not contracted 25 17 22 17
Investment properties 2
Under contracts 290 - 290 -
Total commitments 3 684 213 3 603 139
1 The shareholders` meeting to approve the scheme as detailed in the circular
posted to CAHL shareholders on 9 February 2005 will take place on Monday, 7
March 2005 and the court hearing to sanction the scheme is set for Tuesday, 12
April 2005.
2 Wedelin Investments 1 (Proprietary) Limited acquisition
The company has entered into purchase agreements to acquire 100% of Wedelin
Investments 1 (Proprietary) Limited, including loan claims. The company owns a
property under development in Mitchells Plain, which will be classified as an
investment property.
The effective date of purchase will be determined by the date that the
Competition Commission approval is received. The purchase consideration has
been advanced on loan account at 31 December 2004.
Group figures above include the Group`s share of commitments of joint ventures
amounting to R54 million (2003: R58 million). The above expenditure will be
financed by existing cash resources and internally generated funds.
Embedded value and value of new business
Rm 2004 2003 % Change
Risk discount rate used (%) 10,25 11,50
Shareholders` funds 8 494 8 782 -3
Net value of life business in force 7 607 6 494 +17
Value of life business in force 8 193 6 686 +23
Cost of solvency capital 1 (586) (192) +205
Fair value adjustment 766 541 +42
Embedded value 16 867 15 817 +7
Total number of shares in issue (millions) 250,8 274,7
Embedded value per share (R) 67,25 57,58 +17
Value of life business written in the year
Net of cost of solvency capital 815 609 +34
Gross of cost of solvency capital 970 625
Cost of solvency capital 1 (155) (16)
New business index excluding natural
increases 3 340 3 060 +9
New business margin % 24 20
1 Opportunity cost of holding the regulatory capital adequacy requirement in
assets generating a lower net return than the risk discount rate.
Embedded value profits
Rm 2004 2003
Embedded value at the end of the year 16 867 15 817
Less capital raised (83) (39)
Plus dividends paid 766 761
1 273 -
Plus Black Economic Empowerment Transaction 1
Less embedded value at the beginning of the year (15 817) (15 127)
Embedded value profits 3 006 1 412
Return on shareholders` net assets (%) 34 16
Return on embedded value (%) 19 9
1 Includes transaction costs of R22 million taken directly to equity.
Analysis of embedded value profits
Rm 2004 2003
Investment return on shareholders` net assets and fair value
adjustment 1 243 86
Translation losses in respect of foreign assets (42) (48)
Other investment returns on shareholders` assets 1 272 256
Adjustment to (deduction of) the carrying value of
Investec Employee Benefits, included within
the value of life business in force 13 (122)
Net effect of changes required on the implementation of AC
133 - (2)
Expected return on value of life business 723 741
Investment experience variation on life business 653 108
Other experience variations 1 (9) (68)
Changes in economic assumptions 2 377 239
Changes in non-economic assumptions 3 (357) (10)
Change in mix of assets backing the capital adequacy
(CAR) 4
requirement (300) -
Value of new business 815 609
Changes in modelling methodology 5 (139) (291)
Embedded value profits 3 006 1 412
1. The amount of R9 million shown for other experience variations arises
mainly from:
- actual individual life withdrawal experience being worse than expected, offset
by
- actual premium increases on corporate business being better than expected.
2. The amount of R377 million shown for changes in economic assumptions
arises from the change to a lower level of economic assumptions.
3. The amount of R357 million shown for the changes in non-economic assumptions
arises mainly from changes to the withdrawal bases as well as expense bases in
respect of corporate business and shareholders` expenses.
4. The assets backing the CAR are currently 50% equities, 25% preference shares
and 25% cash (previously 100% equities).
5. The amount of R139 million shown for the changes in modelling methodology
arises mainly from allowing more accurately for expected future Secondary Tax
on Companies.
Sensitivity to risk discount rates
In order to indicate sensitivity to varying assumptions, the value of life
business in force less cost of solvency capital and the value of new business
written are shown below for various changes in assumptions. Each value is shown
with only the indicated parameter being changed.
Value of life
business
in force
less cost of Value of new
solvency business
capital written
Rm 2004 in 2004
Base value 7 607 815
Value of life business 8 193 970
Cost of solvency capital (586) (155)
Risk discount rate increased by one
percentage point to 11,25% 6 851 680
Value of life business 7 627 886
Cost of solvency capital (776) (206)
Risk discount rate decreased by one
percentage point to 9,25% 8 426 980
Value of life business 8 802 1 079
Cost of solvency capital (376) (99)
Future investment returns reduce by one
percentage
point, with bonus rates changing
commensurately 6 596 762
Value of life business 7 393 973
Cost of solvency capital (797) (211)
Withdrawal rates increase by 10% 7 124 706
Value of life business 7 710 861
Cost of solvency capital (586) (155)
Maintenance expenses (other than commissions)
increased
by 10% 7 308 769
Value of life business 7 894 924
Cost of solvency capital (586) (155)
New business acquisition expenses (other than
commissions)
increased by 10% 759
Value of life business - 914
Cost of solvency capital - (155)
Assurance mortality and morbidity increase
by 10%, annuity
mortality decrease by 10% 6 638 637
Value of life business 7 224 792
Cost of solvency capital (586) (155)
These values illustrate mainly the effect of negative changes in assumptions.
The effect of positive changes in the assumptions to the same extent would be
to increase the values by a similar amount to the reductions indicated above.
Bases and assumptions
(i) Future investment returns on the major asset 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
% 2004 2003
Government stock 8,25 9,50
Equities 10,25 11,50
Property 9,25 10,50
(ii) The risk discount rate has been set equal to the
investment return on equity assets 10,25 11,50
(iii) Maintenance expense inflation rate 4,25 5,50
(iv) 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.
(v) Taxation has been allowed for at rates and on bases applicable to Section
29A of the Income Tax Act. Full tax 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 Tax on Companies. No
allowance has been made for the tax changes announced in the Budget on 23
February 2005.
(vi) Other bases, bonus rates and assumptions: In general, parameters reflect
best estimates of future experience, consistent with the valuation basis used
by the statutory actuary, excluding any first- or second-tier margins. However,
in contrast to the valuation basis assumption, the embedded value does make
allowance for automatic premium and benefit increases.
(vii) The fair value adjustment reflects the excess of the fair value over the
value of the tangible net assets of entities as included in the shareholders`
funds, it also removes the carrying value of the present value of in-force
business acquired from Investec Employee Benefits from shareholders` funds
(since it is included in the value of in-force business).
This adjustment consisted of the following:
Fair value adjustment
Rm 2004 2003
Liberty Group Properties (Proprietary) Limited 240 216
Liberty Ermitage Jersey Limited 290 140
STANLIB Limited 345 307
Carrying value of in-force business acquired from Investec
Employee Benefits (109) (122)
766 541
In the case of Liberty Group Properties (Proprietary) Limited and Liberty
Ermitage Jersey Limited a price earnings ratio multiplier was applied to the
net after taxation recurring earnings of the subsidiaries. The multipliers used
were 10x and 10x (2003: 10x and 10x) respectively.
In the case of STANLIB Limited a price earnings ratio multiplier was applied
to the net after taxation recurring earnings of STANLIB Limited. The multiplier
used was maintained at 10x. The R345 million represents Liberty Life`s 37,4%
share of the excess over the net asset value of STANLIB Limited and effectively
values STANLIB Limited at R1,7 billion in total.
(viii) Non-recurring expenses amounting to R137 million were identified in 2004.
These were largely due to retrenchment costs, discontinued salary costs, the
renovation of Liberty Life Centre, impairment to internally developed software
and costs incurred in respect of the Black Economic Empowerment transaction.
These expenses are included in the analysis of embedded value profits but do not
form part of the future projections.
Commentary
In 2004 the Liberty Group grew its new business premiums by 15% to R13 440
million while improving the net new business margin to 24%. Net cash inflows
from insurance operations remained strong at R3 640 million (notwithstanding the
maturity of R2 090 million during the second half of the year which was referred
to in the interim financial results). Management expenses of the group increased
by 5% to R1 928 million on a like for like basis.
The core individual life business continued to grow and produced good results.
Individual new business premiums were up 22% to R11 374 million. The embedded
value margin on new business increased to 28%, well ahead of the margin
range experienced in recent years. Net cash inflows improved by 76% to
R5 492 million, underpinning the continued growth in new individual business
market share for the last five consecutive years. The increase in maintenance
costs per policy was contained well within the actuarial assumption and
resulted in a release to profit of R74 million after taxation.
These positive operational results contributed to a 33% improvement in
headline earnings per share, notwithstanding the recognition of significant
non-recurring expenditure relating mainly to the continuing
operational restructuring of the group as well as the recently implemented
Black Economic Empowerment transaction. Earnings for 2004 have also
benefited from the shareholders` participation in investment returns on assets
backing certain classes of policyholder business. The weighted average gross
investment return in 2004 on the equity, managed and foreign assets portfolios
was 22,7% versus 12,5% in 2003.
Embedded value per share increased by 17% to R67,25 and the capital position of
the group remained strong, with shareholders` funds of R8 494 million (after the
impairment of the BEE transaction preference shares of R1 251 million)
covering the capital adequacy requirement 2,1 times.
A final dividend for 2004 of 153 cents per share has been declared, 32%
higher than the 2003 final dividend of 116 cents per share , thereby bringing
the total dividend for the year to 315 cents, a 13% increase on the total
dividend for 2003 of 278 cents.
New business
Recurring Single
premiums premiums
Rm 2004 2003 2004 2003
Individual 2 674 2 504 8 700 6 808
Corporate 484 431 1 582 1 924
Total new business 3 158 2 935 10 282 8 732
% Change +8 +18
Indexed new business 1
Total
premiums %
Rm 2004 2003 Change
Individual 11 374 9 312 +22
Corporate 2 066 2 355 -12
Total new business 13 440 11 667 +15
% Change +15
Indexed new business 1 4 186 3 808 +10
Indexed new business excluding
contractual increases 3 340 3 060 +9
1. Indexed new business is a standard industry measure that represents recurring
new business plus 10% of new single premiums.
New individual single premiums increased by 28% to R8 700 million with CPI
Plus, Excelsior risk profiled and Excelsior property portfolios being the most
favoured asset classes for investment products. New individual recurring
premiums grew by 7% to R2 674 million, with the rate of growth being negatively
impacted by the discontinuance of the Medical Lifestyle and Medical Lifestyle
Plus product sales in the first quarter of 2004.
In the first full year, Lifestyle Protector risk product sales
amounted to R494 million.
New corporate single premiums decreased by 18% to R1 582 million while
stronger sales in the second half of 2004 resulted in new recurring corporate
premiums increasing by 12%.
Support from independent brokers continued in 2004 with individual new
business sales increasing by 17% to R4 344 million, despite the
discontinuance of the Medical Lifestyle and Medical Lifestyle Plus
products, which were widely distributed by this channel.
The Bancassurance relationship with Standard Bank continued to yield
significant benefits, with individual new business premiums increasing by 35%
to R3 557 million in 2004. New corporate benefit premiums doubled year on year,
but remain disappointing given the opportunities that should exist within
Standard Bank`s client base. The sales model for corporate benefits was
restructured towards the end of 2004 with a view to improving sales from this
channel.
Bancassurance sales now comprise 26% of total new business.
Market share - Individual new business (including Liberty Active)
Liberty Life together with Liberty Active`s share of the individual new
business market continued to grow in 2004 according to the Life Offices`
Association statistics for the nine months ended 30 September 2004.
New business margins
The margin improvement on individual new business from 22% in 2003 to 28% in
2004 can be ascribed to improved margins on the Lifestyle Protector risk
product, which was launched in the second half of 2003, together with a
reduction in the risk discount rate as a result of lower interest rates. The
reduction in margin on corporate benefits new business was driven by
disappointing new business sales volumes resulting in an under recovery of
costs. This area will continue to receive heightened focus in 2005.
Headline earnings
Rm 2004 2003 % Change
Operating profit from insurance operations
after taxation 929 720 +29
Net income after taxation of financial services
operations 265 200 +32
Income on other shareholders` investments 160 125 +29
Preference dividend in subsidiary (102) (95) +7
Headline earnings 1 252 950 +32
Weighted average number of shares in issue
(millions) 271,9 274,0
Headline earnings per share (cents) 460,4 346,4 +33
BEE normalised headline earnings per share, which ignores the legal substance of
the BEE transaction and adjusts the accounting treatment adopted for statutory
financial statement purposes to reflect the economic reality of the transaction,
increased by 34% from 346,4 cents in 2003 to 465,4 cents in 2004.
Operating profit from insurance operations for 2004 benefited significantly
from the shareholders` participation in investment returns on assets backing
certain classes of policyholder business. The weighted average gross investment
return in 2004 on the equity, managed and foreign assets portfolios was 22,7%
versus 12,5% in 2003.
Investment returns
In accordance with the actuarial guidance note (PGN110), which was adopted
for the first time in December 2003, investment and annuity option guarantees
are now marked to market at the balance sheet date using appropriate
modelling techniques. The change in `market value` of the guarantees is
recorded in the income statement as part of the operating profit on insurance
operations. Due to the fact that medium term government bond yields have reduced
to 8,25% (9,50% at the end of 2003), the gap between expected future investment
returns and guarantees offered on certain policies has narrowed. This largely
accounted for an increase in the guarantee reserve which resulted in a change
against profit of approximately R220 million after taxation.
The total increase in the guarantee reserve was more than compensated for in
2004 by higher shareholders` participation in capital returns to policyholders,
higher fees resulting from a higher asset base and the reduced discount rate.
Net income after taxation of financial services operations increased by 32% from
R200 million in 2003 to R264 million in 2004. The main contributors to the
increase were:
The shareholders` trading portfolio, which recorded a 48% increase in
profit from R46 million in 2003 to R68 million in 2004. This portfolio has
largely been realised; and
A substantial increase in STANLIB`s earnings. Liberty Life`s share of
headline earnings amounted to R77 million in 2004, reflecting an increase
of 99% on 2003 R39 million. The year-on-year increase in contribution was
driven by once-off restructuring costs in 2003 and higher average assets
under management in 2004.
Net income on other shareholders` investments increased by 29% from R125 million
in 2003 to R161 million in 2004, mainly as a result of higher cash balances
building up over the period to November when the Black Economic Empowerment
transaction was implemented, utilising R1 273 million in cash.
Shareholders` listed investments (including the long-term portfolio which was
established towards the end of 2003) also accounted for some of the increase as
dividends received on these investments increased by 145% from R33 million in
2003 to R81 million in 2004. Dividends received in 2004 included a special R30
million distribution from Metoz Holdings Limited (formerly Metro Cash and
Carry Limited).
Headline earnings for 2004 include R51 million representing the income return
on assets utilised to fund the Black Economic Empowerment
transaction up to the date of implementation - 8 November 2004.
The weighted average number of shares in issue for 2004 has been reduced from
this date. Preference dividends accrued on the empowerment preference shares
at 65% of prime since the date of implementation amounting to R13 million were
not accounted for in income.
Net cash inflows
Individual Corporate
Rm 2004 2003 2004 2003
Net premiums 16 359 13 556 4 195 4 566
Net claims and benefits 10 867 10 436 6 047 3 189
Net cash inflows from
insurance operations 1 5 492 3 120 (1 852) 1 377
STANLIB net cash inflows 2
Ermitage net cash inflows
Total net cash inflows
Total %
Rm 2004 2003 Change
Net premiums 20 554 18 122 +13
Net claims and benefits 16 914 13 625 +24
Net cash inflows from
insurance operations 1 3 640 4 497 -19
STANLIB net cash inflows 2 15 300 12 100 +26
Ermitage net cash inflows 3 681 1 653 +123
Total net cash inflows 22 621 18 250 +24
1 As reported in the interim financial statements published in August 2004, one
corporate client`s property-backed policies matured in the second half of 2004.
This resulted in a cash outflow of R2 090 million for corporate benefits . The
maturity of these policies has created additional capacity to sell
individualproperty-backed policies at higher margins.
2 Represents 100% of STANLIB`s cash inflows.
STANLIB`s net cash inflows of R15 300 million were 26% ahead of those in 2003.
Net inflows into equity funds comprised 29% of total net inflows (16% in 2003)
with the balance being made up of money market, flexi cash and fixed interest
funds. Total assets under management and funds under administration (after
eliminating common assets) increased by 25% from R178 billion at 31 December
2003 to R223 billion at 31 December 2004.
Net cash inflows for Liberty Ermitage increased by 160% in Dollars (123% in
Rand) from US$220 million in 2003 (R1 653 million) to US$572 million in 2004
(R3 681 million). 56% of net cash inflows for 2004 were from third parties
(2003: 26%). Total assets under management (after eliminating common assets)
increased by 31% from US$2 791 million at 31 December 2003 to US$3 644 million
at 31 December 2004.
Management expenses
Rm 2004 2003 % Change
Total expenses for the group per financial
statements 2 036 1 860 +9
IEB expenses incurred since October 2003 1 (93) (32)
BEE transaction expenses (before taxation) (15) -
Total group expenses 1 928 1 828 +5
1 Liberty Life acquired part of the Investec Employee Benefits business in 2003
and started incurring costs with effect from 1 October 2003 when the employees
were transferred. The 2003 comparative consequently comprises only three
months` expenses.
Cost saving targets for 2004 were met even though significant non-recurring
expenses were incurred in 2004. Liberty Life`s headcount (excluding
the sales force) reduced by 152 from 3 472 at the end of 2003 to 3 320 at the
end of 2004. In the second half of 2004, part of the information technology
infrastructure and operations were outsourced to Standard Bank, resulting in a
headcount reduction of 70 and an annual cost saving of approximately R30
million. Group human resources was also restructured resulting in a reduction
in headcount of 25.
As a result of tight expense control and a growing in-force book, maintenance
costs per policy for Liberty Personal Benefits increased by 3,5% to R248 and
for Liberty Active reduced by 4,9% to R154. The lower than expected maintenance
costs per policy resulted in a release of approximately R74 million after
taxation from policyholders` liabilities into operating profit from insurance
operations. There was no material comparable amount in 2003.
Non-recurring expenses amounted to R137 million in 2004 (2003: R111 million).
Embedded value per share
Embedded value per share of R67,25 at 31 December 2004 increased by 17% from
R57,58 at 31 December 2003. BEE normalised embedded value per share (i.e. after
adjusting the accounting treatment of the BEE transaction to reflect the
economic reality of the transaction rather than its legal form), increased
by 14% from R57,58 at 31 December 2003 to R65,69 at 31 December 2004.
Shareholders` funds decreased by 3% to R8 494 million due mainly to the
technical impairment for accounting purposes of the empowerment preference
shares of R1 251 million. Strong operating results (also from subsidiary and
joint venture companies) and favourable investment markets largely offset the
impairment impact on shareholders` funds. Shareholders` funds amount to R9 745
million if the impairment is ignored. This represents an increase of 11% on
shareholders` funds at 31 December 2003 of R8 782 million.
The value of in-force business increased by 17% to R7 607 million as a result
of lower interest rates (and consequently lower risk discount rates), strong new
business sales at healthy margins and improved investment returns. These
positive factors more than compensated for some negative features in the value
of in-force such as the changes in basis to allow better for future secondary
tax on companies, shareholders` expenses, withdrawal experience and the expense
strain in the Liberty Corporate Benefits business. A higher opportunity cost of
capital has also been reflected in the value of in-force business due to the
fact that the capital adequacy requirement (CAR) is no longer backed in full by
equities as was the case in 2003. CAR is now backed by 50% equities, 25%
preference shares and 25% cash.
Capital adequacy
The capital adequacy requirement of the group increased by 16% from R3 403
million at 31 December 2003 to R3 954 million at 31 December 2004. The increase
is the result of strong sales of the Lifestyle Protector risk product (which
demands relatively high levels of capital in the early years) and the impact
of the lower interest rate environment. Notwithstanding the increase in the
capital adequacy requirement and taking into consideration that R1 251 million
of shareholders` funds have been impaired as a result of the Black Economic
Empowerment ownership transaction, shareholders` funds of R8 494 million
covered the capital adequacy requirement 2,1 times at 31 December 2004.
Dividend policy and final dividend for 2004
With a view to reduce volatility and improve predictability, the following
dividend policy has been adopted, commencing with the final dividend for the
year ended 31 December 2004.
Total dividends for 2004 have been determined with reference to a yield of
approximately 4,75% on the embedded value of the group. Subject to the
statutory CAR cover remaining above 1,5 times, growth in the group`s
dividend will be broadly in line with the medium-term growth in embedded
value. The interim dividend will be declared as 40% of the previous full
year`s dividend.
Accordingly, a final ordinary dividend No 78 of 153 cents per share has
been declared in respect of the financial year ended 31 December 2004
(2003: 116 cents per share).
The important dates pertaining to this dividend are:
Last day to trade cum dividend on the JSE Friday, 1 April 2005
First trading day ex dividend on the JSE Monday, 4 April 2005
Record date Friday, 8 April 2005
Payment date Monday, 11 April 2005
Share certificates may not be dematerialised or rematerialised between Monday,
4 April 2005 and Friday, 8 April 2005 both days inclusive. Where applicable,
dividends in respect of certificated shareholders will be transferred
electronically to shareholders` bank accounts on payment date . In the absence
of specific mandates, dividend cheques will be posted to shareholders.
Shareholders who have dematerialised their shares will have their accounts
With their CSDP or broker credited on Monday, 11 April 2005.
Prospects
Real growth in earnings, embedded value and dividends is anticipated in 2005,
but will to some extent depend on investment markets continuing to perform
well in 2005. The proposed acquisition of Capital Alliance, if successful,
will achieve our aim of generating efficiencies in due course, which should
benefit policyholders and shareholders alike.
Audit opinion
The auditors, PricewaterhouseCoopers Inc., have issued their opinions on the
group financial statements and embedded value statement for the year ended
31 December 2004. Copies of the auditors` unqualified reports are available
for inspection at the Company`s registered office.
Derek Cooper Myles Ruck
Chairman Chief Executive
1 March 2005
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
Global Markets & Investment Banking Group
Merrill Lynch South Africa (Pty) Ltd
Registration number 1995/001805/07
Registered Sponsor and Member of the
JSE Securities Exchange South Africa
Accounting policies and presentation
The accounting policies adopted by the company and the group comply with South
African Statements of Generally Accepted Accounting Practice as well as the
South African Companies Act, 1973. The financial statements are prepared on the
historical- cost basis, modified by the revaluation of investment properties,
owner-occupied properties and financial instruments to fair value and the
application of the equity method of accounting for investments in subsidiary
companies and joint ventures. The financial statements for 2004, incorporating
the appropriate accounting for the Black Economic Empowerment transaction, have
been prepared on a consistent basis with the previous year as well as the
interim financial statements for 2004.
Liberty Group will comply with International Financial Reporting Standards
(IFRS) from 1 January 2005, with the first reporting period under IFRS being the
six months ending 30 June 2005. South African Statements of Generally Accepted
Accounting Practice are currently closely aligned with IFRS and therefore
changes to the group`s accounting will be restricted to a few areas.
The more significant implications on the group`s results and disclosures being:
IFRS 4: Insurance contracts (issued March 2004). The objective of the standard
is to specify the financial reporting requirements for insurance contracts
rather than address the recognition and measurement of obligations arising from
insurance contracts, which will be addressed in phase 2 of the International
Accounting Standards Board`s project on insurance . Interpretations of
definitions regarding investment contracts and insurance contracts have also
developed further following the issue of IFRS 4. Liberty Group will deal with
these changes in interpretation as part of its adoption of IFRS in 2005.
IFRS 2: Share-based payments (issued February 2004). Options issued to staff
in terms of the group`s share option scheme will be accounted for in accordance
with IFRS 2 from 1 January 2005. IFRS 2 will be applied retrospectively for all
options granted after 7 November 2002 that have not vested on the effective
date , 31 December 2004. IFRS 2 requires the recognition of an expense equal to
the fair value of options granted to employees. The fair value will be expensed
over the vesting period based on the services received from these employees.
Currently the South African Institute of Chartered Accountants is obtaining an
opinion from the International Financial Reporting Interpretation Committee
(IFRIC) on whether BEE transactions fall within the ambit of IFRS 2. If this is
the case there may be implications to the group`s accounting for the BEE
transaction concluded this year.
A further significant issue referred for interpretation by IFRIC, concerns the
rate of taxation to be applied to any deferred taxation applicable to
revaluations on investment properties. Liberty Life considers the Capital Gains
Tax rate to be the appropriate rate to be applied to such valuations, whereas
conflicting interpretations of IAS 12 appear to call for the corporate rate of
taxation. It is unlikely that IFRIC/IFRS clarification on this matter will be
obtained in the short term.
These results and an overview of the Liberty Group are available at
www.liberty.co.za
