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LGL
LIBU
Liberty Life - Reviewed preliminary results for the year ended 31 December 2005
Liberty Group Limited
"Liberty Life"
Incorporated in the Republic of South Africa
Registration number: 1957/002788/06
Alpha code: LGL
Issuer code: LIBU
ISIN code: ZAE000057360
REVIEWED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005
Financial performance
for the year ended 31 December 2005
Comparatives include Capital Alliance for nine months where appropriate
IFRS: International Financial Reporting Standards
Adjusted(5)
2005 2004 % change
Indexed new business (Rm) 4 870 4 336 12
New business margin before SOI(1)impact(%) 23 24
Net cash inflows from insurance
operations (Rm) 5 726 3 186 80
BEE normalised headline earnings per
share before IFRS adjustments and
SOI provisions(2) (cents) 665,4 465,3 43
Headline earnings per share(3) (cents) 731,2 459,7 59
Management expenses (Rm) 3 612 3 370 7
Normalised management expenses(4)(Rm) 3 089 3 079 0
BEE normalised embedded value per share
before SOI provisions (2) (R) 75,56 63,72 19
Embedded value per share (R) 75,96 65,07 17
Statutory capital adequacy requirement
cover (times covered) 2,0 2,5
Final dividend per share (cents) 224 153 46
Total dividend per share (cents) 350 315 11
Capital reduction (cents per share) 360
Return on embedded value (%) 22 19
1- Statement of intent (SOI) signed between National Treasury and the Life
Offices regarding minimum values on saving products.
2- BEE normalised headline earnings per share and BEE normalised embedded
value per share are shown after adjusting the accounting treatment required
for statutory financial statement purposes to reflect the economic reality of
the BEE transaction.
3- In compliance with International Financial Reporting Standards (IFRS).
4- IFRS adjustments (mainly share based payment costs) and restructuring,
integration and other non-recurring expenses are excluded.
5- Adjusted where appropriate for nine months of Capital Alliance Holdings
Limited and IFRS restatements
Commentary on results
2005 could well be regarded as a significant turning point in the life
assurance industry. A number of unfavourable rulings against life assurance
companies (including Liberty Life) by the Pension Fund Adjudicator (PFA),
coupled with a wave of negative sentiment towards life assurers from the media
and consumers themselves, led to a long overdue rethink as to how to reposition
our business model in future. The PFA rulings and statement of intent (SOI)
are dealt with in more detail below. What has been encouraging is that in
spite of the negative perceptions surrounding the industry, Liberty Life
nevertheless managed to turn in a very good performance for the 2005 financial
year with significantly increased cash flows.
Performance highlights
Indexed new business premiums increased by 12% to R4 870 million at an overall
margin of 20% (23% before SOI impact - see below) on a like for like basis,
which is at the high end of the stated target range of 18% to 22%. Net cash
inflows from insurance operations amounted to R5,7 billion - the highest level
to date. In addition, STANLIB and Liberty Ermitage net cash inflows amounted to
R13,3 billion and R0,4 billion ($69 million) respectively.
Recurring management expenses of the group were flat on a like for like basis
and maintenance costs per policy for all the life insurance companies in the
group were largely within actuarial assumptions. Liberty Life"s renewal cost per
policy increased by 4% to R258 from the R248 reported at 31 December 2004.
Liberty Active"s cost per policy decreased from R154 per policy to R139. Capital
Alliance"s cost per policy for complex products increased by 2% from R217 at 31
March 2005 to R221 and for simple products from R80 at 31 March 2005 to R98.
Restructuring and integration costs amounted to R184 million for the year, R36
million lower than the projection given to analysts and investors in November
2005. Other non-recurring costs of R15 million include inter alia the increase
in the post-retirement medical liability and fees paid in respect of the bond
issue.
Notwithstanding a R321 million after tax SOI provision in respect of Liberty
Life and Liberty Active, BEE normalised headline earnings per share before IFRS
adjustments of 549,8 cents were 18% higher than the comparable number in 2004.
This would have been 665,4 cents or 43% higher before accounting for the SOI
provision. Capital Alliance Holdings Limited"s (CAHL) SOI provision of R85
million has been expensed in the income statement as part of the goodwill
impairment arising on acquisition of CAHL. These provisions, together with a
further amount of R193 million in respect of the SOI which has reduced the in
force business, amount to R599 million - the total negative impact of the SOI on
the group"s embedded value. Strong operational results were complemented by the
positive impact of buoyant investment markets for 2005. The weighted average
investment return used as a proxy to calculate shareholders" 10% share of
policyholder capital bonuses on certain classes of business was 33,2% at 31
December 2005 compared with 22,7% at 31 December 2004.
BEE normalised headline earnings per share before IFRS and SOI
2005 2004 % change
Rm Rm
Operating profit from insurance operations
before IFRS and SOI 1 308 827 58
Operating profit from insurance operations
Per financial statement 942 841 12
IFRS adjustments 45 14)
SOI provision 321 0
Operating profit from shareholders" funds
before IFRS and SOI 451 425 6
Operating profit from shareholders" funds
Per financial statement 899 409
IFRS adjustments (448) 16
Net income on BEE preference
shares accounted for in equity 88 31
BEE normalised headline earnings
before IFRS and SOI 1 847 1 283 44
BEE normalised weighted average number of
shares in issue 277,6 275,7 1
Weighted average number of shares in issue 251,8 271.9 (7)
Reinstatement of BEE shares 25,8 3,8
BEE normalised headline earnings per share
before IFRS and SOI 665,4 465,3 43
BEE normalised embedded value per share of R73,41 was 15% higher than at 31
December 2004. The total impact on BEE normalised embedded value of the SOI
provisions was R599 million or R2,16 per share, comprising R406 million
provided through the income statement and a R193 million reduction in value of
in-force. In terms of new actuarial guidance on embedded value calculations,
known future non-recurring costs of R216 million after tax have been allowed for
in the calculation following our announcements in November regarding
restructuring and integration costs. This deduction from BEE normalised embedded
value amounts to R0,78 per share. The goodwill impairment associated with the
CAHL acquisition of R312 million before SOI has reduced embedded value by
R1,12. Before taking these exceptional items into account, BEE normalised
embedded value per share would have increased by 22% to R77,47.
A final dividend for 2005 of 224 cents per share (153 cents per share in 2004),
has been declared in line with the group"s newly adopted dividend policy, as
communicated in the 2004 year end results. The total dividend for the year of
350 cents per share reflects an increase of 11% (in line with the current
estimated medium term growth rate of our embedded value after payment of
normal dividends) on the total 2004 dividend of 315 cents per share.
Capital reduction
The Capital Adequacy Requirement (CAR) cover ratio decreased from 2,5 times at
31 December 2004 to 2,0 times at 31 December 2005, mainly as a result of the
acquisition of CAHL, higher Lifestyle Protector (risk products) sales, offset to
an extent by increased excess assets on a statutory basis. A target CAR cover
level of 1,7 times results in excess capital of approximately R1,1 billion.
Therefore a capital reduction of R1 billion or R3,60 per share will be paid out
of the share premium account, subject to shareholder and regulatory approval.
The total payout to shareholders for the 2005 year will therefore amount to
R7,10 per share. Further details will be contained in the notice of the group"s
annual general meeting to be posted to shareholders before 31 March 2006. As a
result of this capital reduction the estimated medium term growth rate of
embedded value (to determine the 2006 ordinary dividend) will be applied to a re
based 2005 dividend of 325 cents per share in order to recognise the impact on
earnings as a result of the reduction in capital.
Significant events in 2005
In April 2005 CAHL was purchased for R3,1 billion. The major focus for the
remainder of 2005 was to ensure a swift and smooth merging of the businesses
and staff of CAHL and Liberty Life. By the end of September CAHL staff had moved
from its head office into Liberty Centre. During this process the company"s
business model was restructured to position it to serve both intermediaries and
policyholders more effectively and efficiently. This caused a certain amount of
disruption compounded by the PFA rulings - but by and large the new model has
been implemented and the benefits thereof are beginning to be extracted. In a
SENS announcement issued on 23 November 2005, it was indicated that the expected
sustainable savings could be in the order of R300 million per annum from 2008
onwards.
The company was the first South African life assurer to issue a capital
qualifying listed corporate bond. Applications for over R4,0 billion were
received and consequently the full amount of R2,0 billion was raised and has
been used to fund working capital requirements.
Liberty Life was elected winner of both categories of awards for life assurers
(individual and corporate) at the SAFSIA awards ceremony. This is the first
time that the largest intermediary body has made both awards in the same year
to one company.
During the course of last year we initiated the disposal of our offshore asset
manager, Liberty Ermitage, and the Australian life assurance business,
Prefsure, which we acquired through the acquisition of CAHL. Hightree (a small
UK distribution business) was disposed of late 2005. The sale process relating
to Liberty Ermitage continues and hopefully will be completed shortly while we
have signed a sale agreement for Prefsure.
Liberty Active
Project Khula was launched within Liberty Active during the course of 2005 to
focus on the lower to middle income segments of the market. Subsequent to the
purchase of CAHL, the project Khula sales force was integrated with CAHL work
site marketing. A comprehensive review of both CAHL and Liberty"s entry level
market products was undertaken and resulted in a simple, streamlined range of
value for money risk products at the lower end of the market. The challenge for
the coming year is to ensure efficient distribution of these products to those
who have a real need for them. In keeping with our philosophy of providing the
right product for the right markets, we are re-evaluating the sale of savings
products to this end of the market.
Pension Fund Adjudicator (PFA) rulings and statement of intent (SOI)
There was a constant stream of negative publicity around the life assurance
industry during the course of last year, fuelled primarily by the media and
numerous negative rulings against various companies within the industry by the
PFA. Whilst there were many aspects of the PFA rulings with which we clearly
disagreed, many of the issues he dealt with and rulings he made had merit.
Whether or not they were legally defensible was less of an issue to us as
whether or not the past practices could be seen as fair, in the light of
the environment in which we now find ourselves.
Under the auspices of the LOA extensive discussions took place, both internally
and with outside interested parties such as the National Treasury and the
Financial Services Board, around reforming the savings products in the industry
- but any solution had to take into account not only the future, but also the
existing in-force books of the life assurers, as well as business on the books
which had already terminated prior to the maturity of the contracts. The
discussion culminated in a December 2005 meeting and the signing of an SOI by
the five largest life office members of the LOA and the Minister of Finance.
Full provision has been made at 31 December 2005 for the minimum values of
savings products as contemplated in the statement of intent. This has had a
negative once-off impact of R599 million on the group"s embedded value.
STANLIB
STANLIB has had its best financial year since its formation in 2002. Profit
before tax and interest exceeded R400 million and assets under management grew
by 27% to R276 billion as at 31 December 2005. Performance in the equity markets
continued to improve both in absolute terms and relative to its peers. The
Alexander Forbes Global Manager Watch survey placed STANLIB third for the year
ended 2005, with its preferred asset portfolio returning 34,6% for the year.
Costs were well controlled and the company is budgeting for good growth in
assets and profitability in the coming year.
Dividend
In line with the group"s dividend policy communicated to shareholders at 31
December 2004, a final dividend of 224 cents has been declared, bringing the
total dividend for the year to 350 cents. This represents an 11% increase on
the 2004 total dividend of 315 cents.
The important dates pertaining to this dividend are:
Last day to trade cum dividend on the JSE Friday, 31 March 2006
First trading day ex dividend on the JSE Monday, 3 April 2006
Record date Friday, 7 April 2006
Payment date Monday, 10 April 2006
Share certificates may not be dematerialised or rematerialised between Monday,
3 April 2006 and Friday, 7 April 2006 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, 10 April 2006.
Events after balance sheet date
The sale of Prefsure for AUS$145 million was announced in January 2006. There
are still a number of regulatory and other conditions precedent that need to be
met. We are confident that completion will occur on or around 31 March 2006.
It was announced by the chairman of the board on 21 February 2006 that
Myles Ruck, Chief Executive of Liberty would be stepping down effective
31 May 2006 and that Bruce Hemphill would be appointed Chief Executive
effective 1 June 2006.
Prospects
We do not expect the same high level of performance from the financial markets
in 2006 that we have enjoyed in 2005. However the domestic economic outlook
remains favourable and we believe that our actuarial assumptions for the 2006
year will be met. While BEE normalised headline earnings may be lower in 2006
due to the impact of a potential lower financial market performance for 2006,
real growth in BEE normalised embedded value and dividends (after re-basing
these respective numbers to allow for the capital reduction of 360 cents per
share) should be achieved.
Auditors opinion
PricewaterhouseCoopers Inc. has reviewed the group financial statements and
audited the embedded value statement for the year ended 31 December 2005.
Copies of the auditors" unqualified review report on the group financial
statements and unqualified audit opinion on the embedded value statement for the
year ended 31 December 2005 are available for inspection at the Company"s
registered office.
Myles Ruck
Chief Executive
Derek Cooper
Chairman
1 March 2006
Transfer Secretaries
Computershare Investor Services 2004 (Pty) Limited
(Registration number: 2004/003647/07)
Ground Floor, 70 Marshall Street, Johannesburg 2000
PO Box 61051, Marshalltown, 2107
Telephone +27 11 370 5000
Please refer to the Liberty Group web page (www.liberty.co.za) where supporting
schedules, copy of the analyst presentation and notes relating to IFRS
restatements are available.
Summarised group balance sheet
as at 31 December 2005
As restated
under IFRS
2005 2004
Rm Rm
Assets
Investments 145 449 103 619
Intangible assets 1 534 331
Disposal groups held for sale 3 2 380
Prepayments, insurance and other receivables 2 747 3 161
Cash and cash equivalents 12 313 6 057
Other assets 1 641 836
Total assets 166 064 114 004
Liabilities
Policyholders" liabilities 1 140 835 97 993
Insurance contracts 103 979 65 972
Investment contracts 36 856 32 021
Financial liabilities at amortised cost 2 200
Third party liabilities arising on
consolidation of mutual funds 4 877 3 523
Deferred taxation 1 2 454 1 232
Disposal groups held for sale 3 1 267
Insurance and other payables 3 609 2 049
Other liabilities 1 221 680
Total liabilities 156 463 105 477
Equity
Ordinary shareholders" interests 9 434 8 526
Minority interests 167 1
Total equity 9 601 8 527
Total equity and liabilities 166 064 114 004
Capital adequacy requirements
Statutory capital adequacy requirement (CAR) 2 3 782 3 013
CAR cover 2,0 2,5
1-In compliance with IAS 12 Income taxes, deferred tax has been provided at
the use rate in respect of revaluation surpluses on investment properties
held as long term strategic investments. This has led to increased deferred
tax provisions amounting to R769 million (2004: R549 million) as a result
of using the income tax rate in certain circumstances as opposed to the
capital gains tax rate used previously. The Board believes that the
additional deferred tax liability, which has been debited to policyholders"
liabilities for accounting purposes, does not reflect economic reality
as the fair (open market) values of the investment properties already
discount the income tax consequences in respect of rental income. The
additional deferred tax liability does therefore not affect policyholders"
values and is reversed for statutory reporting purposes to the Financial
Services Board.
2-Previously the capital adequacy requirement (CAR) and the CAR cover ratio
were quantified using values as published in the financial statements. With the
implementation of IFRS and the divergence of published accounting and statutory
(regulatory) bases, these measures are now reported on the statutory
(regulatory) basis.
3-Disposal groups held for sale include the total assets and liabilities in
respect of Liberty Ermitage Jersey Limited and Prefsure Holdings Limited.
Summarised group income statement
for the year ended 31 December 2005
As restated
under IFRS
2005 2004
Rm Rm
Net insurance premiums, management and service fees 20 145 13 481
Investment returns 31 671 18 827
Total revenue 51 816 32 308
Net insurance benefits and claims (14 020) (9 405)
Transfer and fair value adjustment to policyholder
liabilities (25 630) (14 376)
Fair value adjustment on third party mutual fund
liabilities (1 354) (1 028)
Acquisition costs associated with insurance and
investment contracts (3 594) (1 920)
Expenses (3 693) (2 919)
Preference dividend in subsidiaries (138) (102)
Goodwill impairment (397)
Loss on sale of subsidiary (2)
Equity accounted earnings from joint ventures 91 73
Profit before taxation 3 079 2 631
Taxation (1 623) (793)
Total earnings 1 456 1 838
Attributable to:
Equity holders 1 442 1 838
Minority interest 14
Total 1 456 1 838
Reconciliation of total earnings
Headline earnings 1 841 1 250
Insurance operations 942 841
Shareholders" fund investments 899 409
Non-headline earnings (399) 588
Total 1 442 1 838
Earnings per share cents cents
Basic earnings 572,8 675,9
Fully diluted 560,4 666,7
Headline earnings 731,2 459,7
Reconciliation of headline earnings
Total earnings attributable to equity holders 1 442 1 838
Goodwill impairment 397
Loss on sale of subsidiary 2
Net realised investment gains on available for
sale designated assets (588)
1 841 1 250
Summarised statement of changes in group
shareholders" funds
for the year ended 31 December 2005
As restated
under IFRS
2005 2004
Rm Rm
Balance at 1 January 8 527
IFRS adjustments (2)
Restated balance at 1 January 8 525 8 779
Total earnings 1 456 1 838
Minority interests arising from acquisition of CAHL 161
Net unrealised investment losses on available for
sale assets (57)
Ordinary dividends (773) (766)
Repayment of redeemable bonds (79)
Subscription for shares 69 83
Black Economic Empowerment transaction 71 (1 273)
Share based payments 45 16
Owner occupied properties - net fair value adjustments 94 (14)
Reversal of fair value adjustment on CAHL existing
shares (17)
Treasury shares (25)
Foreign currency translation (5)
Shareholders" funds at 31 December 9 601 8 527
Ordinary shareholders" interests 9 434 8 526
Minority interests 167 1
Summarised group cash flow statement
for the year ended 31 December 2005
As restated
under IFRS
2005 2004
Rm Rm
Operating activities 7 748 3 738
Investing activities (4 867) (417)
Financing activities 2 068 (2 731)
Net increase in cash and cash equivalents 4 949 590
Cash and cash equivalents at beginning year 6 057 5 479
Net cash acquired on business acquisition
and disposals 1 444
Reclassified to disposal groups held for sale (137)
Foreign exchange movements on cash balances (12)
Cash and cash equivalents at end of year 12 313 6 057
New business
for the year ended 31 December 2005
Comparatives include Capital Alliance for nine months
Recurring Single
premiums premiums
2005 2004 2005 2004
Rm Rm Rm Rm
Individual 2 924 2 759 10 797 8 870
Group 635 531 2 317 1 588
Total new business 3 559 3 290 13 114 10 458
% Change 8% 25%
Indexed new business
Natural increases 959 846
Indexed new business excluding
natural increases
Total
premiums % change
2005 2004
Rm Rm
Individual 13 721 11 629 18
Group 2 952 2 119 39
Total new business 16 673 13 748 21
% Change 21%
Indexed new business 4 870 4 336 12
Natural increases 959 846 13
Indexed new business excluding
natural increases 3 911 3 490 12
Net cash flow from insurance operations
for the year ended 31 December 2005
Comparatives include Capital Alliance for nine months
Individual business Group business
2005 2004 2005 2004
Rm Rm Rm Rm
Net premiums from insurance
contracts and inflows from
investment contracts 20 792 17 664 6 499 4 700
Net claims and benefits (15 844) (12 892) (5 721) (6 286)
Total net cash inflows 4 948 4 772 778 (1 586)
Total
2005 2004
Rm Rm
Net premiums from insurance contracts
and inflows from investment contracts 27 291 22 364
Net claims and benefits (21 565) (19 178)
Total net cash inflows 5 726 3 186
Excluding cash inflows of STANLIB and Liberty Ermitage amounting to R13 billion
and R0,4 billion ($69 million) respectively.
Analysis of shareholders" funds invested
for the year ended 31 December 2005
Group Contribution
funds invested to earnings
2005 2004 2005 2004
Rm Rm Rm Rm
Insurance operations 1 019 109 914 841
Life fund operating surplus 1 593 956
Present value of in force business
acquired 1 019 109 (90) (13)
Liberty Active preference dividend (138) (102)
Working capital charge (1) (130)
Statement of Intent - SOI rulings (321)
Financing of insurance operations 683 1 052 65
Fixed assets and working capital 2 883 1 052 130
Callable capital bonds and preference
share liabilities (2 200) (65)
Financial services operations 449 850 149 172
Trading portfolio 423 7 68
Liberty Group Properties 11 4 33 24
STANLIB 406 407 107 75
Other 32 16 2 5
Listed investments 1 797 2 269 62 94
Metoz 242 30
SABMiller 120 919 9 22
Other 1 677 1 108 53 42
Other investments 4 540 3 790 254 319
Cash, preference shares and mutual
funds 4 052 2 287 157 202
Foreign assets 65
Redeemable bonds (83)
Share of pooled portfolios 373 1 382 54 132
Unlisted investments 115 121 43 3
Disposal groups held for sale 946 456 105 46
Prefsure Holdings 400 28
Liberty Ermitage Jersey 546 456 77 46
Administration expenses - shareholder
allocation (163) (128)
Normal taxation excluding insurance
operations 38 (20)
Secondary tax on companies (74) (74)
Capital gains taxation on
shareholder specific assets
Net investment gains 491 531
Goodwill impairment (397)
Loss on sale of Hightree Financial
Services (2)
Total shareholders" funds 9 434 8 526 1 442 1 781
Earnings
Recognised in income statement 1 442 1 838
Recognised directly in equity (2) (57)
1 442 1 781
Group investment
gains/(losses)
2005 2004
Rm Rm
Insurance operations
Life fund operating surplus
Present value of in-force business
Liberty Active preference dividend
Working capital charge (1)
Statement of Intent - SOI rulings
Financing of insurance operations
Fixed assets and working capital
Callable capital bonds and preference
share liabilities
Financial services operations 2 (16)
Trading portfolio
Liberty Group Properties
STANLIB (1) (15)
Other 2 (1)
Listed investments 382 652
Metoz 28 40
SABMiller 84 264
Other 270 348
Other investments 228 113
Cash, preference shares and mutual funds 26 54
Foreign assets (32)
Redeemable bonds 37
Share of pooled portfolios 102 31
Unlisted investments 100 23
Disposal groups held for sale 12 (45)
Prefsure Holdings
Liberty Ermitage Jersey 12 (45)
Administration expenses - shareholder allocation
Normal taxation excluding insurance operations
Secondary tax on companies
Capital gains taxation on
shareholder specific assets (133) (173)
Net investment gains (491) (531)
Goodwill impairment
Loss on sale of Hightree Financial Services
Total shareholders" funds
Earnings
Recognised in income statement
Recognised directly in equity (2)
(1) -With effect from 1 July 2005 Liberty Life 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 8,93% nacm which is equivalent to the bond interest
rate.
(2) -Prior to the implementation of IFRS unrealised investment gains or losses
on shareholder-designated assets were taken directly to equity. With effect
from 1 January 2005 all gains and losses are taken to earnings.
Embedded value and value of new business
as at 31 December 2005
Group embedded value
Restated As previously
under IFRS reported
2005 2004 2004
Rm Rm Rm
Risk discount rate 10,00% 10,75% 10,25%
Net worth 8 279 8 775 9 260
Shareholders" funds on
published basis 21 9 434 8 526 8 494
Adjustment of shareholders"
funds from published basis 2 (1 236) (326)
Financial services
subsidiaries fair value
adjustment 3 1 345 875 875
Adjustment for carrying value
of in force business acquired 4 (1 019) (109) (109)
Allowance for fair value of
share options 1 (245) (191)
Net value of life business in
force 10 874 7 544 7 607
Value of life business in
force 11 563 8 157 8 193
Cost of solvency capital (689) (613) (586)
Embedded value 19 153 16 319 16 867
Embedded value per share information
Restated As previously
under IFRS reported
2005 2004 2004
Embedded value (Rm) 19 153 16 319 16 867
Number of shares in issue
less shares in respect of the
BEE transaction (millions) 252,2 250,8 250,8
Embedded value per ordinary
share (R) 75,96 65,07 67,25
Embedded value before BEE
impairment (Rm) 20 404 17 623 18 171
Number of shares including
shares in respect of the BEE
transaction (millions) 277,9 276,6 276,6
BEE normalised embedded value
per share (R) 73,41 63,72 65,69
Value of new business and new business margins
2005 2004
Rm Rm
Net value of new business written in the year 882 815
Gross value of new business 945 970
Cost of solvency capital (63) (155)
New business index excluding natural increases 3 911 3 340
New business margin 22,6% 24,4%
Present value of future expected premiums 26 902 24 030
Value of new business as a percentage of future
expected premiums 3,3% 3,4%
The value of new business is the value at the point of sale derived from the
new business premium income net of contractual increases.
The value of new business shown above is prior to the adjustment in respect of
the implementation of minimum values for savings products. The effect of this
adjustment is to reduce the margin and is described under point 19 of the
"bases, assumptions and additional information" section.
Embedded value profits
2005 2004
Rm Rm
Embedded value at the end of the year 19 153 16 867
Less capital raised (69) (83)
Plus dividends paid 773 766
Plus Black Economic Empowerment transaction
(1) 1 273
Less restated embedded value at the beginning
of the year (16 319) (15 817)
Embedded value profits 3 538 3 006
Return on net worth 40% 32%
Return on embedded value 22% 19%
(1) Includes transaction costs of R22 million taken directly to equity
Analysis of embedded value profits
An analysis of the components of embedded value profits for the year
ended 31 December 2005 is summarised below.
Net value of
life business Embedded
Net worth in force value
Rm Rm Rm
Embedded value profits for the year
Embedded value of the end of the
year 8 279 10 874 19 153
Less capital raised (69) (69)
Plus dividends paid 773 773
Less restated embedded value at
the beginning of the year (8 775) (7 544) (16 319)
Embedded value profits 208 3 330 3 538
Components of embedded value
profits
Value of new business written in
the year 882 882
Expected return on value of life
business 8 938 938
Expected net of tax profit
transfer to net worth 11 481 (481)
Operating experience variances 12 (154) 131 (23)
Operating assumption changes 13 62 (218) (156)
Embedded value profits from
operations 389 1 252 1 641
Investment return on net worth 1 073 1 073
Exchange rate movements 46 46
Investment variances 519 773 1 292
Changes in economic assumptions 14 23 434 457
Changes in modelling methodology 15 (437) (166) (603)
Value of in force acquired 16 (945) 1 112 167
Changes in company tax rate 17 118 118
Change in allowance for fair value
of share options 18 (54) (54)
Implementation of minimum values
for savings products 19 (406) (193) (599)
Total embedded value profits 208 3 330 3 538
Bases, assumptions and additional information
1. The restatement of the embedded value at 31 December 2004 can be broken
down into the following components:
- Changes as a result of using the Statutory Valuation Method rather than the
published basis previously used to determine the emergence of profits. This
resulted in a total increase of R11 million to the embedded value (see note
2 below).
- Changes as a result of the increase in the margin of the risk discount rate
over the equity investment return. This resulted in a decrease of R368
million to the embedded value.
- Allowance for the fair value of share options outstanding as at the
valuation date. This resulted in a decrease of R191 million to the embedded
value.
2. The amounts of R1 236 million and R326 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.
3. The published value of financial services subsidiaries is enhanced for
embedded value purposes to essentially hold these subsidiaries as a multiple
of earnings. This adjustment is shown as the "financial services subsidiaries
fair value adjustment".
This adjustment consists of the following:
31 December 31 December
2005 2004
Rm Rm
Liberty Group Properties (Proprietary) Limited 300 240
Liberty Ermitage Jersey Limited 305 290
STANLIB Limited 710 345
Prefsure Holdings Limited 30
1 345 875
In the case of Liberty Group Properties (Proprietary) Limited, Liberty Ermitage
Jersey Limited and STANLIB Limited, a price earnings ratio multiplier was
applied to the net after taxation recurring earnings of the subsidiaries. In
all cases a multiplier of 10 was used (2004: 10). In the case of STANLIB
Limited the R710 million represents Liberty Life"s share of the excess over the
net asset value of STANLIB Limited and effectively values STANLIB Limited at
R2,7 billion in total.
The R30 million for Prefsure Holdings Limited represents the excess of the net
sale proceeds over the value at which Prefsure is currently held, being cost
plus retained earnings since acquisition.
4. The carrying value of business acquired by Liberty Life (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.
31 December 31 December
2005 2004
Rm Rm
Investec Employee Benefits (96) (109)
Capital Alliance Holding Limited CAHL (872)
Business previously acquired by CAHL (51)
(1 019) (109)
5. 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.
2005 2004
Government stock 7,50% 8,25%
Equities 9,50% 10,25%
Property 8,50% 9,25%
Cash 6,00%
6. -The risk discount rate has been set equal to
0,5% in excess of the investment return on
equity assets at 31 December 2005 and equal to
the investment return on equity assets at 31 December
2004 restated at 31 December 2005 to 10.75%. 10,00% 10,25%
7. Maintenance expense inflation rate 4,00% 4,25%
8. 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.
9. 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. No allowance has been made for the taxation changes announced in
the Budget on 15 February 2006.
10.Other bases, bonus rates and assumptions:
Parameters reflect best estimates of future experience,
consistent with the valuation basis used by the statutory actuary, excluding
any compulsory or discretionary margins. However, in contrast to the
valuation basis assumption, the embedded value does make allowance for
automatic premium and benefit increases.
11.The expected net of tax transfer to net worth includes a negative amount
of approximately R575 million arising due to the new business strain
experienced on the statutory valuation basis.
12.The amount of R23 million shown for operating experience variations arises
from actual risk experience being better than expected but being offset by
non-recurring expenses incurred. These non-recurring expenses amounted to
R220 million (pre tax) for 2005 and were largely due to restructuring and
integration costs (R184 million). The non-recurring expenses incurred in
2005 are included in the analysis of embedded value profits but do not
form part of the future projections.
13.The largest component of the amount of R156 million shown for
operating assumption changes is an allowance for the first time in the
embedded value for future non-recurring expenses of R316 million, planned to be
spent on restructuring and integration costs. This R316 million discounted and
net of tax amounts to R216 million. The positive balance of R60 million relates
to changes to the withdrawal bases, a reduction in fees on certain portfolios of
business as well as changes to the assumed rate of take-up of automatic
contribution increases in respect of risk only products, offset by changes to
mortality and policy extension assumptions.
14.The amount of R457 million shown for changes in economic assumptions arises
from the change to a lower level of economic assumptions.
15.The amount of R603 million shown for changes in modelling methodology
arises mainly from:
The establishment of a reserve, amounting to R340 million, in light of the
move towards valuing embedded derivatives on a market consistent basis
rather than a real-world basis.
Changes required to model commission more accurately as well as removing
inconsistencies between best estimate and valuation cash flows.
16.The amount of R167 million shown for value of in force acquired reflects
the difference between the carrying value established on an accounting
basis at the date of acquisition of CAHL and the value of in force
calculated at the same date.
17.The amount of R118 million shown for change in company tax rate arises from
the change in the corporate tax rate from 30% to 29%.
18.The amount of R54 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 Life share price over
the reporting period.
19.The amount of R599 million in respect of the implementation of minimum
values for savings products reflects the impact of allowing for the minimum
values required for savings products as per the Statement of intent signed
between the Life Offices Association and the National Treasury in December
2005.
The amount of R882 million for the value of new business written in the year
is prior to any allowance for these minimum values. The value of new business
written in the year allowing for this effect is as follows:
Rm
Value of new business written during the period 777
Gross of cost of solvency capital 858
Cost of solvency capital (81)
New Business index excluding natural increases 3 911
New business margin 19,9%
Present value of future expected premiums 26 216
Value of new business as a percentage of future expected premiums 3,0%
20.The assets backing the Capital Adequacy Requirement (CAR) are 60% equities,
20% cash, 15% preference shares and 5% gilts (previously 50% equities, 25%
cash and 25% preference shares).
21.Shareholders" funds on the published basis are stated after the full
impairment of goodwill amounting to R397 million arising on the acquisition
of CAHL at 1 April 2005.
Commitments 2005 2004
Rm Rm
Operating lease commitments
Equipment 64 39
Within 1 year 31 14
1 to 5 years 33 25
6 to 10 years 0 0
Investment properties 691 793
Within 1 year 79 74
1 to 5 years 344 339
6 to 10 years 268 380
Capital commitments
Capital Alliance Holdings Limited acquisition 0 3 047
Equipment 288 203
Under contracts 248 178
Authorised by the directors but not contracted 40 25
Investment properties under contracts 0 290
Total commitments 1 043 4 372
Related parties
There have been no significant changes to the nature of the related party
transactions as described in note 29 to the 31 December 2004 annual financial
statements. IFRS requires a more comprehensive disclosure of related party
relationships which will be provided in the annual financial statements for
31 December 2005.
Accounting policies and presentation
The annual financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) as well as the South
African Companies Act, 1973.
These are Liberty Life"s first IFRS annual financial statements and the
provisions of IFRS 1 first-time adoption of International Financial Reporting
Standards, have been applied.
Shareholders are referred to the unaudited interim results at 30 June 2005
regarding details of the financial restatement impact and accounting policy
changes as a consequence of the IFRS adoption.
Acquisition of CAHL
On 1 April 2005, Liberty acquired 100% of the issued share capital of CAHL
(excluding existing holdings), at a purchase price consideration of R3 047
million, utilising excess shareholder funds.
The summarised assets and liabilities arising from the acquisition are as
follows:
Total Value of
recognised in force Net
values acquired asset value
Rm Rm Rm
Investments 16 608 16 608
Intangible assets 1 467 1 331 136
Other assets 1 276 1 276
Insurance and other receivables 1 731 1 731
Cash and cash equivalents 1 445 1 445
Policyholders" liabilities (17 817) (17 817)
Financial liabilities at amortised
cost (200) (200)
Minority interest (161) (161)
Other payables (1 699) (386) (1 312)
Net identifiable assets and
liabilities 2 650 945 1 705
Goodwill on acquisition 397
Consideration paid 3 047
Less cash acquired (1 445)
Net cash outflow 1 602
The goodwill arose from the residual cost of the acquisition over the embedded
value at acquisition date which could not be attributed to any other asset (no
other intangibles existed.)
CAHL has adopted IFRS with effect from 1 April 2005.The relevant IFRS
adjustments relating to CAHL have been incorporated into the assets and
liabilities at acquisition.
Date: 02/03/2006 08:30:31 AM Produced by the JSE SENS Department
