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Insurance
www.fitchratings.com 18 September 2012
Life Insurers / South Africa
Liberty Group Limited Full Rating Report
Key Rating Drivers
Well-Established Domestic Franchise: Liberty Group Limited (LGL) has a strong, established
domestic franchise and business position, which have been supported by organic growth and
acquisitions. In South Africa the group is among the four largest life insurers and private asset
managers. Furthermore, the strength and diversity of LGL‟s distribution network, in particular its
bancassurance joint venture with Standard Bank Group Limited (Standard Bank; rated
„BBB+‟/Negative), is a key positive ratings driver.
Strong Capitalisation: Fitch Ratings considers capital adequacy to be strong, both for LGL as
an entity and for the Liberty group as a whole (comprising Liberty Holdings Ltd (LBH), the
holding company of the group, and LGL, as well as a number of other group subsidiaries).
LBH Group and LGL had regulatory CAR cover ratios of 2.4x and 2.9x, respectively, at end-
2011 which are well above both the group‟s target of 1.7x and the minimum regulatory
requirement of 1.0x. The group‟s capitalisation is susceptible to volatility in the equity markets,
as is also the case for its peers.
Solid Performance in Tough Conditions: The group‟s headline earnings were up by 3% at
ZAR2,597m (2010: ZAR2,522m) with the return on embedded value (ROEV) for the South
African insurance business improving to 13.9% (2010: 12.6%). Earnings were supported by
improved performances from the South African insurance and asset management businesses,
despite lower returns from investment markets. At H112 the group‟s headline earnings
improved by 41% to ZAR1,676m.
Improved New Business Margin: The improvement in new business margin on a present
value of new business premium (PVNBP) basis to 1.4% (2010: 1.2%) was driven mainly by the
decrease in lapses in the South African insurance business. In H112 the new business margin
further improved to 1.5%. Fitch expects the margin to continue to improve.
Persistency Issue Addressed: LGL‟s customer retention issue (i.e. poor persistency) in its
core South African insurance business, which began in 2009, has now been largely resolved.
Since end-H109, the group has undertaken substantial restructuring and customer retention
initiatives to address its persistency problem. As a result, its persistency experience improved.
Fitch views this as a positive and expects the South African insurance business to continue to
perform well in view of the initiatives that have been established in the business.
What Could Trigger a Rating Action
Operating Result Improving Further: Although an upgrade is unlikely in the near term, the
key rating drivers that could result in an upgrade in the medium term include continued
improvement in profitability, an improvement in the life new business margin towards the
group‟s medium-term target of 2.0%, continued growth in volumes of new business,
capitalisation sustained at strong levels as well as market share being maintained.
Weakening of Performance/Capitalisation: A sustained poor operating performance driven
by narrower new business margins, a significant reduction in the group's capitalisation based
on Fitch's own assessment, a drop in LGL's regulatory capital adequacy requirement ratio to
below 1.7x, or a weakening in the company's market position could lead to a downgrade.
Ratings
National Insurer Financial Strength AA(zaf)
National Long-Term Rating AA−(zaf) Subordinated debt A+(zaf)
Sovereign Risk Long-Term Foreign-Currency IDR BBB+
Outlooks
National Insurer Financial Strength Stable National Long-Term Rating Stable Sovereign Long-Term Foreign-Currency IDR
Negative
Financial Data
Liberty Holdings Limitedª (Group Consolidated)
(ZARm) 2011
Total assets 253 Total equity 16 Debt (including hybrids) 2,195 Gross written premiums 27,302 Net income 3,038
At 31 December 2011 ª The consolidated group‟s financial figures used in this report relate to Liberty Holdings Limited, which drives the rating of Liberty Group Limited, the main life insurance company
Related Research
South African Life Insurance (January 2012)
Analysts
Sonja Zinner +44 20 3530 1321 [email protected] Harish Gohil +44 20 3530 1257 [email protected]
Insurance
Liberty Group Limited
September 2012 2
Market Position and Size/Scale
One of South Africa’s Largest Life Insurers Strong domestic market position but limited diversification
Wide range of life insurance and financial products
Well-established in the mass-affluent market in South Africa
Business outside South Africa of small scale
Successful bancassurance agreement
Multi-channel distribution strategy a positive ratings factor
Strong Domestic Market Position but Limited Diversification
The Liberty group is one of the largest life insurers in South Africa in terms of gross written
premiums: it has a market share of around 18% in South Africa, based on total new business
premiums. It has a well-established business position in South Africa and has a well-known
brand in the local market. However, compared to large multi-national insurance groups Liberty
is of modest scale and lacks geographic diversification. The insurer is a pure life insurance
player and does not write any significant non-life business.
Wide Range of Life Insurance and Financial Products
The group provides a wide range of non-banking financial products and services including risk,
investment and retirement products to individuals; employee benefit solutions to the corporate
market by offering pension, provident, investment and risk products; and health-related
services comprising healthcare administration, managed care and health insurance to
institutional customers. In addition, the group offers asset-management, property development
and management services.
Well Established in the Mass-Affluent Market in South Africa
The group‟s core focus has traditionally been on the mass-affluent market in South Africa
where it has established a strong business position in terms of market share, franchise and
distribution. The maturity of this target market resulted in the group broadening its offering and
has recently entered the entry-level market. This provides further revenue diversification, which
is seen by Fitch as a positive, as long as the strategy is executed successfully.
Business Outside South Africa of Small Scale
Geographically, South Africa is the group‟s core market, accounting for 98.5% of total revenue
and 98.9% of total assets in 2011. However the group has expanded into the rest of Africa in
partnership with Standard Bank. It offers life, health and short-term insurance to 14 African
countries outside South Africa.
Liberty‟s expansion into Africa offers the prospect of good growth opportunities (in view of the
low penetration of insurance products and services) and diversification of earnings. Fitch
believes that this does not come without its challenges and also entails execution risk. That
said, the agency believes that the group‟s strong relationship with Standard Bank has
positioned it well to implement this strategy. The African businesses has yet to reach the scale
required to significantly contribute to geographic diversification, and it is likely to be many years
before it does so.
Successful Bancassurance Agreement
The group has a successful bancassurance relationship with Standard Bank (one of four large
banking groups in South Africa) which Fitch considers a key positive rating factor. Standard
Related Criteria
Insurance Rating Methodology (September 2011)
Insurance
Liberty Group Limited
September 2012 3
Bank provides a key bancassurance distribution channel and significant support through its
local relationships, due diligence, information technology and advisory services. This enables
Liberty to expand its revenue base in South Africa and facilitate entry into new markets in the
rest of Africa.
Multi-Channel Distribution Strategy a Positive Ratings Factor
Figure 1 shows the life new business sourced from each distribution channel for Retail SA and
Corporate during 2011. A key positive rating factor for the group is the strength and diversity of
its distribution, including its success in bancassurance with Standard Bank.
Figure 1
2.7%
34.4%31.9%
31.0%
22.8%
22.9%
53.8%
0.5%
Broker
Bancassurance
Tied channels
Other
Life New Business by Distribution Channel, 2011Inner ring: Retail
Outer ring: Corporate
Source: Company, Fitch
Insurance
Liberty Group Limited
September 2012 4
Ownership Is Neutral to Rating
The group was established in 1957 and has been listed on the Johannesburg Securities
Exchange since 1962. Liberty has more than 8,000 shareholders, ranging from major
institutions to individuals. LBH is 53.6% owned by Standard Bank. Standard Bank‟s primary
banking subsidiary is The Standard Bank of South Africa Limited („BBB+‟/Negative).
Figure 2
Abridged Group Structure
Source: Liberty Holdings Limited.
Standard Bank Group Limited
Liberty Holdings Limited
Frank Life Limited
Liberty Active Limited
Capital Alliance Life
Limited
Liberty Growth Limited
Liberty Life Namibia Limited
Liberty Group
Limited
STANLIB Limited
Liberty Group Properties
(Pty) Limited
Liberty Health Holdings (Pty)
Limited
Liberty Holdings Namibia
(Pty) Limited
CFC Insurance Holdings Limited
53.62%
74.9% 75% 56.8%
The group‟s main operating companies are:
LGL, the primary life insurance operating company; and
STANLIB, the primary fund management company.
Other important operating companies include:
Liberty Health Holdings (Pty) Ltd (Liberty Health), which offers technology solutions, health
care administration and managed care in South Africa and other parts of Africa; and
Liberty Group Properties (Pty) Limited, which develops and manages direct property
assets and other real-estate investments in the retail, commercial and hospitality sectors
Corporate Governance and Management
Corporate governance and
management are adequate and neutral
for the rating.
Insurance
Liberty Group Limited
September 2012 5
Industry Profile and Operating Environment
Challenging Economic Environment with Significant Reform Underway
The local environment continued to show signs of recovery in 2011, with improved local equity
markets and positive economic growth, but it nonetheless remains challenging. Fitch expects
life insurers‟ earnings to remain under pressure in the near term, in view of the difficult and
volatile South African and global investment market conditions and continued financial
constraint on disposable incomes in South Africa.
Significant regulatory changes are being undertaken in the life insurance sector which Fitch
believes will ultimately significantly affect how life insurers operate. See South African Life
Insurance: Good Performance in Difficult Environment published in January 2012 and available
on www.fitchratings.com.
Fitch believes the pension fund reform may have an adverse impact on life insurance
companies, as part of people‟s current monthly retirement contributions into life insurers'
retirement saving products may be redirected to the national fund. However, on the positive
side, an opportunity exists for insurers to be one of the administration service providers to the
NSSF.
The impact of the national health reform on life insurers offering healthcare services and
medical administration is unclear at the moment. Fitch, however, believes that it could include
the following: medical schemes becoming redundant if the government decides to administer
the National Health Insurance (NHI) fund; a reduction in or discontinuation of subscriptions to
medical aid by consumers once the NHI scheme is in place, in view of consumers being unable
to afford both private and public healthcare.
Although the introduction of the new solvency regime is likely to result in increased capital
requirements for most insurers, the significance of the impact is unclear at present, since the
new regulation is still emerging.
Insurance
Liberty Group Limited
September 2012 6
Peer Analysis
Performance in Line with Peers
Liberty is the third-largest life insurer in South Africa in terms of GWP. All of the South African
life insurers in Fitch‟s rated universe have Insurer Financial Strength (IFS) ratings of „AA(zaf)‟
or above.
Liberty appears approximately in the middle of its leading peer group in terms of most of the
key financial metrics such as CAR cover or ROEV in the table below. The group has strong
market positions in the mid- to upper-income segments. It has a well-established and
recognised brand and is expanding its franchise in the lower-income segment in South Africa
as well as in the rest of Africa.
Figure 3 Peer Comparison Table (2011)
(ZARm) National IFS rating CAR cover
(x)d GWP EV/GEV
ROEV/ ROGEV (%)
Total assets
Total equity AUM
Net profit
Liberty Holdings Limited AA(zaf)/Stablea 2.9 27,302 28,639 13.9 253,228 16,283 455,000 3,038
Old Mutual Life Assurance Company (South Africa) Limited
AAA(zaf)/Stable 4.1 26,367 n.a. 11.9e
451,184 n.a. 559,700 6,400
Sanlam Limited AA+(zaf)/Stableb 3.7 33,225 63,521 16.4 382,203 36,868 503,000 6,606
MMI Holdings Limited AA(zaf)/Stablec 2.3 10,990 30,811 7.1 289,572 23,061 437,054 815
IFS – Insurer Financial Strength. GWP – Gross written premiums. PVNBP – Present Value of New Business Premiums. EV/GEV – Embedded Value/Group Equity Value. ROEV /ROGEV – Return on Embedded Value/Return on Group Equity Value. AUM – Assets Under Management. N.a. – Not available The key indicators in this table for the peers are for 12 months ended 31 December 2011 except for MMI Holdings Limited which is for six months ended 31 December 2011 ª The National IFS Rating/Outlook applies to Liberty Group Limited and not Liberty Holdings Limited. Liberty Holdings Limited is the holding company of the group. b The National IFS Rating/Outlook applies to Sanlam Life Insurance Limited and not Sanlam Limited. Sanlam Limited is the holding company of the group and has a National
Long-Term Rating of „AA-(zaf)‟ c The National IFS Rating/Outlook applies to Momentum Group Limited and Metropolitan Life Limited and not to MMI Holdings Limited. MMI Holdings Limited is the holding
company of the group and has a National Long-Term Rating of „A+(zaf)‟ d The CAR cover ratios for Sanlam Limited, Liberty Holdings Limited and MMI Holdings Ltd refer to the CAR cover ratios for Sanlam Life Insurance Limited, Liberty Group
Limited and the MMI group respectively e This metric is not only for OMLACSA in South Africa, it also includes emerging markets comprising other African countries, Asia and Latin America
Source: Company announcements, Fitch
Insurance
Liberty Group Limited
September 2012 7
Solid Capitalisation and Low Financial Leverage Capital strong but somewhat sensitive to equity market volatility
Capital requirements likely to increase
Subordinated debt refinanced
Financial leverage low and expected to drop
Capital Strong But Somewhat Sensitive to Equity Market Volatility
Fitch considers Liberty‟s capital position to be strong, based on its own risk-adjusted
assessment as well as the regulatory CAR cover ratios. LBH and LGL had regulatory CAR
cover ratios of 2.4x and 2.9x respectively at end-2011 (2010: 2.3x and 2.7x respectively) which
are well above both the group‟s target of 1.7x and the minimum regulatory requirement of 1.0x.
The improvement in LGL‟s CAR cover ratio was attributable to a lower capital adequacy
requirement in 2011. At H112 LGL‟s CAR cover remained stable and Fitch expects Liberty to
maintain its strong capital position.
Fitch notes that Liberty‟s capitalisation demonstrates some sensitivity to equity market
conditions - however, this is in line with leading peers. Even when applying stress scenarios in
the agency‟s own risk-adjusted assessment, Liberty's CAR remains strong.
Capital Requirements Likely to Increase
The FSB is in the process of developing a new risk-based solvency regime for South Africa,
known as Solvency Assessment and Management (SAM), based on the principles of the EU
Solvency II Directive, but adapted to South African-specific circumstances where necessary.
The regulator currently expects to implement it in 2015. Although the introduction of SAM is
likely to result in increased capital requirements for insurers, the significance of the impact is
unclear at present as the new regulation is still in flux.
Subordinated Debt Refinanced
LGL issued ZAR1.0bn of subordinated debt securities in August 2012. The security is not
callable and has its final maturity date on 13 August 2017. The issue is part of the group‟s
active capital management and takes into account the repayment of LGL‟s ZAR2bn bond,
which has been called on its first call date in September 2012.
Financial Leverage Dropped
Financial leverage ratios have dropped after the bond has been called to 8% compared to 14%
at end-2011. Fitch considers this low for LGL‟s rating level. Fitch notes that there is a possibility
of further subordinated bonds issuances in the future. Fitch expects financial leverage to
remain within an acceptable range for LGL's rating level.
Figure 4 Capitalisation and Leverage
(ZARm) 2007 2008 2009 2010 2011 Fitch's expectation
Total equity 12,491 13,826 12,935 14,379 16,283 Fitch expects the group to maintain its strong capital position. Leverage is expected to remain in an acceptable range for its rating level.
Total financing and commitments ratioª (x) 0.5 0.2 0.2 0.2 0.2
Financial leverage ratiob (%) 30 17 17 15 14
Operating leverage ratioc (x) 39.2 16.9 19.6 19.0 17.9
Regulatory CAR cover ratio (x): LBH 1.8 2.1 2.2 2.3 2.4
Regulatory CAR cover ratio (x): LGL 2.0 2.7 2.8 2.7 2.9
ª Total financing and commitments ratio = Total financing and commitments (includes matched-funding) to consolidated shareholders‟ equity b Financial leverage ratio = All debt /equity capital + debt + total hybrids
c Operating leverage ratio = Total liabilities (excluding unit-linked) to shareholders‟ funds
Source: Company, Fitch
Insurance
Liberty Group Limited
September 2012 8
Adequate Financial Flexibility
Good ability to raise additional funds
Strong interest coverage
Good Ability to Raise Additional Funds
In 2005, the FSB relaxed its rules relating to the use of subordinated debt capital in the
calculation of statutory capital. As a result, South African life insurers have raised debt capital,
bringing their capital structures more into line with those of insurers operating in more
developed markets. Following regulatory approval, LGL issued ZAR2bn of unsecured
subordinated callable notes in September 2005. The notes mature in September 2017 and
were redeemed in September 2012.
Strong Interest Coverage
Fitch views Liberty‟s interest coverage on debt-servicing capabilities as strong for its rating.
Interest coverage (excluding realised and unrealised gains) was 5.9x in 2011 (2010: 6.5x) and
remains slightly above its five-year average of 5.8x. The outstanding amount of debt has been
reduced to ZAR1.0bn which reduces Liberty‟s interest expense burden at present.
Figure 5 Debt Service Capabilities and Financial Flexibility
(ZARm) 2007 2008 2009 2010 2011 Fitch's expectation
Interest expense 666 664 709 769 899 Fitch expects coverage to improve in 2012 due to strong earnings. Fixed charge coverage ratioª (x) 9.2 4.6 2.5 6.5 5.9
ª Fixed-charge coverage ratio = EBITDAb operating result before fixed charges (excluding realised and unrealised gains) / interest expenses (including interest on hybrids and
dividends on preference shares) b Earnings before interest, taxation, depreciation and amortisation
Source: Company, Fitch
Holding Company Liquidity
LBH is a pure holding company and it
conducts no business other than that
related to its investment in the Liberty
group. LibHold had cash holdings of
ZAR18m in 2011.
Insurance
Liberty Group Limited
September 2012 9
Solid Performance Despite Tough Economic Conditions Strong and improved performance
Improved new business margin
Growth Initiatives segment continued to report a loss
Strong and Improved Performance
Liberty‟s performance improved in 2011, with headline earnings up 3% at ZAR2,597m in 2011
(2010: ZAR2,522m) and ROEV for the South African insurance business improving to 13.9%
(2010: 12.6%). Earnings have been supported by improved performances from the South
African insurance business, attributable to continued improvement in policyholder persistency,
and the asset management business, driven by higher average assets under management and
improved performance fees. The lower returns from investment markets were attributable to the
poor performance of investment markets in 2011, compared with their strong performance in
2010. At H112 the group‟s headline earnings were up by 41% to ZAR1,676m.
Improved New Business Margin
The group‟s total life new business margin on a PVNBP basis strengthened to 1.4% in 2011
(2010: 1.2%) driven mainly by a lower lapse rate in the South African insurance business. In
H112 the new business margin further improved to 1.5% (H111: 1.3%). Fitch notes that within
segment „Retail SA‟ which accounts for more than half of the South African long-term insurance
business, the new business margin has improved to 1.8% at H112 (2011:1.6%, 2010: 1.3%).
Growth Initiatives Continued to Report a Loss
This business reported a headline loss of ZAR91m in 2011 (2010: headline loss of ZAR77m).
Liberty Health‟s headline loss widened to ZAR65m (2010: headline loss of ZAR43m) as a result
of the continued loss of lives under administration due to the continued movement of members
to Government Employees Medical Scheme (GEMS) in 2011 and an increase in costs incurred,
a number of which were one-off costs. Fitch expects this segment to continue to generate
losses over the next few years due to start-up expenses and the need to increase scale to
cover fixed costs, in the context of a competitive operating environment.
Figure 6 Financial Performance and Earnings
(ZARm) 2007 2008 2009 2010 2011 Fitch's expectation
Net income 1,516 1,072 37 2,302 2,736 Fitch expects the group‟s performance to improve in 2012. The agency expects the life new business margin in the „Retail SA‟ business to continue to improve towards the group‟s medium-term target of 2.0%.
Operating profit 14,938 15,196 12,668 14,637 14,658
Pre-tax profit 5,484 2,378 1,082 4,260 4,421
Pre-tax operating return on assets (%) 2.5 1.9 0.8 1.1 1.7
Return on book equity (incl. gains) 42.4 20.9 2.0 22.9 24.4
Source: Company, Fitch
Insurance
Liberty Group Limited
September 2012 10
Investments of Moderate Risk Equity exposure commensurate with rating level
Bond portfolio of good credit quality
Equity Exposure Commensurate with Rating Level
Fitch considers Liberty‟s investment risk as commensurate for the rating level. The majority of
assets backing Liberty‟s shareholders‟ investment portfolio (SIP) of ZAR20.4bn (2010:
ZAR17.3bn) and capital portfolio of ZAR9.2bn (2010: ZAR9.0bn) are invested in local cash,
bonds and property, as shown in Figures 10 and 11.
Figure 8 Figure 9
23%20%
23%
9%
15%
10%
21%
15%
27%
7%
18%
12%
Local equities
Local bonds
Local cash
Local preference
sharesLocal property
Foreign assets
Liberty's Shareholders’ Investment
Portfolio, 2011Inner ring: 2010
Outer ring: 2011
Source: Company, Fitch
18%12%
52%
18%
17%
63%
4%
16%
Local equities
Preference shares
Local cash, bonds &
property
Foreign assets
Liberty’s Capital Portfolio, 2011Inner ring: 2010
Outer ring: 2011
Source: Company, Fitch
Fitch notes that according to its global rating methodology the portion of unaffiliated equities
expressed as a percentage of equity of 222% is considered high. However, South African
insurers tend to have higher equity exposure compared to European or North American peers,
in part reflecting the particular “profit-sharing” model of South African life insurance business.
Fitch notes that Liberty‟s investments are of lower risk compared to some of its South African
peers. Overall taking into account the features of the South African insurance market Fitch
considers Liberty‟s equity exposure as commensurate with the rating level.
Bond Portfolio of Good Credit Quality
Liberty‟s investment portfolio is relatively well-diversified in terms of industry exposure. Fitch
considers the group‟s portfolio to be of a good credit quality, with the majority that are subject to
credit risk rated „A-‟ or above (on the South African national ratings scale).
Figure 7 Investment and Asset Risk
(ZARm) 2007 2008 2009 2010 2011 Fitch's expectation
Unaffiliated equities/total equity (%) 204.0 173.1 176.9 234.5 221.6 Fitch expects the group to continue to pursue its current investment strategy of moderate risk.
Affiliated equities/total equity (%) 2.4 3.7 4.4 4.2 3.8
Financial investments 176,223 169,760 173,146 192,317 197,959
Source: Company, Fitch
Insurance
Liberty Group Limited
September 2012 11
Good Asset/Liability Management Hedging programme in place
Strong liquidity position
Business predominantly market-related
Hedging Programme in Place
Fitch views Liberty‟s ALM as good. The group does have exposure to investment guarantees
but this is well managed by LibFin and hedged as appropriate. Asset-liability mismatch risks
relating to maturity guarantees are assessed through stochastic modelling, in line with
professional guidance issued by the Actuarial Society of South Africa (ASSA).
For its non-linked and non-participating business, the group follows a policy of matching assets
and liabilities as closely as possible. Where the business is exposed to interest-rate risk, the
group makes use of its hedging programme.
Strong Liquidity Position
Liberty has a liquid balance sheet to support its policyholder liabilities. Fitch considers Liberty‟s
investment portfolio to be liquid and commensurate with Liberty‟s current rating.
Business Predominantly Market-Related
Figure 11 shows the breakdown by type of business of LGL‟s policyholder total liabilities. LGL‟s
business is predominantly market-related, (80% of policyholder total liabilities at end-2011),
with policyholders bearing most of the investment risk. However, maturity guarantees and
guaranteed annuity options (GAOs) are embedded in some of LGL‟s main classes of business
and expose the group to interest-rate and market-price risk.
Figure 11
With-profit buisness
9%
Non-profit annuities
7%Market-related/linked
80%
Other
2%
With-profit annuities
2%
LGL's Policyholder Total Liabilities, 2011
Source: Company, Fitch
The maturity guarantees apply to about 40% of policyholder total liabilities, while GAOs apply
to around 10% of policyholder total liabilities. With-profit products and non-profit annuities
expose the company to market and interest rate risk. Fitch notes that the portion of business
that entails guarantees is moderate.
Figure 10 Asset/Liability and Liquidity Management
(ZARm) 2007 2008 2009 2010 2011 Fitch's expectation
Liquid assets/policyholder liabilities (%) 96.6 100.8 99.3 99.7 97.4 Liberty has a liquid balance sheet, which Fitch expects to be maintained. Policyholder liabilities 186,137 172,805 184,300 197,878 208,565
Source: group, Fitch
Insurance
Liberty Group Limited
September 2012 12
Risk Management
Risk Management Adequate Enhanced risk management
Good reinsurance quality
Enhanced Risk Management
Risk management has improved significantly in the four years since the establishment of LibFin
in 2008. LibFin undertook de-risking activities in 2008 and 2009 to bring the risk position within
appetite, including the creation of a centre for the management of credit and market risk,
reduction of interest rate exposure through hedging activities and a permanent reduction in the
group‟s equity exposure. The group is continually enhancing its enterprise-wide value and risk
management and has made good progress in the development of its capital modelling
capabilities.
The agency expects further improvement due to the development of the group‟s economic
capital model and risk management framework.
Good Reinsurance Quality
The quality of reinsurers is good, with the reinsurance programme being placed with external
reinsurers that typically have an international credit rating of ‘AA-‟ or above. Reinsurers are
generally well-known international companies.
Insurance
Liberty Group Limited
September 2012 13
Appendix A: Additional Financial Exhibits
Figure 12 Headline Earnings Contribution by Business Unit (ZARm) 2011 2010 Change (%)
South African long-term Insurance 2,474 2,445 1 Retail SA 1,314 899 46 Liberty Corporate 36 103 -65 LibFin 1,124 1,443 -22 Asset management 510 457 12 STANLIB 414 361 15 Liberty Properties 96 96 0 Growth initiatives -91 -77 -18 Liberty Africa 21 10 >100 Liberty Health -65 -43 -51 Frank Financial Services -47 -44 -7 Other -296 -303 2 Total 2,597 2,522 3
Source: company
Insurance
Liberty Group Limited
September 2012 14
Appendix B: Other Ratings Considerations
Below is summary of additional ratings considerations of a “technical” nature, that are also part
of Fitch‟s ratings criteria.
Group IFS Rating Approach
LGL is considered core to the group as it is the main life insurance subsidiary of the group, and
its ratings are based on a combined Liberty group assessment.
Notching
As defined in the agency‟s insurance rating methodology, Fitch regards South Africa as a
“Strong” regulatory environment, with a strong capital regime and priority afforded to
policyholder obligations.
Notching Summary
IFS Ratings
Standard notching was used. LGL‟s national IFS rating is lifted by one notch from the National
Long-Term Rating to „AA(zaf)‟ in view of the strong regulatory regime in South Africa and the
preferential treatment that policyholders receive in South Africa.
Hybrids
LGL‟s National Long-Term subordinated debt rating is notched down one notch from its
National Long-Term Rating to „A+(zaf)‟, to reflect the level of subordination. The notes have no
interest deferral features or other loss absorption features.
Short-Term Ratings
Not applicable.
Hybrids – Equity/Debt Treatment
Figure 13 Hybrids Treatment
Hybrid Amount CAR Fitch (%) CAR reg. override (%) FLR debt (%)
LGL ZAR1bn 0 100 100%
CAR Capitalisation ratio: FLR Financial leverage ratio. N.A. Not Applicable For CAR % tells portion of hybrid value included as Available Capital, both before (Fitch %) and the Regulatory Override For FRL, % tells portion of hybrid value included as debt in numerator of leverage ratio Source: Fitch
The recently issued subordinated bond has been structured for Tier 2 own funds eligibility
according to the grandfathering provisions of the QIS2 specifications under the SAM regime.
According to Fitch‟s methodology, this subordinated bond is classified as 100% capital due to
regulatory override within Fitch‟s risk-based capital assessment and is classified as 100% debt
regarding the agency‟s financial leverage calculations.
Exceptions to Criteria/Ratings Limitations
None.
Insurance
Liberty Group Limited
September 2012 15
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