Jan 18, 2016
“The challenges for revenue growth and profitability in a declining interest rate and
low inflation environment.”
Myles RuckChief Executive
Liberty Group Limited
16 October 2003
Have we seen this before?
UK 10-Year Bond Yields
0
1
2
3
4
5
6
7
8
9
01-J an-96 31-Dec-96 31-Dec-97 31-Dec-98 01-J an-00 31-Dec-00 31-Dec-01 31-Dec-02 01-J an-04
%
UK Retail Price Inflation
0123456789
01/1996 12/1996 12/1997 12/1998 01/2000 12/2000 12/2001 12/2002 01/2004
%
In the UK : 1996 - 2000
• Declining interest rates• Declining inflation• Positive life and pension business
growth BUT• Beginning 2000 equity market slid
into a bear phase
From 2000
• Rates continued downward trend• Inflation continued to fall• Bear market grew worse• Investment returns were eroded
AND …
From 2000 (continued)
• Guarantees exposed• Mortality rates under estimated
(annuity contracts)• Mismatches• Poor investment performance• Threatened solvency ratios
SO ...
UK Life insurers on verge of bankruptcy
From 2000 (continued)
AND• Sales declined• Companies sold equities to avoid
continued declines in asset values• New capital was raised• Profits fell• Dividends came under pressure
BUT MEANWHILE …
Back at the ranch …
• High interest rate environment throughout
• Relatively high inflation• Stronger capital adequacy ratios• Little or no forced equity sales• No capital raising required, but
significant management action assumed by some companies
AND …
Back at the ranch …
• Bear market less severe• Positive sales growth throughout• Weakening rand environment
(helped sales)• Investment guarantees low
relative to yields WE WEATHERED THE STORM!
The new environment (SA)
• Likely to achieve 3% - 6% inflation target range
• Interest rates will adjust accordingly, moving lower
• Can stock market go lower?
The new environment (SA) (continued)
Actual2002 2003 2004 2006
Real GDP (% p.a.)
Prime (% average)
Headline CPIX (% p.a.)annual average
$/R (R average)
3,00
15,59
9,30
10,54
2,00
15,25
6,80
7,56
3,50
11,30
4,40
7,10
3,80
11,20
4,90
7,50
3,50
11,75
4,50
7,80
2005
Macro-economic forecast
The new environment (SA) (continued)
• Increased savings likely to result (lower debt servicing costs >> more disposable income)
• Contractual savings will gain market share as cash savings become less attractive
The new environment (SA) (continued)
• Shift from money-market to equity-type investments
• Pension fund outflows likely to reduce
Industry challenges and risks
• Asset-liability matching* Particularly annuity portfolio (long
duration and reinvestment risk)• Smoothed-bonus business
* Negative bonus stabilisation reserves
• Capital management* How much? (What CAR ratio?)* What asset mix?
Industry challenges and risks (continued)
• Earnings volatility* Investment returns and currency
fluctuations* Investment guarantees
>At what level in the future and at what cost?
>New stochastic reserving basis >> volatility
• Vulnerable to 10% shareholder entitlement to investment return* Both positive and negative returns
Industry challenges and risks (continued)
• Pressure on expenses (increase above inflation rate)* Skilled staff and IT costs* Large fixed cost infrastructure
• Margin squeeze* Fixed management fees* Commission deregulation
Industry challenges and risks (continued)
• Outperform investment benchmarks and competitors’ investment performance
• Competition from unit trust industry and other savings providers
• Manage policyholders’ expectations
• Customer retention
Industry challenges and risks (continued)
• Regulation and cost of compliance* FAIS, FICA* Exchange control* AC133
So what is Liberty doing?
Revenue growth
1H99 1H00 1H01 1H02 1H03
479
1 0571 024
1 6371 730
-200400600800
1 0001 2001 4001 6001 8002 000RmTotal net cash inflow from insurance operations
Continued focus on being cash-flow positive and increasing the quantum
- Premiums received exceed benefits paid
Revenue growth (continued)
TOTAL LIBERTY & CHARTER
19,6%
15,4%
22,7%
16,6%
23,6%
20,2%
24,8%22,6%
0%
5%
10%
15%
20%
25%
30%
Recurring Individual Single Individual
Year ended 31December 2000
Year ended 31December 2001
Year ended 31December 2002
Quarter ended 31March 2003
Individual business market share
Revenue growth (continued)
• Boost premiums by focusing on:* Customer service* Improving persistency* Providing the right product* Educating the consumer
Revenue growth (continued)
* Growing market share* New markets (including Africa)* Distribution* Bancassurance
Revenue growth (continued)
• Manage benefit payments* Extend maturing policies* Offer attractive alternatives at
maturity* Keep proceeds within the larger
Liberty Group* Underwriting
Profitability
• Ensure that products are written on profitable bases
• Cut and control expenses• Reduce cost per policy
* Increase the in-force book• Accurate underwriting and risk
rating
Conclusion
• Strong capital position• Largely matched book (annuities,
guaranteed products and linked business)
• Limited exposure to smoothed bonus business
Conclusion (continued)
• Positioned to benefit from flow out of money-market investments
• Expect low interest-rate low inflation environment to be good for equity markets
Yield Gap
All Share Index trailing P/E ratioRises as interest rates decline
F/C
F/C
RISC1 7 October 2003
Liberty is well positioned to meet the challengesof the new environment