Analysts doubt Liberty recovery
• Insurer maintains dividend and says it is investing for growth but analysts sceptical about underlying businesses
Analysts are unconvinced that Liberty, which reported a double-digit drop in earnings on Friday, can turn around its underlying businesses, but say the insurer is a good dividend payer that trades at a discount.
Analysts are unconvinced that Liberty, which reported a double-digit drop in earnings on Friday, can turn around its underlying businesses, but say the insurer is a good dividend payer that trades at a discount to its peers.
“Management’s track record on delivering growth strategies hasn’t filled investors with confidence,” said Nkareng Mpobane, a fund manager at Ashburton Investments.
A challenging consumer environment, lower investment returns, accounting anomalies arising from its listed property portfolio and operational challenges in Stanlib were the key drivers behind the group’s weak results, said Liberty group CEO Thabo Dloti.
For the year to December 2016, Liberty’s normalised headline earnings fell 38.8% from the prior period to R2.5bn, reflecting a 37% drop in operating earnings and a 42% decline in earnings from the shareholder investment portfolio. The result was better than expected, said Mpobane.
In a trading update issued in January, Liberty cautioned that earnings could be as much as 55% behind the previous period. The share price, which closed stronger on Friday, had taken much of the pain then, he said.
The share slid nearly 11% on the trading update, wiping R3.1bn off Liberty’s market value and dragging down peers, whose shareholders collectively lost R10bn on the day.
Dloti said persistency challenges and higher-than-normal disability and critical illness claims cut earnings by R572m.
Weak economic growth and high unemployment in SA have led to enormous withdrawals from retirement funds.
Liberty, in particular, had lost a number of customers in its retirement annuity book, in part following churn by advisers, Dloti said.
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An analyst said the insurer had positioned its balance sheet conservatively going forward, suggesting that it expected persistency to worsen. “We haven’t seen peers take the same action. The tough economy is something that all insurers deal with.”
Dloti conceded that Liberty needed to improve its customer proposition and said it had launched a number of initiatives that were boosting sales, including new investment products and an enhanced digital capability. It planned to launch a “new age” short-term insurer, in a joint venture with Standard Bank, and had hired former Telesure CEO Leon Vermaak to spearhead this project, he said.
Justin Floor, portfolio manager at Kagiso Asset Management, said the short-term insurance space “is highly competitive, with extremely strong incumbents. Momentum’s experience in entering the short-term market does not augur well for near-term success.”
The CEO said: “We are not swayed by where we are in the cycle and continue to invest for growth.”
Liberty remained a good dividend payer and had kept its dividend consistent with the previous period at 691c per share, Mpobane said.
Floor said: “Liberty trades at a noticeable discount to the rest of the sector.
“Clear strategy and consistent execution are needed to narrow this, and these are outcomes that remain uncertain.”