Time for a turnaround at Liberty?
Despite the insurer’s dropping market share and dismal performance, analysts hold out hope for a change of fortune
All eyes are on new Liberty CEO David Munro to turn around the ailing fortunes of the insurer, which has lost market share to rivals Sanlam, Old Mutual, MMI and even relative newcomer Discovery.
Liberty’s share of the market dropped to 23% in 2016 from 27% three years prior as the new policies it wrote failed to keep pace with those of other insurers, Jpmorgan estimates show.
Munro’s appointment is expected to translate into better results in the long term.
“A change of management is always significant for any business,” says Ashburton Investments fund manager Rahima Cassim. “In the case of Liberty, its largest shareholder is taking an active stance in trying to make the business more viable by putting Munro into the business as CEO.”
Liberty’s dismal performance in the 2016 year prompted Jpmorgan to downgrade its 2017 earnings forecast for the insurer by 23%, and by 19% for 2018.
“The change in headline earnings is mainly due to the base being reset after Liberty’s weak [2016] numbers, mostly on the back of retail affluent market share losses, increased lapses, weaker shareholder investment portfolio performance and decreasing [value of new business] margins,” John Storey, head of SA equity research at the investment bank, says in a note to clients.
Liberty’s operational update for the first quarter of this year would not have done much to assuage Storey’s concerns.
There was no mention of its market share losses, and recurring premiums — a clear window into policy lapses — at Liberty’s retail and corporate units presented a mixed bag: sales of recurring premium policies for individuals were flat compared with the three months to March 2016, while similar sales for corporate entities fell 2%, mainly because the group sold fewer umbrella products.
The shareholder investment portfolio, which delivered a lower gross return of 5.7% for the 2016 year (compared with 9.6% before), delivered returns ahead of benchmark for 2017. However, new business margins, which diminished across its retail and corporate units last year, remain under pressure.
Cloete says sell-side analysts agree Liberty’s earnings could rebound strongly this year off its low 2016 base, with normalised headline earnings expected to rise about 56% to R14.12/share.
“As Liberty’s 2016 [year] was a very weak result, the comparable base is low, so it’s reasonable to expect a strong increase for 2017 earnings,” he says.
But what’s coming for the half-year?
Cloete says the shareholder weighted all share index (Swix) delivered a 3.3% return over the half-year to 2017, and the all bond index a return of 4%, while the rand was up 5% against the dollar.
“[This] compares to stronger investment returns in [2016] — the
Swix index return was
7.3%, the rand/dollar was about 4.8% stronger and the all bond index was up by 11.2%,” he says. “This means that the investment return on the shareholder investment portfolio is going to be lower for the first half of 2017 than the first half of 2016, which will be a headwind to growth in the 2017 normalised headline number.”
Ashburton’s Cassim says Munro’s appointment may result in management changes in the short term, as well as possible changes in strategy.
“We do not think that there is significant operational earnings upside in the shorter term,” she says. “Longer term, however, given the changes that should be implemented by management to reposition the business, we expect a better set of results.”
Cloete calls Liberty a turnaround story for 2017, but says this is more likely to come through in the second half.
Sell-side analysts agree that Liberty’s earnings could rebound strongly this year off its low 2016 base