Questions around Liberty CEO exit
Examine Dloti’s performance in an unbiased way
THE untimely and sudden departure of Thabo Dloti as CEO of Liberty has solicited wide and varied responses from the business community and society. Most have criticised the appointment of a career banker to run an insurance company, while others are quietly murmuring about yet another black CEO making way for a white CEO.
However, I have yet to hear any of these analysts critically assess the performance of Dloti as CEO of Liberty and compare it with that of his peers.
Obviously Liberty is a separately listed company with its own board. However, the life insurer is also a 54% subsidiary of Standard Bank, which means that the board is primarily accountable to the bank as its parent.
It is clear that Standard Bank was unhappy with Dloti’s performance.
In fact Liberty chairman and former CEO of Standard Bank Jacko Maree confirmed this when he revealed that he and current co-CEO of Standard Bank, Sim Tshabalala, were asked to sit with Dloti and discuss the issues facing the company and “the prioritisation of what had to be done and the speed of execution” thereof.
This was the essence of the disagreement that led to Dloti being asked to step aside.
It is clear that the board felt certain things had to be done within a certain period of time.
Well then, lets assess Dloti’s performance, over time, against his peers. But we need an objective measure.
We need a rational and unbiased way to judge the performance of a CEO of a life insurance company against an equally relevant yardstick.
The actuaries have come up with such a measure. It’s called Embedded Value. For the technical types, the embedded value of a life insurance company is the present value of future profits plus adjusted net asset value.
The basic logic is that life insurance policies are long-term contracts, where the policyholder pays a premium to be covered against a possible future event, such as the death of the policyholder. Future cash inflows for the insurance company are made up of the premiums paid by policyholders while future cash outflows are made up of claims paid to policyholders as well as various expenses.
The difference between these two represents future profit, after adjusting for a few other elements.
Net asset value is the difference between the total assets and liabilities of an insurance company.
In the famous words of Barry Roux, “I put it to you” that the most rational and unbiased way to measure the performance of the CEO of a life insurance company is his or her ability to enhance or destroy its embedded value, adjusted for dividends.
Maree has referred to the good job done by Dloti’s predecessor, Bruce Hemphill, against the disappointing performance of Liberty under Dloti.
Hemphill took over as CEO of Liberty in 2006 and handed over to Dloti in 2014.
During Hemphill’s tenure Liberty grew embedded value by 11.1% per annum adjusted for dividends. If we compare this to peer Sanlam who grew embedded value by 15.5% over the same period, we end up with a 4.4% deficit.
Some may argue that the comparison is unfair because Sanlam has been the bestperforming life insurance company of all the traditional players.
That argument only stands if we assume that Standard Bank expects less of Liberty. I doubt that very much.
The facts show that during Dloti’s tenure, Liberty grew embedded value by 11.5%, while Sanlam delivered 16.5% in the same period. This gives us a deficit of 5% for Liberty — very similar to the one that occurred during Hemphill’s tenure.
“Hemphill ’s worst year was 2009. In that year the company’s operating profit was down 60% and the company wrote off just over R2-billion in embedded value, which excludes the extra R1-billion writedown due to the performance of investment markets.”
Some may argue that Hemphill’s worst year was in the middle of the global financial crisis. But Dloti was not exactly operating in a bed of roses either last year.
As outsiders we are not privy to the details boards consider, but based on publicly available data that is generally accepted as the very measure of performance, it is difficult to understand why Liberty’s board or perhaps its shareholder Standard Bank would be more unhappy with Dloti than it was with Bruce Hemphill.
Khumalo is chief operating officer of MSG Afrika and presents “Power Business” on Power 98.7 at 6pm, Monday to Thursday
Dloti was not exactly operating in a bed of roses either last year