Ques­tions around Lib­erty CEO exit

Ex­am­ine Dloti’s per­for­mance in an un­bi­ased way

Sunday Times - - OPINION -

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

Andile Khu­malo

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