Liberty Group
Inaugural subordinated unsecured
callable bond
Presentation to investors
May 2005
Roadshow team
Liberty
• Myles Ruck, Chief Executive Officer
• Deon de Klerk, Chief Financial Officer
• Stewart Rider, Group Executive – Finance and Investor relations
• Samuel Sathekge, Financial Accountant – Group Finance
JPMorgan – Joint Lead Arranger and Bookrunner
• Marc Hussey, Head of Debt Capital Markets
Standard Bank – Joint Lead Arranger and Bookrunner
• Andrew Pamphilon, Debt Origination
Andisa Securities – Co-arranger
• Chris Clarkson, Head of Debt & Capital Markets Group
1
Agenda
Overview
Operating review
Financial review
Capital management strategy
The proposed bond instrument
Summary and Questions
Appendix
2
Corporate Structure
(as at 31-12-2004)
Standard Bank
Rated AA+(zaf) – Long Term Issuer
(54,65%)
Liberty Holdings Limited
(50,17%)
Liberty Group Limited
Rated AA(zaf) - Insurer Financial Strength
Rated AA-(zaf) – Long Term Issuer
Life Assurance
Asset Management
• Liberty Personal Benefits
• STANLIB (37,4%)
• Liberty Corporate Benefits
• Liberty Ermitage
• Liberty Active
• Liberty Properties
3
Industry issues
• Increasing compliance and regulatory requirements
• Volatile investment markets
• Risk averse investors
• Perception of industry
• AIDS (not as much an issue for Liberty Life)
4
Industry positives
• Industry has started recognising its shortcomings
• Emerging middle class - a reality, but net spenders
• South African economy - a success story
• Investors becoming more bullish
• Good local investment returns
• Cash being accumulated by investors = opportunity
5
Nature of the business
Liberty’s business is conceptually simple and generic
• We develop products
• We sell products
• We receive money
• We invest the money according to product specification
• We administer according to product specification
• We pay benefits
6
Key strengths
• Strong business franchise
– Pure SA life insurance play, revised management team
– Very high investment-grade credit ratings from Fitch (AA Insurer
Financial Strength Rating and AA- Long Term Issuer Rating)
– Strong parent in Standard Bank Group (AA+/F1+)
– Limited exposure to smoothed bonus business
– Market positioning (trend of increasing market share) and solid brand
recognition
• Competitive advantages
– Diversification of business mix and breadth of product range
– Distribution channels and resources
7
Key strengths (cont’d)
• Solid financial indicators
– Increasing market share
– Positive net cash flows from insurance operations
– Strong capital base with good CAR cover
– Inroads being made on expense base
– Proven resilience in times of tough operating environments
• Potential for growth
- Upper income market (traditional Liberty)
- Emerging market (Liberty Active)
- Bancassurance (Standard Bank)
8
Agenda
Overview
Operating review
Financial review
Capital management strategy
The proposed bond instrument
Summary and Questions
Appendix
9
Overview of the Group’s embedded
value (proxy for cash flow drivers)
2004
2003
Stanlib
Liberty
4%
Properties
Liberty
1%
Ermitage
Ermitage
Stanlib Properties
1%
4%
4%
4%
Shareholder
NAV
Shareholder
46%
NAV
50%
Value of in Value of in -
force
force
41%
45%
10
Business units
Liberty Corporate Benefits (LCB)
Individual Life (LPB and Liberty Active)
•
Individual insurance and investment products
•
Life, disability, local investments, offshore investments,
retirement savings, preservation schemes and annuities
•
Middle and upper income, and high net worth clients
• Markets and administers flexible, comprehensive and
packaged solutions to the retirement funding and insured
needs of small-to-medium size companies (staff of
between 10 and 300)
•
Targeting lower income group through Liberty Active
• Also manages larger corporate funds
•
Uses four channels of distribution (viz. Agents, Franchises,
Brokers and Standard Bank Financial Consultants)
• Client funds spread across geographic regions and
industries
Key performance indicators
Key performance indicators
Rm
2004
2003
%
change
Indexed new business
3,544
3,184
+11
Indexed new business
New single premiums
New recurring
premiums
Net cash flows
8,700
6,808
+25
2,674
2,504
+8
5,492
3,120
+76
New single premiums
New recurring
premiums
Net cash flows1
10,867
10,436
+4
819
571
+43
Claims and benefits
Value of new business
Rm
Claims and benefits
Value of new business
1
2004
2003
%
change
643
624
+3
1,582
1,924
-18
484
431
+12
(1,852)
1,377
235
6,048
3,189
+90
(4)
37
-111
One client maturity of R2.1 billion in a property-backed portfolio (2004)
11
Business units (cont’d)
STANLIB
Liberty Ermitage (Jersey)
• Established in 2002, combining the asset and wealth
management businesses of Liberty and Standard
Bank
• Jersey-based fund management company,
specialising in hedge funds
• 41% third party funds
• Liberty Group and Standard Bank each hold 37.5%,
with BEE partners holding 25%
• Representative offices in London, Luxembourg,
Bermuda and New York
• Focus on asset management of retail and institutional
investments
Key performance indicators
Rm
Net cash flows
Assets under mgmt1
Headline earnings
1
Excluding common assets
Key performance indicators
Rm
2004
2003
%
change
Net cash flows
3,681
1,653
123
20,533
18,513
+11
46
43
+7
2004
2003
%
change
15,300
12,100
26
137,926
113,978
+21
Assets under mgmt1
119
80
+49
Headline earnings
1
Excluding common assets
12
Agenda
Overview
Operating review
Financial review
Capital management strategy
The proposed bond instrument
Summary and Questions
Appendix
13
Financial summary – 4 year history
Income statement (Rm)
For the year ended December
2004
2003
2002
2001
13,440
11,667
11,301
9,819
4,186
3,808
3,634
2,944
815
609
605
455
24%
20%
20%
18%
Net cash flow from insurance operations4
3,640
4,497
4,501
2,931
Headline earnings
1,251
949
1,069
1,499
Headline EPS
460c
346c
391c
551c
Dividends per ordinary share
315c
278c
312c
278.0c
Headline RoE
16%
12%
13%
25%
248
154
240
161
225
152
-
Total new business
Indexed new business1
Value of new business written2
New business margin3
Maintenance cost per policy
Liberty Life
Liberty Active
1
2
3
4
The sum of new recurring premiums plus 10% of new single premiums
The present value, at the time of sale, of the projected stream of after-tax profits from that business
Expresses the embedded value of new business as a percentage of indexed new business (net of natural increases)
The excess of total premiums over total policyholder claims and benefits
14
Headline earnings
Headline earnings (Rm)
Revenue earnings attributable to shareholders’ funds
Operating profit from insurance operations
162
179
180
1,153
2000
1,320
2001
323
230
889
720
2002
2003
929
2004
Key features
• 10% shareholders’ participation
• Higher average asset base
• Investment guarantee reserves
• Management expenses
• Strong underlying Stanlib, Ermitage growth
15
Financial summary (cont’d)
Balance Sheet (Rm)
For the year ended December
2004
2003
2002
2001
Shareholders’ funds
8,494
8,782
8,588
8,346
16,867
15,817
15,127
14,767
Capital adequacy requirement
3,954
3,403
2,857
2,391
Embedded value per share
67.25
57.58
55.28
54.21
2.1x
2.6x
3.0x
3.5x
Embedded value
Capital adequacy cover (x covered)
Policyholder liabilities and total assets (Rbn)
Policyholder liabilities
89.4
75.6
86.3
73.6
2001
2002
Total assets
96.6
83.8
2003
109.6
98.0
2004
• BEE technical impairment of R1,251m in FY2004
• Only 40% of shareholders’ funds in equities – equity concentration now largely resolved
16
Embedded value
Embedded value (Rm)
Value of in-force business
14,767
1,310
Shareholders' funds
15,127
Fair value adjustment
15,817
541
16,867
766
838
11,941
8,494
996
8,782
8,588
8,346
6,123
4,822
5,111
5,701
2000
2001
2002
6,494
2003
7,607
2004
17
Agenda
Overview
Operating review
Financial review
Capital management strategy
The proposed bond instrument
Summary and Questions
Appendix
18
Capital management strategy
Liberty Life’s capital adequacy (prior to Capital Alliance acquisition)
31 December (Rm)
2004
Capital adequacy requirement (CAR)
3,954
Shareholder's funds
9,745
(Empowerment transaction)
Shareholders' funds after empowerment
transaction
CAR cover
2003
CAR cover
3,403
2.6
8,782
2.6
(1,251)
8,494
2.1
Comments on level of capital
Impact of the BEE and CAL transactions on CAR
• Liberty’s capital covers potential additional charges,
fraud, errors, uninsured risks, etc.
• Pre the proposed takeover of Capital Alliance Limited
(CAL) and allowing for full impairment for the BEE
capital, CAR cover was 2.1x.
• Stochastic modelling of embedded guarantees results
in volatility (pricing policyholder put)
• New risk product requires more capital
• International accounting standards could influence
ratios
• Liberty endeavours to find a balance between
ROE/ROEV and security, and our capital takes into
account our lower risk business mix
• Medium term CAR target levels are 1.5x – 1.7x
• Dividend policy introduced in line with medium term
EV growth
- In line with what was communicated to the market
after the BEE transaction
- More than adequate allowing for the CAL deal to
follow
• Estimated CAR post the CAL deal and dividend
payments due to Liberty and CAL shareholders,
would be in the range of 1.60x—1.70x by December
2005.
- This assumes no additional benefits from pooling
the CAR levels of the two integrated companies
19
Agenda
Overview
Operating review
Financial review
Capital management strategy
The proposed bond instrument
Summary and Questions
Appendix
20
The subordinated, unsecured
secondary capital issue
• We believe Liberty is the first South African insurance company to be
granted FSB approval to issue regulatory capital in the form of a bond
- Approval was given early in May 2005
• The benefits of the instrument to Liberty include:
- Enhancing regulatory capital adequacy ratios
- Diversifying funding sources
- Reducing the cost of capital and
- This evolution is similar to the bank market where all of South Africa’s
major banks have successfully raised regulatory capital in the form of
bonds
• The proposed form of debt instrument is virtually identical to the secondary
capital issued by all of the four major banks in South Africa
21
Summary terms
Issuer:
Liberty Group Limited
Insurer Financial Strength Rating
AA (zaf)
Long-term Issuer Rating:
AA- (zaf)
Amount:
Up to ZAR [2]bn, subject to market conditions
Status:
Subordinated, unsecured secondary capital
Legal Maturity:
[12 years, due 2017]
Step-up/call date:
[7 years, 2012]
Coupon
[ ]% semi-annual fixed rate, stepping up to
3M Jibar + [100bps and the initial swap rate] after the
Step-up/call date
Pricing:
R153 + spread
Listing:
BESA
Governing Law:
South African law
22
Comparison between the new LG01
bond and the SBK5 bond
Maturity
Pricing at launch
Subordinated to senior credits
Callable after 7 years
Step-up +100bps
Call subject to regulatory approval
Qualifying regulatory capital
SBK5
LG01
12 non-call 7
12 non-call 7
R153 + 95
TBD










23
Impact of the bond on key ratios (pro
forma 2004)
Pre-bond
Post-bond
12.8%
11.9%
CAR cover
2.1x
2.7x
Debt/Equity
N/A
23.5%
Debt/Total Capital
N/A
19.1%
Interest cover ratio
N/A
8.6x
Weighted average cost of capital
Source: Company estimates. Based on December 31, 2004 financials
24
Why Liberty paper
• Strong cash flows
• High interest cover and low debt ratios
• Conservative regulator
• Sustainable growing business
• Track record of delivery
25
Agenda
Overview
Operating review
Financial review
Capital management strategy
The proposed bond instrument
Issue process and deal contacts
Appendix
26
Issue process
• Roadshow: [May 25 - 27]
• Bookbuild, launch and price: June [6] (begin 9am)
• All bonds will be allocated at the same clearing spread
• Early, firm and aggressive bids to be rewarded during allocations
27
Contacts
Issuer contacts
Arranger contacts
•Deon de Klerk
Tel: (011) 408 2572
E-mail: deon.deklerk@liberty.co.za
•Andrew Pamphilon
Tel: (011) 378 7003
E-mail: andrew.pamphilon@standardbank.co.za
•John Sturgeon
Tel: (011) 408 2872
E-mail: john.sturgeon@liberty.co.za
•Marc Hussey
Tel: (011) 507 0730
E-mail: marc.j.hussey@jpmorgan.com
•Stewart Rider
Tel: (011) 408 3260
E-mail: stewart.rider@liberty.co.za
•Chris Clarkson
Tel (011) 374 1291
E-mail: clarksonc@standardbank.co.za
•Samuel Sathekge
Tel: (011) 408 3063
E-mail: samuel.sathekge@liberty.co.za
28
Agenda
Overview
Operating review
Financial review
Capital management strategy
The proposed bond instrument
Issue process and deal contacts
Appendix
29
Comparison of debt-to-capital ratio
with European peers
60%
52%
50%
40%
40%
19%
17%
20%
25%
24%
22%
33%
31%
31%
l
nt
ia
Pr
ud
e
Fo
rt
is
lli
an
z
A
XA
A
e
R
is
s
Sw
ZF
S
ua
l
O
ld
M
ut
rR
e
e
R
an
no
ve
H
un
ic
h
M
on
d)
Li
be
rty
(p
os
tb
Sk
an
di
a
0%
Source: JPMorgan estimates
30
Peer comparison - total new
business
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Rm
LGL I
LGL G
SLM I
2002
SLM G
OML I
2003
I = Individual; G = Group; Source: company financial statements
OML G
MOM I
MOM G
2004
31
Peer comparison - indexed new life
business*
4,000
3,000
2,000
1,000
0
Rm
Liberty
Sanlam
2002
Old Mutual
2003
Momentum
Discovery (Life)
2004
* Indexed new business as per embedded value statement; Source: company financial statements
32
Peer comparison - net flow of funds
from life insurance operations
6,000
4,000
2,000
0
-2,000
-4,000
-6,000
-8,000
-10,000
-12,000
Rm
Liberty
Sanlam
2002
Source: company financial statements
Old Mutual
2003
Momentum
Discovery (Life)
2004
33
Peer comparison - embedded value
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Rm
02
03
04
02
LGL
03
04
02
03
SLM
OML
NAV and subs
VIF
Source: company financial statements
04
02
03
MOM
04
02
03
04
DSY
34
Gross investment returns
25
year-to-date return 2003
Actuarial assumption
22.7%
year-to-date return 2004
12.5%
20
15
10
5
0
-5
-10
-15
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
35