Insurance · 9/18/2012 · Insurance 18 September 2012 Life Insurers / South Africa Liberty Group Limited Full Rating Report Key Rating Drivers Well-Established Domestic Franchise:

Insurance

www.fitchratings.com 18 September 2012

Life Insurers / South Africa

Liberty Group Limited Full Rating Report

Key Rating Drivers

Well-Established Domestic Franchise: Liberty Group Limited (LGL) has a strong, established

domestic franchise and business position, which have been supported by organic growth and

acquisitions. In South Africa the group is among the four largest life insurers and private asset

managers. Furthermore, the strength and diversity of LGL‟s distribution network, in particular its

bancassurance joint venture with Standard Bank Group Limited (Standard Bank; rated

„BBB+‟/Negative), is a key positive ratings driver.

Strong Capitalisation: Fitch Ratings considers capital adequacy to be strong, both for LGL as

an entity and for the Liberty group as a whole (comprising Liberty Holdings Ltd (LBH), the

holding company of the group, and LGL, as well as a number of other group subsidiaries).

LBH Group and LGL had regulatory CAR cover ratios of 2.4x and 2.9x, respectively, at end-

2011 which are well above both the group‟s target of 1.7x and the minimum regulatory

requirement of 1.0x. The group‟s capitalisation is susceptible to volatility in the equity markets,

as is also the case for its peers.

Solid Performance in Tough Conditions: The group‟s headline earnings were up by 3% at

ZAR2,597m (2010: ZAR2,522m) with the return on embedded value (ROEV) for the South

African insurance business improving to 13.9% (2010: 12.6%). Earnings were supported by

improved performances from the South African insurance and asset management businesses,

despite lower returns from investment markets. At H112 the group‟s headline earnings

improved by 41% to ZAR1,676m.

Improved New Business Margin: The improvement in new business margin on a present

value of new business premium (PVNBP) basis to 1.4% (2010: 1.2%) was driven mainly by the

decrease in lapses in the South African insurance business. In H112 the new business margin

further improved to 1.5%. Fitch expects the margin to continue to improve.

Persistency Issue Addressed: LGL‟s customer retention issue (i.e. poor persistency) in its

core South African insurance business, which began in 2009, has now been largely resolved.

Since end-H109, the group has undertaken substantial restructuring and customer retention

initiatives to address its persistency problem. As a result, its persistency experience improved.

Fitch views this as a positive and expects the South African insurance business to continue to

perform well in view of the initiatives that have been established in the business.

What Could Trigger a Rating Action

Operating Result Improving Further: Although an upgrade is unlikely in the near term, the

key rating drivers that could result in an upgrade in the medium term include continued

improvement in profitability, an improvement in the life new business margin towards the

group‟s medium-term target of 2.0%, continued growth in volumes of new business,

capitalisation sustained at strong levels as well as market share being maintained.

Weakening of Performance/Capitalisation: A sustained poor operating performance driven

by narrower new business margins, a significant reduction in the group's capitalisation based

on Fitch's own assessment, a drop in LGL's regulatory capital adequacy requirement ratio to

below 1.7x, or a weakening in the company's market position could lead to a downgrade.

Ratings

National Insurer Financial Strength AA(zaf)

National Long-Term Rating AA−(zaf) Subordinated debt A+(zaf)

Sovereign Risk Long-Term Foreign-Currency IDR BBB+

Outlooks

National Insurer Financial Strength Stable National Long-Term Rating Stable Sovereign Long-Term Foreign-Currency IDR

Negative

Financial Data

Liberty Holdings Limitedª (Group Consolidated)

(ZARm) 2011

Total assets 253 Total equity 16 Debt (including hybrids) 2,195 Gross written premiums 27,302 Net income 3,038

At 31 December 2011 ª The consolidated group‟s financial figures used in this report relate to Liberty Holdings Limited, which drives the rating of Liberty Group Limited, the main life insurance company

Related Research

South African Life Insurance (January 2012)

Analysts

Sonja Zinner +44 20 3530 1321 [email protected] Harish Gohil +44 20 3530 1257 [email protected]

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=663950

Insurance

Liberty Group Limited

September 2012 2

Market Position and Size/Scale

One of South Africa’s Largest Life Insurers Strong domestic market position but limited diversification

Wide range of life insurance and financial products

Well-established in the mass-affluent market in South Africa

Business outside South Africa of small scale

Successful bancassurance agreement

Multi-channel distribution strategy a positive ratings factor

Strong Domestic Market Position but Limited Diversification

The Liberty group is one of the largest life insurers in South Africa in terms of gross written

premiums: it has a market share of around 18% in South Africa, based on total new business

premiums. It has a well-established business position in South Africa and has a well-known

brand in the local market. However, compared to large multi-national insurance groups Liberty

is of modest scale and lacks geographic diversification. The insurer is a pure life insurance

player and does not write any significant non-life business.

Wide Range of Life Insurance and Financial Products

The group provides a wide range of non-banking financial products and services including risk,

investment and retirement products to individuals; employee benefit solutions to the corporate

market by offering pension, provident, investment and risk products; and health-related

services comprising healthcare administration, managed care and health insurance to

institutional customers. In addition, the group offers asset-management, property development

and management services.

Well Established in the Mass-Affluent Market in South Africa

The group‟s core focus has traditionally been on the mass-affluent market in South Africa

where it has established a strong business position in terms of market share, franchise and

distribution. The maturity of this target market resulted in the group broadening its offering and

has recently entered the entry-level market. This provides further revenue diversification, which

is seen by Fitch as a positive, as long as the strategy is executed successfully.

Business Outside South Africa of Small Scale

Geographically, South Africa is the group‟s core market, accounting for 98.5% of total revenue

and 98.9% of total assets in 2011. However the group has expanded into the rest of Africa in

partnership with Standard Bank. It offers life, health and short-term insurance to 14 African

countries outside South Africa.

Liberty‟s expansion into Africa offers the prospect of good growth opportunities (in view of the

low penetration of insurance products and services) and diversification of earnings. Fitch

believes that this does not come without its challenges and also entails execution risk. That

said, the agency believes that the group‟s strong relationship with Standard Bank has

positioned it well to implement this strategy. The African businesses has yet to reach the scale

required to significantly contribute to geographic diversification, and it is likely to be many years

before it does so.

Successful Bancassurance Agreement

The group has a successful bancassurance relationship with Standard Bank (one of four large

banking groups in South Africa) which Fitch considers a key positive rating factor. Standard

Related Criteria

Insurance Rating Methodology (September 2011)



Insurance


September 2012 3

Bank provides a key bancassurance distribution channel and significant support through its

local relationships, due diligence, information technology and advisory services. This enables

Liberty to expand its revenue base in South Africa and facilitate entry into new markets in the

rest of Africa.

Multi-Channel Distribution Strategy a Positive Ratings Factor

Figure 1 shows the life new business sourced from each distribution channel for Retail SA and

Corporate during 2011. A key positive rating factor for the group is the strength and diversity of

its distribution, including its success in bancassurance with Standard Bank.

Figure 1

2.7%

34.4%31.9%

31.0%

22.8%

22.9%

53.8%

0.5%

Broker

Bancassurance

Tied channels

Other

Life New Business by Distribution Channel, 2011Inner ring: Retail

Outer ring: Corporate

Source: Company, Fitch

Insurance


September 2012 4

Ownership Is Neutral to Rating

The group was established in 1957 and has been listed on the Johannesburg Securities

Exchange since 1962. Liberty has more than 8,000 shareholders, ranging from major

institutions to individuals. LBH is 53.6% owned by Standard Bank. Standard Bank‟s primary

banking subsidiary is The Standard Bank of South Africa Limited („BBB+‟/Negative).

Figure 2

Abridged Group Structure

Source: Liberty Holdings Limited.

Standard Bank Group Limited

Liberty Holdings Limited

Frank Life Limited

Liberty Active Limited

Capital Alliance Life

Limited

Liberty Growth Limited

Liberty Life Namibia Limited

Liberty Group

Limited

STANLIB Limited

Liberty Group Properties

(Pty) Limited

Liberty Health Holdings (Pty)

Limited

Liberty Holdings Namibia

(Pty) Limited

CFC Insurance Holdings Limited

53.62%

74.9% 75% 56.8%

The group‟s main operating companies are:

LGL, the primary life insurance operating company; and

STANLIB, the primary fund management company.

Other important operating companies include:

Liberty Health Holdings (Pty) Ltd (Liberty Health), which offers technology solutions, health

care administration and managed care in South Africa and other parts of Africa; and

Liberty Group Properties (Pty) Limited, which develops and manages direct property

assets and other real-estate investments in the retail, commercial and hospitality sectors

Corporate Governance and Management

Corporate governance and

management are adequate and neutral

for the rating.

Insurance


September 2012 5

Industry Profile and Operating Environment

Challenging Economic Environment with Significant Reform Underway

The local environment continued to show signs of recovery in 2011, with improved local equity

markets and positive economic growth, but it nonetheless remains challenging. Fitch expects

life insurers‟ earnings to remain under pressure in the near term, in view of the difficult and

volatile South African and global investment market conditions and continued financial

constraint on disposable incomes in South Africa.

Significant regulatory changes are being undertaken in the life insurance sector which Fitch

believes will ultimately significantly affect how life insurers operate. See South African Life

Insurance: Good Performance in Difficult Environment published in January 2012 and available

on www.fitchratings.com.

Fitch believes the pension fund reform may have an adverse impact on life insurance

companies, as part of people‟s current monthly retirement contributions into life insurers'

retirement saving products may be redirected to the national fund. However, on the positive

side, an opportunity exists for insurers to be one of the administration service providers to the

NSSF.

The impact of the national health reform on life insurers offering healthcare services and

medical administration is unclear at the moment. Fitch, however, believes that it could include

the following: medical schemes becoming redundant if the government decides to administer

the National Health Insurance (NHI) fund; a reduction in or discontinuation of subscriptions to

medical aid by consumers once the NHI scheme is in place, in view of consumers being unable

to afford both private and public healthcare.

Although the introduction of the new solvency regime is likely to result in increased capital

requirements for most insurers, the significance of the impact is unclear at present, since the

new regulation is still emerging.



http://www.fitchratings.com/

Insurance


September 2012 6

Peer Analysis

Performance in Line with Peers

Liberty is the third-largest life insurer in South Africa in terms of GWP. All of the South African

life insurers in Fitch‟s rated universe have Insurer Financial Strength (IFS) ratings of „AA(zaf)‟

or above.

Liberty appears approximately in the middle of its leading peer group in terms of most of the

key financial metrics such as CAR cover or ROEV in the table below. The group has strong

market positions in the mid- to upper-income segments. It has a well-established and

recognised brand and is expanding its franchise in the lower-income segment in South Africa

as well as in the rest of Africa.

Figure 3 Peer Comparison Table (2011)

(ZARm) National IFS rating CAR cover

(x)d GWP EV/GEV

ROEV/ ROGEV (%)

Total assets

Total equity AUM

Net profit

Liberty Holdings Limited AA(zaf)/Stablea 2.9 27,302 28,639 13.9 253,228 16,283 455,000 3,038

Old Mutual Life Assurance Company (South Africa) Limited

AAA(zaf)/Stable 4.1 26,367 n.a. 11.9e

451,184 n.a. 559,700 6,400

Sanlam Limited AA+(zaf)/Stableb 3.7 33,225 63,521 16.4 382,203 36,868 503,000 6,606

MMI Holdings Limited AA(zaf)/Stablec 2.3 10,990 30,811 7.1 289,572 23,061 437,054 815

IFS – Insurer Financial Strength. GWP – Gross written premiums. PVNBP – Present Value of New Business Premiums. EV/GEV – Embedded Value/Group Equity Value. ROEV /ROGEV – Return on Embedded Value/Return on Group Equity Value. AUM – Assets Under Management. N.a. – Not available The key indicators in this table for the peers are for 12 months ended 31 December 2011 except for MMI Holdings Limited which is for six months ended 31 December 2011 ª The National IFS Rating/Outlook applies to Liberty Group Limited and not Liberty Holdings Limited. Liberty Holdings Limited is the holding company of the group. b The National IFS Rating/Outlook applies to Sanlam Life Insurance Limited and not Sanlam Limited. Sanlam Limited is the holding company of the group and has a National

Long-Term Rating of „AA-(zaf)‟ c The National IFS Rating/Outlook applies to Momentum Group Limited and Metropolitan Life Limited and not to MMI Holdings Limited. MMI Holdings Limited is the holding

company of the group and has a National Long-Term Rating of „A+(zaf)‟ d The CAR cover ratios for Sanlam Limited, Liberty Holdings Limited and MMI Holdings Ltd refer to the CAR cover ratios for Sanlam Life Insurance Limited, Liberty Group

Limited and the MMI group respectively e This metric is not only for OMLACSA in South Africa, it also includes emerging markets comprising other African countries, Asia and Latin America

Source: Company announcements, Fitch

Insurance


September 2012 7

Solid Capitalisation and Low Financial Leverage Capital strong but somewhat sensitive to equity market volatility

Capital requirements likely to increase

Subordinated debt refinanced

Financial leverage low and expected to drop

Capital Strong But Somewhat Sensitive to Equity Market Volatility

Fitch considers Liberty‟s capital position to be strong, based on its own risk-adjusted

assessment as well as the regulatory CAR cover ratios. LBH and LGL had regulatory CAR

cover ratios of 2.4x and 2.9x respectively at end-2011 (2010: 2.3x and 2.7x respectively) which

are well above both the group‟s target of 1.7x and the minimum regulatory requirement of 1.0x.

The improvement in LGL‟s CAR cover ratio was attributable to a lower capital adequacy

requirement in 2011. At H112 LGL‟s CAR cover remained stable and Fitch expects Liberty to

maintain its strong capital position.

Fitch notes that Liberty‟s capitalisation demonstrates some sensitivity to equity market

conditions - however, this is in line with leading peers. Even when applying stress scenarios in

the agency‟s own risk-adjusted assessment, Liberty's CAR remains strong.

Capital Requirements Likely to Increase

The FSB is in the process of developing a new risk-based solvency regime for South Africa,

known as Solvency Assessment and Management (SAM), based on the principles of the EU

Solvency II Directive, but adapted to South African-specific circumstances where necessary.

The regulator currently expects to implement it in 2015. Although the introduction of SAM is

likely to result in increased capital requirements for insurers, the significance of the impact is

unclear at present as the new regulation is still in flux.

Subordinated Debt Refinanced

LGL issued ZAR1.0bn of subordinated debt securities in August 2012. The security is not

callable and has its final maturity date on 13 August 2017. The issue is part of the group‟s

active capital management and takes into account the repayment of LGL‟s ZAR2bn bond,

which has been called on its first call date in September 2012.

Financial Leverage Dropped

Financial leverage ratios have dropped after the bond has been called to 8% compared to 14%

at end-2011. Fitch considers this low for LGL‟s rating level. Fitch notes that there is a possibility

of further subordinated bonds issuances in the future. Fitch expects financial leverage to

remain within an acceptable range for LGL's rating level.

Figure 4 Capitalisation and Leverage

(ZARm) 2007 2008 2009 2010 2011 Fitch's expectation

Total equity 12,491 13,826 12,935 14,379 16,283 Fitch expects the group to maintain its strong capital position. Leverage is expected to remain in an acceptable range for its rating level.

Total financing and commitments ratioª (x) 0.5 0.2 0.2 0.2 0.2

Financial leverage ratiob (%) 30 17 17 15 14

Operating leverage ratioc (x) 39.2 16.9 19.6 19.0 17.9

Regulatory CAR cover ratio (x): LBH 1.8 2.1 2.2 2.3 2.4

Regulatory CAR cover ratio (x): LGL 2.0 2.7 2.8 2.7 2.9

ª Total financing and commitments ratio = Total financing and commitments (includes matched-funding) to consolidated shareholders‟ equity b Financial leverage ratio = All debt /equity capital + debt + total hybrids

c Operating leverage ratio = Total liabilities (excluding unit-linked) to shareholders‟ funds


Insurance


September 2012 8

Adequate Financial Flexibility

Good ability to raise additional funds

Strong interest coverage

Good Ability to Raise Additional Funds

In 2005, the FSB relaxed its rules relating to the use of subordinated debt capital in the

calculation of statutory capital. As a result, South African life insurers have raised debt capital,

bringing their capital structures more into line with those of insurers operating in more

developed markets. Following regulatory approval, LGL issued ZAR2bn of unsecured

subordinated callable notes in September 2005. The notes mature in September 2017 and

were redeemed in September 2012.

Strong Interest Coverage

Fitch views Liberty‟s interest coverage on debt-servicing capabilities as strong for its rating.

Interest coverage (excluding realised and unrealised gains) was 5.9x in 2011 (2010: 6.5x) and

remains slightly above its five-year average of 5.8x. The outstanding amount of debt has been

reduced to ZAR1.0bn which reduces Liberty‟s interest expense burden at present.

Figure 5 Debt Service Capabilities and Financial Flexibility


Interest expense 666 664 709 769 899 Fitch expects coverage to improve in 2012 due to strong earnings. Fixed charge coverage ratioª (x) 9.2 4.6 2.5 6.5 5.9

ª Fixed-charge coverage ratio = EBITDAb operating result before fixed charges (excluding realised and unrealised gains) / interest expenses (including interest on hybrids and

dividends on preference shares) b Earnings before interest, taxation, depreciation and amortisation


Holding Company Liquidity

LBH is a pure holding company and it

conducts no business other than that

related to its investment in the Liberty

group. LibHold had cash holdings of

ZAR18m in 2011.

Insurance


September 2012 9

Solid Performance Despite Tough Economic Conditions Strong and improved performance

Improved new business margin

Growth Initiatives segment continued to report a loss

Strong and Improved Performance

Liberty‟s performance improved in 2011, with headline earnings up 3% at ZAR2,597m in 2011

(2010: ZAR2,522m) and ROEV for the South African insurance business improving to 13.9%

(2010: 12.6%). Earnings have been supported by improved performances from the South

African insurance business, attributable to continued improvement in policyholder persistency,

and the asset management business, driven by higher average assets under management and

improved performance fees. The lower returns from investment markets were attributable to the

poor performance of investment markets in 2011, compared with their strong performance in

2010. At H112 the group‟s headline earnings were up by 41% to ZAR1,676m.

Improved New Business Margin

The group‟s total life new business margin on a PVNBP basis strengthened to 1.4% in 2011

(2010: 1.2%) driven mainly by a lower lapse rate in the South African insurance business. In

H112 the new business margin further improved to 1.5% (H111: 1.3%). Fitch notes that within

segment „Retail SA‟ which accounts for more than half of the South African long-term insurance

business, the new business margin has improved to 1.8% at H112 (2011:1.6%, 2010: 1.3%).

Growth Initiatives Continued to Report a Loss

This business reported a headline loss of ZAR91m in 2011 (2010: headline loss of ZAR77m).

Liberty Health‟s headline loss widened to ZAR65m (2010: headline loss of ZAR43m) as a result

of the continued loss of lives under administration due to the continued movement of members

to Government Employees Medical Scheme (GEMS) in 2011 and an increase in costs incurred,

a number of which were one-off costs. Fitch expects this segment to continue to generate

losses over the next few years due to start-up expenses and the need to increase scale to

cover fixed costs, in the context of a competitive operating environment.

Figure 6 Financial Performance and Earnings


Net income 1,516 1,072 37 2,302 2,736 Fitch expects the group‟s performance to improve in 2012. The agency expects the life new business margin in the „Retail SA‟ business to continue to improve towards the group‟s medium-term target of 2.0%.

Operating profit 14,938 15,196 12,668 14,637 14,658

Pre-tax profit 5,484 2,378 1,082 4,260 4,421

Pre-tax operating return on assets (%) 2.5 1.9 0.8 1.1 1.7

Return on book equity (incl. gains) 42.4 20.9 2.0 22.9 24.4


Insurance


September 2012 10

Investments of Moderate Risk Equity exposure commensurate with rating level

Bond portfolio of good credit quality

Equity Exposure Commensurate with Rating Level

Fitch considers Liberty‟s investment risk as commensurate for the rating level. The majority of

assets backing Liberty‟s shareholders‟ investment portfolio (SIP) of ZAR20.4bn (2010:

ZAR17.3bn) and capital portfolio of ZAR9.2bn (2010: ZAR9.0bn) are invested in local cash,

bonds and property, as shown in Figures 10 and 11.

Figure 8 Figure 9

23%20%

23%

9%

15%

10%

21%

15%

27%

7%

18%

12%

Local equities

Local bonds

Local cash

Local preference

sharesLocal property

Foreign assets

Liberty's Shareholders’ Investment

Portfolio, 2011Inner ring: 2010

Outer ring: 2011


18%12%

52%

18%

17%

63%

4%

16%

Local equities

Preference shares

Local cash, bonds &

property

Foreign assets

Liberty’s Capital Portfolio, 2011Inner ring: 2010

Outer ring: 2011


Fitch notes that according to its global rating methodology the portion of unaffiliated equities

expressed as a percentage of equity of 222% is considered high. However, South African

insurers tend to have higher equity exposure compared to European or North American peers,

in part reflecting the particular “profit-sharing” model of South African life insurance business.

Fitch notes that Liberty‟s investments are of lower risk compared to some of its South African

peers. Overall taking into account the features of the South African insurance market Fitch

considers Liberty‟s equity exposure as commensurate with the rating level.

Bond Portfolio of Good Credit Quality

Liberty‟s investment portfolio is relatively well-diversified in terms of industry exposure. Fitch

considers the group‟s portfolio to be of a good credit quality, with the majority that are subject to

credit risk rated „A-‟ or above (on the South African national ratings scale).

Figure 7 Investment and Asset Risk


Unaffiliated equities/total equity (%) 204.0 173.1 176.9 234.5 221.6 Fitch expects the group to continue to pursue its current investment strategy of moderate risk.

Affiliated equities/total equity (%) 2.4 3.7 4.4 4.2 3.8

Financial investments 176,223 169,760 173,146 192,317 197,959


Insurance


September 2012 11

Good Asset/Liability Management Hedging programme in place

Strong liquidity position

Business predominantly market-related

Hedging Programme in Place

Fitch views Liberty‟s ALM as good. The group does have exposure to investment guarantees

but this is well managed by LibFin and hedged as appropriate. Asset-liability mismatch risks

relating to maturity guarantees are assessed through stochastic modelling, in line with

professional guidance issued by the Actuarial Society of South Africa (ASSA).

For its non-linked and non-participating business, the group follows a policy of matching assets

and liabilities as closely as possible. Where the business is exposed to interest-rate risk, the

group makes use of its hedging programme.

Strong Liquidity Position

Liberty has a liquid balance sheet to support its policyholder liabilities. Fitch considers Liberty‟s

investment portfolio to be liquid and commensurate with Liberty‟s current rating.

Business Predominantly Market-Related

Figure 11 shows the breakdown by type of business of LGL‟s policyholder total liabilities. LGL‟s

business is predominantly market-related, (80% of policyholder total liabilities at end-2011),

with policyholders bearing most of the investment risk. However, maturity guarantees and

guaranteed annuity options (GAOs) are embedded in some of LGL‟s main classes of business

and expose the group to interest-rate and market-price risk.

Figure 11

With-profit buisness

9%

Non-profit annuities

7%Market-related/linked

80%

Other

2%

With-profit annuities

2%

LGL's Policyholder Total Liabilities, 2011


The maturity guarantees apply to about 40% of policyholder total liabilities, while GAOs apply

to around 10% of policyholder total liabilities. With-profit products and non-profit annuities

expose the company to market and interest rate risk. Fitch notes that the portion of business

that entails guarantees is moderate.

Figure 10 Asset/Liability and Liquidity Management


Liquid assets/policyholder liabilities (%) 96.6 100.8 99.3 99.7 97.4 Liberty has a liquid balance sheet, which Fitch expects to be maintained. Policyholder liabilities 186,137 172,805 184,300 197,878 208,565

Source: group, Fitch

Insurance


September 2012 12

Risk Management

Risk Management Adequate Enhanced risk management

Good reinsurance quality

Enhanced Risk Management

Risk management has improved significantly in the four years since the establishment of LibFin

in 2008. LibFin undertook de-risking activities in 2008 and 2009 to bring the risk position within

appetite, including the creation of a centre for the management of credit and market risk,

reduction of interest rate exposure through hedging activities and a permanent reduction in the

group‟s equity exposure. The group is continually enhancing its enterprise-wide value and risk

management and has made good progress in the development of its capital modelling

capabilities.

The agency expects further improvement due to the development of the group‟s economic

capital model and risk management framework.

Good Reinsurance Quality

The quality of reinsurers is good, with the reinsurance programme being placed with external

reinsurers that typically have an international credit rating of ‘AA-‟ or above. Reinsurers are

generally well-known international companies.

Insurance


September 2012 13

Appendix A: Additional Financial Exhibits

Figure 12 Headline Earnings Contribution by Business Unit (ZARm) 2011 2010 Change (%)

South African long-term Insurance 2,474 2,445 1 Retail SA 1,314 899 46 Liberty Corporate 36 103 -65 LibFin 1,124 1,443 -22 Asset management 510 457 12 STANLIB 414 361 15 Liberty Properties 96 96 0 Growth initiatives -91 -77 -18 Liberty Africa 21 10 >100 Liberty Health -65 -43 -51 Frank Financial Services -47 -44 -7 Other -296 -303 2 Total 2,597 2,522 3

Source: company

Insurance


September 2012 14

Appendix B: Other Ratings Considerations

Below is summary of additional ratings considerations of a “technical” nature, that are also part

of Fitch‟s ratings criteria.

Group IFS Rating Approach

LGL is considered core to the group as it is the main life insurance subsidiary of the group, and

its ratings are based on a combined Liberty group assessment.

Notching

As defined in the agency‟s insurance rating methodology, Fitch regards South Africa as a

“Strong” regulatory environment, with a strong capital regime and priority afforded to

policyholder obligations.

Notching Summary

IFS Ratings

Standard notching was used. LGL‟s national IFS rating is lifted by one notch from the National

Long-Term Rating to „AA(zaf)‟ in view of the strong regulatory regime in South Africa and the

preferential treatment that policyholders receive in South Africa.

Hybrids

LGL‟s National Long-Term subordinated debt rating is notched down one notch from its

National Long-Term Rating to „A+(zaf)‟, to reflect the level of subordination. The notes have no

interest deferral features or other loss absorption features.

Short-Term Ratings

Not applicable.

Hybrids – Equity/Debt Treatment

Figure 13 Hybrids Treatment

Hybrid Amount CAR Fitch (%) CAR reg. override (%) FLR debt (%)

LGL ZAR1bn 0 100 100%

CAR Capitalisation ratio: FLR Financial leverage ratio. N.A. Not Applicable For CAR % tells portion of hybrid value included as Available Capital, both before (Fitch %) and the Regulatory Override For FRL, % tells portion of hybrid value included as debt in numerator of leverage ratio Source: Fitch

The recently issued subordinated bond has been structured for Tier 2 own funds eligibility

according to the grandfathering provisions of the QIS2 specifications under the SAM regime.

According to Fitch‟s methodology, this subordinated bond is classified as 100% capital due to

regulatory override within Fitch‟s risk-based capital assessment and is classified as 100% debt

regarding the agency‟s financial leverage calculations.

Exceptions to Criteria/Ratings Limitations

None.

Insurance


September 2012 15

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Insurance · 9/18/2012 · Insurance 18 September 2012 Life Insurers / South Africa Liberty Group Limited Full Rating Report Key Rating Drivers Well-Established Domestic Franchise: