liberty group inaugural subordinated unsecured callable bond presentation to investors

Liberty Group Inaugural subordinated unsecured

callable bond

Presentation to investors

May 2005

2

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

3

Agenda

Overview

Operating review

Financial review

Capital management strategy

The proposed bond instrument

Summary and Questions

Appendix

4

Liberty Holdings Limited

Liberty Group LimitedRated AA(zaf) - Insurer Financial Strength

Rated AA-(zaf) – Long Term Issuer

Corporate Structure (as at 31-12-2004)

Standard BankRated AA+(zaf) – Long Term Issuer

(54,65%)

(50,17%)

Life Assurance Asset Management

• Liberty Personal Benefits

• Liberty Corporate Benefits

• Liberty Active

• STANLIB (37,4%)

• Liberty Ermitage

• Liberty Properties

5

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)

6

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

7

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

8

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

9

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)

10

Agenda

Overview

Operating review

Financial review




Appendix

11

Value of in -

force

45%

Ermitage

4%

Stanlib

4%

Shareholder

NAV

46%

Liberty

Properties

1%

Overview of the Group’s embedded value (proxy for cash flow drivers)

2004

Value of in -

force

41%

Ermitage

4%

Stanlib

4%

Shareholder

NAV

50%

Liberty

Properties

1%

2003

12

Business units

• 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

• Targeting lower income group through Liberty Active

• Uses four channels of distribution (viz. Agents, Franchises, Brokers and Standard Bank Financial Consultants)

Individual Life (LPB and Liberty Active)Individual Life (LPB and Liberty Active) Liberty Corporate Benefits (LCB)Liberty Corporate Benefits (LCB)

• 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)

• Also manages larger corporate funds

• Client funds spread across geographic regions and industries

Rm 2004 2003%

change

Indexed new business 3,544 3,184 +11

New single premiums 8,700 6,808 +25New recurring premiums

2,674 2,504 +8

Net cash flows 5,492 3,120 +76

Claims and benefits 10,867 10,436 +4

Value of new business

819 571 +43

Key performance indicatorsKey performance indicators

Rm 2004 2003%

change

Indexed new business 643 624 +3

New single premiums 1,582 1,924 -18New recurring premiums

484 431 +12

Net cash flows1 (1,852) 1,377 235

Claims and benefits 6,048 3,189 +90

Value of new business

(4) 37 -111


1 One client maturity of R2.1 billion in a property-backed portfolio (2004)

13

Business units (cont’d)

• Jersey-based fund management company, specialising in hedge funds

• 41% third party funds

• Representative offices in London, Luxembourg, Bermuda and New York

Liberty Ermitage (Jersey)Liberty Ermitage (Jersey)


Rm 2004 2003%

change

Net cash flows 3,681 1,653 123

Assets under mgmt120,53

318,51

3+11

Headline earnings 46 43 +7

• Established in 2002, combining the asset and wealth management businesses of Liberty and Standard Bank

• Liberty Group and Standard Bank each hold 37.5%, with BEE partners holding 25%

• Focus on asset management of retail and institutional investments

STANLIBSTANLIB

Rm 2004 2003%

change

Net cash flows 15,300 12,100 26

Assets under mgmt1 137,926113,97

8+21

Headline earnings 119 80 +49


1 Excluding common assets 1 Excluding common assets

14

Agenda

Overview

Operating review

Financial review




Appendix

15

Financial summary – 4 year history

For the year ended December 2004 2003 2002 2001

Total new business 13,440 11,667 11,301 9,819

Indexed new business1 4,186 3,808 3,634 2,944

Value of new business written2 815 609 605 455

New business margin3 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%

Maintenance cost per policy

Liberty Life

Liberty Active

248

154

240

161

225

152

-

-

Income statement (Rm)Income statement (Rm)

1 The sum of new recurring premiums plus 10% of new single premiums2 The present value, at the time of sale, of the projected stream of after-tax profits from that business3 Expresses the embedded value of new business as a percentage of indexed new business (net of natural increases)4 The excess of total premiums over total policyholder claims and benefits

16

Headline earnings

Headline earnings (Rm)Headline earnings (Rm)

1,153 1,320889 720 929

323230

180

179162

2000 2001 2002 2003 2004

Revenue earnings attributable to shareholders’ funds

Operating profit from insurance operations

• 10% shareholders’ participation

• Higher average asset base

• Investment guarantee reserves

• Management expenses

• Strong underlying Stanlib, Ermitage growth

Key featuresKey features

17

Financial summary (cont’d)

For the year ended December 2004 2003 2002 2001

Shareholders’ funds 8,494 8,782 8,588 8,346

Embedded value 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

Capital adequacy cover (x covered) 2.1x 2.6x 3.0x 3.5x

75.6 73.683.8

98.089.4 86.396.6

109.6

2001 2002 2003 2004

Policyholder liabilities Total assets

Balance Sheet (Rm)Balance Sheet (Rm)

Policyholder liabilities and total assets (Rbn)Policyholder liabilities and total assets (Rbn)

• BEE technical impairment of R1,251m in FY2004

• Only 40% of shareholders’ funds in equities – equity concentration now largely resolved

18

Embedded value

Embedded value (Rm)Embedded value (Rm)

4,822 5,111 5,7016,494

7,607

1,310838

541

766

6,123

8,3468,588

8,782

8,494996

2000 2001 2002 2003 2004

Value of in-force business Shareholders' funds Fair value adjustment

14,767

11,941

15,12715,817

16,867

19

Agenda

Overview

Operating review

Financial review




Appendix

20


31 December (Rm) 2004 CAR cover 2003 CAR cover

Capital adequacy requirement (CAR) 3,954 3,403

Shareholder's funds

(Empowerment transaction)

9,745

(1,251)

2.6 8,782

2.6

Shareholders' funds after empowerment transaction

8,494 2.1

• Liberty’s capital covers potential additional charges, fraud, errors, uninsured risks, etc.

• 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

Liberty Life’s capital adequacy (prior to Capital Alliance acquisition) Liberty Life’s capital adequacy (prior to Capital Alliance acquisition)

Comments on level of capitalComments on level of capital

• Pre the proposed takeover of Capital Alliance Limited (CAL) and allowing for full impairment for the BEE capital, CAR cover was 2.1x.

- 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

Impact of the BEE and CAL transactions on CARImpact of the BEE and CAL transactions on CAR

21

Agenda

Overview

Operating review

Financial review




Appendix

22

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

23

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

24

Comparison between the new LG01 bond and the SBK5 bond

SBK5 LG01

Maturity 12 non-call 7 12 non-call 7

Pricing at launch R153 + 95 TBD

Subordinated to senior credits Callable after 7 years Step-up +100bps Call subject to regulatory approval Qualifying regulatory capital

25

Impact of the bond on key ratios (pro forma 2004)

Pre-bond Post-bond

Weighted average cost of capital 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

Source: Company estimates. Based on December 31, 2004 financials

26

Why Liberty paper

• Strong cash flows

• High interest cover and low debt ratios

• Conservative regulator

• Sustainable growing business

• Track record of delivery

27

Agenda

Overview

Operating review

Financial review



Issue process and deal contacts

Appendix

28

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

29

Contacts

Issuer contacts•Deon de KlerkTel: (011) 408 2572E-mail: [email protected]

•John SturgeonTel: (011) 408 2872E-mail: [email protected]

•Stewart RiderTel: (011) 408 3260E-mail: [email protected]

•Samuel SathekgeTel: (011) 408 3063E-mail: [email protected]

Arranger contacts•Andrew PamphilonTel: (011) 378 7003E-mail: [email protected]

•Marc HusseyTel: (011) 507 0730E-mail: [email protected]

•Chris ClarksonTel (011) 374 1291E-mail: [email protected]

30

Agenda

Overview

Operating review

Financial review



Issue process and deal contacts

Appendix

31

17% 19% 22% 24% 25%31% 31% 33%

40%

50% 52%

0%

20%

40%

60%

Comparison of debt-to-capital ratio with European peers

Source: JPMorgan estimates

32

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

LGL I LGL G SLM I SLM G OML I OML G MOM I MOM G

2002

Peer comparison - total new business

2003 2004

I = Individual; G = Group; Source: company financial statements

Rm

33

0

1,000

2,000

3,000

4,000

Liberty Sanlam Old Mutual Momentum Discovery (Life)

2002 2003 2004

Peer comparison - indexed new life business*

* Indexed new business as per embedded value statement; Source: company financial statements

Rm

34

Peer comparison - net flow of funds from life insurance operations

-12,000

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

2002 2003 2004

Liberty Sanlam Old Mutual Momentum Discovery (Life)Rm

Source: company financial statements

35

Peer comparison - embedded value

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

02 03 04 02 03 04 02 03 04 02 03 04 02 03 04

NAV and subs VIF

LGL SLM OML MOM DSY

Rm

Source: company financial statements

36

Gross investment returns

-15

-10

-5

0

5

10

15

20

25

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

year-to-date return 2003 year-to-date return 2004

12.5%

22.7%

Actuarial assumption

liberty group inaugural subordinated unsecured callable bond presentation to investors

Documents

liberty activeuses

lower income group

group executive finance

liberty activeliberty

investment productslife

product specificationwe

high net worth

bond instrumentsummary