Fitch Downgrades South Africa's Liberty Group to IFS 'AA(zaf)'; Outlook Negative
Fitch Ratings-London/Johannesburg-04 September 2009: Fitch Ratings has today downgraded South Africa-based Liberty Group Limited's (Liberty) National Insurer Financial Strength (IFS) Rating to 'AA(zaf)' from 'AA+(zaf)' and downgraded its National Long-term rating to 'AA-(zaf)' from 'AA(zaf)'. Fitch has simultaneously downgraded Liberty's subordinated debt to 'A+(zaf)' from 'AA-(zaf)'. The Outlook on all the ratings is Negative.
The downgrades reflect Liberty's earnings volatility in H109, stemming from the group's weak product persistency and exposure to the turbulent investment market conditions. The Negative Outlook reflects Fitch's concern over persistency experience turning out to be worse than the company's current expectations for the next 12 to 24 months and potential continuation of weak earnings, due to difficult consumer conditions and volatile financial markets.
While product persistency remains a key challenge in the current environment for the South African life industry as a whole, Liberty's persistency experience and the resulting losses are poor compared to its peers. The group took a total charge of ZAR1,719m for persistency in its H109 embedded value results. Fitch notes that Liberty has taken active steps since early 2008 to address its poor persistency record - however, the agency believes there is uncertainty regarding the extent to which this situation can be turned around.
On the positive side, Liberty's ratings continue to reflect its well-established business positions in South Africa, its strong and diversified distribution networks and robust capital position. Fitch considers the strength and diversity of Liberty's distribution network and success in bancassurance with the Standard Bank group as a key positive rating driver.
Fitch believes that Liberty is relatively well-capitalised, particularly as a result of the group's
significant "de-risking" of its balance sheet. The decline in Liberty's published capital adequacy requirement (CAR) cover to 2.5x at H109 from 2.7x at FYE08 results from the payment of the 2008 final capital reduction and the loss that was incurred in H109.
The group's financial performance for H109 was adversely affected by changes the company made to its long-term persistency assumptions, high lapse rates and hedging and exchange rate losses which resulted in the group incurring a headline loss of ZAR1,258m (FY08: headline earnings of ZAR1,110m; H108: headline earnings of ZAR409m). As a result, return on embedded value on an annualised basis declined to minus 27.0% in H109 from positive 3.4% in FY08. In H109, Liberty reported an unrealised market risk loss of ZAR531m on the Group's foreign currency investments.
Liberty Group is a South African-based financial services group that provides non-banking financial products and services. Its primary operations include life insurance and fund management. Liberty Group Limited is the group's main insurance operating company and the ultimate holding company of the group is Liberty Holdings Limited, which is listed on the Johannesburg Stock Exchange.
Contacts: Nicole Gibb, Johannesburg, Tel: +27 11 380 0909; Harish Gohil, London, Tel: +44 (0) 20 7682 7264.
Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com; Hannah Warrington, London, Tel: +44 (0) 207 417 6298, Email: hannah.warrington@fitchratings.com.
Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(zaf)' for National ratings in South Africa. Specific letter grades are not therefore internationally comparable.
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