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Liberty Financial Solutions (LibFin)

 

What we do

 
LibFin was created in 2008 as part of the group’s risk management strategy to actively manage:
Risks arising from financial market exposures which originate in the life insurance business through mismatches between assets and liabilities; and 
Investment performance of shareholder and policyholder assets in the life insurance business. 
 
LibFin’s primary objectives are to:
Ensure shareholder market risk exposure is within defined risk appetite limits;
Manage the market risk exposure arising from asset-liability mismatches in the Life insurance business;
Ensure that investment performance offered to shareholders exceeds the associated cost of capital;

Provide appropriate investment performance for policyholders; and
Generate an alternate, diversified revenue source through the efficient management of shareholder assets and exposures. 
 
Responsibilities and structure
Management of risk has been separated into that which the group wishes to retain as a long-term investment and that which is not attractive on a risk-to-reward assessment. This facilitates a clear understanding of the types of risk and the strategic approaches required to manage each risk category, which resulted in the definition of two separate portfolios namely, the shareholder investment portfolio and risk management portfolio. The former will be managed to a long-term return objective, whereas the risks inherent to the risk management portfolio are managed to minimise profit and loss volatility.

LibFin's structure therefore recognises the different strategic approaches and skill sets needed to manage these portfolios. This is shown diagrammatically as follows: 
 
 
LibFin Markets
LibFin Markets' primary responsibility is to manage market risk exposure arising from the complex and long-dated asset-liability mismatches within the life insurance business. These are represented in the Risk Management Portfolio and arise as a result of the following product sets: 
Annuities and Guaranteed Capital Bonds (GCBs);
Investment Guarantees; and
Negative Rand Reserves.
 
LibFin Markets also seeks to extract value by investing a portion of the underlying funds in a well-diversified fund of government and corporate instruments. 
 
LibFin Investments
LibFin Investments oversees the management of approximately R200 billion of shareholder and policyholder assets. The team has built a competency which is leveraged across policyholder and shareholder funds. Appropriate portfolio construction and fund allocation to underlying specialist asset managers, along with ongoing performance evaluation, ensures quality investment performance. 
 

Our 2009 focus areas

Reducing the group’s market risk exposure
During 2009 LibFin continued the implementation of a de-risking programme to reduce the group's overall market risk exposure over the longer term and align it to a defined risk appetite. This programme involved the reduction of interest rate exposure through hedging activity in 2008 and the reduction of aggregate equity exposure in 2009. The measures taken will, in time, reduce earnings volatility, ensure better control of the balance sheet and strengthen the group's capital position. 
 
Ongoing management of market risk
Market risk management has continued to mature throughout the year. LibFin Markets has improved the methodology and execution of asset-liability matching on a complex set of insurance products. This required continued development of the business infrastructure to support improvements to: 
Market risk management (asset-liability matching);
Data quality, frequency and granularity; and
Delivery of investment performance.
 
Managing investment performance
During 2009 LibFin Investments enhanced various business processes and improved skills to ensure appropriate investment performance for the group's policyholders and shareholders. 
 
Shareholder Investment Portfolio (SIP)
Subsequent to the group's adoption of a defined risk appetite framework, a formal review of shareholders assets and other exposures was carried out to ensure alignment to this framework. This resulted in the SIP which will be managed to maximise after-tax returns on a long-term basis utilising the available allocated quantum of risk appetite.

The SIP comprises of the shareholder assets (assets backing capital and excess assets in the life fund) and exposures arising from the 90:10 book of business. This portfolio represents the exposure to market risk that Liberty wishes to maintain over the long-term and is therefore not dissimilar to a well diversified and relatively conservative investment portfolio.

Performance benchmarks for various asset categories in the SIP have been set. The translation of the return requirements on the SIP into formal asset manager mandates continues.
 
Policyholder funds
During the year, the LibFin Investments team was expanded to enable it to enhance: 
The construction of policyholder investment portfolios to optimise returns; 
Mandates for asset managers;
The evaluation and reporting processes for asset manager performance; and 
Asset manager due diligence reviews.
 
This has led to changes in various underlying fund benchmarks, fund manager mandates and portfolio structures. A more dedicated approach to performance evaluation and reporting has improved the ability of the business to monitor and track asset manager performance within the mandated terms, and to conduct appropriate market comparisons. 
 
Enhancing Management Information Systems (MIS) to support processes 
The effective management of market risk, particularly market risk arising from asset liability mismatches, depends on the capability and support of first class MIS and IT systems. Improvements to these systems during the year addressed quality of data, operational support and process re-engineering. This enabled more frequent and accurate re-pricing of assets and liabilities and the calculation of more appropriate risk analytics, to ensure effective asset liability management. 
 
Delivering on commitments
Key strategies and operational objectives identified for 2009 in the 2008 annual report Status
Provide earnings protection and generate additional profits Ongoing
Assist management in moving within the stated market risk appetite Complete
Complete staffing up the unit, in order to generate the capacity to fully achieve its mandate  Complete
Generate long-run outperforming balanced portfolios through strategic asset allocation with a focus on performance against the liability set rather than the market (specifically for pension liabilities)  Ongoing
 

Financial

Performance indicators 2009
Rm
2008(1)
Rm 
Total headline earnings (248) (67)
Shareholder investment portfolio 214 564
Risk Management (ALM) 297 (313)
Equity de-risking (519)
Transfer to Insurance – 90:10 planned margins (240) (318)
Net earnings by asset class (8)
Equity 552
Equity de-risking activity (519)
Foreign asset (485)
Interest rates and volatilities 506
Other minor asset classes (62)
Shareholder positions under management (Rm) 16 512
Local equities 3 498
Preference shares 1 460
Local cash, fixed income, property and other 8 903
Foreign currency holdings 2 651  
     
(1) Comparatives are not available for net earnings by asset class and shareholder positions. 
 
LibFin Markets
LibFin Markets realised a profit for the 2009 financial year of R297 million.

Differences between the negative rand reserve valuation methodology and that of the embedded derivatives, together with adverse movements in interest rates, resulted in a first half loss of R176 million.

The market price of shorter term volatility reduced dramatically during the year, with the South African Volatility Index (SAVI) falling from an opening level of 43% to a close of 23,5% at the end of 2009. This generated a substantial reduction in the value of the investment guarantee reserve, which flowed through to earnings. The costs of managing market risk were tightly controlled and the assets backing the annuity books also generated a positive margin. Changes in the yield curve during the second half of the year also provided a positive contribution. These effects generated R473 million in total for the second half. 
 
LibFin Investments
LibFin Investments delivered a profit for the financial year of R214 million before the allocation of R240 million 90:10 planned margins to the Retail SA insurance business and excluding a loss of R519 million resulting from equity de-risking activities. 

In the first half, earnings were negatively impacted by the stronger rand. The rally in financial markets during the second half of 2009 resulted in a significant improvement in this portfolio's performance generating a net profit of R676 million for the second half. Equity investments were the primary contributor while currency protection prevented further losses from currency appreciation.
 

Planning for 2010

Both 2008 and 2009 should be classified as "build" years. Much focus was placed on building teams, infrastructure processes and capabilities and the refining of overall governance, as would be expected of a new business. While this continues into 2010, the focus will shift to executing with the new processes and systems in place. To this end the division aims to achieve the following by business area: 
 
LibFin Markets
Strategies to bring the business within defined risk appetite have been implemented, and the foundations for reshaping the business infrastructure have been laid allowing for an enhanced focus in 2010 on: 
Refinement of risk management systems and processes to improve execution of ongoing daily risk management activities; 
Managing market exposure using more frequently updated position information to minimise profit and loss volatility; and 
Originating attractive investments for the annuity and GCB portfolios. 
 
LibFin Investments
Improvements to processes will be continued to ensure optimal investment performance. Additional goals are: 
Final implementation of the shareholder investment portfolio; 
Completion of a full review of various policyholder asset portfolios; 
Due diligence reviews of all direct asset managers; and
Revision and refinement to relevant asset manager mandates. 

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