Pressure heaped on Liberty

Johannesburg - Liberty Holdings, the R17.6bn life insurance group, has come under fire for hedging its exposure to the interest and equity markets - a tactic analysts believed was too conservative and provided reduced "upside" to shareholders.

Ratings agency Fitch then heaped pressure on Liberty, downgrading the group on the basis of its volatile earnings, a function of see-sawing investment markets and weak "product persistency".

The negative outlook reflected the pressure Liberty's ratings were under. The company's ratings could be downgraded if there is a material deterioration in capital or significant continuing earnings volatility, news agency I-Net Bridge reported.

Fitch downgraded Liberty to negative from stable.

In its first quarter operating and financial results Liberty unveiled hedges that would buffer its exposure to volatility in the interest rate and equity markets. While the group holds a negative outlook on equity market performance in the short term, analysts said the view was too conservative.

"What people didn't like was seeing big negative numbers after the hedges had been implemented," said Khaya Gobodo, head of equities at Afena Capital, of Liberty's first-quarter numbers.

Liberty Holdings reported a R400m first-quarter loss but only after R350m in operating earnings were wiped out by unrealised investment losses of R750m.

At the time, Liberty CEO Bruce Hemphill indicated said that the group was focusing on the protection of client and shareholder funds over short-term profits and performance.

Analysts speak out

Analysts polled by Fin24.com argue, however, that Liberty stands to lose out on further equity price gains. In fact, many indices have risen by a fifth or more since the beginning of March 2009.

In a note to clients, stockbroker Barnard Jacobs Mellet said: "What is more disappointing than the loss is the hedge put in place at the bottom of the market on the latter risk. Upside has been given away."

In an emailed response to Fin24.com questions, Giles Heeger, CEO of Liberty Financial Solutions, said: "The market positions we elected to hedge are equity positions which would lose significantly more in a falling market than they would make in a rising market." Liberty Financial Solutions is the business responsible for managing Liberty's risk and balance sheet.

In other words, if the markets lost 10%, Liberty's loss would be far higher than a gain if markets had increased by 10%, Heeger said.

"Given this non-linear effect, we considered it prudent to reduce some of the equity market risk given the real likelihood of markets falling further in the midst of the financial market crisis," he said.

"We also believe current economic indicators are not yet pointing to the fact that the global economy is out of danger - we have preferred to take a prudent approach."

Asked if Liberty could make good on these financial instruments, Afena's Gobodo said: "Yes, Liberty has the people to implement these strategies."

"But the real question for me is whether or not management has the stomach to see it through if the market rises another 20%," said Gobodo. Afena holds shares in Liberty Holdings.

Another asset manager - who asked to remain anonymous - said that if the market ran hard, it would dampen Liberty's performance relative to its peers. He didn't agree with Liberty's negative outlook on equity markets.

Liberty Holdings was down 2.24% weaker on the JSE on Wednesday, trading at 6 069c against a financial index that was 1.19% stronger.

- Fin24.com