| Thu 3 Mar 2005, 9:38 | | Results for the year ended 31 December 2004 |
|
SANLAM LIMITED
(REGISTRATION NUMBER 1959/001562/06)
JSE share code: SLM
ISIN number: ZAE000028262
NSX share code: SLA
AUDITED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004
HIGHLIGHTS
- Strong Earnings
- Headline earnings per share up 31%
- Strong performance by all businesses
- Result from operations before tax up 46%
- Operating margin of 23,3% (17,5% for 2003)
- Dividend up 25% to 50 cents per share
- Significantly improved Business Flows
- Net funds inflow of R17 billion (R5 billion in 2003)
- New Life business inflows up 12%
- Investment inflows up 86% to R41 billion
Embedded Value
Embedded value of 1 346 cents per share
Return on embedded value of 27,7% (22,5% per share)
Embedded value of new Life business of R324 million (up 40%)
New business embedded value margin up from 12,7% to 16,5%
SALIENT FEATURES
for the year ended 31 December 2004 2004 2003
SANLAM LIMITED GROUP
Earnings:
Result from operations before tax R million 3 520 2 405 46%
Core earnings (1) R million 3 340 2 641 26%
Headline earnings (2) R million 3 185 2 351 35%
Adjusted headline earnings based on R million 4 141 3 291 26%
the LTRR (3)
Net result from operations per share cents 72,1 53,2 36%
Core earnings per share (1) cents 122,3 100,2 22%
Headline earnings per share (2) cents 116,6 89,2 31%
Adjusted headline earnings per share cents 151,6 124,9 21%
based on the LTRR (3)
Group administration cost ratio (4) % 30,6 33,6
Group operating margin (5) % 23,3 17,5
Business volumes:
New business volumes R million 59 852 38 786 54%
Net fund flows R million 16 591 4 956 235%
New business embedded value R million 324 232 40%
Life insurance new business APE (6) R million 1 958 1 832 7%
New business embedded value margin % 16,5 12,7
EMBEDDED VALUE:
Embedded value R million 36 682 29
231
Embedded value per share cents 1 346 1 131
Growth from life business % 26,9 24,7
Return on embedded value (7) % 27,7 14,0
SANLAM LIFE INSURANCE LIMITED
Shareholders' funds R million 25 983 19 736
Capital adequacy requirements (CAR) R million 6 550 7 175
CAR covered by prudential capital times 3,7 2,6
Notes
(1) Core earnings = net result from operations, investment income and
equity-accounted earnings.
(2) Headline earnings = core earnings after assistance to policyholders' funds
and net gains/losses on derivative instruments.
(3) Adjusted headline earnings based on the LTRR = net result from operations
and total investment return based on a long-term rate of return.
(4) Administration costs as a percentage of income earned by the shareholders'
funds less sales remuneration.
(5) Result from operations as a percentage of income earned by the
shareholders' funds less sales remuneration.
(6) APE = annual premium equivalent and is equal to new recurring premiums
(excluding indexed growth premiums) plus 10% of single premiums.
(7) Growth in embedded value (with dividends paid, capital raised and cost of
treasury shares acquired reversed) as a percentage of embedded value at the
beginning of the period.
EXECUTIVE REVIEW
Overall performance
In the year to December 2004, we delivered on tough targets and the benefits
of our wide-reaching initiatives started to flow through to the Group's
financial performance more strongly. New business fund inflows for Group
operations amounted to R59,9 billion, an improvement of 54% on 2003. Net fund
inflows of almost R16,6 billion are substantially higher than the R5 billion
recorded in 2003. The embedded value of new life business written improved by
40% to R324 million. Headline earnings per share improved by 31% to 116,6
cents, while core earnings per share are up 22% due to an improved operational
performance across the Group and particularly the favourable underwriting
results of Santam.
Strategic delivery
We have followed through in our "back to basics" drive, tackling the systemic
factors undermining the Group's performance:
We have concentrated on becoming a more customer-centric organisation,
particularly in the development of new products and services, and improving
our service interface through various initiatives such as comprehensive broker
and advisor training to ensure profitable future growth.
Greater efficiency is key to competing effectively in a lower inflation
environment. We have tackled cost structures across the Group, particularly in
the Life Insurance cluster. Benefits from the major cost-cutting exercise in
Sanlam Life are evident in its operating results and the improvement in its
new business embedded value margin. The R250 million of annualised cost
savings promised, was delivered in 2004.
The marked improvement in investment performance from Sanlam Investment
Management (`SIM') remains core to Sanlam's recovery and future performance.
SIM posted strong growth in gross and net fund inflows in 2004 and has
continued the trend of improved investment. Notably, SIM produced the top
performing unit trust in South Africa for the second year running.
The restructuring of some of Sanlam's UK operations into Sanlam Financial
Services UK and Sanlam Multi Manager International has been completed and the
refocused operations made a welcome return to profitability.
Gensec Bank returned its banking license in June 2004 and has been fully
restructured into Sanlam Capital Markets (`SCM'). SCM has made good progress
extracting synergies within the Group and its maiden results for the year are
in line with our expectations.
Our employee benefits business has been refocused and separated from the
Sanlam Individual Life business, and a new leadership team is in place. The
business relocated to our Johannesburg office to establish a sound operating
base from which to drive new growth and stem the loss of market share.
Our co-operation agreement with Absa continues to develop steadily at all
levels, evidenced by improved mutual support of products and services, and the
early success of Sanlam Home Loans.
Looking ahead
For the most part, the recovery phase of our turnaround strategy is now
complete. The extensive cost-cutting and restructuring undertaken has
positioned the Group to deliver against the challenges facing the industry,
and Sanlam in particular.
Looking ahead, we will continue to concentrate on finding the most effective
ways to unlock and return value to shareholders, while investing in those
areas with the greatest potential to deliver sustainable profitable growth. In
particular, we will focus on further improving distribution reach, redeploying
the Group's "lazy" capital and establishing the new Sanlam brand.
We will continue to work closely with Absa to broaden our existing product
offering, explore cross-selling opportunities and drive a greater share of
Absa Brokers' volumes.
We will continue to give substance to our truly South African positioning,
across all the dimensions of black economic empowerment. The integration of
the Ubuntu-Botho consortium into the working life of the Group will continue
steadily, informed by the need to convert potential into new business inflows.
Our investment in the development of our people and our operating systems will
be a feature of the year ahead, as will our investment in positive socio-
economic progress on a wide front.
Capital efficiency is a major focus point. We are committed to optimising
Sanlam's capital base to ensure sufficient financial strength and the
efficient use of capital. Sanlam's capital utilisation strategy will primarily
focus on investing in profitable structural growth opportunities that will
support and complement the Group's strategy. Any excess capital will be
returned to shareholders through the most efficient combination of capital
distribution and share buy-backs. The monetisation of a portion of Sanlam's
stake in Absa will lower capital concentration risk and is essential to
effectively execute the capital strategy. The Barclays transaction, if
concluded, will accelerate the implementation of this strategy.
Our strategy and its execution has delivered good results in 2004 which have
been enhanced by strong equity markets and the exceptionally favourable
underwriting cycle that supported the Santam results. Sanlam is set to deliver
shareholder value through its distribution initiatives and operational and
capital efficiencies. The immediate challenge is to leverage our improved
positioning into increased new business inflows and market share gains.
DIVIDEND
Sanlam's philosophy to date has been to maintain a smoothed dividend growth
pattern. This implies that the dividend will not necessarily follow the annual
earnings pattern. The sound earnings performance and Sanlam's strong capital
position enabled the lifting of the overall level of the dividend in respect
of 2004. The intention is to revert to a smoothed real dividend growth pattern
from this new base.
The Board declared a dividend of 50 cents per share payable on Wednesday, 18
May 2005 to shareholders recorded in the register on Friday, 22 April 2005.
This represents an increase of 25% over the 40 cents per share dividend
declared in respect of 2003.
To allow for the dividend calculation, Sanlam's share register (including
Sanlam's two nominee companies namely Sanlam Share Account (Pty) Ltd and
Sanlam Fundshares Nominee (Pty) Ltd) will be closed for all transfers, off
market transactions and dematerialisations or rematerialisations from Monday,
11 April 2005 to Friday, 22 April 2005, both dates included.
The last date of trade to qualify for this dividend will be Friday, 15 April
2005 and shares will trade ex div from Monday, 18 April 2005.
Roy Andersen Johan van Zyl
Chairman Group Chief Executive
Sanlam Limited
Cape Town
2 March 2005
COMMENTS ON THE ANNUAL RESULTS TO DECEMBER 2004
Earnings
Summarised income statement for the year ended 31 December 2004
R million 2004 2 003
Net result from operations 1 968 1 402 40%
Equity-accounted earnings 969 781 24%
Net investment income 403 458 -12%
CORE EARNINGS 3 340 2 641 26%
Financial assistance to policyholder - (290)
funds
Net loss on derivatives (155) -
HEADLINE EARNINGS 3 185 2 351 35%
Net realised investment surpluses 700 134
Discontinuance expenses (18) (77)
Impairment of investments and goodwill (256) (248)
Amortisation of goodwill (328) (277)
Attributable earnings 3 283 1 883 74%
Net result from operations 1 968 1 402 40%
LTRR investment return 2 173 1 889 15%
LTRR EARNINGS 4 141 3 291 26%
Headline earnings of R3 185 million for the year are up 35% on 2003. Core
earnings of R3 340 million, are up by 26%. This excludes the once-off or
abnormal effect of financial assistance provided to the policyholder funds in
2003 and the impact of derivative instruments held in the shareholders'
capital portfolio. Growth in diluted headline and core earnings per share is
lower at 31% and 22% respectively. This is largely due to the dilution effect
of the new Sanlam shares issued to Ubunto-Botho Investments as part of the
black empowerment transaction completed earlier in 2004.
The exceptional growth in earnings is largely the result of strong growth in
operating income from all major Group operations, with gross operating income
improving by 46% on 2003. Santam delivered another outstanding performance,
which was complemented by sterling performances from Sanlam Individual Life,
the Investment cluster, Sanlam Financial Services (UK) and Sanlam Capital
Markets. After accounting for taxation and the Santam minorities' share of
income, net operating income is up 40% on 2003.
Net dividend, rental and interest earned on the shareholders' discretionary
portfolio were down 12% on 2003. The reduction is partly due to lower
prevailing interest rates. In terms of current accounting standards and
Sanlam's election during the implementation of AC133, any changes in the
market value of these investments are excluded from headline earnings. Equity-
accounted income rose by 24% to R969 million and reflects Absa's good
operating performance over the period. Equity-accounted income largely
represents the Sanlam shareholder funds' proportionate share of Absa's
earnings for the twelve months to 30 September 2004.
The funding levels of all policyholder funds have improved to such an extent
that no additional financial support was required in 2004 (2003: R290
million). The net fair value adjustment of the hedges in place against adverse
market movements in respect of Sanlam shareholder funds' discretionary
investment portfolio at 31 December 2004 amounted to a loss of R155 million -
reflecting the strong growth in equity markets towards the end of 2004. The
value adjustment required in respect of hedging structures in place in 2003
was minimal and was not disclosed separately in the 2003 results.
Attributable earnings increased by 74% to R3 283 million. This represents
total earnings for the period, apart from unrealised investment surpluses that
are taken directly to equity in terms of Sanlam's accounting policies.
Attributable earnings are stated net of the aggregate net realised investment
surplus of R700 million, expenditure of R18 million in finalising the
termination of certain Gensec Bank operations, amortised goodwill and an
impairment of the investment in the Safair Lease Finance (`SLF') joint
venture. SLF is included in the discontinuing operations of Gensec Bank and
has a substantial foreign currency exposure. The strong appreciation of the
rand and a comprehensive review of the expected cash flows and residual values
over the lease periods required a review of the carrying value of the
investment. Based on the latest valuation, an impairment of R210 million was
deemed prudent.
Earnings based on a long-term rate of investment return of 11% pre-tax per
annum (2003: 12%) increased by 26% from R3 291 million in 2003 to R4 141
million.
The withdrawal of AC121 (Disclosure in the financial statements of long-term
insurers) and the compulsory full implementation of International Financial
Reporting Standards in 2005, will require a review of the Group's accounting
policies, which will include a review of the designation of investments and
the accounting treatment of derivatives.
Impact of the Ubuntu-Botho transaction
Following the approval by shareholders in April 2004, Ubuntu-Botho Investments
(Proprietary) Limited (`Ubuntu-Botho'), a black empowerment consortium led by
Patrice Motsepe, acquired an initial 8% of Sanlam's ordinary share capital and
became one of the largest beneficial shareholders in Sanlam.
The net increase in Sanlam's issued shares due to the transaction, and to a
lesser extent other treasury share activity, resulted in a dilution of
approximately 5% in the return on embedded value per share for 2004. The
calculated weighted average number of Sanlam shares in issue includes 5,8
million (3 million weighted) of the Sanlam `A' deferred shares issued to
Ubuntu-Botho, which in terms of the relevant value added formula, qualified
for conversion into ordinary shares based on Sanlam's business flows for the
year. The right to convert is determined and vests on the finalisation of each
full year's audited results.
The transfer of 56,5 million Sanlam treasury shares to the Sanlam Ubuntu-Botho
Community Development Trust to establish its 20% holding in Ubuntu-Botho, is
accounted for as a disposal of treasury shares for no consideration in terms
of Generally Accepted Accounting Practice. This does not impact on the income
statement. The financial effects of the transaction as set out in the circular
to shareholders on the transaction, provided for the possible write down of
the carrying value of these shares (R303 million pro forma) in the income
statement.
Business volumes
New Business Volumes for the year ended 31 December 2004
R million 2004 2003
Individual Life single 7 259 6 062 20%
Individual Life recurring 1 448 1 504 -4%
Group business 2 493 2 446 2%
Life business 11 200 10 012 12%
Investment cluster 27 637 15 021 84%
Innofin 6 068 5 103 19%
SFS UK 5 950 1 500
Namibia Unit Trust 1 278 395
Investment business 40 933 22 019 86%
Short-term insurance 7 719 6 755 14%
TOTAL 59 852 38 786 54%
New business flows
Overall new business inflows for the Group improved by 54% to R59,9 billion.
This is the combined result of an 86% improvement in gross investment related
inflows and satisfactory growth overall in new Life business flows and short-
term insurance premiums.
The Investment cluster performed exceptionally well by attracting new
investment flows of R27,6 billion. New wholesale third party investment
mandates for the year amounted to R8,7 billion, compared with R5 billion in
2003 and only R0,4 billion in 2002. Net new mandates totalled R3 billion (R0,3
billion in 2003). Sanlam Collective Investments achieved R11 billion in new
inflows, 40% more than in 2003. Sanlam Multi Manager and Sanlam Private
Investments both received over R3 billion in new inflows, which is three times
that achieved in 2003. New business inflows of Sanlam Financial Services in
the United Kingdom amounted to R6 billion. The actuarial consulting business,
PSolve, contributed 80% of new business flows.
The 12% growth in Life insurance new inflows is encouraging after the
disappointing inflows in 2003. Individual single premiums, which constitute
approximately 65% of new Life inflows, are up by 20% on 2003. This is largely
due to a R600 million maiden contribution from Merchant Investors Assurance
and 26% growth in Investment linked life annuities sold by Innofin. New
Individual recurring business is down 4%, while new Group Life business is 2%
up on 2003. The overall Life Annual Premium Equivalent (`APE') of R1 958
million is 7% up on 2003.
Short-term insurance premiums, net of reinsurance, increased by 14% on 2003.
The growth in premiums is the combined impact of a 2% improvement in gross new
premiums written and the optimisation of Santam's level of reinsurance.
Net funds inflow
Net funds inflow exceeded R16 billion, a significant improvement on the R5
billion achieved for the 2003 financial year. The bulk of the net flows came
from investment flows, with strong net inflows achieved by Innofin and all the
major businesses in the Investment cluster, as well as from Sanlam Financial
Services (`SFS') in the UK. The net outflow of Sanlam Individual Life funds of
recent years has been curbed and a net inflow was recorded for the year. The
continuing net loss of Group Life business remains a concern and is receiving
high priority.
New business embedded value
A combination of cost savings in the Life cluster, higher new business inflows
and a 1,1% reduction in the risk discount rate, contributed to a 40% increase
to R324 million in the embedded value of new life business written during the
year. The profitability of the new life business, as measured by the ratio of
the embedded value of the new business to the Annual Premium Equivalent,
improved from 12.7% in 2003 to 16.5%. This margin is at the high end of what
we regard as sustainable in the current industry environment.
Result from operations
Result from operations for the year ended 31 December 2004
R million 2004 2003
Life Insurance cluster 1 768 1 467 21%
Individual Life 1 580 1 285 23%
Employee Benefits 188 182 3%
Short-term insurance 1 369 735 86%
Investment cluster 431 270 60%
Sanlam Capital Markets 90 55 64%
Independent Financial Services 50 (1)
Corporate income 75 73 3%
Corporate expenses (186) (120) -55%
Continuing operations 3 597 2 479 45%
Discontinued operations (77) (74)
Gross result from operations 3 520 2 405 46%
The result from operations increased by 46% to R3 520 million. Solid
performances were delivered by all businesses, with an exceptional
contribution from Santam.
The Sanlam Individual Life operating profit of R1 580 million is 23% up on
2003. These results include a first contribution (R61 million) from Merchant
Investors Assurance (`MIA'). Except for the MIA contribution, the improved
performance is largely attributable to a lower cost base and the resulting
rise in administration income. The growth was tempered by a decrease in
interest earned on working capital due to lower interest rates. Before
interest earned, operating profit rose by 52% on 2003.
Sanlam Employee Benefits profit increased by 3% on 2003 to R188 million due to
improved underwriting profit benefiting from favourable claims experience.
Exceptional underwriting performance in property, motor and personal lines
contributed to Santam's underwriting surplus of R1 166 million. Operating
profit of R1 369 million 17,7% of net premiums earned), which also includes
the interest earned on the free float, is 86% higher than 2003.
The Investment cluster operating result of R431 million is 60% up on 2003. All
operations in the Cluster performed well. Fees received by Sanlam Properties
from the Vukile listing and incentive fees earned on the outperformance of
benchmarks by the wholesale investment manager contributed to the strong
results. International operations contributed R77 million from a very low 2003
base.
Sanlam Capital Markets achieved an annual operating profit of R90 million in
line with target and an after tax return on capital of 21% for 2004.
Independent Financial Services recorded a major improvement on 2003, largely
due to an improved performance by the actuarial consulting business (within
SFS) operating in the UK.
Other income is 3% up on 2003; the relatively low increase is due to shrinking
margins on the preference share portfolio. The substantial increase in
corporate expenses can mostly be attributed to the Corporate Social Investment
spend that has been transferred to a centralised budget from 2004 and a once-
off provision for a special Group branding campaign.
Discontinuing operations consist of the remaining Gensec assets and related
liabilities that do not match the profile and criteria set for the ongoing SCM
operations. Following the official return of the Gensec banking license on 21
June 2004, the assets constituting discontinuing operations are from 1 July
2004 part of Sanlam's capital portfolio and their results are being reported
as part of investment return. Discontinued expenditure reflected in operating
profit for the period to June 2004 includes the final provision in respect of
the settlement of the Fieldstone court case and a prudent adjustment to the
valuation of certain debt instruments.
Solvency
At 31 December 2004 the statutory capital requirement (`CAR') of the Life
business amounted to R6,6 billion. Capital allocated to Sanlam Life and
qualifying for regulatory capital purposes amounted to R23,9 billion, which
covered the capital requirement 3,7 times (2,6 times at the end of 2003). The
improved cover can be attributed to improved equity markets and the active
management of the shareholders' funds.
Embedded value
At 31 December 2004 Sanlam's embedded value amounted to R36,7 billion or 1 346
cents per share. This represents an increase of 25% on the R29,2 billion at
the end of December 2003. Taking into account the dividend paid in respect of
the 2003 financial year of R1,1 billion, the R0,8 billion capital raised by
issuing new shares to Ubuntu-Botho, and R0,4 billion utilised to buy back 39,1
million Sanlam shares during the period, the return on embedded value to the
end of 2004 amounted to 27,7%. The growth per share is lower at 22,5%
essentially due to the dilution effect of the new shares issued as part of the
Ubuntu-Botho transaction.
The value of Sanlam Life's in-force book (`VIF') at the end of December 2004
amounted to R8,7 billion, after taking into account the cost of capital at
risk of R1,4 billion. Growth from life insurance business, based on the
starting value of VIF, amounted to 26,9% compared with growth of 24,7% in
2003. The improvement is largely the result of a 40% increase to R324 million
in the embedded value of new business written and positive investment
variances.
GROUP BALANCE SHEET at 31 December 2004
2004 2003
R million R million
ASSETS
Property and equipment 184 220
Owner-occupied properties 380 390
Goodwill 1 865 1 855
Investments 191 913 156 622
Deferred tax 342 257
Short-term insurance technical assets 1 980 2 302
Working capital assets 31 360 34 410
Trade and other receivables 20 211 22 602
Cash, deposits and similar securities 11 149 11 808
Total assets 228 024 196 056
EQUITY AND LIABILITIES
Shareholders' funds 27 642 21 687
Minority shareholders' interest 2 796 1 931
Long-term policy liabilities 162 226 134 079
Insurance contracts 107 889 94 556
Investment contracts 54 337 39 523
Term finance 4 791 4 200
Deferred tax 1 678 651
Short-term insurance technical provisions 5 198 5 156
Working capital liabilities 23 693 28 352
Total equity and liabilities 228 024 196 056
Segregated funds not included in the above 121 678 83 181
balance sheet
Total assets under management and 349 702 279 237
administration
GROUP INCOME STATEMENT for the year ended 31 December 2004
2004 2003
Note R million R million
FUNDS RECEIVED FROM CLIENTS 1 70 731 48 883
Result from operations before tax 4 3 520 2 405
Tax on result from operations 5 (1 032) (724)
Result from operations after tax 2 488 1 681
Minority shareholders' interest (520) (279)
NET RESULT FROM OPERATIONS 1 968 1 402
Net investment income 403 458
Investment income 6 648 699
Tax on investment income 5 (102) (131)
Minority shareholders' interest (143) (110)
Net equity-accounted earnings 969 781
Equity-accounted earnings 1 298 1 025
Tax on equity-accounted earnings 5 (329) (244)
CORE EARNINGS 3 340 2 641
Financial assistance provided to - (290)
policyholders' funds
Net investment surpluses on derivative (155) -
instruments
Investment surpluses on derivative (218) -
instruments
Tax on investment surpluses on 5 48 -
derivative instruments
Minority shareholders' interest 15 -
HEADLINE EARNINGS 3 185 2 351
Net realised investment surpluses 700 134
Realised investment surpluses 779 215
Tax on realised investment surpluses 5 1 (56)
Minority shareholders' interest (80) (25)
Net discontinuance costs (18) (77)
Discontinuance costs (20) (108)
Tax on discontinuance costs 5 2 31
Impairment of investments and goodwill (256) (248)
Amortisation of goodwill (328) (277)
ATTRIBUTABLE EARNINGS 3 283 1 883
Diluted earnings per share (cents):
Net result from operations 72,1 53,2
Core earnings 122,3 100,2
Headline earnings 116,6 89,2
Attributable earnings 120,2 71,5
Basic attributable earnings per share 121,7 72,1
Adjusted weighted average number of 8 2 731,3 2 634,5
shares for diluted earnings per share
(million)
ADJUSTED HEADLINE EARNINGS based on 4 141 3 291
the long-term rate of return (LTRR) (R
million)
Adjusted headline earnings based on 151,6 124,9
the LTRR (cents per share)
GROUP STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2004
2004 2003
R million R million
Shareholders' funds at beginning of 21 687 20 651
year
Attributable earnings 3 283 1 883
Dividends paid (1 082) (972)
Net unrealised investment surpluses 3 588 693
(1)
Unrealised investment surpluses 4 718 1 047
Tax on unrealised investment surpluses (865) (289)
Minority shareholders' interest (265) (65)
Movement in foreign currency (157) (211)
translation reserve
Cost of treasury shares acquired (2) (83) (344)
Cost of treasury shares donated to the (314) -
Sanlam Ubuntu-Botho Community
Development Trust
Net realised investment surplus on (126) -
other treasury shares
New shares issued (3) 865 -
Cost relating to share issuance (19) -
Adoption of AC133 - (13)
Shareholders' funds at end of year 27 642 21 687
(1) Upon the introduction of AC133, investments were classified as available-
for-sale and Sanlam elected to take unrealised investment surpluses directly
to equity.
(2) Comprises movement in cost of shares held by subsidiaries and the share
incentive trust.
(3) Comprises 113 million new ordinary shares at R7,65 per share, 56,5 million
`A' deferred shares at R0,01 per share and 52 million `A' preference shares at
R0,01 per share.
CASH FLOW STATEMENT
for the year ended 31 December 2004
2004 2003
R million R million
Net cash inflow from operating 1 124 1 329
activities before dividends paid
Dividends paid (1 062) (951)
Net cash (outflow)/inflow from (1 331) 129
investment activities
Net cash inflow/(outflow) from 453 (1 463)
financing activities
Net decrease in cash and cash (816) (956)
equivalents
Cash, deposits and similar securities 11 769 12 725
at beginning of year
Cash, deposits and similar securities 10 953 11 769
at end of year
ABRIDGED SHAREHOLDERS' FUNDS BALANCE SHEET - NET ASSET VALUE (All
businesses consolidated at NAV)
at 31 December 2004
2004 2003
R million R million
Assets
Goodwill 1 865 1 855
Investments 32 565 26 010
Working capital and other assets 30 091 33 249
Total assets 64 521 61 114
Equity and liabilities
Shareholders' funds 27 642 21 687
Minority shareholders' interest 2 971 2 217
Term finance, working capital and 33 908 37 210
other liabilities
Total equity and liabilities 64 521 61 114
ABRIDGED SHAREHOLDERS' FUNDS BALANCE SHEET - FAIR VALUE (Group businesses
listed below not consolidated, but reflected as investments at fair value)
at 31 December 2004
2004 2003
Note R million R million
Assets
Property and equipment 106 113
Owner-occupied properties 370 370
Goodwill 351 -
Investments
Sanlam businesses 7 7 785 6 237
Investment Management (2) 2 384 1 904
Sanlam Financial Services 349 378
Sanlam Capital Markets (3) 483 1 001
Gensec Properties 12 52
Innofin (4) 187 214
Santam 4 028 2 688
Other (5) 342 -
Associated company - Absa 9 429 5 181
Joint venture - Safair Lease Finance 140 -
(6)
Other investments
Other equities 7 441 6 670
Public sector stocks and loans 1 550 1 916
Investment properties 619 607
Other interest-bearing investments 7 809 6 033
Deferred tax 233 3
Working capital assets 6 932 5 296
Total assets 42 765 32 426
Equity and liabilities
Shareholders' funds 29 982 22 819
Minority shareholders' interest 63 -
Term finance 5 064 4 501
Deferred tax 1 143 298
Working capital liabilities 6 513 4 808
Total equity and liabilities 42 765 32 426
Net asset value per share (cents) 1 100 883
(1) The goodwill relates to the consolidation of Merchant Investors Assurance
and is excluded in the build-up of the Group embedded value, as the current
value of in-force business for this life insurance company is included in the
embedded value.
(2) Included in Investment Management are Sanlam Investment Management, Sanlam
Collective Investments, Tasc (for 2003) and the Investment Cluster's
international businesses.
(3) The comparative figures for December 2003 refer to Gensec Bank (including
the discontinued operations). The December 2004 figure includes only the
activities of Sanlam Capital Markets.
(4) The value of Innofin on 31 December 2004 excludes the value of the Illa
business, as this is included in the calculation of the Group value of in-
force business. On 31 December 2003, the value of the Illa business was still
included in the value of Innofin as disclosed above.
(5) Other businesses comprise Direct Axis, Sanlam Home Loans, Multi-Data and
Sanlam Trust, which were consolidated at underlying net asset value in 2003
and Break-Thru Financial Services, Bull and Bear Financial Services, Simeka
Employee Benefits, Green Capital and Octogen. Octogen is included at original
cost in the 2003 comparative figures, within other equities.
(6) The Safair Lease Finance joint venture was previously included in the
value of Gensec Bank, but as it is part of the discontinued operations, it is
excluded from the value of Sanlam Capital Markets.
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2004
2004 2003
R million R million
1.FUNDS RECEIVED FROM CLIENTS
LIFE INSURANCE 11 200 10 012
INVESTMENTS 40 933 22 019
SHORT-TERM INSURANCE 7 719 6 755
Total new business 59 852 38 786
PREMIUMS ON EXISTING BUSINESS 10 879 10 097
Total funds received from clients 70 731 48 883
2.PAYMENTS TO CLIENTS
LIFE INSURANCE 25 517 25 136
INVESTMENTS 24 226 14 416
SHORT-TERM INSURANCE 4 397 4 375
Total payments to clients 54 140 43 927
3.NET FLOW OF FUNDS
LIFE INSURANCE (3 438) (5 027)
Investments 16 707 7 603
Short-term insurance 3 322 2 380
Total net inflow of funds 16 591 4 956
4.ANALYSIS OF RESULT FROM OPERATIONS
Per business cluster
Life insurance 1 768 1 467
Short-term insurance 1 369 735
Investment management 431 270
Sanlam Capital Markets 90 55
Independent Financial Services 50 (1)
Corporate income 75 73
Corporate costs (186) (120)
Result from continuing operations 3 597 2 479
Discontinuing operations (77) (74)
Result from operations before tax 3 520 2 405
NOTES (continued)
2004 2003
R million R million
ANALYSIS OF RESULT FROM OPERATIONS
(continued)
Functional analysis
Financial services income 17 079 15 970
Sales remuneration (1 961) (1 892)
Income after sales remuneration 15 118 14 078
Underwriting policy benefits (6 965) (6 877)
Administration costs (4 633) (4 796)
Result from operations before tax 3 520 2 405
5.TAXATION
Result from operations 1 032 724
Current year 1 018 714
Prior year (4) 9
Equity-accounted earnings included in 18 1
result from operations
Investment income - current year 102 131
Equity-accounted earnings 329 244
Tax on derivatives (48) -
Realised investment surpluses (1) 56
Taxation on discontinuance costs (2) (31)
Income tax charged to income statement 1 412 1 124
Tax on unrealised investment surpluses 865 289
(taken to equity)
Investment surpluses - normal 128 -
Investment surpluses - capital gains tax 110 145
Investment surplus on investment in 627
associated company - capital gains tax 144
Total income tax 2 277 1 413
6. INVESTMENT INCOME
Interest-bearing investments 370 326
Equities 323 312
Properties 32 61
Other (77) -
Total investment income 648 699
NOTES (continued)
2004 2003
R million R million
7.SANLAM BUSINESSES: EXCESS OF FAIR VALUE OVER NET ASSET VALUE
The shareholders' funds balance sheet at fair value include the value of the
companies below based on directors' valuation, apart from Santam, which is
valued according to ruling share prices.
Net asset value of businesses 4 116 3 772
Investment Management (1) 504 368
Sanlam Financial Services UK 288 402
Sanlam Capital Markets 483 1 001
Gensec Properties 5 28
Innofin 146 152
Santam 2 662 1 821
Other (2) 28 -
Goodwill recognised in respect of above 1 027 1 198
businesses
Deferred capital gains tax on investments 302 135
at fair value
Revaluation adjustment of interest in 2 340 1 132
businesses to fair value
Fair value of businesses 7 785 6 237
8.NUMBER OF SHARES FOR CENTS PER SHARE
CALCULATIONS
million million
Earnings per share
Number of ordinary shares in issue at 2 654,6 2 654,6
beginning of period
Add: Weighted number of shares issued 84,8 -
Less: Weighted Sanlam shares held by (41,1) (44,1)
subsidiaries
Adjusted weighted average number of shares 2 698,3 2 610,5
for basic earnings per share
Add: Conversion of deferred shares 3,0 -
Add: Total number of shares under option 132,1 157,8
Less: Number of shares (under option) that (102,1) (133,8)
would have been issued at fair value
Adjusted weighted average number of shares 2 731,3 2 634,5
for diluted earnings per share
Value per share
Number of ordinary shares in issue 2 767,6 2 654,6
Shares held by subsidiaries (47,5) (69,4)
Convertible deferred shares held by Ubuntu- 5,8 -
Botho
Adjusted number of shares for value per 2 725,9 2 585,2
share
(1) Included in Investment Management are Sanlam Investment Management,
Sanlam Collective Investments, Tasc (for 2003) and the Investment Cluster's
international businesses
(2) Included in Other businesses are Direct Axis, Sanlam Home Loans, Multi-
Data, Sanlam Trust, Break-Thru Financial Services, Bull and Bear Financial
Services, Simeka Employee Benefits, Green Capital and Octogen.
ACCOUNTING POLICIES AND ACTUARIAL BASIS
The accounting policies adopted for the purposes of the financial statements
comply with South African Statements of Generally Accepted Accounting Practice
and with applicable legislation. Except for the change in accounting policy
relating to goodwill, as detailed below, these accounting policies are
consistent with those of the previous year.
The policy liabilities and profit entitlement rules are determined in
accordance with prevailing legislation, Generally Accepted Accounting
Practice, including accepted actuarial practice, and the stipulations
contained in the demutualisation proposal. There were no material changes in
the financial soundness valuation basis or embedded value calculation
methodology since 31 December 2003, except for the deduction of the fair value
of the outstanding employee share incentive options.
CHANGES IN REPORTING STRUCTURES AND ACCOUNTING POLICIES
The results of Innofin have been transferred from the Investment Cluster to
the Life Insurance cluster. Results from operations of prior periods have
been restated accordingly and for December 2003, R22 million of profit is
transferred from the Investment cluster to the Life Insurance cluster. The
embedded value calculation now also includes the value of in-force life
insurance business written by Innofin on Sanlam Life's license. The non-
insurance business is still valued on a fair value approach.
As the regulatory requirements for Sanlam's acquisition of Merchant Investors
Assurance (MIA) were only satisfied late in December 2003 the results of the
company were not consolidated into the Sanlam group for the 2003 annual
report. The full investment was included at the cost of R383 million in equity
investments. MIA is consolidated from 2004 and its net asset value as at
acquisition date is included in the consolidated 2004 results with an
accompanying adjustment to goodwill. In the embedded value calculation the
goodwill is reversed and replaced by the value of MIA's in-force business.
Following the restructuring of the Group's international advisory and asset
management businesses, Sanlam has, with effect from 1 July 2003, reduced its
holding in the advisory and related businesses (Sanlam Financial Services UK)
to 60%. Sanlam's Investment Cluster regained a 100% holding in the asset and
multi-manager components. The results of the investment manager are included
with the Investment cluster for the 2004 year. For 2003 the results are
included in the Independent Financial Services Cluster for the first six
months and in the Investment Cluster for the second half of the year.
The presentation of deferred tax in respect of the policyholder funds has been
amended in line with a directive issued by the Financial Services Board. In
terms of the directive deferred tax assets and liabilities should be
recognised and separately disclosed for all temporary differences of the
policyholder funds. This deferred tax was previously included in and
disclosed as part of long-term policy liabilities. Comparative figures have
been restated to transfer the applicable deferred tax balances from long-term
policy liabilities to a deferred tax liability.
The accounting policy for goodwill has been amended as required by IFRS 3
(AC140). Goodwill in respect of business combinations with an agreement date
on or after 31 March 2004 are not amortised, but reflected at original cost
less provisions for impairment. In terms of the transitional provisions of
IFRS 3 (AC140), the accounting policy for business combinations with an
agreement date before 31 March 2004 remains unchanged for the 2004 financial
year.
The migration to new International Financial Reporting Standards (`IFRS') for
insurers will, in its full extent, last a number of years. IFRS 4, the
standard for the first phase of IFRS on insurance contracts, was only recently
issued with an effective date of 1 January 2005. Future results may be
impacted, as the development of guidance for the long-term insurance industry,
both from an accounting and actuarial perspective, is an ongoing process.
As was the case in the 2003 results, the Gensec result from operations is
split between continuing (Sanlam Capital Markets) and discontinuing
operations. The results of all the operations are included in headline
earnings and only the expenses directly attributable to termination of
operations are excluded from headline earnings.
In the 2003 year-end results the Group introduced the concept of core
earnings. Core earnings comprise the Group's results from operations, equity-
accounted income and investment income, and as such it represents the headline
earnings previously published for June 2003. To maintain comparability we will
continue to report core earnings in 2004. Due to the distorted result achieved
by including the value adjustment of derivatives in headline earnings, whilst
the value adjustment of the underlying hedged portfolio of shares is taken
directly to equity, this amount has also been excluded from core earnings.
AUDITED RESULTS
A copy of the unqualified audit opinion of the joint auditors, Ernst & Young
and PricewaterhouseCoopers Inc, on the group results is available for
inspection at the registered office of the company.
ADJUSTED HEADLINE EARNINGS - LTRR
2004 2003
R million R million
THE LTRR INVESTMENT RETURN IS
DETERMINED BY APPLYING THE LONG-TERM
EXPECTED RETURN OF 11% (2003: 12%) TO
THE AVERAGE MONTHLY SHAREHOLDERS' FUND
INVESTMENTS
Adjusted headline earnings - long-term
rate of return (LTRR)
Net result from operations 1 968 1 402
LTRR investment return 2 173 1 889
Net equity-accounted earnings 969 781
Investment return after taxation 1 204 1 108
Adjusted headline earnings - LTRR 4 141 3 291
Reconciliation of headline earnings
and LTRR headline earnings
Headline earnings per income statement 3 185 2 351
Net realised investment surpluses per 700 134
income statement
Net unrealised investment surpluses 3 588 693
taken directly to equity
Net LTRR adjustment (3 332) 113
Adjusted headline earnings - LTRR 4 141 3 291
Analysis of net LTRR adjustment
Investment return (4 224) (61)
Equities (750) 168
Surplus on investment in associated (3 505) (676)
company
Interest-bearing investments 47 461
Properties (16) (14)
Tax 618 163
Minority shareholders' interest 274 11
Net LTRR adjustment (3 332) 113
ASSETS SUBJECT TO LTRR
Investments per shareholders' funds 32 565 26 010
balance sheet at net asset value
Less: Investment in associated (9 763) (5 391)
companies
Investment in joint ventures (165) (309)
Investments held in respect of term (3 809) (4 454)
finance
Investments held in respect of capital (62) (1 568)
market activity
Investments from discontinued (905) -
operations, matched by liabilities
Other (168) (289)
LTRR investments 17 693 13 999
EMBEDDED VALUE
for the year ended 31 December 2004
2004 2003
R million R million
EMBEDDED VALUE
Sanlam group shareholders' funds at 29 982 22 819
fair value
Adjustment for discounting capital 138 91
gains tax (1)
Adjustment to include business under (321) (449)
value of in-force (2)
Present value of strategic corporate (883) (592)
expenses (3)
Fair value of share incentive scheme (799) (431)
(4)
STC deferred tax asset written down (100) -
(5)
Sanlam group shareholders' adjusted 28 017 21 438
net assets
Net value of life insurance business 8 697 7 793
in-force
Value of life insurance business in- 10 097 9 143
force
Individual business 8 959 7 884
Employee benefits 1 138 1 259
Cost of capital at risk (1 400) (1 350)
Individual business (1 128) (936)
Employee benefits (272) (414)
Minorities interest in value of in- (32) -
force
Sanlam group embedded value 36 682 29 231
Embedded value per share (cents) (6) 1 346 1 131
Number of shares (million)(6) 2 726 2 585
EMBEDDED VALUE EARNINGS
Embedded value from new life insurance 324 218
business (7)
Earnings from existing life insurance 1 358 1 404
business
Expected return 1 145 1 153
Operating experience variations (8) 142 241
Operating assumption changes (8) 71 10
Embedded value earnings from life 1 682 1 622
operations
Economic assumption changes 197 99
Tax changes - (6)
Investment variances (9) 253 (50)
Exchange rate movements (37) -
Growth from life insurance business 2 095 1 665
Investment return on shareholders' 6 389 2 226
adjusted net assets
Change in minority interest in value (32) -
of in-force
Increase in fair value of share (368) (150)
incentive scheme (4)
Total embedded value earnings before
dividends are paid, capital raised and 8 084 3 741
cost of treasury shares acquired
Dividends paid (1 082) (972)
Capital raised 846 -
Cost of treasury shares acquired (397) (344)
Change in Sanlam group embedded value 7 451 2 425
EMBEDDED VALUE (continued)
2004 2003
R million R million
EMBEDDED VALUE EARNINGS (continued)
Growth from life insurance business as 26,9% 24,7%
a % of beginning value of in-force
Return on embedded value (6) 27,7% 14,0%
Return on embedded value per share (6) 22,5% 14,2%
NEW BUSINESS EMBEDDED VALUE
VALUE OF NEW BUSINESS 342 260
INDIVIDUAL BUSINESS - RSA 282 200
Employee benefits - RSA 46 57
International (10) 14 3
Cost of capital at risk (18) (28)
INDIVIDUAL BUSINESS - RSA (10) (17)
Employee benefits - RSA (5) (11)
International (10) (3) -
Net value of new business (7) 324 232
NET VALUE OF NEW BUSINESS AS A
PERCENTAGE OF THE ANNUAL PREMIUM
EQUIVALENT
Annual Premium Equivalent (APE) (11) 1 958 1 832
INDIVIDUAL BUSINESS - RSA 1 489 1 470
Employee benefits - RSA 356 343
International 113 19
Net value of new business 324 232
INDIVIDUAL BUSINESS - RSA 272 183
Employee benefits - RSA 41 46
International (10) 11 3
APE margin (8) 16,5% 12,7%
INDIVIDUAL BUSINESS - RSA 18,3% 12,4%
Employee benefits - RSA 11,5% 13,4%
International (10) 9,7% 15,8%
EMBEDDED VALUE (CONTINUED)
Gross Cost of Net value Change
value of capital of in- from base
in-force at risk force %
business R million business
R R million
million
SENSITIVITY
VALUE OF IN-FORCE BUSINESS LESS
COST OF CAPITAL
BASE VALUE 10 097 (1 400) 8 697
Increase risk discount rate by 9 481 (1 724) 7 757 (11%)
1,0% to 11,8%
Decrease risk discount rate by 10 773 (1 040) 9 733 12%
1,0% to 9,8%
Investment return (and 10 119 (1 341) 8 778 1%
inflation) decreased by 1,0%,
coupled with a 1,0% decrease in
risk discount rate to 9,8%, and
with bonus rates changing
commensurately
INVESTMENT RETURN (AND 9 284 (1 665) 7 619 (12%)
INFLATION) DECREASED BY 1,0%
AND WITH BONUS RATES CHANGING
COMMENSURATELY
Non-commission maintenance 9 798 (1 396) 8 402 (3%)
expenses (excluding investment
expenses) increase by 10%
Discontinuance rates increase 9 890 (1 347) 8 543 (2%)
by 10%
Mortality and morbidity 9 547 (1 384) 8 163 (6%)
increased by 10% for
assurances, coupled with a 10%
decrease in mortality for
annuities
Assets fall by 10% 9 259 (1 377) 7 882 (9%)
VALUE OF NEW BUSINESS
BASE VALUE 342 (18) 324
Increase risk discount rate by 305 (21) 284 (12%)
1,0% to 11,8%
Decrease risk discount rate by 383 (14) 369 14%
1,0% to 9,8%
Investment return (and 359 (18) 341 5%
inflation) decreased by 1,0%,
coupled with a 1,0% decrease in
risk discount rate to 9,8%, and
with bonus rates changing
commensurately
INVESTMENT RETURN (AND 322 (20) 302 (7%)
INFLATION) DECREASED BY 1,0%
AND WITH BONUS RATES CHANGING
COMMENSURATELY
Non-commission maintenance 319 (18) 301 (7%)
expenses (excluding investment
expenses) increase by 10%
Non-commission acquisition 296 (17) 279 (14%)
expenses increase by 10%
Discontinuance rates increase 321 (17) 304 (6%)
by 10%
Mortality and morbidity 292 (18) 274 (15%)
increased by 10% for
assurances, coupled with a 10%
decrease in mortality for
annuities
New business volumes decrease 271 (16) 255 (21%)
by 10%
METHODOLOGY
THE EMBEDDED VALUE METHODOLOGY APPLIED IS CONSISTENT WITH THE METHODOLOGY USED
IN THE 31 DECEMBER 2003 EMBEDDED VALUE REPORT. THERE ARE NO MATERIAL CHANGES
IN THE METHODOLOGY USED, EXCEPT FOR THE DEDUCTION OF THE FAIR VALUE OF THE
EMPLOYEE SHARE INCENTIVE SCHEME.
PRINCIPAL ASSUMPTIONS
2004 2003
% p.a. % p.a.
GROSS INVESTMENT RETURN AND INFLATION
(12)
FIXED-INTEREST SECURITIES 8,3 9,4
Equities and offshore investments 10,3 11,4
Hedged equities (13) 8,3 8,4
Property 9,3 10,4
Cash 6,3 7,4
Risk discount rate 10,8 11,9
Return on capital at risk (14) 9,1 10,0
Unit cost and salary inflation 4,3 5,4
Consumer price index inflation 3,3 3,9
Decrements, expenses and bonuses
Future mortality, morbidity and
