| Thu 9 Mar 2006, 8:06 | | Sanlam Group - Audited results for the year ended |
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SLM
SLM
Sanlam Group - Audited results for the year ended 31 December 2005
SANLAM GROUP
REGISTERED NAME: SANLAM LIMITED
JSE SHARE CODE: SLM
REGISTRATION NUMBER 1959/001562/06)
NSX SHARE CODE: SLA
ISIN number: ZAE000070660
Audited results for the year ended 31 December 2005
Contents
Overview
Key features
Salient results
Executive review
Comments on the results
Financial statements
Group balance sheet
Group income statement
Group statement of changes in equity
Group cash flow statement
Shareholders" fund information
Abridged shareholders" fund balance sheet - FV
Abridged shareholders" fund balance sheet - NAV
Reconciliation of earnings to segmental analysis
Notes to the financial statements
Adjusted headline earnings - LTRR
Accounting policies and actuarial basis
Adoption of IFRS
Transitional provisions
Changes in accounting policies
IFRS reconciliation of equity and earnings
Embedded value
Administration
Sanlam Group Results 2005
Key features
Earnings
Headline earnings per share up 99%
Core earnings per share up 25%
Business Flows
Total new business volumes up 23% to R73 billion
Investment inflows up 29% to R53 billion
Net fund inflows of R15 billion
Embedded Value
Embedded value per share 1 615 cents
Return on embedded value per share 24,4%
Embedded value of new life business R291 million
New business embedded value margin 13,5%
Dividend per share up 30% to 65 cents
Capital management
Disposal of shareholding in Absa realised some R10 billion
13% of issued shares successfully bought back for R4.4 billion
SALIENT FEATURES
for the year ended 31 December 2005 2005 2004
SANLAM LIMITED GROUP
Earnings:
Result from financial services R million 2 300 1 812 27%
after tax
Core earnings (1) R million 3 280 2 659 23%
Headline earnings (2) R million 5 813 2 963 96%
Net result from financial services cents 90,9 70,5 29%
per share
Core earnings per share (1) cents 129,7 103,4 25%
Headline earnings per share (2) cents 229,8 115,3 99%
Group administration cost ratio (3) % 29,1 31,4
Group operating margin (4) % 20,7 21,6
Dividend per share cents 65 50 30%
Business volumes:
New business volumes R million 73 481 59 852 23%
Net fund flows R million 15 168 16 591
Value of new business R million 291 321 -9%
Life insurance new business APE (5) R million 2 153 1 958 10%
Value of new business margin (6) % 13,5 16,4
EMBEDDED VALUE:
Embedded value R million 38 204 36 633 4%
Embedded value per share cents 1 615 1 344 20%
Growth from life business % 22,3 26,5
Return on embedded value per share % 24,4 22,6
(7)
SANLAM LIFE INSURANCE LIMITED
Shareholders" fund R million 27 314 26 308 4%
Capital adequacy requirements (CAR) R million 5 375 6 550 -18%
CAR covered by prudential capital times 3,9 3,6 8%
Notes
Core earnings = net result from financial services and net investment income
(including dividends received from associates).
Headline earnings = core earnings, net investment surpluses, secondary tax on
companies and equity-accounted headline earnings less dividends received from
associates.
Administration costs as a percentage of financial services income earned by the
shareholders" fund less sales remuneration.
Result from financial services as a percentage of financial services income
earned by the shareholders" fund less sales remuneration.
APE = annual premium equivalent and is equal to new recurring premiums
(excluding indexed growth premiums) plus 10% of single premiums.
Value of new business margin = value of new business as a percentage of life
insurance new business APE.
Growth in embedded value per share (with dividends paid, capital movements and
cost of treasury shares acquired reversed) as a percentage of embedded value per
share at the beginning of the period.
The above is extracted from segmental information, except for embedded value
results.
EXECUTIVE REVIEW
Overview
By any measure, South Africa had an epic year. A stable interest rate and a
strong rand, falling inflation figures and positive assessments of emerging
markets by international investors, saw the South African economy expand at a
rate of 5%, its fastest pace since 1984. At the same time, the rampant equity
bull market pushed the JSE all-share index to all-time highs, while the property
market continued to grow, albeit at a more subdued rate than that experienced
during the preceding few years.
The 2005 financial year was spent converting aspiration into reality.
Significant headway was made in terms of the implementation of our strategy
towards capital efficiency, realignment of core businesses and growth
initiatives.
Sanlam achieved strong overall results in 2005. Headline earnings improved by
99% to 229.8 cents per share while Core earnings per share are up 25% to 129.7
cents per share. Total new business fund inflows for the Group operations
amounted to R73.5 billion, an improvement of 23% on 2004. Net fund inflows of
R15.2 billion are only marginally down on the R16.6 billion recorded in 2004.
The embedded value of new life business written was some 9% lower at R291
million but was compensated for by the growth in value of new non-life business.
Delivering on strategy
The evolution of Sanlam into a balanced financial services enterprise took shape
during 2005.The disposal of Sanlam"s shareholding in ABSA realised some R10
billion, with the intention to redeploy some R7 billion deemed as being in
excess of the Group"s capital requirements. A successful share buy back
programme resulted in 13% of Sanlam"s shares in issue being acquired for R4.4
billion at an average price of R12.39 per share. Capital invested in support of
Sanlam"s growth strategy included the acquisition of shares in African Life
Assurance Company for some R2.6 billion, as well as a controlling interest in
Channel Life for R116 million. Together with Sanlam Group Solutions and our
strategic stake in Safrican, these operations will form the bedrock of Sanlam"s
entry-level life market strategy. The integration process is on track and we are
confident that our operational and return targets will be met.
In line with Sanlam"s aim to strengthen its distribution strategy into the
middle and upper market segments, Sanlam Personal Finance has had notable
success in improving its distribution resources while enhancing the demographic
profile of young and black advisers. A more tangible presence in Gauteng has
included setting up a separate adviser channel targeting the upper middle class,
while the affluent sector of our business continues to be successfully driven
through Innofin.
Sanlam"s move into health management commenced this year with the acquisition of
a majority interest in the Resolution Health Group, a provider of comprehensive
healthcare solutions. We have also strengthened offshore diversification with
the launch of Shriram Life Insurance, a joint venture between Sanlam and the
Shriram Group of India. While this represents a small investment, the Indian
insurance market holds promise of significant growth. We are confident that the
combination of Sanlam"s insurance skills and the Shriram Group"s strong track
record and its extensive distribution network will translate into a sound and
successful business.
Capital management
The directors and management of Sanlam continue to focus on ensuring an optimal
capital structure. The share buy-back programme approved by shareholders last
September was successfully completed, with a total of 359 million Sanlam shares
repurchased for a final consideration of R4.4 billion. The benefit of the buy-
back is evident in the improved return on embedded value and the dividend per
share.
The productive utilisation of capital is of paramount concern to the board, and
management will be focused on investing in profitable growth opportunities. At
the same time we will continue to evaluate share repurchases in the open market
on a selective basis.
Life industry developments
A number of high-profile rulings relating to the charge structures and
membership entitlements in respect of early terminations of retirement annuities
have fuelled negative public sentiment towards life products as an investment
medium. In an effort to reaffirm the value proposition of life products, the
life industry, through the Life Offices Association, and National Treasury have
broadly reached agreement on termination values to be met by insurers. Sanlam
has made a provision of R620 million (before tax) in the 2005 results for these
enhanced early termination benefits.
Dividend
The sound earnings performance in 2005 enabled the board to increase the total
dividend distribution by 30% on 2004. As a result of the reduction in the number
of shares in issue, the dividend per share increases by 15 cents to 65 cents per
share. The dividend is payable on Wednesday, 10 May 2006 to shareholders
recorded in the register on Friday, 28 April 2006.
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 Friday, 21 April
2006 to Friday, 28 April 2006, both dates included.
The last date of trade to qualify for this dividend will be Thursday, 20 April
2006 and shares will trade ex div from Friday, 21 April 2006.
Appointment of auditors
In the interest of improved efficiency and to eliminate cost duplication,the
Board reconsidered the joint audit appointment for Sanlam and the use of two
different audit firms in the various group companies. It was decided to
recommend to the Annual General Meeting that Ernst & Young be appointed as
auditors of Sanlam and all entities that are wholly-owned. We wish to thank
PriceWaterhouseCoopers for their professional and excellent service over many
years as auditors.
Looking forward
The growth curve of our economy provides a strong foundation for sustainable
growth across our business constituents. The challenges remain - as they have
since the advent of our young democracy - to achieve growth and transformational
development, underpinned by the provision of employment opportunities and
housing, the maintenance and development of our infrastructure and the
management of the HIV/Aids pandemic and the impact it is having on our business
and on our communities.
We have made substantial strides in reinventing the architecture of Sanlam"s
business and realising our vision of becoming the pre-eminent generator of
wealth in our markets. Our new, operationally robust Sanlam is positioned to
continue to deliver shareholder value through both investment and organic
growth. We will continue to focus on ensuring optimal capital management, and to
challenge ourselves and our competitors through the provision of innovative
products and services and entry to new and vital markets. Each of our business
clusters is moving in the right direction and we believe that we are set for
continued growth.
Market conditions, in particular the performance of the equity markets,
contribute substantially to Sanlam"s headline earnings and will impact in 2006
on our ability to repeat or improve on the 2005 earnings.
Roy Andersen
Chairman
Johan van Zyl
Group Chief Executive
Sanlam Limited
Cape Town
8 March 2006
Sponsor
JPMorgan Equities Limited
COMMENTS ON THE RESULTS
International Financial Reporting Standards
The audited Sanlam group results as presented for the 2005 financial year have
been prepared, for the first time, based on and in compliance with International
Financial Reporting Standards (IFRS). The 2004 results have been restated
accordingly. The global development and practical interpretation and application
of these accounting standards are however ongoing and certain interpretations
and disclosures adopted in these results may be subject to change in future
reports.
While we fully support the efforts of the accounting profession to achieve
consistency in reporting and to counter any misrepresentation of company
results, we are concerned that the current implementation of IFRS may not in all
instances reflect economic and contractual reality, the most notable example
being the prescribed IFRS valuation bases of investments in subsidiaries,
associated companies and own (Sanlam Limited) shares supporting policy
liabilities, which has introduced a substantial distortion in Sanlam"s reported
headline earnings. We will continue to interact with all role players to find a
more appropriate approach to these problem areas.
Earnings
Shareholders" fund summarised income statement for the year ended
31 December
R million 2005 2004
Net result from financial services 2 300 1 812 27%
Net investment income 980 847 16%
CORE EARNINGS 3 280 2 659 23%
Secondary Tax on Companies (STC) (88) 100
Equity-accounted headline earnings 478 720 -34%
Net investment surpluses 2 003 698 187%
Earnings before fund transfers and 5 673 4 177 36%
provisions
Financial claims (590) -
Fund transfers 730 (1
214)
HEADLINE EARNINGS 5 813 2 963 96%
Other equity-accounted earnings (8) -
Profit on disposal of associate and 5 125 58
subsidiaries
Impairment of investments and goodwill (3) (263)
Attributable earnings 10 927 2 758 296%
Net result from financial services 2 300 1 812
Net investment return 8 627 946
Attributable earnings 10 927 2 758
Net result from financial services after 2 212 1 912 16%
tax and STC
Financial claims (590)
LTRR investment return 2 453 2 158 14%
LTRR HEADLINE EARNINGS 4 075 4 070 1%
Headline earnings of R5 813 million for the year are up 96% on 2004 while Core
earnings of R3 280 million are up 23%. Growth in Headline and Core earnings, on
a per share basis, is marginally higher than the absolute increase at 99% and
25% respectively as earnings per share are based on the weighted average number
of shares in issue, which is marginally down on 2004. This is largely due to the
effect of the new Sanlam shares issued in 2004 to Ubunto-Botho Investments as
part of the black empowerment transaction, being offset by the impact of the
Sanlam shares bought back late in 2005.
Core earnings comprise the net operating result from providing financial
services as well as net investment income earned on the shareholders" fund. The
latter includes dividends received from associated companies, but Core earnings
exclude the equity-accounted retained earnings of associated companies that do
not form part of the Group operating structure and activities (e.g. the
investment in Absa prior to its disposal). Core earnings of R3 280 million are
23% up on 2004, the combined effect of a 27% growth in the net result from
providing financial services and a 16% increase in net investment income.
All major Group operations, with the exception of Santam, reported an increase
in net operating profit. A sterling performance by the businesses in the
Investment cluster in particular, including Sanlam Capital Markets, was somewhat
offset by the expected contraction of short-term underwriting margins
experienced by Santam. The gross result from operations improved by 11% on 2004.
After accounting for taxation and the Santam minorities" share of its lower net
income, net operating income increased by 27% on 2004. Notwithstanding the
reduction in underwriting results in 2005, the strong performance of the equity
markets enabled Santam to equal its 2004 headline earnings.
Net investment income consists of dividends and interest earned on the
shareholders" fund"s discretionary investment portfolio, as well as the margin
earned on a preference share portfolio. Investment income for the first six
months of 2005 was substantially up on 2004, in part due to the extraordinary
dividend of R249 million received on the realisation of the investment in Absa.
The sale of Absa and the capital reduction in the second half of the year,
however, caused a major reduction in the level of investment income and limited
the full-year increase on this line to 16%.
Result from financial services for the year ended 31 December
R million 2005 2004
Life insurance 1 729 1 493 16%
Sanlam Personal Finance 1 512 1 309 16%
Sanlam Employee Benefits 217 184 18%
Short-term insurance 1 016 1 361 -25%
Investment management 699 419 67%
Sanlam Capital Markets 151 86 76%
Independent Financial Services 32 44 -27%
Corporate expenses (172) (169) -2%
Continued operations 3 455 3 234 7%
Discontinued operations & Marketing - (119) -
provision
Gross result from financial services 3 455 3 115 11%
Headline earnings are reported net of a Secondary Tax on Companies (STC) charge
of R88 million as the STC payable in respect of the group"s dividends paid
exceeded the available STC credits generated in the shareholders" fund. The
first-time implementation of a policy to account for unutilised STC credits at
year-end resulted in the raising of a R100 million asset and a corresponding
income item at the end of 2004.
Equity-accounted retained headline earnings of R478 million are down 34% on
2004. The major contribution to this line is the Sanlam shareholders" fund"s
proportionate share of Absa"s earnings prior to the sale of the investment. The
reported earnings for 2005 reflect Absa"s strong operating performance for the
six months to March 2005. It also includes R30 million, being Sanlam"s 21%
interest in the African Life results for the nine months to 31 December 2005.
Following the introduction of IFRS and the designation of all shareholders" fund
investments as "at fair value through profit or loss", Headline earnings now
include all fair value changes on the investments held by the shareholders"
fund. A 187% improvement in net investment surpluses, in part due to the strong
equity market growth in 2005, made a material contribution to the increase in
Headline earnings over 2004.
National Treasury and the Life Offices" Association announced an agreement in
December 2005 on minimum standards to be applied on early termination of long-
term savings and investment products. Certain enhanced early termination values
will, where applicable, be applied retrospectively for five years. The cost of
providing these benefits in respect of Sanlam"s existing business is estimated
at some R620 million. This amount, net of tax, is provided for in full in the
2005 financial results as a once-off income statement charge of R440 million.
For embedded value purposes it is assumed that the full tax relief will only be
realised some time in the future. On a net present value basis the charge to
embedded value is therefore R500 million. Certain other financial claims have
been or could potentially be instituted against Group companies, some of which
have already been referred to in the 2004 annual report and before. These claims
in essence relate to possible tax liabilities due to differences on treatment
and interpretation between Sanlam and the South African Revenue Services,
contractual disputes and potential claims flowing from pension fund
administration and surplus apportionments. The relevant Group operations are
contesting or intend to contest either the merit or quantum of the majority of
these claims. The Sanlam board, in taking a prudent view on the potential
liability on these claims, decided to strengthen existing provisions created for
such claims by R150 million. This should ensure that provisions sufficiently
cover the aggregate liability in a best estimate outcome, although not
necessarily the maximum exposure in respect of these items.
In terms of IFRS, in determining the Sanlam group results, Sanlam shares held in
the policyholder portfolios have to be treated as treasury shares (and no longer
as an investment at fair value) and shares held by these portfolios in group
subsidiaries and associates may no longer be accounted for as investments at
fair value, but must be accounted for at their net asset value and equity-
accounted values respectively. Since the policyholder liabilities remain
unaffected, a fund transfer (through Headline earnings) is required to or from
the shareholders" fund in respect of the market value changes of these shares.
For 2005 this transfer to the shareholders" fund amounted to R730 million,
compared to a transfer from the shareholders" fund of R1 214 million for the
same period in 2004. Excluding these transfers, the once-off provision created
in respect of potential financial claims and enhanced termination values, the
growth in Headline earnings amounted to 36%.
Attributable earnings for 2005 of R10.93 billion are 296% higher than the R2.76
billion in 2004. After the adoption of IFRS, there are only a few items that are
reported in Attributable earnings but fall outside the definition of Headline
earnings. These are essentially limited to profit realised on the sale of a
subsidiary or associate and goodwill impairments. Due to the restriction placed
by IFRS on not fair value accounting the investment in Absa, Sanlam realised an
accounting profit of R5 billion on the sale of its holding in Absa. This
represents the difference between the sales / transaction value and the equity
accounted carrying value of the investment.
Business volumes
New business flows
Total new business inflows at R73.5 billion are 23% higher than in 2004, in
particular due to a strong performance in the second half of the financial year.
New business inflows in the second six months of the year totalled R43.3
billion, 32% up on that achieved in the comparable period in 2004. Inflows into
white-labelled unit trust funds, higher Investment inflows, as well as a strong
recovery by new Life Insurance product sales, contributed substantially to this
improvement. The new life business Annual Premium Equivalent (APE) of R2 153
million is 10% higher than in 2004, with group life business and international
life business being up 25% and 27% respectively.
New Business Volumes for the year ended 31 December
R million 2005 2004
Life insurance 11 862 11 200 6%
Investments 52 748 40 933 29%
Short-term insurance 8 871 7 719 15%
73 481 59 852 23%
Retail 28 473 24 613 16%
Institutional 19 684 18 239 8%
Sanlam Financial Services (UK) 10 615 5 950 78%
Sanlam Collective Investments white label 5 838 3 331 75%
Short-term insurance 8 871 7 719 15%
73 481 59 852 23%
New retail business flows improved by 16% on 2004 to R28.5 billion.
South African Individual Life Insurance business of R8.0 billion is only 2% up
on 2004 and comprises 28% of retail flows vs 32% in 2004. After a disappointing
start to the year (8% down on 2004 for first six months), single premium life
inflows in South Africa recovered to end the year on R6.5 billion, approximately
the same level as in 2004. Satisfactory growth in continuations, endowments and
the sale of Living Life annuities offset the lower demand for guaranteed savings
products. New recurring premiums inflows improved by 9% on 2004. This is
substantially due to the improved demand for Sanlam"s Matrix range of risk
products.
South African non-life retail gross inflows of R16 billion are 16% up on 2004.
This comprises investment inflows to the Innofin product range, Sanlam Private
Investments new inflows, as well as the retail inflows into Sanlam Collective
Investments.
Consolidated Financial Services, created in 2004 through the merger of Sanlam"s
Namibian life insurance interests with that of other Namibian parties, recorded
26% growth in new life business and a 166% increase in gross unit trust inflows
in its first year. Merchants Investors Assurance in the UK achieved an 11%
growth to R671 million in new business inflow.
SA Institutional new business flows were just short of R20 billion in 2005, an
increase of 8% on 2004.
Group Life premiums represent 16% of South African institutional inflows in
2005. It totalled R2.9 billion and is 14% up on 2004. This is the result of
strong new inflows attracted in the second half of 2005, which were 25% higher
than that in the comparable period in 2004. New Group Life business is
essentially focussed on risk business due to an increasing percentage of
investment business inflows being placed with asset managers directly.
Sanlam Investment Management"s (SIM) institutional investment inflows grew by 7%
to R16.9 billion. R9.4 billion originated from third party wholesale asset
management mandates, while Sanlam Multi Manager recorded inflows of R3.1
billion. New wholesale inflows to Sanlam Collective Investments and SIM
International improved by 17% and 12% respectively.
Sanlam Financial Services (UK) performed exceptionally well to attract new
business under administration and advice of GBP0.9 billion (R10.6 billion) in
2005, an improvement of 78% on 2004.
Net business flows
The Public Investment Commissioner withdrew R6 billion of its funds under
management from SIM in March 2005 as part of the restructuring of its investment
process and mandates. Notwithstanding this withdrawal, the Group achieved
positive net business inflows of some R15.2 billion for the year, compared with
R16.6 billion in 2004. Excluding the R6 billion withdrawal, the South African
institutional investment businesses achieved net inflows of R6.7 billion, which
is only marginally down on 2004. A major contribution to the Group"s
institutional net inflow also came from Sanlam Financial Services (UK). Group
Life net outflows however remain high. Fund terminations, which can in part be
ascribed to funds being switched into direct investment portfolios, resulted in
net outflows of R3.5 billion for the year, a similar level to 2004. Net business
inflows from retail business amounted to R3.5 billion.
Embedded value of new business
The embedded value of new life business written for 2005, of R291 million, is 9%
lower than in 2004. Margins and profitability remained under pressure during the
year, largely due to more competitive pricing and cost incurred to support sales
growth in 2006. The average APE margin achieved in 2005 amounted to 13.5%,
compared with 16.4% achieved in 2004. In terms of the proposed future basis of
disclosure for the industry, the profit margin is also expressed as a percentage
of the present value of total new business premiums. On this basis the overall
margin reduced from 2.2% to 1.8%.
Progress has been made in standardising the measurement of the profitability of
and value added by non-life business. It is the intention to also disclose the
value of new non-life business in future to provide a more complete picture of
new business performance. These calculations are still being refined but
indicate that non-life retail business made a substantial contribution to the
value of the overall new retail investment business flows in 2005, compensating
by enlarge for the lower value of the life business.
Embedded value
At 31 December 2005 Sanlam"s embedded value amounted to R38.2 billion or 1 615
cents per share. This represents an increase of 4% on the R36.6 billion at the
end of December 2004, despite the R4.4 billion utilised to buy back 359 million
shares. Taking into account the capital reduction and the dividend paid in
respect of the 2004 financial year, the return on embedded value to the end of
2005 amounted to 20.6%. A higher growth per share of 24.4% confirms the
accretive effect of the share buy back. A return of 20.0% was achieved on net
assets.
EMBEDDED VALUE
R million 2005 2004
Net Asset Value (at fair value) 30 592 29 782 3%
Goodwill on life company 1 328 356
acquisitions
Non-life Group operations 9 702 7 743 25%
Portfolio investments 19 562 21 683 -10%
Adjustments (2 962) (2 000) 48%
Adjusted Net Asset Value 27 630 27 782 -1%
Net value of life in-force 10 574 8 851 19%
business
Embedded value 38 204 36 633 4%
Embedded value per share (cents) 1 615 1 344 20%
Share price at 31 December (cents) 1 519 1 300 17%
Discount to embedded value 5.9% 3.3%
The value of the Life businesses" in-force book (VIF) at the end of December
2005 amounted to R10,6 billion, after taking into account the cost of capital at
risk of R1,7 billion. Growth from life insurance business, based on the starting
value of VIF, amounted to 22,3% compared with growth of 26,5% in 2004. The
negative effect of adjustments made to the long-term asset mix assumption of
both the policyholder funds and the assets supporting CAR and an increased
allowance for STC payable in future, in part offset the benefit of positive
operating and investment variances experienced during the year.
Solvency
As at 31 December 2005 all group companies were adequately capitalised.
The statutory capital requirement (CAR) of Sanlam Life amounted to R5.3 billion.
Capital allocated to Sanlam Life and qualifying for regulatory capital purposes
amounted to R20.9 billion, which covered the capital requirement 3.9 times (3.6
times at the end of 2004). The improved cover can be attributed to improved
equity markets and the active management of the shareholders" funds. All
policyholder portfolios were fully funded as at 31 December 2005.
Santam ended the 2005 financial year with a healthy solvency level of 61%, which
will reduce to 49% after payment of its ordinary dividend of 227 cents per share
and special dividend of 650 cents per share.
These results will be tabled at the annual general meeting to be held at the
Sanlam Head Office in Bellville on Wednesday, 7 June 2006. Shareholders are
invited to attend this meeting.
GROUP BALANCE SHEET at 31 December 2005
2005 2004
R million R million
ASSETS
Property and equipment 249 184
Owner-occupied properties 492 380
Goodwill 2 174 2 186
Value of business acquired 942 -
Deferred acquisition costs 1 155 994
Long-term reinsurance assets 389 318
Investments 232 851 187 606
Investment properties 12 748 14 413
Equity-accounted investments 1 037 5 167
Equities and similar securities 120 763 88 084
Public sector stocks and loans 47 998 44 434
Debentures, insurance policies, preference 21 173 17 141
shares and other loans
Cash, deposits and similar securities 29 132 18 367
Deferred tax 372 440
Short-term insurance technical assets 2 372 1 980
Working capital assets 35 716 31 192
Trade and other receivables 27 427 20 043
Cash, deposits and similar securities 8 289 11 149
Total assets 276 712 225 280
Equity and liabilities
Shareholders" fund 25 020 19 685
Minority shareholders" interest 3 443 3 515
Total equity 28 463 23 200
Long-term policy liabilities 198 234 163 556
Insurance contracts 109 591 92 961
Investment contracts 88 643 70 595
Term finance 2 879 6 685
External investors in consolidated funds 6 030 3 209
Cell owners" interest 268 47
Deferred tax 1 623 809
Short-term insurance technical provisions 6 702 5 198
Working capital liabilities 32 513 22 576
Trade and other payables 30 057 20 924
Provisions 860 465
Taxation 1 596 1 187
Total equity and liabilities 276 712 225 280
GROUP INCOME STATEMENT for the year ended 31 December 2005
2005 2004
Note R million R million
Net income 63 307 41 975
Financial services income 20 393 17 836
Reinsurance premiums paid (2 339) (2 303)
Reinsurance commission received 445 504
Investment income 10 429 9 658
Investment surpluses 35 282 16 659
Change in fair value of external (903) (379)
investors liability
Net insurance and investment contract (41 440) (30 081)
benefits and claims
Long-term insurance contract benefits (21 070) (15 829)
Long-term investment contract benefits (14 094) (9 985)
Enhanced early termination benefits (620) -
Short-term insurance claims (6 904) (5 014)
Reinsurance claims received 1 248 747
Expenses (7 769) (7 026)
Sales remuneration (2 632) (2 302)
Administration costs (5 137) (4 724)
Impairment of investments and goodwill (12) (263)
Net operating result 14 086 4 605
Equity-accounted earnings 944 1 085
Finance cost (136) (49)
Discontinued operations - (92)
Profit before tax 14 894 5 549
Taxation 4 (2 803) (1 771)
Shareholders" fund (1 684) (1 013)
Policyholders" fund (1 119) (758)
Profit for the year 12 091 3 778
Attributable to:
Shareholders" fund 10 927 2 758
Minority shareholders" interest 1 164 1 020
12 091 3 778
Earnings attributable to shareholders of
the company (cents):
Continuing operations:
Basic earnings per share 7 439,2 112,3
Diluted earnings per share 7 432,0 110,9
GROUP STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2005
2005 2004
R million R million
Shareholders" fund:
Balance at beginning of year 19 685 17 622
Total recognised income 11 008 2 559
Profit for the year 10 927 2 758
Equity-accounted earnings movement in 15 (42)
associated companies" reserves
Movement in foreign currency translation 66 (157)
reserve
Cost of treasury shares donated to the Ubuntu- - (314)
Botho Community Development Trust
Net realised investment surpluses on other 25 (126)
treasury shares
Share based payments 64 51
Dividends paid (1 295) (1 022)
Acquired through business combinations (31) -
New shares issued (1) - 865
Costs relating to share issuance - (19)
Shares cancelled (4 446) -
Cost of treasury shares acquired (2) 10 69
Balance at end of year 25 020 19 685
Minority shareholders" interest:
Balance at beginning of year 3 515 1 944
Total recognised income 1 163 1 005
Profit for the year 1 164 1 020
Movement in foreign currency translation (1) (15)
reserve
Share based payments 5 4
Dividends paid (788) (168)
Acquisitions, disposals and other movements in (452) 730
minority interests
Balance at end of year 3 443 3 515
Shareholders" fund 19 685 17 622
Minority shareholders" interest 3 515 1 944
Total equity at beginning of year 23 200 19 566
Shareholders" fund 25 020 19 685
Minority shareholders" interest 3 443 3 515
Total equity at end of year 28 463 23 200
(1) 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.
(2) Comprises movement in cost of shares held by subsidiaries and the share
incentive trust.
GROUP CASH FLOW STATEMENT
for the year ended 31 December 2005
2005 2004
R million R million
Net cash inflow/(outflow) from operating 1 938 (3 774)
activities
Net cash inflow from investment activities 13 069 1 908
Net cash (outflow)/inflow from financing (6 919) 2 842
activities
Cash flow from discontinued operations - (92)
Net increase in cash and cash equivalents 8 088 884
Cash, deposits and similar securities at 29 320 28 436
beginning of year
Cash, deposits and similar securities at end 37 408 29 320
of year
ABRIDGED SHAREHOLDERS" FUND BALANCE SHEET -
FAIR VALUE (Group businesses, associates and joint venture below
reflected as investments at fair value)
at 31 December 2005
2005 2004
R million R million
Assets
Property and equipment 177 106
Owner-occupied properties 480 370
Goodwill (1) 419 387
Value of business acquired (1) 942 -
Deferred acquisition costs 582 -
Investments 35 307 34 794
Sanlam businesses 9 702 7 743
Investment Management (2) 3 228 2 384
Sanlam Financial Services UK 382 349
Sanlam Capital Markets 552 441
Innofin 341 187
Santam 4 749 4 028
Other (3) 450 354
Associated companies 871 10 033
Absa - 9 429
Peermont 779 604
Other 92 -
Joint ventures 395 270
Other investments 24 339 16 748
Other equities and similar securities 12 267 6 739
Public sector stocks and loans 2 019 1 550
Investment properties 671 619
Other interest-bearing and preference share 9 382 7 840
investments
Deferred tax 216 313
Working capital assets 4 486 6 657
Total assets 42 609 42 627
Equity and liabilities
Shareholders" fund 30 592 29 782
Minority shareholders" interest 439 61
Term finance 2 834 5 477
External investors in consolidated funds 49 51
Deferred tax 1 031 1 143
Working capital liabilities 7 664 6 113
Total equity and liabilities 42 609 42 627
Net asset value per share (cents) 1 293 1 093
The value of business acquired and goodwill relates mainly to the consolidation
of African Life Assurance and Merchant Investors Assurance and are excluded in
the build-up of the Group embedded value, as the current value of in-force
business for these life insurance companies are included in the embedded value.
Included in Investment Management are Sanlam Investment Management, Sanlam
Collective Investments and the Investment Cluster"s international businesses.
Other businesses comprise the non-life businesses in the Life Insurance cluster,
which are excluded from the value of in-force and all the businesses in the
Independent Financial Services cluster apart from Sanlam Financial Services UK.
ABRIDGED SHAREHOLDERS" FUND BALANCE SHEET -
FAIR VALUE (continued)
2005 2004
R million R million
EXCESS OF FAIR VALUE OVER NET ASSET VALUE: SANLAM BUSINESSES AND
INVESTMENTS
The shareholders" fund balance sheet at fair value includes the
value of the companies below based on directors" valuation, apart
from Santam, Absa and Peermont, which are valued according to ruling
share prices.
Net asset value of businesses and investments 5 583 8 434
Investment Management businesses (1) 752 514
Sanlam Financial Services UK 340 335
Sanlam Capital Markets 552 441
Innofin 177 155
Santam 2 903 2 655
Absa - 4 030
Peermont 310 218
Safair Lease Finance 94 45
Other (2) 455 41
Goodwill in respect of above businesses 1 198 1 198
Deferred capital gains tax on investments at 546 1 146
fair value
Revaluation adjustment of interest in 3 641 7 268
businesses and investments to fair value
Fair value of businesses and investments 10 968 18 046
Analysis of fair value
Sanlam businesses 9 702 7 743
Associated companies 871 10 033
Joint ventures 395 270
Fair value of businesses and investments 10 968 18 046
(1) Included in Investment Management are Sanlam Investment Management, Sanlam
Collective Investments and the Investment cluster"s international businesses.
(2) Other businesses comprise the non-life businesses in the Life Insurance
cluster, which are excluded from the value of in-force and all the businesses in
the Independent Financial Services cluster apart from Sanlam Financial Services
UK.
ABRIDGED SHAREHOLDERS" FUND BALANCE SHEET -
FAIR VALUE (continued)
Net Minority Shareholders"
assets shareholders" fund
interest
R million R million R million
Reconciliation of equity -
fair value:
31 December 2004
Reported under SA GAAP 30 045 63 29 982
Change in carrying value of (196) (2) (194)
investment contracts
Revaluation of trading (42) - (42)
account assets and
liabilities
Goodwill amortisation 36 - 36
reversed - Merchant
Investors Assurance
Reported under IFRS 29 843 61 29 782
1 January 2004 - unaudited
Reported under SA GAAP 22 819 - 22 819
Change in carrying value of (181) - (181)
investment contracts
Revaluation of trading (42) - (42)
account assets and
liabilities
Reported under IFRS 22 596 - 22 596
ABRIDGED SHAREHOLDERS" FUND BALANCE SHEET -
NET ASSET VALUE
(All businesses consolidated at net asset value)
at 31 December 2005
2005 2004
R million R million
Assets
Goodwill 2 174 2 170
Investments 32 547 26 582
Working capital and other assets 33 918 26 748
Total assets 68 639 55 500
Equity and liabilities
Shareholders" fund 25 020 19 685
Minority shareholders" interest 3 557 2 932
Term finance, working capital and 40 062 32 883
other liabilities
Total equity and liabilities 68 639 55 500
RECONCILIATION OF EARNINGS to segmental analysis
for the year ended 31 December
2005
Year ended 31 December 2005
Shareholder Policyholder
activities activities
R MILLION Total Financial Investment
services return
Net income 63 307 19 390 10 022 33 895
Financial services income 20 393 20 524 (3) (128)
Reinsurance premiums paid (2 339) (2 339) - -
Reinsurance commission received 445 445 - -
Investment income 10 429 718 892 8 819
Investment surpluses 35 282 42 9 115 26 125
Change in fair value of external (903) - 18 (921)
investors liability
Net insurance and investment (41 440) (9 030) - (32
contract benefits and claims 410)
Long-term insurance contract (21 070) (2 754) - (18
benefits 316)
Long-term investment contract (14 094) - - (14
benefits 094)
Enhanced early termination (620) (620) - -
benefits
Short-term insurance claims (6 904) (6 904) - -
Reinsurance claims received 1 248 1 248 - -
Expenses (7 769) (7 685) - (84)
Sales remuneration (2 632) (2 632) - -
Administration costs (5 137) (5 053) - (84)
Impairment of investments and (12) - (12) -
goodwill
Net operating result 14 086 2 675 10 010 1 401
Equity-accounted earnings 944 5 865 74
Finance cost (136) - - (136)
Profit before tax 14 894 2 680 10 875 1 339
Tax expense (2 803) (567) (1 117) (1 119)
Shareholders" fund (1 684) (567) (1 117) -
Policyholders" fund (1 119) - - (1 119)
Profit for the year 12 091 2 113 9 758 220
Attributable to:
Shareholders" fund 10 927 1 710 9 217 -
Minority shareholders" interest 1 164 403 541 220
12 091 2 113 9 758 220
RECONCILIATION OF EARNINGS to segmental analysis
for the year ended 31
December 2005
Year ended 31 December 2004
Shareholder Policyholder
activities activities
R MILLION Total Financial Investment
services return
Net income 41 975 17 170 879 23 926
Financial services income 17 836 17 886 (7) (43)
Reinsurance premiums paid (2 303) (2 303) - -
Reinsurance commission 504 504 - -
received
Investment income 9 658 1 083 789 7 786
Investment surpluses 16 659 - 127 16 532
Change in fair value of (379) - (30) (349)
external investors liability
Net insurance and investment (30 081) (6 965) - (23
contract benefits and claims 116)
Long-term insurance contract (15 829) (2 698) - (13
benefits 131)
Long-term investment (9 985) - - (9 985)
contract benefits
Short-term insurance claims (5 014) (5 014) - -
Reinsurance claims received 747 747 - -
Expenses (7 026) (6 996) (1) (29)
Sales remuneration (2 302) (2 302) - -
Administration costs (4 724) (4 694) (1) (29)
Impairment of investments (263) - (263) -
and goodwill
Net operating result 4 605 3 209 615 781
Equity-accounted earnings 1 085 - 984 101
Finance cost (49) - - (49)
Loss from discontinued (92) (94) 2 -
operations
Profit before tax 5 549 3 115 1 601 833
Tax expense (1 771) (789) (224) (758)
Shareholders" fund (1 013) (789) (224) -
Policyholders" fund (758) - - (758)
Profit for the year 3 778 2 326 1 377 75
Attributable to:
Shareholders" fund 2 758 1 812 946 -
Minority shareholders" 1 020 514 431 75
interest
3 778 2 326 1 377 75
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2005
2005 2004
R million R million
FUNDS RECEIVED FROM CLIENTS
LIFE BUSINESS 11 862 11 200
INVESTMENTS 52 748 40 933
SHORT-TERM INSURANCE 8 871 7 719
Total new business 73 481 59 852
PREMIUMS ON EXISTING BUSINESS 11 173 10 879
Total funds received from clients 84 654 70 731
Funds received from short-term insurance are
recognised in the income statement. All other
funds received are recognised directly in the
balance sheet or as segregated funds as
applicable; fee income earned on this business is
recognised in the income statement.
payments TO CLIENTS
LIFE BUSINESS 27 499 25 517
RISK UNDERWRITING BENEFITS 2 618 2 568
OTHER PAYMENTS 24 881 22 949
INVESTMENTS 36 195 24 226
SHORT-TERM INSURANCE 5 792 4 397
Total payments to clients 69 486 54 140
Life insurance risk underwriting benefits and
short-term insurance payments are recognised in
the income statement; all other payments to
clients are recognised directly in the balance
sheet or as segregated fund flows as applicable.
NET FLOW OF FUNDS
LIFE BUSINESS (4 464) (3 438)
Investments 16 553 16 707
Short-term insurance 3 079 3 322
Total net inflow of funds 15 168 16 591
TAXATION
Result from financial services 747 789
Current year 752 793
Prior year (5) (4)
Investment income - current year 150 92
Investment surpluses 330 232
Profit on disposal of associated companies 534 -
Enhanced early termination benefits (180) -
Secondary Tax on Companies 103 (100)
Tax expense - shareholders" fund 1 684 1 013
Tax expense - policyholders" fund 1 119 758
Total income tax charged to income statement 2 803 1 771
NOTES (continued)
2005 2004
R million R million
SEGMENTAL ANALYSIS - SHAREHOLDERS" FUND
Financial services
Life insurance 1 729 1 493
Short-term insurance 1 016 1 361
Investment management 699 419
Sanlam Capital Markets 151 86
Independent Financial Services 32 44
Corporate expenses (172) (194)
Result from continued operations 3 455 3 209
Discontinued operations - (94)
Result from financial services before tax 3 455 3 115
Investment INCOME - SHAREHOLDERS" FUND
Interest-bearing investments 460 445
Equities 372 312
Properties 53 32
Investment income before associated companies 885 789
Dividends from associated companies 384 264
Total investment income 1 269 1 053
NOTES (continued)
2005 2004
Cents Cents
EARNINGS PER SHARE
Basic earnings per share:
Net result from financial services 92,5 71,4
Core earnings 131,8 104,8
Headline earnings 233,7 116,8
Profit from continuing operations attributable to 439,2 112,3
shareholders" fund
Discontinued operations attributable to - (3,6)
shareholders" fund
Diluted earnings per share:
Net result from financial services 90,9 70,5
Core earnings 129,7 103,4
Headline earnings 229,8 115,3
Profit from continuing operations attributable to 432,0 110,9
shareholders" fund
Discontinued operations attributable to - (3,6)
shareholders" fund
R million R million
Analysis of earnings:
Net result from financial services 2 300 1 812
Net investment income 980 847
Investment income per note 6 1 269 1 053
Tax on investment income (150) (92)
Minority shareholders" interest (139) (114)
Core earnings 3 280 2 659
Net enhanced early termination benefits (440) -
Enhanced early termination benefits (620) -
Tax on enhanced early termination benefits 180 -
Provision for financial claims (150) -
Net equity-accounted headline earnings 478 720
Equity-accounted headline earnings (excluding 489 749
dividends received)
Minority shareholders" interest (11) (29)
Net investment surpluses 2 733 (516)
Investment surpluses 3 478 33
Tax on investment surpluses (330) (232)
Minority shareholders" interest (415) (317)
Secondary tax on companies (88) 100
Headline earnings 5 813 2 963
Non-headline earnings 5 114 (205)
Profit for the period 10 927 2 758
Adjusted headline earnings based on the long-term 4 075 4 070
rate of return
Profit from continuing operations attributable to 10 927 2 850
shareholders" fund
Discontinued operations attributable to - (92)
shareholders" fund
NOTES (continued)
2005 2004
million Million
Number of shares:
Number of ordinary shares in issue at beginning of 2 767,6 2 654,6
period
Add: Weighted number of shares issued - 84,8
Less: Weighted average number of shares cancelled (76,4) -
Less: Weighted Sanlam shares held by subsidiaries (203,5) (201,6)
(including policyholders)
Adjusted weighted average number of shares for 2 487,7
basic earnings per share 2 537,8
Add: Weighted conversion of deferred shares 6,2 3,0
Add: Total number of shares under option 89,6 132,1
Less: Number of shares (under option) that would (54,1)
have been issued at fair value (102,1)
Adjusted weighted average number of shares for 2 529,4
diluted earnings per share 2 570,8
Number of ordinary shares in issue - beginning of 2 767,6 2 654,6
period
Shares issued - 113,0
Shares cancelled (359,0) -
Number of ordinary shares in issue 2 408,6 2 767,6
Shares held by subsidiaries in shareholders" fund (48,6) (47,5)
Convertible deferred shares held by Ubuntu-Botho 6,5 5,8
Adjusted number of shares for value per share 2 366,5 2 725,9
R million R million
8. ASSETS UNDER MANAGEMENT AND ADMINISTRATION
Total assets per Group balance sheet 276 712 225 280
Segregated funds not included in Group balance 167 215 121 678
sheet
Total assets under management and administration 443 927 346 958
9. CONTINGENT LIABILITIES
Shareholders are referred to the contingent liabilities disclosed in the
2004 annual report. The circumstances surrounding these contingent
liabilities remained unchanged.
ADJUSTED HEADLINE EARNINGS - LTRR
2005 2004
R million R million
THE LTRR INVESTMENT RETURN IS DETERMINED BY
APPLYING THE LONG-TERM EXPECTED RETURN OF 10%
(2004: 11%) TO THE AVERAGE MONTHLY SHAREHOLDERS"
FUND INVESTMENTS
Adjusted headline earnings - long-term rate of
return (LTRR)
Net result from financial services 2 300 1 812
Secondary tax on companies (88) 100
Policyholder fund restitution and financial claims (590) -
LTRR investment return after taxation 2 453 2 158
Equity-accounted headline earnings 478 720
Dividends received from associated companies 290 264
LTRR investment return - balanced portfolio 1 685 1 174
Adjusted headline earnings - LTRR 4 075 4 070
Reconciliation of headline earnings and LTRR
headline earnings
Headline earnings per note 7 5 813 2 963
Fund Transfers (730) 1 214
Net LTRR adjustment (1 008) (107)
Adjusted headline earnings - LTRR 4 075 4 070
Analysis of net LTRR adjustment
Investment return (1 411) (300)
Equities (1 856) (331)
Interest-bearing investments 460 47
Properties (15) (16)
Tax 64 (65)
Minority shareholders" interest 339 258
Net LTRR adjustment (1 008) (107)
AssetS subject to LTRR
Investments per shareholders" fund balance sheet 32 547 26 582
at net asset value
Less: Investment in associated companies (2 428) (4 544)
Investment in joint ventures (328) (69)
Investments held in respect of term finance (2 508) (3 809)
Investments held in respect of capital market (42) (62)
activity
Investments matched by liabilities (2 567) (905)
Other (36) (104)
LTRR investments 24 638 17 089
ACCOUNTING POLICIES AND ACTUARIAL BASIS
Statement of compliance
The accounting policies adopted for the purposes of the financial statements
comply with International Financial Reporting Standards (IFRS) and with
applicable legislation. The policy liabilities and profit entitlement rules are
determined in accordance with prevailing legislation, generally accepted
actuarial practice and the stipulations contained in the demutualisation
proposal. There have been no material changes in the financial soundness
valuation basis since 31 December 2004.
Adoption of IFRS
Being a first-time adopter of IFRS for the 2005 financial year, the Group"s date
of transition to IFRS is 1 January 2004. The Group"s opening balance sheet on 1
January 2004 and comparative information for 2004 have been restated to comply
with all IFRS effective as at 31 December 2005.
The migration to IFRS for insurers will, in its full extent, take a number of
years. The results have been prepared in accordance with current interpretations
of IFRS. 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.
The South African standard applicable to long-term insurers, AC121 has been
withdrawn concurrently with the introduction of IFRS. Therefore, long-term
insurers will no longer have any form of exemption from applying normal
consolidation principles in instances where investments are held in policyholder
portfolios to fund policyholder benefits.
Shareholders" fund
In terms of South African Generally Accepted Accounting Practice (SA GAAP) the
shareholders" fund"s investments in associated companies (and joint ventures)
were carried at their original cost plus the shareholders" fund"s share of its
retained earnings after acquisition (effectively carried at net asset value
including goodwill, if any). In respect of the investment in Absa, Safair Lease
Finance and Peermont, the equity-accounted carrying value was further adjusted
to reflect the investment at fair value. These adjustments to fair value are
not allowed in the absence of AC121 and Sanlam is required to reflect the
shareholders" fund"s investment in these companies at the equity-accounted
carrying value.
Policyholders" fund
The policyholders" fund"s investment in Absa must also be carried at original
cost plus its share of retained earnings after acquisition. Portfolio
investments in subsidiary companies (e.g. Santam) can no longer be accounted for
at market value but be carried at consolidated net asset value. Portfolio
investments in Sanlam shares have to be treated as treasury shares and deducted
from equity on consolidation. The result is a mismatch between the valuation of
long-term policy liabilities, which continues to include the affected
investments on a marked to market basis, and the policyholder assets underlying
these liabilities, which may not be at fair value or may be eliminated on
consolidation. The movement in mismatch in any particular period, is accounted
for through an income statement transfer to or from the shareholders" fund,
impacting on Headline and Attributable earnings as well as net asset value. An
appropriate adjustment is made to the value of the shareholders" fund for
Embedded Value and Capital Adequacy Requirement purposes to reverse this impact.
TRANSITIONAL PROVISIONS
IFRS 1 First-time Adoption of International Financial Reporting Standards
requires retrospective compliance with all IFRS expected to be effective at the
end of the first IFRS reporting period. However, it contains a number of
exemptions to this full retrospective application of IFRS. The Group has
applied the following exemptions:
Business combinations
The Group has elected not to apply IFRS 3 Business Combinations retrospectively
to business combinations that occurred prior to 1 January 2004. Accordingly, no
adjustments have been made to the accounting treatment of these business
combinations.
Property and equipment
The Group has elected to use the previous SA GAAP revaluation of selected
property and equipment as deemed cost on the date of transition to IFRS.
Cumulative translation differences
The cumulative translation differences in respect of the Group"s foreign
operations have been deemed to be zero on the date of transition to IFRS.
Designation of financial instruments
The majority of the Group"s financial instruments were designated as `available
for sale" in terms of SA GAAP. The Group has elected to redesignate these
financial instruments to the `at fair value through profit or loss" category in
IAS 39 Financial Instruments: Recognition and Measurement.
Share-based payments
The Group has elected not to apply IFRS 2 Share-based Payment to equity
instruments granted on or before 7 November 2002 or granted after 7 November
2002 but which had vested prior to 1 January 2005.
Comparatives
In terms of IFRS 1 First time adoption of International Financial Reporting
Standards an entity need not disclose comparative information that complies with
IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39 Financial
Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts in its
first set of IFRS annual financial statements. In the interest of comparable
disclosure, the Group has not applied this exemption.
Compound financial instruments
The Group has elected not to separate compound financial instruments into equity
and liability components where the liability component is no longer outstanding
on the date of transition.
Changes in reporting structures and accounting policies
The implementation of IFRS concurrently with the withdrawal of the specific
South African accounting standard applicable to insurers (AC121) required the
following changes to the Group"s basis of presentation and accounting policies:
- The measurement basis of the investment in Absa and Peermont on the balance
sheet is changed from fair value to an equity-accounted valuation. This item has
been updated to include the policyholders" investment in Absa following the
revised interpretation discussed above;
- Sanlam Limited shares held in policyholder portfolios are treated as
treasury shares and eliminated against equity on consolidation (carried at fair
value in terms of SA GAAP);
- The policyholders" fund"s interest in Santam Limited is consolidated in the
balance sheet under IFRS (carried at fair value in terms of SA GAAP);
- Goodwill in respect of business combinations with an agreement date prior
to 1 January 2004 is not amortised but subject to an impairment review
(amortised in terms of SA GAAP);
- The valuation basis for investment policy contracts is changed from the
Financial Soundness Valuation method to fair value;
- Recognition of share option costs in the Group income statement with a
corresponding increase in equity (no cost recognised in terms of SA GAAP);
- Reclassification of financial assets formerly designated as `available for
sale" to the `at fair value through profit or loss" category; and
- The consolidation of certain investment vehicles controlled by the Group,
e.g. collective investment schemes (carried as investments at fair value in
terms of SA GAAP).
The financial impact of the changes in accounting policies is disclosed in the
IFRS Reconciliation of Equity and Earnings on pages 28 to 32.
IFRS RECONCILIATION OF EQUITY AND EARNINGS
Notes refer to the notes on pages 31 to 32.
2004
R million
Reconciliation of reported earnings:
Attributable earnings reported under SA GAAP 3 283
Withdrawal of AC121:
Difference between fair value-based earnings and
equity-accounted earnings for the shareholders"
fund"s investment in:
Absa (1) (2 942)
Peermont (1) (246)
Safair Lease Finance (1) 67
Change in value shortfall of the policyholders"
fund"s investment in:
Absa (1) (384)
Santam (2) 46
Vukile (2) (71)
Satrix (2) (113)
Sanlam (3) (632)
Elimination of dividend paid to policyholders (3) (60)
Adoption of IFRS:
New business strain from investment contracts (4) (13)
Share based payments (5) (51)
Goodwill amortisation (6) 328
Goodwill impairment (6) (42)
Reclassification of available for sale investments 3 588
(7)
Profit attributable to shareholders" fund under 2 758
IFRS
IFRS RECONCILIATION OF EQUITY AND EARNINGS (continued)
31 December 2004
Assets Liabilities Minority Shareholders"
shareholders" fund
interest
R million R million R million R million
Reconciliation of equity:
Reported under SA GAAP 228 024 197 586 2 796 27 642
Withdrawal of AC121:
Reduction in carrying
value of shareholders"
fund"s investment in:
Absa (1) (5 456) (783) (23) (4 650)
Peermont (1) (386) (67) - (319)
Safair Lease Finance (1) (225) - - (225)
Reduction in carrying
value of policyholders"
fund"s investment in:
Absa (1) (613) (34) - (579)
Santam (2) (90) - - (90)
Vukile (2) 2 140 1 483 728 (71)
Satrix (2) 483 739 - (256)
Sanlam (3) (1 824) - - (1 824)
Consolidation of 2 539 2 507 32 -
investment vehicles (8)
Elimination of inter- (897) (897) - -
company transactions (9)
Reclassification of (258) (258) - -
policy loans (10)
Adoption of IFRS:
Change in carrying value - 1 270 (2) (1 268)
of investment contracts
(4)
Recognition of deferred 994 - - 994
acquisition costs asset
(4)
Tax effect of change in 80 - - 80
investment contract
valuation basis (4)
Goodwill amortisation (6) 358 - 30 328
Goodwill impairment (6) (48) - (6) (42)
Reclassification of long- 318 318 - -
term reinsurance assets
(11)
Revaluation of trading (42) - - (42)
account assets and
liabilities (12)
Change in carrying value 14 - 7 7
of other associated
companies (13)
Reclassification of cell - 47 (47) -
owners" interest (14)
Reclassification of term 169 169 - -
finance (15)
Reported under IFRS 225 280 202 080 3 515 19 685
IFRS RECONCILIATION OF EQUITY AND EARNINGS (continued)
1 January 2004
Assets Liabilities Minority Shareholders"
shareholders" fund
interest
R million R million R million R million
Reconciliation of
equity:
Reported under SA GAAP 196 056 172 438 1 931 21 687
Withdrawal of AC121:
Reduction in carrying
value of shareholders"
fund"s investment in:
Absa (1) (1 822) (148) (8) (1 666)
Peermont (1) (91) (18) - (73)
Safair Lease Finance (1) (292) - - (292)
Reduction in carrying
value of policyholders"
fund"s investment in:
Absa (1) (206) (11) - (195)
Santam (2) (136) - - (136)
Vukile (2) - - - -
Satrix (2) 547 690 - (143)
Sanlam (3) (1 344) - - (1 344)
Consolidation of 1 418 1 404 14 -
investment vehicles (8)
Elimination of inter- (375) (375) - -
company transactions (9)
Reclassification of (207) (207) - -
policy loans (10)
Adoption of IFRS:
Change in carrying value - 1 092 - (1 092)
of investment contracts
(4)
Recognition of deferred 836 - - 836
acquisition costs asset
(4)
Tax effect of change in 75 - - 75
investment contract
valuation basis (4)
Goodwill amortisation - - - -
(6)
Goodwill impairment (6) - - - -
Reclassification of long-232 232 - -
term reinsurance assets
(11)
Revaluation of trading (42) - - (42)
account assets and
liabilities (12)
Change in carrying value 14 - 7 7
of other associated
companies(13)
Reclassification of cell - - - -
owners" interest (14)
Reclassification of term - - - -
finance (15)
Reported under IFRS 194 663 175 097 1 944 17 622
IFRS RECONCILIATION OF EQUITY AND EARNINGS (continued)
Notes on IFRS implementation adjustments:
Investments in associated companies and joint venture
The Group"s investments in Absa, Peermont and the Safair Lease Finance joint
venture were recognised at fair value in terms of SA GAAP. IFRS does not allow
the continued use of a fair value basis for these investments, resulting in a
reduction in the carrying value from fair value to an equity-accounted
valuation.
Reported earnings are adjusted with the difference between the fair value-based
investment return and equity-accounted earnings.
Policyholders" fund"s investment in subsidiaries
In terms of SA GAAP the policyholders" fund"s investments in Santam and Vukile,
subsidiaries of the Sanlam group, and Satrix, now a consolidated fund, were
accounted for as equity investments at fair value. In terms of IFRS the
policyholders" interest must be consolidated and measured at net asset value.
Reported earnings are adjusted with the difference between the fair value-based
investment return and the consolidated earnings.
Policyholders" fund"s investment in Sanlam shares
In terms of SA GAAP the policyholders" fund"s investment in Sanlam Limited
shares was accounted for as an equity investment at fair value. In terms of
IFRS the policyholders" interest must be treated as treasury shares and
recognised as a deduction from equity on consolidation.
Reported earnings are adjusted with the investment return earned on the Sanlam
shares held by policyholder portfolios.
Measurement of investment policy contracts
Investment contracts issued by Sanlam Life Insurance Limited were measured under
SA GAAP using bases similar to the Financial Soundness Valuation (FSV) method.
These contracts are valued at fair value in terms of IFRS, requiring an
adjustment to their carrying value. The FSV valuation includes specific
allowance for commission and other issuing costs. In a fair value environment,
the FSV cost allowance is replaced by a deferred acquisition costs (DAC) asset
in terms of IAS 18 Revenue. The new business strain, as well as the increase in
the total net liability recognised in respect of investment contracts, result
primarily from the difference between the incremental cost that can be
capitalised to DAC in terms of IFRS and the level of cost allowance inherent to
the FSV method.
Share option costs
IFRS 2 Share-based Payment requires the recognition of an income statement
expense in respect of equity instruments granted to participants of the Group"s
share incentive schemes. No income statement effect was recognised in terms of
SA GAAP, except for administration costs incurred in respect of the schemes.
Goodwill amortisation and impairment
Goodwill in respect of business combinations with an agreement date prior to 31
March 2004 was amortised under SA GAAP and subject to an impairment review.
Goodwill is not amortised under IFRS but subject to at least an annual
impairment review. Goodwill amortised under SA GAAP during the 2004 financial
year has been reversed in terms of IFRS 1. All goodwill has been tested for
impairment as at 1 January 2004 and 31 December 2004. An additional impairment
was required on 31 December 2004, mainly in respect of the Group"s international
operations.
Reclassification of available for sale investments
In terms of SA GAAP (AC133) the Group classified the majority of its investments
as `available for sale" and elected to transfer unrealised investment surpluses
directly to equity. In terms of IFRS 1 the Group has reclassified these
financial instruments as `at fair value through profit or loss" (refer to the
Transitional provisions above). Unrealised investment surpluses formerly
reported directly in equity have been transferred to the income statement.
Consolidation of investment vehicles
IFRS requires the consolidation of certain investment vehicles controlled by the
Group, e.g. collective investment schemes, which were previously recognised at
fair value in the Group balance sheet.
Elimination of inter-company transactions
Inter-company transactions at arm"s length, which do not influence the Group"s
net earnings, were previously not eliminated from the results to fairly present
the activities of the various businesses. In the absence of AC121 inter-company
transactions are eliminated with no net impact on the shareholders" fund.
Reclassification of policy loans
Loans granted to policyholders were disclosed as separate assets under AC121.
Loans with a legal right of set-off and where the intention is to settle the
policy loan and policy liability on a net basis, must be offset in terms of
IFRS. The affected loans have been reclassified from investment assets to long-
term policy liabilities.
Reclassification of long-term reinsurance assets
Contracts entered into with reinsurers under which the Group is compensated for
losses on one or more contracts issued by the Group and that meet the
classification requirements for insurance contracts were previously offset
against long-term insurance contract liabilities. These reinsurance assets have
been reclassified from long-term policy liabilities to a separate asset class in
terms of the disclosure requirements of IFRS 4.
Revaluation of trading account assets and liabilities
The valuation of certain unquoted trading assets and liabilities was adjusted to
comply with the requirements of the revised IAS 39, among others in respect of
the treatment of day one profits.
Change in carrying value of other associated companies
The post acquisition equity-accounted earnings of certain associated companies
have been changed as a result of the transition to IFRS.
Reclassification of cell owners" interest
Santam"s interests in cell insurance companies are not consolidated under IFRS,
resulting in a reclassification of the cell owners" interest from minority
shareholders" interest to a cell owners" liability.
Reclassification of term finance
The short-term portion of term finance formerly relating to the discontinued
activities of Gensec Bank has been reallocated from working capital liabilities
to term finance. In addition, term finance liabilities over properties held in
unit-linked policyholder portfolios have been reallocated and disclosed
separately from policyholder assets.
EMBEDDED VALUE
EMBEDDED VALUE
2005 2004
R million R million
Sanlam group shareholders" fund at 30 592 29 782
fair value
Adjustment for discounting capital 245 138
gains tax (1)
Reverse goodwill and value of (1 328) (356)
business acquired (2)
Present value of strategic corporate (947) (883)
expenses (3)
Fair value of share incentive scheme (793) (799)
(4)
Adjustment for delayed tax relief on (60) -
enhanced early
termination benefits(5)
STC deferred tax asset written down (79) (100)
(6)
Sanlam group shareholders" adjusted 27 630 27 782
net assets
Net value of life insurance business 10 574 8 851
in-force (7)
Value of life insurance business in- 12 542 10 285
force
Individual business 11 485 9 147
Employee benefits 1 057 1 138
Cost of capital at risk (1 707) (1 400)
Individual business (1 393) (1 128)
Employee benefits (314) (272)
Minority shareholders" interest in (261) (34)
value of in-force
Sanlam group embedded value 38 204 36 633
Embedded value per share (cents) (8) 1 615 1 344
Number of shares (million) (8) 2 366 2 726
Notes:
Adjustment to allow for the delay before incurring the capital gains tax
liability included in the fair value.
Goodwill and value of insurance and investment contract business acquired
(VOBA), relating to life insurance subsidiaries, are reversed from the net
assets, as their value of in-force business is incorporated in the Group"s value
of in-force business. At 31 December 2005 the adjustment was mainly in respect
of African Life (R955 million) and Merchant Investors Assurance (R356 million).
The December 2005 value has been calculated by multiplying the 2005 recurring
corporate expenses not related to life business (after tax) of R115 million by
the share price of 1519 cents and dividing by the headline earnings per share
based on the long-term rate of return excluding extraordinary items of 184,4
cents.
The fair value of the Sanlam share incentive scheme has been determined using a
statistical model. Actual options outstanding have been valued based on the
actual share price and dividend yield at the valuation date.
At 31 December 2005 the financial statements allow for the full tax deduction of
R180 million on the enhanced early termination benefit cost of R620 million in
respect of Sanlam Life Insurance Limited. This adjustment allows for the time
value effect of not realising the tax relief immediately.
The deferred tax asset, relating to life insurance business, based on the unused
STC credits, and included in the net asset value, is reversed as the value of in
force business already includes an allowance for STC.
The net value of life insurance business in-force at 31 December 2005 includes
that of the African Life Group.
The number of shares is after the effect of shares delisted and cancelled under
the share buy back programme, as well as the dilution from the additional
conversion rights vesting during the year in respect of the deferred shares held
by Ubuntu-Botho
2. EMBEDDED VALUE EARNINGS
2005 2004
VALUE OF ADJUSTED TOTAL Total
IN-FORCE NET
ASSETS
R MILLION R MILLION R MILLION R million
Embedded value from new life 709 (418) 291 321
insurance business (1)
Earnings from existing life (450) 1 801 1 351 1 363
insurance business
Expected return on value of in- 1 193 - 1 193 1 148
force business (2)
Expected transfer of profit from (1 348) 1 348 - -
value of in-force to adjusted net
assets (3)
Operating experience variations (314) 452 138 144
(4)
Operating assumption changes 19 1 20 71
Embedded value earnings from life 259 1 383 1 642 1 684
operations
Economic assumption changes (5) (287) (29) (316) 197
Tax changes (6) (144) (35) (179) -
Investment variances 785 60 845 253
Exchange rate movements (7) 4 - 4 (37)
Change in minorities shareholders" (20) - (20) (34)
interest in value of in-force
Growth from life insurance 597 1 379 1 976 2 063
business
Investment return on shareholders" - 5 551 5 551 6 389
adjusted net assets (9)
Change in fair value of share - 6 6 (368)
incentive scheme
Total embedded value earnings 597 6 936 7 533 8 084
before dividends paid, capital
movements and cost of treasury
shares acquired
Acquired value of in-force 1 126 (1 126) - -
business (8)
Dividends paid - (1 363) (1 363) (1 082)
Capital (share buy-back) / raised - (4 446) (4 446) 846
Cost of treasury shares acquired - (153) (153) (397)
Change in Sanlam group embedded 1 723 (152) 1 571 7 451
value
Growth from life insurance 22,3% 26,5%
business as a % of beginning value
of in-force
Return on embedded value (9) 20,6% 27,7%
Return on embedded value per share 24,4% 22,6%
(10)
Notes:
The minority shareholders" interest in the net value of new business for 2005
amounted to R 0,2 million.
This amount includes the expected return on both the starting value of in-force
business and the accumulation of value of new business from point of sale to
year-end.
This amount is the expected, after tax, profit transfer to net assets from the
value of in-force at the start of the year. (The expected after tax
profit/(loss) transferred to net assets in respect of value of new business is
not included).
The main contributors to the operating experience variations are positive risk
experience of R221 million, offset by higher than expected outflows from group
stabilised bonus business resulting in a R96 million decrease in embedded value.
Economic assumption changes at 31 December 2005 can be broken down into the
following components:
Lower bond yields and the reduced inflation gap assumption added R15 million to
the embedded value.
Changes to the long-term asset mix assumptions, in respect of:
- policyholder funds, leading to a R130 million decrease in the embedded value;
and
- assets supporting capital at risk, leading to a R201 million decrease in the
embedded value.
The tax changes at 31 December 2005 can by broken down into the following
components:
- The change in the corporate tax rate from 30% to 29%, which added R167 million
to the embedded value;
- The allowance for secondary tax on companies (STC) is made by placing a
present value on the tax liability generated by net cash dividends paid out by
the life company. Previously it was assumed that over the long-term the
proportion of cash dividends paid would reduce to a level of 50% from the
current 100% level. We now assume that all future dividends will be paid in
cash, increasing the deduction for future STC by R273 million; and
- A strengthening of tax provisions leading to a R73 million decrease in
embedded value.
The principal exchange rates used to translate the operating results of foreign
business are the same as used in the principal financial statements.
The acquired value of in-force insurance business relates to the following:
- At 1 January 2005 the carrying value of Safrican Insurance Company Limited was
included in adjusted net assets. During 2005 the accompanying goodwill was
reversed and replaced by value of in-force (R17 million), leaving adjusted
shareholders" net assets of R9 million after minority interests, with no change
to total embedded value.
- At 31 December 2005 the total cost and carrying value relating to African Life
Assurance Company Limited was reversed and replaced by its value of in-force (R1
109 million) and adjusted shareholders" net assets (R1 647 million).
Total embedded value earnings before dividends paid, capital raised / share buy
back and cost of treasury shares acquired, as a percentage of embedded value at
the beginning of the period.
The return on embedded value per share for 2005 includes the effect of shares
delisted and cancelled under the share buy back programme, as well as the
dilution from the additional conversion rights vesting during the year in
respect of the deferred shares held by Ubuntu-Botho.
3. VALUE OF NEW LIFE INSURANCE BUSINESS
2005 2004
R million R million
VALUE OF NEW BUSINESS:
GROSS VALUE OF NEW BUSINESS 318 339
INDIVIDUAL BUSINESS - RSA 254 279
Employee benefits - RSA 56 46
International (1) 8 14
Cost of capital at risk (27) (18)
INDIVIDUAL BUSINESS - RSA (13) (10)
Employee benefits - RSA (10) (5)
International (1) (4) (3)
Net value of new business (2)(3)(5) 291 321
NEW BUSINESS PROFITABILITY RATIOS:
Annual Premium Equivalent (APE) (4) 2 153 1 958
INDIVIDUAL BUSINESS - RSA 1 565 1 489
Employee benefits - RSA 445 356
International (1) 143 113
Present value of new business 16 533 15 357
premiums (4)
INDIVIDUAL BUSINESS - RSA 11 246 11 096
Employee benefits - RSA 4 111 3 352
International (1) 1 176 909
Net value of new business (2)(3)(5) 291 321
INDIVIDUAL BUSINESS - RSA 241 269
Employee benefits - RSA 46 41
International (1) 4 11
APE margin 13,5% 16,4%
INDIVIDUAL BUSINESS - RSA 15,4% 18,1%
Employee benefits - RSA 10,4% 11,5%
International (1) 2,8% 9,7%
Present value of new business 1,8% 2,1%
premium margin
INDIVIDUAL BUSINESS - RSA 2,1% 2,4%
Employee benefits - RSA 1,1% 1,2%
International (1) 0,3% 1,2%
Notes:
International includes life insurance business of Sanlam Namibia and Merchant
Investors Assurance.
African Life is not included, as the company was acquired at the end of the 2005
financial year.
Net value of new business includes minority interests of R0,2 million in 2005
(R2 million in 2004).
APE (annual premium equivalent) is equal to new recurring premiums (excluding
indexed growth premiums) plus 10% of single premiums. The profitability of new
business is measured by both the ratio of value of new business (VNB) to APE, as
well as to the present value of new business premiums
The total charge to embedded value of R500 million, resulting from the enhanced
early termination benefit agreement for savings business, includes the effect on
the current year"s new business. Had the agreed future minimum standard applied
for the whole of 2005, the new business embedded value figure would have been
R14 million lower.
4. SENSITIVITY ANALYSIS AT 31 DECEMBER 2005
Gross Net value Change
value of Cost of of in- from
in-force capital force base
business at risk business value
R million R million R million %
VALUE OF IN-FORCE
BUSINESS (1)
BASE VALUE 12 262 (1 688) 10 574
Increase risk discount 11 717 (2 166) 9 551 (10)
rate by 1,0%
Decrease risk discount 13 179 (1 416) 11 763 11
rate by 1,0%
Investment return (and 12 269 (1 580) 10 689 1
inflation) decrease by
1,0%, coupled with a 1,0%
decrease in risk discount
rate, and with bonus
rates changing
commensurately
Investment return (and 11 368 (1 991) 9 377 (11)
inflation) decrease by
1,0% and with bonus rates
changing commensurately
Non-commission 11 892 (1 675) 10 217 (3)
maintenance expenses
(excluding investment
expenses) increase by 10%
Discontinuance rates 12 037 (1 628) 10 409 (2)
increase by 10%
Mortality and morbidity 11 530 (1 663) 9 867 (7)
increase by 10% for
assurances, coupled with
a 10% decrease in
mortality for annuities
Equity assets fall by 10% 11 700 (1 685) 10 015 (5)
Notes:
(1) Value of in-force sensitivity analysis includes African Life.
Gross
value of Cost of Net value Change
new capital of new from
business at risk business base
R million R million R million value
%
VALUE OF NEW BUSINESS (1)
Base value 318 (27) 291
Increase risk discount 267 (30) 237 (19)
rate by 1,0%
Decrease risk discount 377 (22) 355 22
rate by 1,0%
Investment return (and 327 (25) 302 4
inflation) decrease by
1,0%, coupled with a 1,0%
decrease in risk discount
rate, and with bonus
rates changing
commensurately
Investment return (and 271 (29) 242 (17)
inflation) decrease by
1,0% and with bonus rates
changing commensurately
Non-commission 292 (27) 265 (9)
maintenance expenses
(excluding investment
expenses) increase by 10%
Non-commission 282 (27) 255 (12)
acquisition expenses
increase by 10%
Discontinuance rates 299 (26) 273 (6)
increase by 10%
Mortality and morbidity 249 (27) 222 (24)
increase by 10% for
assurances, coupled with
a 10% decrease in
mortality for annuities
Notes:
(1) The value of new business sensitivity analysis excludes African Life.
5. EMBEDDED VALUE METHODOLOGY
Other than stated below, the embedded value methodology applied in preparing the
embedded value report is consistent with the methodology used in the previous
year. The most significant changes for the current period include:
Revised assumptions for modeling future STC on net cash dividends; and
Adjustments to assumed long-term asset mix assumptions for both policyholders"
and shareholders" funds.
These changes, together with other significant items of experience, have been
highlighted and their effect quantified in the notes to the embedded value
results tables.
6. ASSUMPTIONS
Investment return and inflation
The assumed investment return on assets supporting the policyholder liabilities
and capital at risk are based on the long-term asset mix for these funds.
Inflation indexation for individual life premiums is assumed to be equal to
consumer price index inflation, while that for employee benefits is assumed to
equal expected salary inflation. Unit cost inflation is assumed to be at the
same level as salary inflation.
Cost of capital at risk
The assumed composition of the assets backing the capital at risk is consistent
with Sanlam"s practice and with the long-term asset distribution when
calculating the capital requirements.
Decrements, expenses and bonuses
Future mortality, morbidity and discontinuance rates and future expense levels
are based on recent experience where appropriate.
Future rates of bonuses for traditional participating business, stable bonus
business and participating annuities are set at levels that are supportable by
the assets backing the respective product asset funds at the respective
valuation dates.
The surrender and paid-up bases of South African life companies have been
adjusted, where applicable, to reflect the minimum standards for early
termination values agreed by the Life Offices" Association and National
Treasury. In all other respects, future benefits have been determined on
current surrender and paid-up bases.
HIV/Aids
Allowance is made, where appropriate, for the impact of expected HIV/Aids-
related claims, consistent with the recommendations of the Actuarial Society of
South Africa as set out in its proposed Professional Guidance Note 105, adjusted
for the findings from subsequently released ASSA Aids models.
Premiums on individual business are assumed to be rerated, where applicable, in
line with deterioration in mortality, with a three-year delay from the point
where mortality losses would be experienced.
Recurring expenses and project costs
Future investment expenses are based on the current scale of fees payable by the
Group"s life insurance companies to the relevant asset managers. To the extent
that this scale of fees includes profit margins for Sanlam Investment
Management, these margins have not been included in the value of in-force and
new business.
In determining the value of in-force business, the value of expenses for certain
planned projects focusing on both administration and distribution aspects of the
life insurance business has been deducted. These projects are of a short-term
nature, although similar projects may be undertaken from time-to-time. No
allowance has been made for the expected positive impact these projects may have
on the future operating experience.
Taxation
Projected tax is allowed for at rates and on bases in accordance with the tax
regimes applicable for each of the life businesses.
Allowance is made for capital gains tax in South Africa. The assumed rollover
period for realisation of investments is five years for property and equity
assets supporting policy reserves. For property and equity assets supporting
capital at risk the assumed rollover period is five years except for Santam
where we assume a ten year rollover period.
Allowance for secondary tax on companies (STC) is made by placing a present
value on the tax liability generated by the net cash dividends paid out, that
are attributable to the South African life companies. It is assumed that all
future dividends will be paid in cash. Previously it was assumed that over the
long-term the proportion of cash dividends paid would fall to a level of 50%
from the starting 100% level.
No allowance is made for tax changes announced by the Minister of Finance in his
budget speech on 15 February 2006.
SENSITIVITY ANALYSIS
Risk premiums relating to mortality are assumed to be increased consistent with
mortality experience (where appropriate).
The mortality assumption relating to annuities is decreased, because a decrease
in mortality increases the mortality risk on annuities.
7. GROSS INVESTMENT RETURN AND INFLATION
Sanlam Life Merchant African BIHL (1)
Insurance Investors Life (1)
Limited
2005 2004 22005 2004 2005 2005
% % p.a. % % p.a. % %
Fixed-interest 7,5 8,3 4,1 4,6 7,4 10,0
securities
Equities and 9,5 10,3 6,6 7,0 9,4 12,0
offshore
investments
Hedged equities (2) 7,5 8,3 6,6 7,0 n/a n/a
Property 8,5 9,3 6,6 7,0 8,4 11,0
Cash 5,5 6,3 4,1 4,6 5,4 8,0
Risk discount rate 10,0 10,8 7,8 8,3 10,9 13,5
Return on capital 7,8 9,1 4,1 4,6 7,9 11,0
at risk
Unit cost and 4,0 4,3 3,0 3,0 4,4 7,0
salary inflation
Consumer price 3,0 3,3 3,0 3,0 n/a n/a
index inflation
8. LONG-TERM ASSET MIX FOR ASSETS SUPPORTING THE CAPITAL AT RISK
Sanlam Life Merchant African BIHL(1)
Insurance Investors Life(1)
Limited
2005 2004 2005 2004 2005 2005
% % % % % %
Equities 25 42 0 0 50 65
Hedged equities 35 26 0 0 0 0
Property 5 8 0 0 0 4
Fixed-interest 20 20 0 0 25 14
securities
Cash 15 4 100 100 25 17
100 100 100 100 100 100
Notes:
African Life = African Life Assurance Company Limited; BIHL = Botswana Insurance
Holdings Limited.
The assumed future return for these assets is lower than that of equities, which
are not hedged, reflecting the cost of derivative instruments.
GROUP SECRETARY
JOHAN BESTER
REGISTERED OFFICE
2 STRAND ROAD, BELLVILLE 7530, SOUTH AFRICA
tELEPHONE +27 21 947-9111
FAX +27 21 947-8066
POSTAL ADDRESS
PO BOX 1, SANLAMHOF 7532, SOUTH AFRICA
REGISTERED NAME: SANLAM LIMITED
(REGISTRATION NUMBER 1959/001562/06)
JSE SHARE CODE: SLM
NSX SHARE CODE: SLA
ISIN NUMBER: ZAE000070660
INCORPORATED IN SOUTH AFRICA
TRANSFER SECRETARIES:
COMPUTERSHARE INVESTOR SERVICES 2004 (PROPRIETARY) LIMITED
(REGISTRATION NUMBER 2004/003647/07)
70 MARSHALL STREET, JOHANNESBURG 2001, SOUTH AFRICA
PO BOX 61051, MARSHALLTOWN 2107, SOUTH AFRICA
TEL 086 1100 913
Fax +27 11 688-5201
WWW.SANLAM.CO.ZA
Directors: R.C. Andersen (Chairman), P.T. Motsepe (Deputy Chairman), J. van Zyl
(Group Chief Executive), M.M.M. Bakane-Tuoane, D.C. Brink, A.S. du Plessis, F.A.
du Plessis, W.G. James, M.V. Moosa, P. de V. Rademeyer, M. Ramos, G.E. Rudman,
R.V. Simelane, Z.B. Swanepoel, E. van As, J.J.M. van Zyl
Date: 09/03/2006 08:07:10 AM Produced by the JSE SENS Department
