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SLM
SLM
SLM - Sanlam Limited - Audited Results for the Year Ended 31 December 2006
Sanlam Limited
Registered name: Sanlam Limited
(Registration number 1959/001562/06)
JSE share code: SLM
NSX share code: SLA
ISIN number: ZAE000070660
Audited results for the year ended 31 December 2006
Contents
Overview
Key features
Salient results
Executive review
Comments on the annual results
Financial statements
Accounting policies and actuarial basis
Group balance sheet
Group income statement
Group statement of changes in equity
Group cash flow statement
Notes to the financial statements
Shareholders` fund information
Group embedded value results
Administration
Sanlam Group Results 2006
Key features
Earnings
*Headline earnings per share up 33%
*Core earnings per share up 17%
*Dividend per share of 77 cents, increase of 18%
Business volumes
*Total new business volumes up 30% to R80,6 billion
*Net fund inflows of R14,1 billion (before PIC withdrawal)
*Sanlam Investments assets under management up 24% to R406 billion
Embedded Value
*Embedded value per share of 2 047 cents
*Return on embedded value per share of 31%
*Value of new life insurance business of R434 million; up 49%
*Life new business margin of 2,1%
Capital management
*4,3% of issued shares bought back during the year for R1,6 billion
*Subordinated debt issue of R2 billion in August 2006
SALIENT RESULTS
for the year ended 31 2006 2005
December 2006
SANLAM LIMITED GROUP
Earnings:
Net result from financial R million 2 616 2 300 14%
services
Core earnings (1) R million 3 402 3 280 4%
Headline earnings (2) R million 6 838 5 813 18%
Net result from financial cents 116,6 90,9 28%
services per share
Core earnings per share (1) cents 151,7 129,7 17%
Headline earnings per share cents 304,9 229,8 33%
(2)
Group administration cost % 26,7 29,1
ratio (3)
Group operating margin (4) % 20,7 20,7
Business volumes:
New business volumes R million 80 648 62 224 30%
Net fund flows R million (7 451) 6 300
Value of new life insurance
business
Value of new life insurance R million 434 291 49%
business
Life insurance PVNBP (5) R million 20 308 16 533 23%
Life new business margin (6) % 2,1 1,8
VALUE OF NEW NON-LIFE LINKED R million 64 -
AND LOAN BUSINESS
EMBEDDED VALUE:
Embedded value R million 46 811 38 204 23%
Embedded value per share cents 2 047 1 615 27%
Growth from life insurance % 30,7 22,3
business
Return on embedded value per % 31,0 24,4
share (7)
SANLAM LIFE INSURANCE LIMITED
Shareholders` fund R million 34 197 27 813
Capital adequacy requirements R million 5 800 5 375
(CAR)
CAR covered by prudential times 4,4 4,0
capital
Notes
1. Core earnings = net result from financial services and net investment
income (including dividends received from non-operating associates).
2. Headline earnings = core earnings, net investment surpluses, secondary
tax on companies and equity-accounted headline earnings less dividends
received from non-operating associates.
3. Administration costs as a percentage of financial services income earned
by the shareholders` fund less sales remuneration.
4. Result from financial services as a percentage of financial services
income earned by the shareholders` fund less sales remuneration.
5. PVNBP = present value of new business premiums and is equal to the
present value of new recurring premiums plus single premiums.
6. Life new business margin = value of new business as a percentage of life
insurance PVNBP.
7. 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.
EXECUTIVE REVIEW
Overview
The success of Sanlam`s strategy to build a balanced, robust and diversified
financial services group is evident from another year of strong financial
performance in 2006. The Group`s focus on client-centric financial
solutions, enhanced distribution and improved capital management has
contributed largely to the overall sound results. The overall strong
performance of investment markets and the South African economy during 2006
was also conducive to a favourable operating environment. Headline earnings
for the year of R6 838 million improved by 18% on 2005. The benefit of
Sanlam`s recent share buy-back programme is reflected in the increase of 33%
in headline earnings per share.
Total new business inflows of R80,6 billion for the year were 30% higher
than for the corresponding period in 2005. The improved level of inflows
experienced since the second half of 2005 has been maintained but the growth
rate has moderated since June 2006, due to the relatively higher comparative
base towards the end of 2005. The overall new business performance is
impressive in the current competitive environment; a tribute to the Group`s
strategy to increase its distribution capacity and reach. The R2 billion
contribution made by the Developing Markets` life businesses reflects the
value added by the acquisitions of African Life and the controlling interest
in Channel Life.
The Group`s operating performance for the year was satisfactory with the net
result from financial services increasing by 14% compared to the same period
in 2005. An outstanding performance by the Investment Management businesses
was to an extent offset by the anticipated decline in short-term insurance
and Group life underwriting margins. The disposal of the Group`s interest
in Absa during July 2005, combined with the application of excess capital
over the past 12 months, complicated a direct comparison of the results for
2005 and 2006. It contributed to a 20% reduction in net investment income
on the reduced investment asset base. Core earnings consequently increased
by only 4% compared to 2005, but improved by 17% on a per share basis.
The value of new life insurance business of R434 million is 49% up on 2005,
a particularly satisfying performance. In addition to this, Sanlam Personal
Finance achieved a value of new non-life business of R64 million. Sanlam`s
embedded value per share at 31 December 2006 amounted to R20,47. The growth
in embedded value per share of 31% is more than double the Group`s target
rate for the year.
Delivering on strategy
Sanlam`s performance for the year to December 2006 reflects the consistent
progress made on all the elements of the strategy we began implementing
three years ago. The year has seen a widening of our client base into both
the affluent and entry-level markets through solution diversification and
strengthening of our sales force.
By leveraging the Group`s existing and sizeable client base, and by building
on our strong relationships with clients, we have continued to drive
efficiencies and grow business volumes significantly across all business
clusters - off substantially less capital. The acquisition of African Life
and Channel Life established Sanlam as an important player in the entry-
level market. The joint venture agreement with Shriram Life Insurance in
India as well as the acquisition of equity stakes in the UK-based
intermediary distribution companies Intrinsic and recently Nucleus, provide
further international diversification and growth opportunities.
Shareholders are referred to the joint announcement on 27 February 2007
between Santam and Sanlam in terms of which Santam proposed a limited
voluntary buy back of 10% of its issued share capital. Sanlam extended an
offer to Santam shareholders to acquire any shares tendered in excess of the
Santam 10% limit. We believe that an increase in our Santam shareholding at
the indicated offer price will be value accretive to Sanlam shareholders and
will further contribute to a closer business relationship between Sanlam and
Santam. Santam also announced its intention to facilitate the introduction
of a 10% black empowerment Santam shareholder group. Sanlam fully supports
this initiative as a business imperative for Santam.
While many of the benefits of rationalisation have been realised during the
past year, we continue to focus on cost reduction in a highly competitive
environment, particularly in newly acquired businesses. Cost ratios
decreased further in 2006, and the retirement fund administration joint
venture with Coris Capital promises to deliver further cost savings and
operational benefits going forward. Improving cost efficiencies in
distribution, as well as agency productivity and maximising cross-selling
opportunities through broader distribution channels, should result in lower
acquisition costs.
Sanlam will seek to offer a wider range of solutions, across a growing
number of geographies. In order to achieve this, we have changed the way we
work - creating independent, more flexible and smaller business units that
are able to respond nimbly to the market.
Satisfactory progress has been made towards meeting the transformation
targets of the Financial Sector Charter. The Sanlam Broad-based Employee
Share Plan was launched during 2006 as part of the investment in our human
capital. In terms of the Share Plan some 1,7 million Sanlam shares were
transferred to more than 5 000 Group employees that do not participate in
other Group share schemes, ensuring that all employees share in the future
growth of the Group.
We have taken significant strides in transforming Sanlam from a mutual
insurer into a world-class financial services Group. While this process
will continue to evolve, the benefits of the change so far are already
evident in our ability to deliver strong results in a competitive
environment.
Capital efficiency
Effective management of Sanlam`s capital base remains key. By making
strategic investments, building a balanced portfolio and applying capital in
the most efficient manner, we have made significant gains in capital
utilisation. In addition, Sanlam Life`s debt issue of R2 billion reduced the
volatility in Sanlam Life`s capital portfolio, as well as the Group`s
economic capital requirement.
By far the biggest redeployment of capital over the past two years has been
through the share buy-back programme. A total of 103,6 million shares were
acquired at a total cost of R1,6 billion during 2006, in addition to the 359
million shares purchased at a total cost of R4,4 billion in 2005. The net
reduction in issued share capital following the initiation of the share buy-
back programme is now 16,7%.
As at 31 December 2006 we determined that the Sanlam shareholders` fund held
discretionary capital in excess of our immediate requirements of some R6
billion. In line with our strategy, Sanlam will remain active in exploring
additional growth opportunities through potential value-enhancing
acquisitions. However, the Board still considers it an efficient
application of the Group`s excess capital to continue the buy-back of Sanlam
shares. A formal buy-back arrangement is being proposed in terms of which
shareholders will have an equal opportunity to tender their Sanlam shares on
a voluntary basis for acceptance. Some R2,7 billion has been earmarked for
this. Full details of the buy-back are provided in a separate announcement,
and will be covered in a circular to shareholders.
Dividend
The strong financial performance during 2006 enabled the Board to increase
the total dividend distribution by some 15% and still maintain a 1,2 times
cash operating earnings cover. As a result of the reduction in the number of
shares in issue following the share buy-backs during the year, the dividend
per share will increase by 18% on the 65 cents per share paid in 2005 to 77
cents per share.
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 20
April 2007 to 26 April 2007, both dates included.
The last date of trade to qualify for this dividend will be Thursday, 19
April 2007 and shares will trade ex div from Friday, 20 April 2007.
Looking ahead
The South African economy has experienced good positive growth, supported by
significant increases in job creation over the past three years. We expect
these trends to continue and accelerate, supported by robust growth in
infrastructure investment by both the private and public sector. This in
turn is expected to boost consumer markets. We, however, remain cognisant
of the challenges facing our country, especially the need to address
poverty, the HIV/Aids pandemic and the need to broaden our skills base. We
believe that strong growth and job creation are critical to addressing these
challenges. As a committed corporate citizen Sanlam will continue to play
an important role in addressing these challenges and making a positive
contribution to the growth of South Africa`s economy.
Sanlam has developed a strong operational base from which to leverage growth
in its markets and become the leader in wealth creation. We continue to
strive for earnings growth and improved capital management as we drive
increasing return on embedded value, while at the same time, our focus on
sustainability and responding to the industry and market dynamics, allows us
to continually reshape our earnings power. Sanlam has become a culturally
diverse business with an entrepreneurial spirit positioning us for further
growth over the longer term.
We support and are working with the regulatory authorities in their efforts
to create a transparent and cost efficient savings environment in South
Africa. We are confident that we are well positioned to operate effectively
within the new and unfolding regulatory regime.
Market conditions, including investment and risk-underwriting conditions,
will affect our ability to repeat our 2006 performance, but we continue to
build on our achievements and focus on enhancing shareholder value.
COMMENTS ON THE RESULTS
Introduction
The audited Sanlam group results for the year ended 31 December 2006 are
presented based on and in compliance with International Financial Reporting
Standards (IFRS).
The past financial year was characterised by the impact of increased
consumerism and competition within the industry, which put pressure on
pricing and margins across the board. Despite these challenges the Group
continued to deliver strong results. The sale of the shareholders` fund
investment in Absa in 2005, and the subsequent application of the proceeds,
complicated a direct comparison of the 2006 and 2005 results.
Earnings
Shareholders` fund summarised income statement for the year ended
31 December
R million 2006 2005
Net result from financial services 2 616 2 300 14%
Net investment income 786 980 -20%
CORE EARNINGS 3 402 3 280 4%
Net broad-based employee share plan (19) -
Net equity-accounted headline earnings 164 478 (66%)
Financial claims - (590)
Investment surpluses (excluding fund 3 215 2 003 61%
transfers)
Amortisation of value of business acquired (45) -
Net Secondary Tax on Companies (STC) (84) (88) 5%
Earnings before fund transfers 6 633 5 083 31%
Fund transfers 205 730
HEADLINE EARNINGS 6 838 5 813 18%
Other non-headline earnings 5 (8)
Profit on disposal of associates and 132 5 125
subsidiaries
Impairment of investments and goodwill (30) (3)
Attributable earnings 6 945 10 927 -36%
Net result from financial services 2 616 2 300 14%
Net investment return 4 329 8 627
Attributable earnings 6 945 10 927 -36%
Core earnings
Core earnings, a measure of the Group`s `normalised` earnings, of R3 402
million for the year are 4% up on 2005. Core earnings comprise the net
result from financial services and net investment income earned on the
shareholders` fund, but exclude abnormal and non-recurring items as well as
investment surpluses. Net investment income consists of dividends, interest
and rental income earned on the shareholders` fund discretionary investment
portfolio as well as the margin earned on the Group`s hybrid debt and
preference share portfolios, and also includes dividends received from non-
operating associated companies and joint ventures. It however excludes the
equity-accounted retained earnings of these operations. The marginal
increase in core earnings is the result of a 14% increase in the net result
from financial services for the period being offset by a 20% decline in net
investment income over the same period. On a per share basis, core earnings
increased by 17%, reflecting the 11% reduction in the weighted average
number of issued shares following the share buy-back scheme in 2005 and
continued market buy-backs during 2006.
The 14% improvement in net result from financial services is substantially
due to an excellent performance by Sanlam Investments and a maiden
contribution from the new acquisitions in Sanlam Developing Markets,
partially offset by a disappointing result by Sanlam Employee Benefits.
Net result from financial services for the year ended 31
December
R million 2006 2005
Sanlam Personal Finance 1 290 1 285 0%
Sanlam Developing Markets 207 (31)
Sanlam Employee Benefits 50 159 -69%
Sanlam Investments 730 528 38%
Sanlam Capital Markets 141 126 12%
Short-term insurance 342 349 -2%
Independent Financial Services 16 22 -27%
Corporate expenses (160) (138) -16%
Net result from financial services 2 616 2 300 14%
*Sanlam Personal Finance (SPF) recorded stable and satisfactory results for
the year as the earnings in both its insurance and investment businesses
benefited from increased business flows and the positive impact of the
strong equity markets on fund values and associated fees earned. SPF
achieved a gross result from financial services of R1 697 million, a 10%
increase on 2005. Non-life business earnings increased from R109 million in
2005 to R176 million in 2006 and are increasingly making an important
contribution to the SPF earnings growth. After tax and minority interest the
net result from financial services of R1 290 million is only marginally up
on 2005. This can essentially be ascribed to a higher effective tax rate in
2006 as the potential benefit of available tax losses were exhausted during
2005.
*The Sanlam Developing Markets (SDM) businesses (African Life and Channel
Life) performed in line with expectations despite the unavoidable management
attention required during the integration process. Gross operating profit
for the year amounted to R421 million. Net of taxation and the minority
shareholders` interest in Channel Life and African Life`s Africa operations,
earnings attributable to Sanlam shareholders amounted to R207 million for
the period. The results for the second half was almost double that reported
for the first half of 2006. The first half performance was however affected
by a degree of prudent reporting due to operational and system problems
experienced in African Life SA, with some compensating upside in the second
half. Channel Life continued on its strong new business growth while
Shriram Life in India reported promising maiden new business results, albeit
still on a relatively low level. Overall, the SDM businesses are well
established within the Group and geared for future growth.
*The sharp fall in the contribution from Sanlam Employee Benefits is
disappointing. Both gross earnings of R70 million and earnings net of tax
and minorities of R50 million are some 70% lower than the results in 2005.
Disappointing new business flows, coupled with a sustained level of
outflows, are eroding the SEB fee base. At the same time, competitive
pricing and the expected normalisation of claims experience, resulted in
reduced margins and a sharp drop in reported risk profits. A further major
contributor to the negative performance is an increase in administration
losses. In preparation for the transfer of the retirement fund
administration business to Coris, additional costs were incurred and certain
provisions created to cover potential claims emanating from administration-
related disputes.
*The majority of Sanlam Investments` businesses benefited from the strong
equity markets, which boosted gross operating results to R1 077 million for
the year, a 54% improvement on 2005. After tax, income attributable to
Sanlam increased by 38% to R730 million. This exceptional performance is
founded on a sustained turnaround in its investment performance and an
increase in its business base. This contributed to an increase in funds
under management (also assisted by equity market growth) and consequently a
higher level of management fees, including a major increase in the level of
performance fees earned.
*Sanlam Capital Markets reported another good set of results. Net operating
profit of R141 million is only 12% up on 2005 but represents a return on
equity of 35%, well ahead of its internal target of 25%. All its business
units contributed to this strong performance after a relatively slow start
to the year.
*Santam`s gross operating earnings for the year of R906 million are 11% down
on the 2005 performance, the result of an anticipated moderation in the
underwriting cycle. On a net basis the 2006 performance of R342 million is
only 2% lower than in 2005. The smaller reduction in net earnings is in part
due to an increase from 50,7% in 2005 to 54,7% in the Sanlam shareholders`
fund holding in Santam. An increase in claims experienced resulted in an
average underwriting margin for the year of 6,1% compared to an average
margin of 8,7% for 2005. The average claims ratio (based on net earned
premiums) for the year is 69% against 65,3% for 2005. The lower
underwriting results were in part compensated for by an increase in interest
earned on working capital balances from a combination of improved working
capital management practices and an increase in interest rates during the
year.
*The net earnings contribution from Independent Financial Services of R16
million is 27% below that of 2005. This is mainly attributable to a
reduction in the Group`s interest in the Punter Southall Group from 61% at
the end of 2005 to 27% at the end of 2006, as well as anticipated losses at
the newly established businesses in the UK.
*The 16% increase in net corporate costs to R160 million is mainly due to
start-up expenditure on the Group`s loyalty programme.
Investment income
A portion of the proceeds from the disposal of Absa during July 2005 was
invested in a balanced portfolio. This resulted in a higher balanced
portfolio investment asset base during 2006 compared to 2005, with a
commensurate increase in investment income. This increase is however more
than offset on a relative basis by the special Absa dividend of R249 million
received during June 2005, resulting in an overall 20% reduction in net
investment income. Excluding the 2005 Absa dividend, net investment income
increased by some 8%.
Headline earnings
Headline earnings for 2006 reached a record R6 838 million, an improvement
of 18% on 2005. The benefit of the share buy-back programme is evident in a
33% increase in headline earnings per share to 304,9 cents per share.
Net result from financial services contributed R2 616 million (38%) to
headline earnings, up 14% on 2005, with the balance essentially reflecting
an increase in the aggregate investment return on the shareholders`
discretionary capital. As referred to above, net investment income of R786
million is 20% down on 2005, while net realised and unrealised investment
surpluses increased by 60% due to the strong equity markets at year-end.
This was partially offset by the net effect of:
*A 66% reduction in equity-accounted earnings. The 2005 equity-accounted
earnings were boosted by Absa`s earnings up to the sale of the shareholders`
fund`s stake in Absa in July 2005 as well as, following the initial block of
shares acquired in African Life, a 20% interest in African Life`s earnings
from March 2005 to the final implementation of the transaction and the
consolidation of the African Life investment from December 2005. The 2006
equity-accounted earnings of R164 million are limited to the appropriate
share of the earnings of the investment in associated companies in Santam,
Sanlam Life and Sanlam Properties.
*The amortisation (R45 million) of the Value of Business Acquired (VOBA)
intangible asset recognised in terms of IFRS on the acquisition of African
Life and Channel Life. VOBA represents the value of the book of long-term
insurance business acquired as part of the African Life and Channel Life
acquisitions, and is amortised through the income statement in terms of IFRS
over the expected life of the in-force book.
*The after tax cost recognised in terms of IFRS 2 Share-based Payment in
respect of the Broad-based Employee Share Plan introduced during 2006. The
cost of R19 million represents the fair value (after tax) of the 1,7 million
Sanlam shares transferred to Sanlam employees in terms of the scheme.
*The non-recurrence of the financial claims provision recognised in 2005.
*Fund transfers of R205 million, being R525 million (72%) lower than for the
same period in 2005. The reduction is essentially due to the effect of the
disposal of the shareholders` fund interest in Absa during July 2005 as well
as the increase in the Sanlam Limited share price during 2006. The disposal
of the Absa holding resulted in the reversal in 2005 of R578 million of the
cumulative shortfall in respect of the investment in Absa shares. Excluding
fund transfers headline earnings increased by 30%.
Attributable earnings
Earnings attributable to shareholders decreased by 36% during 2006. This is
mainly due to the once-off profit of R5 billion realised on the disposal of
the shareholders` fund interest in Absa during 2005. Excluding profit on the
disposal of subsidiaries and associates, attributable earnings increased by
17%.
Business volumes
New business flows
Total new business inflows for the year are 30% higher than for the
corresponding period in 2005. Growth in both life and investment business
remained very strong and exceeded the comparative period in 2005 by 24% and
34% respectively. The growth in life business includes the impact of the
first time inclusion of African Life, Channel Life and Shriram in the 2006
results; excluding Sanlam Developing Markets, life business increased by 8%.
White label flows are 36% up on 2005, assisted to an extent by the first
time inclusion of SDM. The SDM white label business comprises of life
licence services provided by Alternative Channel, a subsidiary of Channel
Life.
New Business Volumes for the year ended 31 December
R million 2006 2005
Life business 13 933 11 220 24%
Sanlam Personal Finance 9 333 8 248 13%
Sanlam Developing Markets 2 003 152
Sanlam Employee Benefits 2 180 2 699 (19%)
Sanlam Investments 417 121 245%
Investment business 48 574 36 295 34%
Sanlam Personal Finance 12 493 9 631 30%
Sanlam Investments 36 081 26 664 35%
Short-term insurance 10 203 8 871 15%
NEW BUSINESS EXCLUDING WHITE LABEL 72 710 56 386 29%
White label 7 938 5 838 36%
Collective Investment Schemes 7 647 5 838 31%
Sanlam Developing Markets 291 -
TOTAL NEW BUSINESS VOLUMES 80 648 62 224 30%
Total new Life business inflows of R13,9 billion are 24% up on 2005. This is
substantially due to strong inflows experienced by Glacier (formerly
Innofin) as well as the maiden contribution from new acquisitions, as
mentioned above.
*SPF Individual Life sales in South Africa are up 14% on 2005.
*New recurring premium sales increased by 12% compared to 2005, driven by an
8% increase in the number of advisers and a 13% increase in their average
premium size.
*Total single premium sales up 14% on 2005. SPF`s Glacier Life insurance
product range recorded excellent growth of 37%.
*Merchant Investors in the UK recorded a satisfactory 13% growth in new
business volumes.
*The first time inclusion of Sanlam Developing Markets inflows of R2 003
million made a material contribution to the strong growth in individual life
flows, with both African Life and Channel Life performing to plan.
*SEB Group Life inflows are 19% down on the comparable 2005 inflows, a
disappointing result following on the 39% growth reported for the six months
to June. Although volatility in new business flows is typical to the nature
of group life business, the low level of new business volumes in SEB since
June 2006 must also be attributed to a difficult and very competitive
market.
Investment related inflows increased by 34% on 2005 to R48,6 billion.
*With the exception of wholesale third party and RSA multi-manager (SMM)
fund flows, where a decline from the exceptionally high 2005 flows was not
unexpected, all other investment management businesses reported strong
increases on the comparable 2005 inflows. SPI and the international fund
management businesses in particular experienced exceptional increases in
inflows, contributing to an overall 35% improvement in inflows in Sanlam
Investments.
*In Sanlam Personal Finance, Glacier`s investment and Sanlam Namibia`s unit
trust new business flows increased by an aggregate 30% compared to 2005.
In a renewed focus on the retention and procurement of quality and
profitable business Santam recorded a 15% increase in net premium inflows
for 2006. In South Africa strong growth was achieved across most classes of
business. International premiums however only increased by 2% in GBP terms.
Net business flows
Net fund outflows of R7,5 billion was recorded for 2006 compared to net
inflows of R6,3 billion in 2005. Total fund inflows increased by 28% on 2005
while outflows in respect of fund withdrawals and policy benefits were up by
50%. Outflows in 2006 include a R21,6 billion withdrawal by the Public
Investment Corporation (PIC) (2005: R6 billion) as part of an overall
adjustment of its investment strategy that resulted in a pro rata reduction
in their mandate allocation to all the major asset managers. Sanlam
Investments` profitability is not expected to be materially affected by the
withdrawal as the funds withdrawn were managed at marginal fees. At the same
time a new performance based fee structure has been agreed on the remaining
PIC funds. Excluding the PIC withdrawals, an overall positive net inflow of
R14,1 billion was achieved compared to an inflow of R12,3 billion in 2005.
Sanlam Investments` net flows amounted to R6,7 billion compared to R6,6
billion in 2005 (excluding the PIC withdrawals). Sanlam Investments`
international businesses performed extremely well with R3,3 billion in net
inflows compared to R1,5 billion in 2005.
Individual life RSA business contributed R1 114 million to the net inflows,
supported by a R1 011 million positive contribution from SDM. The shift from
life to non-life business was again evident in 2006 with SPF`s RSA life
business recording net inflows of R103 million compared to a R2,3 billion
net inflow of RSA non-life business. The net outflows in SEB (Group Life
business) continued and remain a concern.
Value of new business
The aggregate value of new life insurance business (Life VNB) increased by
49% to R434 million compared to 2005. This increase was supported by the
first time inclusion of the African Life and Channel Life VNB in 2006.
Excluding SDM, Life VNB decreased by only 3%, a commendable performance
given the margin pressure caused by recent regulatory changes as well as a
concerted effort to improve clients` yield reduction.
SPF Life VNB is marginally lower compared to 2005. Competitive pricing and
an improvement in the value proposition provided to clients through
solutions such as StratusSP, resulted in a reduction in the SPF Life VNB
margin from 2,1% in 2005 to 1,9% in 2006. SEB`s disappointing new business
volumes for the year is reflected in the 15% reduction in Life VNB. Margins
were however maintained at 1,1%.
The SDM Life VNB performance is in line with expectations at a margin that
is significantly higher than the traditional SPF business, essentially due
to its different mix of business. The value of new life business totalled
R134 million at an average margin of 4,3%. Value attributable to Sanlam
shareholders amounted to R81 million at a slightly lower margin of 3,5%.
The value of non-life business amounted to R64 million for 2006. The shift
from life to non-life business, as eluded to elsewhere in this report,
supported the value of non-life linked business, which amounted to R37
million. The profitability of non-life linked business was 0,7%. The value
of new loan business written by Sanlam Home Loans and Sanlam Personal Loans
amounted to R27 million in 2006. The value of new loan business as a
percentage
of loans granted was 1,3% in 2006.
Embedded value
The Group`s embedded value of R46,8 billion as at 31 December 2006 is 23% up
on the R38,2 billion reported at 31 December 2005, after allowing for the
R1,5 billion dividend paid in respect of the 2005 financial year as well as
R1,6 billion spent on the buy-back of shares during the year. Embedded value
per share increased by 27% to R20,47, reflecting the accretion resulting
from the share buy-back programme. The discount of Sanlam`s share price to
embedded value increased from 5,9% at 31 December 2005 to 10,6% at 31
December 2006.
EMBEDDED VALUE
R million 2006 2005
NET ASSET VALUE (AT FAIR 37 491 30 592 23%
VALUE)
Goodwill on life company 1 425 1 328
acquisitions
Non-life Group operations 13 210 9 702 36%
Portfolio investments 22 856 19 562 17%
Adjustments (2 943) (2 962) -1%
Adjusted net asset value 34 548 27 630 25%
Net value of life in- 12 263 10 574 16%
force business
Embedded value 46 811 38 204 23%
Embedded value per share 2 047 1 615 27%
(cents)
Share price (cents) 1 830 1 519 20%
Discount to embedded 10,6% 5,9%
value
In line with our diversification drive, non-life operations are making an
increasing contribution to the Group Embedded Value. As at the end of
December 2006 these operations were valued at R13,2 billion and accounted
for 28% of Group Embedded Value.
Taking into account the share buy-backs during the year as well as the
dividend paid, the return on embedded value for 2006 amounted to 30,7%. On a
per share basis the growth amounted to 31%, compared with growth of 24,4% in
2005.
Growth from non-life operations amounted to R4,4 billion (45% growth),
whereas the growth from life insurance business amounted to R3,3 billion
(31% growth).
Solvency
All life insurance companies in the Group were adequately capitalised at the
end of December 2006. The capital of Sanlam Life Insurance Limited amounted
to R34,2 billion, compared to R27,8 billion as at 31 December 2005. The
Capital Adequacy Requirements (CAR) were covered 4,4 times by regulatory
capital at the end of December 2006, compared to 4,0 times as at 31 December
2005. There were no policyholder portfolios at 31 December 2006 with
negative stabilisation reserves.
Short-term insurer, Santam, maintained its healthy solvency position and its
shareholder funds constituted 62% of net earned premiums at the end of
December 2006, the same level as at 31 December 2005.
Although the Group`s capital base was reduced by R1,6 billion as a result of
the buy-back of shares during the year ended 31 December 2006, the Group
remained in a strong solvency position at 31 December 2006. The Sanlam
Limited Board, as required by the JSE Listing Requirements, is of opinion
that after the share buy-back, Sanlam Limited and the Group has sufficient
share capital, reserves and working capital for ordinary business purposes
and to service its debt during the following 12 months and that the Group`s
assets will exceed its liabilities during this period.
Roy Andersen Johan van Zyl
Chairman Group Chief Executive
Sanlam Limited
Cape Town
7 March 2007
Financial Statements for the year ended 31 December 2006
ACCOUNTING POLICIES AND ACTUARIAL BASIS
Basis of presentation
The accounting policies adopted for the purposes of the financial statements
comply with International Financial Reporting Standards, and are consistent
with those applied in the 2005 financial statements. 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 2005,
apart from changes in the economic assumptions.
Application of new and revised standards
The following new or revised IFRSs and interpretation have effective dates
applicable to the Group`s 2006 financial year:
*Amendment to IAS 19 Employee Benefits - Actuarial Gains and Losses, Group
Plans and Disclosures
*Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates - Net
Investment in a Foreign Operation
*Amendments to IAS 39 Financial Instruments: Recognition and Measurement -
Cash Flow Hedge Accounting of Forecast Intragroup Transactions
*Amendments to IAS 39 Financial Instruments: Recognition and Measurement -
The Fair Value Option
*Amendments to IAS 39 Financial Instruments: Recognition and Measurement and
IFRS 4 Insurance Contracts - Financial Guarantee Contracts
*IFRIC 4 Determining whether an arrangement contains a lease
The application of these standards and interpretation did not have a
significant impact on the Group`s reported results and cash flows for the
year ended 31 December 2006 and the financial position at 31 December 2006.
Disclosure in the notes to the financial statements has been amended in
accordance with the requirements of the revised IAS 19 and IAS 39.
The following new or revised IFRSs and interpretations have effective dates
applicable to the Group`s 2007 financial year (unless otherwise indicated):
*IFRS 7 Financial Instruments: Disclosures
*Amendment to IAS 1 Presentation of Financial Statements - Capital
Disclosures
*IFRS 8 Operating Segments (effective 2009 financial year)
*IFRIC 8 Scope of IFRS 2
*IFRIC 9 Reassessment of Embedded Derivatives
*IFRIC 10 Interim Financial Reporting and Impairment
*IFRIC 11 IFRS 2: Group and Treasury Share Transactions (effective 2008
financial year)
*IFRIC 12 Service Concession Arrangements (effective 2008 financial year)
*AC 503 Accounting for Black Economic Empowerment (BEE) Transactions
The Group has not early adopted any of these standards or interpretations.
The application of these standards and interpretations in the 2007 financial
reporting period is not expected to have a significant impact on the Group`s
reported results, financial position and cash flows.
GROUP BALANCE SHEET at 31 December 2006
2006 2005
R million R million
ASSETS
Property and equipment 259 249
Owner-occupied properties 530 492
Goodwill 2 163 2 174
Value of business acquired 977 982
Deferred acquisition costs 1 397 1 155
Long-term reinsurance assets 427 389
Investments 280 627 232 851
Properties 14 602 12 748
Equity-accounted investments 3 417 1 037
Equities and similar securities 141 456 120 763
Public sector stocks and loans 53 921 47 998
Debentures, insurance policies, preference 31 743 21 173
shares and other loans
Cash, deposits and similar securities 35 488 29 132
Deferred tax 549 372
Short-term insurance technical assets 2 288 2 372
Working capital assets 46 265 35 716
Trade and other receivables 37 103 27 427
Cash, deposits and similar securities 9 162 8 289
Total assets 335 482 276 752
Equity and liabilities
Shareholders` fund 29 121 25 020
Minority shareholders` interest 3 934 3 443
Total equity 33 055 28 463
Long-term policy liabilities 237 864 198 234
Insurance contracts 125 517 109 591
Investment contracts 112 347 88 643
Term finance 5 760 2 879
Interest-bearing liabilities matched by 3 689 2 835
assets
Other interest-bearing liabilities 2 071 44
External investors in consolidated funds 8 010 6 030
Cell owners` interest 329 268
Deferred tax 1 929 1 623
Short-term insurance technical provisions 7 752 6 702
Working capital liabilities 40 783 32 553
Trade and other payables 37 801 30 071
Provisions 996 886
Taxation 1 986 1 596
Total equity and liabilities 335 482 276 752
GROUP INCOME STATEMENT for the year ended 31 December 2006
2006 2005
Notes R million R million
Net income 69 960 63 307
Financial services income 24 221 20 393
Reinsurance premiums paid (2 432) (2 339)
Reinsurance commission received 383 445
Investment income 12 022 10 722
Investment surpluses 37 903 35 282
Finance cost - margin business (223) (293)
Change in fair value of external (1 914) (903)
investors liability
Net insurance and investment contract (50 072) (41 440)
benefits and claims
Long-term insurance and investment (43 272) (35 164)
contract benefits
Enhanced early termination benefits - (620)
Short-term insurance claims (8 086) (6 904)
Reinsurance claims received 1 286 1 248
Expenses (8 956) (7 769)
Sales remuneration (3 300) (2 632)
Administration costs (5 656) (5 137)
Impairment of investments and goodwill (30) (12)
Amortisation of value of business (45) -
acquired
Net operating result 10 857 14 086
Equity-accounted earnings 423 944
Finance cost - other (114) (136)
Profit before tax 11 166 14 894
Taxation 1 (3 070) (2 803)
Shareholders` fund (1 894) (1 684)
Policyholders` fund (1 176) (1 119)
Profit for the year 8 096 12 091
Attributable to:
Shareholders` fund 6 945 10 927
Minority shareholders` interest 1 151 1 164
8 096 12 091
Earnings attributable to shareholders
of the company (cents):
Basic earnings per share 2 315,2 439,2
Diluted earnings per share 2 309,6 432,0
Group Statement Of Changes In Equity for the year ended 31 December
2006
2006 2005
R million R million
Shareholders` fund:
Balance at beginning of year 25 020 19 685
Total recognised income 7 263 11 008
Profit for the year 6 945 10 927
Equity-accounted movement in associated - 15
companies` reserves
Movement in foreign currency translation 318 66
reserve
Net realised investment surpluses on (188) 25
treasury shares
Share-based payments 74 64
Dividends paid (1) (1 467) (1 295)
Acquired through business combinations - (31)
Shares cancelled (1 644) (4 446)
Cost of net treasury shares sold (2) 63 10
Balance at end of year 29 121 25 020
Minority shareholders` interest:
Balance at beginning of year 3 443 3 515
Total recognised income 1 257 1 163
Profit for the year 1 151 1 164
Movement in foreign currency translation 106 (1)
reserve
Share-based payments 9 5
Dividends paid (668) (788)
Acquisitions, disposals and other (107) (452)
movements in minority interests
Balance at end of year 3 934 3 443
Shareholders` fund 25 020 19 685
Minority shareholders` interest 3 443 3 515
Total equity at beginning of year 28 463 23 200
Shareholders` fund 29 121 25 020
Minority shareholders` interest 3 934 3 443
Total equity at end of year 33 055 28 463
1. Dividend of 65 cents per share paid during 2006 (2005: 50 cents per
share) in respect of the 2005 financial year.
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 2006
2006 2005
R million R million
Net cash (outflow)/inflow from operating (5 436) 1 938
activities
Net cash inflow from investment activities 11 704 13 069
Net cash inflow/(outflow) from financing 971 (6 919)
activities
Net increase in cash and cash equivalents 7 239 8 088
Cash, deposits and similar securities at 37 408 29 320
beginning of year
Cash, deposits and similar securities at end 44 647 37 408
of year
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31
December 2006
2006 2005
R R
million million
1. TAXATION
Result from financial services 850 747
Investment income 184 150
Investment surpluses 714 330
Profit on disposal of subsidiaries 3 -
Profit on disposal of associated companies 4 534
Enhanced early termination benefits - (180)
Secondary Tax on Companies 139 103
Tax expense - shareholders` fund 1 894 1 684
Tax expense - policyholders` fund 1 176 1 119
Total income tax charged to income 3 070 2 803
statement
Cents Cents
2. EARNINGS PER SHARE
Basic earnings per share:
Net result from financial services 118,7 92,5
Core earnings 154,4 131,8
Headline earnings 310,4 233,7
Profit attributable to 315,2 439,2
shareholders` fund
Diluted earnings per share:
Net result from financial services 116,6 90,9
Core earnings 151,7 129,7
Headline earnings 304,9 229,8
Profit attributable to 309,6 432,0
shareholders` fund
R million R million
Analysis of earnings (refer
shareholders` fund income
statement):
Net result from financial services 2 616 2 300
Core earnings 3 402 3 280
Headline earnings 6 838 5 813
Profit attributable to 6 945 10 927
shareholders` fund
Number of shares:
Number of ordinary shares in issue 2 408,6 2 767,6
at beginning of year
Less: Weighted average number of (43,8) (76,4)
shares cancelled
Less: Weighted average Sanlam (161,7) (203,5)
shares held by subsidiaries
(including policyholders)
Adjusted weighted average number of 2 203,1 2 487,7
shares for basic earnings per share
Add: Weighted conversion of 6,8 6,2
deferred shares
Add: Total number of shares under 63,1 89,6
option
Less: Number of shares (under (29,9) (54,1)
option) that would have been issued
at fair value
Adjusted weighted average number of 2 243,1 2 529,4
shares for diluted earnings per
share
Number of ordinary shares in issue 2 408,6 2 767,6
- beginning of year
Shares cancelled (105,0) (359,0)
Number of ordinary shares in issue 2 303,6 2 408,6
Shares held by subsidiaries in (24,1) (48,6)
shareholders` fund
Convertible deferred shares held by 7,2 6,5
Ubuntu-Botho
Adjusted number of shares for value 2 286,7 2 366,5
per share
3. SHARE REPURCHASES
The Sanlam shareholders granted general authorities to the Group at the
2005 and 2006 annual general meetings to repurchase Sanlam shares in
the market. The Group acquired 103,6 million shares from 9 March 2006
to 31 December 2006 in terms of the general authorities. The lowest and
highest prices paid were R14,07 and R18,06 per share respectively. The
total consideration paid of R1,6 billion was funded from existing cash
resources. All repurchases were effected through the JSE trading system
without any prior understanding or arrangement between the Group and
the counter parties. Authority to repurchase 227 million shares, or
8,6% of Sanlam`s issued share capital at the time, remain outstanding
in terms of the general authority granted at the annual general meeting
held on 7 June 2006.
The financial effects of the share repurchases during 2006 are
illustrated in the table below:
Before After
Re-purchases Re-purchases
Basic earnings per share:
Profit attributable to Cents 308,8 315,2
shareholders` fund
Headline earnings Cents 304,1 310,4
Diluted earnings per share:
Profit attributable to Cents 303,5 309,6
shareholders` fund
Headline earnings per share Cents 298,8 304,9
Value per share:
Embedded value Cents 2 030 2 047
Net asset value Cents 1 290 1 274
Tangible net asset value Cents 1 100 1 075
4. BUSINESS COMBINATIONS
Channel Life Limited (Channel Life)
The Group acquired a controlling interest in Channel Life, a South
African based long-term insurance company, during February 2006. As
part of the transaction, the Group`s 55% interest in Safrican
Insurance Company Limited (Safrican) was transferred to Channel Life.
The Channel Life group contributed R762 million and R27 million to
Group revenue and net profit respectively for the twelve months ended
31 December 2006.
Other
Other business combinations relate to the following:
- The acquisition of Coris multi-manager business;
- The first time consolidation of African Life`s 50% interest in Pan
African Insurance Holdings (PAIH) after the group gained management
control at the end of the 2006 financial year; and
- Increase in the shareholding of other subsidiaries, predominantly
Santam.
Coris and PAIH`s contribution to profit for 2006 is not material.
Channel Life Other
R million R million
Details of the purchase consideration
and goodwill acquired are as follows:
Purchase consideration 133 569
Cash consideration 123 501
Net asset value contributed 10 68
Fair value of net assets acquired 76 352
Goodwill 57 217
The goodwill acquired relates to the future new business potential of
the Channel Life group and synergies between the other interests
acquired and existing Sanlam group businesses.
Channel Life Other
Fair value Carrying Fair value Carrying
value (1) value (1)
R million R million R million R million
Details of the assets and
liabilities acquired are as
follows:
Property and equipment 5 5 6 6
Owner-occupied properties - - 2 2
Intangible assets 42 15 - -
Investments 12 327 12 327 429 429
Deferred tax 55 55 (1) (1)
Trade and other receivables 115 115 35 35
Cash, deposits and similar 134 134 12 12
securities
Term finance (12) (12) - -
Long-term liabilities (12 362) (12 362) (268) (268)
Net working capital (170) (170) (78) (78)
liabilities
Net assets 134 107 137 137
Minority shareholders` (58) 215
interest
Net assets acquired 76 352
(1) Carrying value of assets and liabilities in acquiree`s own
financial statements on acquisition date.
1 CONTINGENT LIABILITIES
Shareholders are referred to the contingent liabilities disclosed in the
2005 annual report. The circumstances surrounding these contingent
liabilities remained unchanged, apart from the discussions with the South
African Revenue Service (SARS) regarding revised tax assessments issued to a
subsidiary of Genbel Securities Limited (Gensec), which has been resolved
since the issuance of the 2005 annual report. A final settlement has been
reached between Gensec and SARS. The amount paid in terms of the agreement
has been funded from an existing provision held for this purpose.
Financial Information for the Shareholders` Fund for the year ended 31
December 2006
Contents
Shareholders` fund balance sheet - Net Asset Value
Shareholders` fund balance sheet - Fair Value
Shareholders` fund income statement
Notes to the shareholders` fund information
SHAREHOLDERS` FUND BALANCE SHEET AT NET ASSET VALUE
at 31 December 2006
2006 2005
R million R million
Assets
Goodwill 2 163 2 174
Value of business acquired 977 982
Investments 36 423 32 547
Working capital and other assets 44 123 32 976
Total assets 83 686 68 679
Equity and liabilities
Shareholders` fund 29 121 25 020
Minority shareholders` interest 4 050 3 557
Term finance, working capital and other 50 515 40 102
liabilities
Total equity and liabilities 83 686 68 679
Net asset value per share (cents) 1 274 1 057
SHAREHOLDERS` FUND BALANCE SHEET AT FAIR VALUE
at 31 December 2006
2006 2005
R million R million
Assets
Property and equipment 195 177
Owner-occupied properties 514 480
Goodwill (2) 477 419
Value of business acquired (2) 977 982
Deferred acquisition costs 917 582
Investments 41 308 35 307
Sanlam businesses 13 210 9 702
Investment Management 5 358 3 228
SIM Wholesale (3) 3 729 2 481
International (SMMI and Octane) 1 336 522
Sanlam Collective Investments 293 225
Sanlam Personal Finance 1 058 668
Glacier 527 341
Sanlam Personal Loans (4) 94 71
Multi-Data 110 82
Sanlam Trust 95 84
Sanlam Home Loans 168 60
Other (5) 64 30
Independent Financial Services 625 505
Punter Southall Group 209 382
Gensec Properties 36 13
Other (6) 380 110
Sanlam Capital Markets 541 552
Santam 5 628 4 749
Associated companies 2 806 871
Peermont 1 062 779
Other 1 744 92
Joint ventures 387 395
Safair Lease Finance 271 271
Shriram 116 124
Other investments 24 905 24 339
Other equities and similar securities 10 906 12 267
Public sector stocks and loans 2 419 2 019
Investment properties 800 671
Other interest-bearing and preference 10 780 9 382
share investments
Deferred tax 287 216
Working capital assets 6 273 4 486
Total assets 50 948 42 649
Equity and liabilities
Shareholders` fund 37 491 30 592
Minority shareholders` interest 818 439
Term finance 4 721 2 834
External investors in consolidated 68 49
funds
Deferred tax 502 1 031
Working capital liabilities 7 348 7 704
Total equity and liabilities 50 948 42 649
Net asset value per share (cents) 1 640 1 293
1. Group businesses listed above not consolidated, but reflected as
investments at fair value.
2. The value of business acquired and goodwill relate mainly to the
consolidation of African Life, Channel Life and Merchant Investors 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.
3. Excludes the investment management operations of Botswana Insurance Fund
Management (BIFM), as it is included in the current value of BIFM in-force
life insurance business.
4. The life insurance component of Sanlam Personal Loans` operations is
included in the value of in-force business and therefore excluded from the
Sanlam Personal Loans fair value.
5. Other Sanlam Personal Finance businesses comprise the non-life
businesses in Namibia.
6. Other Independent Financial Services investments include Intrinsic,
Nucleus, Thebe Community Financial Services, SA Quantum, Coris, Simeka
Employee Benefits and Bull and Bear Financial Services.
SHAREHOLDERS` FUND INCOME STATEMENT
for the year ended 31 December 2006
2006 2005
R million R million
Result from financial 4 126 3 455
services before tax
Life insurance 2 188 1 729
Short-term Insurance 906 1 016
Investment Management 1 077 699
Sanlam Capital Markets 151 151
Independent Financial 20 32
Services
Corporate and other (216) (172)
Tax on financial services (996) (752)
income
Minority shareholders` (514) (403)
interest
Net result from financial 2 616 2 300
services
Net investment income 786 980
Core earnings 3 402 3 280
Net enhanced early - (440)
termination benefits
Provision for financial - (150)
claims
Net broad-based employee (19) -
share plan
Net equity-accounted 164 478
headline earnings
Net investment surpluses 3 420 2 733
and fund transfers
Amortisation of value of (45) -
business acquired
Net Secondary tax on (84) (88)
Companies
Headline earnings 6 838 5 813
Other equity-accounted 5 (8)
earnings
Profit on disposal of 132 5 125
subsidiaries and
associates
Impairment of investments (30) (3)
and goodwill
Attributable earnings 6 945 10 927
NOTES TO THE SHAREHOLDERS` FUND INFORMATION
for the year ended 31 December 2006
1. NEW BUSINESS AND TOTAL FUNDS RECEIVED FROM CLIENTS
2006 2005
R million R million
Analysed per market:
Retail
Life business 9 597 7 382
Sanlam Personal Finance 8 231 7 230
Sanlam Developing Markets 1 366 152
Non-life business 29 091 16 036
Sanlam Personal Finance 7 414 6 236
Sanlam Private Investments 10 257 3 154
Sanlam Collective Investments cash and 11 420 6 646
equity
South African 38 688 23 418
Non-South African 6 818 4 413
Sanlam Developing Markets 637 -
Sanlam Personal Finance - Namibia 5 424 3 742
Sanlam Personal Finance - Merchant 757 671
Investors
Total retail 45 506 27 831
Institutional
Group Life business 2 392 2 820
Sanlam Employee Benefits 2 180 2 699
Sanlam Investment Management 212 121
Non-life business 10 187 15 052
Segregated 5 402 9 448
Sanlam Multi-Manager 2 131 3 094
Sanlam Collective Investments wholesale 2 654 2 510
South African 12 579 17 872
Sanlam Investment Management non-SA 4 422 1 812
Total institutional 17 001 19 684
White label 7 938 5 838
Sanlam Collective Investments 7 647 5 838
Sanlam Developing Markets 291 -
Santam 10 203 8 871
Total new business 80 648 62 224
2. NET FLOW OF FUNDS
2006 2005
R million R million
Analysed per market:
Retail
Life business 1 114 (974)
Sanlam Personal Finance 103 (1 184)
Sanlam Developing Markets 1 011 210
Non-life business 7 982 3 281
Sanlam Personal Finance 2 314 2 713
Sanlam Private Investments 4 920 142
Sanlam Collective Investments cash and 748 426
equity
South African 9 096 2 307
Non-South African 1 919 1 151
Sanlam Developing Markets 658 -
Sanlam Personal Finance - Namibia 1 651 1 095
Sanlam Personal Finance - Merchant (390) 56
Investors
Total retail 11 015 3 458
Institutional
Group Life business (3 384) (3 550)
Sanlam Employee Benefits (2 835) (2 882)
Sanlam Investment Management (549) (668)
Non-life business (22 732) (752)
Segregated (23 105) (3 069)
Sanlam Multi-Manager 200 1 743
Sanlam Collective Investments wholesale 173 574
South African (26 116) (4 302)
Sanlam Investment Management non-SA 2 784 1 493
Total institutional (23 332) (2 809)
White label 1 700 2 572
Sanlam Collective Investments 3 675 2 572
Sanlam Developing Markets (1 975) -
Santam 3 166 3 079
Total net (outflow)/inflow (7 451) 6 300
2006 2005
R million R million
EXCESS OF FAIR VALUE OVER NET ASSET VALUE OF 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 and Peermont, which are valued according to
ruling share prices. No deferred capital gains tax is provided
in respect of Santam from 2006.
Net fair value of businesses and 16 403 10 422
investments
Fair value of businesses and 16 403 10 968
investments
Deferred capital gains tax on - (546)
businesses and investments at fair
value
Less: Net asset value of businesses and 8 643 5 538
investments
Investment Management 938 752
SIM Wholesale 622 437
International (SMMI and Octane) 283 231
Sanlam Collective Investments 33 84
Sanlam Personal Finance 510 305
Glacier 217 177
Sanlam Personal Loans 47 32
Multi-Data 40 18
Sanlam Trust 13 4
Sanlam Home Loans 168 55
Other 25 19
Independent Financial Services 536 405
Punter Southall Group 189 295
Gensec Properties 25 11
Other 322 99
Sanlam Capital Markets 541 552
Santam 3 798 2 903
Associated companies 2 079 403
Peermont 335 310
Other 1 744 93
Joint ventures 241 218
Safair Lease Finance 125 94
Shriram 116 124
Less: Goodwill in respect of above 1 247 1 247
businesses
Revaluation adjustment of interest in 6 513 3 637
businesses and investments to fair
value
Analysis of fair value
Sanlam businesses 13 210 9 702
Associated companies 2 806 871
Joint ventures 387 395
Fair value of businesses and 16 403 10 968
investments
3. EXCESS OF FAIR VALUE OVER NET ASSET VALUE OF SANLAM BUSINESSES AND
INVESTMENTS (continued)
The fair value of the Sanlam businesses has been determined by the
application of stock exchange prices for listed companies and the following
valuation methodologies for unlisted businesses:
Fair value
2006 2005
2005
Valuation method R million R million
R million
Ratio of price to assets under 5 358 3 228
management
SIM Wholesale 3 729 2 481
International (SMMI and Octane) 1 336 522
Sanlam Collective Investments 293 225
Discounted cash flows 1 451 1 083
Glacier 527 341
Sanlam Personal Loans 94 71
Multi-Data 110 82
Sanlam Trust 95 84
Gensec Properties 36 13
Punter Southall Group 209 382
Other 380 110
Earnings multiple - Other 64 30
Net asset value 709 612
Sanlam Home Loans 168 60
Sanlam Capital Markets 541 552
Fair value of unlisted businesses 7 582 4 953
The main assumptions applied in the primary valuation for the unlisted
businesses are presented below. The sensitivity analysis is based on the
following changes in assumptions:
Assumption Change in assumption
Ratio of price to assets under
management (P/AuM) 0,1%
Risk discount rate (RDR) 1,0%
Perpetuity growth rate (PGR) 1,0%
Earnings multiple (PE) 1,0
Fair value of businesses
Valuation method Weighted Base Decrease Increase
average value in in
assumption assumption assumption
Ratio of price to P/AuM = 5 358 4 875 5 849
assets under 1,24% (2005:
management (P/AuM) 0,99%)
Discounted cash flows RDR = 17,2% 1 451 1 554 1 363
(2005:17,3%)
PGR = 2,5% - 1 451 1 413 1 497
5% (2005:
2,5% - 5%)
Earnings multiple PE = 7,5 64 57 72
times (2005:
7,5 times)
2006 2005
R million R million
Investment INCOME - SHAREHOLDERS`
FUND
Equities and similar securities 581 756
Interest-bearing, preference shares 459 460
and similar securities
Properties 54 53
Rental income 67 83
Rental related expenses (13) (30)
Total investment income 1 094 1 269
5. ASSETS UNDER MANAGEMENT AND
ADMINISTRATION
Total assets per Group balance sheet 335 482 276 752
Segregated funds not included in 188 257 148 839
Group balance sheet
Total assets under management and 523 739 425 591
administration
GROUP EMBEDDED VALUE RESULTS
for the year ended 31 December 2006
1. EMBEDDED VALUE
2006 2005
Note R million R million
Sanlam group shareholders` fund at 37 491 30 592
fair value
Reverse goodwill and value of life (1 425) (1 328)
business acquired
Merchant Investors (356) (356)
African Life (955) (955)
Channel Life (91) -
Other (23) (17)
Shareholders` fund adjustments (1 518) (1 634)
Present value of strategic 1 (667) (947)
corporate expenses
Fair value of share incentive (772) (793)
scheme
Adjustment for discounting capital 64 245
gains tax
Adjustment for delayed tax relief 2 (60) (60)
on enhanced early termination
benefits
STC deferred tax asset written down (83) (79)
Sanlam group shareholders` adjusted
net assets 34 548 27 630
Net value of life insurance 3
business in-force 12 263 10 574
Value of life insurance business in- 14 746 12 542
force
Sanlam Personal Finance 12 010 10 049
Sanlam Developing Markets 1 762 1 436
Sanlam Employee Benefits 974 1 057
Cost of capital at risk (2 115) (1 707)
Sanlam Personal Finance (1 582) (1 290)
Sanlam Developing Markets (142) (103)
Sanlam Employee Benefits (391) (314)
Minority shareholders` interest in (368) (261)
value of in-force
Sanlam Personal Finance (51) (54)
Sanlam Developing Markets (317) (207)
Sanlam Employee Benefits - -
Sanlam group embedded value 46 811 38 204
Embedded value per share (cents) 2 047 1 615
Number of shares (million) 2 287 2 366
2. EMBEDDED VALUE EARNINGS
for the year ended 31 2006 2005
December 2006
R million Note Total Value of Adjusted Total Value Ad-
in-force net of in- justed
assets force net
assets
Embedded value 434 1 106 (672) 291 709 (418)
from new life
business
Earnings from 1 717 (507) 2 224 1 351 (450) 1 801
existing life
business
Expected return 1 256 1 256 - 1 193 1 193 -
on value of in-
force business
Expected - (1 783) 1 783 - (1 348) 1 348
transfer of
profit to
adjusted net
assets
Operating 4 277 (113) 390 138 (314) 452
experience
variations
Operating 184 133 51 20 19 1
assumption
changes
Embedded value 2 151 599 1 552 1 642 259 1 383
earnings from
life operations
Economic 5 (5) (8) 3 (316) (287) (29)
assumption
changes
Tax changes 6 47 47 - (179) (144) (35)
Investment 1 015 972 43 845 785 60
variances
Exchange rate 119 119 - 4 4 -
movements
Change in (76) (76) - (20) (20) -
minority
shareholders`
interest in
value of in-
force
Growth from 3 251 1 653 1 598 1 976 597 1 379
life business
Investment 8 461 - 8 461 5 557 - 5 557
return on
shareholders`
adjusted net
assets
Non-life 4 359 - 4 359 2 610 - 2 610
operations
Balanced 3 986 - 3 986 2 937 - 2 937
portfolio
Change in 116 - 116 10 - 10
shareholders`
fund
adjustments
Total embedded 7 11 712 1 653 10 059 7 533 597 6 936
value earnings
before
dividends paid,
capital
movements and
cost of
treasury shares
acquired
Acquired value - 38 (38) - 1 126 (1 126)
of in force
Dividends paid (1 535) - (1 535) (1 363) - (1 363)
Shares (1 644) - (1 644) (4 446) - (4 446)
cancelled
Cost of 74 - 74 (153) - (153)
treasury shares
acquired
Change in 8 607 1 691 6 916 1 571 1 723 ( 152)
Sanlam group
embedded value
Growth from 30,7% 22,3%
life insurance
business as a %
of beginning
value of in-
force
Return on 30,7% 20,6%
embedded value
Return on 31,0% 24,4%
embedded value
per share
3. ANALYSIS OF RETURN ON EMBEDDED VALUE (ROEV)
2006 2005
EV earnings ROEV EV ROEV
earnings
R % R million %
million
NON-LIFE OPERATIONS 4 359 44,9% 2 610 33,7%
Sanlam Personal Finance 303 45,4% 190 38,3%
Santam 1 043 22,0% 1 198 29,7%
Investment management 2 711 84,0% 1 011 42,4%
Sanlam Capital Markets 141 35,3% 152 34,5%
Independent Financial 161 31,9% 59 15,0%
Services
Balanced portfolio 3 986 20,4% 2 937 13,5%
Change in shareholders` fund 116 10
adjustments
Shareholders` adjusted net 8 461 30,6% 5 557 20,0%
assets
Growth from life insurance 3 251 30,7% 1 976 22,3%
business
Value of new life business 434 4,1% 291 3,3%
Existing life business 1 717 16,2% 1 351 15,3%
Expected return 1 256 11,9% 1 193 13,5%
Operating experience 277 2,6% 138 1,6%
variations
Operating assumption changes 184 1,7% 20 0,2%
Adjustments 1 176 11,1% 354 3,9%
Investment variances and 1 134 10,7% 849 9,5%
exchange rate movements
Economic assumption changes (5) 0,0% (316) -3,6%
Tax changes 47 0,4% (179) -2,0%
Minority interest in value of (76) -0,7% (20) -0,2%
in-force
Return on embedded value 11 712 30,7% 7 533 20,6%
4. VALUE OF NEW LIFE INSURANCE 2006 2005
BUSINESS
R million R million
VALUE OF NEW LIFE BUSINESS (AT
POINT OF SALE)
Gross value of new life business 472 318
Sanlam Personal Finance 276 279
Sanlam Developing Markets 149 (17)
Sanlam Employee Benefits 47 56
Cost of capital at risk (38) (27)
Sanlam Personal Finance (15) (17)
Sanlam Developing Markets (15) -
Sanlam Employee Benefits (8) (10)
Net value of new life business 434 291
Sanlam Personal Finance 261 262
Sanlam Developing Markets 134 (17)
Sanlam Employee Benefits 39 46
Net value of new life business
attributable to:
Shareholders` fund 379 291
Sanlam Personal Finance 259 262
Sanlam Developing Markets 81 (17)
Sanlam Employee Benefits 39 46
Minority shareholders` interest 55 -
Sanlam Personal Finance 2 -
Sanlam Developing Markets 53 -
Sanlam Employee Benefits - -
Net value of new life business 434 291
Geographical analysis:
4. VALUE OF NEW LIFE INSURANCE 2006 2005
BUSINESS (continued)
R million R million
South Africa 346 287
Africa 84 3
Other international 4 1
Net value of new life business 434 291
New business profitability
Before minorities
Present value of new business 20 308 16 533
premiums
Sanlam Personal Finance 13 735 12 297
Sanlam Developing Markets 3 107 125
Sanlam Employee Benefits 3 466 4 111
Life new business margin 2,1% 1,8%
Sanlam Personal Finance 1,9% 2,1%
Sanlam Developing Markets 4,3% -13,6%
Sanlam Employee Benefits 1,1% 1,1%
After minorities
Present value of new business 19 426 16 402
premiums
Sanlam Personal Finance 13 663 12 166
Sanlam Developing Markets 2 297 125
Sanlam Employee Benefits 3 466 4 111
Life new business margin 2,0% 1,8%
Sanlam Personal Finance 1,9% 2,2%
Sanlam Developing Markets 3,5% -13,6%
Sanlam Employee Benefits 1,1% 1,1%
NOTES TO THE GROUP EMBEDDED VALUE RESULTS
1. STRATEGIC CORPORATE EXPENSES
The present value of strategic corporate expenses has been calculated by
applying a multiple of 7,2 (2005: 8,2) to the after tax corporate expenses.
From 2006, corporate expenses includes allowance for interest earned on cash
held in respect of the annual dividend between year-end and actual payment
date.
2. TAX RELIEF ON ENHANCED EARLY TERMINATION BENEFITS
The 2005 financial statements allowed for the full tax relief of R180
million on the enhanced early termination benefit cost of R620 million.
This adjustment allows for the time value effect of not realising the tax
relief immediately.
3. SENSITIVITY ANALYSIS AS AT 31 DECEMBER 2006
Gross value Cost of Net value Change from
of in-force capital at of in- base value
business risk force
business
R million R million R million %
VALUE OF IN-
FORCE BUSINESS
BASE VALUE 14 338 (2 075) 12 263
*Increase risk 13 479 (2 352) 11 127 -9
discount rate by
1,0%
*Decrease risk 15 309 (1 762) 13 547 10
discount rate by
1,0%
*Investment 14 546 (2 006) 12 540 2
return (and
inflation)
decrease by
1,0%, coupled
with a 1,0%
decrease in risk
discount rate,
and with bonus
rates changing
commensurately
*Investment 13 646 (2 292) 11 354 -7
return (and
inflation)
decrease by 1,0%
and with bonus
rates changing
commensurately
*Non-commission 13 901 (2 069) 11 832 -4
maintenance
expenses
(excluding
investment
expenses)
increase by 10%
*Discontinuance 14 051 (2 006) 12 045 -2
rates increase
by 10%
*Mortality and 13 512 (2 054) 11 458 -7
morbidity
increase by 10%
for assurances,
coupled with a
10% decrease in
mortality for
annuities
*Assets fall by 13 744 (2 042) 11 702 -5
10%
Gross Cost of Net value of Change from base
value of capital new business value
new at risk
business
R R million R million %
million
Value of new
life business
BASE VALUE 409 ( 30) 379
*Increase risk 347 ( 35) 312 -18
discount rate by
1,0%
*Decrease risk 483 ( 27) 456 20
discount rate by
1,0%
*Investment 435 ( 30) 405 7
return (and
inflation)
decrease by
1,0%, coupled
with a 1,0%
decrease in risk
discount rate,
and with bonus
rates changing
commensurately
*Investment 369 ( 35) 334 -12
return (and
inflation)
decrease by 1,0%
and with bonus
rates changing
commensurately
*Non-commission 371 ( 31) 340 -10
maintenance
expenses
(excluding
investment
expenses)
increase by 10%
*Discontinuance 356 ( 31) 325 -14
rates increase
by 10%
*Mortality and 365 ( 29) 336 -11
morbidity
increase by 10%
for assurances,
coupled with a
10% decrease in
mortality for
annuities
2006 2005
R million R million
4. OPERATING EXPERIENCE VARIATIONS
Risk experience 280 221
Group stabilised business outflows (108) (96)
Working capital and other 105 13
Total operating experience variations 277 138
5. ECONOMIC ASSUMPTION CHANGES
Investment yields and inflation gap (51) 15
Long-term asset mix assumptions 46 (331)
Total economic assumption changes (5) (316)
6. TAX CHANGES
NOTES TO THE GROUP EMBEDDED VALUE
RESULTS (continued)
Change in corporate tax rate - 167
Change in policyholders` fund tax 117 -
rate
STC modeling changes (70) (273)
Strengthening of tax provisions - (73)
Total tax changes 47 (179)
2006 2005
R million R million
7. RECONCILIATION OF EMBEDDED VALUE EARNINGS
The embedded value earnings reconcile as follows to
attributable earnings for the year:
Attributable earnings per income 6 945 10 927
statement
Earnings recognised directly in 392 145
equity
Equity-accounted movement in - 15
associated companies` reserves
Net foreign currency translation 318 66
gains
Share-based payments 74 64
Reverse fund transfers recognised (205) (730)
in income statement
Movement in fair value adjustment - 2 876 (3 631)
non-life operations
Other 32 61
Earnings: shareholders` fund at 10 040 6 772
fair value
Movement in adjustments to 19 164
shareholders` fund
Present value of strategic 280 (64)
corporate expenses
Fair value of share incentive 21 6
scheme
Adjustment for discounting capital (181) 107
gains tax
Adjustment for delayed tax relief - (60)
on enhanced early termination
benefits
STC deferred tax asset written down (4) 21
Change in goodwill and VOBA (97) 154
adjustments less VIF acquired
Earnings: shareholders` adjusted 10 059 6 936
net assets
Growth from life business 1 653 597
Total embedded value earnings 11 712 7 533
8. ASSUMPTIONS
Sanlam Life Merchant African Life Botswana
& Sanlam Investors Life
Namibia Insurance
% 2006 2005 2006 2005 2006 2005 2006 2005
Gross investment
return, risk
discount rate and
inflation
Fixed-interest 7,9 7,5 4,6 4,1 8,0 7,4 11,0 10,0
securities
Equities and 9,9 9,5 7,1 6,6 10,0 9,4 13,0 12,0
offshore
investments
Hedged equities 7,9 7,5 7,1 6,6 n/a n/a 13,0 n/a
Property 8,9 8,5 7,1 6,6 9,0 8,4 12,0 11,0
Cash 5,9 5,5 4,6 4,1 6,0 5,4 9,0 8,0
Risk discount 10,4 10,0 8,3 7,8 10,5 10,9 14,5 13,5
rate
Return on capital 5,3 7,8 4,6 4,1 6,6 6,5 8,9 11,0
at risk
Unit cost and 4,4 4,0 3,5 3,0 5,0 4,4 8,0 7,0
salary inflation
Consumer price 4,4 3,0 3,5 3,0 n/a n/a n/a n/a
index inflation
Sanlam Life Merchant African Life Botswana
& Sanlam Investors Life
Namibia Insurance
% 2006 2005 2006 2005 2006 2005 2006 2005
Long-term asset
mix for assets
supporting the
capital at risk
Equiites - 25 - - 50 50 75 65
Hedged equities 20 35 - - - - - -
Property - 5 - - - - 1 4
Fixed-interest 50 20 - - - 25 24 31
securities
Cash 30 15 100 100 50 25 - -
100 100 100 100 100 100 100 100
9. ASSUMPTIONS
The embedded value calculation is based on best estimate assumptions. These
assumptions are used as basis for the statutory valuation method, to which
compulsory and discretionary margins are added for the determination of
policy liabilities in the financial statements.
Investment return and inflation
The assumed investment return on assets supporting the policy liabilities
and capital at risk are based on the long-term asset mix for these funds.
Inflation assumptions for unit cost, policy premium indexation and employee
benefits salary inflation are based on an assumed long-term gap relative to
fixed-interest securities.
Assets backing 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
used to calculate the statutory capital requirements of the Group`s life
businesses.
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 the South African life companies in the
Group have been adjusted, where applicable, to reflect the minimum standards
for early termination values agreed between 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, using models developed by the Actuarial Society of South
Africa, adjusted for Sanlam`s practice and product design.
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.
Investment management fees
Future investment expenses are based on the current scale of fees payable by
the Group`s life insurance businesses to the relevant asset managers. To the
extent that this scale of fees includes profit margins for Sanlam Investment
Management, these margins are not included in the value of in-force and new
business.
Project costs
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 is deducted. These projects are of a
short-term nature, although similar projects may be undertaken from time-to-
time. No
NOTES TO THE GROUP EMBEDDED VALUE RESULTS (continued)
allowance is made for the expected positive impact these projects may have
on the future operating experience of the Group.
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 has been made for the impact of capital gains tax on investments
in South Africa, excluding investments in Group subsidiaries. The assumed
rollover period for realisation of these investments is five years.
Allowance is made for STC by placing a present value on the tax liability
generated by the net cash dividends paid that are attributable to life
insurance business. It is assumed that all future dividends will be paid in
cash.
10. EMBEDDED VALUE METHODOLOGY
The methodology applied in preparing the embedded value report is consistent
with the methodology used in the 2005 annual report, apart from the
following:
*Improved modeling of Sanlam Life`s future paid-up policies;
*Allowance for the impact of the joint venture agreement with Coris in the
modeling of Sanlam Employee Benefits administration business;
*An increased allowance for planned project costs;
*Explicit allowance for the expected increase in maintenance unit cost
associated with the decline in the Sanlam Life in force book; and
*Other model changes.
The net impact of the above changes is as follows:
*The embedded value increased by R184 million at 31 December 2006; and
*Operating assumption changes (included in embedded value earnings) for the
2006 financial year increased by R184 million.
In addition to the above, the shareholders` adjusted net assets and the
investment return thereon were increased with R576 million by the following:
*No deferred capital gains tax is provided in respect of the shareholders`
fund investment in Santam from 2006, with a consequential reduction in the
discounting adjustment for capital gains tax; and
*Allowance has been made in the calculation of the adjustment for corporate
expenses for interest earned on cash held in respect of the annual dividend,
between year-end and actual payment date.
GROUP SECRETARY REGISTERED NAME: SANLAM LIMITED
JOHAN BESTER (REGISTRATION NUMBER
1959/001562/06)
REGISTERED OFFICE JSE SHARE CODE: SLM
2 STRAND ROAD, BELLVILLE 7530, NSX SHARE CODE: SLA
SOUTH AFRICA ISIN NUMBER: ZAE000070660
tELEPHONE +27 21 947 9111 INCORPORATED IN SOUTH AFRICA
FAX +27 21 947 8066
TRANSFER SECRETARIES:
COMPUTERSHARE INVESTOR SERVICES
POSTAL ADDRESS 2004 (PROPRIETARY) LIMITED
PO BOX 1, SANLAMHOF 7532, SOUTH (REGISTRATION NUMBER
AFRICA 2004/003647/07)
70 MARSHALL STREET, JOHANNESBURG
2001, SOUTH AFRICA
PO BOX 61051, MARSHALLTOWN 2107,
SOUTH AFRICA
TEL 086 110 0913
Fax +27 11 688 5201
THE ANNUAL GENERAL MEETING OF THE MEMBERS OF SANLAM LIMITED WILL BE HELD ON
WEDNESDAY, 6 JUNE 2007 AT 14:00 IN THE CR LOUW AUDITORIUM, SANLAM HEAD
OFFICE, 2 STRAND ROAD, BELLVILLE.
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, A.D. Botha, A.S. du
Plessis, F.A. du Plessis, W.G. James, M.V. Moosa, JP Moller, R.K. Morathi,
S.A. Nkosi, I. Plenderleith, M. Ramos, G.E. Rudman, R.V. Simelane, Z.B.
Swanepoel, E. van As, J.J.M. van Zyl, P.L. Zim.
Sponsor: J.P.Morgan Equities Limited
08 March 2007
Date: 08/03/2007 07:59:57 Produced by the JSE SENS Department.
