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CHAIRMAN'S STATEMENT
Dear shareholder,
It is my pleasure to report on the performance of your investment in Sanlam
over the past year and to highlight certain of our achievements and activities.
Although we made considerable progress in several areas and achieved our
objectives for this period, we nevertheless face new challenges and need to
tackle certain areas that require further attention. It remains our mission to
achieve excellent returns for our shareholders - our immediate focus being to
produce the results that will enable the market to convert to a premium the
discount of our current share price to embedded value.
In the period since our listing, from 30 November 1998 to 31 December 2000, our
share price grew by R3,56 from R6,00 per share to R9,56. This growth together
with the dividend of 25 cents paid, yielded a compound return of 27% per annum
for our shareholders on their initial investments that represents a real return
of approximately 17% per annum.
I congratulate and welcome Dr Leon Vermaak as chief executive of Sanlam Limited
with effect from 1 May 2001. We underwent an extensive process to select the
person best suited to accept the challenge of Sanlam's strategic needs of the
future and have no doubt that Dr Vermaak will energetically lead the Group into
the important next phase of our development.
I also take pleasure in welcoming Mr Thulani Gcabashe, Prof Andri Perold, Prof
Johan van Zyl, and Mr Peter Vundla to the Board as new non-executive directors
of Sanlam. I have great confidence in the perspectives and contributions they
can bring to Sanlam.
FINANCIAL RESULTS
Reaching principal targets
We are pleased to report that Sanlam achieved most of the financial objectives
set a year ago and that our focus on improving operational efficiencies and the
performance of our businesses is paying dividends. This focus has delivered
growth in profits in new business and in a net inflow of funds. A crucial
measure of success is the discount of Sanlam's share price to embedded value.
Although we have shown progress, particularly recently, we have not yet
convinced the market that our performance and prospects justify a share price
at least equal to Sanlam's embedded value, let alone a premium. On 31 December
2000 Sanlam's share price of 956 cents reflected a discount of 8% to an
embedded value of 1035 cents per share. Our approximate embedded value on 28
February 2001 amounted to 1 075 cents per share, which reflects a widening of
this discount to 13%. Eradicating this discount remains the key focus area to
unlock value for shareholders. The message from our shareholders is clear. We
need to demonstrate sustainable growth to improve Sanlam's rating.
Dividend
On 7 March 2001 the Board declared a dividend of 30 cents per share for 2000.
Our target of sound real growth in dividends in 2000 was achieved as the
dividend increased by 20% compared with the dividend of 1999.
Earnings
With effect from this report, we have decided to use the long term rate of
return for the determination of our earnings. Applying a long-term return of
13%, our headline earnings for 2000 amounted to R3478 million, 28% higher than
the earnings of R2 721 million for 1999. We clearly succeeded in exceeding our
target of 10% real growth in 2000.
New business and funds flow
I am pleased to report that we achieved a net inflow of R777 million in 2000.
During 1999 Sanlam had a net outflow of funds of R10,427 million. Management
focused on turning this net outflow around and although we are certainly not
satisfied with this level of net inflows, we are confident that this turnaround
has established the basis for further improvement in 2001 and thereafter.
New business volumes grew by 46% to R37, 7 billion, improving the embedded
value of new business for 2000 to R209 million from R101 million in 1999. In
2001 we expect to further improve on this performance.
Operational performance
All businesses recorded successes, most notably the operational performance and
growth in new business volumes of Sanlam Personal Finance and the reduction in
net outflow of funds and sound growth in profits of Sanlam Employee Benefits.
Gensec registered an improved performance in the second half of 2000,
overcoming the effects of the weak financial markets in the first half of the
year. Sanlam Investment Management (previously Gensec Asset Management)
succeeded in securing strong inflows from segregated funds and Gensec Bank
continued to register sound growth, as it has done since its launch two years
ago.
OTHER ACHIEVEMENTS
Among the significant successes in 2000 was the conclusion of the acquisition
of Guardian National Insurance by Santam. The transaction was implemented and
Santam and Guardian's operations were successfully integrated. This
amalgamation strengthens Santam's position as the market leader and provides a
sturdy foundation for future growth.
During the year the Board and Gensec management considered the need for the
continued listing of Gensec and we reached the conclusion that significant
benefits were to be had if we acquired the interests of minorities and
established Gensec as a wholly owned subsidiary. This transaction, valued at R5
billion, was completed on 22 December 2000. The exploitation of potential
synergies and the optimisation of Sanlam and Gensec's capital efficiencies are
receiving attention. Henceforth Sanlam Investment Management and Gensec Bank
will be managed as separate businesses within the Sanlam Group. This structure
promises to add real value to shareholders, starting this year.
Our commitment to transparent, comprehensive and frank communication with our
shareholders was recognised by the Investment Analysts Society of Southern
Africa last year, when we won their overall award for Financial Reporting and
Communication. This was the first time that this award had been made to a
company in its first full year of a listing on the JSE Securities Exchange SA
(JSE). I have to commend our financial director, Flip Rademeyer, for his
contribution towards achieving this award. We will continue to be transparent
and approachable, thereby improving the standard of our evaluation by investors
and enabling the market to determine a realistic value for Sanlam shares.
During 2000 we also succeeded in influencing the lives of many South Africans
positively through our expanded corporate social involvement and sponsorship
programmes.
GROWTH STRATEGY
We believe that real growth is the key to changing the discount of the share
price to embedded value to a premium.
Sanlam has set itself a target of 10% growth in real terms, as primarily
measured by growth in headline earnings, which in turn requires similar growth
in operating profit and top-line growth. As indicated earlier, the improvement
in the flow of net funds will be an important focus area in the year ahead.
Organic growth
Our growth objectives will be achieved by enhancing and expanding Sanlam's
value proposition to our clients, and ensuring that our product offerings and
client service continue to improve. First indications are that we have started
regaining market share. Our sales force and brokers have done well and the
restructuring of Sanlam's businesses has positioned the Group to keep on
growing in its targeted market segments. A concerted effort is being made to
achieve greater penetration of the emerging black salaried market. Further
penetration of the higher end of the market is equally important and will be
pursued through Innofin as well as Sanlam Personal Finance.
Since reorganising Sanlam into autonomous businesses in 1998 the first
objective has been to improve each business' operations within its target
markets. The next phase will be to develop synergies between the various
businesses. This has already been achieved between Gensec Bank's abilities in
structuring products and Sanlam Personal Finance's distribution capabilities.
The increasing importance of individual choice in the markets serviced by
Sanlam Employee Benefits offers significant opportunities. Sanlam Employee
Benefits' people and technological capabilities position it to exploit these
opportunities, and we are therefore targeting this market as a source of future
growth. Providing reliable administration that is able to accommodate the
individual needs of our members, backed up by sound advice, will be
prerequisites for growing our market share.
The re-engineering of the investment process of Sanlam Investment Management to
meet world-class standards has fundamentally transformed the business. We want
to build on our capabilities as managers and will focus on achieving sound
investment returns that out-perform relevant benchmarks, taking full cognisance
of the risk/reward relationship. Improved investment performance will
contribute to our objective of growing funds flow and improving profitability.
Structural growth
Since 1998 our focus has been on improving our operational performance in
existing businesses. I believe that our businesses are now ready to start
seeking international opportunities.
Innofin is in the process of launching its first product aimed at the high net
worth market and, with SP2, expects to grow its share of this important market
segment.
Sanlam Investment Management acquired Punter Southall in the United Kingdom,
which will extend and improve its capability there. The expansion of Sanlam
Investment Management's private client business through the purchase of the
private client business of ABN Amro South Africa (now Sanlam Private Investor
Services) will advance its offering in South Africa and should contribute to
growth in 2001. This will also improve its ability to attract funds offshore.
CAPITAL EFFICIENCY
The acquisition of the Gensec minorities has enabled the Group to increase
capital efficiency through its capital outlay of R5 billion in exchange for
full control over the Gensec Corporate capital of R3 billion and its total
profit and cash-flow. In similar vein, we are revisiting the capital allocation
to all our businesses to determine whether the current allocation is still
appropriate. This is being considered in conjunction with the deployment of
assets backing the capital, which could with the optimisation of the Sanlam and
Gensec capital bases, free up capital. While the Sanlam share price trades at a
discount to its embedded value a buy-back of our shares makes eminently good
sense. We will request shareholders to renew the existing authority at our
Annual General Meeting on 13 June 2001. A possible buy-back of shares couldn't
be considered during the past year owing to the proposed Metlife merger and the
acquisition of Gensec minorities.
We are devoting attention to the returns earned by our businesses. Applying
realistic bases is crucial, and we will therefore hold management of each
business responsible for operating profit returns on equity. These will be
augmented by the investment return on Group capital. The corporate asset
manager is responsible for ensuring that the targeted investment returns are
achieved. Net asset value represents about 80% of our market capitalisation and
75% of our embedded value, and we are improving our management of capital.
Improving returns obviously starts with enhancing operational performance and
optimising margins but ultimately, should a business or a part of the business
prove not able to deliver sustainable returns, we will sell it or close it down
REPOSITIONING
Sanlam is intent on further strengthening its position as a truly South African
company in the full sense which will require a measure of repositioning. This
requirement is supported by extensive market research during 2000, which again
confirms the strength of the Sanlam brand in all our target markets. This
competitive advantage will be aggressively deployed in the strengthening of our
position as a truly South African company.
In analysing the proposed Metlife merger, which would have accelerated the
repositioning of Sanlam, we have concluded that an empowerment transaction of
substance in South Africa pertaining to our business is unlikely in the near
future. However, in my view, tremendous potential exists to co-operate on
business projects of relevance to Sanlam and empowerment organisations.
Our Employment Equity Programme was submitted to Government and, although good
progress was made in several areas, results are not yet satisfactory and will
demand a concerted effort throughout the Group. Mentoring and the development
of empowerment appointees to the fullest extent of their abilities will enjoy
priority.
EMPLOYER OF CHOICE
The Financial Services industry is particularly dependent on its people and our
future achievements will be inextricably linked to the further development and
retention of employees and to attract people of the highest calibre. Success in
this area will be measured by whether Sanlam will be recognised as the employer
of choice.
This recognition will depend on creating a culture and working environment that
provide challenging opportunities for all employees. This process begins with
our core philosophy of decentralised management providing development,
stimulation and satisfaction in the working environment. It clearly also
requires compensation commensurate with performance and an alignment of
employees' objectives with those of our shareholders.
To meet these challenges we are continuously updating our remuneration policies
and placing more emphasis on incentives, including bonuses and share incentive
schemes.
INTERNATIONALISATION
The drive towards the internationalisation of our businesses will come from
their decentralised management teams. Their local operational successes
indicate that they are now ready to pursue international initiatives.
Initially we aimed at penetrating developing markets because of the particular
suitability of our core competencies to their specific requirements. It has,
however, become clear from our investigations that we may well be able to
capitalise on opportunities in niche markets of developed markets. The
information technology, administrative capabilities and operational
efficiencies of Sanlam's traditional businesses are of a First World standard
and could be deployed outside South Africa. This could, for instance, provide a
low-risk and low-capital opportunity in the field of third party
administration. Both Sanlam Investment Management and Gensec Bank will continue
to focus primarily on developed markets to satisfy their international
aspirations. While we are keen to report heightened success and progress, we
are well aware of the need to avoid the pitfalls of over-exuberance in
initiatives such as these. We remain true to our primary requirement of
achieving a return on equity commensurate with the risk.
ENVIRONMENT
Industry related trends
Statutory
There are particular regulatory trends in our industry that will impact on our
industry. On the statutory side the Policyholder Protection Rules and the
proposed Financial Advisory and Intermediary Services Bill have far-reaching
implications. The objectives of this legislation are to improve disclosure and
consumer protection. We fully support these goals but believe that in time and
without detracting too much from the aims of the legislation, the regulations
should be adjusted to lower the cost of compliance - a cost ultimately born by
consumers.
The Medical Schemes Act introduced on 1 January 2000 prescribes, among others,
community rating and open enrolment in an effort to enable more people to have
access to medical cover. These regulations introduced new risks for medical
schemes by removing some of the mechanisms they previously used to manage their
exposure to risk. At the end of 2000 most medical schemes had to raise their
contributions significantly but it remains unclear whether the number of
individuals who are covered by medical schemes has increased as envisaged.
Our businesses that are affected by this legislation have over the past years
prepared themselves for its practical implementation. I am pleased to report
that we are ready to comply with the terms of all the new legislation and
regulations and to apply them to the benefit of our clients and ultimately our
shareholders.
Capital gains tax
Capital gains tax is expected to come into effect on 1 October this year and,
with the recent changes in the four-fund dispensation and the tax on foreign
dividends, it will negatively affect all savings, directly or indirectly. The
proposed effective rate of the tax is acceptably low at the current rate of
inflation, but the potential of future increases in the rates of tax and/or
inflation is of concern. Sanlam together with the rest of the life insurance
industry is at present raising a number of issues with the authorities. These
include tax cascading or double taxation where the same gain can be taxed more
than once in certain group structures.
The legislation on value-added tax and secondary taxation on companies
eliminated tax cascading to a large extent. It would appear that in the
apparent rush to implement capital gains tax, such elimination has been
overlooked. This will, among others, also affect retirement funds, which are
currently by definition exempted from capital gains tax. Given the
acknowledgement by National Treasury that important policy issues still need to
be clarified, I trust that capital gains tax will not be implemented until
acceptable solutions have been found.
Political milieu
South Africa's prominent political and economic role in Africa is progressively
and successfully being promoted under the leadership of President Thabo Mbeki,
for which he deserves credit. The President has progressed significantly in
founding a specific vision for the continent - the Millennium African
Renaissance Programme (MAP). His briefing on MAP to the World Economic Forum in
Davos in January 2001 was a reassuring confirmation of the commitment by
African leaders to sustainable economic development.
It is therefore regrettable that the actions of political leaders such as
President Robert Mugabe of Zimbabwe and in some other African states seem to
directly oppose the very first element of President Mbeki's MAP, namely to
promote peace, security, stability and democratic governance. As long as these
actions remain unchallenged by the Organisation of African Unity (OAU) and
African leaders committed to the MAP, the realisation of our vision for Africa
- and South Africa - will be protracted. South Africa stands out as a beacon of
hope for Africa with our commitment to democracy and the rule of law based on
our constitution.
Locally, and on a more positive note, I believe that South Africa is making
headway in pragmatically addressing its own problems. While crime remains a
banner issue, President Mbeki's State of the Nation Address at the opening of
Parliament on 9 February generated welcome impetus to the local practical
implementation of MAP. The attention in his speech to economic matters was a
welcome recognition of the important role of the private sector in the
development of South Africa.
Economy
In the past year, the South African economy once again demonstrated its
resilience in the face of challenges. Real gross domestic product increased by
3% in 2000, and it appears the economy will repeat this performance in 2001.
The driving forces behind this will, however, change. Whereas growth was driven
by a strong performance in net exports in 2000, domestic demand will play a
dominant role in ensuring that the economy remains on track in 2001.
If taken into account that government consumption expenditure declined in real
terms in 2000, it is clear that the private sector performed admirably and is
continuing to do so. The decline in confidence levels has to date not been
reflected in household consumption expenditure, nor in fixed capital formation
in the business sector. Therefore, should Government successfully improve
service delivery, and should business confidence further recover, the South
African economy could deliver a pleasant surprise.
Macro-economic stability has largely been achieved, allowing the emphasis to
shift to much needed micro-economic reforms. These include improved labour
relations - i.e. a significant reduction in work days lost as a result of
strikes, addressing the shortage of workforce skills, improving the execution
of government policy, and more effective promotion of the small business
sector. I believe that the Minister of Finance, Mr Trevor Manuel,
comprehensively addressed these elements in his Budget speech on 21 February
this year. The outlook for the South African economy remains positive although
the low personal saving rate of 0,6% in 2000 remains a problem.
We are disappointed that the Budget did not allow more scope for life insurers
to increase their foreign investment from the current ceiling of 15% to 20% of
assets, and thus level the playing fields for all financial institutions. The
scope for life insurers to invest abroad was actually reduced. We appreciate
that the reduction should attract more investments to the JSE , but we believe
the long-term effect of this limitation is to the detriment of South Africans
who, for sound reasons, want the same freedom as citizens of the rest of the
developed world to spread their investments internationally.
A further factor restraining the South African economy is the lack of fixed
investment, with the ratio of gross fixed capital formation to GDP running at
approximately 15%. While Government's stated intention to increase capital and
infrastructure spending will support an improvement in this regard, the private
sector holds the key to putting the economy onto a higher growth platform. For
this to happen would require the availability of profitable business
opportunities, and the confidence on the part of the business sector to exploit
those opportunities. It would also be unrealistic to expect foreign investors
to take up the baton of investing in South Africa ahead of local businesses. A
social accord between all the important role players in the economy,
recognising these realities, is a necessary step to improving the investment
climate in South Africa.
Aids
The Aids pandemic shows no signs of abating. It will impact on our national
economy and overall productivity, and not only the directly related industries
such as health care and life insurance.
We have taken measures to financially manage the ravaging effects of this
devastating virus and have set aside an Aids reserve of approximately R1,5
billion to cover expected future claims from existing business. Many of our
policies allow us to increase risk premiums as needed. We also revise rates for
new business from time to time, in accordance with the expected mortality rates
for each business sector. While we are permitted to properly underwrite
applications for life insurance our mortality experience should remain within
expectations.
APPRECIATION
The wise guidance of my fellow directors, their commitment and support over the
past year are indeed appreciated. Ms Kate Jowell, Prof Flip Smit and Mr Murray
Grindrod, who retire as directors on 7 March 2001, deserve a special word of
appreciation for their services over the years. I thank my executive committee
and all our employees for their continued dedication and diligence towards
meeting the objective of improving the performance of Sanlam. It is gratifying
to be able to rely on such exceptional support to achieve excellent returns for
shareholders and to serve our clients with the passion they deserve. This has
been a challenging year in many ways and I am proud that our management and
staff have shown what can be done.
A special word of appreciation goes to executive director George Rudman, who
has elected to retire after 37 years of commendable service and achievements.
George did a sterling job in his leadership role in the demutualisation of
Sanlam in particular and I wish him and his family a most wonderful and
well-deserved retirement.
Thank you to our shareholders for investing in Sanlam; analysts and brokers for
your research, coverage and support; our business partners for the successes we
all achieved; our sales brokers and advisers for these results we can post for
2000; and the media for objective reporting on our business.
Lastly, a personal thank you for all the good wishes and the support I received
during my recent illness. I am responding very well to treatment and, together
with my medical team, am indeed positive about the outcome.
Marinus Daling
Executive Chairman
Sanlam's full results for 2000 are available on our internet site
http//:www.sanlam.co.za
QUOTES
we achieved most of the financial objectives for 2000
our results must enable the market to convert to a premium the discount of our
current share price to embedded value we have accelerated our efforts
in evaluating international opportunities south africa is making headway
in pragmatically addressing its own problems