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SANLAM GROUP - RESULTS FOR THE SIX MONTHS TO 30 JUNE 2003
SANLAM GROUP
Registered name: Sanlam Limited
(Registration number 1959/001562/06)
JSE share code: SLM
ISIN number: ZAE000028262
RESULTS FOR THE SIX MONTHS TO 30 JUNE 2003
Highlights
Business flows
New business inflows up 23%
Strong growth in segregated investment inflows
Net cash inflow of R558 million
Earnings
Operating profit up 13%
Headline earnings up 30%
LTRR adjusted earnings up 8%
Good progress on strategic initiatives
Sanlam delivered strong growth in both operating and headline earnings for the
six months to June 2003. This was due to a satisfactory operational performance
from most of the Group"s businesses together with a substantial increase in the
contribution from Absa. The adverse impact of market conditions on life
insurance inflows was balanced by a significant improvement in investment fund
inflows.
Looking forward, lower interest rates should have a positive impact on the
demand for equities and contribute to an improvement in the overall business
environment. Lower short-term interest rates will, however, have a negative
impact on interest linked operating and investment income for the remainder of
the year. While no material improvement is therefore expected in the Group"s
results for the second half of 2003, management remains confident that its
renewed operational focus will unlock the value inherent in the Group and
achieve sustainable profitable growth going forward.
SALIENT FEATURES
Six months/unaudited Full
year
2003 2002 2002
Operating:
Operating profit
before tax R million 1 222 1 085 2 149
Headline earnings(1) R million 1 373 1 053 2 280
Adjusted headline
earnings based on
the LTRR(2) R million 1 681 1 554 3 227
Net operating profit
per share cents 28,7 28,1 56,3
Headline earnings
per share cents 52,1 39,9 86,7
Adjusted headline
earnings per share
based on the LTRR(2) cents 63,8 58,9 122,7
Group administration
cost ratio(3) % 31,8 34,0 34,4
Group operating
margin(4) % 18,2 18,0 17,0
Business volumes:
New business volumes R million 18 234 14 816 32 257
Net funds flow R million 558 (1 326) (3 934)
Embedded value of new
life business R million 100 146 320
Life insurance new
business APE(5) R million 832 1 032 2 179
New business embedded
value margin % 12,0 14,1 14,7
Embedded value:
Embedded value
per share cents 1 023 1 094 1 032
Growth from Life
business(6) % 13,9 12,6 12,7
Return on embedded
value(7) % 5,4 (7,2) (8,9)
Notes
(1) Headline earnings = net operating profit and investment income.
(2) Adjusted headline earnings based on the LTRR = net operating profit and
total investment return based on a long-term rate of return.
(3) Administration costs as a percentage of income earned by the shareholders"
funds less sales remuneration.
(4) Operating profit as a percentage of income earned by the shareholders" funds
less sales remuneration.
(5) APE = Annual premium equivalent and is equal to new recurring premiums
(excluding indexed growth premiums) plus 10% of single premiums.
(6) Returns for six months are annualised.
(7) Growth in embedded value (with dividends paid added back) as a percentage of
embedded value at the beginning of the year. Returns for six months are
annualised.
EXECUTIVE REVIEW
Performance in the first six months of 2003
The business environment remained difficult throughout the first six months of
2003 as declining equity markets, currency volatility and uncertain market
sentiment persisted. Against this background it is gratifying to report a 30%
increase to 52,1 cents per share in the Group"s Headline Earnings.
Group operations recorded a 13% improvement in gross operating results for the
period. Most notable is the more than doubling of Santam"s contribution and a
61% improvement in Gensec Bank"s results. In addition the results were boosted
by a strong improvement in investment income, which was particularly enhanced by
a substantial increase in equity-accounted earnings from the Group"s investment
in Absa. Headline earnings based on a 12% long-term rate of investment return,
improved by 8%.
New business inflows improved by 23% on the back of a strong recovery in
segregated investment inflows. New inflows were inhibited by market conditions.
Poor equity market performance caused investor dissatisfaction with equities as
an asset class, and a strong preference for liquidity and cash based products.
This trend, coupled with the attraction of relatively high short-term interest
rates, was evident in record levels of money market inflows in the unit trust
industry. The inverse yield curve that prevailed throughout the period impacted
negatively on the attractiveness of longer-term returns offered by Life products
such as term annuities and guaranteed return products.
The focus of Sanlam Investment Management (`SIM") is on delivering sustained
competitive investment results. It is therefore encouraging to note a further
improvement in SIM"s position in both the domestic and global Alexander Forbes
Large Manager Watch Ranking. On a year on year basis SIM improved to 5 out of 10
on both the global and domestic manager watch. The calendar year to 31 July
2003 confirms this improvement with SIM ranking 3rd and 4th in the respective
surveys. The SIM Unit Trust performance measured over a 12-month period through
the Plexus Survey has improved from 24 out of 26 management companies a year
ago, to 8 out of 22 at the end of June 2003. Strong growth in investment fund
inflows during the first half of 2003 is largely due to the improvement in SIM"s
investment management rating.
New Life inflows were severely affected by the lower demand for contractual
savings products, and single premium Life products in particular. This impacted
negatively on Sanlam Life"s fund flows, new business embedded value margin and
embedded value. However, despite the disappointing new business volumes, the
most recent Life Office Association statistics indicate market share gains for
Sanlam Life. Sanlam Life"s strategy for sustained performance improvement is
based on an increase in new Life inflows through meeting the changing product
and service needs of clients, while at the same time focusing on cost-efficient
distribution and support structures. Good progress has been made in the first
six months of 2003 to address several identified focus areas:
* Sanlam Life recently announced the appointment of Themba Gamedze as Chief
Executive of the Employee Benefits (EB) division. This appointment follows
a decision to improve operational focus and delivery in EB, refocusing it
as a major growth area in the Group"s Life business;
* The revised strategy to improve Sanlam"s visibility and accessibility is
progressing well. Thirty nine new service centres were opened or upgraded
during the six months. These centres provide cost effective contact and
service facilities for clients and intermediaries;
* Sanlam Life"s focussed distribution through market segmentation is being
further developed through an optional group scheme business (to be launched
in October 2003); and
* Sanlam Life has embarked on a comprehensive business wide re-engineering
programme aimed at reducing costs by in excess of R250 million in the 2004
financial year.
Strategic Focus
In May 2003, Sanlam announced new operational structures as part of the Group"s
strategy of improving operational focus and delivery. As part of the
restructuring, the Group has been aligned into four clusters, namely life
assurance, short-term insurance, investment and banking. Each cluster operates
autonomously with set targets and is headed by an executive with strong
operational experience.
The group also announced the restructuring of its international business, Sanlam
Financial Services (SFS) and Gensec Bank in August, while detail on an agreed co
operation with Absa was announced in September 2003.
International Business
In terms of the restructuring agreement, SFS will transfer responsibility for
the South African sourced international funds (approximately R18 billion) that
it managed through io investors to a new wholly-owned offshore business unit in
the investment cluster, Sanlam Multi-Manager International (SMMI). io investors
will continue to focus on specialised investment products and solutions for the
non-South African market. At the same time Sanlam will reduce its interest in
the remaining SFS business to 60%.
On a group level, Sanlam will continue to move away from a centralised approach
to internationalisation, with each of the clusters developing and expanding its
own international activities. This will allow each cluster to continue
leveraging existing operational strengths to provide cost-effective, relevant
product and service offerings.
Gensec Bank
The restructuring of Gensec will refocus the bank around the areas that are
complementary and value enhancing to Sanlam"s current businesses. These core
activities will be grouped in a new entity, Sanlam Capital Markets that will
capitalise on the potential of a centralised treasury, structured products and
brokerage capability to serve the Group"s clients.
Non-core investment banking activities will be terminated during the process of
restructuring, while certain long-term investments and activities will initially
be retained, but not expanded. Certain of these activities, such as the
investment banking business, may be offered to Absa in line with the aims of the
co-operation agreement signed by Sanlam and Absa.
This restructuring and increased focus on the core business areas of risk
management solutions and associated capital market activities, will enhance
operational performance, optimise return on capital and allow more effective
redeployment of capital.
Absa relationship
Satisfactory progress has been made on formalising closer cooperation with Absa.
A formal agreement has been entered into with Absa Brokers on dedicated support,
training and service structures that will aid in Sanlam regaining a meaningful
share of Absa Brokers" sales volumes. Other areas of co-operation are being
pursued.
Outlook for the rest of 2003
Looking forward, lower interest rates should have a positive impact on the
demand for equities and contribute to an improvement in the overall business
environment. Lower short-term interest rates will, however, have a negative
impact on interest linked operating and investment income for the remainder of
the year. The restructuring of Gensec Bank will result in a lower contribution
from that source for the rest of the year. Management remains confident that its
renewed operational focus will unlock the value inherent in the Group and
achieve sustainable profitable growth going forward.
Directorate
Changes to the operating structures brought about adjustments to the board
membership of Sanlam. Lize Lambrechts (Life cluster), Johan van der Merwe
(Investment cluster) and Steffen Gilbert (Short-term insurance cluster) joined
the board as alternate directors. Chris Swanepoel retains his position on the
executive committee, but stepped down as an alternate director of the board to
enhance his independence as statutory actuary. Charl le Roux, an executive
director, and Bonang Mohale, an alternate director, both left the board and the
Group to pursue other interests. Angus Samuels and Marius Ferreira resigned as
alternate directors. The board also accepted the resignation of non-executive
director Thulani Gcabasche during the period. We thank the outgoing board
members for their contribution during their tenure.
Ton Vosloo
Chairman
Johan van Zyl
Group Chief Executive
Sanlam Limited
Cape Town
3 September 2003
COMMENTS ON INTERIM RESULTS TO JUNE 2003
Headline earnings
As from 2002, following various directives issued by the JSE in this regard, we
publish two Headline Earnings figures. The headline earnings used for JSE record
purposes combine net operating profit and investment income (including equity-
accounted earnings). In addition, we also provide an adjusted headline earnings
figure based on the long-term rate of return (LTRR) that includes net operating
income and an assumed investment return (income and market movement) based on an
expected LTRR of 12% (2002: 13%) pre-tax. The rate is reviewed annually and is
linked to the long bond yield. The investment return is determined by applying
the long-term rate of return to the monthly average market value of the
shareholder fund"s balanced investment portfolio.
Headline earnings of R1 373 million (52,1cps) recorded for the six months are
30% up on 2002. The improvement on 2002 is the combined effect of a positive
operating variance and a major increase in investment income, particularly
equity-accounted earnings. Equity-accounted earnings substantially represents
the income earned on the shareholders" fund"s investment in Absa. The increase
over 2002 is due to a strong increase in Absa"s underlying operating results and
the one-off negative effective impact of R189 million that Unifer had on the
results recorded for Absa in the 2002 results.
Six months to June
R million 2003 2002
Net operating income 756 742 2%
Investment income 617 311 98%
Equity-accounted earnings 375 94 299%
Other investment income 242 217 12%
HEADLINE EARNINGS 1 373 1 053 30%
Net operating income 756 742 2%
Investment return (LTRR) 925 812 14%
LTRR ADJUSTED EARNINGS 1 681 1 554 8%
Headline earnings adjusted for the long-term investment return assumption at
63,8cps (R1 681 million), is 8% higher than 2002. The growth in the long-term
investment return was aided by the one-off Absa effect above and negatively
impacted by the reduction in the long-term return rate used (from 13% to 12%)
and the effect of lower equity markets on the asset base.
Business volumes
Overall new business inflows for the six months increased by R3,4 billion (23%)
over 2002. A major improvement in investment fund inflows and short-term
insurance premiums was somewhat offset by disappointing new Life business
inflows.
Inflows per product type
Six months to June
R million 2003 2002
Life Business 4 884 6 44 -24%
Individual recurring 717 690 4%
Individual single & continuations 2 528 3 654 -31%
Group 1 066 1 466 -27%
Namibia & Innofin 573 636 -10%
Investment 10 272 5 802 77%
Short-term insurance 3 078 2 568 20%
New business inflows 18 234 14 816 23%
Total inflows 23 134 19 666 18%
Life business APE 832 1 032 -19%
New business embedded value 100 146 -32%
Embedded value margin 12.0% 14.1%
In a major recovery, investment fund inflows exceeded the 2002 volumes by 77%.
This was mainly the result of a substantial improvement in local and offshore
segregated fund inflows - albeit from a low base. Sanlam Collective Investments
and Innofin both attracted strong money market inflows, which is in line with
the current market preference for cash and liquid investments. Santam performed
exceptionally well and grew its premium inflow (net of reinsurance premiums) by
20%.
Lower levels of Individual Life single premium business are being experienced
throughout the industry, as is reflected in the latest Life Office Association
market share statistics. Notwithstanding very disappointing new business
results, Sanlam"s market share of Individual Life single premium business
increased in the first quarter of 2003 to 24,6% from 22,7% in the last quarter
of 2002. Sanlam"s new Life inflows were down 24% on the first six months of
2002, mainly due to a sharp fall in both Group and Individual Life single
premium inflows. Market conditions played a major role in these results. A lack
of investor equity risk appetite was aggravated by the impact of the inverse
yield curve as the terms offered on certain single premium products, such as
term annuities and guaranteed return products, could in many instances not match
the current high short-term interest rates.
Due to the weaker sales volumes recorded for the period, the embedded value of
the new Life business for the six months amounted to R100 million, 32% down on
2002. The new business margin consequently deteriorated from 14,1% to 12,0%.
A net inflow of R558 million was recorded for the first six months of 2003
compared to the net outflow of R1 326 million in 2002. The turnaround can
largely be ascribed to the R2,2 billion improvement in SIM segregated fund and
unit trust net flows. The lower Life inflows had a major negative impact on
overall net cash flows. The increase in Group business and Individual Life
outflows was, however, contained to only 3%, compared to the first six months of
2002. This is notwithstanding a one-off outflow of R1,4 billion relating to the
maturity of a single corporate policy.
Operating profit
Group operating profit for the six months of R1 222 million is 13% up on 2002.
Operating results have been restated to be in line with the new business
clusters and reflect the transfer of Innofin and Sanlam Collective Investments
from Sanlam Life to SIM and certain corporate activities to Sanlam Life. The
International numbers reflect the structure as at 30 June 2003, before the
implementation of the recently announced restructuring and integration of the
business into other clusters.
Six months to June
R million 2003 2002
Sanlam Life 740 730 1%
Santam 281 127 121%
Gensec Bank 82 51 61%
SIM 124 117 6%
International 7 69 -90%
Other 50 56 -11%
1 284 1 150 12%
Corporate expenses (62) (65) 5%
Gross operating profit 1 222 1 085 13%
The reduction in Sanlam Life"s new business volumes for the year to date did not
have a material impact on profit for the six months. This is as a result of its
deferred profit recognition practice followed in respect of Life products. The
positive variance compared with 2002 is due to a combination of an increase in
underwriting profit and net interest earned on working capital (due to higher
interest rates) and the containment of cost. Total administration expenses
remained unchanged compared to the first half of 2002.
Santam performed exceptionally well. The management of claims and reinsurance,
return on operating cash, and a sound maiden contribution from their UK
acquisition, all contributed to a profit of R281 million. This more than doubled
their contribution to Group operating profit compared to the first six months of
2002.
Notwithstanding the negative impact on revenue of lower assets under management,
the investment cluster (SIM) reported a 6% increase in operating profit.
Positive growth contributions from Property Asset Management, Tasc and Sanlam
Collective Investments were somewhat offset by a reduction in the profit
contributed by the wholesale asset management business.
The half-year profit contribution of R82 million from Gensec Bank is a
substantial improvement of 61% on their 2002 results. The bank"s local
operations performed exceptionally, in particular in the debt and fixed interest
areas. The performance of the Fieldstone operations, however, has been poor as a
result of limited transaction fee inflows.
Sanlam"s international business, SFS, did not achieve the growth in fee income
from assets under management required to offset the substantial increase in its
capacity and cost base during 2002. Their results, in particular asset
management, brokerage and private client business, were affected by lower fee
income as a result of the impact of weaker markets on the level of investments
under management. This is due to both the distressed equity markets as well as
low new business volumes. The 13% strengthening in the R/$ exchange rate
aggravated the impact and resulted in a 90% reduction in profit. The recent
restructuring of this business should improve performance going forward.
The operating margin of 18,2% for the six months shows a marginal improvement on
the 18,0% for 2002 - mainly through the containment of the increase (4%) in the
Group"s administration expenditure. With the exception of Santam, where the
increase in expenses was substantially offset by an increase in income, as well
as the international business, where costs were incurred since June 2002 in
building capacity, all businesses managed to keep expenditure approximately at
the same level as in the first half of 2002.
Goodwill impairment
As part of the recently announced restructuring of the activities of Gensec
Bank, the carrying value of certain of its major investments was reviewed. Due
to an unsatisfactory performance to date from the investment in Fieldstone, the
carrying value of that investment (R131 million) was provided for in full. The
fair value of the Bank"s exposure to the Safair Lease Financing joint venture
was also reassessed and written down by R100 million.
Solvency
The capital of Sanlam Life increased marginally to R17,5 billion at the end of
the period and CAR (Capital Adequacy Ratio) cover amounted to 1.9 at the end of
June 2003, compared to 1.7 at the end of December 2002.
A prudent valuation of certain smoothed bonus policyholder portfolios in terms
of prevailing actuarial guidelines resulted in the shareholders" fund providing
financial assistance of R290 million (2002 full year: R153 million) to these
portfolios. This assistance will be repayable should the funding position
recover sufficiently. Full provision has been made for this assistance against
the investment return for the shareholders" fund.
Embedded value
Sanlam"s embedded value amounted to R26,8 billion (1 023cps) at the end of June
2003, marginally down on the R27,1 billion (1 032cps) at the end of December
2002.
The Group accepted return on embedded value as a primary performance measure.
This takes account of both the return earned on capital employed and the growth
in the value of the Life company"s in-force book of business. A target has been
set to outperform the 10-year bond yield by between 3% and 4% per annum on a
sustained basis.
Taking into account the dividend of R972 million paid during the period, the net
growth on the December 2002 embedded value balance amounted to R726 million
(5,4% annualised).
This return was negatively impacted by the prevailing market conditions. The
value of Sanlam Life"s in-force book of business amounted to R6,7 billion, after
taking into account the cost of capital at risk (R1,4 billion). Annualised
growth from life business, based on the starting value of the in-force life
business, amounted to 13,9%.
Contingency
Shareholders are referred to the note in the 2002 Annual Report on the potential
tax liability of a subsidiary of Gensec. This matter is still being pursued
with the revenue authorities.
Dividend
As standard practice, Sanlam only declares an annual dividend at year-end.
Therefore no interim dividend has been declared.
GROUP INCOME STATEMENT
Note Six months unaudited Full year
2003 2002 2002
R million R million R million
FUNDS RECEIVED FROM CLIENTS 1 23 134 19 666 42 098
Financial services income 7 673 6 929 14 531
Sales remuneration (959) (896) (1 863)
Income after sales remuneration 6 714 6 033 12 668
Underwriting policy benefits (3 354) (2 895) (6 162)
Administration costs (2 138) (2 053) (4 357)
Operating profit before tax 4 1 222 1 085 2 149
Tax on operating profit 5 (354) (279) (549)
Operating profit from ordinary
activities after tax 868 806 1 600
Minority shareholders interest (112) (64) (118)
NET OPERATING PROFIT 756 742 1 482
Net investment income 242 217 402
Investment income 6 370 325 620
Tax on investment income 5 (77) (63) (110)
Minority shareholders" interest (51) (45) (108)
Net equity-accounted earnings 375 94 396
Equity-accounted earnings 467 47 471
Tax on equity-accounted earnings 5 (92) 47 (75)
HEADLINE EARNINGS 1 373 1 053 2 280
Net investment surpluses(1) (49) (1 194) (2 621)
Investment surpluses 6 (52) (1 289) (2 822)
Tax on investment surpluses - 87 177
Minority shareholders" interest 3 8 24
Impairment of investments and
goodwill (231) - -
Amortisation of goodwill (150) (129) (259)
ATTRIBUTABLE EARNINGS 943 (270) (600)
Diluted earnings per share (cents):
Net operating profit from ordinary
activities 28,7 28,1 56,3
Headline earnings 52,1 39,9 86,7
Attributable earnings 35,8 (10,2) (22,8)
Adjusted weighted average number of shares (million) 2 634
2 639 2 631
ADJUSTED HEADLINE EARNINGS based
on the LTRR (R million) 1 681 1 554 3 227
Adjusted headline earnings based
on the LTRR (cents per share) 63,8 58,9 122,7
(1) Upon the introduction of AC133, investments were classified as available-for
sale and Sanlam elected to take unrealised investment surpluses directly to
equity. In terms of the requirements of AC133, prior year results were not
restated.
GROUP BALANCE SHEET
June unaudited December
2003 2002 2002
R million R million R million
ASSETS
Non-current assets
Fixed assets 289 263 260
Owner-occupied properties 353 381 381
Goodwill 1 840 2 014 1 992
Investments 146 721 157 438 149 276
Deferred tax 189 125 237
Short-term reinsurance provisions 1 945 1 576 2 072
Current assets
Trade and other receivables 21 179 20 223 16 614
Cash, deposits and similar
securities 12 217 8 895 12 725
Total assets 184 733 190 915 183 557
EQUITY AND LIABILITIES
Shareholders" funds 20 208 20 984 20 651
Minority shareholders" interest 1 625 1 636 1 624
Non-current liabilities
Long-term policy liabilities 126 050 137 723 129 329
Insurance contracts 88 456
Investment contracts 37 594
Term finance 4 951 5 131 5 382
Deferred tax 37 277 35
Short-term insurance provisions 4 580 3 199 4 226
Current liabilities 27 282 21 965 22 310
Total equity and liabilities 184 733 190 915 183 557
Segregated funds not included in
the above balance sheet 65 869 68 396 62 396
Total assets under management
and administration 250 602 259 311 245 953
Tangible net asset value per
share (cents) - group businesses valued at fair value 787
861 798
GROUP STATEMENT OF CHANGES IN EQUITY
Six months unaudited Full year
2003 2002 2002
R million R million R million
Shareholders" funds at beginning
of year 20 651 22 231 22 231
Attributable earnings 943 (270) (600)
Dividends paid (972) (921) (921)
Movement in treasury shares
acquired 5 (56) (59)
Unrealised investment surpluses(1) (384) - -
Unrealised investment surpluses (342) - -
Tax on investment surpluses (69) -
Minority shareholders" interest 27 - -
Foreign currency translation
differences (29) - -
Adoption of AC133(2) (6) - -
Shareholders" funds at end of
period 20 208 20 984 20 651
(1) Upon the introduction of AC133, investments were classified as available-for
sale and Sanlam elected to take unrealised investment surpluses directly to
equity. In terms of the requirements of AC133, prior year results were not
restated.
(2) The adoption of AC133 by Gensec Bank in 2003 resulted in the revaluation of
instruments at the beginning of the year with a consequent restatement to
opening retained income.
CASH FLOW STATEMENT
Six months unaudited Full year
2003 2002 2002
R million R million R million
Net cash inflow from operating
activities before dividends paid 1 177 23 4 113
Dividends paid (972) (921) (921)
Net cash outflow from investment
activities (332) (698) (1 130)
Net cash (outflow)/inflow from
financing activities (381) 182 354
Net (decrease)/increase in cash
and cash equivalents (508) (1 414) 2 416
Cash, deposits and similar
securities at beginning of period 12 725 10 309 10 309
Cash, deposits and similar
securities at end of period 12 217 8 895 12 725
NOTES TO THE FINANCIAL STATEMENTS
Six months unaudited Full year
2003 2002 2002
R million R million R million
1.FUNDS RECEIVED FROM CLIENTS
Life insurance 4 884 6 446 13 123
Investments 10 272 5 802 13 586
Short-term insurance 3 078 2 568 5 548
Total new business 18 234 14 816 32 257
Recurring premiums on
existing business 4 900 4 850 9 841
Total funds received from clients 23 134 19 666 42 098
Life insurance annual premium
equivalent 832 1 032 2 179
2.PAYMENTS TO CLIENTS
Life insurance 13 808 13 925 27 896
Investments 6 610 5 260 14 211
Short-term insurance 2 158 1 807 3 925
Total payments to clients 22 576 20 992 46 032
3.NET FLOW OF FUNDS
Life insurance (4 024) (2 629) (4 932)
Investments 3 662 542 (625)
Short-term insurance 920 761 1 623
Total flow of funds 558 (1 326) (3 934)
4.ANALYSIS OF OPERATING PROFIT
Sanlam Life 740 730 1 451
Sanlam Investment Management 124 117 243
International 7 69 75
Gensec Bank 82 51 112
Santam 281 127 257
Gensec Properties 8 7 24
Corporate income 42 49 101
Corporate costs (62) (65) (114)
Total operating profit 1 222 1 085 2 149
5. INCOME TAX
Operating profit 354 279 549
Current year 354 279 556
Prior year - - (7)
Investment income 77 63 110
Current year 77 63 110
Prior year - - -
Equity-accounted earnings 92 (47) 75
Investment surpluses - (87) (177)
Investment surpluses - normal - 34 15
Investment surpluses
- capital gains tax - (121) (182)
Investment surplus on investment
in associated company - capital
gains tax - - (10)
Investment surpluses taken
directly to equity 69 - -
Investment surpluses - normal 66 - -
Investment surpluses - capital
gains tax 3 - -
Income tax 592 208 557
6.ACTUAL (INVESTMENT RETURN)
Investment income 370 325 620
Interest bearing investments 179 136 319
Equities 154 137 236
Properties 37 52 65
Investment surpluses (394) (1 289) (2 822)
Realised and unrealised
investment surpluses (578) (904) (2 193)
Surplus/(deficit) on investment
in associate company 184 (385) (629)
Actual investment return (24) (964) (2 202)
7.SHAREHOLDERS" FUNDS BALANCE EET (AT FAIR) VALUE
(Group businesses listed below not consolidated, but reflected as
investments at fair value)
Assets
Fixed assets 134 147 153
Owner-occupied properties 333 333 333
Investments
Sanlam businesses 5 471 6 741 5 485
Investment Management(1) 1 665 2 072 1 587
International 741 1 516 1 071
Gensec Bank 1 177 1 255 1 186
Gensec Properties 71 84 60
Santam 1 817 1 814 1 581
Associated company - Absa 4 545 4 015 3 957
Other Investments
Other equities 5 164 6 726 5 734
Public sector stocks and loans 1 534 1 607 1 611
Investment properties 611 835 659
Other interest bearing investments 7 287 6 599 6 859
Deferred tax - 38 50
Current and other assets 4 714 4 131 5 028
Total Assets 29 793 31 172 29 869
Equity and liabilities
Shareholders" funds 20 658 22 601 20 947
Term finance 4 696 4 450 4 581
Current and other liabilities 4 439 4 121 4 341
Total equity and liablities 29 793 31 172 29 869
Excess of fair value over net
asset value of businesses
The shareholders" funds balance
sheet at fair value include the value of the companies below based on
directors" valuation,
apart from Santam, which is valued according to ruling share prices.
Fair value of businesses (above) 5 471 6 741 5
485
Less: Tangible net asset value 3 738 3 646 3 820
Investment Management(1) 354 335 394
International 415 385 439
Gensec Bank 1 376 1 467 1 459
Gensec Properties 51 52 49
Santam 1 542 1 407 1 479
Less: Goodwill recognised in respect of above businesses 1 283
1 454 1 369
Deferred capital gains tax on investments at fair value -
24 -
Revaluation adjustment of interest
in businesses to fair value 450 1 617 296
(1) Included in Investment Management are the values of Sanlam Investment
Management, Sanlam Collective Investments and Innofin.
NOTES (continued) June unaudited December
2003 2002 2002
R million R million R million 8.
ABRIDGED SHAREHOLDERS" FUNDS BALANCE SHEET - NET ASSET VALUE
(All businesses consolidated at NAV)
Assets
Goodwill 1 840 2 014 1 992
Investments 24 390 24 065 24 026
Current and other assets 31 747 25 267 27 788
Total Assets 57 977 51 346 53 806
Equity and liabilities
Shareholders" funds 20 208 20 984 20 651
Term finance, current and other
liabilities 37 769 30 362 33 155
Total equity and liabilities 57 977 51 346 53 806
9.CAPITAL ADEQUACY AND RATIOS
Shareholders" funds - Sanlam Life Insurance Limited 17 484
18 125 17 001
Capital adequacy requirements (CAR) 9 050
8 825 9 900
Times CAR covered by shareholders" funds times 1,9
2,1 1,7
Shareholders" funds as percentage of
Policy liabilities % 13,9 13,2 13,1
Non-market-related liabilities % 20,2 20,2 19,7
ACCOUNTING POLICIES AND ACTUARIAL BASIS
The accounting policies adopted for the purposes of the interim financial
statements comply with South African Statements of Generally Accepted Accounting
Practice, specifically AC127 on interim financial reporting, and with applicable
legislation. Apart from the adoption of AC133, these accounting policies are
consistent with those of the previous year except where stated otherwise.
There were no material changes in the financial soundness valuation basis or
embedded value calculation methodology since 31 December 2002.
CHANGES IN REPORTING STRUCTURES AND ACCOUNTING POLICIES
Following the restructuring of the Sanlam businesses into four distinct
clusters, the results of Innofin and Sanlam Collective Investments (formerly
Sanlam Unit Trusts) have been transferred from the Life cluster to the
Investment cluster. Certain corporate functions were transferred into the
businesses as part of the creation of a small streamlined central function.
Operating results of prior periods have been restated to reflect the above
changes.
The adoption of AC133 Financial Instruments: Recognition and Measurement in the
2003 financial year resulted in certain changes in presentation for the Sanlam
group:
Sanlam Life has categorised its life policies between investment contracts,
which fall within the scope of AC133, and insurance contracts.
An insurance contract is a contract under which Sanlam accepts significant
insurance risk by agreeing with the policyholder to compensate the policyholder
or other beneficiary if a specified uncertain future event (the insured event)
adversely affects the policyholder or other beneficiary. Insurance contracts
fall outside the scope of AC133 and will continue to be valued on the current
financial soundness valuation basis.
Investment contracts are measured at fair value, as specified by AC133.
Currently the financial soundness approach is considered to be an appropriate
valuation model for investment contracts issued by long-term insurers. This is
in accordance with interim solutions developed in conjunction with the South
African Institute of Chartered Accountants, which are being implemented in order
to limit significant temporary changes to the treatment of investment and
insurance contracts within South Africa, while adhering to the principles of
AC133.
The liabilities under insurance and investment contracts are disclosed
separately on the balance sheet.
The migration to new International Financial Reporting Standards (IFRS) for
insurers will last a number of years, as there is currently no such standard.
The exposure draft on the first phase of the proposals for IFRS on insurance
contracts was only recently issued. Future results may however be impacted, as
the development of guidance for the long-term insurance industry, both from an
accounting and actuarial perspective, is an ongoing process.
Gensec Bank has revisited all financial instruments that were previously carried
at historical or amortised cost (excluding instruments originated by the Bank)
and for which the Bank does not have the intent and ability to keep to maturity.
These will now be marked-to-market with the effective date being 1 January 2003.
The net effect on implementation date is, in accordance with AC133, reflected as
an adjustment to opening retained earnings for the year.
Since the 2002 results we present two Headline earnings figures, the primary
figure being based on operating profit and actual investment income earned for
the period and the secondary being headline earnings adjusted for the long-term
rate of return. The introduction of AC133 forced us to revisit the treatment of
investment surpluses. In the past all investment surpluses were taken through
the income statement. We have now classified all investments of the
shareholders" portfolio as available-for-sale in terms of the standard and
elected to take unrealised investment surpluses directly to equity. Realised
investment surpluses will be recycled to the income statement, but do not form
part of headline earnings.
ADJUSTED HEADLINE EARNINGS - LTRR
The LTRR investment return is determined
by applying the long-term expected return
Of 12% (2002:13%) to the average
monthly shareholders" fund investments.
Long-term rate of return (LTRR)
Net operating profit 756 742 1 482
LTRR investment return 925 812 1 745
Net equity-accounted earnings 375 94 396
Investment return after taxation 550 718 1 349
Adjusted headline earnings - LTRR 1 681 1 554 3 227
Reconciliation of headline
earnings and LTRR headline
earnings
Headline earnings per income
statement 1 373 1 053 2 280
Net investment surpluses per
income statement (49) (1 194) (2 621)
Net unrealised investment
surpluses taken directly to
reserves (384) - -
Net LTRR adjustment 741 1 695 3 568
Adjusted headline earnings - LTRR 1 681 1 554 3 227
Analysis of net LTRR adjustment
Investment return 821 1 940 4 054
Equities 710 1 252 3 081
(Surplus)/deficit on investment
in associated company (184) 385 629
Interest bearing investments 325 279 301
Properties (30) 24 43
Tax (5) (179) (364)
Minority shareholders" interest (75) (66) (122)
Net LTRR adjustment 741 1 695 3 568
ASSETS SUBJECT TO LTRR
Investments per shareholders"
funds balance sheet (note 8) 24 390 24 065 24 026
Less : Investment in ABSA 4 545 4 015 3 957
Investments held in respect of
term finance 4 791 4 266 4 731
Investments held in respect of
banking activity 1 508 1 138 1 544
Other (38) 78 199
Long-term rate of return investments 13 584 14
568 13 595
EMBEDDED VALUE
1. EMBEDDED VALUE June unaudited December
2003 2002 2002
R million R million R million
Sanlam Group shareholders" funds
at fair value (per note 7) 20 658 22 601 20 947
Adjustment for discounting capital gains tax(1) -
37 -
Present value of strategic corporate expenses(2) (472)
(733) (600)
Sanlam Group shareholders" adjusted net assets 20 186 21
905 20 347
Net value of life insurance
business in force 6 655 6 822 6 740
Value of life insurance business in force 8 010
8 572 8 251
Cost of capital at risk (1 355) (1 750) (1 511)
Sanlam Group embedded value 26 841 28 727 27 087
Six months unaudited Full year
2003 2002 2002
2. EMBEDDED VALUE EARNINGS R million R million R million
Embedded value from new life insurance business 100
146 320
Earnings from existing life insurance business 579
650 1 353
Expected return 527 595 1 208
Operating experience variations(3) 110 42 96
Operating assumption changes (58) 13 49
Embedded value earnings from
life operations 679 796 1 673
Economic assumption changes 114 (48) 117
Tax changes 23 - -
Investment variances (including
change in long-term asset mix)(4) (363) (325) (907)
Growth from life insurance business 453 423
883
Investment return on shareholders" adjusted net assets 273
(1 512) (3 612)
Total embedded value earnings
before dividends are paid 726 (1 089) (2 729)
Dividends paid (972) (921) (921)
Increase/(Decrease) in Sanlam Group embedded value (246) (2
010) (3 650)
Growth from life insurance business as a % of beginning value of in-force
13,9%* 12,6%* 12,7%*
annualised
Six months unaudited Full
year
2003 2002 2002
3. NEW BUSINESS EMBEDDED VALUE R million R million R million Value of
new business
Gross value of new business 113 171 365
Individual business 98 109 266
Group business 15 62 99
Cost of Capital at risk (13) (25) (45)
Individual business (10) (7) (19)
Group business (3) (18) (26)
Net value of new business 100 146 320
Net value of new business as a
percentage of the annual
premium equivalent
Annual Premium Equivalent (APE)(5) 832 1 032 2 179
Individual business 694 828 1 774
Group business 138 204 405
Net value of new business 100 146 320
Individual business 88 102 247
Group business 12 44 73
APE margin 12,0% 14,1% 14,7%
Individual business 12,7% 12,3% 13,9%
Group business 8,7% 21,6% 18,0%
4. SENSITIVITY
R million % Change from base
Value of in-force business less
cost of capital at risk
Base value 6 655
Risk discount rate increases by 1,0% to 12,9% 5 921
(11%)
Risk discount rate decreases by 1,0% to 10,9% 7 487
13%
Value of new business less cost of capital at risk
Base value 100
Risk discount rate increases by 1,0% to 12,9% 81
(19%)
Risk discount rate decreases by
1,0% to 10,9% 122 22%
METHODOLOGY
The embedded value methodology applied is consistent with the methodology used
in the 31 December 2002 Embedded Value report. There were no material changes
in the methodology used.
PRINCIPAL ASSUMPTIONS
Gross investment return and inflation
June unaudited December
2003 2002 2002
% p.a. % p.a. % p.a.
Fixed-interest securities 9,4 12,2 10,8
Equities and offshore investments 11,4 14,2 12,8
Hedged equities (6) 8,4 11,2 9,8
Property 10,4 13,2 11,8
Cash 7,4 10,2 8,8
Risk discount rate 11,9 14,7 13,3
Return on capital at risk (7) 10,0 13,1 11,9
Unit cost and salary inflation 4,9 7,7 6,3
Consumer price index inflation 3,4 6,2 4,8
Decrements, expenses and bonuses
Future mortality, morbidity and discontinuance rates and future expense levels
were based on recent experience where appropriate.
Future rates of bonuses for traditional participating business, stable bonus
business and participating annuities were set at levels that were supportable by
the assets backing the respective product asset funds at the respective
valuation dates.
Sanlam Life"s current surrender and paid-up bases were assumed to be maintained
in the future.
HIV/Aids
Allowance was made, where appropriate, for the impact of expected HIV/Aids-
related claims, consistent with the recommendations of the Actuarial Society of
South Africa as set out in its latest proposed Professional Guidance Note (PGN)
105.
Premiums were 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.
Taxation
Projected corporate tax was allowed for at a rate of 30%. Allowance was made
for capital gains tax. The assumed rollover period for realisation of
investments is five years for property and equity assets supporting capital at
risk and policy reserves. For strategic equity assets the assumed rollover
period is ten years.
Allowance for secondary tax on companies was made by placing a present value on
the tax liability generated by the net cash dividends paid that are attributable
to the life company. It was assumed that over the long-term the proportion of
cash dividends paid would fall to a level of 50% from the current 100% level.
Long-term asset mix for assets supporting the capital at risk
June unaudited December
2003 2002 2002
% % %
Equities 42 54 58
Hedged equities 26 18 18
Property 8 16 12
Fixed-interest securities 20 10 10
Cash 4 2 2
100 100 100
Six months unaudited Full year
2003 2002 2002
7. NEW BUSINESS PREMIUMS R million R million R million
Financial statements
New business premiums (per note 1) 4 884 6 446
13 123
Less: Premium increases (index
growth) (305) (257) (564)
Plus: Optional reduction in premiums 17
17 34
Less: Other life business(8) (633) (642) (1 300)
Premiums used in the calculation of annual premium equivalent 3 963
5 564 11 293
New business embedded value premiums
Recurring premiums 484 527 1 166
Single premiums 3 479 5 037 10 127
Premiums used in the calculation of annual premium equivalent 3 963
5 564 11 293
(1) Adjustment to allow for the delay before incurring the capital gains tax
liability included in the fair value.
(2) The June 2003 value was calculated by multiplying half the projected full
year corporate expenses not related to life business (after tax) of R86 million
by the share price of 700 cents and dividing by the headline earnings per share
based on the long-term rate of return of 63,8 cents. The present value of
strategic corporate expenses reduced by R128 million for the six months to 30
June 2003 of which R57 million is in respect of expenses absorbed by Sanlam
Life.
(3) The main contributor to the operating experience variation was positive risk
experience of R91million.
(4) The change in the long-term asset mix assumptions resulted in a decrease of
R117 million.
(5) APE (annual premium equivalent) is equivalent to new recurring premiums plus
10% of single premiums. APE excludes life licence business.
(6) The assumed future return for these assets is lower than that of equities,
which are not hedged, reflecting the cost of derivative instruments.
(7) The investment return on assets supporting the capital at risk is based on
the long-term asset mix for these funds.
(8) The majority of profits in respect of these premiums accrue to Sanlam
Investment Management and Innofin.
Group secretary
Johan Bester
Registered office
2 Strand Road, Bellville 7530
Telephone (021) 947-9111
Fax (021) 947-3670
Postal address
PO Box 1, Sanlamhof 7532
Registered name: Sanlam Limited
(Registration number 1959/001562/06)
JSE share code: SLM
ISIN number: ZAE000028262
Incorporated in South Africa
Transfer secretaries:
Computershare Limited
(Registration number 2000/006082/06)
70 Marshall Street, Johannesburg 2001
Private Bag X105, Marshalltown 2107
Tel (011) 370-5000
Fax (011) 370-5487
www.sanlam.co.za
Directors: T. Vosloo (Chairman), J. van Zyl (Chief Executive Officer), J.P.L.
Alberts, D.C. Brink, A.S. du Plessis, V.P. Khanyile, C.E. Maynard, D.N.M.
Mokhobo, A.F. Perold (USA citizen), P. de V. Rademeyer, G.E. Rudman, P.E.I.
Swartz, E. van As, J.J.M. van Zyl.
Alternate directors: N.T. Christodoulou, S.C Gilbert, L. Lambrechts, J.H.P. van
der Merwe
Date: 04/09/2003 08:39:04 AM Supplied by www.sharenet.co.za
Produced by the JSE SENS Department
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