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SANLAM GROUP - INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2004
SANLAM GROUP
Incorporated in the Republic of South Africa
Registered name: Sanlam Limited
(Registration number 1959/001562/06)
JSE share code: SLM
NSX share code: SLA
ISIN number: ZAE000028262
("Sanlam")
Sanlam Group
Interim Results for the six months ended 30 June 2004
Highlights
Strong Earnings
- Headline earnings per share up 29%
- Core earnings per share up 15%
- Result from operations before tax up 39%
- Solid performance by all operations
- Significant growth in contribution from Santam
Outstanding Business flows
- Net fund inflow of R8 billion (R558 million for the first half of 2003)
- Life new business inflows up 10% on 2003
- Investment inflows up 77% to R18 billion
Embedded value
- Embedded value of new Life business of R138 million - an increase of 29%
- New business embedded value margin up from 12,1% to 15,0%
- Annualised return on embedded value of 11,5% (5,4% in 2003)
"We have achieved improved results across all of our operations by tackling
factors that have undermined our performance and systematically realising the
opportunities open to the Group.
"Going forward, we will continue to build profitable and diversified revenue
streams and pursue the growth opportunities we have identified. We are confident
of delivering additional cost savings, and expect further improvements from our
restructured operations. We are a truly South African business best placed to
align our offering to the changing product and service needs of clients in
traditional and emerging markets."
SALIENT FEATURES Six months unaudited Full year
2004 2003 2003
SANLAM LIMITED GROUP
Earnings:
Result from operations before R million 1 694 1 222 2 405
tax
Core earnings (1) R million 1 599 1 373 2 641
Headline earnings (2) R million 1 669 1 283 2 351
Adjusted headline earnings R million 1 916 1 681 3 291
based on the LTRR (3)
Net result from operations cents 34,8 28,7 53,2
per share
Core earnings per share (1) cents 60,2 52,1 100,2
Headline earnings per share cents 62,8 48,7 89,2
(2)
Adjusted headline earnings cents 72,1 63,8 124,9
per share based on the LTRR
(3)
Group administration cost % 31,1 32,2 33,6
ratio (4)
Group operating margin (5) % 23,4 18,1 17,5
Business volumes:
New business volumes R million 27 143 18 234 38 786
Net funds flow R million 8 263 558 4 956
New business embedded value R million 138 107 232
Life insurance new business R million 917 882 1 832
APE (6)
New business embedded value % 15,0 12,1 12,7
margin
EMBEDDED VALUE:
Embedded value R million 30 905 26 841 29 662
Embedded value per share cents 1 129 1 023 1 147
Growth from life business (7) % 16,6 13,9 24,7
Return on embedded value (8) % 11,5 5,4 14,4
SANLAM LIFE INSURANCE LIMITED
Shareholders" funds R million 20 064 17 484 19 736
Capital adequacy requirements R million 7 775 9 050 7 250
(CAR)
Shareholders" funds to total % 15,3 13,9 14,7
policy liabilities
Shareholders" funds to non- % 23,0 20,2 21,7
market-related policy
liabilities
CAR covered times 2,6 1,9 2,7
Notes
1. Core earnings = net result from operations, investment income and
equity-accounted earnings.
2. Headline earnings = core earnings after assistance to policyholders" funds
and net gains/losses on derivative instruments.
3. Adjusted headline earnings based on the LTRR = net result from operations
and total investment return based on a long-term rate of return.
4. Administration costs as a percentage of income earned by the shareholders"
funds less sales remuneration.
5. Results from operations as a percentage of income earned by the
shareholders" funds less sales remuneration.
6. APE = Annual premium equivalent and is equal to new recurring premiums
(excluding indexed growth premiums) plus 10% of single premiums.
7. Returns for six months are annualised.
8. Growth in embedded value (with dividends paid, capital raised and cost of
treasury shares acquired reversed) as a percentage of embedded value at the
beginning of the period. Returns for six months are annualised.
EXECUTIVE REVIEW
Operational performance
Sanlam achieved satisfactory results for the six-month period to 30 June 2004.
Overall new business volumes were 49% up on the first six months of 2003 and net
fund inflows exceeded R8 billion, assisted by strong new investment related
inflows. The embedded value of new life business improved by 29% to R138
million. Headline earnings increased by 30% and core earnings by 16%, due to an
improved operational performance across the Group and a particularly strong
performance from Santam. Headline and core earnings per share increased by 29%
and 15% respectively, taking the increase in the weighted number of issued
shares following the Ubuntu-Botho transaction into account.
A combination of ongoing stock market volatility, a strong rand and low interest
rates contributed to a difficult business environment for contractual savings
and Life assurance products in particular. Short-term insurance business,
however, performed exceptionally well, benefiting from continuing favourable
underwriting conditions.
Delivering on strategy
Sanlam introduced its back to basics strategy in May 2003. During this reporting
period, management attention remained focused on the implementation of this
strategy and on initiatives to address those factors that have hindered the
Group"s past performance. Satisfactory progress has been made to date in respect
of several of these initiatives, which contributed to the period"s improved
results.
Benefits from the major cost-cutting exercise in Sanlam Life are evident in its
operating results and the improvement in its average new business embedded value
margin. We remain confident that the indicated R250 million of annualised cost
savings will be realised for the full year.
The restructuring of Sanlam"s UK operations into Sanlam Financial Services UK
has been completed and the re-focused operations made a welcome return to
profitability during the period.
Gensec Bank returned its banking license in June 2004 and now formally operates
as the restructured Sanlam Capital Markets (SCM), with its primary focus on
complementary and value enhancing services to the Group. SCM"s maiden results
for the six months are in line with our expectations.
The co-operation arrangement with Absa is starting to bear fruit. This is
evident in improved mutual support of products and services, as well as the
early successes of joint ventures like the recently launched Sanlam Home Loans.
Consistent competitive investment performance remains a priority. Sanlam
Investment Management"s challenge is to maintain its recent achievements in
respect of investment results and new business inflows and to rebuild a
sustained superior long-term performance record.
The Ubuntu-Botho empowerment transaction was successfully implemented and the
broad-based shareholder base of Ubuntu-Botho is in the process of being
finalised.
Looking forward
Management"s focus is aimed at sustaining the positive momentum of unlocking
shareholder value. This is particularly targeted at improvements in distribution
reach and capacity and capital efficiency. Delivering on the strategies
implemented during the past year to increase the inflows and market share of the
Life Insurance Cluster is our highest priority. While the Absa distribution
agreement and the Ubuntu-Botho transaction provide good potential for growth,
substantial effort is required to unlock this potential and convert it into
positive business inflows. Appropriate structures have been put in place to
explore these opportunities. An analysis of Sanlam"s market positioning and
penetration identified certain real growth opportunities. The renewed focus on
Employee Benefits business and its relocation to our recently launched
Johannesburg office is part of this initiative. The latter is in particular
aimed at increasing our presence and visibility in the Gauteng market.
Optimising Sanlam"s capital utilisation is an ongoing priority. Several options
on preferred capital structures, composition and utilisation are being
evaluated. We aim to report in detail on the progress in this regard when we
announce our year-end results for 2004.
Having substantially completed our recovery phase, Sanlam is now ready to
leverage off the platforms created in each cluster to build profitable and
diversified revenue streams and pursue growth opportunities. We are confident
that cost-cutting and restructuring throughout the Group have left our
operations in a favourable position to deliver against the challenges facing the
industry and Sanlam in particular, including our ability to counter the threat
of a lower return and inflation environment. We are focusing on exploring new
growth and revenue opportunities for the Group to substitute potentially lower
future revenue streams due to changing market preferences, competitive product
offerings and shrinking margins. A number of future revenue sources are already
in place, including growing contributions from new ventures like Sanlam Home
Loans and Sanlam Personal Loans, and new acquisitions such as Merchant Investors
Assurance. The process of developing new revenue sources by extending our
service and product offering continues.
In the current business environment we expect the positive operational
performance to continue for the remainder of the year.
Directorate
Roy Andersen was appointed as an independent director and non-executive chairman
with effect from 3 June 2004. He succeeds the previous chairman, Ton Vosloo, who
retired on 2 June 2004. Roy Andersen was the former Chief Executive Officer of
Liberty Group Limited and is the non-executive chairman of Murray & Roberts
Holdings Limited and Virgin Active South Africa.
The Ubuntu-Botho transaction makes provision for the nomination of three non-
executive directors to the Sanlam Board. Patrice Motsepe was appointed as deputy
chairman and Rejoice Vakashile Simelane and Bernard Swanepoel as non-executive
directors, with effect from 1 April 2004, filling existing vacancies on the
Board.
The Sanlam Board decided to increase the number of directors from 16 to 18 to
further strengthen and diversify the Board. Maria Ramos and Valli Moosa were
appointed as independent non-executive directors with effect from 3 June 2004.
Roy Andersen Johan van Zyl
Chairman Group Chief Executive
Sanlam Limited
Cape Town
1 September 2004
COMMENTS ON THE INTERIM RESULTS TO JUNE 2004
Summarised income statement for the 6 months to June
R million 2004 2 003 % Change
Net result from operations 22%
925 756
Equity-accounted earnings 19%
448 375
Net investment income -7%
226 242
CORE EARNINGS 1 599 16%
1 373
Financial assistance to policyholder funds
- ( 290)
Net gains on derivatives
70 200
HEADLINE EARNINGS 30%
1 669 1 283
Net realised investment surpluses
43 ( 83)
Discontinuance expenses
(13) -
Impairments
(57) ( 231)
Goodwill amortised
(179) ( 150)
Attributable earnings 79%
1 463 819
Net result from operations 22%
925 756
LTRR investment return 7%
991 925
LTRR EARNINGS 14%
1 916 1 681
Earnings
Headline earnings for the six-month period increased by 30% to R1 669 million
(2003: R1 283 million), largely due to the strong growth in the result from
operations and in the equity-accounted contribution from Absa"s earnings for its
six month reporting period to March 2004. Investment income was down by 7%,
substantially due to lower prevailing interest rates. Headline earnings per
share increased by 29%.
In terms of AC133 (Financial Instruments: Recognition and Measurement) Sanlam
has designated its investment assets as available-for-sale and all derivatives
are allocated to the held-for-trading category. The interpretation of AC133 has
evolved during the year. At the time of preparing the interim results for 2003
and adopting AC133, it was considered that Sanlam"s treatment of derivatives in
its capital portfolio would qualify for hedge accounting and the results were
presented on that basis. Based on current interpretation of AC133 it became
clear that the Group is not allowed to apply hedge accounting principles in
cases where a portfolio of equities is hedged, despite the fact that the hedges
are effective. As a result, the net fair value adjustment of derivative
instruments held by the shareholders" funds needs to be included in headline
earnings, but the value changes in the underlying equity portfolio are taken
directly to equity. This mismatch provides a distorted disclosure of the real
investment performance. The net fair value adjustment of derivatives as at 30
June 2004 amounted to a gain of R70 million, compared to R200 million as at 30
June 2003. The 2003 interim results have been restated accordingly. A minimal
value adjustment in the 2003 year-end results was not disclosed separately.
The presentation of the 2003 year-end Group results included a core earnings
line, comprising net result from operations, equity-accounted income and
investment income earned on shareholders" funds. We continue to report core
earnings in 2004, which increased by 16% to R1 599 million for the six months to
June. Core earnings exclude the value adjustment of derivatives as well as the
financial assistance afforded to policyholders" funds in 2003.
Attributable earnings for the six months increased by 79% to R1 463 million,
representing total earnings for the period, excluding unrealised investment
surpluses that are taken directly to equity in terms of Sanlam"s accounting
policies. Attributable earnings are stated net of an aggregate realised
investment surplus of R43 million, a provision of R13 million in respect of an
onerous property lease contract resulting from the closure of Gensec Bank"s
Dublin operations, amortised goodwill and an impairment of the investment in the
Safair Lease Finance joint venture (included in the discontinuing operations of
Gensec Bank), which has a substantial foreign currency exposure. The strong
appreciation of the Rand required a review of the carrying value of the
investment. Based on the latest valuation, an impairment of R47 million was
deemed prudent.
Earnings based on a long-term rate of investment return of 11% pre-tax per annum
(2003: 12%) increased by 14% (earnings per share up 13%).
The withdrawal of AC121 (Disclosure in the financial statements of long-term
insurers) and the compulsory full implementation of International Financial
Reporting Standards in 2005 will require a review of the Group"s accounting
policies, which will include a review of the designation of investments and the
accounting treatment of derivatives. An indication of the impact on earnings and
the changes to the reporting format will be addressed in the 2004 annual report.
Impact of the Ubuntu-Botho transaction
Following the approval by shareholders in April 2004, Ubuntu-Botho, an
empowerment consortium led by Patrice Motsepe, acquired an initial 8% of
Sanlam"s ordinary share capital and became the largest beneficial shareholder in
Sanlam.
The transaction resulted in a dilution of approximately 1% in earnings per share
for the six months based on the increase in the weighted number of shares in
issue, and a 3,4% dilution in the embedded value per share as at 30 June 2004,
taking into account the increase in Sanlam"s issued shares due to the
transaction. The calculated number of Sanlam shares in issue makes provision for
3 million of the Sanlam `A" deferred shares issued to Ubuntu-Botho to be
convertible into ordinary shares based on Sanlam"s business flows for the six
months. The final calculation and the right to convert will only vest on the
finalisation of the full year"s audited results.
The effective transfer of 56,5 million Sanlam treasury shares to Ubuntu-Botho to
bring about the Sanlam Ubuntu-Botho Development Trust"s 20% holding in Ubuntu-
Botho, is accounted for as a disposal of treasury shares for no consideration,
which, in terms of generally accepted accounting practice, do not impact on the
income statement. (The illustration of the financial effects of the transaction
as set out in the circular to shareholders on the transaction provided for the
possible write down of the carrying value of these shares (R303 million pro
forma) in the income statement.)
Business volumes
New Business Volumes for the 6 months to June
R million 2004 2003 % Change
Individual Life 3 906 3 782 3%
Recurring 671 717 -6%
Single 3 235 3 065 6%
Employee benefits 1 071 1 066 0%
Namibia 85 36 136%
Merchant Investors 305 -
Life business 5 367 4 884 10%
Investment cluster 12 040 7 554 59%
Innofin 3 148 2 324 35%
SFS UK 2 730 182
Namibia Unit Trust 274 212 29%
Investment business 18 192 10 272 77%
Short-term insurance 3 584 3 078 16%
TOTAL 27 143 18 234 49%
Total new business inflows of more than R27 billion for the first six months of
2004 is 49% higher than in 2003. This substantial increase can mainly be
ascribed to the improved inflows in the investment cluster and the increased
business flows in the UK advisory and investment management business.
Life business inflows increased by 10% on 2003
Individual Life inflows were 3% up on the first six months of 2003. Recurring
premium new business decreased by 6% as volatility in equity and currency
markets continued to depress investor appetite for equity-linked contractual
savings products. Individual single premiums were 6% higher than 2003, mainly
due to the increase in life annuity product sales. Relatively low long-term
returns negatively impacted on guarantee plans and term annuity products (which
constitute approximately 65% of total single premiums). International product
sales were virtually non-existent due to the strong Rand.
New employee benefit flows have shown strong growth early in 2004 but, due to
the high inflows towards the end of the first half of 2003, could not improve on
the overall fund flows of the first six months of 2003.
The Life business flows include the maiden contribution from Merchant Investors
Assurance in the UK.
Investment related inflows increased by a significant 77% on 2003
Investment cluster inflows increased by R4,5 billion, or 59%, to R12 billion.
New SIM segregated fund mandates contributed the bulk of this growth, although
meaningful new inflows were also achieved in all the other investment cluster
businesses.
Innofin"s portfolio administration and investment business achieved new inflows
of R3,1 billion, 35% up on 2003.
The actuarial and investment advisory business in the UK, Sanlam Financial
Services, attracted new business of GBP 225 million (R2,7 billion) for the six
months.
Santam"s net premium income increased by 16% to R3,6 billion, the result of a
reduction in the level of reinsurance in line with the company"s strategy of
keeping more business at an acceptable risk profile.
Net fund flows
Net fund inflows for the six months exceeded R8 billion, well in excess of the
R5 billion achieved for the full twelve months in the 2003 financial year. The
bulk of the net flows came from investment business, with major contributions
from SIM segregated funds and the SFS UK business. Net Life business fund flows
were still negative for the six months but recorded a major improvement on 2003,
mainly due to well contained outflows.
New business embedded value
The new business annual premium equivalent (APE) for the first six months
increased by 4% to R917 million. Excluding Innofin"s APE and the maiden
contribution of MIA, the Sanlam Life APE of R804 million is 3% lower compared to
the same period in 2003. The embedded value of new business for the six months
increased by 29% to R138 million, largely assisted by the realisation of the
cost-cutting exercise undertaken at the end of 2003. The APE margin of 15,0%
compares favourably with the 12,1% recorded in 2003. The embedded value of new
business includes R8 million (2003: R7 million) in respect of Innofin"s life
insurance business. No material new business embedded value was added by the new
business written by MIA.
Result from operations
Result from operations for the 6 months to June
R million 2004 2003 %
change
Life Insurance cluster 847 750 13%
Individual Life 762 668 14%
Employee Benefits 85 82 4%
Santam 667 281 137%
Investment cluster 212 114 86%
Sanlam Capital Markets 50 50 -
Independent Financial Services 33 15 120%
Other 41 42 -2%
Corporate expenses ( 79) ( 62) -27%
Continuing operations 1 771 1 190 49%
Discontinuing operations ( 77) 32
Gross result from operations 1 694 1 222 39%
The result from operations increased by 39% to R1 694 million, assisted by an
exceptional contribution from Santam.
The Life Insurance cluster"s operating profit increased by 13% to R847 million.
The improved Sanlam Life performance is largely attributable to realised
benefits from the cost-cutting exercise and an improvement in certain market-
related revenue items. Lower interest rates had a negative impact on interest
earned on working capital. Innofin improved on its 2003 performance and the
cluster"s results also include a first contribution of R26 million from Merchant
Investors Assurance.
Exceptional underwriting performance in property, motor and personal lines
contributed to Santam"s underwriting surplus of R578 million (16% of net
premiums earned) for the six months. As a result its result from operations of
R667 million (which also includes interest earned on its working capital)
exceeded the 2003 results by 137%.
The Investment cluster results for the six months increased by 86% to R212
million. All operations performed well. Strong contributions came from the
international multi-manager operations and from Sanlam Properties that benefited
from the recent property listing.
Sanlam Capital Markets (SCM) achieved its target of an operating profit of R50
million for the first six months of 2004. Following the restructuring of Gensec
Bank, its results are split between those of SCM and those attributed to the
balance of the Gensec Bank operations. The latter is in respect of assets and
associated liabilities that do not meet the criteria set for SCM and cannot be
readily realised. The results of these operations for the six months are
included in headline earnings under the heading of discontinuing operations.
Included in the reported R77 million net loss from these activities is a prudent
fair value adjustment on certain of these assets. It also includes a further
provision to cover the amicable final out-of-court settlement of the case
brought against Gensec Bank in the USA by the previous owners of Fieldstone.
The Gensec Bank banking license was officially returned on 21 June 2004. It is
intended that the assets comprising discontinuing operations be transferred to
and reported as part of Sanlam"s capital from 1 July 2004. Future return on
these assets will form part of investment returns.
Independent Financial Services recorded a major improvement on the first six
months of 2003, largely due to an improved performance from the UK actuarial
consulting and investment management operations.
The increase in corporate expenditure can mostly be attributed to the
centralisation of the Group"s Corporate Social Investment spend as from 2004.
Solvency
The capital of Sanlam Life increased by R0,4 billion, after paying a dividend of
R1,1 billion, to R20,1 billion at the end of the period and CAR (Capital
Adequacy Requirements) cover amounted to 2,6 at the end of June 2004, compared
to 2,7 at the end of December 2003.
Embedded value
Sanlam"s embedded value amounted to R30,9 billion at the end of June 2004, 4% up
on the R29,7 billion at the end of December 2003.
Taking the dividend of R1,1 billion paid into account, R0,8 billion capital
raised during the period and R0,2 billion cost of treasury shares acquired, the
net growth on the December 2003 embedded value balance amounted to R1,7 billion
(11,5% annualised). The annualised growth per share is lower at 7,4% essentially
due to the dilution caused by the issue of new shares in the Ubuntu-Botho
transaction. The value of Sanlam Life"s in-force book amounted to R7,8 billion,
after taking into account the cost of capital at risk of R1,4 billion.
Annualised growth from life business, based on the starting value of the in-
force life business, amounted to 16,6%.
DIVIDEND
IN LINE WITH PAST PRACTICE, NO INTERIM DIVIDEND HAS BEEN DECLARED. SANLAM
DECLARES AN ANNUAL DIVIDEND AT YEAR-END.
GROUP INCOME STATEMENT
Six months unaudited Full year
2004 2003 2003
Note R million R million R million
FUNDS RECEIVED FROM CLIENTS 1 32 412 23 134 48 883
Result from operations before tax 4 1 694 1 222 2 405
Tax on result from operations 5 (517) (354) (724)
Result from operations after tax 1 177 868 1 681
Minority shareholders" interest (252) (112) (279)
NET RESULT FROM OPERATIONS 925 756 1 402
Net investment income 226 242 458
Investment income 6 335 370 699
Tax on investment income 5 (52) (77) (131)
Minority shareholders" interest (57) (51) (110)
Net equity-accounted earnings 448 375 781
Equity-accounted earnings 611 467 1 025
Tax on equity-accounted earnings 5 (163) (92) (244)
CORE EARNINGS 1 599 1 373 2 641
Financial assistance provided to - (290) (290)
policyholders" funds
Net investment surpluses on 70 200 -
derivative instruments
Investment surpluses on derivative 77 242 -
instruments
Tax on investment surpluses on 5 (7) (42) -
derivative instruments
HEADLINE EARNINGS 1 669 1 283 2 351
Net realised investment surpluses 43 (83) 134
Investment surpluses 93 (96) 215
Tax on investment surpluses 5 (20) 10 (56)
Minority shareholders" interest (30) 3 (25)
Net discontinuance costs (13) - (77)
Discontinuance costs (13) - (108)
Tax on discontinuance costs 5 - - 31
Impairment of investments and (57) (231) (248)
goodwill
Amortisation of goodwill (179) (150) (277)
ATTRIBUTABLE EARNINGS 1 463 819 1 883
Diluted earnings per share (cents):
Net result from operations 34,8 28,7 53,2
Core earnings 60,2 52,1 100,2
Headline earnings 62,8 48,7 89,2
Attributable earnings 55,1 31,1 71,5
Basic attributable earnings per 55,5 31,2 72,1
share
Adjusted weighted average number of 8 2 657,2 2 633,9 2 634,5
shares (million)
ADJUSTED HEADLINE EARNINGS based on 1 916 1 681 3 291
the LTRR (R million)
Adjusted headline earnings based on 72,1 63,8 124,9
the LTRR (cents per share)
GROUP BALANCE SHEET
June unaudited December
2004 2003 2003
R million R million R million
ASSETS
Non-current assets
Property and equipment 203 289 220
Owner-occupied properties 386 353 390
Goodwill 2 093 1 840 1 855
Investments 168 604 146 721 156 622
Deferred tax 294 189 257
Short-term reinsurance provisions 1 939 1 945 2 302
Current assets
Trade and other receivables 18 549 21 179 22 602
Cash, deposits and similar securities 10 202 12 217 11 808
Total assets 202 270 184 733 196 056
Equity and liabilities
Shareholders" funds 22 930 20 208 21 687
Minority shareholders" interest 2 248 1 625 1 931
Non-current liabilities
Long-term policy liabilities 145 039 125 864 134 079
Insurance contracts 94 608 88 332 94 556
Investment contracts 50 431 37 532 39 523
Term finance 4 508 4 951 4 200
Deferred tax 673 223 651
Short-term insurance provisions 4 963 4 580 5 156
Current liabilities 21 909 27 282 28 352
Total equity and liabilities 202 270 184 733 196 056
Segregated funds not included in the above 92 362 65 869 83 181
balance sheet
Total assets under management and 294 632 250 602 279 237
administration
GROUP STATEMENT OF CHANGES IN EQUITY
Six months unaudited Full year
2004 2003 2003
R million R million R million
Shareholders" funds at beginning of 21 687 20 651 20 651
period
Attributable earnings 1 463 819 1 883
Dividends paid (1 082) (972) (972)
Net unrealised investment surpluses 316 (260) 693
(1)
Unrealised investment surpluses 408 (250) 1 047
Tax on unrealised investment (101) (37) (289)
surpluses
Minority shareholders" interest 9 27 (65)
Movement in foreign currency (70) (29) (211)
translation reserve
Movement in cost of treasury shares 138 5 (344)
(2)
Net realised investment surplus on (370) - -
treasury shares
New shares issued (3) 866 - -
Cost relating to share issuance (18) - -
Adoption of AC133 - (6) (13)
Shareholders" funds at end of 22 930 20 208 21 687
period
(1) Upon the introduction of AC133, investments were classified as available-
for-sale and Sanlam elected to take unrealised investment surpluses directly to
equity.
(2) Comprises movement in cost of shares held by subsidiaries and the share
incentive trust.
(3) Comprises 113 million new ordinary shares at R7,65 per share, 56,5 million
`A" deferred shares at R0,01 per share and 52 million `A" preference shares at
R0,01 per share.
CASH FLOW STATEMENT
Six months unaudited Full year
2004 2003 2003
R million R million R million
Net cash (outflow)/inflow from operating (737) 1 177 1 720
activities before dividends paid
Dividends paid (1 082) (972) (972)
Net cash outflow from investment activities (943) (332) (495)
Net cash inflow/(outflow) from financing 1 156 (381) (1 170)
activities
Net decrease in cash and cash equivalents (1 606) (508) (917)
Cash, deposits and similar securities at 11 808 12 725 12 725
beginning of period
Cash, deposits and similar securities at 10 202 12 217 11 808
end of period
ABRIDGED SHAREHOLDERS" FUNDS BALANCE SHEET -
NET ASSET VALUE
(All businesses consolidated at NAV)
June unaudited December
2004 2003 2003
R million R million R million
Assets
Goodwill 2 093 1 840 1 855
Investments 26 539 24 390 26 010
Current and other assets 27 480 31 747 33 249
Total assets 56 112 57 977 61 114
Equity and liabilities
Shareholders" funds 22 930 20 208 21 687
Minority shareholders" interest 2 406 1 932 2 217
Term finance, current and other 30 776 35 837 37 210
liabilities
Total equity and liabilities 56 112 57 977 61 114
ABRIDGED SHAREHOLDERS" FUNDS BALANCE SHEET -
FAIR VALUE
(Group businesses listed below not consolidated, but reflected as
investments at fair value)
June unaudited December
2004 2003 2003
Note R R R
million million million
Assets
Fixed assets 103 134 113
Owner-occupied properties 369 333 370
Goodwill (1) 353 - -
Investments
Sanlam businesses 7 5 664 5 471 6 237
Investment Management (2) 2 079 1 603 1 904
Sanlam Financial Services 356 741 378
Sanlam Capital Markets (3) 441 1 177 1 001
Gensec Properties 30 71 52
Innofin (4) 145 62 214
Santam 2 613 1 817 2 688
Associated company - Absa 6 254 4 545 5 181
Joint venture - Safair Lease Finance 298 - -
(5)
Other investments
Other equities 6 815 5 164 6 670
Public sector stocks and loans 2 388 1 534 1 916
Investment properties 505 611 607
Other interest-bearing investments 6 142 7 287 6 033
Deferred tax 150 - 3
Current assets 6 413 4 714 5 296
Total assets 35 454 29 793 32 426
Equity and liabilities
Shareholders" funds 23 958 20 658 22 819
Term finance 4 819 4 696 4 501
Deferred tax 391 5 298
Current liabilities 6 286 4 434 4 808
Total equity and liabilities 35 454 29 793 32 426
Net asset value per share (cents) 875 787 883
1. The goodwill relates to the consolidation of Merchant Investors Assurance and
is excluded in the build-up of the Group embedded value, as the current value of
in-force business for this life insurance company is included in the embedded
value.
2. Included in Investment Management are Sanlam Investment Management, Sanlam
Collective Investments, Tasc and the Investment Cluster"s international
businesses.
3. The comparative figures for June and December 2003 refer to Gensec Bank
(including the discontinued operations). The June 2004 figure includes only the
activities of Sanlam Capital Markets.
4. The value of Innofin on 30 June 2004 excludes the value of the Illa business,
as this is included in the calculation of the Group value of in-force business.
On 31 December 2003, the value of the Illa business was still included in the
value of Innofin as disclosed above. The value on 30 June 2003 comprises only
two thirds of the total value of Innofin and was based on a conservative
valuation.
5. The Safair Lease Finance joint venture was previously included in the value
of Gensec Bank, but as it is part of the discontinued operations, it is excluded
from the value of Sanlam Capital Markets.
NOTES TO THE FINANCIAL STATEMENTS
Six months unaudited Full year
2004 2003 2003
R million R million R million
1. FUNDS RECEIVED FROM CLIENTS
LIFE INSURANCE 5 367 4 884 10 012
INVESTMENTS 18 192 10 272 22 019
SHORT-TERM INSURANCE 3 584 3 078 6 755
Total new business 27 143 18 234 38 786
RECURRING PREMIUMS ON EXISTING 5 269 4 900 10 097
BUSINESS
Total funds received from clients 32 412 23 134 48 883
New business premiums used in the
calculation of Annual Premium
Equivalent (APE)
Recurring premiums 454 484 1 026
Individual Life 671 717 1 478
Merchant Investors Assurance 3 - -
Sanlam Namibia 13 10 26
Less: index growth (289) (305) (643)
Add: optional reductions 18 17 38
Group Life 38 45 127
Single premiums 4 630 3 979 8 067
Individual Life 2 431 2 528 4 819
Merchant Investors Assurance 302 - -
Sanlam Namibia 72 26 54
Group Life 1 021 925 2 164
Innofin (Illa"s) 804 500 1 030
Total premiums used to calculate 5 084 4 463 9 093
APE
Life insurance annual premium 917 882 1 832
equivalent
2. PAYMENTS TO CLIENTS
LIFE INSURANCE 12 383 13 808 25 136
INVESTMENTS 9 704 6 610 14 416
SHORT-TERM INSURANCE 2 062 2 158 4 375
Total payments to clients 24 149 22 576 43 927
3. NET FLOW OF FUNDS
LIFE INSURANCE (1 747) (4 024) (5 027)
Investments 8 488 3 662 7 603
Short-term insurance 1 522 920 2 380
Total flow of funds 8 263 558 4 956
NOTES (continued)
Six months unaudited Full year
2004 2003 2003
R million R million R million
4. ANALYSIS OF RESULT FROM OPERATIONS
Per business cluster
Life Insurance cluster 847 750 1 467
Santam 667 281 735
Investment cluster 212 114 270
Sanlam Capital Markets 50 50 55
Independent Financial Services 33 15 (1)
Sanlam Financial Services UK 24 7 (20)
Gensec Property Services 9 8 19
Corporate income 41 42 73
Corporate costs (79) (62) (120)
Result from continuing operations 1 771 1 190 2 479
Discontinuing operations (77) 32 (74)
Total result from operations 1 694 1 222 2 405
Functional analysis
Financial services income 8 154 7 707 15 970
Sales remuneration (914) (959) (1 892)
Income after sales remuneration 7 240 6 748 14 078
Underwriting policy benefits (3 291) (3 354) (6 877)
Administration costs (2 255) (2 172) (4 796)
Total result from operations 1 694 1 222 2 405
5. TAXATION
Result from operations 517 354 724
Current year 517 354 714
Prior year - - 9
Equity-accounted earnings included in - - 1
result from operations
Investment income - current year 52 77 131
Equity-accounted earnings 163 92 244
Tax on derivatives 7 42 -
Realised investment surpluses - capital 20 (10) 56
gains tax
Taxation on discontinuance costs - - (31)
Income tax charged to income statement 759 555 1 124
Taxation charged directly to equity:
Unrealised investment surpluses 101 37 289
Investment surpluses - normal - 66 64
Investment surpluses - capital gains (61) (29) 81
tax
Investment surplus on investment in
associated company - capital gains tax 162 - 144
Total taxation 860 592 1 413
NOTES (continued)
Six months Full year
unaudited
2004 2003 2003
R R million R million
million
6. INVESTMENT INCOME
Interest-bearing investments 137 179 326
Equities 179 154 312
Properties 19 37 61
Total investment income 335 370 699
7. SANLAM BUSINESSES: EXCESS OF FAIR VALUE OVER NET ASSET VALUE
The shareholders" funds balance sheet at fair value include the value
of the companies below based on directors" valuation, apart from Santam,
which is valued according to ruling share prices.
June unaudited December
2004 2003 2003
R million R million R million
Net asset value of businesses 3 413 3 738 3 772
Investment Management (1) 367 311 368
Sanlam Financial Services 378 415 402
Sanlam Capital Markets 441 1 376 1 001
Gensec Properties 34 51 28
Innofin 136 43 152
Santam 2 057 1 542 1 821
Goodwill recognised in respect of 1 112 1 283 1 198
above businesses
Deferred capital gains tax on 111 - 135
investments at fair value
Revaluation of interest in businesses 1 028 450 1 132
to fair value
Fair value of businesses 5 664 5 471 6 237
8. NUMBER OF SHARES FOR CENTS PER
SHARE CALCULATIONS
Earnings per share
Number of ordinary shares in issue 2 767,6 2 654,6 2 654,6
Less: Weighted Sanlam shares held by (48,9) (28,9) (44,1)
subsidiaries
Less: Adjustment for weighting of (84,7) - -
shares issued during period
Adjusted weighted average number of
shares for basic earnings per share 2 634,0 2 625,7 2 610,5
Add: Total number of shares under 128,9 159,4 157,8
option
Less: Number of shares (under
option) that would have been issued (108,7) (151,2) (133,8)
at fair value
Add: Dilutive effect of deferred 3,0 - -
shares
Adjusted weighted average number of
shares for diluted earnings per share 2 657,2 2 633,9 2 634,5
Value per share
Number of ordinary shares in issue 2 767,6 2 654,6 2 654,6
Shares held by subsidiaries (30,4) (28,9) (69,4)
Adjusted number of shares for value 2 737,2 2 625,7 2 585,2
per share
(1) Included in Investment Management are Sanlam Investment Management,
Sanlam Collective Investments, Tasc and the Investment Cluster"s
international businesses
ACCOUNTING POLICIES AND ACTUARIAL BASIS
The accounting policies adopted for the purposes of the financial statements
comply with South African Statements of Generally Accepted Accounting Practice,
specifically AC127 on interim financial reporting, and with applicable
legislation. Except for the change in the presentation of deferred tax relating
to the policyholder funds detailed below, these accounting policies are
consistent with those of the previous year.
The policy liabilities and profit entitlement rules are determined in accordance
with prevailing legislation, generally accepted actuarial practice and the
stipulations contained in the demutualisation proposal. There were no material
changes in the financial soundness valuation basis or embedded value calculation
methodology since 31 December 2003.
changes in reporting structures and accounting policies
The results of Innofin have been transferred from the Investment Cluster to the
Life Cluster. Results from operations of prior periods have been restated
accordingly. For June 2003, R10 million and for December 2003, R22 million of
profit is transferred from the Investment Cluster to the Life Cluster. The
embedded value calculation now also includes the value of in-force life
insurance business written by Innofin on Sanlam Life"s license. The non-
insurance business is still valued on a fair value approach.
As the regulatory requirements for Sanlam"s acquisition of Merchant Investors
Assurance were only satisfied late in December 2003 the results of the company
were not consolidated into the Sanlam group at year-end. The full investment was
included at the cost of R383 million in equity investments. From June 2004, only
the net asset value of MIA will be included in the consolidated results with an
accompanying adjustment to goodwill. In the embedded value calculation the
goodwill is reversed and replaced by the value of MIA"s in-force business.
Following the restructuring of the Group"s international advisory and asset
management businesses, Sanlam has, with effect from 1 July 2003, reduced its
holding in the advisory and related businesses (Sanlam Financial Services UK) to
about 60%. Sanlam"s Investment Cluster regained a 100% holding in the asset and
multi-manager components. The results of the investment manager are included
with the Investment Cluster for the 2004 year. For 2003 the results are
included in the Independent Financial Services Cluster for the first six months
and in the Investment Cluster for the second half of the year.
The accounting policy for deferred tax in respect of the policyholder funds has
been amended to comply with a directive issued by the Financial Services Board.
In terms of the directive deferred tax assets and liabilities should be
recognised and separately disclosed for all temporary differences of the
policyholder funds. This deferred tax was previously included in and disclosed
as part of long-term policy liabilities. Comparative figures have been restated
to transfer the applicable deferred tax balances from long-term policy
liabilities to a deferred tax liability.
The migration to new International Financial Reporting Standards (IFRS) for
insurers will, in its full extent, last a number of years. IFRS 4, the standard
for the first phase of IFRS on insurance contracts was only recently issued with
an effective date of 1 January 2005. Future results may be impacted, as the
development of guidance for the long-term insurance industry, both from an
accounting and actuarial perspective, is an ongoing process.
As was the case in the 2003 results, the Gensec results are split between
continuing (Sanlam Capital Markets) and discontinuing operations. The results of
all the operations are included in headline earnings and only the expenses
directly attributable to termination of operations are excluded from headline
earnings.
In the 2003 year-end results the Group introduced the concept of core earnings.
Core earnings comprise the Group"s results from operations, equity-accounted
income and investment income, and as such it represents the headline earnings
previously published for June 2003. To maintain comparability we will continue
to report core earnings in 2004. Due to the distorted result achieved by
including the value adjustment of derivatives in headline earnings, whilst the
value adjustment of the underlying hedged portfolio of shares is taken directly
to equity, this amount has also been excluded from core earnings.
ADJUSTED HEADLINE EARNINGS - LTRR
June unaudited December
2004 2003 2003
R million R million R million
THE LTRR INVESTMENT RETURN IS
DETERMINED BY APPLYING THE LONG-TERM
EXPECTED RETURN OF 11% (2003: 12%) TO
THE AVERAGE MONTHLY SHAREHOLDERS"
FUND INVESTMENTS
Adjusted headline earnings - long-
term rate of return (LTRR)
Net result from operations 925 756 1 402
LTRR investment return 991 925 1 889
Net equity-accounted earnings 448 375 781
Investment return after tax 543 550 1 108
Adjusted headline earnings - LTRR 1 916 1 681 3 291
Reconciliation of headline earnings
and LTRR headline earnings
Headline earnings per income 1 669 1 283 2 351
statement
Net realised investment surpluses per 43 (83) 134
income statement
Net unrealised investment surpluses 316 (260) 693
taken directly to equity
Net LTRR adjustment (112) 741 113
Adjusted headline earnings - LTRR 1 916 1 681 3 291
Analysis of net LTRR adjustment
Investment return (104) 821 (61)
Equities 443 710 168
Surplus on investment in associated (760) (184) (676)
company
Interest-bearing investments 211 325 461
Properties 2 (30) (14)
Tax 13 (5) 163
Minority shareholders" interest (21) (75) 11
Net LTRR adjustment (112) 741 113
AssetS subject to LTRR
Investments per shareholders" funds 26 509 24 390 26 010
balance sheet at net asset value
Less: Investment in associated (6 413) (4 588) (5 391)
companies
Investment in joint ventures (268) (331) (309)
Investments held in respect of term (3 417) (4 791) (4 454)
finance
Investments held in respect of (89) (1 177) (1 568)
banking operations
Investments held in respect of (797) - -
discontinued operations
Other (255) 81 (289)
Long-term rate of return investments 15 270 13 584 13 999
EMBEDDED VALUE
June unaudited December
2004 2003 2003
R million R million R million
EMBEDDED VALUE 1
Sanlam group shareholders" funds at 23 958 20 658 22 819
fair value
Adjustment for discounting capital 111 - 91
gains tax (1)
Adjustment to include business under (353) - (449)
value of in-force (2)
Present value of strategic corporate (641) (472) (592)
expenses (3)
Sanlam group shareholders" adjusted 23 075 20 186 21 869
net assets
Net value of life insurance business 7 830 6 655 7 793
in force (2)
Value of life insurance business in 9 237 8 010 143
force
Cost of capital at risk (1 407) (1 355) (1 350)
Sanlam group embedded value 30 905 26 841 29 662
Embedded value per share (cents) 1 129 1 023 147
Number of shares (million) 2 737 2 625 2 585
Six months unaudited Full year
2004 2003 2003
R million R million R million
2. EMBEDDED VALUE EARNINGS
Embedded value from new life 138 100 218
insurance business (4)
Earnings from existing life insurance 736 579 1 404
business
Expected return 582 527 1 153
Operating experience variations (5) 113 110 241
Operating assumption changes (5) 41 (58) 10
Embedded value earnings from life 874 679 1 622
operations
Economic assumption changes (48) 114 99
Tax changes - 23 (6)
Investment variances (including (183) (363) (50)
change in long-term asset mix)
Exchange rate movements (21) - -
Growth from life insurance business 622 453 1 665
Investment return on shareholders" 1 031 268 2 226
adjusted net assets (6)
Total embedded value earnings before
dividends are paid, capital raised 1 653 721 3 891
and cost of treasury shares acquired
Dividends paid (1 082) (972) (972)
Capital raised 848 - -
Cost of treasury shares acquired (176) 5 (344)
Change in Sanlam group embedded value 1 243 (246) 2 575
Growth from life insurance business 16,6%* 13,9%* 24,7%
as a % of beginning value of in-force
Return on embedded value (7) 11,5%* 5,4%* 14,4%
Return on embedded value per share 7,4%* 5,4%* 14,6%
(7)
* annualised
embedded value (CONTINUED)
June unaudited December
2004 2003 2003
R million R million R million
3. NEW BUSINESS EMBEDDED VALUE
GROSS VALUE OF NEW BUSINESS 149 120 260
INDIVIDUAL BUSINESS - RSA 124 103 200
Group business - RSA 19 15 57
Rest of the world (8) 6 2 3
Cost of Capital at risk (11) (13) (28)
INDIVIDUAL BUSINESS - (5) (10) (17)
RSA
Group business - RSA (4) (3) (11)
Rest of the world (8) (2) - -
Net value of new business (4) 138 107 232
NET VALUE OF NEW BUSINESS AS A
PERCENTAGE OF THE ANNUAL PREMIUM
EQUIVALENT
Annual Premium Equivalent (APE) 917 882 1 832
(9)
INDIVIDUAL BUSINESS - 729 735 1 470
RSA
Group business - RSA 141 138 343
Rest of the world (8) 47 9 19
Net value of new business 138 107 232
INDIVIDUAL BUSINESS - 119 93 183
RSA
Group business - RSA 15 12 46
Rest of the world (8) 4 2 3
APE margin % 15,0 12,1 12,7
INDIVIDUAL BUSINESS - % 16,3 12,7 12,4
RSA
Group business - RSA % 10,6 8,7 13,4
Rest of the world (8) % 8,5 22,2 15,8
R million % Change from
base
4. SENSITIVITY
VALUE OF IN-FORCE BUSINESS LESS COST
OF CAPITAL AT RISK
BASE VALUE 7 830
Risk discount rate increases by 1,0% 7 084 (10%)
to 13,9%
Risk discount rate decreases by 1,0% 8 665 11%
to 11,9%
VALUE OF NEW BUSINESS LESS COST OF
CAPITAL AT RISK
Base value 138
Risk discount rate increases by 1,0% 123 (11%)
to 13,9%
Risk discount rate decreases by 1,0% 155 12%
to 11,9%
5. METHODOLOGY
THERE WERE NO MATERIAL CHANGES IN THE EMBEDDED VALUE METHODOLOGY APPLIED SINCE
31 DECEMBER 2003.
6. PRINCIPAL ASSUMPTIONS
June unaudited December
2004 2003 2003
% p.a. % p.a. % p.a.
GROSS INVESTMENT RETURN AND
INFLATION
FIXED-INTEREST SECURITIES 10,4 9,4 9,4
Equities and offshore investments 12,4 11,4 11,4
Hedged equities (10) 9,4 8,4 8,4
Property 11,4 10,4 10,4
Cash 8,4 7,4 7,4
Risk discount rate 12,9 11,9 11,9
Return on capital at risk (11) 11,0 10,0 10,0
Unit cost and salary inflation 6,4 4,9 5,4
Consumer price index inflation 4,9 3,4 3,9
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 are
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.
June unaudited December
2004 2003 2003
% % %
Long-term asset mix for assets
supporting the capital at risk
Equities 42 42 42
Hedged equities 26 26 26
Property 8 8 8
Fixed-interest securities 20 20 20
Cash 4 4 4
100 100 100
Six months unaudited Full year
2004 2003 2003
R million R million R million
7. New business premiums
FINANCIAL STATEMENTS
New business premiums (per note 1 to 5 367 4 884 10 012
financial statements)
Less: Premium increases (index (289) (305) (643)
growth)
Plus: Optional reduction in premiums 18 17 38
Less: Other life business (12) (12) (133) (314)
Premiums used in the calculation of 5 084 4 463 9 093
annual premium equivalent
New business embedded value premiums
Recurring premiums 454 484 1 026
Single premiums 4 630 3 979 8 067
Premiums used in the calculation of 5 084 4 463 9 093
annual premium equivalent
1. Adjustment to allow for the delay before incurring the capital gains tax
liability included in the fair value.
2. Reverse goodwill relating to Merchant Investors Assurance (MIA), as its
value of in-force business is included in the total value of life insurance
business in force. (The December 2003 adjustment also includes the transfer of
Innofin"s life insurance business from net assets to the value of in-force.)
3. The June 2004 value was calculated by multiplying half the projected full
year corporate expenses not related to life business (after tax) of R52,5
million by the share price of 880 cents and dividing by the headline earnings
per share based on the long-term rate of return of 72,1 cents.
4. The net value of new business for prior periods has been restated to
include MIA and Innofin to enhance comparability. The embedded value earnings
for these periods have, however, not been restated.
5. The main contributor to the operating experience variation was positive
risk experience of R92 million. Expense savings contributed R20 million to the
operating experience variation and R57 million to the operating assumption
changes. It also gave rise to an improved new business embedded value margin.
6. The investment return on shareholders" adjusted net assets excludes the
cost of treasury shares transferred to Ubuntu-Botho.
7. Total embedded value earnings before dividends paid, capital raised and
cost of treasury shares acquired, as a percentage of embedded value at the
beginning of the period. The return per share is net of the dilution resulting
from the Ubunto-Botho transaction.
8. The rest of the world includes Sanlam Namibia and MIA.
9. APE (annual premium equivalent) is equivalent to new recurring premiums
plus 10% of single premiums.
10. The assumed future return for these assets is lower than that of equities,
which are not hedged, reflecting the cost of derivative instruments.
11. The investment return on assets supporting the capital at risk is based on
the long-term asset mix for these funds.
12. The majority of profits in respect of these premiums accrue to Sanlam
Investment Management.
Date: 02/09/2004 08:59:17 AM Supplied by www.sharenet.co.za
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