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SLM - Sanlam Limited - Audited Results for the Year Ended 31 December 2006

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

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