Capital adequacy

Capital adequacy for the South African operations is measured with reference to the cover provided by the Group's prudential regulatory capital in relation to the Capital Adequacy Requirements. The capital adequacy of Merchant Investors, the Group's life insurance operations in the United Kingdom (UK), is measured in terms of the Financial Services Authority's guidelines in the UK, which are materially in line with those of the South African operations.

The valuation of assets and policy liabilities for prudential capital adequacy purposes is generally in line with the methodology for the published results. Some adjustments are however required, as set out below. 
Policy liabilities are valued net of reinsurance and the reinsurance asset is eliminated.
Investment contracts with investment management services
The liabilities are set equal to the retrospectively accumulated fair value of the underlying assets less unrecouped expenses (set equal to the deferred acquisition cost (DAC) asset) in the case of individual business. These retrospective liabilities are higher than the prospective liabilities calculated as the present value of expected future benefits and expenses less future premiums at the relevant discount rates.

The DAC asset is eliminated. 
Group undertakings and inadmissible assets
The value of assets is reduced by taking into account the prescribed valuation bases for Group undertakings and to eliminate inadmissible assets (as defined in the relevant prudential regulations). 
Capital Adequacy Requirements (CAR)
The excess of assets over liabilities of life insurance operations on the prudential regulatory basis should be sufficient to cover the CAR in terms of the relevant regulations as well as professional guidance notes issued by the Actuarial Society in South Africa and the UK. The CAR provides a buffer against experience worse than that assumed in the valuation of assets and liabilities.

On the valuation date, the ordinary CAR was used for the South African operations as they exceeded the termination and minimum CAR.

The largest element of the CAR relates to stabilised bonus business. Consistent with an assumed fall in the fair value of the assets (the "resilience scenario"), which is prescribed in the actuarial guidance notes, the calculation of the CAR takes into account a reduction in non-vesting bonuses and future bonus rates and for the capitalisation of some expected future profits (resulting from discretionary margins in the valuation basis and held as part of the liabilities).

At 31 December 2010, the resilience scenario assumes that: 
> Equity values decline by 30%;
> Property values decline by 15%;
> Fixed interest yields and inflation-linked real yields increase or decrease by 25% of the nominal or real yields (whichever gives the highest total capital adequacy requirements); and 
> Assets denominated in foreign currencies decline by at least 20% on the valuation date and do not subsequently recover within the short term. 
Provision is made for credit and operational risk in the calculation of the CAR.

The excess of the actuarial values of assets over liabilities for the main life insurance holding companies is disclosed in the table below. The values disclosed for Sanlam Life capture the solvency position of the entire Sanlam Life Group, including subsidiaries such as Sanlam Life Namibia, SDM Limited, Channel Life and Botswana Insurance Holdings. Merchant Investors is the only life insurance company in the Group that is not a subsidiary of Sanlam Life, and its solvency position is therefore shown separately. All subsidiaries of Sanlam Life were adequately capitalised. 
Sanlam Life
Merchant Investors
R million   
Fair value of assets  
272 584
250 749
18 931
20 045  
Less: Liabilities  
232 063
213 713
18 574
19 700  
Actuarial value of policy liabilities  
218 133
200 377
17 841
18 885  
   Investment contracts  
99 066
89 703
14 934
15 716  
   Insurance contracts  
119 067
110 674
2 907
3 169  
Long-term and current liabilities  
13 930
13 336
Excess of assets over liabilities for financial reporting
40 521
37 036
Adjustment for prudential regulatory purposes  
(17 344)
(15 503)
Adjustment for Group undertakings            
Sanlam Investment Management  
(3 673)
(3 796)
(5 391)
(4 188)
SDM Limited  
(3 129)
(2 534)
Capital requirements of life insurance subsidiaries, adjusted for minority interests  
(1 755)
(1 889)
Inadmissible assets  
(2 997)
(2 886)
Unsecured subordinated bond  
2 128
1 965
Excess of assets over liabilities for prudential regulatory purposes
25 305
23 498
Capital adequacy requirements
Capital adequacy requirements (CAR) before management actions  
12 800
15 200
Management actions assumed  
(5 425)
(7 525)
Reduction in future bonus rates  
(3 176)
(4 165)
Reduction in non-vested bonuses  
Capitalisation of portion of expected future profits held as discretionary margins  
(1 037)
Reduction in grossing up of the assets covering CAR and other  
(1 345)
(1 919)
CAR after management actions assumed
7 375
7 675
Times CAR covered by excess of assets over liabilities for prudential regulatory purposes