Financial review


Sustained shareholder value creation - Sanlam's 2010 results in a nut-shell.

We are pleased to report on another solid performance in the 2010 financial year. An unwavering execution of the Group strategy and appropriate financial discipline in a challenging business environment contributed to a sustained delivery on the Group's commitment to optimise shareholder value. 

Business environment

The Report of the Group Chief Executive provides information on the business environment in 2010. By their nature the Group's operations are exposed to the volatility of financial markets and economic conditions in general. This was again illustrated in the 2010 financial results. The main features to take cognisance of in evaluating the Group's results are highlighted below.

Economic conditions

Economic growth in the main geographical regions in Africa and the United Kingdom (UK) where the Group operates remained weak. Administrative inflation continued to put pressure on disposable income in the South African target market areas. 

Equity markets

The South African equity market followed international trends with a strong performance in the latter half of 2010. The FTSE/JSE All Share and Swix indices closed the year 16% and 18% up respectively on their 31 December 2009 levels. This compares to the respective increases of 29% and 26% in 2009. The strong equity market performance since the latter half of 2009 contributed to a 22% higher average market level during 2010 as compared to 2009. 

Interest Rates

Long-term interest rates decreased by 1% since 31 December 2009 while short-term interest rates declined further in 2010 from the exceptionally high levels in early 2009. The result was a 2% fall in the average return earned on the Group's cash portfolio in 2010.

Foreign currency exchange rates

The rand continued its strong performance against all the major currencies to which the Group has exposure, as reflected in the table below (negative variances indicate a strengthening of the rand).
Foreign currency/Rand Europe
31/12/2008 12,85 13,33 9,24 1,26 0,13
31/12/2009 10,56 11,89 7,36 1,13 0,10
31/12/2009 10,56 11,89 7,36 1,13 0,10
31/12/2010 8,88 10,36 6,62 1,05 0,09
Average: 2009 11,62 13,04 8,31 1,20 0,11
Average: 2010 9,68 11,29 7,30 1,10 0,10

Changes in presentation and accounting policy

The following changes were made to the Group’s accounting policies and basis of presentation, as previously reported in the interim results:
> Segmental reporting: The Investment Management and Capital Markets segments were restructured. Sanlam Private Equity, Sanlam Properties and Sanlam Structured Solutions were reallocated from Sanlam Investments and combined with Sanlam Capital Markets to form the new Capital Management segment. The impact on the individual clusters' results was immaterial.
> Accounting policies: Sanlam Sky Solutions and Channel Life were integrated into a single business unit after the acquisition of the minority shareholder interest in Channel Life in 2009. As part of the integration, Channel Life's accounting policies for insurance contracts have been aligned with those of the Sanlam Group by eliminating negative rand reserves held as part of its insurance contract policy liabilities. The change in accounting policy resulted in a R248 million decrease in the Group shareholders' fund on 31 December 2009 and an R11 million reduction in the published Group Equity Value on this date. Further details are provided in the notes to the financial statements.

Key performance indicators

The primary performance target of the Group is to optimise shareholder value through maximising the Return on Group Equity Value (RoGEV) per share. This measure of performance is regarded as the most appropriate given the nature of the Group's business and incorporates the result of all the major value drivers in the business.

A target has been set for the RoGEV per share to exceed the Group's cost of capital on a sustainable basis. Cost of capital is set at the government (9-year) bond yield at the start of each financial year plus 300 basis points, with a target to exceed this return by at least 100 basis points. Over a short-term measurement period the actual return achieved can be distorted by volatile market movements. An ‘adjusted’ RoGEV is therefore also reported that aims to exclude the impact of investment market volatility. This is calculated by assuming that for purposes of the investment return earned on the supporting capital of covered business and the valuation of other Group operations, the investment return assumptions at the beginning of the reporting period were actually achieved in that period. Other significant items not under management’s control are also excluded.

The target RoGEV per share for 2010 based on the above metrics was 13,4%. The actual 2010 RoGEV per share achieved of 18,2% is well in excess of this target, supported by the favourable equity market performance and a decrease in long-term interest rates during the year. The adjusted RoGEV for 2010 amounted to 16%, which is also in excess of the targeted return. A key measure of performance is also its sustainability. On a cumulative basis the Group has outperformed the RoGEV performance target since being demutualised in 1998.

Other key indicators used by the Group to evaluate its operational performance are as follows for the 2010 reporting period:
> Net result from financial services increased by 23% on 2009 to 161,5 cents per share.
> New business volumes of R106 billion, up 3% on 2009.
> Value of new life business up 11% to R762 million.
> Net fund inflows of R22 billion in 2010 compared to R15 billion in 2009.
> Dividend per share increased by 11% to 115 cents per share.
Group Equity Value
Group Equity Value (GEV) is a measure of the value of the Group's operations, excluding any value attached to future new business written by the covered business (life insurance) operations of the Group. GEV is the aggregate of the following components:
> The embedded value of covered business, being the life insurance businesses of the Group. This comprises the capital supporting these operations and the net value of their in-force books of business.
> The fair value of other Group operations based on listed market prices or market-related longer-term assumptions, which includes the investment management, capital markets, credit, short-term insurance and the non-covered wealth management operations of the Group.
> The fair value of discretionary and other capital.
The shareholder value created by the Group in 2010 is reflected in the 18,2% RoGEV per share achieved for the financial year. This is the combined effect of a 14% increase in the GEV per share to R28,18 and the 104 cents per share dividend paid during the year.
The GEV at 31 December 2010 is analysed in the following table:
Group equity value
R million
Fair value
of assets
Value of
Total 2009
Fair value
of assets
Value of
Embedded value of covered business
31 045
14 033
17 012
28 988 14 247 14 741
Sanlam Personal Finance
21 488
8 144
13 344
19 884 8 098 11 786
Sanlam Developing Markets
3 952
1 104
2 848
3 479 1 363 2 116
Sanlam UK
665 217 448
Sanlam Employee Benefits
4 967
4 573
4 960 4 569 391
Other Group operations
19 413
19 413
16 833 16 833
Retail cluster
3 359
3 359
2 707 2 707
Institutional cluster
7 525
7 525
6 977 6 977
Short-term insurance
8 529
8 529
7 149 7 149
Other capital
2 903
2 903
1 703 1 703
53 361
36 349
17 012
47 524 32 783 14 741
Discretionary capital
4 000
4 000
3 500 3 500
Group Equity Value
57 361
40 349
17 012
51 024 36 283 14 741
Issued shares for value per share
2 035,5
    2 063,1
GEV per share
2 818
    2 473
Share price
2 792
  2 275

Covered business

The Group's covered business operations increased from R29 billion at the end of 2009 to R31 billion at 31 December 2010. The value of the in-force book (VIF) increased from R14,7 billion in 2009 to R17,0 billion, with the increase supported by strong growth in the value of new covered business as well as the positive impact of the decline in long-term interest rates on the value of the in-force book.

Capital held in support of covered business at its fair value of R14 billion is in line with 2009. The level and nature of the supporting capital allocated to covered business is determined with reference to minimum regulatory requirements as well as economic, risk and growth considerations. A stochastic model is used to determine long-term required capital levels that, within a 95% confidence level, are targeted to be able to cover the minimum statutory capital adequacy requirement (CAR) at least 1,5 times over each of the next 10 year-ends. The optimal utilisation of capital receives ongoing management attention, with particular focus on the best portfolio asset mix and the capital efficiency of both in-force business and new products being offered.

All of the life insurance businesses within the Group were sufficiently capitalised at the end of the 2010 financial year. The total admissible regulatory capital (including identified discretionary capital) of Sanlam Life Insurance Limited, the holding company of the Group's major life insurance subsidiaries, of R25,3 billion covered its capital adequacy requirements (CAR) 3,4 times. No policyholder portfolio had a negative bonus stabilisation reserve at the end of 2010.

Other Group operations

The fair value of other Group operations increased by 15% on 2009 to reach R19,4 billion. Santam and Sanlam Developing Markets' listed non-life operations are valued at traded market value, while management valuations are used for the other unlisted businesses. The latter are based on applicable market-related yields and ratios, applying methodologies and key assumptions that are in all material aspects consistent with those applied in 2009. The increase in other Group operations is attributable to the following:
> A significant increase in the valuation of Sanlam Personal Finance's non-life operations. Most of the businesses recorded strong operational results in 2010, recovering from the recessionary conditions of the past two years, with improved future profit prospects on the back of an economic recovery in South Africa. This provided support to the valuations together with the positive impact of lower long-term interest rates on the discounted cash flow valuation basis.
> An outperformance of the Santam share price relative to the general market.
> Net third-party fund inflows into the institutional asset management operations, combined with positive investment market returns, contributing to an increase in these businesses' assets under management, with a commensurate increase in valuations.
The muted increase in the rand value reflected for the Sanlam UK operations should be seen in the context of a 13% appreciation in the rand/sterling exchange rate in 2010.
To the extent that the net asset value of non-life Group operations also qualifies for and is utilised to cover a portion of the covered business's capital requirement, a capital diversification benefit is achieved. Given the strong capital position of the Group at the end of the 2010 financial year and in anticipation of the Financial Services Board's introduction of new solvency requirements (Solvency Assessment and Management) over the next number of years, the diversified utilisation of capital that is allowed in terms of the current regime was eliminated. Other capital of R2,9 billion includes funds set aside for the Sanlam dividend to be paid in May 2011 in respect of the 2010 financial year and some illiquid non-strategic investments.

Discretionary capital

The Group's discretionary capital held in excess of its immediate operational and regulatory requirements is specifically identified and separately managed. The utilisation of this capital is managed through a centralised capital allocation process based on strategic considerations and minimum risk-adjusted return hurdle rates. Discretionary capital amounted to R4 billion on 31 December 2010, an increase of R0,5 billion on the R3,5 billion level reported in 2009. Factors contributing to the change in discretionary capital during the year include:
> Sanlam share buy-backs of R887 million, which were limited due to the relatively high share price. A total of 37,2 million shares were acquired at an average price of R23,86 per share.
A number of smaller but strategically important transactions that utilised some R385 million of discretionary capital. These include:
> The acquisition of 609 476 Santam shares (0,5%) in the market for R62 million, largely necessary to ensure that Sanlam's interest in Santam will not be diluted as a result of the periodic requirement to issue or reissue shares for share incentive scheme purposes.
> Sanlam Developing Markets utilising some R60 million to strengthen the Channel capital base; R65 million to acquire a 49% interest in the life insurance business of Nico Malawi; while BIHL acquired interests in Legal Guard, Funeral Services Group and Letshego for R49 million (Group's share).
> MiWay required additional financing of R28 million to fund start-up costs.
> The Institutional cluster utilised some R30 million to further its International Investment Partner strategy, essentially to fund the acquisition of Four Capital Partners in the UK, and some R35 million to provide funding for Sanlam Properties' property development projects.
> Sanlam Healthcare Management acquired the Eternity health administration business for some R25 million.
> R30 million was used to strengthen the capital base of Fundamo in support of its growth strategy.
> R267 million was released through the sale of our investments in MiWay (to Santam) and JHI Properties. The special Santam dividend paid in the latter half of 2010 contributed a further R300 million.
> R1,0 billion of investment returns earned on the capital allocated to the life insurance businesses that were not required to support these operations at the end of 2010.
Discretionary capital
R billion  
Group Equity Value 57,4
Strategic investments (not included in Life capital) (19,4)
Life insurance subsidiaries’ embedded value (31,0)
Provision for 2010 dividend (not included in valuation of strategic investments) (1,5)
Other (1,5)
Discretionary capital
Capital efficiency is a major strategic focus of the Group. Unproductive capital is value dilutive and the optimal utilisation of capital is therefore a key Group priority. Some level of prudence is however required in dealing with what is earmarked as surplus to the Group's requirements until we have a better understanding of the full impact of the new Solvency Assessment and Management (SAM) regime. Our view is that it is too early in the development and roll-out of the SAM rules and requirements for any speculation on the potential for surplus capital in addition to what is currently being earmarked as discretionary.

A number of strategic investment opportunities have been identified and are being pursued on an ongoing basis. Negotiations in respect of some of these ventures are at different stages of completion. It is expected that should this and a number of other opportunities under consideration be successful, a major portion of the identified discretionary capital will be utilised.

A key consideration in these and other possible transactions remains the ability to extract value in excess of an appropriate risk-adjusted hurdle rate that will contribute to maximising the Group's return on capital.

The opportunity remains to add value through the buy-back of Sanlam shares. The Sanlam Board is of the opinion that share buy-backs are still an efficient way of returning capital to shareholders should the strategic investment opportunities not materialise.

Return on Group Equity Value

As a financial services organisation, the Group has a material exposure to the investment markets, both in respect of the shareholder capital portfolio that is invested in financial instruments, as well as a significant portion of the fee income base that is linked to the level of assets under management. After the negative GEV return in 2008 (-1,7%) that reflected the depressed financial markets at the time, the Group's performance recovered in 2009 and 2010 in line with the stronger investment markets. Sanlam achieved a RoGEV per share of 18,2% in 2010 relative to the 16,2% achieved in 2009 and well up on the 13,4% target set for the year.
Return on Group Equity Value
for the year ended 31 December 2010
R million
R million
Sanlam Personal Finance
4 525
3 003 14,3
Covered business
3 782
2 815 14,4
Other operations
188 13,2
Sanlam Developing Markets
569 19,2
Covered business
467 16,7
Other operations
102 63,8
Sanlam UK
(89) (5,8)
Covered business
(14) (2,1)
Other operations
(75) (8,9)
Institutional cluster
1 761
2 607 23,6
Covered business
1 153 20,8
Other operations
1 155
1 454 26,4
Short-term insurance
2 056
2 133 40,5
Discretionary and other capital
Balance of portfolio
Intangible assets less value of in-force acquired
Treasury shares
Change in net worth adjustments
Return on Group Equity Value
9 322
7 449 16,5
Return on Group Equity Value per share

Return on covered business

Covered business yielded a return of 17,5% compared to 15,5% in 2009. An analysis of this return is set out below.
Return on covered business
for the year ended 31 December 2010
R million
Net value of new business
Earnings from existing business
2 639
2 430
Expected return on value of in-force
2 218
1 714
Operating experience variances
Operating assumption changes
Expected investment return on adjusted net worth
1 151
1 091
Embedded value earnings from operations
4 456
4 128
Economic assumption and tax changes
(1 206)
Investment variances – value of in-force
1 149
Investment variances – adjusted net worth
Project expenses and other
Total embedded value earnings
5 057
4 421
Return on covered business
The favourable return during 2010 is the combined effect of the following:
> Net value added by new business written of R666 million (2009: R607 million) and earnings from the existing in-force book of R2,6 billion (2009: R2,4 billion). The increase in the latter was aided by positive experience variances of R468 million, essentially related to positive risk experience and interest earned on net working capital. Net operating assumption changes were negative R47 million, adversely impacted by a strengthening in long duration persistency assumptions in Sanlam Personal Finance;
> The decrease in long-term interest rates and simultaneous change in long-term return assumptions resulted in a positive change in the economic assumptions base of R430 million, compared to a negative change of R1,2 billion in 2009;
> The assets held in policyholder portfolios were positively impacted by the improved market conditions, resulting in an increase in expected future fee income. This, combined with assets increasing in some portfolios in excess of the related liabilities, contributed to investment variances of R332 million in 2010 after a similar increase of R1,1 billion in 2009; and
> Sustained positive investment returns on the capital supporting the life operations of R1,2 billion compared to a return of R1,6 billion in 2009. The 2010 result comprises an expected investment return of R1,1 billion (2009: R1,1 billion) and positive investment variances of R4 million (2009: R0,5 billion). The lower positive variance in 2010 can be ascribed to the lower level of interest earned on the cash exposure in the portfolios as well as lower offshore returns.
Return on other Group operations

The valuations of the other Group operations were positively impacted by the continued improvement in market conditions and yielded a positive return of 24% for 2010 (28% in 2009). The Group's investment in Santam was again the largest contributor to this performance. Following a return of 42% in 2009, the investment in Santam yielded a return of R2 billion (30%) in 2010. Sterling operational performance from the non-life businesses in SPF and SDM is reflected in a respective 46% and 37% return on those businesses in 2010. Operations in the Institutional cluster achieved a return of 17%. As mentioned above, the Institutional cluster's performance is directly linked to the higher overall level of assets under management following the strong investment market performance during the year. The Group's businesses in the UK are still experiencing the aftermath of the financial market crisis but yielded a satisfactory return of 6% for the year, given the strong rand exchange rate.
Return on discretionary and other capital

The return on discretionary and other capital was impacted by the following:
> A positive investment return of R400 million. The relatively low return of 6% can be attributed to the level of local and offshore cash holdings in the portfolio;
> A negative change of R62 million in the net worth adjustments. This primarily relates to a small increase in the capitalised allowance for corporate costs that are not reflected in the valuation of the other Group businesses; and
> A loss of R153 million recognised in respect of treasury shares. This loss is substantially attributable to losses recognised on the delivery of share incentive scheme shares to participants at the applicable strike prices.

Adjusted return on Group Equity Value

By excluding the impact of investment market volatility from RoGEV, the adjusted RoGEV per share is determined and for 2010 amounts to 16,0% (2009: 13,1%).
Adjusted return on Group Equity Value
for the year ended 31 December 2010
R million
R million
Sanlam Personal Finance
3 826
2 579 12,3
Covered business
3 083
2 391 12,2
Other operations
188 13,2
Sanlam Developing Markets
722 24,4
Covered business
705 25,2
Other operations
17 10,6
Sanlam UK
(37) (2,4)
Covered business
93 13,7
Other operations
(130) (15,3)
Institutional cluster
1 753
2 327 20,1
Covered business
939 16,9
Other operations
1 175
1 388 22,8
Short-term insurance
1 614
545 10,3
Discretionary and other capital
Adjusted Return on Group Equity Value
8 252
6 040 13,4
Adjusted Return on Group Equity Value per share

Pages: 1 2