Basis of preparation and presentation of the shareholders’ fund information

 
This section provides additional information in respect of the Group shareholders' fund in a format that corresponds to that used by management in evaluating the performance of the Group.

It includes analyses of the Group shareholders' fund's consolidated financial position and results in a similar format to that used by the Group for internal management purposes. View the Group financial statements prepared in accordance with IFRS and include the consolidated results and financial position of both the shareholder and policyholder activities. These IFRS financial statements also do not distinguish between the shareholders' operational and investment activities, which are separate areas of management focus and an important distinction in evaluating the Sanlam Group's financial performance. Information is presented in this section to provide this additional shareholders' fund information.

The Group also discloses Group Equity Value (GEV) information. The Group's key strategic objective is to maximise returns to shareholders. GEV has been identified by management as the primary measure of value, and return on GEV (RoGEV) is used by the Group as the main performance measure to evaluate the success of its strategies towards sustainable value creation in excess of its cost of capital. GEV more accurately reflects the performance of the Group than results presented under IFRS and provides a more meaningful basis of reporting the underlying value of the Group's operations and the related performance drivers. This basis allows more explicitly for the impact of uncertainty in future investment returns and is consistent with the Group's operational management structure.

View the glossary containing explanations of technical terms used in these financial statements.
 
Basis of preparation and presentation - shareholders' fund information 
View the basis of presentation and accounting policies in respect of the financial information of the shareholders' fund, apart from the specific items described under separate headings in this section.

The basis of preparation and presentation of the shareholders' information is also consistent with that applied in the 2009 financial statements, apart from the following:
 
> Segmental reporting: The Investment Management and Capital Markets segments were restructured. Sanlam Private Equity, Sanlam Properties (excluding the property management operations that were reallocated to the corporate segment) and Sanlam Structured Solutions were reallocated from Sanlam Investments and combined with Sanlam Capital Markets to form the new Capital Management segment. Comparative information has been restated accordingly. The impact on the applicable segments' results was immaterial.
> Adjusted RoGEV: The calculation of the adjustment relating to listed businesses was amended during 2010 as part of the continuous refinement of the methodology used. The adjusted RoGEV for listed businesses was previously assumed to be equal to the base return assumption for equities. With effect from the 2010 financial year, the out or under performance of the business' share price relative to the general market is added to the base return assumption for equities. Comparative information has not been restated.
> Adjusted RoGEV: The calculation of the adjustment relating to listed businesses was amended during 2010 as part of the continuous refinement of the methodology used. The adjusted RoGEV for listed businesses was previously assumed to be equal to the base return assumption for equities. With effect from the 2010 financial year, the out or under performance of the business' share price relative to the general market is added to the base return assumption for equities. Comparative information has not been restated.
 
The shareholders' fund information includes the following:
> Consolidated shareholders' fund at net asset value, together with a consolidated shareholders' fund income statement and related notes;
> Shareholders' fund at fair value; and
> GEV and RoGEV information.
 

Consolidated shareholders' fund, income statement and related information

The analysis of the shareholders' fund at net asset value and the related shareholders' fund income statement reflects the consolidated financial position and earnings of the shareholders' fund, based on accounting policies, apart from the following:
 
Basis of consolidation
Group companies are consolidated in the analysis of the Sanlam Group shareholders' fund at net asset value. The policyholders' and outside shareholders' interests in these companies are treated as minority shareholders' interest on consolidation. 
 
Consolidation reserve 
In terms of IFRS, the policyholders' fund's investments in Sanlam shares and Group subsidiaries are not reflected as equity investments in the Sanlam Group IFRS statement of financial position, but deducted in full from equity on consolidation (in respect of Sanlam shares) or reflected at net asset value (in respect of subsidiaries). The valuation of the related policy liabilities however includes the fair value of these investments, creating an artificial mismatch between policy liabilities and policyholder investments, with a consequential impact on the Group's shareholders' fund and earnings. The consolidation reserve created in the Group financial statements for these mismatches is not recognised in the shareholders' fund at net asset value as the related policyholder investments are recognised as equity instruments at fair value. The fund transfers between the shareholders' and policyholders' fund relating to movements in the consolidation reserve are commensurately also not recognised in the shareholders' fund's normalised earnings. This policy is applied, as these accounting mismatches do not represent economic profits and losses for the shareholders' fund. 
 
Segregated funds
Sanlam also manages and administers assets in terms of third party mandates, which are for the account of and at the risk of the clients. As these are not the assets of the Sanlam Group, they are not recognised in the Sanlam Group statement of financial position in terms of IFRS and are also excluded from the shareholders' fund at net asset value and fair value. Fund flows relating to segregated funds are however included in the notes to the shareholders' fund information to reflect all fund flows relating to the Group's assets under management. 
 
Equity-accounted earnings 
Equity-accounted earnings are presented in the shareholders' fund income statement based on the allocation of the Group's investments in associates and joint ventures between operating and nonoperating entities: 
 
> Operating associates and joint ventures include investments in strategic operational businesses, namely Sanlam Personal Loans, Shriram Life Insurance, Shriram General Insurance, Letshego and the Group's life insurance associates in Africa. The equity-accounted earnings from operating associates and joint ventures are included in the net result from financial services.
> Non-operating associates and joint ventures include investments held as part of the Group's balanced investment portfolio. Vukile and the Santam Group's equity-accounted investments are the main non-operating associates and joint ventures. Dividends received from non-operating associates and joint ventures are included in core earnings. The remainder of equity-accounted retained earnings is reflected as equity-accounted earnings.
 
Core earnings
A Sanlam core earnings figure is presented as an earnings measure that excludes items of a volatile or once-off nature. Core earnings comprise the net result from financial services and net investment income earned on the shareholders' fund, but excludes abnormal and non-recurring items as well as investment surpluses. Net investment income includes dividends received from non-operating associated companies and joint ventures but excludes the remaining equity-accounted retained earnings. Dividends received on equity investments that are in essence a proportionate return of the capital investment, are not treated as investment income, but offset against the related negative investment surpluses on the particular investment. 
 
Normalised earnings per share
As discussed under the policy note for 'Consolidation reserve' above, the IFRS prescribed accounting treatment of the policyholders' fund's investments in Sanlam shares and Group subsidiaries creates artificial accounting mismatches with a consequential impact on the Group's IFRS earnings. In addition, the number of shares in issue used for the calculation of IFRS basic and diluted earnings per share must also be reduced with the treasury shares held by the policyholders' fund. This is in the Group's opinion not a true representation of the earnings attributable to the Group's shareholders, specifically in instances where the share prices and/or the number of shares held by the policyholders' fund change significantly during the reporting period. The Group therefore calculates normalised diluted earnings per share to eliminate fund transfers relating to the investments in Sanlam shares and Group subsidiaries held by the policyholders' fund. 
 
Fund flows
The notes to the shareholders' fund information also provide information in respect of fund flows relating to the Group's assets under management. These fund flows have been prepared in terms of the following bases: 
 
Funds received from clients
Funds received from clients include single and recurring long- and short-term insurance premium income from insurance and investment policy contracts, which are recognised in the financial statements. It also includes contributions to collective investment schemes and non-life insurance linked-products as well as inflows of segregated funds, which are not otherwise recognised in the financial statements as they are funds held on behalf of and at the risk of clients. Transfers between the various types of business, other than those resulting from a specific client instruction, are eliminated. 

White label fund flows relate to business where the Group is principally providing administrative or life licence services to third party institutions. White label business is by nature low margin business and subject to volatile cash flows.

Funds received from clients include the Group's effective share of funds received from clients by strategic operational associates and joint ventures.
 
New business
In the case of long-term insurance business the annualised value of all new policies (insurance and investment contracts) that have been issued during the financial year and have not subsequently been refunded, is regarded as new business.

All segregated fund inflows, inflows to collective investment schemes and short-term insurance premiums are regarded as new business.

New business includes the Group's share of new business written by strategic operational associates and joint ventures. 
 
Payments to clients
Payments to clients include policy benefits paid in respect of long- and short-term insurance and investment policy contracts, which are recognised in the financial statements. It also includes withdrawals from collective investment schemes and non-life insurance linked-products as well as outflows of segregated funds, which are not otherwise recognised in the financial statements as they relate to funds held on behalf of and at the risk of clients. Transfers between the various types of business, other than those resulting from a specific client instruction, are eliminated. 

White label fund flows relate to business where the Group is principally providing administrative or life licence services to third party institutions. White label business is by nature low margin business and subject to volatile cash flows.

Payments to clients include the Group's effective share of payments to clients by strategic operational associates and joint ventures.
 

Shareholders’ fund at fair value

The shareholders' fund at fair value is prepared from the consolidated shareholders' fund by replacing the net asset value of the Group operations that are not part of covered business, with the fair value of these businesses. Fair values for listed businesses are determined by using stock exchange prices and for unlisted businesses by using directors' valuations. 
 

Group Equity Value 

GEV is the aggregate of the following components:
 
> The embedded value of covered business, which comprises the required capital supporting these operations (also referred to as adjusted net worth) and their net value of in-force business;
> The fair value of other Group operations based on longer-term assumptions, which includes the investment management, capital markets, short-term insurance and the non-covered wealth management operations of the Group; and
> The fair value of discretionary and other capital.
 
 
GEV is calculated by adjusting the shareholders' fund at fair value with the following: 
 
> Adjustments to net worth; and
> Goodwill and the Value of Business Acquired intangible assets relating to covered business are replaced by the value of the in-force book of covered business.
 
Although being a measure of value, GEV is not equivalent to the economic value of the Group as the embedded value of covered business does not allow for the value of future new business. An economic value may be derived by adding to the GEV an estimate of the value of the future sales of new covered business, often calculated as a multiple of the value of new covered business written during the past year.

The GEV is inherently based on estimates and assumptions, as set out in this basis of preparation and as also disclosed under critical accounting estimates and judgements in the annual financial statements. It is reasonably possible that outcomes in future financial years will be different to the current assumptions and estimates, possibly significantly, impacting on the reported GEV. Accordingly, sensitivity analyses are provided for changes from the base estimates and assumptions within the Shareholders' information. 
 
Adjustments to net worth
Present value of corporate expenses
GEV is determined by deducting the present value of corporate expenses, by applying a multiple to the after tax corporate expenses. This adjustment is made as the embedded value of covered business and the fair value of other Group operations do not allow for an allocation of corporate expenses. 
 
Share incentive schemes granted on subsidiaries' own shares 
Where Group subsidiaries grant share incentives to staff on the entities' own shares, the fair value of the outstanding incentives at year-end is deducted in determining GEV. The expected cost of future grants in respect of these incentive schemes is allowed for in the calculation of the value of in-force covered business and the fair value of other Group operations as appropriate. 
 
Share incentive schemes granted on Sanlam shares 
Long-term incentives granted by the Group on Sanlam shares are accounted for as dilutive instruments. The GEV is accordingly not adjusted for the fair value of these outstanding shares, but the number of issued shares used to calculate GEV per share is adjusted for the dilutionary effect of the outstanding instruments at year-end. The expected cost of future grants in respect of these incentive schemes is allowed for in the calculation of the value of in-force covered business and the fair value of other Group operations.
 

Return on Group Equity Value

The RoGEV is equal to the change in GEV during the reporting period, after adjustment for dividends paid and changes in issued share capital, as a percentage of GEV at the beginning of the period. 
 

Adjusted Return on Group Equity Value

As stated above, optimising shareholder value through maximising RoGEV is the Sanlam Group's key strategic objective. Given the nature of the Group's operations and the level of required capital, the return on investment markets has a significant impact on the RoGEV reported for a specific period. The Group's success in achieving its return target is accordingly measured on a cumulative basis since demutualisation in 1998 to eliminate the distortion caused by market highs and lows. In evaluating the Group's results for a specific reporting period it is important to exclude the impact of investment market volatility in that period. Adjusted RoGEV is presented on this basis to provide an indication of the Group's underlying, longer-term performance.

The actual RoGEV for a reporting period is adjusted as follows to determine the equivalent adjusted RoGEV: 
 
Key assumptions 
Where applicable, the economic assumptions used for the embedded value of covered business at the end of the previous financial year (base economic assumptions or base return assumptions) remain constant for the reporting period and are assumed to have materialised. Deviations in adjusted RoGEV are therefore only affected by the result of operational performance. 
 
Investment return 
The investment return earned on shareholder assets is adjusted by replacing the actual return with an assumed return based on the base return assumptions. Both the actual and assumed returns are adjusted for taxation as appropriate. 
 
Assets under management
Where assets under management (AUM) forms the base for the valuation of a business at fair value, it is assumed that the applicable AUM increased over the reporting period by: 
 
> The actual net flows recorded for the period; and
> An adjusted investment return on the respective portfolios. The actual return earned on the portfolios is replaced by an assumed return based on the base return assumptions, adjusted for any actual over- or underperformance compared to benchmarks. The adjusted AUM is therefore not impacted by market movement variances compared to the base return assumptions, but any over- or underperformance against the benchmark will impact the level of AUM.
 
 
The price to AUM ratio is kept constant unless changes in the underlying performance, business model or risk profile of the business justify a change. 
 
Risk premiums
The risk premium applied to determine the risk discount rate for valuation purposes is adjusted if justified by changes in the underlying operational performance, business model or risk profile of the business. 
 
Return on value of in-force
Items relating to economic assumptions, investment market returns and ad hoc adjustments are excluded from adjusted RoGEV on the basis that they are not under management's control. These will include economic assumption changes, investment variances, tax changes and other similar changes. 
 
Project expenses
Project expenses are excluded from adjusted RoGEV given that the potential benefits from the projects will only be realised over the longer term and are therefore not reflected in shorter measurement periods. 
 
Listed businesses 
For adjusted RoGEV purposes the actual investment return earned on listed businesses is replaced by an assumed return equal to the base return assumption for equities together with the under or out performance of the business' share price relative to the general market. 
 
Basis of preparation and presentation - embedded value of covered business 
The Group's embedded value of covered business information is prepared in accordance with PGN107 (version 5), the guidance note on embedded value financial disclosures of South African long-term insurers issued by the Actuarial Society of South Africa (Actuarial Society). Covered business represents the Group's long-term insurance business for which the value of new and in-force contracts is attributable to shareholders. 

The embedded value results of the Group's covered business are included in the shareholders' information as it forms an integral part of GEV and the information used by management in evaluating the performance of the Group. The embedded value of covered business does not include the contribution to GEV relating to other Group operations or discretionary and other capital, which are included separately in the analysis of GEV.

The basis of presentation for the embedded value of covered business is consistent with that applied in the 2009 financial statements.
 

Covered business

Covered business includes all material long-term insurance business that is recognised in the Sanlam Group financial statements

This business includes individual stable bonus, linked and market-related business, reversionary bonus business, group stable bonus business, annuity business and other non-participating business written by Sanlam Personal Finance, Sanlam Developing Markets, Sanlam UK and Sanlam Employee Benefits.

Covered business excludes the value of investment products provided under a life insurance policy where there is very little or no insurance risk.
 

Acquisitions, disposals and other movements 

The embedded value of covered business results are prepared taking cognisance of changes in the Group’s effective shareholding in covered business operations. 
 
Methodology

Embedded value of covered business

The embedded value of covered business is the present value of earnings from covered business attributable to shareholders, excluding any value that may be attributed to future new business. It is calculated on an after-tax basis taking into account current legislation and known future changes. 

The embedded value of covered business comprises the following components:
 
> Adjusted net worth (ANW); and
> The net value of in-force business.
 
Adjusted net worth
ANW comprises the required capital supporting the covered business and is equal to the net value of assets allocated to covered business that does not back policy liabilities. 

The required capital allocated to covered business reflects the level of capital considered sufficient to support the covered business, allowing for an assessment of the market, credit, insurance and operational risks inherent in the underlying products, subject to a minimum level of the local statutory solvency requirement for each business.

Sanlam applies stochastic modelling techniques on an ongoing basis to assist in determining and confirming the most appropriate capital levels for the covered business. The modelling target is set to maintain supporting capital at such a level that will ensure, within a 95% confidence level, that it will at all times cover the minimum statutory capital adequacy requirement (CAR) at least 1,5 times over the following 10 years. The capital allocated to covered business includes an allowance for capital required in respect of future new business.

The capital allocated to covered business is funded from two main sources:
 
> A balanced investment portfolio, comprising investments in equities, hedged equities, property, fixed interest securities, cash and subordinated debt funding. The subordinated debt funding liability is matched by ring-fenced bonds and other liquid assets held as part of the balanced investment portfolio.
> Capital diversification, where the net asset value of other Group operations are used to cover a portion of the required capital.
 
Given the asset mix of the balanced investment portfolio, the fair value of this portfolio will fluctuate commensurately with changes in investment market returns. The difference between the fair value of the balanced investment portfolio and the required capital is funded from capital diversification as deemed appropriate. Changes in the utilisation of capital diversification are presented separately in the analysis of change in embedded value of covered business.

Transfers are made to or from adjusted net worth on an annual basis for the following: 
 
> Transfers of net operating profit. These transfers relate to dividends paid from covered business in terms of the Group’s internal dividend policy to fund the dividend payable to Sanlam Limited shareholders; and
> Transfers to or from the balanced investment portfolio. Any capital in the portfolio that is in excess of the requirements of the covered business is transferred to discretionary capital in terms of the Group’s capital management framework.
 
Net value of in-force business
The net value of in-force business consists of:
 
> The present value of future shareholder profits from in-force covered business (PVIF), after allowance for
> The cost of required capital supporting the covered business.
 
Present value of future shareholder profits from in-force covered business 
The long-term policy liabilities in respect of covered business in the financial statements are valued based on the applicable statutory valuation method for insurance contracts and fair value for investment contracts. These liabilities include profit margins, which can be expected to emerge as profits in the future. The discounted value, using a risk-adjusted discount rate, placed on these expected future profits, after taxation, is the PVIF. 

The PVIF excludes the cost of required capital, which is separately disclosed.
 
Cost of required capital
A charge is deducted from the embedded value of covered business for the cost of required capital supporting the Group’s existing covered business. The cost is the difference between the carrying value of the required capital at the valuation date and the discounted value, using a risk-adjusted discount rate, of the projected releases of the capital allowing for the assumed after-tax investment return on the assets deemed to back the required capital over the life of the in-force business. 
 

Value of new business

The value of new business is calculated as the discounted value, at point of sale, using a risk-adjusted discount rate, of the projected stream of after-tax profits for new covered business issued during the financial year under review. The value of new business is also reduced by the cost of required capital for new covered business. 

In determining the value of new business:
 
> A policy is only taken into account if at least one premium, that is not subsequently refunded, is recognised in the financial statements;
> Premium increases that have been allowed for in the value of in-force covered business are not counted again as new business at inception;
> Increases in recurring premiums associated with indexation arrangements are not included, but instead allowed for in the value of in-force covered business;
> The expected value of future premium increases resulting from premium indexation on the new recurring premium business written during the financial year under review is included in the value of new business;
> Continuations of individual policies and deferrals of retirement annuity policies after the maturity dates in the contract are treated as new business if they have been included in policy benefit payments at their respective maturity dates;
> For employee benefits, increases in business from new schemes or new benefits on existing schemes are included and new members or salary-related increases under existing schemes are excluded and form part of the in-force value;
> Renewable recurring premiums under group insurance contracts are treated as in-force business; and
> Assumptions are consistent with those used for the calculation of the value of in-force covered business at the end of the reporting period.
 
Profitability of new covered business is measured by the ratio of the net value of new business to the present value of new business premiums (PVNBP). The PVNBP is defined as new single premiums plus the discounted value, using a risk-adjusted discount rate, of expected future premiums on new recurring premium business. The premiums used for the calculation of PVNBP are based on the life insurance new business premiums disclosed in note 1, excluding white label new business.
 

Risk discount rates and allowance for risk 

In accordance with the actuarial guidance, the underlying risks within the covered business are allowed for within the embedded value calculations through a combination of the following: 
 
> Explicit allowances within the projected shareholder cash flows;
> The level of required capital and the impact on cost of required capital; and
> The risk discount rates, intended to cover all residual risks not allowed for elsewhere in the valuation.
 
The risk margins are set using a top-down approach based on Sanlam Limited’s weighted average cost of capital (WACC), which is calculated based on a gross risk-free interest rate, an assumed equity risk premium, a market assessed risk factor (beta), and an allowance for subordinated debt on a market value basis. The beta provides an assessment of the market’s view of the effect of all types of risk on the Group’s operations, including operational and other non-economic risk. 

To derive the risk discount rate assumptions for covered business, an adjusted WACC is calculated to exclude the non-covered Group operations included in Sanlam Limited’s WACC and to allow for future new covered business. The covered business operations of the Group use risk margins of between 2,5% and 7,0% and the local gross risk-free rate at the valuation date.
 

Minimum investment guarantees to policyholders 

An investment guarantee reserve is included in the reserving basis for policy liabilities, which makes explicit allowance for the best estimate cost of all material investment guarantees. This reserve is determined on a market consistent basis in accordance with actuarial guidance from the Actuarial Society (PGN110). No further deduction from the embedded value of covered business is therefore required.
 

Share incentive schemes

The embedded value of covered business assumes the payment of long-term incentives in the future and allows for the expected cost of future grants within the value of in-force covered business and value of new business. 
 

Sensitivity analysis

Sensitivities are determined at the risk discount rates used to determine the base values, unless stated otherwise. For each of the sensitivities, all other assumptions are left unchanged. The different sensitivities do not imply that they have a similar chance of occurring. 

The risk discount rate appropriate to an investor will depend on the investor’s own requirements, tax position and perception of the risk associated with the realisation of the future profits from the covered business. The disclosed sensitivities to changes in the risk discount rate provide an indication of the impact of changes in the applied risk discount rate.

Risk premiums relating to mortality and morbidity are assumed to be increased consistent with mortality and morbidity experience respectively, where appropriate.
 

Foreign currencies

Changes in the embedded value of covered business, as well as the present value of new business premiums, of foreign operations are converted to South African rand at the weighted average exchange rates for the financial year, except where the average exchange rate is not representative of the timing of specific changes in the embedded value of covered business, in which instances the exchange rate on transaction date is used. The closing rate is used for the conversion of the embedded value of covered business at the end of the financial year. 
 
Assumptions

Best estimate assumptions

The embedded value calculation is based on best estimate assumptions. The assumptions are reviewed actively and changed when evidence exists that material changes in the expected future experience are reasonably certain. The best estimate assumptions are also 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. 

It is reasonably possible that outcomes in future financial years will be different to these current best estimate assumptions, possibly significantly, impacting on the reported embedded value of covered business. Accordingly, sensitivity analyses are provided for the value of in-force and value of new business.
 

Economic assumptions

The assumed investment return on assets supporting the policy liabilities and required capital is based on the assumed 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. 

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 each valuation date.
 

Assets backing required capital

The assumed composition of the assets backing the required capital is consistent with Sanlam’s practice and with the assumed long-term asset distribution used to calculate the statutory capital requirements and internal required capital assessments of the Group’s covered business. 
 

Demographic assumptions

Future mortality, morbidity and discontinuance rates are based on recent experience where appropriate. 
 
HIV/Aids 
Allowance is made, where appropriate, for the impact of expected HIV/Aids-related claims, using models developed by the Actuarial Society, 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. 
 
Expense assumptions
Future expense assumptions reflect the expected level of expenses required to manage the in-force covered business, including investment in systems required to support that business, and allow for future inflation. The split between acquisition, maintenance and extraordinary project expenses is consistent with the statutory valuation assumptions and based on actual expenses incurred. 
 

Project expenses

In determining the value of in-force covered business, the present value of projected expenses for certain planned projects focusing on both administration and existing distribution platforms of the life insurance business is deducted. Although these projects are of a short-term nature, similar projects may be undertaken from time-to-time. No allowance is made for the expected positive impact these projects may have on the future operating experience of the Group. 

Special development costs that relate to investments in new distribution platforms are not allowed for in the projections. The actual costs relating to these projects are recognised in the earnings from covered business on an accrual basis.
 

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 covered business and value of new business, as they are incorporated in the valuation of the Sanlam Investments businesses at fair value. 
 

Taxation

Projected taxation is based on the current tax basis that applies in each country. 

Allowance has been made for the impact of capital gains tax on investments in South Africa, assuming a five-year roll-over period.

Allowance is made for secondary tax on companies (STC) in the value of in-force covered business and the value of new business at a rate of 10% by placing a present value on the tax liability generated by the net cash dividends paid that are attributable to covered business. It is assumed that all future dividends will be paid in cash.

No allowance was made for tax changes announced by the Minister of Finance in his budget speech in February 2011.
 
Earnings from covered business
The embedded value earnings from covered business for the period are equal to the change in embedded value, after adjustment for any transfers to or from discretionary capital, and are analysed into three main components: 
 
> Value of new business
The value of new business is calculated at point of sale using assumptions applicable at the end of the reporting period.
 
> Net earnings from existing covered business
Expected return on value of covered business
The expected return on value of covered business comprises the expected return on the starting value of in-force covered business and the accumulation of value of new business from point of sale to the valuation date.
 
Operating experience variances
The calculation of embedded values is based on assumptions regarding future experiences including discontinuance rates (how long policies will stay in force), risk (mortality and morbidity) and future expenses. Actual experience may differ from these assumptions. The impact of the difference between actual and assumed experience for the period is reported as operating experience variances.
 
Operating assumption changes
Operating assumption changes consist of the impact of changes in assumptions at the end of the reporting period (compared to those used at the end of the previous reporting period) for operating experience, excluding economic or taxation assumptions. It also includes certain model refinements.
 
> Expected investment return on adjusted net worth
The expected investment return on adjusted net worth attributable to shareholders is calculated using the future investment return assumed at the start of the reporting period.

The total embedded value earnings from covered business include two further main items:
 
> Economic assumption changes
The impact of changes in external economic conditions, including the effect that changes in interest rates have on risk discount rates and future investment return assumptions, on the embedded value of covered business.
 
> Investment variances
Investment variances – value of in-force
The impact on the value of in-force business caused by differences between the actual investment return earned on policyholder fund assets during the reporting period and the expected return based on the economic assumptions used at the start of the reporting period. 
 
Investment variances – investment return on adjusted net worth 
Investment return variances caused by differences between the actual investment return earned on shareholders’ fund assets during the reporting period and the expected return based on economic assumptions used at the start of the reporting period.