Report by the group chief executive

"Sustainability is the capacity to endure."

Is the Sanlam business sustainable? If yes, is it contributing in a meaningful way to the sustainability of those who support it and keep it relevant?

The word sustainability is derived from the Latin sustinere, which means to hold up. In the English language there are several definitions for sustainability, depending on your dictionary. There is, however, one that struck a chord with me: “Sustainability is the capacity to endure.”

To rephrase the opening question, is Sanlam capable of enduring? And is Sanlam assisting its clients, its distribution channels, its employees, its investors, and the country to endure?
Our results certainly show that we have endured, not only in 2010, but also in 2008 and 2009. The Sanlam Group has displayed consistent resilience, powered by a robust strategy, in the three most trying years since I took over as Chief Executive of the Sanlam Group eight years ago. In 2008 the world's financial systems came severely unglued. In 2009 the world remained in crisis and South Africa was not spared. In 2010 some cautious optimism surfaced, but the operating environment remained extremely tough.

Our final results for 2010 confirm that Sanlam is a sustainable business that has achieved growth even under the most challenging conditions. The year under review was marked by the impact of lower short-term interest rates, a stronger rand, and a tougher claims environment. Despite this the Group's gross value of new business (VNB), a key indication of profitable new business growth in our life insurance business, grew by 11% to R762 million. New business flows were up by 3% on 2009, and net operating profit increased by 22% to R3,3 billion.

Our strategy, which has proved resilient and sustainable, was fundamental in helping us to once again deliver a solid set of results. The five pillars that continue to make up our strategy are: optimal capital utilisation, earnings growth, costs and efficiencies, diversification and transformation. By focusing resolutely on these five pillars, we have achieved market-leading growth over the past seven years and have transformed Sanlam into an efficient and profitable company with a healthy capital position. 

Performance highlights

The Group showed strong resilience in an ongoing adverse business environment to achieve satisfactory operating results for 2010. The diversified nature of our operations contributed to strong operational performances from our retail life businesses and our short-term insurance operation Santam. This largely offset some deterioration in the operating results of the investment, employee benefits and capital market operations. Despite the pressure on earnings in 2010, the core operations of all the major Group businesses remain sound.

The following are some of the salient results:
> Net result from financial services per share up 23%
> New business volumes increased by 3% to R106 billion 
> Gross VNB margin of 2,79% compared to 2,61% in 2009 
> Return on Group Equity Value per share of 18,2% 
> Dividend per share increased by 11% to 115 cents 

2010 – How did we do?

The year under review was a roller-coaster ride, but this did not come as a surprise. Most of Sanlam’s major focus regions struggled with GDP growth, with the exception of India. Africa and the UK proved particularly sluggish.

In 2010 South Africa was trying to recover from its first recession in 17 years, which struck in 2009, and which left our country reeling from more than one million job losses. Despite having experienced a buoyant first quarter, economic growth in South Africa slowed markedly in the second and third quarters, with the 2010 FIFA World Cup providing only a brief spurt in spending.

Globally, the defining event of 2010 was the developing sovereign debt crisis in Europe, bringing with it the possibility of a second leg to the global banking crisis emanating from European banks’ exposure to credit-impaired sovereign bonds. Unresolved imbalances in the global economy caused further tension, resulting in currency war accusations flying between the US and China. The inability of the G20 to resolve the issue of global imbalances raised fears of the adoption of protectionist measures that would set back global growth prospects.

Emerging markets suddenly looked attractive, being able to provide better economic fundamentals than many of the developed countries. Increased capital flows to emerging markets, including South Africa, caused currencies to appreciate sharply in response. The rand was no exception.

The financial markets had a major impact on our reported results in 2010:
> The rand maintained its strength for most of 2010 and appreciated against the currencies of most of our foreign businesses. This impacted negatively on the financial results of our businesses in the UK, India and the rest of Africa. 
> Despite the strong rebound in equities from September 2010, the equity market underperformed on a relative basis in 2010 compared to the strong performance in 2009, impacting negatively on headline earnings. Lower volatility also limited profitability in our capital management operations. However, average equity market levels were substantially higher in 2010 than in 2009, resulting in higher asset-based fee income. 
> The average short-term interest rate in 2010 was 2% lower than in 2009. This had a significant impact on the Group's interest earnings from working capital, resulting in substantially lower contributions to operating results and the net result from financial services. Net investment returns on cash in the capital portfolio were also lower. Money-market funds were less attractive and this decreased fund flows to our investment and savings businesses. Sales of guaranteed products in the single premium space were considerably lower as a direct result of the lower interest rate environment. 
> While lower interest rates brought some relief for debt-ridden consumers, the high cost of living combined with high levels of unemployment resulted in a subdued demand for retail financial products, mainly in the middle, self-employed and professional markets. Affluent market sales, however, showed good growth. 
We are exceptionally proud of the fact that Glacier by Sanlam, our affluent market offering, became the platform provider of choice in 2010, especially for brokers. Since 2006 it has grown from the third biggest platform to the biggest by the end of September 2010. Glacier reached gross sales of R15,8 billion for 2010.

Similarly, Sanlam Private Investments (SPI), our investment house that manages assets for affluent private individuals and other entities, managed to attract a net inflow of R5 billion for 2010, despite the downturn in the markets. This business has proved that it is capable of performing well on a sustainable basis.

Despite the economic challenges for consumers, we managed to maintain one of the best retention rates in the industry. Overall persistency and retention levels continued to improve, with 2010 levels the highest ever. We attribute this largely to our client-centric approach, which includes providing clients with appropriate financial advice. 

2010 – Key achievements

> Sanlam International Investment Partners (SIIP) manages Sanlam and external client international assets of more than US$4,5 billion. SIIP continued its strategy of acquiring stakes in carefully selected, specialist investment management businesses during 2010, buying a stake in Centre Asset Management, a New York-based equity manager, as well as in Exclusive Holdings, a European property manager. 
> Glacier International, the international division of Glacier by Sanlam, was launched at the beginning of 2010 in partnership with US-based Milliman, one of the top risk management companies in the world. This new offering was set up to provide affluent South African clients with innovative ways of investing offshore. The new offering became available in October 2010 and we are confident that this offering will rapidly gain traction. 
The intensity of flood and drought events is predicted to increase. These events will have direct economic impacts through flood damage and water shortages during drought periods.
Key to the sustainability and ongoing growth of Sanlam UK is the success of the new Sanlam UK Distribution Services division. This division was set up early in 2010 to assist its underlying businesses in achieving greater new business volumes by providing intermediary agencies with expert support in the fields of tax, risk management and business consultancy. Sanlam UK will also be leveraging off the strength of the Sanlam brand, which has become well recognised and respected in the UK, by rebranding and repositioning its subsidiaries in the first half of 2011. 
> Sanlam Personal Finance (SPF) launched the pilot version of our new Sanlam Empowerment Funds in October 2010. These funds offer black clients access to empowerment funding asset classes and direct investment into BEE deals. Initial feedback from the market has been positive. 
> Sanlam Personal Loans (SPL) expanded its client database to offer loans to selected Sanlam clients in the lower middle market from November 2010. SPL also started a pilot project offering loans to selected Sanlam clients in the entry-level market as well as the segment of the middle market with a poorer credit history. 
> As part of our strategy to tap into new markets, SDM made good progress with a number of new initiatives in 2010. These include launching a new life company in Uganda, acquiring a stake in NICO Life in Malawi and finalising a partnership with First Bank in Nigeria. In addition, Safrican performed very well. The group risk business and agency force in Sanlam Sky Solutions performed above expectation. SDM also managed to establish a medical business, Sanlam Health International in 2010 which is operational in a number of African countries. In South Africa, SDM also launched icover which provides affordable and easily accessible funeral cover to low income earners. 
> SDM's joint venture with the JD Group became operational during 2010. 
> The sale of MiWay, the new direct short-term insurance venture, to Santam was finalised in 2010. Santam will reimburse Sanlam's investment of R240 million into MiWay, while Sanlam will also share in any increase in the valuation of MiWay up to December 2013. Sanlam also retains access to the MiWay structures to enable it to distribute other financial services products. 
> Following the merger of Telemed with Bestmed in 2010, Sanlam Healthcare Management acquired Eternity Health Administrators to become the fourth largest medical administrator in South Africa. 

Strategic relevance

Overall, our focused strategy continued to serve the Group well in 2010. Below follows a brief overview of how the five pillars of our strategy proved relevant under the economic and market conditions that prevailed. 

Optimal capital utilisation

The Group remains well capitalised with identified discretionary capital of R4 billion as at the end of December 2010. Disciplined use of discretionary capital remains a key commitment of the Group. While it was prudent to use the discretionary capital available to us as a buffer in 2009, it had been our intention to efficiently redistribute some of this capital into profitable growth opportunities in 2010.

Unfortunately, however, very few sizeable opportunities presented themselves that would have yielded the required returns as a result of the prevailing difficult economic circumstances. While we certainly made the effort, we were unable to find a suitable target acquisition of the scale required to meet the desired hurdle return.

We therefore used R887 million of the R3,5 billion in discretionary capital available at the beginning of 2010 to buy back 37 million Sanlam shares. A further R62 million was used to acquire 610 000 Santam shares, increasing the effective Sanlam holding to 57%. A further R320 million was used to fund a number of smaller new business ventures. With the addition of fund returns and the identification of additional surplus capital we ended 2010 with discretionary capital of R4 billion.

We are mindful of the fact that the high levels of discretionary capital contribute to lower overall Return on Group Equity Value (RoGEV) as the capital is mainly invested in cash, which is yielding a return substantially below the required hurdle rate. Therefore, unless we can find ways of applying the discretionary capital productively, we will have to return it to shareholders through share buy-backs or special dividends.

However, our clear preference is to use this capital for appropriate growth opportunities. We are currently pursuing a larger number of smaller deals that are greenfields in nature in order to meet the required hurdle. Needless to say, strict governance is being applied to this process.

Earnings growth

Ongoing challenges in the business environment put a damper on our earnings for 2010. Nevertheless we still managed to increase net result from financial services per share for 2010 by 23% compared to 2009. Normalised headline earnings per share were up by 15% on 2009, with flat relative investment market returns in 2010 offsetting the growth in operating earnings.

Sanlam Developing Markets (SDM) certainly contributed towards our earnings growth for 2010. Overall, SDM experienced an 18% growth in new business volumes for 2010, with all geographical regions having contributed despite the strengthening of the rand. SDM also achieved solid earnings growth of 34% due to a successful diversification strategy.

Sanlam UK produced much improved results for 2010. This is reflective largely of the stabilisation and recovery of financial markets over much of the period, a more positive contribution from all businesses and the absence of several material one-off costs in the cluster.

Despite ongoing strain on discretionary retail savings, Sanlam Personal Finance recorded a 7% increase in new investment business in South Africa. This was, however, offset by lower unit trust sales in Namibia against a high base in 2009.

Gross investment flows in Sanlam Investments were up by 1%. Sanlam Investments' assets under management amounted to R491 billion on 31 December 2010, up from R441 billion at the end of December 2009.

Sanlam Investment Management (SIM) experienced healthy net client cash flows. This resulted in good profitability relative to 2009 profits. The majority of SIM's funds under management outperformed their benchmarks on a one-year rolling basis to end of December 2010 and on a rolling three-year basis.

Sanlam Multi Manager and the international businesses achieved strong new business volumes, offset by lower money-market collective investment and private investment inflows.
In terms of the supply of water we will need to embrace the fundamental concept that water does not come from a tap, nor even a dam. Water is provided to us by healthy and functioning ecosystems.

Net investment inflows of some R15 billion (excluding white label) for the twelve months, versus R8,8 billion in 2009, are particularly satisfactory in the current business climate.

Sanlam Employee Benefits (SEB) had a disappointing 2010, with new flows down by 70%. Specific focus will be given to growing sustainable market share, supported by consistent first-class service delivery to clients. Net result from financial services, however, increased by 11% to R171 million. 

Cost and efficiencies

Over the past two years our businesses were forced to shift their focus from growth to coping with the very difficult economic conditions. Capital preservation was the highest priority, together with initiatives aimed at lowering risks and costs in most businesses.

In addition, a number of significant regulatory changes have been introduced in recent years and more are on the horizon for South Africa as detailed by our Chairman in his report. In addition regulators in the UK and India are also introducing changes that impact on the way we do business in these areas. Implementation of these changes is placing strain on our resources.

We are already placing strong focus on preparing and gearing up for the new Solvency II environment. The Financial Services Board (FSB) published the Solvency Assessment and Management (SAM) Roadmap early in November 2010, stipulating an aggressive implementation timeline. As expected it follows the Solvency II regulations in Europe quite closely. The good news is that initial actuarial assessments show that Sanlam's capital position is healthy.

In 2010 we reviewed our structures to align them even closer to our strategy. The key is on improved focus and co-ordination across businesses in order to deliver on promises. Our goal is to raise additional profit of R300 million over the next two years, simply by becoming more efficient. To realise this goal we launched the Sanlam for Sanlam programme in November 2010.

The Sanlam for Sanlam programme encourages effective collaboration between clusters with the goal of achieving greater growth and profitability. One of Sanlam's great strengths lies in the fact that it can compete as a group. By collaborating more we can create further value for the Sanlam Group as a whole.

The programme also aims to reduce costs. Cost-cutting initiatives on the cards for 2011 include moving Johannesburg-based groups currently spread across several buildings under one roof. A decision has also been taken to move Sanlam and Santam onto one IT platform. A substantial amount of money is being invested in systems renewal and IT upgrades.

In addition, Sanlam for Sanlam aims to make it easier for clients to interact with the company. Sanlam Developing Markets and Sanlam Personal Finance have therefore integrated their service offices.


Strategic diversification, combined with prudent practices, provided the Sanlam Group with the resilience needed to endure the severe economic downturn over the past three years.

Since 2003 we have successfully diversified our mix of business as well as our geographic exposure to different markets.

In South Africa for instance, following the merger of Telemed with Bestmed in 2010, Sanlam Health Management (SHM) acquired Eternity Health Administrators to become the fourth largest medical aid administrator in South Africa.

Our African operations, managed through SDM, form an integral part of Sanlam's diversification strategy. Africa offers strong economic growth and good margins, and for now, competition from other industry players remains low. Our operation in Ghana, for example, is the fastest growing business in our portfolio outside of South Africa.

We expanded into Uganda in the second quarter of 2010 and believe this market offers excellent growth potential. Sanlam Life Uganda is a new long-term insurance company 100% owned by Sanlam.

In 2011 we aim to further diversify our financial services offering by venturing into the medical insurance business with some of our African operations, starting with Tanzania and Zambia. We will also be expanding into more developing countries and have identified opportunities in other countries including Swaziland, Zimbabwe and Angola.

Sanlam International Investment Partners (SIIP) has made good progress in delivering on its objective of establishing a competitive global asset management competence for the Sanlam Group. SIIP has a strategic objective to expand the Group's asset management footprint through direct investment in carefully selected specialist investment management businesses in specific regions. Boasting nine key partnerships at the end of December 2010, SIIP grew international non-Sanlam originated assets by R5,8 billion in 2010. SIIP manages most of the Sanlam Group's international assets, worth R31 billion across various international funds.


The financial services sector, in which Sanlam is a key stakeholder, is the country's biggest business sector, representing 25% of the country's GDP. Therefore, it is vital for the country that our industry remains profitable. In order to maintain a healthy bottom-line we need to ensure our sustainability and relevance by transforming in a meaningful way. Only through focused transformation will we ensure that this business remains viable for generations to come. For this reason transformation is one of the pillars of our business strategy.

In the opening line of this Report, I posed the question whether Sanlam is contributing in a meaningful way to the sustainability of those who support it and keep it relevant, namely our clients, our distribution channels, our employees, our investors, and the country as a whole. In other words, are we giving as much attention to our triple bottom-line as we are focused on our bottom-line? The triple bottom-line measures a company's economic, social and environmental impact.

Our achievements in this regard are detailed in the Group Sustainability Report, in this Integrated Annual Report as well as the full Sustainability Report published online. I would, however, like to report on some of our key achievements for 2010. 
> Sanlam has been actively transforming ownership of the Group since 1993. At the end of 2010, black shareholding in the Sanlam Group stood at close to 20% as measured according to the formulas prescribed by the dti's BEE Scorecard. 
> I am exceptionally proud of the role our industry played through the Association for Savings and Investment South Africa (ASISA) in helping to resurrect the Financial Sector Charter. I am pleased that the first phase was gazetted before the end of 2010 and look forward to seeing the finalisation of the second phase early in 2011.
> Transformation in terms of staff composition and the development of an equitable workplace remains a business imperative. Our revised Group Policy on Employment Equity was approved early in 2010. In summary, we aim to increase the current total black staff complement from the baseline in 2009 of 54,08% to 62,72% by 2012. The biggest increase should occur within the middle management level. At the end of 2010, our black:white employee ratio was 60:40. 
> The financial services industry continues to experience a shortage of skilled black staff and a high turnover of staff therefore continues to be of concern. To counter this over the long term, focused development of internal staff members is encouraged with the aim of growing Sanlam's own supply of talent. During 2010, Sanlam spent approximately R59 million on training and development. 
> For the seventh year in a row, Sanlam qualified for inclusion on the JSE's Socially Responsible Investment (SRI) Index and was listed as one of the best performers for the year. 
> We submitted our first Progress Report to the United Nations Global Compact (UNGC) in 2010. The UNGC is a policy initiative for businesses that are committed to aligning their operations and strategies with 10 universally accepted principles in the areas of human rights, labour, environment and anti-corruption. We became a member of the UNGC in 2008. 
> As a signatory to the United Nations Principles for Responsible Investment (UN-PRI), we continue to search for ways to address those principles incrementally. We voluntarily completed the UN-PRI Annual Report for the first time in 2010. 
Water scarcity should be at the heart of economic development planning, which means putting extra effort into increasing water efficiency and securing our water supplies.
Sanlam staff took transformation to a new level in 2010 with the Lighter Side of Life challenge. I am proud of our people who participated in this voluntary weight-loss programme, which focused on healthy weight loss through sustainable changes in lifestyle. Cumulatively the 25 participants lost 461.5 kg. According to the Medical Nutritional Institute these results are well above average. Since the wellbeing of our staff is critical, this programme will be repeated in 2011. 

Other progress

> Legal cases
  We finalised three prominent longstanding legal cases involving Sanlam in 2010 (one dating back to the 1970s). They were the claims against Sanlam for Topmed and Selfmed reserves and pension fund surpluses of the Datakor and Picbel Pension Funds.

In the interests of ensuring the sustainability of our business and minimising the financial impact of these legal cases, sufficient reserves to cover the full awards had been set aside when these claims were first instituted.

In an industry like ours, which is driven by people and contracts, mistakes are unfortunately unavoidable. Also, expectations, conditions, regulations and technology often change over the terms of such contracts, sometimes resulting in protracted court cases and settlement agreements.

What is important, however, is that we make good in a fair manner where we have made mistakes. We have been accused of taking too long to resolve the issues in the three cases concerned. However, what is often not appreciated is that fair settlements are usually only reached through protracted processes, often involving legal procedures and the involvement of independent outside experts. I believe that it is Sanlam’s moral duty to ensure that our staff, clients, shareholders and other stakeholders are treated fairly. This is what we have consistently done, even if it has taken time to resolve.

It is also important to note that in most cases, the details of the settlements we arrive at are confidential and that it is therefore often difficult to publicly comment on these cases. 
> Accolades
  At Sanlam, we always strive to be the best at what we do, and 2010 was no different. In this regard, the Group achieved numerous accolades in various spheres of the business, some of which were: 
  > In 2010, the Ombudsman for Long-term Insurance rewarded Sanlam Life for consistent service to their office over the past ten years. This is the first time that the Ombudsman has publicly acknowledged an insurer for service. 
  > Our vision is to be the leader in wealth creation and protection. Our leading position amongst our peers in this regard was confirmed by the December 2010 results of the Company Confidence Predictor (Campbell Belman) which also indicated our continuing improved confidence ratings in the markets. 
  > We also earned top position in a number of categories of the Financial Intermediaries Association (FIA) Industry Recognition Awards. These awards pay tribute to those insurance product providers who receive favourable ratings in the FIA’s annual intermediary satisfaction benchmark survey, conducted with almost 3 000 independent brokers. 
  > The Business Times Top-100 Companies survey, which rates companies in terms of the most wealth created for shareholders over specific periods, rated Sanlam at the top of the financial services industry in the Top-40 Index and 10th overall. 
  > The Investment Analysts Society of Southern Africa (IAS) named Sanlam as the company with the best financial reporting and communications in the insurance sector to the investment community in 2010. This is the 10th award from IAS since our listing on the JSE 12 years ago. 
  > The UK’s Investment Week 2010 Fund Manager of the Year Awards named Sanlam Investment Management’s Global Fund manager, Kokkie Kooyman, the winner in the Financial Specialist category. 

2011 – Gearing for sustainable growth

The South African economy is not going to stage a large-scale recovery in 2011. Instead we expect slow, yet steady progress, led by household consumption and followed by a turnaround in capital spending by the business sector. This is likely to lead to a current account deficit, which could curb the rising trend in the exchange rate.

Risks facing us over the shorter term are volatile markets and a continued weakness in the economies of developed markets. Of concern is that the economies of most African countries tend to lag the developed world. Therefore, while slow recovery is starting to set in elsewhere, countries like Botswana are still feeling the recessionary pressures.

The outlook for the financial services business environment is not buoyant, but we expect to see modest growth in 2011. Cautious optimism is therefore in order for 2011.

We have identified the following priorities for 2011:
> Pursue profitable growth opportunities with the aim of efficiently redistributing some of our discretionary capital. 
> Expand our customer base in South Africa through innovation in product design and distribution mechanisms. 
> Diversify into African countries that present growth opportunities and expand our offering across our African operations. Our African health management business is ready for roll-out in selected markets. 
> Significantly expand our adviser and broker footprint across all our retail businesses in South Africa, Africa, the UK and India. 
> Grow our medical business aggressively.
> Focus on exploiting synergies across our business through the Sanlam for Sanlam programme. 
> Apply creative thinking to attract and retain previously disadvantaged people at middle and senior management. 

In closing

Big business has a vital role to play in ensuring economic growth, but it must also play a stronger role in helping sustain our growth, and helping to protect the functioning of aquatic ecosystems.
We have worked hard to get fighting fit and all the key elements are in place for the Sanlam Group to continue on its growth path. We are operating off a solid base in South Africa and we are well positioned in markets that continue to present huge growth opportunities, namely Africa, India and the UK. I am proud of the business that we have collectively built and I am confident that our model is sustainable.

Yes, the past three years have proved challenging, but adversity also has the tendency to highlight weaknesses as well as opportunities that are not always obvious. I am confident that we have significantly strengthened vulnerable areas of our business and that we have identified further growth opportunities that we may have missed in the past. The diligence and enthusiasm with which the Sanlam team has tackled the work at hand has been extremely gratifying and I would like to thank each and every Sanlam employee, our intermediaries and my management team for their support during 2010. I would also like to thank the members of the Sanlam Board for their guidance, vision and support. 

In June 2010 we said goodbye to Roy Andersen after six years as chairman of the Sanlam Group. I would like to express my appreciation to Roy for the valued role he played during this time. Desmond Smith is certainly no stranger to the Sanlam Group and he stepped into the role of new chairman with both sleeves rolled up. I look forward to working with Desmond as we step it up along our growth path.

There will be new obstacles as we navigate the ever changing business and regulatory environment, but change is good. Change is what keeps me ticking and enthusiastic about the plans I have for Sanlam. Supported by a stable management team with vast experience, surplus capital waiting to be deployed, and a proven strategy in place, the Sanlam Group remains well positioned to continue to embrace sustainable growth.
Johan van Zyl
Group Chief Executive