annual report 2002 - sanlam shared documents... · (4)ltrr headline earnings adjusted for the...
TRANSCRIPT
T h i n k i n g a h e a d
A n n u a l R e p o r t 2 0 0 2
Contents
2 Business Structure
3 Salient Features
10 Non-executive Directors
12 Report of the Chairman and acting
Chief Executive
22 Executive Committee
24 Statement on Corporate Governance
38 Introductory Sustainability Report
48 Financial Review
58 Business Reviews
• Sanlam Life
• Sanlam Investment Management
• Sanlam International
• Gensec Bank
• Santam
84 Annual Financial Statements
147 Report on the Sanlam
Group Embedded Value
151 Definitions and Glossary of
Technical Terms
152 Notice of Annual General Meeting
154 Shareholding and Administration
New business embedded value margin increased from 13,2% to
14,7%
Embedded value of new business increased by 10% to
R320 million
Operating profit of R2149 million
• Excellent underwriting results from Santam: up 46%
•11%growth in Sanlam Life operating profit
LTRR headline earnings of R3 227million(122,7 cents per share)
14%growth in Comparable LTRR headline earnings
(cents per share)
Dividend increased to 37cents per share
Page 1
Highlights
Page 2
Business Structure
Sanlam LifeSanlam Life is a major provider of life
insurance, retirement annuities, savings
products, unit trusts and trust services
to individuals and the second largest provider of
investment and risk products to group funds
and schemes in South Africa. It also provides
administration, actuarial and consulting
services to the group retirement industry and
money transfer services.
Sanlam Investment Management ServicesSIM is South Africa’s second largest investment
manager measured by assets under manage-
ment, providing traditional and alternative
investment products to institutional
and retail clients.
Sanlam InternationalSanlam International operates an integrated
business complex targeting affluent and
institutional markets, combining
actuarial and investment consulting,
manager of managers investment
management, stockbroking, discretionary
investment management and independent
financial advisory services.
Gensec BankGensec Bank provides investment banking
solutions for the South African savings
industry, public sector enterprises and
corporates.
Gensec Property ServicesGensec Property Services undertake letting,
rental collection, marketing, contracting and
administration services.
Santam – 54,1% (strategic investment)Santam is the largest short term insurance
company and market leader in the motor and
personal insurance sector in South Africa
(43,8% held by shareholders’ funds).
Absa – 23,0% (associated company)Absa is one of the largest commercial banks
in South Africa (19,2% held by
shareholders’ funds).
Page 3
Salient Features
for the year ended 31 December 2002 2002 2001
SANLAM LIMITED GROUP
Operating profit before tax R million 2 149 2 092(1)
Headline earnings(2) R million 2 280 2 628
Headline earnings based on the LTRR(3) R million 3 227 3 534
Net operating profit per share cents 56,3 62,9
Headline earnings per share cents 86,7 99,1
Headline earnings per share based on the LTRR(3) cents 122,7 133,2
Comparable LTRR headline earnings per share(4) cents 134,4 117,6
New business volumes R million 32 257 36 581
Net outflow of funds R million (3 934) (950)
Embedded value of new business R million 320 290
Life insurance new business APE(5) R million 2 179 2 204
New business embedded value margin % 14,7 13,2
Embedded value per share cents 1 032 1 167
Dividend per share cents 37 35
FINANCIAL RATIOS
Return on average monthly shareholders’ funds
– Operating profit after tax % 7,2 8,2
– Headline earnings % 11,0 12,9
– LTRR Headline earnings % 15,6 17,4
Return on embedded value(6) % (8,9) 12,3
Group administration cost ratio(7) % 34,4 35,2
Group operating margin(8) % 17,0 18,4
SANLAM LIFE INSURANCE LIMITED
Shareholders’ funds to total policy liabilities % 13 14
Shareholders’ funds to non-market-related policy liabilities % 20 22
Capital adequacy requirements covered times 1,7 2,8
Notes(1)Operating results for 2001 have been reclassified to reflect the current reporting structure.(2)Headline earnings = Net operating profit and investment income.(3)LTRR headline earnings = Net operating profit and total investment return based on an expected long term rate of return.(4)LTRR headline earnings adjusted for the impact of Absa’s Unifer losses, capital gains tax, reversal of surplus tax provision and a change
in the recognition of currency translation differences. (5)APE = Annual premium equivalent and is equal to new recurring premiums (excluding indexed growth premiums) plus 10%
of single premiums.(6)Growth in embedded value (with dividends paid added back) as a percentage of embedded value at the beginning of the year.(7)Administration costs as a percentage of income earned by the shareholders’ funds less sales remuneration.(8)Operating profit as a percentage of income earned by the shareholders’ funds less sales remuneration.
Page 4
innovaLeadership through
✓18 new products launched in 2003
✓Gensec Bank concludes innovative joint venture with
Imperial Holdings to form Safair Lease Finance
✓Established the Sanlam Development Fund of Funds
✓Launched “Aggressive Ideas for Innovation” programme
among all staff
✓Launched Investment Development Programme
for black professionals
Page 5
tion
Page 6
investLeadership through
✓Generally improved performances from Sanlam
Investment Management
✓Attracted some of the best investment professionals in
the country to Sanlam Investment Management
✓Raging Bull Award for Sanlam Global Trust
✓29% of Sanlam unit trusts in top quartile and 76% in the
top half over a 12-month period by year-end
✓Sanlam Investment Management moves from 8th to 6th
position on Alexander Forbes Large Manager Watch
Page 7
ment
Page 8
transfoLeadership through
✓Black Economic Empowerment Committee of
Board established
✓Procurement programme finalised
✓Actively involved in industry deliberation on an equity
charter for the finance sector
✓Steady progress in the participation of empowerment
groups in ownership and control structures
✓Solid progress on employment equity – more than 30%
of staff are black and more than 60% female
✓One third of advisors corps is black
✓Corporate Social Investment Programme realigned
Page 9
rmation
Page 10
Non-executive Directors as at the date of this report
T Vosloo (Ton) (65)D Phil (hc) UOFS; DEcon (hc) US
Appointed 1989Chairman since 2002Chairman of Naspers Limited, MIH HoldingsLimited, MIH Limited, WWF SA and Cape Philharmonic Orchestra and director of several other companies
JPL Alberts (Johan) (60)SASS, BCom, CA (SA), IAMP (Geneva)
Appointed 1995Businessman and director of Sanlam LifeInsurance Limited and several other companies
DC Brink (Dave) (63)MSc Eng (Mining), DCom (hc) (UPE)
Appointed 1994Chairman of Murray and Roberts HoldingsLimited and Unitrans Limited, Deputy Chairmanof Absa Limited and director of BHP/Billiton Limited, Billiton PLC and Sappi Limited
AS du Plessis (Attie) (59)BCom, CA (SA), Adv Dip Tax Law, AMP(Harvard), AEP (Unisa)
Executive director (until 28 February 2002)Non-executive director (from 1 March 2002)Chairman of Gencor Limited, Director of AbsaLimited and several other companies
TS Gcabashe (Thulani) (45)BA
Appointed 2001Director of Eskom Enterprises (Pty) Limited
VP Khanyile (Vusi) (52)BCom (Hons)
Appointed August 2002Chairman Thebe Investment Corporation Limitedand chairman/director of several other companies
CE Maynard (Carmen) (50)MCom (Wits)
Appointed 2001Director of Sanlam Investment Management,Trans Caledon Tunnel Authority and othercompanies
DNM Mokhobo (Dawn) (54)BA (Social Sciences)
Appointed 1996Managing Director of MBM Change Agents(Pty) LimitedChairperson of Tsebo Outsourcing GroupDirector of Nozala Investments (Pty) Limited,Engen Limited, Sanlam Life InsuranceLimited and other companies
Prof AF Perold (André) (50)PhD, Mms, BSc (Hons)
Appointed 2001George Gund Professor at Harvard Business SchoolDirector of Merrill Lynch InvestmentManagers Mutual Funds, Genbel SecuritiesLimited and Gensec Bank LimitedUSA Citizen
GE Rudman (George) (59)BSc, FFA, FASSA, ISMP (Harvard)
Appointed 2001Chairman of Sanlam Life Insurance Limitedand director of Santam Limited
PEI Swartz (Peter) (61)Ad Ed Dip
Appointed 1994Director of Absa Limited, Distell Limited,Ellerine Holdings Limited, New ClicksHoldings Limited, Sancino Project Limitedand other companies
E van As (Eugene) (64)
Appointed 15 January 2003 Chairman of Sappi Limited (RSA) anddirector of several other companies
JJM van Zyl (Boetie) (64)Pr Eng, BSc Eng
Appointed 1995Lead DirectorDirector of Sanlam Life Insurance Limited,Naspers Limited, Murray and Roberts Holdings Limited and other companies
Audit and Risk committeeJPL Alberts (Chairman)
GE Rudman
Prof AC Bawa (resigned 31 March 2002)
PEI Swartz
CE Maynard (from 1 March 2002)
Human resources committeeT Vosloo (Chairman)
DC Brink
JJM van Zyl
Nomination committeeDC Brink (Chairman)
DNM Mokhobo
BP Vundla (resigned 31 March 2002)
Black economicempowerment committee DC Brink (Chairman)
T Gcabashe
DNM Mokhobo
Special committeeAll non-executive directors, apart from thechairman and any directors who served in anexecutive capacity less than three years ago(AS du Plessis and GE Rudman).
From left to right (front): Carmen Maynard, Dave Brink, Attie du Plessis, Ton Vosloo, Dawn Mokhobo, George Rudman,
Johan Alberts, Boetie van Zyl
From left to right (back): Vusi Khanyile, Peter Swartz, Eugene van As, Thulani Gcabashe, André Perold
Page 11
Dear shareholders
We report on our results and activities during the
past year, which contains a combination of solid
achievements, innovative actions and developments and
also some results that were less than satisfactory.
A number of forces coalesced to make the past year
one of the most demanding periods in Sanlam’s recent
business history. The negative trends in the global
economy which had an impact locally, as well as the
problems the brutal equity markets have created on the
balance sheets of the international insurance industry,
particularly companies in the United Kingdom, were
among the challenges the Group had to face. At the
same time, Sanlam recognised that the dynamics of
South Africa and the rapidly changing financial services
industry within this country, require that to succeed an
organisation must evolve, anticipating the trends and
the demands of the market. To do this called for
renewed focus and some repositioning.
Sanlam, which today is one of the largest financial
services groups based in South Africa with assets under
management of R246 billion, has been at the forefront
of a change process and this report highlights our
results and achievements.
Operating environment
The results were recorded against a background of a
weak global economy and a rise of 4 percentage points
in the domestic prime overdraft rate during the course
Report of the Chairman and Acting Chief Executive
Page 12
The Sanlam BusinessStrategyOur business strategy is underpinned bythe three themes of
• Domestic growth to increase our share of the market in South Africa.
• Client relationships to build strong and mutually beneficial relationshipswith all our clients in order to ensuretheir loyalty to us.
• Internationalisation to become a South African financial servicesorganisation with an international focus by identifying new and profitableopportunities in the global market-place.
Ton Vosloo (left) Chairman
Flip Rademeyer (right) Acting Chief Executive
Page 13
range of financial products and remains determined to
provide them with access to products typically sourced
from banks.
Overview of results
In spite of securing a 3% increase in operating
profit, the results are disappointing. They are in line
with the indications given in the trading update in
December 2002 and reflect the impact of weak
global markets on a financial services business,
which derives much of its income from investment
returns.
In summary Sanlam Life, which constitutes the
bulk of our business, turned in a sterling performance
in the challenging trading conditions, as did short term
insurer, Santam. However these results were offset by
unsatisfactory performances from Gensec Bank, in spite
of some improvement in the second half of the year and
from Sanlam International. Sanlam Investment
Management maintained its performance level with
encouraging signs of improvement towards the end of
the year.
Reflecting our continuing drive to bolster topline
growth, we succeeded in increasing financial services
income by 11% to R12,7 billion. A 17% increase in
risk underwriting claims at Sanlam Life and Santam
and the 9% rise in administration expenditure,
although well contained in an environment where the
Group invested heavily in building its international
of the year as well as extreme exchange rate volatility.
The South African economy demonstrated its resilience
in spite of the rand/dollar exchange rate appreciating by
28% during the year.
South African equity prices largely followed
movements in international markets, which took their
cue from Wall Street. While the JSE Securities
Exchange (JSE) outperformed Wall Street in the first six
months of 2002, this performance was reversed in the
second half of the year as resources stocks came under
pressure from the sharp appreciation in the rand and
concerns surrounding the impact of government’s
policy on black economic empowerment on the mining
sector. In all it was a volatile period for the financial
services industry with perhaps the most notable trend
being the continued desire of investors to move towards
more liquid, short term investments rather than longer
term life products. This checked the growth of our
individual life business.
Among other things, management was occupied
with evaluating the most appropriate way of harnessing
the Group’s 23% investment in ABSA, the imperative
being that the solution had to benefit both businesses
and deliver value to shareholders. Towards the end of
the financial year it was concluded that a full merger of
the two groups would not achieve the desired objective
of delivering value to shareholders and discussions on a
co-operation model are being pursued. Sanlam
acknowledges that its clients require a more complete
Page 14
Report of the Chairman and Acting Chief Executive (continued)
have directly, as well as in partnership with the rest
of the industry through the Life Offices’ Association
(LOA), launched consumer education programmes
to encourage more realistic expectations of benefit
returns.
The impact of the weak financial markets which
gave rise to lower investment values was also felt on
the Group’s embedded value, which at
R27,1 billion or 1 032 cents a share was below that
of the previous year. However, the new business
embedded value margin improved to 14,7%, and
moved closer to our stretch objective of an 18%
margin.
Strategy
Much energy and many Group resources were
devoted to progressing the Group strategy in the
period and this investment is starting to pay
dividends. To recap, our vision – to be the leader in
wealth creation – supports the definition of Sanlam
as a group of businesses focussed on building,
preserving and growing wealth for our clients.
The vision is founded on three themes:
• Superior client relationships,
• Domestic growth and
• International growth.
In the area of superior client relationships, we
aim to live the Sanlam brand and provide trusted
advice and innovative solutions to our clients. In
capacity, resulted in gross operating profit of
R2,1 billion, 3% ahead of last year’s figure.
Headline earnings per share, based on a long
term rate of investment return of 13% per annum,
totalled 122,7 cents, an 8% decline on the previous
year’s 133,2 cents. On a comparable basis we
achieved an increase of 14%. As a Group we favour
this method of earnings calculation – the
recommended practice for long term insurers in the
United Kingdom – as it provides investors with a
superior measure of sustainable long term results.
Based on the sustainability of our long term
earnings and the fact that we have completed most
of the Group’s re-positioning and will concentrate
on delivering results as we move forward the board
has declared an increased annual dividend of
37 cents a share (2001: 35 cents a share).
It is pleasing to report that individual life
business performed well and new business inflows
rose by 5%, largely as a result of single premium
business, but this did not stem the net outflow from
our business. New Group business at R32,2 billion
was 12% lower than for the 2001 financial year.
We are acutely aware of, and have empathy with
some clients’ disillusionment with the effective
returns versus the projected returns on some of their
long term investments and bonus declarations. This
is an industry-wide experience and is directly linked
to declining investment markets world-wide. We
Page 15
The growth markets for Sanlam
Individual/retail • Retired
• Entry level
• Middle market
• Affluent
Self-employed/owner businesses • Entrepreneurs
• Small businesses
Employee benefits market • Public sector
• Medium sized
businesses
• Large businesses
• New economy
Throughout the Group, we have embarked on a
unified approach to tap into these clearly identified
growth market segments and can report great success in
this initiative. Our detailed analysis shows that the
small business segment contributes almost 35% to gross
domestic product and represents 55% of formal, private
sector employment. The Sanlam Nexus solution
offering was specifically developed to address this
market opportunity.
At the other end of the spectrum, the affluent
market (with a monthly household income of R30 000
plus) represents only 0,6% of the population but invests
13% of household expenditure on insurance and
savings. This is a key target market for our Innofin
products and Sanlam Personal Investments.
We are also urgently applying our minds to the fact
that our clients undoubtedly need access to certain
banking products. We recognise that to fulfil our vision
of being the leader in wealth creation, we must add
the recent past the Group has concentrated on
improving its customer relationship management
systems and integrating a lifetime value
management programme for clients. We continue
to focus on developing and delivering appropriate
client solutions that address the needs of clients in
different market segments as effectively as possible.
Products and services are sourced from across the
Sanlam Group, and draw on the resources of the
individual life, employee benefit and unit trust
business units. Our brand and distribution
capability are key strengths of the Group.
Research has shown that in 2001, for the first
time, the disposable income of black South Africans
overtook that of white South Africans. Sanlam has
identified that 43% of its target market is black and
that 57% of that market segment currently has no
insurance. Much energy has therefore been, and will
continue to be, devoted to developing our interface
with this important sector of the market.
It is significant to note that in 2002 the number
of black advisors in Sanlam increased by 64% from
400 to 655, a third of our advisor corps. Black
advisors were responsible for 35% of sales in
recurring premiums and black clients represented
44% of new recurring policies in 2002.
Page 16
Report of the Chairman and Acting Chief Executive (continued)
As we consolidate our position in the competitive
investment arena and achieve improved investment
performance figures, we will progress towards our
objective of elevating operational excellence and
expanding our presence in and share of the middle
market. In this regard a number of innovative products
and services have already been launched in response to
client needs.
It is our longer-term objective to broaden our
market base to encompass the segments of the market
that we have identified as having above average growth
potential.
On the international front, we can report
satisfactory progress. By 31 December 2002, our
international business, which was affected by a
strengthening rand and expenditure incurred in
expanding the platform, contributed 8% of Group
operating profit. Our internationalisation plan is to
build and/or buy businesses that match our niche
strategy to provide products and services to the
corporate and high net worth retirement and savings
market. The structure of our international business is
founded on providing actuarial and investment
consulting services via Punter Southall and PSolve. The
investment options we offer clients include multi-
management (via io Investors), private client asset
management (via Hichens Investment Management)
and brokerage services (via Hichens Harrison). We aim
to extend the reach of this business, by utilising
these products to our offering. We are pursuing
discussions with ABSA on a co-operation model that
will add value to both organisations.
In light of the challenging market conditions, the
Group paid considerable attention to innovative ways
of stimulating domestic growth for our products and
regaining market share. Immediate consideration was
given to improving investment performance, a key
success factor in stimulating domestic growth. With the
appointment of Johan van der Merwe as chief executive
officer at Sanlam Investment Management and a
refined investment process, a number of exceptional
investment professionals were inspired to join the
re-invigorated team.
While the Morgan Stanley World Index declined by
42,7% in rand terms during the year and the South
African All Share Index fell by 8,4% over the same
period, it is pleasing to report that the portfolios of
Sanlam Investment Management on a relative basis,
reflected generally improved performances. By the
year-end, 29% of Sanlam’s unit trusts were in the top
quartile and 76% in the top half, when measured over
a 12-month period. Sanlam Investment Management
has also moved up from 8th position to 6th position in
the Alexander Forbes Large Manager Watch over the
past year.
These heartening trends should start to translate into
improved fund flows in the year ahead but in the year under
review, the Group experienced net outflows of R4 billion.
Page 17
synergies with the life business can be further exploited
to develop appealing products for the corporate market.
At the time of writing, it appears as if the
international financial markets will remain mired in a
bear market, stifled by weak economies and the threat
of a war in the Middle East. Naturally this will have a
negative impact on investment performance in spite of
the fact that the outlook for our local markets is
reasonably optimistic. The test of our recently
strengthened and energised investment team will be to
seek those opportunities, both in the markets and via
innovative new products, that will deliver superior
returns on an appropriate risk-adjusted basis.
The investment team is well aware of the strategic
importance of delivering improved performance and is
capable of meeting that challenge.
In the area of establishing Sanlam’s integrated
business model, excellent progress has been made at
Sanlam Life. The essence of our business remains
wealth creation for our clients and that motivates our
relentless focus on providing clients with trusted advice
and superior client service from across our businesses.
The drive to broaden the product range to satisfy
all of the clients’ wealth creation needs, will also
continue.
One of our competitive advantages is our solid
distribution channel. This, coupled with our powerful
brand, are great value drivers and we will be optimising
these assets to deliver significant benefits.
independent financial advisors as the distribution
network. As in South Africa, our international business
is driving towards delivering superior risk-adjusted
returns to clients. Demonstrating the success of our
formula, the funds under advice more than doubled
to in excess of $24 billion and the number of
continuing institutional client relationships in the
consulting business increased from 310 to 450.
This provides a strong platform for our expansion
into Europe.
Focus areas for 2003
With much of the Group’s strategy now in place, our
focus for the year ahead will be on delivering value.
We have four clear areas on which we will concentrate:
• Operational performance
• Investment performance
• Harnessing the values inherent in our integrated
business model, including banking products
• Developing the four pillars of Black Economic
Empowerment
From an operational point of view we need to
address a number of issues such as improving the
Group’s operating margin through regaining lost
business and adding and retaining new business across
all the business units as well as through containing and
ultimately reducing the cost of acquiring new business.
To this end attention will be paid to the employee
benefits division where the current meaningful
Page 18
Report of the Chairman and Acting Chief Executive (continued)
Builder Fund on which we reported last year, as well as
the launch of the Sanlam Development Fund-of-Funds,
South Africa’s first private equity fund-of-funds, have
become the blue print for similar initiatives which will
be announced in the year ahead. We continue to
introduce innovative products and services that will
reach the broadest segment of our population and
satisfy their wealth creation needs.
Corporate governance
Corporate governance fell under the spotlight during
the year, in the light of corporate failures both globally
and here in South Africa. Investors, regulators and the
media focused their attention on corporate
wrongdoings and lifted the veil on many unacceptable
practices. As a Group we welcome greater shareholder
activism and accept our responsibility to be accountable
to all our stakeholders.
A detailed report on corporate governance can be
found elsewhere in this report, and we would like to draw
shareholders’ attention to the progress that has been made
within the Group in this area. We embrace the principles
of the Code of Corporate Practices and Conduct as set
out in the King Committee Report on Corporate
Governance (King II) and have taken a number of steps
towards improved compliance. A particular achievement
is the fact that a non-executive director now chairs every
subsidiary in the Group and each subsidiary’s audit
committee also has a non-executive chairman.
As is appropriate for one of South Africa’s leading
companies, Black Economic Empowerment remains
high on the agenda at Sanlam and we elaborate on our
initiatives elsewhere in this report.
Throughout the Group, employment equity will
continue to be encouraged, building on the successes
already attained. We also aim to introduce new black
shareholders into the Group and any participation will
be based on the value they are able to add to Sanlam.
The Group’s procurement policy was finalised and was
initiated during the year. It aims to ensure that our
suppliers are diverse in terms of race, gender and
disability status. In particular, Sanlam service providers
will be actively encouraged to utilise the skills of
historically disadvantaged individuals. We remain an
active participant in the economic development of the
country, not only in the economic debate and policy
formulation, but also through direct financial
investment. Initiatives such as the R2,2 billion Sanlam
Development Fund and the R500 million Community
The Values of SanlamAt Sanlam, we…
• Grow shareholder value throughinnovation and superior performance
• Lead with courage
• Serve with pride
• Care because we respect others
• Act with integrity and accountability
Page 19
The sluggish recovery in the global economy is
evident in renewed weakness in the USA, which
impacts on other regions via foreign trade links, and
weak domestic demand in the Euro zone and Japan. In
addition, at the time of writing, the uncertainty created
by the risk of war in Iraq is having a negative effect on
business confidence, but once this issue is resolved,
global economic activity could resume positively.
While South Africa’s economic outlook is robust
with inflation set to fall rapidly, creating room for
interest rates to decline during the latter half of the year,
the domestic financial markets, which tend to mirror
international bourses, are likely to remain under
pressure. Naturally this will impact on investment
performance. However we are confident that as a result
of the Group’s realignment and greater focus, our
businesses are more resilient and better able to
withstand negative pressures.
As the nation’s wealth grows, so does the pool of
savings that can fund not only Sanlam’s continued
growth, but also that of the country. The rigorous
discipline imposed on the South African economy by
the Department of Finance under the leadership of
Minister Trevor Manuel, and the Reserve Bank led by
Governor Tito Mboweni, gives us great comfort.
Mr Manuel deserves particular credit for his well-balanced
and dynamic national budget proposals for 2003.
Further measures to improve the country’s
personal savings ratio from its currently
Corporate social investment
Sanlam views corporate social investment as an
important element of a broader transformation agenda.
Investments are made in conjunction with other
initiatives such as employment equity and
developmental procurement. The Group devotes 1% of
its net operating profit (after tax) to form the basis for
its corporate social investment budget which means
that the budget for the 2003 financial year will be in
the vicinity of R15 million.
The Group’s guiding principles influence the way
investments are made. Common themes at Group level
encompass education, economic development (or
entrepreneurship), HIV/Aids and social development
(or poverty alleviation). These themes are strictly
aligned with the Group’s core values of wealth creation
and transformation.
A more comprehensive report on our corporate
investment programme is published elsewhere in this
document.
Economic outlook
One of the most important features of the performance
of the South African economy in 2002 was that the
growth dynamics showed signs of a shift. Although still
tentative, the ability of government to embrace a more
expansionary policy on a sustainable basis could cement
this change in the behaviour of the economy. We
therefore start 2003 on a relatively optimistic note.
Page 20
Report of the Chairman and Acting Chief Executive (continued)
to thank him, and Prof Ahmed Bawa who also
resigned as a non-executive director on that date,
for their contributions to our deliberations. We are
delighted that Vusi Khanyile, the chairman of
Thebe Investment Corporation and Eugene van As,
the executive chairman of Sappi Limited, accepted
the invitation to join the Sanlam board as non-
executive directors. The contribution made by our
non-executive directors, the custodians
of the governance process, is immense and we thank
them for their wise counsel and active participation
in our debates.
The executive team within the Group was
strengthened during the year with a number of
appointments, aligning the management reporting
lines with our restructured businesses. Adding
weight to our commitment to internationalisation,
Angus Samuels was appointed chief executive of
Sanlam International, and Johan van der Merwe
took the helm at Sanlam Investment Management
in his stead. Lizé Lambrechts was appointed chief
executive of Sanlam Life and Yvonne Themba was
appointed chief executive of Corporate Affairs – the
first black woman on Sanlam’s executive team.
Appreciations
To the men and women of Sanlam, thank you. In a
year as challenging as the year just past it is always
difficult to remain focused. We would therefore like
disappointingly low level of 0,5% would, however
be welcomed, as increased savings would bolster the
economy. As personal savings is in the first instance
dependable on income, consideration should be
given to further reduce the direct taxation on
households so as to increase disposable income.
Prospects
Sanlam enters the new financial year positively and
with most of the vital elements in place to allow our
teams to concentrate on delivering value. Provided
investment markets are fair, we anticipate that the
Group’s results for the 2003 financial year will show
a satisfactory improvement on those for 2002.
Directorate and Executive
During the period Leon Vermaak, the Group’s chief
executive, left Sanlam to pursue his own business
interests and a rigorous process of appointing a
successor is underway. Flip Rademeyer, financial
director, was appointed acting chief executive with
the brief to refocus the businesses on improved
performance, particularly in respect of investment
results and business growth. It is gratifying to report
that these areas of concern are being tackled head-
on and, as has been reported, progress is being
achieved. Peter Vundla, a non-executive director,
resigned from the board of directors from 31 March
2002 due to a conflict of interest and we would like
Page 21
We are also indebted to our shareholders,
analysts and brokers for their sustained interest in
our endeavours and to the media for reporting on
our activities so diligently.
It was the resolute determination of everyone in
the Group to embrace our shared vision and to
implement our strategies that carried us to the point
where we embark on the new year far stronger and
better positioned.
to pay tribute to our colleagues throughout the
Sanlam Group for their loyalty and dedication. The
results that were achieved in 2002, an exacting
period for us all, reflect their commitment and
endeavours as well as the progress that Sanlam has
made in its goal of becoming the employer of
choice in the financial services industry.
As always our sales brokers and advisors played
an important role in the success of our business and
we are grateful for their continued support and
value our trusted relationships. To our suppliers,
thank you for measuring up to our exacting
standards.
Ton Vosloo
Chairman
Flip Rademeyer
Acting chief executive
5 March 2003
Page 22
Executive Committeeas at the date of this report
JAA Samuels (Angus) (52)
Appointed to Exco: October 2000
Chief Executive: Sanlam International
UK citizen
Sanlam service: 4 years
Alternate director: Sanlam Limited
CG Swanepoel (Chris) (52)
BSc (Hons), FIA, FASSA
Appointed to Exco: October 1998
Chief Actuary
Sanlam service: 31 years
Alternate director: Sanlam Limited
Y Themba (Yvonne) (37)
BA, MBA
Appointed to Exco: October 2002
Chief Executive: Corporate Affairs
Sanlam service: 11 months
JHP van der Merwe (Johan) (38)
MCom, M.Phil, CA (SA)
Appointed to Exco: July 2002
Chief Executive: Sanlam Investment Management
Sanlam service: 8 months
V van Vuuren (Vic) (45)
BJuris (Unisa), AEP (Unisa)
Appointed to Exco: October 1998
Chief Executive: Human Resources
Sanlam service: 6 years
J van Zyl (Johan) (46)
PhD, DSc (Agric)
Appointed to Sanlam Exco: August 2001
Chief Executive: Santam
Santam service: 1 year
Executive director: Sanlam Limited
From left to right (front): Nick Christodoulou, Lizé Lambrechts, Charl le Roux, Bonang Mohale, Johan van der Merwe,
Flip Rademeyer, Vic van Vuuren, Yvonne Themba, Johan van Zyl
From left to right (back): Marius Ferreira, Chris Swanepoel, Angus Samuels
P de V Rademeyer (Flip) (55)
CA (SA), SEP (Stanford)
Appointed to Exco: October 1998
Acting Chief Executive
Financial Director
Sanlam service: 5 years
Executive director: Sanlam Limited
NT Christodoulou (Nick) (55)
BSc Eng (Ind), MBA
Appointed to Exco: October 1998
Chief Executive: Sanlam Strategy and Business Development
Sanlam service: 7 years
Alternate director: Sanlam Limited
M Ferreira (Marius) (48)
BCom (Hons)
Appointed to Exco: November 2001
Chief Executive: Gensec Bank
Sanlam service: 8 years
Alternate director: Sanlam Limited
L Lambrechts (Lizé) (39)
BSc (Hons), FIA
Appointed to Exco: April 2002
Chief Executive: Sanlam Life
Sanlam service: 18 years
PC le Roux (Charl) (48)
BSc
Appointed to Exco: October 1998
Sanlam service: 26 years
Executive director: Sanlam Limited
BF Mohale (Bonang) (41)
CM (SA), Pr IMM, P Gr Dip Mkt (IMM)
Appointed to Exco: September 2001
Chief Executive: Shared Services and Associated Businesses
Sanlam service: 1 year
Alternate director: Sanlam Limited
Page 23
Page 24
Statement on Corporate Governance
The Board of Sanlam Limited (“Sanlam”) endorses
and is fully committed to complying with the
principles of the Code of Corporate Practices and
Conduct as set out in the King Committee Report
on Corporate Governance (“King II”).
The directors have considered the implications of
King II and are of the opinion that Sanlam has
complied substantially with the requirements of King
II during the period under review. Areas requiring
further enhancement will be considered during the
2003 financial year. In supporting the code, the
directors recognise the need to conduct the enterprise
with integrity and in accordance with generally
accepted corporate practices.
The Sanlam group (“Group”) operates within a
decentralised business model environment. Each
business has its own governance structures. Clear
approval frameworks and agreed upon principles are
in place to ensure a coherent governance approach
throughout the Group.
As recommended by King II, the Board is
currently reviewing its existing charter regulating how
business is to be conducted by the Board in
accordance with the principles of good corporate
governance. The charter will set out responsibilities
to be discharged by board members collectively as
well as the individual roles they are expected to fulfil.
The existing annual critical self-evaluation process of
the effectiveness of the Board, its committees and
individual directors will be enhanced. Many existing
governance practices that have been in place in
Sanlam for a number of years will be codified into
the Board charter.
The Group monitors developments in the
corporate governance arena, both nationally and
internationally, with a view to reviewing and
adapting corporate governance structures and
practices where appropriate.
The Board of Directors of Sanlam
Composition
Details of the directors on the Sanlam Board appear
on pages 10 and 22 of this report. At the end of the
period under review the Board comprised of an
independent chairman, 12 non-executive directors
(10 of whom are independent) and three executive
directors.
Page 25
Current Board Representation by Race and Gender
Male Female Total
Black 3 1 4
White 11 1 12
Total 14 2 16
Independent Non-exec Exec Total
Black 4 — — 4
White 7 2 3 12
Total 11 2 3 16
The chairman and the lead director are
independent directors. The Board is ultimately
accountable and responsible for the performance and
affairs of the company. The company does not have a
controlling shareholder or group of shareholders. There
is also not any specific minority shareholding
representation on the Board. A third of all board
members retire every year at the company’s annual
general meeting.
The Board meets at least five times a year to
consider business philosophy and strategic issues, set
risk parameters, approve budgets and to monitor that
the implementation of delegated responsibilities is
properly executed. Feedback from its committees is
also considered. The Board considers a number of key
performance indicators, variance reports and industry
trends. A range of non-financial information is also
provided to the Board to enable it to consider
qualitative performance factors.
The independent and non-executive directors on
the Sanlam Board are high-calibre individuals with the
necessary integrity, skills and experience to bring
judgement to bear on various key issues relevant to the
business of the company, independent of management.
Senior members of management attend/are invited to
board meetings. Possible conflicts of interest are
regularly declared. Non-executive sessions are held at
the end of all board meetings.
The major operating companies in the Group
each have their own board structures comprising
both executive and non-executive directors as well as
appropriate committees. Further details on these
boards and their respective committees are provided
in the business reviews on pages 58 to 83.
The positions of chairmen of the boards of these
companies as well as the chairmen of their audit
committees were recently reviewed to bring them in
line with King II.
Board Committees
Audit and Risk Committee
Male Female Total
Black 1 — 1
White 2 1 3
Total 3 1 4
The committee comprises three independent
directors and one non-executive director, all of whom
are financial literate and the majority has financial
expertise. The chairman is an independent director.
The committee meets at least three times a year.
Members of senior management, the Chief Internal
Auditor and the External Audit partners attend
meetings of the committee.
Page 26
Statement on Corporate Governance (continued)
the use of the external auditors for non-audit services
are reviewed annually.
The committee has reviewed its activities during
the period under review and is satisfied that it has
fulfilled its responsibilities in compliance with the
terms of reference that governs its activities.
Human Resources Committee
Male Female Total
Black — — —
White 3 — 3
Total 3 — 3
Three independent directors constitute this
committee.
The Group Human Resources Committee is
charged with the responsibility of managing the
Group’s intellectual human capital and transformation
processes. In particular, the committee approves
executive appointments and reviews succession
planning (including for the CEO). The committee is
further responsible for the remuneration strategy of
the Group, the approval of guidelines for incentive
schemes and the annual determination of Board and
Sanlam Executive Committee remuneration packages
relative to local and international industry
benchmarks. In doing so, the committee ensures that
the incentive schemes are in line with good business
practice and ensures reward for excellent performance.
The performance of the members of the Executive
Committee (including the CEO) is evaluated annually
to coincide with the consideration of performance
based bonuses by the committee.
The Audit and Risk committee has recently
reviewed its charter to be in line with the
requirements of King II and international best
practice.
The main responsibilities of this committee are
to assist the Board in fulfilling its oversight
responsibilities by:
• Setting and overseeing the overall standard for
financial reporting, risk management, internal
controls and ethical conduct within the Group;
• Monitoring the effectiveness of business risk
management processes in the Group;
• Reviewing and assessing the quality of the work
done by the professionals responsible for financial
reporting and internal control;
• Engaging in discussions with external and internal
auditors on the quality and acceptability of the
control environment and reporting structures; and
• Maintaining compliance with legal and statutory
requirements.
The Sanlam Board has authorised the committee
to investigate any activity within its terms of
reference. The committee is authorised to seek any
information it requires from any employee in the
Group, and all employees are expected to co-operate
with any request made by the committee.
The committee is entitled to obtain outside legal
or other independent professional advice via the
Company Secretary of Sanlam.
South African GAAP is followed for financial
reporting and, where appropriate, information is also
given in terms of international GAAP.
Executive sessions with the internal and external
auditors are held regularly. Materiality levels as well as
Page 27
The committee has also been authorised by the
Board to search for and make recommendations to
the Board regarding the appointment of a new chief
executive officer. External consultants have been
engaged to assist in the process.
Nominations Committee
Male Female Total
Black — 1 1
White 1 — 1
Total 1 1 2
Both committee members are independent
directors.
The Nominations Committee is responsible for
identifying fit and proper candidates who could be
appointed to the Board and evaluating them against
the specific disciplines and areas of expertise
required on the Board. The interests of different
stakeholders are considered as well. A shortlist of
suitable candidates is regularly updated especially
with regard to other (possibly conflicting) board
positions they have accepted or resigned from.
Proposals are presented to the Board for final
decisions thereon.
Special Committee
Male Female Total
Black 3 1 4
White 5 1 6
Total 8 2 10
The Special Committee comprises all independent
directors with the exclusion of the chairman of the
Board. The lead director is chairman of the committee.
This committee is responsible for evaluating the
effectiveness of the chairman of the Board on an
annual basis. Before the appointment or re-
appointment of the chairman of the Board, the
committee must discuss the matter in detail and make
a recommendation to the Board.
Black Economic Empowerment Committee
Male Female Total
Black 1 1 2
White 1 — 1
Total 2 1 3
The Black Economic Empowerment committee
was established on 4 September 2002 and comprises
3 independent directors.
The main responsibilities of the committee are to
recommend, monitor and advise on matters pertaining
to black economic empowerment throughout the
Group.
More background on Sanlam’s initiatives on Black
Economic Empowerment appears on page 38 of this
report.
Ad Hoc Board Committees
The Board has the right to appoint special ad hoc
board committees from among its members and
authorise them to perform specific tasks. During the
period under review seven such committee meetings
took place.
Page 28
Statement on Corporate Governance (continued)
Record of attendance at meetingsAudit Human
Board and Risk Resources BEE
Meetings planned 5 4 3 1
Meetings held 6 4 4 1(1 special) (1 Round
Robin)
Non-executive directorsVosloo T 6 4Alberts JPL 4 3Bawa AC (Resigned
31/3/2002)Brink DC 5 4 1
(1 Recused)Du Plessis AS 6Gcabashe TS 4Khanyile V 2
(Appointed7/8/2002)
Maynard CE 6 3 (Appointed
1/3/2002)Mokhobo DNM 5 1Perold AF 4Rudman GE 6 4Swartz PEI 5 4
(1 Recused)Van Zyl JJM 5 3Vundla BP 1
(Resigned31/3/2002)
Executive directorsVermaak L 6Le Roux PC 6Rademeyer P de V 6Van Zyl J 6
Alternate directorsChristodoulou NT 5Ferreira M 5Mohale BF 5Samuels JAA 5Swanepoel CG 5
The executive and alternate directors are not members of the various Board Committees, but do attend the meetings ona regular basis where appropriate on invitation. The Special Committee did not meet during 2002 as Mr Vosloo wasonly appointed as Chairman of the Board on 1 January 2002. The Nomination Committee met informally on anumber of occasions and gave feedback to the Board on their nominations and recommendations.
Page 29
The Executive Committee
Male Female Total
Black 1 1 2
White 9 1 10
Total 10 2 12
This committee, which functions under the
leadership of the chief executive officer, is charged with
the responsibility of the operational management of the
Group.
The committee comprises the business heads, the
chief financial officer, the chief actuary and the heads of
corporate functions. Three of the members are also
executive directors and five are alternate directors.
The committee normally meets every fortnight.
The member’s and the committee’s authority is
limited to those powers delegated to them by the
Board.
Company secretary and professional adviceAll directors have unlimited access to the services of the
Company Secretary, who is responsible to the Board for
ensuring that proper corporate governance principles
are adhered to. Board orientation or training is done
when appropriate.
All directors are entitled to seek independent
professional advice concerning the affairs of the Group,
at Sanlam’s expense.
The Sanlam Board appointed the Company
Secretary who is also the Public Officer, Compliance
Officer, the delegated Information Officer of Sanlam
and is responsible for the execution of all the different
statutory requirements applicable to those positions.
Relations with shareholders The Board understands the information needs of
shareholders and places great importance on
meaningful dialogue with shareholders and ensures that
they are kept appropriately informed on matters
affecting the Group and that they have access to the
Group. Reports and announcements, meetings with
analysts and journalists and the Sanlam website are used
extensively to provide relevant information to
shareholders. Open lines of communication are
maintained and the chief executive officer and the
business executives meet with shareholders on an
ongoing basis to ensure transparency. All Board
members are requested to attend Sanlam’s Annual
General Meeting, to which all shareholders are invited.
The Group’s financial results will continue to be
published in the financial media, notwithstanding the
proposed relaxation of this requirement by the JSE
Securities Exchange, so as to maximise its
communication efforts to its relatively large number of
individual shareholders. A comprehensive programme
of meetings with major shareholders and investment
analysts follows the release of final and interim results.
Shareholders are encouraged to contact Sanlam with
questions or concerns and, subject to price sensitivity,
management seeks to provide rapid responses.
Sanlam is committed to transparency and disclosure
of relevant and appropriate information in its Annual
Report and through other communication channels.
This is aimed at providing a full and proper evaluation
of Sanlam and its share price and as a means of
monitoring management’s performance. This is
pursued continuously, notwithstanding the complex
nature of life insurance business and the challenge of
meeting best practice standards, both locally and
internationally.
Share dealingsIn terms of Sanlam’s “closed period” policy, directors,
officers, participants in the share incentive scheme and
staff who may have access to price sensitive
information, are precluded from dealing in Sanlam
shares for approximately two months prior to release of
Page 30
Statement on Corporate Governance (continued)
impact and likelihood of a particular risk occurrence.
Risks with a low likelihood of occurring, but with a
potentially catastrophic impact are regarded as
unacceptable. The policy dictates that each business
institutes maximum loss limits as part of their business
strategy. Furthermore, the responsibilities of all the role
players in the SRM process are clearly defined within
the SRM policy.
The Audit and Risk committee charter has been
amended to specifically include risk management in its
scope. This enables the Board to monitor and evaluate
the risk management process and the resultant risks
identified on a regular and continuous basis.
A Group Risk Management function has been
established to give effect to the SRM policy on a group-
wide basis. Regular interaction between the business
units and the Group Risk Management function has
been formalised. The SRM policy for the Sanlam group
has been adopted and implemented by the various
decentralised businesses. Some have, due to their
specific business environments, implemented even more
rigorous risk and compliance policies, procedures and
methodologies.
The risk reporting and identification process in
each business unit flows into the respective Boards and
Audit and Risk committees. The identified risks are
collated and discussed at group level via the formal
interaction with the Group Risk Management function.
The outcome of this process is reported to the Sanlam
Limited Audit and Risk Committee and Board.
Risk management is an ever-evolving process. SRM
in the Group is striving towards increased integration of
the management of risks. In this process there is a
commitment to best practice techniques.
Documented and tested processes are in place,
aimed at ensuring business continuity in all critical
areas in the event of a disaster.
An independent quality assurance review of the risk
management process in the Sanlam group has been
the Group’s interim and final results. Details of
directors’ dealings in Sanlam shares are disclosed to the
JSE Securities Exchange through the Stock Exchange
News Service (SENS). In addition, more stringent
trading policies regarding all personal transactions in all
financial instruments are in force at Sanlam Investment
Management and at Gensec Bank.
Going concernThe Board has considered and recorded the facts and
assumptions on which it relies to conclude that Sanlam
will continue as a going concern in the financial year
ahead. The directors are of the opinion that Sanlam will
be a going concern in the year ahead and their
statement in this regard is also contained in the
statement on the responsibility of directors for annual
financial statements.
Strategic risk managementAlthough the Board has ultimate responsibility for risk
management, the responsibility and authority for day-
to-day management of risks have been delegated to
specialist committees and executive management with
regular feedback to the Audit and Risk Committee.
The primary objective of strategic risk management
is to optimise the Group’s risk adjusted return in
support of sustained real earnings growth per annum.
Risk management is not necessarily about avoiding
risk, but managing risk within acceptable and/or
prescribed parameters. In conducting business
operations, it is important to correctly identify and have
the ability to absorb certain risks. The current risk
management process recognises this dynamic by
managing the three elements of risk, namely
opportunity, hazard and uncertainty.
A comprehensive Strategic Risk Management
(SRM) policy for Sanlam group is in place and
addresses the significant risk categories facing the
Group. Risk evaluation is defined as a combination of
Page 31
completed by an external service provider. This
included an evaluation of the effectiveness of the risk
management activities and measurements against best
practice. The external service provider found that the
risk management activities are effective.
Internal auditThe Group’s internal audit function operates from a
board approved mandate and the authority, resources,
scope of work and effectiveness of the function are
reviewed annually. The Chief Internal Auditor is
appointed in consultation with the chairman of the
Audit and Risk Committee.
Internal audit operates to audit plans approved by
the audit committee of each business and that is based
on a formal risk assessment as well as issues highlighted
by the audit committee and senior management.
The audit plans are of a continuous nature in order to
identify emerging risk areas. Internal audit co-ordinates
their work with other assurance providers (external
audit, risk management, compliance and forensic
investigations) to ensure proper coverage of financial,
operational and compliance controls and to minimise
duplication of effort.
Internal audit provides assurance that the
management processes are adequate to identify and
monitor significant risk and that the internal control
systems are effective. Control breakdowns are
reported in terms of an escalation policy, audit
committee minutes and through the chairmen of
subsidiary audit committees, to the appropriate level
of risk management and audit committees, where
management actions and progress are monitored.
The Chief Internal Auditor has ready and regular
access to the chairman of the Board and of the Audit
and Risk Committee.
No significant internal financial control
breakdowns occurred in the Group during the 2002
financial year.
Statutory actuaryThe Chief Actuary of Sanlam Limited, who is the
statutory actuary of Sanlam Life Insurance Limited,
is subject to the disciplines of professional conduct and
guidance and reports to the directors of Sanlam Life
Insurance Limited and the regulatory authorities.
He has unfettered access to the Board and must report
fully and impartially to these bodies on the financial
soundness of Sanlam Life Insurance Limited based on
the actuarial valuation of its assets and policy liabilities.
He is the ultimate guardian of the interests of the life
insurance policyholders of the Group.
Business ethicsThe Sanlam group is committed to the highest
standards of integrity and ethical conduct in dealings
with all its stakeholders. A central representative
Ethics Committee monitors adherence to the
precepts of the Code of Ethics, and investigates
matters brought to its attention when necessary.
Stakeholders were consulted in the original drafting
of the Code before its implementation. Sanlam’s
Code of Ethics was again distributed to each
employee during December 2002 to commit each
Sanlam employee to high ethical and performance
standards. The Code and its processes are regularly
measured against best practice.
The Ethics Committee is chaired by an Executive
Committee member and consists of:
Male Female Total
Black 1 1 2
White 2 1 3
Total 3 2 5
The same Executive Committee member is also
responsible for the Forensic Investigations department
which, among other things, administers a hotline
outsourced to an independent service provider.
Page 32
Statement on Corporate Governance (continued)
❑ A clear and meaningful distinction is made between
high performers, average performers and under
performers and remuneration is distributed
accordingly.
❑ Strong incentives are created for superior
performance by individuals and teams.
❑ Top contributors are awarded significantly higher
bonuses.
❑ Under performers are not rewarded and active steps
are taken to either encourage the individual to
improve performance or the individual must leave
the company, in line with accepted practices.
• Executive and alternate directors
The package for executive and alternate directors
includes a base salary, a variable performance linked
bonus and an allocation of share options. All of these
are established in terms of the principles above. The
remuneration is reviewed annually by the Group
Human Resources Committee in line with the Group
Remuneration Philosophy after evaluating each
executive director’s performance, including that of the
chief executive officer.
• Non-executive directors
Non-executive directors receive an annual fee for
making their knowledge, experience and insight
available to the boards and board committees of which
they are members. A further fee is paid for attending
and contributing to board meetings. The company
pays for all travelling and accommodation costs. The
chairman receives a fixed annual all-inclusive fee. Fee
structures are recommended by the Group Human
Resources Committee to the Board and are reviewed
annually with the assistance of external service
providers. In doing so the Committee takes cognisance
of market norms and practices as well as the additional
responsibilities placed on board members by new acts,
regulations and corporate governance guidelines.
Adequate grievance and disciplinary procedures are in
place to ensure the enforcement of the Code.
Compared to previous years and measured against
the established levels of materiality, no incidence of
such importance occurred that it had to be escalated
to the Ethics Committee for consideration and
clearance.
Employee participationThe Executive Committee has committed itself to an
ongoing process of transparency, consultation and
inclusivity to staff. To this end, issues that materially
affect employees follow a participative process that is
designed to promote good employer/employee
relations.
Effective communication through various media is
continually improved to ensure that employees are well
informed and able to share their views, thoughts and
opinions proactively at all levels within the Group.
Remuneration philosophyThe Group Human Resources Committee is
responsible for the remuneration strategy of the Group,
the approval of mandates for incentive schemes within
the Group and the determination of Sanlam Directors’
and executive committee members’ remuneration
packages relative to local and international industry
benchmarks.
The establishing of appropriate remuneration is
inextricably linked to the further development and
retention of executives and to attract people of the
highest calibre.
• Employees in general
The following principles are paramount in
determining the proper remuneration levels:
❑ All remuneration practices are structured in such a
way that they provide for clear differentiation
between individuals with regard to performance.
Page 33
Directors’ and officers’ emoluments for the year ended 31 December 2002
Company
Salary/ contribu- Other
Months fees Bonus tions benefits Total
Name in office R000 R000 R000 R000 R000
Executive directors
L Vermaak(1) 12 2 024 — 403 2 500 4 927
AS du Plessis(2) 2 257 — 39 — 296
P de V Rademeyer 12 1 360 — 187 — 1 547
PC le Roux 12 1 965 272 205 — 2 442
J van Zyl 12 1 454 48 186 — 1 688
Total executive directors 7 060 320 1 020 2 500 10 900
Officers
JP Bester(3) 5 279 — 66 — 345
NT Christodoulou 12 1 020 — 218 — 1 238
M Ferreira 12 1 142 — 171 — 1 313
L Lambrechts(4) 9 702 131 115 — 948
BF Mohale 12 1 105 — 154 — 1 259
XB Motswai(5) 8 303 — 54 — 357
JAA Samuels(6) 12 3 906 1 166 694 390 6 156
CG Swanepoel 12 1 193 — 181 — 1 374
Y Themba(7) 3 113 — 12 — 125
V van Vuuren 12 831 — 130 — 961
JHP vd Merwe(8) 6 684 2 000 100 30 2 814
Total officers 11 278 3 297 1 895 420 16 890
Bonuses reflected are payable in 2003, based on the 2002 results and the formulae applicable for the different businesses, apart from J van Zyl atSantam where the actual payment in 2002 is reflected.Refer to the Directors’ Report on page 88 for details of changes in directorships.(1)Resigned 31 December 2002(2)Executive director until 28 February 2002, appointed non-executive director from 1 March 2002(3)Appointed 7 August 2002(4)Appointed 1 April 2002(5)Resigned 31 August 2002(6)Payment is made in pound sterling. Conversion to rand was done at the average exchange rate for the year(7)Appointed 1 October 2002(8)Appointed 1 July 2002
Page 34
Statement on Corporate Governance (continued)
Directors’ and officers’ emoluments for the year ended 31 December 2001
Company
Salary/ contribu-
Months fees Bonus tions Total
Name in office R000 R000 R000 R000
Executive directors
HSC Bester 12 1 735 — 259 1 994
AD Botha 4 2 123 — 215 2 338
MH Daling 12 3 054 2 000 439 5 493
AS du Plessis 12 1 489 1 500 236 3 225
P de V Rademeyer 12 1 215 1 000 187 2 402
GE Rudman(1) 3 261 — 39 300
J van Zyl(2) 10 667 48 73 788
L Vermaak(3) 12 1 612 1 000 264 2 876
Total executive directors 12 156 5 548 1 712 19 416
Officers
NT Christodoulou 12 962 1 000 154 2 116
M Ferreira 12 974 800 226 2 000
PC le Roux 12 1 218 1 820 182 3 220
BF Mohale 4 345 200 56 601
CG Swanepoel 12 1 075 800 177 2 052
JAA Samuels(4) 12 2 745 1 022 637 4 404
V van Vuuren 12 634 900 114 1 648
X Motswai 6 208 49 42 299
Total officers 8 161 6 591 1 588 16 340
(1)Became a non-executive director on 1 September 2001 after resigning as executive director at 31 March 2001(2)Appointed as a non-executive director on 7 March 2001 and became an executive director on 1 August 2001(3)Includes service at Santam (4 months) and Sanlam (8 months)(4)Payment is made in pound sterling. Conversion to rand was done at the average exchange rate for the year
Page 35
Directors’ and officers’ emoluments for the year ended 31 December 2002Other Fees from
Fees Committees fees group TotalName R000 R000 R000 R000 R000Non-executive directorsJPL Alberts 126 70 — — 196AC Bawa(1) 23 13 — — 36DC Brink 126 20 — — 146AS du Plessis(2) 111 54 688 630 1 483TS Gcabashe 111 20 — — 131V Khanyile(3) 67 20 — — 87CE Maynard 111 72 — — 183DNM Mokhobo 126 52 — — 178AF Perold(4) 460 34 — 515 1 009GE Rudman 111 62 — 66 239PEI Swartz 126 30 — — 156JJM van Zyl 126 80 — — 206T Vosloo 630 — — — 630BP Vundla(5) 8 — — 22 30Travel and subsistence 410 — — — 410Total non-executive directors 2 672 527 688 1 233 5 120(1)Resigned 31 March 2002(2)Executive director until 28 February 2002, appointed non-executive director from 1 March 2002(3)Appointed 7 August 2002 (4)Payment is made in US dollars. Conversion to rand was done at the applicable exchange rates on payment dates(5)Resigned 31 March 2002
Directors’ and officers’ emoluments for the year ended 31 December 2001Fees from
Fees Committees group TotalName R000 R000 R000 R000Non-executive directorsJPL Alberts 93 76 — 169AC Bawa 93 74 — 167DC Brink 93 26 — 119TS Gcabashe(1) 77 — — 77WM Grindrod(2) 23 12 — 35K Jowell(2) 23 69 — 92DL Keys(3) 56 — — 56CE Maynard(4) 39 — 22 61DNM Mokhobo 93 20 — 113AF Perold(5) 333 — 444 777GE Rudman(6) 31 9 68 108P Smit(2) 23 108 — 131PEI Swartz 93 27 — 120JJM van Zyl 93 55 — 148T Vosloo 139 53 — 192BP Vundla(1) 77 — — 77Travel and subsistence 352 — — 352Total non-executive directors 1 731 529 534 2 794(1)Appointed 7 March 2001(2)Resigned 7 March 2001(3)Resigned 31 August 2001 (4)Appointed 1 August 2001(5)Payment is made in US dollars. Conversion to rand was done at the applicable exchange rates on payment dates(6)Became a non-executive director on 1 September 2001 after resigning as executive director on 31 March 2001
Page 36
Statement on Corporate Governance (continued)
Interest of directors and officers in share capital at the date of this report
Non-
Number of shares Beneficial beneficial Options
Executives
P de V Rademeyer 52 657 24 061 1 246 327
P C le Roux 726 728 — 1 250 000
J van Zyl 1 051 — —
Total executives 780 436 24 061 2 496 327
Non-executives
JPL Alberts 23 294 — —
DC Brink 38 899 — —
AS du Plessis — — 666 666
TS Gcabashe 300 — —
V Khanyile — — —
CE Maynard — — —
DNM Mokhobo 20 780 — —
AF Perold — — —
GE Rudman 128 661 90 000 728 750
PEI Swartz 41 402 — —
JJM van Zyl 9 559 — —
T Vosloo 12 976 — —
Total non-executives 275 871 90 000 1 395 416
Officers
NT Christodoulou 13 116 40 319 947 162
M Ferreira 558 043 — 2 758 213
BF Mohale — — 643 369
CG Swanepoel 409 998 — 895 395
JAA Samuels 274 204 — 2 544 451
V van Vuuren 14 341 — 480 045
JHP van der Merwe 1 168 — 4 100 000
JP Bester 322 714 — 356 173
Y Themba — — 36 319
L Lambrechts 15 203 — 508 142
Total officers 1 608 787 40 319 13 269 269
Total 2 665 094 154 380 17 161 012
Page 37
Directors’ and officers’ share incentivesDetails regarding the directors’ and officers’ restricted shares and share options held under the Sanlam Limited Share Incentive Scheme and the financial years during which they become unconditional, are as follows (in thousands):
Total Becoming unrestricted in31 Dec Re- 31 Dec Unre-
2001 leased New 2002 stricted 2003 2004 2005 2006 2007 2008 Strike price Average
EXECUTIVE DIRECTORSP de V Rademeyer– restricted fully paid shares — — — — — — — — — — — — —– share options 936 — 310 1 246 188 261 225 349 99 62 62 R6,00 – R8,26 R7,07PC le Roux– restricted fully paid shares 643 76 22 589 — 228 201 60 — — — — —– share options — — 1 250 1 250 — — — 500 250 250 250 R8,26 R8,26
Totals: executive directors– restricted fully paid shares 643 76 22 589 — 228 201 160 — — —– share options 936 — 1 560 2 496 188 261 225 849 349 312 312
NON-EXECUTIVEDIRECTORSAS du Plessis– restricted fully paid shares — — — — — — — — — — — — —– share options 1 122 455 — 667 667 — — — — — — R6,00 R6,00GE Rudman– restricted fully paid shares — — — — — — — — — — — — —– share options 729 — — 729 729 — — — — — — R6,00 – R7,35 R6,38
Totals: non-executive directors– restricted fully paid shares — — — — — — — — — — —– share options 1 851 455 — 1 396 1 396 — — — — — —
OFFICERSNT Christodoulou– restricted fully paid shares 19 9 — 10 — 10 — — — — — — —– share options 807 — 140 947 291 211 146 203 40 28 28 R6,00 – R8,26 R6,77M Ferreira– restricted fully paid shares 443 — — 443 158 122 89 41 33 — — — —– share options 2 646 — 112 2 758 734 692 580 369 287 74 22 R8,20 – R9,23 R8,30BF Mohale– restricted fully paid shares — — — — — — — — — — — — —– share options 595 — 48 643 — — 238 138 129 129 9 R8,26 –R9,07 R9,01CG Swanepoel– restricted fully paid shares 108 28 3 83 — 54 29 — — — — — —– share options 815 10 90 895 240 213 169 182 55 18 18 R6,00 – R8,26 R7,09JAA Samuels– restricted fully paid shares 274 — — 274 — 110 55 55 54 — — — —– share options 2 367 — 177 2 544 270 580 590 544 374 151 35 R8,20 – R9,23 R8,44V van Vuuren– restricted fully paid shares 9 3 — 6 — 3 3 — — — — — —– share options 288 58 250 480 6 93 79 137 65 50 50 R6,00 – R8,26 R7,58JHP van der Merwe– restricted fully paid shares — — — — — — — — — — — — —– share options — — 4 100 4 100 — — — 1 640 820 820 820 R7,49 R7,49JP Bester– restricted fully paid shares 133 21 4 116 — 94 22 — — — — — —– share options 296 — 60 356 120 81 47 59 25 12 12 R6,00 – R8,26 R6,92Y Themba– restricted fully paid shares — — — — — — — — — — — — —– share options — — 36 36 — — — 15 7 7 7 R8,26 R8,26L Lambrechts– restricted fully paid shares 7 3 — 4 — 4 — — — — — — —– share options 504 96 100 508 17 150 115 148 38 20 20 R6,00 – R8,26 R7,02
Totals: Officers– restricted fully paid shares 993 64 7 936 158 397 198 96 87 — —– share options 8 318 164 5 113 13 267 1 678 2 020 1 964 3 435 1 840 1 309 1 021
GRAND TOTALS– restricted fully paid shares 1 636 140 29 1 525 158 625 399 256 87 — —– share options 11 105 619 6 673 17 159 3 262 2 281 2 189 4 284 2 189 1 621 1 333
Note: J van Zyl (executive director) only participates in Santam’s share incentive scheme.
Page 38
Introductory Sustainability Report
With our unconditional endorsement of the
principles of King II, we will be publishing our first
comprehensive sustainability report later this year.
As an introduction, the section below highlights our
progress with some of those corporate issues that are
not covered elsewhere in this report.
Black Economic EmpowermentSanlam’s Black Economic Empowerment (BEE)
drives are pursued through four avenues:
employment equity, participation in the economic
development of South Africa, procurement and
service providers, as well as ownership and
participation in Sanlam’s control structures.
• Employment equity
Sanlam promotes Employment Equity (EE) by
fostering a working environment in which
opportunities, treatment and expectations are based
on practices that do not relate to race, religion,
gender or any other unfair discriminatory ground.
We have continued with a number of initiatives
in 2002. These include the aggressive drive to
address staff composition across all levels; a
transparent process in staff recruitment, promotion
and placement; accelerated training and
development programmes; anti-racism and diversity
management training; linking incentive bonuses to
employment equity targets and providing reasonable
accommodation of designated groups by modifying
job or working environments to provide historically
disadvantaged individuals access and opportunities
to participate and advance in employment.
The required EE reports for the Group have
been filed with the Department of Labour and a
compliance certificate has been issued.
More information is provided in the section on
transformation below.
• Participation in the economic development of
South Africa
Our pioneering launch of the Sanlam Development
fund in 1996 has financed economic development
projects to the value of more than R2,2 billion.
The fund provides equity and loans that are
financed by investments from retirement funds and
other institutional investors. The sectors in which
the fund has invested include small business
entrepreneurs, special purpose vehicles to empower
previously disadvantaged individuals to acquire
ownership of companies, direct investments in black
economic empowerment companies and basic
infrastructure.
Another funding vehicle established by Sanlam
to participate in the economic development of South
Africa is the Community Builder Fund. This fund
invests in community infrastructure, the provision of
services, job creation and economic empowerment.
Sanlam Development Investments at SIM
manages these funds.
37%
63%
32%
68%
Male Female Black White
Staff numbers on 31 December 2002
Page 39
During 2002, Sanlam Development Investments
was enhanced with the inauguration of a Board of
Governors and with the launch of Sanlam
Development Fund-of-Funds: South Africa’s first
private equity fund-of-funds. It has already attracted
commitments of R303 million.
The new Sanlam Development Fund-of-Funds
leverages the strengths of the original Development
Fund and Community Builder initiatives and was
created in response to three compelling market
needs: to deliver market-competitive returns to
investors, to enjoy greater diversification of risk and
to promote empowerment in meaningful ways
irrespective of the size of the contribution by an
individual institutional investor.
We are pleased that our investment of
R278 million in 1999 in the Government’s
Umsobomvu Fund that addresses job creation in the
country has finally started to pay dividends with the
implementation of some projects during 2002. This
investment, in the form of a special demutualisation
levy, followed the largest individual empowerment
and broad economic development exercise in the
country when Sanlam demutualised and listed in
1998, which for the first time introduced a large
number of our then two million policyholders to the
equity investment arena.
We continue to develop and provide sustainable
and affordable contractual saving schemes to the
mass market such as the Halala Savings Plan, so as to
provide entry mechanisms to this cornerstone of
economic development.
Sanlam plays an active role in the economic
debate and policy formulation in the country.
During 2002 we co-sponsored the Africa Economic
Summit of the WEF, and continued to participate in
other economic structures like Business South
Africa, the Nelson Mandela Foundation, the Black
Management Forum and the Africa Institute.
Sanlam is also an active participant in the
development of a BEE charter for the Financial
Services Industry.
Our Corporate Social Investment Programme as
an element of BEE and the economic development
of South Africa is discussed on page 44 of this
report.
• Procurement
Sanlam strives to ensure that its suppliers are diverse
in terms of race, gender and disability status. In
particular, the participation of historically
disadvantaged individuals is actively promoted
through the Sanlam service providers.
Sanlam welcomes the emergence of Small,
Medium and Micro Enterprises (SMME) and BEE
groups in the South African business world. As part
of our commitment to these groups, an
organisational culture is being developed in the
Sanlam group that encourages an understanding of
and appreciation for diversity with regard to the
providers and suppliers of goods and services. Some
of Sanlam’s support services have been outsourced to
SMME and BEE groups during the last few years.
The Sanlam group therefore endeavours to
implement initiatives for the accelerated
development and empowerment of these designated
business groups, not only to improve the existing
provider base, but also to avail us of the goods and
services provided by these groups.
This policy applies to all Sanlam wholly owned
subsidiaries and serves as a guideline to all partly
owned subsidiaries.
• Ownership and participation in control
structures
We have embarked on a comprehensive approach to
advance black ownership and the participation in
the control structures of Sanlam.
Page 40
Introductory Sustainability Report (continued)
Succession planning
Sanlam has a well-developed, internationally
benchmarked, succession planning process in place that
spans all businesses within the Group.
The quality of the company’s succession pools are
reviewed twice a year to ensure that there are sufficient
resources to deal with the Group’s future requirements.
During this process information on individual
succession pool candidates is updated and individual
development plans monitored.
Given the complexities of a large corporation
Sanlam is following a comprehensive process in the
identification and appointment of a Chief Executive
Officer. This process is aligned with the internal
succession plan.
Leadership and executive development
Leadership and executive development initiatives in
Sanlam are not only aimed at improving the strength of
the leadership in Sanlam to international standards, but
also to create a learning culture within the leadership of
the Group. To this end programmes are structured in
such a way to give participants the opportunity to
interact with the executives of the Group as well as
participants who have already completed the
programmes. In this way an ever-increasing group of
people are in development on an ongoing basis.
The Sanlam Executive Development programme,
which is an international programme accredited by
Manchester Business School, is the flagship of the
Leadership and Executive Development initiative. The
consistent exceptionally good ratings and status this
programme enjoys is the result of continuous effort to
update the programme and make it relevant to the
changing Sanlam business environment.
To address the need for middle and senior
management development, a customised Sanlam Senior
Management Development Programme was designed in
conjunction with a local Business School. The focus of
this programme is the South African business
The first aim is to try and achieve this at the
Sanlam group level by firstly introducing new black
shareholders where possible, and secondly by
converting the existing black shareholders of Sanlam
from passive to active participants.
The promotion of new black ownership and
control could be at corporate or at subsidiary level.
If the role of the subsidiary is core in the execution of
the vision, then Sanlam will retain sufficient control
and flexibility of the subsidiary. It is preferred that,
notwithstanding the participation by the BEE group
in the control structures of the subsidiary, the
ownership should be at the Group level.
The existing black shareholders can be divided
into two groups. The first, institutional shareholders,
comprises retirement funds and institutions that are
black controlled, or represent a black majority. The
objective here is to stimulate their active participation
in the control structure.
The second group is the individual black
shareholders where the aim is to support their
collective participation. A consideration in support of
this is some shareholder club that, in addition, will
also serve as a vehicle for training and development in
shareholder matters.
Management of human intellectual capitalEmployer of choice
Striving to become an employer of choice remains
one of the cornerstones of human resource practice
within the Sanlam group. A number of initiatives
have been launched in this regard e.g. the
introduction of flexible remuneration modelling as
well as benchmarking Sanlam practices against other
South African Companies. The strength of the
Group’s employment brand is apparent from its
ability to attract top calibre personnel. This was
evident especially in the second half of the year in the
area of investment management.
Page 41
environment. A pilot programme was launched in 2002
and two programmes have been scheduled for 2003.
In addition to individual learning plans that form
part of the performance management process
throughout the Group, the initiative aimed at group
development for high potential and succession pool
members was repositioned. This group, the Sanlam
Future Leadership Group, attend an annual two-day
workshop where they have the opportunity to engage
with the CEO about the strategy and other key issues.
Part of this programme also involves a series of lectures
by international experts on strategically relevant topics.
As part of the Leadership and Executive Development
initiative Sanlam also sends selected individuals to
programmes at a variety of international Business
Schools including Harvard, Insead and Ashridge.
Corporate Recruitment and Skills Development
A number of initiatives have been launched not only to
ensure access to the required skills for the Group, but
also to address the area of corporate social investment.
These initiatives include bursaries and scholarships at
school, technikon and university level and the
sponsoring of the Chair in Investment Management at
the University of the Western Cape. Sanlam is also one
of the main sponsors of the Brightest Young Minds
initiative that draws together the top final year students
from the various universities around the country.
TransformationEmployment Equity
Sanlam views Employment Equity (EE) as an integral
part of its overall transformation strategy. The Group
accepts the necessity to enact legislation for the removal
of economic legacies of structural inequality, and views
EE as an opportunity to strategically position itself to
achieve its business objectives.
During 2002 the Group aggressively pursued EE
targets. Reward systems were linked to these targets,
and the company profile reflected more than 30% black
Leadership and executive development
• 67 senior managers participated in
structured customised development
programmes during 2002.
• During 2002, forty executives participated
in the Sanlam Internationally Accredited
Executive Development Programme. 27%
of them were black compared to 3% at the
first intake in 2001 and 14% at the second
intake in 2001/2002. Females represented
27% in 2002 compared with 7% and
17% at the first two intakes.
• Of the 54 participants in the 2002
Management Development Programme,
34% were black and 34% female.
• 162 staff members (30% female and
20% black) participated in the Sanlam
Future Leadership workshops.
Skills Development
Since the inception of the skills development
legislation, Sanlam has aligned its training
and development initiatives to ensure
compliance. During the first year, 1 April
2000 to 31 March 2001, Sanlam recovered
the maximum of 50% of the levies paid in
the form of skills grants. In the second year,
1 April 2001 to 31 March 2002, the
maximum of 75% of levies were recovered.
Page 42
Introductory Sustainability Report (continued)
• A series of 30 individual interviews with Sanlam
and Business Exco members.
• Six workshops with 300 Sanlam managers across
the country and in Namibia.
• A three-day workshop with Sanlam Future
Leaders, who will become leaders of the change
process.
• Feedback sessions to the Sanlam Exco.
HIV and AidsSanlam’s corporate efforts to deal
with the devastating effects of the
Aids pandemic are driven by a
special HIV/Aids unit. This unit
forms part of Sanlam’s
transformation division.
Sanlam’s Exco
ratified an Aids
strategy towards the
end of 2001, after which
the Aids unit embarked on an extensive group-
wide implementation process during 2002. The
following Aids initiatives were successfully
implemented:
Internal initiatives
Several initiatives were undertaken during the year:
• Sanlam conducted a KAP (Knowledge, Attitudes
and Perceptions) study amongst its employees.
• The Sanlam Exco and the Sanlam Business Exco
attended Aids education sessions that covered issues
related to disease and impact on business.
• The Exco’s of Sanlam Life, SIM and Tasc attended
sessions highlighting the Group’s initiatives and the
business imperatives thereof.
• SIM, Sanlam Wealth Management and Innofin
employees attended Aids training sessions.
• Sanlam trained employees to become Aids
educators. They will co-facilitate Aids education
workshops within the Group. Following
employees; a first in Sanlam’s history. Recognising the
potential for a revolving door syndrome, Sanlam
implemented various affirmative action measures to
change the Group culture and thus ensure the retention
and development of designated groups.
On numerous places in the rest of the report
information is given of women and blacks that have
been appointed to boards and executive
committees.
As Sanlam has invested substantial human and
financial resources in its EE drive over the
past eight years, the Group contracted an
external consultant to objectively assess:
• The success of EE implementation
within Sanlam, with specific reference
to black employee perceptions and
experiences.
• The gap between the Sanlam barrier report
recommendations and current EE
practices.
• Sanlam’s EE performance against the EE Act.
• An international perspective on Sanlam’s
EE successes and failures.
The research results serve as guide for further
Sanlam EE interventions.
Sanlam’s top management actively supported all
EE initiatives, with the CEO hosting monthly EE
focus groups with randomly selected staff members.
Numerous research and organisational development
projects have emerged from these focus groups.
Truly South African Company
In an effort to facilitate and expedite transformation
within the Group, Sanlam launched a project,
Sanlam as a truly South African Company, to
clearly define what it means to be a successful South
African company in a rapidly shifting, democratic
and transformed macro environment.
The project involved the following and will
continue in 2003:
Page 43
international best practice, Sanlam has become the
first company in the insurance sector to train
employees as Aids peer counsellors to provide
crisis intervention to fellow employees. They work
in close association with the Sanlam medical
department. External parties have expressed
interest in using this counsellor model as a
blueprint for training of counsellors in the
insurance industry.
• All employees, who are members of Sanlam’s medical
aid schemes, and their dependents have access to
professional counsellors via the Aid for Aids programme.
• This Aid for Aids programme also provides anti-
retroviral medication to all HIV positive employees
and their dependents.
• All new Sanlam employees attend an Aids education
session during the monthly induction programme.
• As part of its Aids awareness campaign, Sanlam has
provided Industrial Theatre Performances for its
employees in Cape Town, Johannesburg, Durban and
Windhoek.
• On World Aids Day, various Sanlam offices around
the country conducted Aids awareness and education
programmes.
External partnerships
• Takalani Sesame: The educational television
children programme, Takalani Sesame, with Sanlam
as corporate sponsor, has joined the fight against Aids
with a new HIV positive muppet. Kami, the new
muppet, will inform toddlers about the dreaded
disease in a sensitive manner and according to
guidelines that have been formulated with major
input from the Department of Education.
• The South African Business Council on HIV and
Aids: Sanlam is a co-sponsor of this council, whose
primary function is to assist SMMEs in developing
Aids interventions and Sanlam also hosted the
council’s AGM in 2002.
• COSATU: Sanlam has embarked on an extensive
Aids home-based caregiver initiative with COSATU.
This initiative will be piloted in a rural South African
community during 2003.
• Santos Football Club: Sanlam has trained local
soccer players from Santos (2002 Premier Soccer
League champions) to become Aids peer educators at
schools. This project which allows sports heroes
to bring the Aids messages to young supporters,
is done in conjunction with the United Sports
Association of South Africa and LoveLife
South Africa.
Other initiatives
• Sanlam has contracted a legal expert to audit all
HR policies against relevant legislation, including
the SA Constitution.
• Condocans have been installed in selected Sanlam
buildings throughout the country.
• Sanlam sponsors various Aids primary health
care initiatives such as the Aids Counsellor at
Tygerberg Hospital.
Sanlam’s Aids initiatives received international
recognition from the Jimmy Carter, Bill Gates
and Kaiser Foundations during 2002.
Page 44
Introductory Sustainability Report (continued)
Corporate Social Investment
Sanlam was established in 1918. The first record of
its corporate social investment (CSI) is found in the
Directors’ Minute Book of 1920, when donations
to three institutions were approved – the Children’s
Missionary Home in Cape Town, the Home for
Orphan Coloured Boys and the University of
Stellenbosch.
In the following 83 years, the Group has
continued at a progressive pace to be one of the
leading contributors to community projects and
programmes that aim to build the wealth of the
South African nation.
We do so because we view our CSI as a business
imperative. The history of the programmes and
projects we supported through CSI and our
positioning as a truly
South African company emphasise our total
commitment to the country and its people. Their
development and growth are essential for our future
as a financial services company.
During 2002, we produced a history of Sanlam’s
social investment under the title, Shaping the
Rainbow. Copies are available on request.
The Mgwali Mission near Stutterheim in the Eastern Cape was the scene of
celebrations when the renovated church and adjacent school were
ceremonially opened in December last year. The mission was the winner of
Sanlam’s Restoration Award for 2001, and the prize-money enabled the
local community to complete its extensive restoration project.
From 2003 our focalareas for CSI includeeducation, economicand entrepreneurialdevelopment,HIV/Aids and socialdevelopment
Page 45
Realigning our efforts
The businesses in the Sanlam group address CSI
according to their own priorities and in view of
communities they serve. During 2002 our overall
CSI objectives were realigned to more effectively
accommodate the social, economic and business
priorities that guide our activities.
Value has been added by co-ordinating the CSI
programmes of the businesses at group level, thus
exploiting synergies through central systems,
allowing for greater impact and combined reporting
without compromising the individual needs of the
companies in the Group.
Focal areas for CSI at a group level now include
education, economic development (including
entrepreneurship), HIV/Aids and social
development. These are aligned to core group
values, like wealth creation and transformation.
CSI is now an important part of a broader
transformation agenda and considered and
implemented with other initiatives such as
employment equity and developmental
procurement.
The first three contestants at the launch of Sanlam’s reality TV programme,
Sanlam Money Game. Sanlam’s sponsorship of the popular series is aimed
at promoting entrepreneurial awareness and skills and will continue in
2003. In each weekly episode three contestants are challenged to make the
most money in a three-day period with only the clothes on their backs, their
driver’s licences and R30 000 in cash as venture capital. As part of this
initiative, the TV series is supplemented with a number of workshops
throughout the country, where leading entrepreneurs share their experiences
and business solutions with aspiring entrepreneurs.
Yvonne Themba (left), chief executive: corporate affairs, with
senior officials of the Tygerberg Hospital at the renewal of
Sanlam’s partnership with the hospital’s Infectious Diseases
Clinic which provides counselling services to HIV patients and
their families.
Page 46
Introductory Sustainability Report (continued)
Guiding principles
A set of guiding principles influence the way
investments are made. All requests and proactive
investments in the abovementioned focal areas that
are evaluated for funding must show strong
developmental and transitional benefits to build
sustainable projects and partnerships in line with
the Group’s mission.
As part of the evaluation there is also
an effort to leverage funds by playing a
catalytic role and through
the establishment of working
partnerships.
A distinction is also drawn between
CSI and sponsorships. In addition to the
development impact, the latter also aims
at the marketing and sales benefits from
the support.
Elmo, one of the characters in Takalani Sesame, a multimedia educational
programme for pre-school children sponsored by Sanlam, brings a little
happiness to one of the patients at the Burns Unit in the Red Cross
Children’s Hospital in Cape Town. Sanlam also sponsored a new pamphlet
on the causes, prevention and treatment of burns in co-operation with the
Child Accident Prevention Foundation of Southern Africa.
A performance by members of the Sanlam Choral Training Programme. Sanlam is a corporate
sponsor of Cape Town Opera.
Funding
Sanlam has committed to contributing one percent
of the Group’s net operating profit after tax as
a basis for determining the CSI budget. Based on
this formula, the budget for 2003 is R15 million.
Sanlam Life mainly drives sponsorships and
R30 million was budgeted for 2002 and
R35 million for 2003.
CSI in 2002
The Sanlam group was involved with 38 new
projects during 2002.
Full details of the projects supported by the
businesses in the Group will be incorporated in
Sanlam’s first sustainability report, to be released
later this year.
For the first time in the 14 years of the national Sanlam Music
Competition for Primary School Learners, top honours were shared last
year by twelve-year-old pianists Misha Meyer and Yasheen Modi.
AmaZulu and Classic Chiefs meet in the finals of
the Halala Cup in 2002. Women’s soccer is one of
the fastest-growing sports in
the world and Sanlam sponsors the National
Women’s Soccer League, in which more than 400
clubs participate.
38Sanlam was
involved in new
CSI projects during 2002
Page 47
Some areas of excellent operationalperformances in a difficult trading environment
Detailed reviews that cover the operational
performance of the different Group businesses are
provided from page 58. This report expands on the
Group financial results and provides an analysis of
the financial information.
Summary of results
Weak equity markets severely impacted on Sanlam’s
2002 financial year. Given the difficult market
conditions, most of the Group companies
performed admirably and recorded satisfactory
operating results. Investment returns were, however,
disappointing and substantially contributed to a
sharp decline in the Group’s attributable earnings
for the year.
Earnings per share, based on a long term rate of
investment return, of 122,7 cents per share were
down 8% (up 14% on a comparable basis)
compared to the 133,2 cents per share achieved in
2001.
Financial services income – the aggregate of
fees, risk premiums and other revenue – increased
by 11% to R12 668 million. The Group
administration expense ratio improved from 35,2%
to 34,4%. Local expenditure was well contained
and down 2% compared to 2001. An expansion of
international capacity, however, caused a 9% overall
increase in administration expenditure.
Underwriting policy benefits in Santam and Sanlam
Life rose by 17%. This relatively high increase in
claims limited the improvement in gross operating
profit. The overall gross profit margin for the
Group at 17,0% was down on the 18,4% achieved
in 2001.
A disproportionate rise in tax and minorities
caused a 11% fall in net operating profit. The
Page 48
Financial Review
Kobus Möller Group Executive Finance
Acting Chief Financial Officer
Page 49
Group’s effective tax rate on operating profit was
25,6% in 2002, marginally up on the 24,6% in
2001. In addition, the 2001 tax charge was lowered
by a R185 million one-off release of surplus tax
provisions. A 28% increase in minority interest is
due to an increase in Santam’s relative contribution
to the Group’s operating profit.
Investment income of R798 million earned on
the shareholders’ funds’ investment portfolio is 17%
lower than in 2001. It includes equity-accounted
earnings of R396 million, which was 11% lower
than in 2001. This comprises Sanlam’s effective
interest in Absa’s attributable earnings for the
12 months to September 2002. The reduction in
Absa’s contribution is due to the losses incurred in
their micro lending operation, Unifer. Net
investment income for 2001 included a
R99 million release of surplus tax provisions.
The negative net investment surpluses of
R2 621 million on the shareholders’ funds’
investment portfolio reflects the year’s movement in
equity markets. The JSE All Share Index lost some
8,4% of its value, while the 28% stronger rand
exacerbated the impact of already weak
international equity markets.
The shareholders’ fund provided financial
assistance of R153 million from its investment
funds to improve the funding level of the
Participating Annuity portfolios. The funding levels
of these portfolios still meet the prescribed
requirements in terms of the Long Term Insurance
Act and the professional guidelines of the ASSA on
the elimination of underfunded positions. The
underfunded positions should improve in line with
a recovery in equity markets.
LTRR headline earnings
‘LTRR headline earnings’ based on a long term
investment return assumption, is aimed at
eliminating the earnings volatility caused by short
term market movements. Based on an average pre-
tax long term return of 13% per annum, the
expected investment return for 2002 amounted to
R1 745 million. This is 6% lower than in 2001 due
to a lower (monthly) asset base on which the
expected return is calculated. We maintain that the
earnings figure derived on the LTRR basis provides
a measure of sustainable long term results for the
industry. It is also the recommended practice of
disclosure for long term insurers in the United
Kingdom. Following the recent developments in
respect of the presentation of Headline earnings,
SUMMARY OF RESULTS
R million 2002 2001
Financial services income 12 668 11 380 11%Underwriting benefits (6 162) (5 285) (17%)Admin expenditure (4 357) (4 003) (9%)
Gross operating profit 2 149 2 092 3%Taxation (549) (330) (66%)Minorities (118) (92) (28%)
Net operating profit 1 482 1 670 (11%)Net investment income 798 958 (17%)
Headline earnings 2 280 2 628 (13%)Net investment surpluses (2 621) 1 596Goodwill amortisation (259) (215)
Attributable earnings (600) 4 009 (115%)
Net operating profit 1 482 1 670 (11%)LTRR investment return 1 745 1 864 (6%)
LTRR headline earnings 3 227 3 534 (9%)
Cents per shareAttributable earnings (22,8) 151,1 (115%)Headline earnings 86,7 99,1 (13%)LTRR headline earnings 122,7 133,2 (8%)
Page 50
Financial Review (continued)
performance. Excluding the impact of these items,
net operating profit is in fact 12% higher, while
headline earnings (on a LTRR basis) improved by
14%. The reversal in 2001 of surplus tax provisions
of R284 million (R185 million in respect of
operating profit) constitutes the major single
adjustment. Excluding this, net operating profit
and LTRR earnings remained substantially
unchanged from 2001 – in line with the trading
statement issued in December 2002.
Other adjustments include the effective
R189 million impact on Sanlam’s earnings of the
losses incurred by Absa during the year in respect of
their Unifer micro lending business. Capital Gains
Tax (‘CGT’) was introduced with effect from the
fourth quarter of 2001. CGT recovered against the
long term investment return amounted to
R120 million for the full 2002, compared
to R28 million for only the last quarter in 2001.
In 2001 Gensec Bank’s international operations
functioned as an integral part of the local
operations. During that year a currency gain of
R158 million was realised on the translation of inter
company balances and accounted for in operating
profit. The management structure of these
operations has since been adjusted to be consistent
with the rest of Sanlam’s international operations.
In terms of Sanlam group policy all international
businesses now operate and are accounted for as
stand alone businesses. As a consequence, in terms
of Generally Accepted Accounting Practice
(AC112), foreign currency gains or losses on the
capital invested in these entities are not accounted
for in operating profit, but transferred to a
non-distributable reserve.
we now also present a headline earnings figure that
is based on operating profit and actual investment
income earned for the period. Headline earnings
calculated on this basis amounts to R2 280 million,
compared with R2 628 million in 2001. The
Johannesburg Securities Exchange (JSE) expressed
their preference for this definition of earnings, as
apposed to LTRR headline earnings, and indicated
that they would in future, for their record purposes,
use it as the official “headline earnings” for Sanlam
(and for all other long term insurance companies).
The official “headline earnings” could vary
materially depending on the policies adopted by
insurers. The lack of reporting consistency in the
industry may limit any constructive use of certain
resultant JSE statistics, e.g. Price/Earnings ratios.
Users of these JSE statistics should therefore exercise
caution when using it.
On implementation of the LTRR it was decided
to determine the rate of return on a longer term
perspective with the intention not to change unless
market factors necessitated such action. The rate is
reviewed on an annual basis and is predominantly
influenced by the investment return assumptions
used in the determination of the embedded value.
Since 2000 we have assumed a 13% rate of return
before tax, based on the expected return on a
balanced portfolio. Given the recent reduction in
long term interest rates, and in line with lower
actuarial assumptions, it has been decided to adjust
the rate used in 2003 to 12% per annum.
Comparable earnings
One-off items included in both the 2001 and 2002
results complicate a true evaluation of the year’s
Page 51
Business volumes
Adverse equity market results had a marked impact
on business volumes for the year. Total new business
inflows were down by R4 billion (12%) on 2001,
mostly due to lower investment inflows. New third
party investment funds were R2,8 billion lower
than in 2001, while Unit Trust inflows were down
by R1,4 billion. The white label facility offered to
third parties also attracted R1,5 billion less inflows.
Innofin managed to attract investment funds of
some R4 billion, 22% more than in 2001. The bulk
of this was in respect of money market funds.
Santam performed well to increase its gross
premium income by 17%.
New life business inflows of R13,1 billion were
only marginally down on 2001. Given the market
conditions, individual life business performed
admirably and new business inflows rose by 5%,
substantially due to a 16% rise in single premium
business. Products offering investment guarantees
provided the bulk of this growth. New group life
business, however, was down by 17%. Lower
investment-linked inflows were the major
contributor to the lack of new business inflows.
Embedded value added by new life business rose by
10% to R320 million, while the new business
embedded value margin improved from 13,2%
to 14,7%. This reflects improved efficiencies
and the quality of new business. We remain on
track to achieve our longer term target margin of
some 18%.
The lower investment inflows also impacted
on net fund flows. Total funds received amounted
to R42 billion which is R4 billion (9%) lower
than in 2001. On the positive side, outflows were
well contained. Life policy benefit payments were
COMPARABLE EARNINGS
R million 2002 2001
Net operating profit 1 482 1 670 (11%)Tax reversal — (185)
Excluding tax reversal 1 482 1 485 0%Currency translation — (158)
Comparable net operating profit 1 482 1 327 12%
LTRR earnings 3 227 3 534 (9%)Tax reversal — (284)
Excluding tax reversal 3 227 3 250 (1%)Currency translation — (158)Absa/UniFer impact 189 —Introduction of CGT 120 28
Comparable LTRR headline earnings 3 536 3 120 13%
cps 134,4 117,6 14%
BUSINESS VOLUMES: NEW BUSINESS
R million 2002 2001
Life business 13 123 13 297 (1%)Investment business 13 586 17 977 (24%)Short term insurance 5 548 4 760 17%
32 257 36 034 (10%)Health care — 547
New business inflows 32 257 36 581 (12%)
Life business APE 2 179 2 204 (1%)New business embedded value 320 290 10%New business embedded value margin 14,7% 13,2%
BUSINESS VOLUMES: NET INFLOWS
R million 2002 2001
Life business (4 932) (6 094) 19%Investment business (625) 3 691 (117%)Short term insurance 1 623 1 393 17%
(3 934) (1 010) (290%)Health care — 60
Net inflows (3 934) (950) (314%)
Total inflows 42 098 46 124 (9%)Total outflows (46 032) (47 074) 2%
Page 52
Financial Review (continued)
• Sanlam Namibia’s results are now included with
Sanlam Life;
• Sanlam Property Asset Management’s results are
included with SIM and no longer with Gensec
Properties;
• Sanlam International’s results are now being
reported separately from SIM;
• Tasc’s results are now included with SIM;
• The wholesale unit trust business was transferred
from Sanlam Life to SIM;
• Sanlam Life’s operating profit and corporate
expenses for 2001 have been restated to reflect
the transfer of corporate expenditure, that is
directly associated with the Life business, to
Sanlam Life. This now aligns the accounting
treatment with that used in the past for
embedded value purposes;
• Income on Santam’s free float, or working capital,
has been reallocated from investment return to
operating profit, to bring it in line with the basis
followed in the rest of the Group. Santam reports
its results on the same basis.
The 3% growth in gross operating profit to
R2 149 million falls well short of our long term
growth target, but is in line with the forecast of
moderate growth made in the December 2002
trading statement. Satisfactory growth from both
Santam and Sanlam Life was substantially offset by
lower contributions from Gensec Bank and from
Sanlam International.
Sanlam Life still provides the major share
(71%) of the Group’s operating profit and
increased its contribution by 11% to
R1 533 million. These results are mainly due to an
increase in net interest earned on its working
capital and in other market linked income sources.
down by 3%, while fund withdrawals and policy
surrenders were R1,2 billion (11%) lower than in
2001. This was, however, not sufficient to
counter the lower inflows and to prevent an
overall net outflow of R3,9 billion. Net short
term insurance business flows improved by some
R230 million on 2001 and recorded a
R1,6 billion net inflow of business. Life business
recorded a net outflow of R4,9 billion, the bulk
of which was in respect of group business.
Although not satisfactory, this was still
a substantial improvement on the R6,1 billion
net outflow of 2001. Net investment business
outflows of R1,6 billion were in total due to the
loss of third party funds, as Sanlam Unit Trusts
recorded net inflows of R1 billion for the year.
Operating results
During the course of the year certain changes in
reporting structures were effected, based on the
changes in management structures. These are
summarised below to indicate the changes
compared to the 2001 financial statements
(2001 figures have been restated accordingly).
With the exception of the treatment of Tasc all of
these were already implemented at the interim
results stage.
• Innofin's results are not presented separately
anymore. These results have been incorporated
into Sanlam Life. The basis of accounting for the
results from the 67% interest has also changed:
100% of their profit is now included in gross
operating profit, with the minority share being
subtracted separately. In the past their
contribution was accounted for on
a net basis;
Page 53
Risk underwriting margins, in particular in respect
of group business, deteriorated somewhat from the
high levels of the past few years. Administration
profits were marginally better than in 2001. A
lower asset base and stagnant new business volumes
limited the increase in fee income. In another
year of exceptional cost control, Sanlam Life’s
administration expenditure reduced by 4%.
Santam contributed R257 million (12%) to the
Group operating profit, an increase of 37% on
2001. Underwriting profit increased by 46% to
R142 million, despite having to account for several
major weather related events in the last half of the
year. Santam’s operating income now also includes
interest of R115 million earned on its free float.
In the past this has been reported as investment
income. The 2001 comparable figures have been
adjusted accordingly.
In a difficult environment for investment
managers SIM did well to repeat its 2001 profit
contribution. After a disappointing first half
performance Gensec Bank recovered somewhat in
the second half of 2002. Certain parts of the bank
performed very well and in some instances showed
substantial revenue increases. The overall
performance of the bank, however, mirrored the
very difficult market conditions and it was
especially their equity related activities that resulted
in the substantial underperformance of the bank.
Sanlam International was successful in
expanding its base substantially during the
financial year, but recorded disappointing
financial results. A combination of lower
international equity markets, substantially higher
expenditure on increased capacity and the negative
impact of the strong rand, resulted in only a
marginal contribution in the second half and a
27% decline in its contribution for the year.
Revenue grew in excess of 50% but this was more
than offset by a doubling of expenditure. The total
operating profit contribution from the Group’s
international operations, including that of Gensec
Bank, declined from R197 million (9,4% of total)
in 2001 to R179 million (8,3% of total).
Corporate expenditure of R138 million was
10% higher than in 2001. The increase was
mainly due to one-off costs incurred on strategic
analyses.
Embedded value
At the end of December 2002, Sanlam’s embedded
value amounted to R27,1 billion (1 032 cents per
share). Taking into account the dividend of
R921 million paid during the year, it represents a
reduction in value of some R2,7 billion (- 8,9%) on
the R30,7 billion as at the end of December 2001.
This negative return in embedded value is due to
OPERATING RESULTS
R million 2002 2001
Sanlam Life 1 533 1 375 11%Santam 257 188 37%Gensec Bank 112 191 (41%)SIM 185 184 1%Sanlam International 75 103 (27%)Other 125 143 (13%)Sanlam Health — 33 (100%)
2 287 2 217 3%Corporate expenses (138) (125) (10%)
Gross operating profit 2 149 2 092 3%
Southern Africa 1 970 1 895 4%International 179 197 (9%)
Page 54
Financial Review (continued)
management responsibilities. The restructuring did
not have any effect on the Group results. The
essence of the restructuring was:
• Sanlam Life exchanged its 58% interest in Genbel
Securities Limited (Gensec) for a 100% interest
in SIM, certain private equity and underwriting
assets, Sanlam Unit Trusts, Multi Data and
Sanlam Trust, the balance (33,3%) of the Group’s
interest in Innofin, a 15,5% interest in Santam
and sundry other assets.
• Gensec transferred its interest in SIM to Sanlam
Life, its interest in Sanlam Netherlands Holdings,
Tasc and Gensec Property Services to Sanlam
Limited, leaving Gensec as the bank controlling
entity with only the local and offshore banking
interests of Gensec Bank.
• Sanlam Limited now holds 100% of Gensec
(Bank) and Sanlam Netherlands Holding BV,
which serves as the controlling entity for offshore
expansion and the holding company for the
offshore corporate assets.
Individual group businesses are tasked with the
responsibility for the total return earned on their
capital base. Specific constraints in Sanlam Life’s
capital portfolio, however, complicate the full
realisation of this objective. Constraints include an
overweight position, as well as a lack of liquidity, in
certain assets, such as the investments in Absa,
Santam, SIM and investment properties. The longer
term objective remains to improve both the balance
and the liquidity of the portfolio that will allow
Sanlam Life full autonomy in the management of
its capital.
At 31 December 2002 the total capital allocated
to Sanlam Life amounted to R17 billion. This is
within a calculated range for Sanlam Life’s optimal
a reduction of R3,6 billion in the value of the
Group’s net assets. Listed entities were valued at the
lower prevailing market prices, while a prudent
assessment of the value of the unlisted non-life
group operations, using current market indicators,
necessitated a R1,7 billion overall reduction in
valuation. These operations, valued at R3,9 billion,
comprise 14% of the total embedded value of the
Group. A R600 million net fair value adjustment
reflects the present value of future corporate
expenses not accounted for in either Sanlam Life or
in the other group business valuations. The value of
Sanlam Life’s in-force book of business amounted
to R6,7 billion at year end, after taking into
account the cost of capital at risk (R1,5 billion).
Growth from life business, based on the starting
value of the in-force life business less the release of
current year operating profit, amounted to 13%.
New business for the year contributed R320 million
to the growth, while Life’s actual operating
performance exceeded the actuarial assumptions
underlying the calculation of the in-force value.
Capital efficiency
The effective and efficient utilisation of Sanlam’s
available capital is a key business driver.
A restructuring of the Group capital structures
was implemented with effect from 1 January 2002.
This formalised the capital optimisation process
that was started during 2001. The restructuring is
aimed at the most effective use of capital in its
allocation to group businesses, while taking
cognisance of the Financial Services Board’s
requirements in respect of qualifying capital for
statutory purposes. The process was also used to, as
far as practicable, align statutory structures with
Page 55
capital. The latter is determined on a regular basis
by using a stochastic model that stress tests various
financial downside scenarios at different confidence
levels, taking into account expected business levels
and statutory or regulatory constraints and
assuming a balanced portfolio with appropriate
liquidity levels.
Participating life products are designed to
stabilise short term investment return volatility over
the lifetime of the products by smoothing its annual
return (bonuses). Actual market returns earned on
the underlying assets in these product portfolios
may therefore result in short term positive or
negative funding positions on any specific reporting
date. Given reasonable policyholder return
expectations and the realisation of expected long
term investment performance, all positive or
negative funding positions should be eliminated
over the lifetime of the product. Given the recent
adverse equity market returns Sanlam Life’s funds
were in a negative funding position on
31 December 2002. The negative funding level of
the Group Participating Annuity portfolio and
Monthly Bonus Fund (10,0% and 11,1% of assets
respectively) required specific disclosure in terms of
the Actuarial Society of South Africa’s (ASSA)
guidelines. The statutory capital adequacy
requirement (‘CAR’) of the life business amounted
to R9,9 billion at the end of 2002. Shareholders’
capital held by Sanlam Life covered this
requirement 1,7 times (2,8 at the end of 2001).
The capital allocated to Gensec Bank amounted
to R2 billion on 31 December 2002. This is in
excess of its current regulatory requirements. To
support the bank’s external rating and to ensure its
competitive market position, Sanlam agreed to also
RETURN ON EQUITY
Shareholder Embedded Return per annum return value growth
1 year from 1.1.2002 (13,3%) (8,4%) 2 years from 1.1.2001 (6,8%) 3,2%3 years from 1.1.2000 0,0% 4,1%4 years from 1.1.1999 10,1% 8,2%
EMBEDDED VALUE
R million 2002 % EV 2001
Group operations at fair value 5 447 20% 7 262 (25%)
Santam 1 581 1 709 (7%)SIM 1 289 2 166 (40%)Gensec Bank 1 186 1 442 (18%)Sanlam International 1 071 1 539 (30%)Other 320 406 (21%)
Absa 3 957 15% 4 036 (2%)Other net assets 11 543 43% 13 101
NET ASSET VALUE (businesses reflected at fair value) 20 947 77% 24 399 (14%)Fair value adjustment ( 600) (603) 0%Value of in-force 6 740 25% 6 941 (3%)
EMBEDDED VALUE 27 087 30 737 (11%)
Sanlam Life 23 741 26 850 (12%)Other 3 346 3 087 11%
NAV cents per share 798 927 (14%)EV cents per share 1 032 1 167 (12%)
Page 56
Financial Review (continued)
Except for some short periods in the past, the
Sanlam share price trades at a substantial discount
to the underlying (embedded) value of the
company. A narrowing of the current discount
provides substantial upside potential for Sanlam
shareholders and a challenge to management to
substantiate the embedded value of the company by
delivering sustained growth in the value of its
underlying components. The table on page 55
provides the recent history of embedded value
growth (including dividends paid to shareholders).
A combination of operational performance and
investment returns is needed to achieve the required
growth in value. The focus of the different group
businesses is to maximise their operational
performance. The optimal utilisation (and
investment) of the Group’s investment portfolio is
an imperative to maximise Group value.
Appropriate investment strategies are reviewed on
an ongoing basis.
Ongoing analyses are being done to set
appropriate targets for the different group
businesses in order to measure operational
performance, whilst taking full cognisance of risk
and capital utilised. Meeting risk-adjusted return
targets is a key in evaluating operational
performance as well as a prerequisite for new
investment propositions. Significant progress
provide a capital maintenance guarantee of
R5 billion to the bank. This contributed greatly in
addressing any market concerns after the reduction
of the bank’s formal capital as part of the
restructuring exercise.
Equity markets have deteriorated since the
balance sheet date. This has an adverse impact on
the Group’s reported capital and the funding levels
of Sanlam Life’s portfolios. Notwithstanding, the
financial position of the Group remains sound.
Return on equity
Several return measures are used at different levels
in the organisation to govern and assess the Group’s
performance. These measures are ultimately all in
support of the goal to provide a competitive return
on investment to the Sanlam shareholder. Over
different periods an investment in Sanlam yielded
returns set out in the table on page 55 (measured in
share price growth and dividends). The negative
effect of recent equity market movements is evident
in the returns.
The Sanlam share price lost some 17% during
the year. This is in line with the performance of
both the FINDI30 and the Insurance Index on the
JSE. The share price discount to embedded value
widened from 21% at the end of December 2001
to 26% at the end of 2002.
Page 57
has been made by Gensec Bank in particular to
measure the performance and contribution of its
business activities on a risk-adjusted return on
capital basis.
The Sanlam group achieved an after tax
operating return of 7,2% on average capital
employed in 2002.
Contingency
Shareholders had been advised earlier (initially in
the announcement of the 2001 interim results in
September 2001) that the South African Revenue
Services (“SARS”) had issued revised assessments
in respect of the 1997, 1998 and 1999 tax years
of a subsidiary of Genbel Securities Limited (“the
company”). As was reported, in terms of the revised
assessments certain significant surpluses arising
from the disposal of certain assets are subjected to
full tax as SARS contends that such surpluses are
not of a capital nature.
The company lodged objections in respect of all
three revised assessments. The company’s objections
that these amounts are in fact of a capital nature
have been disallowed and penalties and interest
were imposed in addition to the tax payable. SARS
afforded the company the opportunity to make
representations with respect to the imposition of
penalties and interest. No resolution has as yet been
reached on this matter. Gensec intends to challenge
the assessments in court should the ongoing
discussions with SARS on the merits of their case
not be successful.
Dividend
The Board has declared a dividend of 37 cents per
share payable on 7 May 2003 to shareholders
registered on 11 April 2003. This represents an
increase of 6% over the 35 cents per share
dividend declared in respect of 2001. The
dividend is covered 3,3 times by LTRR headline
earnings. This represents a relaxation of our stated
target cover of between 3,5 and 4,5 times.
Our dividend philosophy adopted since
demutualisation is one of stable growth in
dividends. The dividend pattern will therefore not
strictly follow the earnings pattern.
Page 58
SanlamBusiness reviews
Santam’s underwriting surplus of
R142 million benefited from both
improved underwriting margins and
increased business volumes
The containment of
costs by Sanlam Life
resulted in estimated
savings in costs since
1999 compared to the
CPIX of approximately
R430 million
Page 59
We are confident that SIM now
has a highly skilled and
motivated investment team in
place that can meet the
investment requirements of our
diverse client base
We believe that the UK
operations provide a strong
foundation for further expansion
in Europe
Several new innovative products
launched by Sanlam Life
The most important
influence on the future of
Gensec Bank will continue
to be the macro investment
banking environment
Page 60
Sanlam Life
Service rating of
90% and 93%
respectively for
individual life
and unit trust
business
from left to right (front): André Zeeman, Lizé Lambrechts (Chief Executive), Anton Gildenhuys, Estelle Morkel
from left to right (back): Heinie Werth, Andy Baxter, Themba Siyolo, Fanie Lategan, Deon Lessing, Hennie de Villiers, Francois Venter, Shaun Woodman
Salient features
• 11% growth in operating profit
• New business embedded value margin increased
from 13,2% to 14,7%
• Administration costs reduced by 4%
Nature of business
Sanlam Life’s business is to provide innovative solutions
and services to its clients, who are either individual
clients or groups of individuals.
The products and services provided by Sanlam Life,
include life insurance, unit trust, trust and linked
product business, and include:
• Risk cover and guarantees (death, disability, trauma
and investments)
• Investments and savings products
• Administration services
• Advice/Consulting
• Loan finance
Page 61
Sanlam Life group profile
Vision and strategy
Sanlam Life shares the Sanlam group’s vision to be
the leader in wealth creation. To achieve our vision
we provide trusted advice and innovative solutions
and build long term relationships with clients. We
foster a culture of passion for our clients, valuing
diversity and differentiation, and encourage
innovation, aiming to create a success friendly
environment.
Our objective is to achieve consistent bottom
line growth and improved new business margins by
focusing on:
• Top line growth
• Retention of funds
• Cost-effectiveness
• Finding new revenue sources
Business environment
The volatile local and global investment markets of the
past few years continued during 2002, influencing the
savings behaviour of clients towards products that
provide a more stable return, such as guaranteed and
cash linked products. Several new innovative products
were launched during 2002 to address these needs.
(Refer to table on page 66 for new products launched.)
The fortunes of the rand had a mixed impact on our
business. The sharp fall in the rand during 2001 was
largely responsible for the increase in CPIX inflation
from 5,8% in September 2001 to 12,7% in November
2002, which led to a 4% increase in interest rates during
the year. This positively impacted on products linked to
interest rates, but also put pressure on consumers’
disposable income and therefore their ability to save.
The appreciation of the rand during the second half
of the year, together with poor offshore equity market
performance, had a negative impact on the demand for
investments linked to our offshore products. This was
aggravated by increased administrative procedures for
offshore investments introduced by the South African
Revenue Service (SARS). These issues were resolved
with SARS towards the end of the year and the current
favourable exchange rate of the rand should attract
clients back to these products.
The above conditions support more liquid, short
term investments rather than the longer term life
products and put pressure on the growth in our life new
SANLAM LIFE INSURANCE LIMITED
Multi-Data (Pty) LimitedMoney transfer
Sanlam Customised Insurance LimitedCell captive
Sanlamtrust Managers LimitedRetail Unit Trusts
Sanlam Trust LimitedEstates and trusts
Sanlam Namibia GroupFinancial Services in Namibia
InnofinLinked products and cash management
Sanlam LifeIndividual life and group life insurance
Direct AxisPersonal Loans
Total Care StrategyGroup Retirement Fund Administration
100%
100%
100%
100%
100%
100%
67%
60%
70%
Page 62
Sanlam Life (continued)
towards its good growth. This was offset by
disappointing inflows into our longer term life and unit
trust products. Inflows into individual life products
grew by only 5% to R9 181 million, employee benefits
business decreased by 17% to R2 642 million and unit
trust inflows reduced by 11% to R4 388 million.
The volatile equity markets boosted inflows into
individual life guaranteed products, which increased
by more than 40%, but had the opposite effect on
market-related savings products that, together with the
reduction in offshore inflows, offset this increase.
Continuations (where clients continue their policies
with Sanlam after they mature), which declined by
18%, were further influenced by the introduction of
capital gains tax during the second half of 2001, which
made certain second-hand policies unattractive owing
to double tax implications. Notwithstanding the
reduction in continuations, we were able to retain
52% of individual life maturity benefit payments
within other life and non-life products offered by the
Sanlam group. This retention rate is in line with that
achieved last year. The establishment of a unit that
focuses on customised investment solutions for unique
client needs for both the individual and group life
business, has resulted in individual life institutional
single premiums increasing significantly from
R123 million to R752 million.
Employee benefits inflows were influenced largely
by unsatisfactory investment performance but this was
countered to some extent by new products, which
offered the services of several asset managers.
Inflows into interest related unit trust funds
increased by 16% owing to the higher interest rates and
volatile equity markets. However, these conditions,
together with an unsatisfactory investment performance
for most of the year, resulted in a 54% decrease in
inflows into equity-based unit trust funds.
New products such as the capital protection and
business. It is also reflected in industry statistics, which
show a slowdown in the growth of individual life
business over the past two years and a growth in shorter
term non-life products.
In response to our clients’ need for more variety and
flexibility we have countered this to some extent by the
introduction of several new products, particularly on the
employee benefits side, which offer the choice of several
asset managers. The improvement of our investment
performance is our most important strategic issue.
We are confident that the recent appointment of senior,
highly qualified investment professionals, together with a
world-class investment process at Sanlam Investment
Management, will ensure a return to sustainable
competitive investment results. Positive results are already
evident in the recent market performance statistics.
Financial reviewSummary of results
Sanlam Life achieved satisfactory overall results
notwithstanding the difficult operating conditions
discussed above. Operating profit increased by 11%,
new business embedded value margin increased from
13,2% to 14,7%, administration costs were reduced
by 4% and Innofin’s new business volumes increased
by 22%.
New business
Total new business increased by 2% to
R21 604 million. Innofin’s volumes increased by a
satisfactory 22% to R5 393 million, as the business
environment during 2002 suited its more flexible
shorter term products, which offer access to a variety of
asset managers. Innofin’s well-established products, such
as its linked administration offering and wrap funds,
supported by new offerings such as multi-manager
products and money market funds as well as
enhancements to its existing product range, contributed
Page 63
inflation protection plans were introduced towards the
end of the year to provide clients with protection in
these market conditions.
Net flow of funds
A total net inflow of funds of R1 071 million was
achieved. Innofin achieved a very satisfactory
R2 799 million net inflow of funds, which is a 16%
improvement on last year. This was largely as a result of
the good inflows discussed above. Although individual
life total inflows increased by only 5% to
R16 275 million, this was higher than the 4% increase
in benefits paid and resulted in a slight improvement on
last year’s net outflow of R1 019 million. Benefits paid
include surrenders, which increased by 16%,
contributing to this increase are several large
institutional surrenders of approximately R1 billion.
If these are excluded, the net outflow of funds in the
individual life business would have reversed.
The outflow of funds from our employee benefits
business deteriorated from R796 million to
R1 388 million, mainly as a result of the decrease in
inflows mentioned above. Notwithstanding difficult
conditions, our success in retaining clients is reflected in
the 9% reduction in fund terminations.
Although inflows into unit trusts decreased by 11%,
ouflows were contained and reduced by 9%, resulting in
a R168 million decrease in their net inflow to
R676 million. There was a net inflow into interest related
unit trusts of R750 million, while equity funds showed
a net outflow of R74 million in unfavourable markets.
Operating profit
The 11% increase in operating profit to
R1 533 million is an exceptional performance taking
into consideration the difficult business conditions
during 2002. This performance is even more
remarkable when considering that the life business,
NEW BUSINESS
R million 2002 2001
Individual Life 9 181 8 770 5%
Recurring 1 540 1 532 1%Single 5 839 5 044 16%Continuations 1 802 2 194 (18%)
Employee Benefits 2 642 3 178 (17%)
Recurring 156 171 (9%)Single 2 486 3 007 (17%)
Innofin 5 393 4 415 22%Unit Trusts 4 388 4 908 (11%)
Total 21 604 21 271 2%
TOTAL RECURRING LIFE PREMIUMS
R million 2002 2001
Individual Life 8 634 8 336 4%Employee Benefits 2 565 2 305 11%
Total 11 199 10 641 5%
BENEFITS PAID
R million 2002 2001
Individual Life 17 291 16 593 4%
Death and disability 1 587 1 552 2%Maturities 8 082 7 866 3%Annuities 2 755 2 989 (8%)Surrenders 4 867 4 186 16%
Employee Benefits 6 439 6 108 5%
Benefit payments 4 406 3 868 14%Terminations 2 033 2 240 (9%)
Innofin 2 594 2 003 30%Unit Trusts 3 712 4 064 (9%)
Total 30 036 28 768 4%
NET CASH FLOW
R million 2002 2001
Individual Life (1 016) (1 019) —Employee Benefits (1 388) (796) (74%)Innofin 2 799 2 412 16%Unit Trusts 676 844 (20%)
Total 1 071 1 441 (26%)
Page 64
Sanlam Life (continued)
system development costs incurred in 2002 was for the
development of our new administration platform for
individual life products.
Our operating margin improved from 25,4% last
year to 26,4% which reflects the results of the more
efficient management of our operations.
Life business operating profit increased by 10% to
R1 471 million and comprises 96% of the Sanlam Life
group profits. Unit trust profits decreased by 8% to
R56 million, largely due to reduced working capital
levels, and therefore lower interest income earned from
this source. Innofin, in its third year of operation,
exceeded its objective to break even in 2003 a year
earlier, posting a R2 million profit.
New business embedded valueNew business embedded value increased by 10% to
R320 million and the new business embedded value
margin increased to 14,7% from 13,2% in 2001. The
growth in new business embedded value was largely
driven by an increased focus on higher quality business
and the containment of costs rather than growth in new
business volumes, which decreased by 1% (measured on
the Annual Premium Equivalent basis), owing to
difficult market conditions discussed above.
Technical reasons such as a change in the actuarial
mortality assumptions and the reduction in the risk
discount rate of 1% also contributed towards the
growth in new business embedded value. Our objective
is to further improve our new business embedded value
margin over the next three years to be more in line with
the industry average, hence our continued emphasis on
optimising costs and writing profitable new business.
Funding position of participating portfoliosThe purpose of participating portfolios is to stabilise
the short term volatility in investment performance
over time to declare smoothed annual bonuses.
which contributes approximately 96% of these profits,
was the most affected by the adverse trading conditions.
Profits generated from funds management
increased by 37% to R944 million. The main
contributors to this growth were improved profits from
the management of our working capital, partly due to
higher interest rates, and also good growth in profits
earned from the non-profit sharing portfolio (where we
carry the underlying investment risk). The last
mentioned profit was boosted by the non-recurrence of
a strengthening in actuarial reserves in 2001.
Risk profits declined by 14% to R589 million, as
underwriting margins decline from the high levels of
the past few years. Although both individual life and
employee benefits’ risk profits declined, the employee
benefits’ profits were more severely impacted by a
higher claims experience. Although we will maintain
our strict underwriting procedures during 2003, the
current margins will remain under pressure.
Our objective to increase administration efficiency has
paid dividends and administration costs have decreased
by 4% from R2 124 million to R2 033 million. System
development costs, which dropped from R192 million
to R101 million, contributed significantly to the
decrease and the remaining costs were contained to the
same level as last year and are in line with our new
business growth and in-force book. The reduction in
our administration costs has led to a marked
improvement in our administration cost ratio from
39,2% last year to 35%. Since 1999 our administration
expenses (excluding restructuring costs but including
system development costs) have increased on average by
3% per annum, which converts to an estimated saving
in these costs of approximately R430 million when
compared with the CPIX inflation rate over this period.
We consider our current level of system development
costs to be at the minimum level required to fund our
continued system renewals. A high percentage of the
Page 65
The short term funding levels of this business may
therefore be in a temporarily positive or negative
position on the annual reporting date depending on
prevailing investment market conditions, the
investment performance achieved during the year and
bonus rates declared. Based on the reasonable
expectations of policyholders and the expected long
term investment performance of these portfolios,
positive or negative funding positions are expected to be
eliminated within the next three bonus declarations.
On 31 December 2002 our employee benefits
participating pension portfolios and Monthly Bonus
Fund were in underfunded positions resulting in their
disclosure according to the guidelines of the Actuarial
Society of South Africa (ASSA). The shareholders’ fund
provided financial assistance of R153 million from its
investment funds to the Bonus Pension portfolio, which
will be repayable should the funding position recover
sufficiently. We have met the prescribed requirements
in terms of the Long Term Insurance Act and the
professional guidance of ASSA on eliminating the
underfunded positions in these portfolios and, as our
investment returns improve, underfunded positions will
improve.
Other achievementsExcellent client service is a key element of our business
and in surveys conducted during 2002 we achieved
satisfactory service ratings of 90% and 93% respectively
for our individual life and unit trust business. Although
our rating of 78% for employee benefits business is
among the best in the industry, it is not satisfactory and
we aim to improve it. Service level targets also form part
of our performance bonus in 2003. Our good
individual life service ratings are confirmed by the
award we received in 2002 for the Best Contact Centre
Solution in Africa. Surveys show that our brand
awareness is one of the highest in the industry.
INCOME STATEMENT
R million 2002 2001
Financial services income 6 961 6 515 7%Sales remuneration (1 158) (1 098) (5%)
Income after sales remuneration 5 803 5 417 7%Underwriting policy benefits (2 237) (1 918) (17%)Administration costs (2 033) (2 124) 4%
Operating profit before tax 1 533 1 375 11%
Admin cost ratio 35,0% 39,2%Operating margin 26,4% 25,4%
OPERATING PROFIT – SUMMARY PER TYPE
R million 2002 2001
Funds management 944 690 37%Risk profit 589 685 (14%)
1 533 1 375 11%
PROFIT – SUMMARY PER BUSINESS
R million 2002 2001
Life business 1 471 1 335 10%Unit Trusts 56 61 (8%)Innofin 2 (19) 111%Other 4 (2) —
1 533 1 375 11%
RISK PROFIT – SUMMARY PER BUSINESS
R million 2002 2001
Individual Life 427 446 (4%)Employee Benefits 162 239 (32%)
Total 589 685 (14%)
LIFE NEW BUSINESS EMBEDDED VALUE
R million 2002 2001
Annual Premium Equivalent (APE)– Individual Life* 1 774 1 737 2%– Employee Benefits 405 467 (13%)
Total 2 179 2 204 (1%)
New business embedded value– Individual Life* 247 208 19%– Employee Benefits 73 82 (11%)
Total 320 290 10%
New business embedded value margin– Individual Life* 13,9% 12,0%– Employee Benefits 18,0% 17,6%
Total 14,7% 13,2%
*Includes Sanlam Namibia Limited
Page 66
Sanlam Life (continued)
the medium to longer term in a fairly mature life
industry. This ongoing client focus, combined with
improvements in operational excellence and our efforts
to unlock new revenue sources, should assist sustainable
profit growth in the longer term.
Profit growth in 2003 is very much dependent
on improved investor sentiment which will follow on
market stability and sustained competitive investment
performance. Lower interest rates and pressure
on underwriting margins will limit the potential
for growth.
Employment equity is a business imperative and
also forms part of our performance bonus targets.
We have made progress in this area when compared
with 2001, and aim to improve further in 2003. Focus
is also placed on providing an environment of equity in
the workplace and on valuing diversity.
ProspectsOur renewed focus on the client and client service,
together with our high brand awareness, indicates that
we are well positioned to strengthen our position over
New products launched during 2002
Product Description
Individual Life
Stratus International RA and Stratus International Retirement annuity and savings product with foreign Endowment exposure and offshore proceeds through the R750 000
allowance for individuals
Stratus International Investment Linked Life Annuity Investment linked life annuity option for the proceeds of the Stratus International RAs
Stratus International Money Market Funds Money market funds as a safe haven during volatileequity market conditions
Low volatility hedge funds Alternative investment choice available for offshore andinternational products
Matrix risk cover New generation risk product
Unit Trusts
Capital and inflation protection plans Initial capital back protection and inflation linkedguarantee
Inflation Linked Fund Return linked to inflation
Innofin
Flexi Guarantee Living Annuity Combination of investment linked life and guaranteedannuity in one policy
Hedge funds An alternative investment option for investment andretirement fund policies
Multi Manager Funds Fund of fund unit trust investments managed by a multi manager
Employee Benefits
Cell Captive Insurer Subsidiary in which the clients participate in the profitsthrough co-ownership
Page 67
Executive CommitteeL Lambrechts (Lizé) (39)BSc (Hons), FIAChief Executive Officer(17 years’ service)
HC Werth (Heinie) (39)CA (SA), MBA – Finance (4 years’ service)
AP Zeeman (André) (42)FIA – Actuarial (21 years’ service)
EA Morkel (Estelle) (34)BA LLB – Human Resources (5 years’ service)
JH de Villiers (Hennie) (38)BCom (Hons), FFA – Individual Life (14 years’ service)
A Baxter (Andy) (51)BA (Oxon) ACA – IT Delivery (2 years’ service)
PJF Venter (Francois) (45)BCom (Hons) NDT (Elec) – Business Solutions (5 years’ service)
SR Woodman (Shaun) (36)BBusSc (IS Hons) (UCT) – Employee Benefits (2 years’ service)
D Lessing (Deon) (43)DCom – Marketing (5 years’ service)
A Gildenhuys (Anton) (28)BCom (Hons) FIA – Client Solutions (6 years’ service)
T Siyolo (Themba) (39)IRDP, SEP (Harvard) – Distribution (4 years’ service)
SA Lategan (Fanie) (51)BCom (Hons), MBA – Sanlam Unit Trusts (26 years’ service)
Audit Committee
JPL Alberts (Johan) (Chairman)
P de V Rademeyer (Flip)
CG Swanepoel (Chris)
GE Rudman (George) (resigned 26 February 2003)
Executive Directors
L Lambrechts (Lizé)
PC le Roux (Charl)
D Lessing (Deon)
HC Werth (Heinie)
AP Zeeman (André)
Non-executive Directors
GE Rudman (George) (appointed as Chairman
27 February 2003)
P de V Rademeyer (Flip)
CG Swanepoel (Chris)
DNM Mokhobo (Dawn)
JJM van Zyl (Boetie)
JPL Alberts (Johan)
JP Möller (Kobus) (alternate)
Dr L Vermaak – resigned 31 December 2002
Page 68
Sanlam Investment Management
Salient Features
• Attracted highly regarded equity specialists
• Improved unit trust investment performance
• Successful integration of private client business of
Merrill Lynch
• Sanlam Development Fund of Funds launched
successfully
Nature of Business
Sanlam Investment Management (SIM) concentrates
on delivering investment solutions to South African
clients and utilises its fellow subsidiaries, io Investors
Limited and Octane Management Limited BVI, for all
offshore investment management activities.
Our areas of expertise cover traditional asset
management, alternative investment products, property
asset management, private client stockbroking and
portfolio management. We also developed and are
independently running the manager-of-managers
operation called Sanlam Multi-Manager.
Independent
investment
consultants are in
agreement that our
investment process
is of a world-class
standard
from left to right (front): Johan van der Merwe (Chief Executive), Temba Muvsi
from left to right (back): Thando Mhlambiso, George Howard, Steve Mills, Banus van der Walt, Raymond Schkolne, Anton Raath
Page 69
As from 1 July 2002 SIM no longer manages or
controls the international holding company Sanlam
Financial Services BV (SFS). Responsibility for this part
of the Group now lies with Sanlam International.
Business Environment and
Operational Review
To say that world markets took a hammering in 2002 is
an understatement, particularly from a South African
perspective because of the dramatic swing in the value
of the rand. An indication of just how tough the
markets were, is indicated by the decline in the Morgan
Stanley World Index by 42,7% in rand terms. The
South African All Share Index, while also ending the
year in negative territory, fell by 8,2% only. The rand
started the year at R/$11,95 and ended at R/$8,60 –
an appreciation of 28%. This dramatic improvement
meant that many of those shares that benefited from
the rand’s decline in 2001 more than gave back their
gains over the last few months of the year.
It is against this background that SIM strived to
deliver an acceptable performance for all its clients.
Following Angus Samuels’ move to Sanlam to take
on the role of head of Sanlam International, Johan van
der Merwe was appointed as CEO. High-profile
recruitments followed, with George Howard joining as
chief investment officer and the appointment of other
highly regarded equity specialists. The new recruits have
all fitted in extremely well and are all making valuable
contributions in their respective teams and the
company as a whole. Management is confident that
SIM now has a highly skilled and motivated
investment team in place that can meet the
investment requirements of our diverse client
base.
The investment process was refined and
adjusted as the year progressed to take into account
issues such as the move to the FTSE free-float basis of
indexation and the collective input of newly acquired
investment skills. Independent investment consultants
agree that this process is of a world-class standard and
the improved unit trust performances bear testimony to
this, while over the last six months institutional
performance, albeit short term, is showing an
improvement.
Employment equity is an initiative that will impact
on all who run businesses in South Africa and we at
SIM are committed to embracing the challenge of
improving our diversity. To this end we have met our
employment equity targets and have developed an
SANLAM INVESTMENT MANAGEMENT
R million 2002 2001
Fee income 419 405 3%Brokerage 45 16 181%Net interest income 22 13 69%
Financial services income 486 434 12%Administration cost (301) (250) (20%)
Operating profit before tax 185 184 1%Tax (60) (53) (13%)
Operating profit after tax 125 131 (5%)
Page 70
Sanlam Investment Management (continued)
and the increase in staff to service the new business
generated by Tasc and Sanlam Property Asset
Management. SIM Wholesale managed to maintain
expenses at the same level as 2001, despite expenditure
incurred in expanding our private equity capability.
We expect some significant inflows and fee income as a
result of these investments.
Prospects
With inflation now seemingly on a downward trend,
improving corporate profits and the prospect of some
interest rate cuts, we expect better local markets in
2003. The one big shadow hanging over positive
returns for 2003 is the ongoing threat of war in the
Middle East. A protracted war and ensuing global
instability could have a major impact on the First
World economies and, as always, the developing
economies will suffer.
We will continue to focus on delivering quality
investment performance for our clients and on
responsible cost control, while searching for value-
adding ventures for both clients and shareholders.
We will be launching a series of new products in
2003 that are specifically aimed at meeting the
needs of existing and potential clients. SPI will
use its size and reach to consolidate its position
in the market and to attract high-quality, long term
business through professional service and consistently
good returns.
Tasc has firmly established itself in the local market
and is now also well placed to offer its services in both
the UK and European markets, where it will be
focusing its marketing efforts.
Sanlam Property Asset Management will continue
to winnow its portfolio over the next year while making
the most of value-adding opportunities in the ever-
diversifying field of property management.
exciting programme aimed at fast-tracking high-
potential candidates from previously disadvantaged
communities into becoming respected investment
professionals. This intensive programme started in early
January 2003 and the first “graduates” are expected to
complete the programme by mid-2004. Each candidate
will have a highly qualified staff member as a mentor to
assist in his or her development. They will also be
exposed to all aspects of asset management on a
rotation basis.
The acquisition by Sanlam Private Investments
(SPI) of a major portion of the private client business of
Merrill Lynch, which was announced in last year’s
report, took place in March 2002. The integration of
the business with our existing operations went
extremely well. With assets under management and
administration of in excess of R11 billion, SPI now has
the critical mass to generate profits even in the
depressed market experienced in 2002.
Financial Review
The SIM group’s operating profit after tax declined to
R125 million from R131 million in 2001.
Group revenue increased by 12% owing to SPI’s
acquisition of the major portion of the Merrill Lynch
private client business and organic growth achieved by
our administration service provider, Tasc (mainly
offshore) and by Sanlam Property Asset Management.
Other income declined by R20,6 million, mainly
due to currency profits reported in 2001, that were not
repeated in 2002. These currency profits originated
from loan funding provided to the SFS group. The loan
funding was transferred to Sanlam Corporate at the
time when the operational responsibility of the SFS
group was moved to Sanlam International.
Administration costs increased by 20%, mainly as a
result of the acquisition of the Merrill Lynch business
Page 71
Executive CommitteeJHP van der Merwe (Johan) (38)MPhil Finance (Cambridge), M Com Income Tax, CA (SA) Chief Executive Officer(9 months’ service)
AA Raath (Anton) (47)CA (SA)Chief Operating Officer(3 years’ service)
T Mhlambiso (Thando) (41)Juris Doctorate Columbia University School of LawMBA (Finance) Columbia University School of BusinessBA (Biology) – Brown UniversityAdmitted to the New York State BarChief of Private Equity Groups(1 year’s service)
G Howard (George) (46)BCom (SA), ACMA (UK), CFA (USA)Chief Investment Officer(7 months’ service)
S Mills (Steve) (45)BSc (Engineering), BCom (Hons), MBAHead: Portfolio Investments(1 year’s service)
RT Schkolne (Raymond) (45)B Bus Sc (Hons) (Personnel Management)Diploma in Datametrics (Statistics)BSc (Information Systems and Operations Research)Head: Human Resources(3 years’ service)
TJ Mvusi (Temba) (48)BA (Unisa)Diploma in International Relations (University of New Delhi, India)Management Advancement Programme (Wits Business School)Head: External Interface(4 years’ service)
UJ van der Walt (Banus) (53)BEcon (Hons)Advanced Executive Programme (Unisa)CEO Sanlam Property Asset Management(34 years’ service)
Audit Committee
AS du Plessis (Attie)
D Ladds (David)
DR Geeringh (Div)
P de V Rademeyer (Flip)
Directors
JHP van der Merwe (Johan) (CEO)
AD Botha (Anton)
PJ Cook (Peter)
AS du Plessis (Attie)
DR Geeringh (Div)
D Ladds (David)
CE Maynard (Carmen)
JD Punter (Jonathan)
P de V Rademeyer (Flip)
R Masson (Ronnie)
AA Raath (Anton)
Page 72
Sanlam International
Salient features• Establishing Sanlam International to provide the
impetus in developing a meaningful international
financial services business
• Laying the foundations for higher levels of profit
generating capacity through a build and buy
program with a marked increase in fee income
• Growing the significant continuing institutional
client relationships in our consulting business
from 310 to 450 clients
• Funds under advice increased from US$10 billion
to US$24 billion
• Building Hichens Investment Management, a June
2002 start-up, with US$75 million in new funds
under management
Business and strategic overviewSanlam International (SI) was established as a business
on 1 July 2002 to provide the impetus in developing a
meaningful international financial services business.
Our vision builds on the Group’s South African vision,
The dominant
thrusts in 2003 will
be to firstly convert
existing assets
under advice to
assets under
management and
secondly to gain
new assets under
management
from left to right (back): Kenneth McKelvey, Gerald Gonzenbach, Lukas van der Walt
from left to right (front): Jonathan Punter, Angus Samuels (Chief Executive)
Page 73
namely to be a leader in wealth creation wherever we
operate. As part of the Group’s corporate restructuring
process, Sanlam Netherlands Holdings BV was established
as the Group’s international holding company. Sanlam
Financial Services BV (SFS), which previously reported
to Sanlam Investment Management (SIM), forms the
backbone of SI’s current international operations.
A business development unit independent of SFS was
established to implement SI’s strategy of gradually
expanding Sanlam’s international business on a selected
regional basis. Sanlam’s internationalisation is not simply
a matter of currency and portfolio diversification – the
intention is to build a sustainable business complex with
a distinct distribution bias. Our primary financial objective
is to render a consolidated rolling return on invested
capital that exceeds the appropriate risk-adjusted weighted
average cost of capital. While our focus is currently on
the UK we will, when opportune, consider expanding
our business to other identified countries in Western
Europe, Asia and the rest of Africa. We believe that our
UK operations provide a strong foundation for further
expansion in Europe. Market dynamics in Asia are
considered attractive but, given that we have no presence
there yet, our task is to develop and implement an
appropriate entry strategy.
The SFS business model combines financial consulting
and manager-of-managers investment management with
the various client-facing consulting entities in SFS,
creating either:
a) the opportunity for direct conversion of established
assets under advice to assets under management or
b) enhanced opportunities for the sale of assets-under-
management services.
SFS concentrates on institutional and high net
worth/affluent individuals.
Business environment and operationalreview – SFSFor the third year in a row world stock markets have
fallen, reflecting the geopolitical risks, corporate malfeasance,
overvaluation of markets and a return to cyclical downturns
in the Western economies, leading to lower and
potentially negative rates of growth. Our businesses
have not been immune to the impact and this is
reflected in our reported reduction in profit after tax.
We have, however, moved against the tide in some areas
and, in a countercyclical manner, have capitalised on
depressed market conditions to further expand and
strengthen our position in certain markets at significantly
lower prices and investment costs. The formal signing
and integration of Hichens Harrison was achieved in
February, BGJ joined the Group in May and Tresman
became an important pillar within PSFM in September.
In addition to this, just before the end of the financial
SANLAM INTERNATIONAL STRUCTURE
Principalsubsidiaries:
Punter Southall & Co LtdBGJ Punter Southall Ltd(including PSolve)
io Asset Management Ltdio Investors LtdOctane management Ltd BVI
Hichens Harrison Ltd(including HIM)
PSFM Ltd (includingTresman)
Business lines
Sanlam Netherlands Holdings BV
Other subsidiaries Sanlam Financial Services BV
Actuarial and InvestmentConsulting
Manager-of-managersinvestment management
Private Client and Brokerage
Independent FinancialAdvisory
Page 74
Sanlam International (continued)
Investment Management (HIM). The steep fall in equity
markets and a resulting collapse of investors’ confidence
led to a dramatic decrease of more than 55% in fee
income, although this was partially mitigated by a major
cost reduction exercise.
HIM was started up in June 2002, with the objective
of building a discretionary private client business
alongside the HH broking licence. Significant costs were
incurred in the build-up of HIM. It is, however, our
pleasure to report that the business is performing in line
with its ambitious plan, which is evidenced by the
acquisition of US$75 million in new funds managed
under the HIM banner.
Independent Financial Advisory1
Tough conditions were experienced by the IFA businesses,
with the advisory market bombarded by proposals for
structural reform, while adverse market conditions made
it difficult to persuade investors to take any action. In
addition, there has been a deliberate policy to broaden the
platform, with an associated increase in the underlying cost
base. Although revenue increased by 19%, costs increased
by 56%, reflecting the delay in revenue generation, before
the new sales force reached productive status. The profit
contribution fell to zero for the year under review.
Financial review – Sanlam InternationalProfit after tax for 2002 is 26% lower than the 2001 result.
A number of factors were responsible for the lower level of
profits. These included the following: significantly worse
than expected equity markets, which lead to lower funds
under management, added corporate governance and
business development costs and an aggressive build
programme with an immediate increase in staff, technology
and office expenses as opposed to deferred revenue benefits.
Focus areas and prospects for 2003Sanlam International will continue to execute the Group
internationalisation strategy in accordance with agreed
principles, focusing on identifying and acquiring
year we signed the basic agreements with the Octane
Management Limited company to build a global
platform for distributing tailored hedge fund solutions.
Our build process is evidenced by our increasing
number of employees from 280 to a current complement
of 456, which includes a 35% increase in senior sales
development staff. The overall Group performance
reflects the combination of lower equity values and
depressed market conditions, together with considerable
investments in new businesses.
Actuarial and Investment Consulting1
In the UK pensions market, continued regulatory
changes, coupled with the challenges arising from poor
investment returns, have enabled the actuarial business
to continue to grow against the market trends. Revenue
grew by 32% while costs increased by 27%, particularly
as a result of staff increases. Profit before taxation
increased by 76% year on year, excluding the positive
impact of BGJ, which was acquired during the year.
PSolve, our newly established investment consultancy
business, made extremely good progress in establishing
its identity and credentials in the highly competitive
institutional market. The business has been acquiring
new clients at a rate that is beyond all expectations and
currently acts for over 50 pension funds, including
recent breakthroughs in the local authorities market.
Manager-of-managers investmentmanagement1
In line with industry trends the business suffered a drop
in earnings of 13%, resulting in a decrease in profits
before tax of 30%. The collapse of the global equity
markets and low inflows of new funds from South
Africa and the UK led to a decrease in funds under
management from US$2,79 billion to US$2,35 billion.
Private client and brokerage1
Hichens Harrison (HH), an acquired brokerage
company, reported a loss post consolidation of Hichens
1Percentage increase/decrease is based on US$ reporting currency of the business
Page 75
carefully selected new business opportunities in
Western Europe and Asia.
Despite some disappointments in 2002, we are
convinced that the foundation has been laid to
increasingly reap the benefits of our investments so far.
Our strategy for 2003 reflects a continuation of the
growth strategy to invest in revenue-generating capacity
with its consequential negative effect on short term
profit. This will nevertheless translate into higher levels of
profit capacity from 2004 onwards. To harvest the
benefits of our development efforts and investments, the
dominant thrusts in 2003 will be to firstly convert
existing assets under advice to assets under management
and secondly to gather new assets under management,
both through direct sales to clients and through contacts
developed through the consulting businesses. We will
also complete the various start-up elements in our
business model, including the construction of the
solutions platforms targeted for completion early in 2003.
Executive Committee
JAA Samuels (Angus) (52)Chief Executive Officer SNH BV(4 years’ service)
L van der Walt (Lukas) (42)CA (SA)Chief Operating and Finance Officer SNH BV(4 years’ service)
JD Punter (Jonathan) (44)FIA, BScChief Executive Officer SFS BV(2 years’ service)
KJ McKelvey (Kenneth) (44)FIA, BSc, MBAChief Operating Officer SFS BV(2 years’ service)
GC Gonzenbach (Gerald) (48)PhD Law, MBAChief Financial Officer SFS BV(4 years’ service)
Sanlam Netherlands Holdings BV
Non-executive directorsAS du Plessis (Attie)W Hogeweg (Wilhelm)P de V Rademeyer (Flip)
Executive directorsJAA Samuels (Angus)L van der Walt (Lukas)JD Punter (Jonathan)
Audit committee (a subcommittee of Sanlam Financial Services BV)AS du Plessis (Attie) (Chairman)JAA Samuels (Angus)L van der Walt (Lukas)W Hogeweg (Wilhelm)JL Walker-Haworth (John)
INCOME STATEMENT
R million 2002 2001
Fee income 639 433 48%Net interest and other income 33 5 560%
Financial services income 672 438 53%Investment managers fees paid (45) (53) 15%Administration costs (552) (282) (96%)
Operating profit before tax 75 103 (27%)Tax (13) (19) 32%
Operating profit after tax 62 84 (26%)
Page 76
Gensec Bank
Many parts of the bank
performed very well and
in certain instances
showed substantial
revenue increases,
while equity-related
activities in particular
resulted in a substantial
underperformance for
the bank as a whole
Salient features
• Successful year for our in-house broker, Gensec
Trading
• Excellent performance of fixed-interest business
• Innovative and good performance of structured
products division
• Underperformance of all equity-related businesses
• Successful conclusion of the Safair Lease Finance
transaction with Imperial Group as 50% partner
Business environment
The environment for investment banking, which
deteriorated rapidly in 2001, remained difficult during
2002. The main drivers for this were the uncertain
international economic outlook, weak and volatile
equity markets and the threat of war in the Middle
East. The Enron and WorldCom corporate accounting
scandals in particular negatively impacted global equity
from left to right (back): Mike Brown, Mark Murning, Francois Oosthuizen, Marius Ferreira (Chief Executive), Steve Müller, Khanyisa Magwentshu,
Johan Latsky, Peter Cook
from left to right (front): Steve de Bruyn, Nico Siebrits, Sabir Munshi, Gerhard Erasmus
markets. Locally the effects were evident as several
smaller banks either handed back their banking licences
or were absorbed into bigger groups.
Early in the year most forecasters were anticipating
real GDP growth of close to 3% for the developed
economies, yet, only half this growth rate was achieved.
Locally, the South African economy continued to expand
and expectations are that growth in 2002 will be slightly
higher than 3%. Nevertheless, South Africa’s growth
potential remained constrained by issues such as the
developments in Zimbabwe, HIV/Aids, skills shortages,
exchange rate fluctuations and investor perceptions.
The overall performance of the bank was affected
by the market conditions and it was our equity-related
activities in particular that resulted in a substantial
underperformance for the bank as a whole. However,
many parts of the bank did perform very well and in
certain instances showed substantial revenue increases,
e.g. Gensec Trading, our discount stockbroker, fixed-
interest activities and structured products.
The progress made in resolving the banking group’s
capital structure, including the provision of a R5 billion
capital maintenance guarantee
from Sanlam,
contributed
greatly to
addressing
certain
concerns
from the
marketplace.
Operational review
Treasury
Treasury is responsible for the funding of the bank and
all client related financial market activities. The fixed-
interest unit made substantial changes to its business
model and shifted its focus to delivering structured
solutions to both the corporate and institutional
investor markets. Performance was very
satisfactory and revenue
was well above budget.
The money market
and foreign exchange
activities performed in line
with expectations. The
volatility in the equity
markets severely affected the
performance of our derivative
INCOME STATEMENT
R million 2002 2001
Operating income 309 462Net interest income 93 46
Financial services income 402 508 (21%)Administration expenses (311) (317) (2%)
Operating profit (excl Fieldstone) 91 191 (52%)Fieldstone operating profit 21 —
Operating profit 112 191 (41%)
FINANCIAL RATIOS
2002 2001
ROE % 11 17Administration cost ratio (excl Fieldstone) % 77 62Revenue per average number of employees (R 000) 1 318 1 658
Page 77
Page 78
Gensec Bank (continued)
Private Equity performed in line with expectations
and has started a number of initiatives to increase assets
under management. These include the launching of
new funds as well as expanding existing funds where
our partners have indicated a willingness to do so.
Risk Management Solutions
Deal flow in the structured products division remained
good, with a number of new initiatives, both locally
and internationally. The unit continued to undertake
significant product development in its traditional
investment markets and extended its business to the
commodity and alternative risk transfer areas, where the
focus is on assisting corporations in dealing with risks
that have traditionally been difficult to manage.
The other drive was to be at the forefront of the
convergence of the insurance and capital markets.
The weather derivative initiative is our exploratory
product in this regard, i.e. transfer of risk traditionally
underwritten by the insurance market to the capital
market.
Gensec Trading is a discount broker that was
established to handle equity transactions within the
group. Performance over the past year was exceptional
and it has increased its market share through non-group
clients and product growth.
Arbitrage
Trading conditions remained difficult, as volatility in
the markets remained high and geopolitical concerns
persisted. However, a number of opportunities did
present themselves and the South African team
performed exceptionally well in capitalising on these.
The Dublin team, in its first full year of operation, was
activities and this, together with a lower demand for
products from investors, resulted in this unit reporting
a loss, compared to an exceptionally high profit in the
previous year.
Investment Banking
Corporate finance had a difficult year due to the low
level of advisory mandates available in the industry.
This unit nevertheless secured a number of key
mandates and although revenues were down on the
previous year, substantial progress was made in building
our advisory capacity. Our corporate finance
professionals were an important link to clients and
contributed to deal flow in other divisions.
The flat performance of the underwriting division
mirrored the conditions in the market.
The debt division continued its good performance
of last year and produced operating revenue in
accordance with budgets, being well up on last year. Its
overall performance for the year was however pulled
down as a result of a provision made in connection with
an equity backed transaction entered into in the 2001
financial year. The bank was awarded the mandate
to be the lead arranger for the Land Bank’s R2 billion
bond issue and Gensec was also appointed as a dealer
for Sasol’s R4 billion commercial paper programme.
In line with our strategy to diversify earnings to
include more annuity-type income, the bank
was successful in securing a 50% interest in the
Safair Lease Finance business.
The public sector finance unit was restructured and
integrated into the overall investment banking division.
Success will be closely linked to its ability to collaborate
with other units within the bank.
Page 79
significantly more exposed to the international
environment and only made a marginal contribution
to revenue.
Investments
Fieldstone, a specialised advisory firm, was acquired
with effect from 1 July 2001. The business was also
negatively affected by the decline in international
investment banking activity and more specifically
the problems in the energy sector. Despite these
circumstances, Fieldstone made a positive contribution
during 2002 and has a good pipeline of mandates.
The Safair Lease Finance partnership with Imperial
Holdings commenced with effect from July 2002
and good progress was made in acquiring aircraft
and the accompanying financing. Unfortunately,
the strengthening of the rand negatively affected the
partnership’s income, which is largely denominated
in US dollars.
Financial Review
The bank’s financial performance reflected the generally
unfavourable market conditions, but was additionally
impacted by the negative performance of our equity
business which overshadowed the good performance of
the other divisions in the bank. Revenue decreased by
21% and although expenses were contained to below
last year’s level, the overall result was a further decline in
operational income compared to the previous year.
Management has implemented measures to resolve the
problems in the equity-related activities and current
performance indicates a more promising 2003.
While operational efficiency has improved,
expenditure over the past few years on system
REVENUE DISTRIBUTION
development, added to management’s critical focus on
our cost structure, are expected to yield further benefits
during 2003. Return on equity was 11% against a
longer term objective of 20%. The higher IT charges
together with lower revenue was primarily responsible
for a deterioration in the administration cost ratio.
Prospects for 2003
It is recognised that the most important influences on the
future of Gensec Bank in the year ahead will continue to
be the macro investment banking environment and the
direction of the Sanlam banking strategy. This strategy
is expected to crystalise during the first half of the year.
We believe that the investment banking environment
will continue to be dominated by economic
uncertainties and volatile markets. Consequently, we do
not anticipate a buoyant year for the industry, but
expect that the bank will show improved performance.
32%
13%33%
22%
25%
15%
9%51%
Revenue per business�for the year 2002
Investment�bankingArbitrageRisk management�solutionsTreasury
Revenue per business�for the year 2001
Investment �bankingArbitrageRisk management�solutionsTreasury
Page 80
Gensec Bank (continued)
S de Bruyn (Steve) (42)CA (SA)Debt Finance (3 years’ service)
NA Siebrits (Nico) (43)CA (SA) Chief Financial Officer (11 years’ service)
S Munshi (Sabir) (41)BScChief Information Officer (6 years’ service)
Audit Committee
TL de Beer (Tom) (Chairman)
AS du Plessis (Attie)
DR Geeringh (Div)
D Ladds (David)
P de V Rademeyer (Flip)
Directors
AD Botha (Anton) (Chairman)
DR Geeringh (Div) (Deputy Chairman)
PJ Cook (Peter)
TL de Beer (Tom)
AS du Plessis (Attie)
M Ferreira (Marius)
D Ladds (David)
Prof AF Perold (André)
P de V Rademeyer (Flip)
Prof S Vil-Nkomo (Sibusiso)
Dr L Vermaak (Leon) – Resigned 31 December 2002
P Mabena (Pindi) – Resigned 25 June 2002
Alternate Directors
MS Murning (Mark)
SH Müller (Steve)
Executive CommitteeM Ferreira (Marius) (48)BCom (Hons) Chief Executive Officer(8 years’ service)
PJ Cook (Peter) (56)MBA, BSc Eng (Mining)Deputy Chief Executive Officer(5 years’ service)
MF Brown (Mike) (54)BA (Hons)Marketing and Distribution (4 years’ service)
G Erasmus (Gerhard) (38)CA (SA)Structured Products (7 years’ service)
J Latsky (Johan) (47)BA LLBSpecial Projects (4 years’ service)
MS Murning (Mark) (43)BComRisk Management Solutions and Treasury (6 years’ service)
FJ Oosthuizen (Francois) (43)BCom (Hons)Arbitrage(17 years’ service)
SH Müller (Steve) (42)CA (SA)Investment Banking (8 years’ service)
AI Gouveia (Tony) (35)CA (SA), MSc (Mathematics)Chief Risk Officer (8 years’ service)
KN Magwentshu (Khanyisa) (37)BJuris, LLBPublic Sector & Empowerment Finance (3 years’ service)
Page 81
Santam
The group
generated
R991 million in
cash from its
operating and
investment
activities,
reinforcing its
healthy financial
position
Salient features
• 32% increase in gross written premiums
• 46% improvement in underwriting surplus
• 39% increase in operating income
• 16% increase in earnings based on long term
rate of return
Nature of business
Following the takeover of Guardian National
Insurance Company in 2000, Santam became the
leading short term insurer in South Africa, with a
market share nearing 30%. With total assets
exceeding R8,9 billion, a countrywide infrastructure,
broker network and more than 650 000 personal
policyholders, its yellow umbrella is truly covering
South Africa. Santam holds strategic investments
in various companies in the insurance industries
in South Africa, Namibia and United Kingdom,
and has business interests in Zimbabwe, Malawi
and Zambia.
Santam offers clients a wide variety of highly
specialised products and services. Its core business
has been the same for more than eight decades – to
take care of its clients’ insurance needs. This is
embedded in providing short term insurance
products and services aimed at specific markets, as
well as utilising and optimising its broker network as
the main delivery channel.
Santam focuses on the corporate, commercial
and personal markets.
Page 82
Santam (continued)
amounting to R30 million were exercised in
relation to certain Africa Group companies, which
adversely affected this line of business. Santam
subsequently took control of four Africa Group
companies which are involved in short term
insurance activities.
The Group’s investment portfolio did not
escape the torrid market conditions and compared
with the exceptional performance in 2001, when
the capital value increased by R311 million, the
market values decreased by R22 million. However
on a relative basis, the portfolio performed
satisfactorily. As a consequence of the poor short
term performance of the investment portfolio,
attributable earnings decreased by 47% despite the
favourable operating results. Applying the long term
rate of return, which eliminates the short term
volatility, earnings have increased by 16% from
R444 million to R516 million.
The Group generated R991 million in cash
from its operating and investment activities,
reinforcing its healthy financial position. Favourable
crop insurance results during the last quarter, as
well as new businesses acquired during the year,
have impacted favourably on cash flow. The
solvency margin remained a healthy 60%, down
from 71% at the end of 2001, mainly as a result of
increased premium volume.
Business Environment and
Financial Review
Operating income increased by an impressive 39%
for the year under review. The underwriting surplus
of R142 million benefited from both improved
underwriting margins and increased business volumes.
Higher short term interest rates and improved cash
flow management contributed towards the increased
investment return on insurance funds.
Climatic conditions in the second half of the
year were rather trying. After a virtually storm-free
first half, severe snow storms and floods in the
Eastern Cape, as well as hailstorms in Gauteng and
the Western Cape late in the year caused significant
damage during this period. Conversely, 2002 was a
good year for the crop insurance business where far
less hail damage was experienced, particularly in the
first half of the summer season.
Gross written premiums increased significantly
by 32% compared to an increase of 23% at net
written premium level. The difference in growth is
mainly due to reinsurance arrangements to protect
the Group from concentration risk in certain
business areas.
The Lion of Africa, in which Santam holds
50%, reported very pleasing results for the year with
earnings of R19,4 million, compared to a loss of
R13,5 million in 2001. Financial guarantees
Page 83
Prospects
It is expected that the short term insurance market
will remain favourable for 2003. The cost of
reinsurance is, however, expected to increase in line
with market trends and reduced capacity.
During January 2003 the Group successfully
concluded the acquisition of the British niche insurer
Westminster Motor Insurance Association Limited,
which specialises in insurance for taxis and private
vehicle rental companies. The purchase of
GBP23,3 million was funded from own resources, and
is seen as an important strategic step for diversifying the
Group’s income base, especially in view of its dominant
position in the South African market.
The focus for 2003 will be on improved
productivity and cost reduction. There will be an
increased effort to reduce the cost of
reinsurance without exposing the
Group to undue risks. Owing to the
foreign acquisition and planned
adjustment in the reinsurance programme,
it is anticipated that capital utilisation will
improve further with solvency margins
reducing mildly in 2003. It is expected that
equity markets will remain unsettled for 2003, directly
affecting investment results.
INCOME STATEMENT
R million 2002 2001
Net earned premium 5 548 4 760 17%Claims incurred (3 925) (3 367) (17%)Net commission (698) (635) (10%)Management expenses (783) (661) (18%)
Underwriting surplus 142 97 46%Investment return on
insurance funds 115 88 31%
Operating income 257 185 39%Investment return 178 540 (67%)
Income before taxation 435 725 (40%)Taxation (116) (142) 19%Minority interest (14) (12) (14%)
Attributable earnings 305 571 (47%)
Santam is listed on the JSE Securities Exchange.More comprehensive information is available in their published annual report.
Page 84
Sanlam Limited GroupAnnual Financial Statements
CONTENTS
85 Directors’ Responsibility for Financial Reporting
85 Certificate by Company Secretary
86 Report of the Statutory Actuary
87 Report of the Independent Auditors
88 Directors’ Report
89 Basis of Presentation and Accounting Policies
98 Group Income Statement
99 Group Balance Sheet
100 Group Statement of Changes in Equity
101 Group Cash Flow Statement
102 Notes to the Group Financial Statements
123 Statement of Actuarial Values of
Assets and Liabilities
127 Sanlam Limited Financial Statements
130 Principal Subsidiaries
131 Financial Information for
the Shareholders’ Funds
Page 85
Directors’ Responsibility for Financial Reporting
The Board of Sanlam Limited accepts responsibility for the integrity, objectivity and reliability of the group and company financial
statements of Sanlam Limited. Adequate accounting records have been maintained. The Board endorses the principle of
transparency in financial reporting. The responsibility for the preparation and presentation of the financial statements has been
delegated to management.
The responsibility of the external auditors is to express an independent opinion on the fair presentation of the financial
statements based on their audit of Sanlam Limited and its subsidiaries.
The audit committees have confirmed that adequate internal financial control systems are being maintained. There were no
material breakdowns in the functioning of the internal financial control systems during the year. The Board is satisfied that the
financial statements fairly present the financial position, the results of operations and cash flows in accordance with relevant
accounting policies, based on South African Statements of Generally Accepted Accounting Practice.
The Board of Sanlam Limited accepts responsibility for the integrity, objectivity and reliability of the Report on the Sanlam
Group Embedded Value. The responsibility for the preparation and presentation of the Report on the Sanlam Group Embedded
Value has been delegated to management.
The responsibility of the appointed external auditors, Ernst & Young, is to express an independent opinion on the fair
presentation of the Report on the Sanlam Group Embedded Value.
The Board is of the opinion that Sanlam Limited is financially sound and operates as a going concern. The financial statements
have accordingly been prepared on this basis.
The financial statements on pages 88 to 143 and the Report on the Sanlam Group Embedded Value on pages 147 to 151 were
approved by the Board and signed on its behalf by:
Ton Vosloo Flip Rademeyer
Chairman Acting Chief Executive
5 March 2003
Certificate by Company Secretary
In my capacity as Company Secretary, I hereby certify, in terms of the Companies Act, that for the year ended 31 December 2002,
the company has lodged with the Registrar of Companies all such returns as are required of a public company in terms of this Act,
and that all such returns are, to the best of my knowledge and belief, true, correct and up to date.
Johan Bester
Company Secretary
5 March 2003
Page 86
Report of the Statutory Actuary of Sanlam Life Insurance Limited
The Sanlam Life Insurance Limited group has been consolidated in the Sanlam Limited group financial statements set out on pages 88 to 143.
My opinion hereunder is in respect of the financial soundness of the Sanlam Life Insurance Limited group, as set out in the Statement of
Actuarial Values of Assets and Liabilities on pages 123 to 126.
FINANCIAL SOUNDNESS VALUATION
I certify that:
• the valuation of Sanlam Life Insurance Limited group as at 31 December 2002, has been performed on the bases as set out on pages 95 to 97.
The valuation has been prepared and the results are presented in accordance with the guidelines (Professional Guidance Notes 103 and 104)
of the Actuarial Society of South Africa;
• the Statement of Actuarial Values of Assets and Liabilities fairly presents the financial position of the Sanlam Life Insurance Limited group;
• Sanlam Life Insurance Limited group was financially sound as at the valuation date, and in my opinion is likely to remain financially sound
for the foreseeable future; and
• the management actions assumed for the calculation of the capital adequacy requirements have been approved by the Board of Directors of
Sanlam Life Insurance Limited and I expect that these actions would be taken if the corresponding risks were to materialise.
EMBEDDED VALUE
In my view the Sanlam Limited group embedded value and the value of the new life insurance business, as set out on pages 147 to 151, fairly
present these values as defined. The embedded value and the value of new life insurance business have been calculated and presented in
accordance with the applicable guidelines (Professional Guidance Note 107) of the Actuarial Society of South Africa.
CG Swanepoel FIA, FASSA
Statutory Actuary
Sanlam Life Insurance Limited
5 March 2003
TO THE MEMBERS OF SANLAM LIMITED
We have audited the annual financial statements and the group annual financial statements of Sanlam Limited for the year ended
31 December 2002 as set out on pages 88 to 143. These annual financial statements are the responsibility of the directors of Sanlam Limited.
It is our responsibility to express an opinion on these financial statements based on our audit.
SCOPE
We conducted our audit in accordance with statements of South African Auditing Standards. These standards require that we plan and
perform the audit to obtain reasonable assurance that the financial statements are free of material misstatements.
An audit includes:
• examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements;
• assessing the accounting principles used and significant estimates made by management; and
• evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
AUDIT OPINION
In our opinion, the annual financial statements and the group annual financial statements of Sanlam Limited fairly present in all material
respects the financial position of the company and group at 31 December 2002 and the results of their operations and cash flows for the year
then ended, in accordance with South African Statements of Generally Accepted Accounting Practice, and in the manner required by the
Companies Act in South Africa.
Ernst & Young PricewaterhouseCoopers Inc
Chartered Accountants (SA)
Registered Accountants and Auditors
Cape Town
5 March 2003
Page 87
Report of the Independent Auditors
Page 88
Directors’ Reportfor the year ended 31 December 2002
NATURE OF BUSINESS
The Sanlam group is one of the largest established financial
services groups in South Africa. Its core activities are set out
on page 2.
CORPORATE GOVERNANCE
The Board of Sanlam endorses the Code of Corporate Practice
and Conduct recommended in the King II Report on Corporate
Governance and has satisfied itself that Sanlam has made
substantial progress towards complying with the Code during
2002 and is now compliant in almost all material aspects.
GROUP RESULTS
Headline earnings based on the long term rate of return basis
decreased from R3 534 million (133,2 cents per share) in
2001 to R3 227 million (122,7 cents per share) in 2002.
Further details regarding the Group’s results are included in
the financial review and the business reviews. The
information in the financial review and corporate governance
statement, requiring disclosure in the directors’ report in
terms of the Companies Act, has been audited.
SHARE CAPITAL
There were no changes in the authorised and issued share
capital of the company during the financial year. Shares with
a cost of R59 million were purchased by a subsidiary, Sanlam
Life Insurance Limited, as part of its normal balanced
portfolio holding.
DIVIDENDS AND DIVIDEND POLICY
It is the Board’s intention to declare only annual dividends and
to maintain a three and a half to four and a half times dividend
cover on headline earnings based on the long term rate of
return. The objective of the Board is to achieve stable growth
in dividend payments and the dividend pattern will therefore
not strictly follow the earnings pattern. The Board has declared
a dividend of 37 cents per share (2001: 35 cents), payable on
7 May 2003, to shareholders registered on 11 April 2003.
SUBSIDIARIES
Details of the company’s principal subsidiaries are set out on
page 130.
DIRECTORS’ INTEREST IN CONTRACTS
No material contracts involving directors’ interests were
entered into in the year under review.
INTEREST OF DIRECTORS AND OFFICERS IN
SHARE CAPITAL
Details of the shareholding by directors and officers at the
date of this report are provided in the Statement on
Corporate Governance on page 36.
DIRECTORS AND SECRETARY
Particulars of the directors and secretary of the company at
the date of this report, are set out on pages 10, 22 and 156.
The following changes in directorships occurred during
the period under review:
Prof AC Bawa resigned 31 March 2002
BP Vundla resigned 31 March 2002
V Khanyile appointed 7 August 2002
Dr L Vermaak resigned 31 December 2002
E van As appointed 15 January 2003
POST-BALANCE SHEET EVENTS
Since the balance sheet date the local share prices have on
average decreased by more than 10%. This has impacted inter
alia on the funding levels of participating policyholder
portfolios. Sanlam Life Insurance Limited however remains in
a financially sound position.
During January 2003, Santam successfully concluded the
acquisition of the British niche insurer Westminster Motor
Insurance Association Limited, which specialises in insurance
for taxis and private motor rental companies. The purchase
price of GBP23,3 million was financed from own resources,
and is seen as an important strategic step for expanding the
Group’s income base.
No other material facts or circumstances have arisen
between the dates of the balance sheet and this report which
affect the financial position of the Sanlam Limited group as
reflected in these financial statements.
By order of the Board
Johan Bester
Secretary
5 March 2003
Page 89
Basis of Presentation and Accounting Policies
BASIS OF PRESENTATION
POLICYHOLDERS’ AND SHAREHOLDERS’
ACTIVITIES
The assets, liabilities and activities of the policyholders
and shareholders in respect of the life insurance business
are managed separately and are governed by the valuation
bases for policy liabilities and profit entitlement rules
which are determined in accordance with prevailing
legislation, generally accepted actuarial practice and the
stipulations contained in the demutualisation proposal.
The valuation bases in respect of policy liabilities and
profit entitlement of shareholders are set out on
pages 95 to 97.
The group financial statements set out on pages 98 to
122 include the consolidated activities of the
policyholders and shareholders. Separate financial
information on the activities of the shareholders of the
Sanlam Limited group is disclosed on pages 131 to 143.
The Statement of Actuarial Values of Assets and
Liabilities of the life insurance business of the Group is
disclosed on pages 123 to 126.
ACTUARIAL VALUES OF ASSETS AND
LIABILITIES
The actuarial values of assets and liabilities are the
consolidated financial position of the Sanlam Life
Insurance Limited group, excluding Sanlam Investment
Management (Proprietary) Limited and Sanlam Trust
Managers Limited, which are included at fair value as
determined by the Board of Directors. Associated
companies are treated as investments and are not equity
accounted for.
FUNDS RECEIVED FROM CLIENTS
Funds received from clients consist of single and
recurring long term and general insurance premium
income, which are included in the financial statements, as
well as unit trust contributions, inflow for assets managed
and administered on behalf of clients and non-life
insurance linked-product contributions, which are not
included 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 transacted
at arm’s length, are eliminated.
NEW BUSINESS
In the case of long term insurance business the value of all
new policies that have incepted during the financial year
and have received at least one premium is regarded as new
business.
All segregated funds inflows, unit trust inflows and
general insurance premiums are regarded as new business.
FINANCIAL SERVICES INCOME
Financial services income for the shareholders consists of:
• income earned from long term insurance activities such
as investment and administration fees, risk
underwriting premiums, asset mismatch profits or
losses and income earned on working capital;
• income from general insurance business, including
income earned on working capital;
• income from banking activities such as realised and
unrealised gains or losses on trading accounts,
unsecured corporate bonds and money market assets and
liabilities, other securities’ related income and fees, and
commissions; and
• income from other financial services such as unit trust
administration, trust services and linked-product
business.
SEGREGATED FUNDS
Sanlam also manages and administers assets for the
account of and at the risk of clients. As these are not the
assets of the Sanlam group, they are not reflected in the
Sanlam group balance sheet but are disclosed in a footnote
to the balance sheet.
TERM FINANCE
The portion of term finance which is repayable within
one year is not transferred to current liabilities. This is
consistent with the treatment of investments redeemable
within one year that are not included in current assets.
CHANGES IN REPORTING STRUCTURES AND
ACCOUNTING POLICIES
A component of expenditure incurred by the Sanlam
corporate office relates to the Sanlam Life business. Prior
to 31 December 2001 these costs were not identified and
allocated as such, but most of the corporate costs were
recognised for embedded value purposes. The specific
costs associated with Sanlam Life’s business have now
Page 90
Basis of Presentation and Accounting Policies (continued)
been identified and are accounted for directly in the
Sanlam Life operating results and in the Life company’s
embedded value calculations.
The segmental reporting of business information
follows the current management responsibility
assignment.
Conforming to Group practice, Santam has
reallocated the reporting of income on its free float
(or working capital) from investment income to operating
profit.
Comparative figures have been adjusted to conform
with the abovementioned changes in presentation in the
current year.
Based on their autonomous and independent
functioning, all international operations of the Group are
now accounted for as foreign entities in terms of South
African Statements of Generally Accepted Accounting
Practice. Currency translation differences arising on the
consolidation of foreign businesses are therefore no longer
reflected in operating income. In 2001 the foreign
businesses of Gensec Bank were accounted for as
integrated operations.
Owner-occupied buildings are treated in accordance
with AC123 (Property, Plant and Equipment) with effect
from 1 January 2002.
HEADLINE EARNINGS
Following the recent developments in respect of the
presentation of headline earnings, we now also present a
headline earnings figure that is based on operating profit
and actual investment income earned for the period.
Accounting standard (AC133) on the measurement and
recognition of financial instruments will be effective from
Sanlam’s 2003 financial year. The intended
implementation of the standard requires that investment
surpluses be recognised against equity in future.
ACCOUNTING POLICIESThe Sanlam Limited group financial statements are
prepared applying the principal accounting policies
below, which are in accordance with and comply with
South African Statements of Generally Accepted
Accounting Practice, and some of which apply specifically
to the life insurance industry. The accounting policies
applied in preparing the financial statements are
consistent with those of the previous year.
BASIS OF CONSOLIDATION
The results of consolidated subsidiaries are included from
the effective dates of acquisition to the effective dates of
disposal. Inter-company profits and losses are eliminated
from the Group results. Inter-company transactions at
arm’s length, which do not influence the Group’s net
earnings, are not eliminated from the results.
Shares held in Sanlam Limited by subsidiary
companies are eliminated against equity on consolidation
where these shares are held by the shareholders’ funds of
the Sanlam Limited group. Where these shares are held as
investments for policyholder benefits they are not
eliminated on consolidation but reflected at fair value as
equity investments in the balance sheet.
In certain instances, a portion of the Sanlam group’s
interest in consolidated subsidiaries is held by the
policyholders’ fund to fund future benefits in terms of its
policyholders’ contracts. The excess of the fair value of the
policyholders’ interest in these consolidated subsidiaries
over their proportionate share of the subsidiaries’ net
assets is recognised in the group balance sheet as equity
investments.
ASSOCIATED COMPANIES
An associated company is a company, not being a
subsidiary, in which the Sanlam group has a long term
investment and over which it has the ability, because of
the extent of its investment, to exercise significant
influence.
The results of associated companies have been
accounted for using the equity method of accounting,
where the Group’s share of the associated companies
earnings before dividends is included in earnings. Where
the associate is held as an investment, the equity-
accounted earnings are included in investment income
with a corresponding adjustment to the carrying value of
the investment in associated companies. This carrying
value is adjusted to fair value with a corresponding
adjustment to investment surpluses on the investment in
associated companies in the income statement.
The above policy has been applied in respect of the
investment in Absa Limited.
JOINT VENTURES
A joint venture is a contractual arrangement whereby two
or more parties undertake an economic activity that is
Page 91
subject to joint control. The results of joint ventures have
been accounted for using the equity method of
accounting, where the Group’s share of the joint ventures’
earnings before dividends is included in earnings.
GOODWILL
Goodwill may arise on the acquisition or change in
the holding (“adjustment”) in a subsidiary company.
It represents the excess of the cost of an acquisition or
adjustment over the fair value of the Group’s share of the
net assets of the subsidiary at the date of acquisition or
adjustment. Where applicable, goodwill is translated to
South African rand using historical rates. Goodwill is
written off on a straight-line basis over the lesser of its
estimated useful life or twenty years. The carrying
amount of goodwill is reviewed annually and written
down for impairment where this is considered necessary.
INTANGIBLE ASSETS
No value is attributed to internally developed trademarks
or similar rights and assets. Costs incurred on these items,
whether purchased or created by the Group, are charged
to the income statement in the period in which they are
incurred.
FINANCIAL INSTRUMENTS
Financial instruments carried on the balance sheet
include cash and bank balances, investments, receivables
and trade creditors. These instruments are generally
carried at their fair value. The particular recognition
methods adopted are disclosed in the individual policy
statements associated with each item.
OWNER-OCCUPIED PROPERTY
Owner-occupied property is property held for use in
the supply of services or for administration purposes.
These properties are valued at carrying amount less
provisions for impairment in value, where appropriate.
Depreciation is provided against the gross carrying
amount of the properties.
INVESTMENTS
Investments are reflected at fair value, which has been
determined on the following bases:
• The value of fixed properties, which generates income,
is determined by discounting expected future cash
flows at appropriate market interest rates. Other fixed
property is valued at cost less provision for impairment
in value, where appropriate;
• Listed shares and units in unit trusts are valued at the
stock exchange and repurchase prices respectively.
The value of unlisted shares is determined by the
directors using appropriate valuation bases;
• Interest-bearing investments are valued by discounting
expected future cash flows at appropriate market
interest rates;
• Listed bonds are valued at the stock exchange prices;
• Listed derivative instruments are valued at the South
African Futures Exchange prices and the value of
unlisted derivatives is determined by the directors using
generally accepted valuation models; and
• Loans of investment script to and from third parties
are not treated as sales and purchases.
DERIVATIVE INSTRUMENTS
Derivative financial instruments include foreign exchange
contracts, interest rate futures, forward rate agreements,
currency and interest rate swaps, currency, interest rate
and equity options and other derivative financial
instruments that are marked to market. Fair values are
obtained from quoted market prices, discounted cash
flow models and option pricing models, as appropriate.
Accounting for these instruments is dependent upon
whether the transactions are undertaken for trading or
non-trading purposes.
Trading transactions include transactions undertaken
for market making, to service customer needs and for
proprietary purposes, as well as any related hedging
transactions. These transactions are marked to market
(fair values) and any profits or losses arising are
recognised in the income statement as operating profit or
loss on dealing activities, after appropriate deferrals for
unearned credit margins and future servicing costs.
The fair values related to such contracts and
commitments are reported on a gross basis in the balance
sheet as positive replacement values and negative
replacement values.
Non-trading transactions are those which are held for
hedging purposes as part of the Group’s risk management
strategy against assets, liabilities, positions or cash flows
measured at fair value as well as structures incorporated in
Page 92
Basis of Presentation and Accounting Policies (continued)
the product design of policyholder products. Derivative
financial instruments used for hedging purposes are
marked to market and any gains or losses are recognised
in the income statement as net investment surpluses.
Gains and losses on derivative financial instruments
incorporated in policyholder products are included in
policy liabilities.
FOREIGN CURRENCY TRANSLATION RESERVE
The exchange differences arising on the translation of
foreign entities are transferred to the non-distributable
foreign currency translation reserve. On disposal of the
net investment, the income is released to the income
statement. A negative foreign currency translation reserve
will not be created.
INVESTMENT RESERVE
Net realised and unrealised investment surpluses on the
revaluation or sale of investments attributable to
shareholders are transferred to an investment reserve.
However, the Board may transfer realised investment
surpluses to retained income. A negative investment
reserve will not be created. Realised and unrealised
investment surpluses attributable to policyholders are
included in policy liabilities.
TRADING ACCOUNT AND MONEY MARKET
ASSETS AND LIABILITIES
Trading account and money market assets and liabilities
are reflected at fair value, which is determined on the
bases set out above for investments.
PROVISIONS
Provisions are recognised when the Group has a present
legal or constructive obligation as a result of past events,
it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation
and a reliable estimate of the amount of the obligation
can be made.
FIXED ASSETS
Fixed assets are reflected at their depreciated cost prices.
Depreciation is provided for on a straight-line basis,
taking into account the residual value and estimated
useful lives of the assets, which vary from two to twenty
years.
LEASES
Leases of assets, under which all the risks and benefits of
ownership are effectively retained by the lessor, are
classified as operating leases. Payments made under
operating leases are charged to the income statement on a
straight line basis over the period of the lease. When an
operating lease is terminated, any payment required by
the lessor by way of penalty is recognised as an expense in
the period in which termination takes place.
INVESTMENT RETURN
Investment income
Interest and rental income is accounted for on an accrual
basis. Rental income is reflected net of property expenditure.
Dividend income is recognised once the last day for
registration has passed. Capitalisation shares received in
terms of a capitalisation issue from reserves, other than
share premium or a reduction in share capital, are treated
as dividend income. Dividend income from subsidiaries is
recognised when the dividends are declared by the subsidiary.
Investment income earned on working capital is
included in operating profit.
Investment surpluses
Investment surpluses consist of net realised surpluses
and deficits on the sale of investments and net unrealised
surpluses and deficits on the valuation of investments at
fair value. These surpluses are recognised in the income
statement or policy liabilities on the date of sale or on the
valuation to fair value date.
LONG TERM RATE OF RETURN
The long term rate of return (LTRR) is determined at the
beginning of the year by the directors and is primarily
based on the actuarial assumptions, taking into account
historical experience and current market conditions
having regard to inflation expectations and consensus
economic and investment forecasts. The directors have
selected this rate with a view to ensuring that investment
returns credited to LTRR headline earnings are consistent
with the actual returns expected to be earned over the
long term.
The long term investment return is calculated on a
monthly basis on the fair value of the investments held in
the shareholders’ funds and holdings in subsidiaries and
associated companies.
Page 93
PREMIUM INCOME
The full annual premiums on individual insurance
policies that are receivable in terms of the policy contracts
are accounted for on policy anniversary dates,
notwithstanding that premiums are payable in
instalments. The monthly premiums in respect of certain
new products are in terms of their policy contracts
accounted for when due.
Group life insurance premiums are accounted for
when receivable. Where premiums are not determined in
advance they are accounted for upon receipt.
General insurance premiums are accounted for when
receivable, net after a provision for unearned premiums
relating to risk periods that extend to the following year.
Premiums outstanding for more than sixty days are not
accounted for. Inward general reinsurance agreement
premiums are accounted for on an intimated basis.
Gross premium income is reduced by reinsurance
premiums applicable to the same period.
CONSULTING FEES EARNED
Consulting fees are accounted for on the accrual basis.
POLICY BENEFITS
Policy claims received up to the last day of each financial
period and claims incurred but not reported (IBNR) are
provided for and included in policy benefits. Past claims
experience is used as the basis for determining the extent
of the IBNR claims.
Underwriting policy benefits in respect of long term
insurance business include the change in the
corresponding actuarial liabilities.
Policy benefits are reflected net of amounts recovered
from reinsurers.
SALES REMUNERATION
Sales remuneration consists of commission payable to
non salaried sales staff on long term and general insurance
business and expenses directly related thereto, bonuses
payable to sales staff and the Group’s contribution to their
retirement and medical aid funds.
Commission on long term insurance business is accounted
for in the financial period during which it is incurred.
Acquisition cost for general insurance business are
deferred over the period in which the related premiums
are earned.
ADMINISTRATION COSTS
Administration costs include, inter alia, indirect taxes
such as revenue stamps payable on insurance policy
contracts and VAT, property and administration expenses
relating to owner-occupied property, property and
investment expenses related to the management of the
policyholders’ investments, product development and
training costs. Internal systems development costs and
purchased systems costs are included in administration
expenses when incurred.
DEFERRED INCOME TAX
Deferred normal income tax is provided at current tax
rates for all temporary differences arising between the tax
bases of assets and liabilities and their carrying values for
financial reporting purposes. Deferred tax assets relating
to unused tax losses are recognised to the extent that it is
probable that future taxable profit will be available against
which the unused tax losses can be utilised.
Deferred capital gains tax balances are reflected at
current values and have not been discounted. Deferred
capital gains tax relating to the assets underlying the
policyholders’ funds is included in policy liabilities.
FOREIGN CURRENCIES
Transactions and balances
Assets and liabilities in foreign currencies are converted to
South African rand at exchange rates ruling at the
financial period end. Differences arising from this
translation are included in investment surpluses as
substantially all foreign assets and liabilities are in respect
of investments. Foreign currency income items are
translated at the weighted average exchange rates for the
period.
Foreign entities
All foreign subsidiaries are regarded as foreign entities due
to the nature of their relationship with the holding
company. Income statement items of foreign subsidiaries
are converted to South African rand at the weighted
average exchange rates for the financial year. The closing
rate is used for the assets and liabilities. At acquisition,
equity is translated at the rate ruling on the date of
acquisition. Post-acquisition equity is translated at the
rates prevailing when the change in equity occurred.
Exchange differences arising on translation of foreign
Page 94
Basis of Presentation and Accounting Policies (continued)
entities’ results are transferred to a non-distributable
reserve until the disposal of the net investment when it is
transferred to retained income.
RETIREMENT BENEFITS
Retirement benefits for employees are provided by a
number of defined benefit and defined contribution
pension and provident funds. The assets of these funds,
including those relating to any actuarial surpluses, are
held separately from those of the Group. The retirement
plans are funded by payments from employees and the
relevant group companies, taking into account the
recommendations of the pension fund valuator.
The Group’s contributions to the defined
contribution and defined benefit funds are charged to the
income statement in the year in which they are incurred.
A valuation in accordance with AC116 is performed on
the balance sheet date. For the purpose of calculating
pensions, medical contributions are deemed to be a part
of pensionable salary. Retirement fund contributions are
made on the pensionable salary. Therefore, pensioners
fund post-retirement medical contributions themselves
from their increased pensions. The Group has provided in
full for its medical contribution commitments in respect
of pensioners and disabled members who are not covered
under the current scheme.
Defined benefit plans
The schemes are valued using the valuation basis for past
service cost, and the attained age method for future
service cost. Any deficits advised by the actuaries are
funded either immediately or through increased
contributions to ensure the ongoing soundness of the
schemes. Contributions are expended during the year in
which they are funded. The net surplus or deficit in the
benefit obligation is the difference between the present
value of the funded obligation and the fair value of plan
assets. The Group recognises the estimated liability using
the projected unit credit method. The present value of the
overfunded portion of these schemes is recognised as an
asset to the extent that there are material benefits available
in the form of refunds and reductions in contributions.
Defined contribution plans
Group contributions to the pension and provident funds
are based on a percentage of the payroll and are charged
against income as incurred.
Medical aid benefits
Group contributions to medical aid funds are charged to
the income statement in the year in which they are
incurred.
Post-retirement medical aid benefits
The present value of this post-retirement medical aid
obligation is actuarially determined annually and any
deficit or surplus is immediately recognised in the income
statement. The Group recognises the estimated liability
using the projected unit credit method. The Group has
no significant exposure to any other post-retirement
benefit obligation.
EQUITY COMPENSATION PLANS
Sanlam operates a staff share incentive scheme through
Sanlam Limited Share Incentive Trust. Shares are offered
on a combined option and deferred delivery basis, which
staff can take up in tranches over a period of up to six
years. The beneficiaries under the scheme are executive
directors, management and sales advisors employed on a
full time basis. There is currently no income statement
effect when such benefits are granted.
SEGMENTAL REPORTING
For management purposes, the Group is organised into a
number of business areas based on the operating activities
of these businesses.
The primary segments are based on the type of
business, namely life insurance, investment management,
banking activities and general insurance. The secondary
segments are based on the geographical segmentation.
The significant geographical regions are Southern Africa
and International (comprising mainly of the United
Kingdom and Republic of Ireland).
DIVIDENDS
Dividends proposed or declared after the balance sheet
date are not recognised at the balance sheet date.
Page 95
POLICY LIABILITIES AND PROFITENTITLEMENTINTRODUCTION
The valuation bases used to calculate the policy liabilities of
all material lines of long term insurance business and the
corresponding shareholder profit entitlement are set out below.
The actuarial valuation of the policy liabilities is
determined using the financial soundness valuation method.
The underlying philosophy is to recognise profits prudently
over the term of each contract consistent with the work done
and risk borne.
Assets are valued at fair value as set out in the accounting
policy for investments. There are no intangible assets
included in the assets of the life insurance business of the
Group. Policy liabilities are valued on bases consistent with
the fair value of assets. The liabilities exceeded the minimum
requirements in terms of actuarial guidance note PGN 104
issued by the Actuarial Society of South Africa ("ASSA").
In the valuation of liabilities, provision is made for:
• The best estimate of future experience;
• The margins prescribed in the ASSA guidelines; and
• Second-tier margins determined to release profits to
shareholders consistent with policy design and company
policy.
APPLICATION OF VALUATION METHODOLOGY
The valuation methodology has been consistently applied for
2001 and 2002. The changes in the discount rates, bonus
rates and other assumptions in general did not have a
material effect on the total liabilities and earnings reported
for 2002. The same valuation methodology is applied for
Sanlam Namibia Limited, for which separate asset funds are
held.
BEST ESTIMATE OF FUTURE EXPERIENCE
The best estimate of future experience is determined as
follows:
• Future investment return assumptions are derived from
market-related interest rates on fixed-interest securities.
The asset composition of the various asset funds,
investment management expenses, taxes at current tax rates
and charges for investment guarantees are taken into
account;
• Unit expenses are based on the 2002 experience of Sanlam
Life Insurance Limited on a going-concern basis and
escalated at estimated expense inflation rates per annum; and
• Assumptions with regard to future mortality, disability
and disability payment termination rates are consistent
with the experience for the four and a half years up to
30 June 2002. Mortality and disability rates are
adjusted to allow for expected deterioration in
mortality rates as a result of Aids and for expected
improvements in mortality rates in the case of annuity
business. Surrender and lapse rates are based on the
experience for the three and a half years up to
30 June 2002.
ASSET FUNDS
Separate asset funds are maintained for each of the
major lines of business. Bonus rates are declared for
each class of participating business in relation to the
funding level of each portfolio and the expected future
net investment return on the assets of the particular
investment portfolio.
BONUS STABILISATION RESERVES
The group and individual stabilised bonus portfolios
are valued on a retrospective basis. If the fair value of
the assets in such a portfolio is greater than the net
premiums invested plus declared bonuses, a positive
bonus stabilisation reserve is created which will be used
to enhance future bonuses. Conversely, if assets are less
than the net premiums invested plus declared bonuses,
a negative bonus stabilisation reserve is created. A
negative bonus stabilisation reserve will be limited to
the amount that the Statutory Actuary expects will be
recovered through the declaration of lower bonuses
during the ensuing three years, if market values of assets
do not recover.
PROVISION FOR FUTURE BONUSES
It was assumed for reversionary bonus business that the
last declared bonus rates would be maintained over the
lifetime of the policies, except that part of the non-vested
bonuses, equal in total to 5,9% of liabilities, would be
cancelled during the next three bonus declarations if
investment conditions do not improve.
For the remainder of the participating business the
last declared bonus rates were assumed for the next three
bonus declarations and bonus rates equal to the assumed
future investment returns less provision for expense
recoveries thereafter.
Page 96
Basis of Presentation and Accounting Policies (continued)
REVERSIONARY BONUS BUSINESS
The liability is set equal to the fair value of the underlying
assets. This is equivalent to a best estimate prospective
liability calculation using the bonus rate as set out in the
previous paragraph, and allowing for the shareholders’
share of a maximum of one-ninth of the cost of these
bonuses.
The present value of the shareholders’ entitlement is
sufficient to cover the margins prescribed in the ASSA
guidelines for the valuation of policy liabilities. The
prescribed margins are thus not provided for in addition
to the shareholders’ entitlement.
INDIVIDUAL STABLE BONUS AND MARKET-
RELATED BUSINESS
For investment policies where the bonuses are stabilised
or directly related to the return on the underlying
investment portfolios, the liabilities are equated to the
retrospectively accumulated fair value of the underlying
assets less any unrecouped expenses. These retrospective
liabilities are higher than the prospective liabilities
calculated at the present value of expected future benefits
and expenses less future premiums at the relevant
discount rates.
To the extent that the retrospective liabilities exceed
the prospective liabilities, the basis contains second-tier
margins. The valuation methodology results in the release
of these margins to shareholders on a fees minus expenses
basis consistent with the work done and risks borne over
the lifetime of the policies.
GROUP STABLE BONUS AND LINKED BUSINESS
In the case of group linked business and group policies
where bonuses are stabilised, the liabilities are equated to
the fair value of the retrospectively accumulated
underlying assets.
To the extent that future fees exceed expenses,
including allowance for the prescribed ASSA margins, the
basis contains second-tier margins. These margins are
released to shareholders consistent with the work done
and risks borne over the lifetime of the policies.
PARTICIPATING ANNUITIESThe liabilities are equated to the fair value of theretrospectively accumulated underlying assets. This is
equivalent to a best estimate prospective liabilitycalculation allowing for future bonus rates as describedabove and expected future investment returns.Shareholder entitlements emerge on a fees minusexpenses basis consistent with work done and risks borneover the lifetime of the annuities. The present value of theshareholders’ entitlement is sufficient to cover themargins prescribed in the ASSA guidelines for thevaluation of policy liabilities. The prescribed margins arethus not provided for in addition to the shareholders’entitlement.
NON-PARTICIPATING ANNUITY BUSINESSNon-participating life and term annuity instalments andfuture expenses in respect of these instalments arediscounted at market-related interest rates. All profits orlosses accrue to the shareholders when incurred.
GUARANTEED PLANSGuaranteed maturities and expected future expenses arediscounted at market-related interest rates. All profits orlosses accrue to the shareholders when incurred.
OTHER NON-PARTICIPATING BUSINESSThe majority of the other non-participating businessliabilities is valued on a retrospective basis. The remainder(less than 2% of policy liabilities) is valued prospectivelyand contains second-tier margins via an explicit interestrate deduction of approximately 2,75% on average.
For non-participating business other than life andterm annuity business and guaranteed plans, an assetmismatch provision is maintained. The interest and assetprofits arising from the non-participating portfolio areadded to this provision. The asset mismatch provisionaccrues to shareholders at the rate of 1,33% monthly,based on the balance of the provision at the end of theprevious quarter. The effect of holding this provision is todampen the impact on earnings of short term fluctuationsin fair values of underlying assets. The asset mismatchprovision represents a second-tier margin. A negative assetmismatch provision will not be created, but such shortfallwill accrue to shareholders in the year in which it occurs.
HIV/AIDSA specific provision for HIV/Aids-related claims ismaintained. The provision for individual policies (more
Page 97
than 85% of the total HIV/Aids provision) is built up byincreasing the opening provision by the HIV/Aids riskpremiums and investment returns on the underlyingassets. It is then reduced by claims attributed toHIV/Aids. This retrospectively built-up provision ishigher than a prospective calculation done according tothe ASSA guidelines allowing for possible increases infuture HIV/Aids risk premiums. This difference can beregarded as a second-tier margin. It is the intention of theGroup to re-rate premiums as experience develops.
Premium rates for group business are reviewed morefrequently. The HIV/Aids provision is based on theexpected Aids claims in a year and the time that mayelapse before premium rates and underwriting conditionscan be suitably adjusted should actual experience beworse than expected.
PROVISIONS FOR MINIMUM MATURITY VALUEGUARANTEESIn addition to the liabilities described above, provision ismade for the possible cost of minimum maturity valueguarantees provided by some participating policies.Stochastic asset modelling techniques are used todetermine the appropriate amount for this provision.
WORKING CAPITALTo the extent that the management of working capitalgives rise to profits, no credit is taken for this indetermining the policy liabilities. This could be viewedas a second-tier margin.
CAPITAL ADEQUACY REQUIREMENTSThe excess of assets over liabilities of life insuranceoperations is sufficient to cover its capital adequacyrequirements in terms of PGN 104. The capital adequacyrequirements provide a buffer against experience worsethan that assumed in the financial soundness valuation.On the valuation date the ordinary capital adequacyrequirements (OCAR) were used as they exceeded thetermination capital adequacy requirements (TCAR).The largest element of the capital adequacy requirementsrelates to stabilised bonus business.
Consistent with an assumed fall in the fair value of theassets (the resilience scenario), which is prescribed in theASSA guidance notes, the calculation of the capital adequacyrequirements takes into account a reduction in non-vestingbonuses and future bonus rates and for the capitalisation ofsome expected future profits (held as part of the liabilities assecond-tier reserves).
Page 98
Sanlam Group Income Statementfor the year ended 31 December 2002
2002 2001Note R million R million
FUNDS RECEIVED FROM CLIENTS 1 42 098 46 124
Financial services income 2 14 524 13 114Sales remuneration (1 856) (1 734)
Income after sales remuneration 12 668 11 380
Underwriting policy benefits 3 (6 162) (5 285)
Administration costs 4 (4 357) (4 003)
Operating profit before tax 5 2 149 2 092
Tax on operating profit 6 (549) (330)
Operating profit from ordinary activities after tax 1 600 1 762
Minority shareholders’ interest (118) (92)
NET OPERATING PROFIT 1 482 1 670
Net investment income 402 515
Investment income 7 620 644
Tax on investment income 6 (110) (10)Minority shareholders’ interest (108) (119)
Net equity-accounted earnings 8 396 443
Equity-accounted earnings 471 621
Tax on equity-accounted earnings 6 (75) (178)
HEADLINE EARNINGS 2 280 2 628Net investment surpluses (2 621) 1 596
Investment surpluses 7 (2 822) 1 999Tax on investment surpluses 6 177 (249)
Minority shareholders’ interest 24 (154)
Amortisation of goodwill 16 (259) (215)
ATTRIBUTABLE EARNINGS (600) 4 009
Diluted earnings per share: Cents Cents
• Net operating profit from ordinary activities 12 56,3 62,9
• Headline earnings 12 86,7 99,1• Attributable earnings 12 (22,8) 151,1
Dividend per share 13 37,0 35,0
PRO FORMA LTRR HEADLINE EARNINGS (R million) 9 3 227 3 534Pro forma headline earnings based on the long term rate of return (LTRR) (cents per share) 12 122,7 133,2
Page 99
Sanlam Group Balance Sheetat 31 December 2002
2002 2001Note R million R million
ASSETSNon-current assets
Fixed assets 14 260 295Owner-occupied properties 15 381 —Goodwill 16 1 992 1 840Investments 17 149 276 165 842
Investment properties 11 128 12 011Equities 78 368 96 209Public sector stocks and loans 31 052 31 299Debentures, insurance policies and other loans 13 246 9 293Cash, deposits and similar securities 15 482 17 030
Deferred tax 18 237 146General reinsurance provisions 19 2 072 1 647
Current assets 29 339 30 375
Trade and other receivables 20 16 614 20 066Cash, deposits and similar securities 12 725 10 309
Total assets 183 557 200 145
EQUITY AND LIABILITIESCapital and reserves
Share capital and premium 21 3 455 3 514Non-distributable reserves 9 415 9 415Investment reserve — 2 145Retained income 7 781 7 157
Shareholders’ funds 20 651 22 231Minority shareholders’ interest 1 624 1 503Non-current liabilities
Long term policy liabilities 23 129 329 145 248Term finance 24 5 382 4 936Deferred tax 18 35 346General insurance provisions 19 4 226 3 296
Current liabilities 22 310 22 585
Trade and other payables 25 21 584 22 041Taxation 726 544
Total equity and liabilities 183 557 200 145
Segregated funds not included in the above balance sheet 62 396 56 251Total assets under management and administration 245 953 256 396Tangible net asset value per share (cents) 28 798 927
Page 100
Sanlam Group Statement of Changes in Equityfor the year ended 31 December 2002
Nondistri-
Share Share Investment butable RetainedR million Note capital premium reserve reserve(1) income Total
Balance at 1 January 2001 27 3 487 487 9 415 5 596 19 012Attributable earnings for the year — — — — 4 009 4 009
Transfer to investment reserve 11 — — 1 658 — (1 658) —
Dividends paid — — — — (790) (790)
Balance at 31 December 2001 27 3 487 2 145 9 415 7 157 22 231Attributable earnings for the year — — — — (600) (600)Transfer from investment reserve 11 — — (2 145) — 2 145 —Dividends paid — — — — (921) (921)
Cost of treasury shares acquired — (59) — — — (59)
Balance at 31 December 2002 27 3 428 — 9 415 7 781 20 651
(1)Non-distributable reserve arising on acquisition of subsidiaries.
Page 101
Sanlam Group Cash Flow Statementfor the year ended 31 December 2002
2002 2001Note R million R million
Net cash flow from operating activities 3 192 1 478
Cash generated from operations before working capital changes 33.1 1 352 1 435Working capital changes 2 353 646
Interest received 2 432 1 567
Interest paid (1 613) (1 155)Taxation (549) (330)
Dividends received 138 105Dividends paid (921) (790)
Net cash flow from investment activities (1 130) 1 959
Net (acquisition)/disposal of investments (1 814) 1 447Interest received 332 318
Taxation 57 (249)
Dividends received 390 388Rental income received 65 80
Acquisition of subsidiaries 33.2 (101) (25)
Acquisition of treasury shares (59) —
Net cash flow from financing activitiesNet term finance raised/(repaid) 354 (164)
Cash flow from movement in policyholders’ funds — —
Cash utilised in policyholders’ activities 33.3 (9 353) (11 745)Taxation 23.1 (228) (414)
Interest received 23.3 4 267 4 561
Dividends received 23.3 2 249 2 070Other investment income 23.3 1 223 1 471
Net realised and unrealised investment surpluses 23.3 (14 077) 15 353
(Increase)/decrease in policyholders’ investments (15 919) 11 296Increase/(decrease) in policy liabilities 15 919 (11 296)
Net increase in cash and cash equivalents 2 416 3 273Cash, deposits and similar securities at beginning of year 10 309 7 036
Cash, deposits and similar securities at end of year 12 725 10 309
Page 102
Notes to the Group Financial Statementsfor the year ended 31 December 2002
2002 2001R million R million
1. FUNDS RECEIVED FROM CLIENTSAnalysis per product (Refer to page 139 for analysis per business)
Insurance business – Premium income 28 512 27 600
Long term insurance (note 23.2) 22 990 22 915
Transfer to segregated funds (26) (75)General insurance 5 548 4 760
Other business 13 586 18 524
Unit trusts 7 884 10 772
Linked products 4 199 3 450
Segregated funds – Sanlam Investment Management 673 3 479Segregated funds – Sanlam International 830 276
Health care — 547
Total funds received from clients 42 098 46 124
The funds received from clients are disclosed net of the following reinsurance premiums:Life business 151 160
General insurance 2 562 1 632
2. FINANCIAL SERVICES INCOME Analysis per product
Long term insurance 7 264 6 837
General insurance 5 663 4 919
Other financial services 1 597 1 358
Total financial services income 14 524 13 114
Included in financial services income isDividend income 145 140
Interest received 2 317 1 635
Interest paid and term finance costs (1 613) (1 155)
3. UNDERWRITING POLICY BENEFITSLong term insurance: death, disability and cash bonuses 2 237 1 918
Individual insurance 1 084 959Group life insurance 1 153 959
General insurance 3 925 3 367
Total underwriting policy benefits 6 162 5 285
Page 103
2002 2001R million R million
4. ADMINISTRATION COSTS INCLUDE:Directors’ remunerationTotal remuneration paid by Sanlam Limited and its consolidated subsidiaries to its present and previous directors:
PresentDirectors’ fees 4,7 2,3Other services (basic remuneration, pensions and bonuses) 16,4 16,1
PreviousDirectors’ fees 0,2 0,6Other services (basic remuneration, pensions and bonuses) 4,8 7,5
Total directors’ remuneration 26,1 26,5
Analysis of directors’ remunerationExecutive directors 21,0 23,7Non-executive directors 5,1 2,8
Total directors’ remuneration 26,1 26,5
Directors’ remuneration paid by subsidiaries 22,2 23,6
Auditors’ remunerationAudit fees 22 21Other services 14 8
Total auditors’ remuneration 36 29
Depreciation 96 107Operating leases 158 141Consultancy fees 198 276Technical, administrative and secretarial fees 27 62Office staff costs 2 176 1 916Office staff (number of persons) 9 716 10 024
5. ANALYSIS OF OPERATING PROFITSanlam Life 1 533 1 375Sanlam Investment Management 185 184Sanlam International 75 103Gensec Bank 112 191Santam 257 188Gensec Properties 24 48Corporate income 96 98Corporate costs (138) (125)Other 5 (3)Sanlam Health — 33
Total operating profit 2 149 2 092
Geographical analysisSouthern African 1 970 1 895International 179 197
Total operating profit 2 149 2 092
Page 104
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
2002 2001R million R million
6. TAXATION: SHAREHOLDERS’ FUNDSAnalysis of income tax on earnings of shareholders’ fundsOperating profit 549 330
current year 556 515
prior year (7) (185)
Investment income 110 10
current year 110 109
prior year — (99)
Equity accounted earnings 75 178
Investment surpluses (177) 249
Net investment surpluses – normal 15 18
– capital gains tax (182) 221
Investment surplus on investment in associated company – capital gains tax (10) 10
Income tax on earnings 557 767
Income taxNormal income tax 858 703
RSA – current year 781 686Foreign 37 17
Capital gains tax 40 —
Deferred tax (376) (114)
Normal tax – current year (144) (67)
– prior year — (278)Capital gains tax (232) 231
Share of associated company’s tax charge 75 178
Taxation 557 767
In addition, the shareholders’ funds paid the following indirect taxes and levies, which are included in the appropriate items in the income statement
Included in administration costs 167 178
Included elsewhere 48 40
215 218
Indirect taxes and levies include value-added tax, revenue stamps paid on insurance policy contracts and statutory levies payable to the Regional Services Councils and the Financial Services Board.
Tax of R228 million (2001: R414 million) was also paid on policyholders’ funds (refer note 23.5).
Page 105
2002 2001% %
6. TAXATION: SHAREHOLDERS’ FUNDS (continued)Reconciliation of tax rate on operating profitStandard rate of taxation 30,0 30,0
Adjusted for:Non-taxable income (3,2) (4,3)
Prior year adjustments (0,3) (9,1)Foreign tax rate differential (1,1) (2,9)
Other 0,2 2,1
Effective tax rate on operating profit 25,6 15,8
Reconciliation of tax rate on investment returnStandard rate of taxation 30,0 30,0
Adjusted for:Non-taxable income 4,6 (2,6)
Investment surpluses (38,7) (10,8)
Prior year adjustments — (3,0)Equity accounted earnings 3,9 (0,2)
Other (0,3) —
Effective tax rate on investment return (0,5) 13,4
R million R million
7. INVESTMENT RETURN: SHAREHOLDERS’ FUNDSInvestment income 620 644
Interest-bearing investments 319 316Equities 236 248Properties 65 80
Investment surpluses (2 822) 1 999
Realised and unrealised investment surpluses (2 193) 1 728
(Deficit)/surplus on investment in associate company (629) 333
Change in accounting policy by subsidiary — (62)
Investment return: shareholders’ funds (2 202) 2 643
8. NET EQUITY-ACCOUNTED EARNINGSInvestment surplus and dividends received on investment in associated company (223) 766
Less: Balance over equity-accounted earnings transferred (from)/to net investment return (619) 323
Investment surplus (629) 333
Capital gains tax 10 (10)
Net equity-accounted earnings 396 443
Page 106
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
2002 2001R million R million
9. PRO FORMA LONG TERM RATE OF RETURN HEADLINE EARNINGSLong term rate of return (LTRR) headline earningsNet operating profit 1 482 1 670
LTRR investment return 1 745 1 864
Net equity accounted earnings 396 443
Investment return after taxation 1 349 1 421
LTRR headline earnings 3 227 3 534
Reconciliation of headline earnings and LTRR headline earningsHeadline earnings per income statement 2 280 2 628
Net investment surplusses (2 621) 1 596Net LTRR adjustment 3 568 (690)
LTRR headline earnings 3 227 3 534
Analysis of net LTRR adjustmentInvestment return 4 054 (877)
Equities 3 081 (488)Deficit/(surplus) on investment in associated company 629 (333)
Interest bearing investments 301 (144)
Properties 43 88
Tax (364) 126
Minority shareholders’ interest (122) 61
Net LTRR adjustment 3 568 (690)
A comparison of the aggregate actual and calculated longer term returns (after tax and minorities) since 1 January 1999 is set out below:Actual returns 3 964 5 787Longer term returns (7 528) (5 783)
(Deficit)/excess aggregate short term fluctuations (3 564) 4
Page 107
2002 2001R million R million
9. PRO FORMA LONG TERM RATE OF RETURN HEADLINE EARNINGS (continued)A reconciliation of the investments included in the calculation of the LTRR is as follows:Investments per shareholders’ funds balance sheet (refer page 136) 24 026 25 095Less: Investment in Absa 3 957 4 036
Investments held in respect of term finance 4 731 4 029
Investments held in respect of banking activities 1 544 915Non-cash free float assets of subsidiary 38 260
Other 161 726
LTRR investments 13 595 15 129
Analysis of LTRR investmentsEquities 8 472 9 471Securities 2 238 2 624
Cash, deposits and similar securities 2 226 1 790
Properties 659 1 244
LTRR investments 13 595 15 129
10. CONSOLIDATION OF FOREIGN SUBSIDIARIESAt the beginning of 2002 the foreign businesses of Gensec Bank were reclassified as foreign entitiesto reflect the greater independence of the offshore operations. This change resulted in the currencytranslation differences arising on consolidation no longer affecting operating profit.
Currency translation profits of R158 million were included in the 2001 operating results.
11. TRANSFER (FROM)/TO INVESTMENT RESERVENet investment surpluses (note 7) (2 822) 1 999
Tax on net investment surpluses (note 6) 177 (249)
Minority interest in net investment surpluses 23 (154)Change in accounting policy by subsidiary (note 7) — 62
Negative reserve transferred to retained income 477 —
Transfer (from)/to investment reserve (2 145) 1 658
Similar to the transfer of a negative investment reserve to retained earnings, a negative foreign currency reserve is not created. At year-end a negative currency reserve is kept in retained earnings.
Page 108
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
2002 2001R million R million
12. DILUTED EARNINGS PER SHAREFor diluted earnings per share the weighted average number of ordinary shares is adjusted for the shares not yet issued under the Sanlam Share Incentive Scheme as well as treasury shares held bysubsidiaries. Diluted earnings per share is calculated by dividing earnings by the adjusted weightedaverage number of shares in issue.
Net operating profit from ordinary activities 1 482 1 670
Headline earnings 2 280 2 628
Headline earnings based on the long term rate of return 3 227 3 534
Attributable earnings (600) 4 009
Number of ordinary shares in issue million 2 655 2 655Add: Incentive shares not issued million 5 20
Less: Sanlam shares held by subsidiary companies (note 21) million (29) (22)
Adjusted weighted average number of shares million 2 631 2 653
Diluted earnings per shareNet operating profit from ordinary activities cents 56,3 62,9Headline earnings cents 86,7 99,1
Headline earnings based on the long term rate of return cents 122,7 133,2
Attributable earnings cents (22,8) 151,1
13. DIVIDENDSA dividend of 37 cents per share (2001: 35 cents per share) was declared in March 2003.
It is envisaged that the company will have sufficient Secondary Tax on Companies (STC) credits not to incur any STC liability when the dividend is paid.
14. FIXED ASSETSLand and buildings 29 76
Computer equipment 80 82
Cost 334 306Accumulated depreciation (254) (224)
Furniture, equipment and vehicles 151 137
Cost 333 281
Accumulated depreciation (182) (144)
Total fixed assets 260 295
The reconciliation of the movement in the book value of fixed assets is not provided, as it is notconsidered material in relation to the Group’s activities.
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2002 2001R million R million
15. OWNER-OCCUPIED PROPERTIESBalance at beginning of year — —Transfer from fixed assets at depreciated value 52 —Transfer from investment properties at fair value 333 —Net expenditure expensed (4) —
Balance at end of year 381 —
Depreciation is provided for over the useful life of owner-occupied properties, taking into accountan expected residual value. If the expected residual value is equal to or greater than the carryingvalue, no depreciation is provided for.
16. GOODWILLBalance at beginning of year 1 840 1 711Additions during the year 411 344
Net consideration paid 411 365Fair value of net assets acquired — 21
Amortisations (259) (215)
Balance at end of year 1 992 1 840
The estimated useful life of goodwill is between five and ten years and it is amortised with effectfrom the acquisition dates. The additions to goodwill during 2002 arose from the acquisition of actuarial consulting, privateclient and investment management businesses, mainly in the UK.
% %
17. INVESTMENTSSpread of investments in equities listed on JSE by sectorIndustrial 39 39Financial 28 27Resources 33 34
100 100
Unlisted equity investmentsAs a percentage of the total investment in equities 5 3
R million R million
Direct offshore investmentsEquities 14 770 21 999Interest-bearing investments 6 220 11 342
Total offshore investments 20 990 33 341
Shares held in holding companySanlam Limited shares held by policyholders’ fundsNumber million 143 140Fair value R million 1 089 1 288
Page 110
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
2002 2001
17. INVESTMENTS (continued)
Investment in associated company(1)
Absa LimitedFair value of interest R million 4 741 5 248Number of shares held 000s 150 059 149 512Interest in issued share capital %
Shareholders’ funds 19,2 17,7Policyholders’ funds 3,8 5,4
Share of earnings after tax for current year R millionShareholders’ funds 396 443Policyholders’ funds 82 172
Distributions received R millionShareholders’ funds 153 136Policyholders’ funds 46 67
Aggregate post-acquisition reserves attributable to shareholders R million 1 138 895
The financial year-end of Absa Limited is 31 March. The equity-accounted earnings for AbsaLimited included in the Sanlam Limited group results are for the 12 month period ended 30 September and were derived from their published annual financial statements and their interimresults. The Sanlam group’s share of these earnings is included in investment income.
(1)Interest in associated company exclude segregated funds’ interest.
R million R million
Investment in joint ventureThe Group holds a 50% stake in a joint controlled entity, Safair Lease Finance (Proprietary)Limited. The interest is accounted for on an equity-accounted basis.Carrying value of interest 408 —Share of earnings after tax 8 —Share of aggregate assets 1 505 —Share of aggregate liabilities 1 112 —
Register of investmentsA register containing details of all investments, including fixed property investments, is availablefor inspection at the registered office of Sanlam Limited.
Term loans and deposits of R278 million (2001: R546 million) are encumbered as detailed in note 24.
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18. DEFERRED TAX AND PROVISIONSDetails of the deferred tax balances and provisions are as follows
Deferred tax ProvisionsAsset Liability
R million R million R million
Balance at 1 January 2001 115 (284) (387)
Charged to income statement 31 87 (170)
Additional provisions – normal 31 33 (170)– capital gains tax — (230) —
Unused amounts reversed — 284 —
Prior year adjustment by subsidiary — (149) —
Utilised during the year — — 56
Balance at 31 December 2001 146 (346) (501)Charged to income statement 77 299 (120)
Additional provisions – normal 74 70 (120)– capital gains tax 3 229 —
Prior year adjustment by subsidiary — 12 —
Acquisition of subsidiaries 14 — —
Utilised during the year — — 54
Balance at 31 December 2002 237 (35) (567)
None of the items included in the provisions is individually material.
2002 2001R million R million
19. GENERAL INSURANCE PROVISIONSGeneral insurance provisions 4 226 3 296
Gross outstanding claims 2 392 2 150
Gross provision for unearned premiums 1 695 1 046Deferred reinsurance acquisition revenue 139 100
Less: General reinsurance provisions 2 072 1 647
Outstanding claims 1 093 1 101
Unearned premiums 834 451
Deferred acquisition cost 145 95
Net general insurance provisions 2 154 1 649
Page 112
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
2002 2001R million R million
20. TRADE AND OTHER RECEIVABLESPremiums receivable 4 499 4 366
Accrued investment income 1 080 1 094
Trading account and money market investments 6 459 10 335
Accounts receivable 4 576 4 271
Total trade and other receivables 16 614 20 066
Cash, deposits and similar securities of R43 million (2001: R681 million) and trading accountinvestments of R980 million (2001: R1 261million) are encumbered as detailed in note 25.
21. SHARE CAPITAL AND PREMIUMAuthorised share capital
4 000 million ordinary shares of 1 cent each 40 40
Issued share capital and premiumNumber of ordinary shares in issue
Total shares in issue million 2 654,6 2 654,6
Shares held by subsidiaries million (29,2) (22,2)
Balance at end of year million 2 625,4 2 632,4
Nominal value and share premium
Nominal value of 1 cent per share R million 27 27
Share premium R million 3 487 3 487
Treasury shares (held by subsidiaries) R million (59) —
Total nominal value and share premium R million 3 455 3 514
Authorised and unissued sharesSubject to the restrictions imposed by the Companies Act, the authorised and unissued shares areunder the control of the directors until the forthcoming annual general meeting.
Page 113
2002 2001000s 000s
21. SHARE CAPITAL AND PREMIUM (continued)Executive share incentive schemeRestricted shares and share options at the beginning of the year 130 195 137 197
New options granted 37 581 30 334Restricted shares cancelled and options granted for the conversion of the Gensec share scheme — (3 811)
Unconditional options and shares released, available for release, or taken up (41 316) (24 375)Options lapsed or cancelled (9 972) (9 300)
Cash dividends received on restricted shares and converted into shares 124 150
Restricted shares and share options at the end of the year 116 612 130 195
Restricted and unrestricted share options as a percentage of total issued shares 5,8% 5,2%
Details regarding the restricted shares and share options outstanding on 31 December 2002 andthe financial years during which they become unconditional, are as follows:
Number of AverageShares Options option price
Unconditional during year ended 000s 000s R
31 December 2003 3 054 20 986 7,50
31 December 2004 2 401 25 660 7,88
31 December 2005 981 29 196 8,05
31 December 2006 306 15 734 8,35
31 December 2007 — 11 198 8,45
31 December 2008 and later 4 7 092 8,15
22. CONTINGENCY RESERVESContingency reserves in respect of general insurance business of R227 million are included inshareholders’ reserves (2001: R189 million) and R53 million (2001: R75 million) in the netassets underlying policy liabilities.
Page 114
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
2002 2001R million R million
23. LONG TERM INSURANCE POLICY LIABILITIES23.1 Analysis of movement in policy liabilities
Income 16 652 46 370
Premium income (note 23.2) 22 990 22 915
Investment surpluses (note 23.3) (6 338) 23 455
Outflow 32 571 35 074
Policy benefits (note 23.4) 21 136 20 630
Retirement fund terminations 4 523 6 385Transfer to segregated assets 109 1 412
Taxation (note 23.5) 228 414
Fees, risk premiums and other payments to shareholders’ funds 6 575 6 233
Net movement for the year (15 919) 11 296Balance at beginning of the year 145 248 133 952
Balance at end of the year 129 329 145 248
23.2 Analysis of premium incomeIndividual insurance 17 469 16 539
Recurring 8 634 8 336
Single 7 033 6 009Continuations 1 802 2 194
Group business 5 521 6 376
Recurring 2 903 2 910
Single 2 618 3 466
Total premium income 22 990 22 915
23.3 Investment return: policyholders’ fundsInvestment income
Interest-bearing investments 4 267 4 561
Equities 2 249 2 070
Properties 1 128 1 230
Total investment income 7 644 7 861Equity-accounted earnings 95 241
Net investment surpluses (14 077) 15 353
Total investment return (6 338) 23 455
Page 115
2002 2001R million R million
23. LONG TERM INSURANCE POLICY LIABILITIES (continued)23.4 Analysis of long term insurance policy benefits
Individual insurance 16 521 15 863
Maturity benefits 8 082 7 866
Surrenders 4 867 4 186
Life and term annuities 2 872 3 011Death and disability benefits(1) 593 666
Cash bonuses(1) 107 134
Group business 4 615 4 767
Withdrawal benefits 2 061 2 152
Pensions 1 378 1 310Lump-sum retirement benefits 877 1 010
Taxation paid on behalf of certain retirement funds 161 167
Death and disability benefits(1) 96 85Cash bonuses(1) 42 43
Total long term insurance policy benefits 21 136 20 630
(1)Excludes death and disability benefits and cash bonuses underwritten by the shareholders (refer note 3).
23.5 Taxation: policyholders’ fundsNormal tax – RSA 4 70
– Foreign 7 9
Share of associated company’s tax charge 13 69Other 204 266
Taxation on retirement funds 114 196
Withholding tax on foreign investments 65 46
Indirect taxation 25 24
Total taxation: policyholders’ funds 228 414
A deferred tax asset has not been recognised for estimated assessed losses in thepolicyholders’ tax funds as it is uncertain whether and when these losses will be utilised.
Page 116
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
2002 2001R million R million
23. LONG TERM INSURANCE POLICY LIABILITIES (continued)23.6 Composition of policy liabilities
Individual insurance 92 342 101 427
Market-related liabilities 27 919 32 549
Stable bonus fund 26 564 32 235
Reversionary bonus policies 8 376 10 294Non-participating annuities 13 797 11 923
Other non-market-related liabilities 15 686 14 426
Group business 36 987 43 821
Market-related liabilities 15 110 20 421
Stable bonus portfolios 10 807 12 596Participating annuities 7 823 8 044
Non-participating annuities 2 038 1 636
Other non-market-related liabilities 1 209 1 124
Total policy liabilities 129 329 145 248
23.7 Policy liabilities include the following:HIV/Aids reserve 1 799 1 711
Reduction in earnings caused by using a retrospective HIV/Aids valuation basis instead of a prospective valuation basis (71) (22)Asset mismatch reserve 494 651
Deferred capital gains tax 76 498
24. TERM FINANCERedeemable cumulative non-voting preference shares issued by subsidiary companies with dividend terms which are linked to prime interest rates and with different redemption dates up to 2012 4 094 3 905
Obligation for post-retirement medical fund contributions in respect of clients – matched by assets held in this regard 201 78
Secured bank loans at interest rates of between 6,4% and 19,85% (2001: 8,45% and 19,85%) and repayable in equal monthly and six-monthly instalments over three to thirteen (2001: four to fourteen) years. Secured by term loans and deposits included in investments 278 546
Unsecured debt securities with interest rates varying between 13% and 16% 311 —
Secured loan notes in the amount of CHF67 million and GBP4 million, bearing interest at variable interest rates. At year-end these rates were 1,56% and 2,08% (2001: 3,3%). The loan notes are ultimately repayable on 30 September 2005 and 31 December 2004 respectively 475 400
Other 23 7
Total term finance 5 382 4 936
Portion potentially repayable within one year included above 1 958 2 087
Page 117
2002 2001R million R million
25. TRADE AND OTHER PAYABLESTrading account and money market liabilities 14 283 12 793
Accounts payable 4 980 7 090
Policy benefits payable 1 631 1 509
Claims incurred but not reported 690 649
Total trade and other payables 21 584 22 041
Trading assets with a total value of R980 million (2001: R1 261 million) and cash of R43 million(2001: R681 million) have been pledged as security for trading account liability positions ofGensec Bank (refer note 20).
26. PAYMENTS TO CLIENTSAnalysis per product(Refer to page 140 for analysis per Sanlam business.)Insurance business – policy benefits paid 27 298 25 915
Long term insuranceUnderwriting (note 3) 2 237 1 918
Other (note 23.4) 21 136 20 630
General insurance (note 3) 3 925 3 367
Other payments 14 211 14 774
Unit trust repurchases 6 907 8 094Segregated funds withdrawn 5 024 4 416Linked products withdrawn 2 280 1 777
Health care — 487
Retirement fund terminations (note 23.1) 4 523 6 385
Total payments to clients 46 032 47 074
The payments to clients are disclosed net of the following reinsurance claims:Life business 143 112
General insurance 1 038 1 060
27. FINANCIAL INSTRUMENTSDerivative financial instrumentsIn connection with its current operating activities, the Group is exposed to various financial risks,such as foreign currency risk, interest rate risk, credit risk, market risk and liquidity risk. For themanagement of financial risks, the Group uses derivative financial instruments as follows:• Gensec Bank, in its trading activities, acts as a dealer in derivative instruments to satisfy the risk
management needs of its clients and assume trading positions based on its market expectations,to benefit from price differentials between instruments and markets.
• Sanlam Life primarily uses derivative financial instruments for the preservation of its capitalbase.
Page 118
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
27. FINANCIAL INSTRUMENTS (continued)Derivative financial instruments (continued)
Residual term to contractual maturity Analysed by useAsset Total
Total liability fairnotional manage- value of
R million < 1 year 1-5 years > 5 years amounts Trading ment amounts
Interest rate products over the counterSwap contracts (2 963) (1 803) (241) (5 007) (5 007) — (48)Purchased options 235 — — 235 235 — 3Written options (236) — — (236) (236) — 3
Total interest rate products (2 964) (1 803) (241) (5 008) (5 008) — (42)
Market risk productsCliquet structures — 656 — 656 — 656 57Forward sale 100 — — 100 — 100 19Collar structures — 419 — 419 — 419 (83)Forward purchase of shares
Local 14 — — 14 — 14 13International — 102 — 102 — 102 62
Fence structuresLocal 350 — — 350 — 350 13International 261 — — 261 — 261 (12)
Total market risk products 725 1 177 — 1 902 — 1 902 69
Foreign exchange products over the counterSpot and forward contracts (purchases) 1 170 — — 1 170 1 170 — 1 170Spot and forward contracts (selling) (1 097) — — (1 097) (1 097) — (1 097)Currency hedges 300 — — 300 — 300 14
Total foreign exchange products 373 — — 373 73 300 87
Securities lending The Sanlam group conducts securities lending activities in respect of some of its listed equities and bonds. The exposure to these activities was limited to less than 25% of the shareholders’ funds of Sanlam Life Insurance Limited and collateral securityand guarantees of between 105% and 150% of the value of the loaned securities are held.
Market risk – interest and equities Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices or changes inmarket interest rates. Policyholders’ and shareholders’ investments in equities are valued at fair value and are therefore susceptible to marketfluctuations. Shareholders’ investments in listed subsidiaries are reflected at net asset value based on the market value of theunderlying investments. Investments subject to equity risk are analysed in the balance sheet and in note 17.
The acquisition of policyholders’ assets is based on the contract entered into and the preferences expressed by the policyholder.Within these parameters, investments are managed with the aim of maximising policyholder returns while limiting risk toacceptable levels within the framework of statutory requirements.
Continuous monitoring takes place to ensure that appropriate assets are held where the liabilities are dependent upon theperformance of specific portfolios of assets and that a suitable match of assets exists for all non-market-related liabilities.
Page 119
27. FINANCIAL INSTRUMENTS (continued)Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate in rand owing to changes in foreign exchange rates.The Group’s exposure to currency risk is mainly in respect of foreign investments made on behalf of policyholders andshareholders for the purpose of seeking desirable international diversification of investments. Exposure to different foreigncurrencies is benchmarked against the currency composition of the Morgan Stanley Capital International World Equity Indexand the JP Morgan Government Bond Index.
Credit risk Credit risk arises from the inability or unwillingness of a counterparty to a financial instrument to discharge its contractualobligations.The Sanlam group’s financial instruments do not represent a concentration of credit risk because the Group deals with avariety of major banks and its accounts receivable and loans are spread among a number of major industries, customers andgeographic areas.
Amounts receivable in terms of long term insurance business are secured by the underlying value of the unpaid policy benefits interms of the policy contract. General insurance premiums outstanding for more than 60 days are not accounted for in premiums. An appropriate level of provision is maintained. Exposure to outside financial institutions concerning deposits and similartransactions is monitored against approved limits.
Liquidity riskLiquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with financialinstruments. Approximately 90% of term finance liabilities are backed by appropriate assets with the same maturity profile. Details of termfinance liabilities are provided in note 24 and current liabilities in note 25. The Group has significant liquid resources andsubstantial unutilised banking facilities.
Underwriting riskUnderwriting risk is the risk that the actual exposure to mortality, disability and medical risks in respect of policyholder benefits willexceed prudent exposure. The statutory actuary of Sanlam Life Insurance Limited reports annually on the financial soundness of the premium rates inuse and the profitability of the business taking into consideration the reasonable benefit expectation of policyholders. All newrate tables are approved and authorised by the statutory actuary prior to being issued. Regular investigations into mortality andmorbidity experience are conducted. Catastrophe insurance is in place for single-event disasters.
All applications for risk cover in excess of specified limits are reviewed by experienced underwriters and evaluated againstestablished standards. Specific testing for HIV/Aids is carried out in all cases where the applications for risk cover exceed a setlimit. All risk-related liabilities in excess of specified monetary or impairment limits are reinsured.
Legal risk Legal risk is the risk that the Group will be exposed to contractual obligations which have not been provided for.During the development stage of any new product and for material transactions entered into by the Group, the legal resources ofthe Group monitor the drafting of the contract document to ensure that rights and obligations of all parties are clearly set out.
Capital adequacy risk Capital adequacy risk is the risk that there are insufficient reserves to provide for variations in actual future experience worse thanthat which has been assumed in the financial soundness valuation. Capital adequacy requirements were covered 1,7 times at 31 December 2002 (2001: 2,8 times).
28. TANGIBLE NET ASSET VALUE PER SHARETangible net asset value per share is calculated on the Group shareholders’ funds of R20 947 million (2001: R24 399 million),after adjusting for the shareholders’ interest in Santam, Gensec Bank, Sanlam Investment Management, Sanlam International,Gensec Property Services and Sanlam Unit Trusts from net asset value to fair value, divided by 2 625 million (2001: 2 632 million) shares (refer note 21).
Page 120
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
29. RETIREMENT BENEFITS FOR EMPLOYEES Retirement provisionThe Sanlam group provides for the retirement benefits of full-time employees and for certain part-time employees by means ofdefined benefit and defined contribution pension and provident funds. These funds are governed by the Pension Funds Act.
Defined contribution fundsThere are separate defined contribution funds for advisors, full-time and part-time office staff. The Sanlam group contributedR156 million to these funds during 2002 (2001: R133 million).
Defined benefit funds The Sanlam group has three defined benefit funds. These funds relate to the office staff that did not elect to transfer to thedefined contribution funds and are closed to new entrants. The Sanlam group contributed R9 million during 2002 to these funds (2001: R7 million). These contributions relate to current service costs and are included in administration costs.According to the latest valuation in accordance with AC116 as at 31 December 2002 the funds were financially sound.
Principal actuarial assumptions at 31 December 2002 were as follows:Pre-retirement discount rate 12% per annumPost-retirement discount rate 8% per annumFuture salary increases 9% per annumExpected return on assets 12% per annumMedical cost rates 12% per annum
Based on reasonable actuarial assumptions about future experience, the employers’ contribution as a fairly constant percentage of the remuneration of the members of the funds should be sufficient to meet the promised benefits of the funds.
Medical aid fundsThe actuarially determined present value of medical aid obligations for disabled members and certain pensioners is fully providedfor at year-end. The Group has no further unprovided post-retirement medical aid obligations for current or retired employees.
Post-retirementDefined benefit funds Medical aid
2002 2001 2002 2001R million R million R million R million
Funded statusThe funded status of the funds were as follows:Actuarial value of fund assets 617 585Present value of accrued retirement benefits 569 554Present value of unfunded obligation — — (84) (44)
Net assets 48 31 (84) (44)Unrecognised surplus (48) (31) — —
Net liability included on balance sheet — — (84) (44)
Movements in the net liability recognised in the balance sheet are as follows:Net liability at start of year — — (44) (38)Net expenses recognised in the income statement — — (42) (7)Contributions — — 2 1
Net liability at end of year — — (84) (44)
The actual return on the market value of the assets as at 31 December 2002 was – 4,12%.The above value of fund assets includes an investment of R11 million in Sanlam shares.The actuarial surplus is currently not recognised as an asset by the Group, as the extent of the surplus available to the companycannot be determined with certainty.The valuation of the defined benefit funds for 2001 was performed on 1 April 2001.
Page 121
30. BORROWING POWERS In terms of the articles of association of Sanlam Limited, the directors may at their discretion raise or borrow money for thepurpose of the business of the company without limitation. Material borrowings of the Sanlam Limited group are disclosed in note 24.
31. COMMITMENTS AND CONTINGENCIES The Group has a commitment in respect of private equity investments amounting to R168 million (2001: R150 million). The Group has the following future operating lease commitments:
2002 2001R million R million
Lease rentals due within one year 111 84Lease rentals due within two to five years 152 307Lease rentals due within more than five years 29 —
Total operating lease commitments 292 391
Shareholders were advised in the 2001 annual report that the South African Revenue Services (“SARS”) had issued revisedassessments in respect of the 1997, 1998 and 1999 tax years of a subsidiary of Genbel Securities Limited (“the company”). In terms of the revised assessments certain significant surpluses arising from the disposal of the assets of the company aresubjected to full tax as SARS contends that such surpluses are not of a capital nature. The company lodged objections inrespect of all three revised assessments. SARS also imposed penalties in respect of the aforementioned taxes due for these years.The company lodged objections in respect of the additional taxes levied. SARS has requested additional information in respectof certain transactions, which has been furnished to them. In the event that the objections are disallowed the companyproposes to appeal against it.
Sanlam embarked on a restructuring of the group of companies during 2002, the result of which being that the capital andreserve funds of Genbel Securities Limited (Gensec) was reduced. Gensec is registered as the Controlling Company of GensecBank in terms of the Banks Act and required a guarantee to maintain its allocated capital and reserve funds in order to conductand grow the business of Gensec and the bank in a competitive manner.An agreement was entered into, in terms of which the Boards of the companies approved that an amount of R2 billion beassigned as capital to Gensec and that Sanlam Limited will provide a capital maintenance guarantee of R5 billion.Gensec has in turn provided an unconditional guarantee in favour of the creditors of Gensec Bank Limited.
Future commitments attributable to Gensec’s 50% stake in the Safair Lease Finance aviation joint venture, amount to R370 million.Gensec has subordinated their investment in the joint venture to third parties’ liabilities.
There are no other material commitments or contingencies.
32. RELATED PARTY TRANSACTIONSDuring the year the company and its subsidiaries in the ordinary course of business entered into various transactions with othergroup companies, associated companies and other stakeholders. These transactions occurred under arm’s length terms.
Associated companiesDetails of investments in associated companies are disclosed in note 17.
SubsidiariesDetails of investments in subsidiaries are disclosed on page 130.
Other stakeholdersDetails of transactions between the policyholders of Sanlam Life Insurance Limited and the shareholders’ funds of the SanlamLimited group are disclosed in note 23.1.
DirectorsAll directors of Sanlam Limited have notified that they did not have a material interest in any contract of significance with thecompany or any of its subsidiaries, which could have given rise to a conflict of interests during the year.Details relating to directors’ emoluments are included in note 4 and their shareholdings in the company are disclosed in thecorporate governance report on page 36.
Page 122
Notes to the Group Financial Statements (continued)for the year ended 31 December 2002
2002 2001Note R million R million
33. NOTES TO THE CASH FLOW STATEMENT33.1 Cash generated from operations
Operating profit before tax per income statement 2 149 2 092Non-cash items 96 107Items disclosed separately (849) (620)Net purchase of fixed assets (44) (144)
Cash generated from operations before working capital changes 1 352 1 435
33.2 Acquisition of subsidiariesDuring the year, various subsidiaries were acquired within the Group. The fair value of assets acquired were as follows:Fixed assets 17 2Investments 2 —Deferred tax 14 —Trade and other receivables 863 20General reinsurance provisions 315 —Cash, deposits and similar securities 228 20Current liabilities (1 026) (1)General insurance provisions (398) —Goodwill 416 344Minority shareholders’ interest (22) (7)
Total purchase price 409 378Less: Increase in long term liabilities (80) (333)
Cash, deposits and similar securities acquired (228) (20)
Cash component of acquisition of subsidiaries 101 25
33.3 Cash utilised in policyholder activitiesPremium income 23.1 22 990 22 915Policy benefits 23.1 (21 136) (20 630)Retirement fund terminations 23.1 (4 523) (6 385)Transfer to segregated assets 23.1 (109) (1 412)Payments to shareholders 23.1 (6 575) (6 233)
Cash utilised in policyholders’ activities (9 353) (11 745)
Page 123
Statement of Actuarial Values of Assets and Liabilities of Sanlam Life Insurance Limited Group
as at 31 December 2002
2002 2001Note R million R million
ASSETSFair value of the assets of Sanlam Life Insurance Limited group 155 998 174 376
LESS: LIABILITIES 138 997 154 467
Actuarial value of policy liabilities (per note 23.1) 129 329 145 248
Long term and current liabilities of Sanlam Life Insurance Limited group 9 668 9 219
Excess of assets over liabilities 2 17 001 19 909
ANALYSIS OF MOVEMENT IN EXCESS OF ASSETS OVER LIABILITIESOperating profit 3 1 476 1 294
Investment return on excess of assets over liabilities (3 175) 2 344
Investment income 474 450
Capital (depreciation)/appreciation 4 (3 496) 1 894
Financial assistance provided to policyholders 5 (153) —
Taxation (309) (369)
Income tax (496) (139)Capital gains tax 187 (230)
Normal dividends paid (900) (660)
Movement in excess assets 6 (2 908) 2 609
CAPITAL ADEQUACY AND RATIOSCapital adequacy requirements (CAR) before management actions 22 425 17 697
Management actions assumed 7 (12 525) (10 595)
CAR after management actions assumed 9 900 7 102
Times CAR covered by excess of assets over liabilities 1,7 2,8
Excess of assets over liabilities as percentage of:Policy liabilities 13% 14%
Non-market-related policy liabilities 20% 22%
Page 124
Notes to the Statement of Actuarial Values of Assets andLiabilities of Sanlam Life Insurance Limited Groupas at 31 December 2002
1. SANLAM LIFE INSURANCE LIMITED GROUP All information presented is in respect of the Sanlam Life Insurance Limited group. As such the actuarial values of assets andliabilities relating to Sanlam Namibia Limited are included in the Statement on Actuarial Values of Assets and Liabilities.
2. EXCESS OF ASSETS OVER LIABILITIESRefer to page 137 for an analysis of the Sanlam Life Insurance Limited group shareholders’ funds at fair value (SanlamInvestment Management and Sanlam Unit Trusts not consolidated, but reflected at fair value).
3. OPERATING PROFITChanges in the valuation bases and assumptions did not have a material effect on the operating profit for 2002 and 2001.
4. CAPITAL DEPRECIATION/APPRECIATIONA special dividend, relating to extraordinary investment surpluses realised during the rationalisation of group companies, was paid to Sanlam Limited and is included in capital depreciation/appreciation above.
5. FINANCIAL ASSISTANCE PROVIDED TO POLICYHOLDERSA prudent valuation of the financial position of the Participating Annuity Portfolio in terms of prevailing actuarial guidelines,indicated the need to bolster the funding level of the portfolio by R153 million. The permanent nature of this support will bedetermined by the future performance of its underlying assets and will be reviewed on a regular basis.
2002 2001R million R million
6. MOVEMENT IN EXCESS ASSETSThe movement in the excess assets can be reconciled to the attributable earnings per the segmental income statement on page 132, as follows:
Attributable earnings of Sanlam Life business (2 836) 2 714
Net corporate income after tax (72) (105)
Movement in excess assets (2 908) 2 609
7. MANAGEMENT ACTIONSThe management actions assumed to offset the negative impact on the capital adequacyrequirements should the resilience scenario occur, are set out below. The resilience scenarioassumes that equity values decline by 30%, property values by 15% and that fixed interest yieldsincrease or decrease by 3% (whatever gives the worst result) on the valuation date and do notsubsequently recover within the short term.
Reduction in non-vested bonuses
Reversionary Bonus business 678 571Reduction in future bonus rates
Individual Stable Bonus business 2 999 2 343
Group Stable Bonus and Alpha Bonus business 1 153 975Monthly Bonus Fund 883 552
Participating annuities 880 1 027Capitalisation of future profits 2 611 2 298
Reduction in grossing up to allow for the composition of the assets covering CAR 3 497 3 231
Independence credits (176) (402)
Total management actions 12 525 10 595
Page 125
2002 2001% %
8. ASSET COMPOSITIONThe assets backing the capital adequacy requirements, used for the purpose of grossing up the intermediate ordinary capital adequacy requirements (as defined in PGN 104) to determine the ordinary capital adequacy requirements, were invested as follows:
Cash 5 3
Fixed-interest securities 8 10
Hedged equities 19 24Property 7 17
Equities 61 46
100 100
9. INVESTMENT RETURN AND INFLATION ASSUMPTIONSPre-tax investment returns by major asset category and inflation assumptions were as follows:
Fixed-interest securities 10,8 11,8
Equities and offshore investments 12,8 13,8
Property 11,8 12,8Cash 8,8 9,8
Future expense inflation (including margin) 7,0 8,0
Consumer Price Index inflation for premium indexation 4,8 5,8
10. DISCOUNT RATES USED IN CALCULATING PROSPECTIVE POLICY LIABILITIESReversionary bonus business
Retirement annuity business 10,8 11,7
Individual policyholder business 10,2 11,1Individual stable bonus business
Retirement annuity business 10,7 11,6
Individual policyholder business 10,1 11,0Non-taxable business 11,6 12,5
Corporate policyholder business 9,7 10,5
Individual market-related businessRetirement annuity business 11,1 12,0
Individual policyholder business 10,4 11,3
Non-taxable business 12,0 13,0Corporate policyholder business 10,0 10,8
Participating annuity business 10,3 11,6
Non-participating annuity business* 10,0 11,5
Guaranteed plans 11,0 10,4
*The calculation of policy liabilities is based on discount rates derived from the zero-coupon yield curve. This is the average rate producing the same result.
Page 126
Notes to the Statement of Actuarial Values of Assets andLiabilities of Sanlam Life Insurance Limited Group (continued)as at 31 December 2002
11. BONUS STABILISATION RESERVES The following portfolios had negative bonus stabilisation reserves which exceeded 7,5% of the relevant investment accounts at31 December 2002:
Investment accounts Deficit
R million R million %
Monthly Bonus Fund 5 118 568 (11,1)Participating Annuity Portfolio 8 732 873 (10,0)
The deficits are the result of weak investment performance, mainly due to poor market conditions.
The bonuses for the Monthly Bonus Fund are determined on a monthly basis according to a formula which will ensure thatthe negative bonus stabilisation reserve will be eliminated within three years, provided that investment returns are in line withour long term assumptions.
Bonuses for the Participating Annuity Portfolio are determined according to a bonus philosophy that has been approved by theBoard of Sanlam Life Insurance Limited. The negative bonus stabilisation reserve will be eliminated during the next threebonus declarations if investment returns are in line with our long term assumptions and bonuses are determined according tothe bonus philosophy.
Page 127
Sanlam Limited Financial Statements
2002 2001Note R million R million
BALANCE SHEET AT 31 DECEMBER 2002
ASSETSNon-current assets
Investment in group companies 2 14 687 13 771Investment in joint venture — 30
Current assets 1 451 511
Loans to subsidiaries 2 1 397 502Accounts receivable 54 9
Total assets 16 138 14 312
EQUITY AND LIABILITIESShare capital and premium 3 3 514 3 514Non-distributable reserves 4 9 342 9 342Retained income 1 340 980
Shareholders’ funds 14 196 13 836Current liabilities 1 942 476
Loans from subsidiaries 2 1 885 442Accounts payable 57 34
Total equity and liabilities 16 138 14 312
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002
Dividends received 5 1 348 812Dividends paid (929) (797)Investment surpluses (54) —Expenditure (5) (2)
Retained income for the year 360 13Retained income at beginning of the year 980 967
Retained income at end of the year 1 340 980
Page 128
Sanlam Limited Financial Statements (continued)for the year ended 31 December 2002
2002 2001Note R million R million
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002
Cash flow from operating activitiesCash utilised in operations 9 (81) (9)Dividends received 1 348 812Dividends paid (929) (797)Cash flow from investing activitiesInvestment in subsidiary companies (916) (21)Investment in joint venture 30 (10)
Decrease in cash and cash equivalents (548) (25)Net loans to subsidiaries – beginning of the year 60 85
Net loans to subsidiaries – end of the year (488) 60
1. ACCOUNTING POLICIESThe accounting policies of the Sanlam Limited group as set out on pages 89 to 94 are also applicable to Sanlam Limited except for investments in subsidiary companies which are reflected at cost price or at a lower value if there is an impairment in value.
2002 2001R million R million
2. SUBSIDIARY COMPANIESInvestment in group companies 14 687 13 771
Shares at cost 14 687 10 373Amounts owing by subsidiaries — 3 398
Current loans with group companies (488) 60
Loans to subsidiaries 1 397 502
Loans from subsidiaries (1 885) (442)
Book value of interest in subsidiaries 14 199 13 831
Fair value of net investment in subsidiaries 21 175 24 610
The loans to subsidiaries are unsecured and not subject to any fixed terms of repayment. No interest is charged but these arrangements are subject to revision from time to time. Details regarding the principal subsidiaries of Sanlam Limited are set out on page 130.
Fair value of subsidiaries are determined on the following bases:
• Listed subsidiaries at stock exchange prices;
• Sanlam Life Insurance Limited at net asset value; and
• Other unlisted subsidiaries at the directors’ valuation.
Notes to the Sanlam Limited Financial Statementsfor the year ended 31 December 2002
Page 129
2002 2001R million R million
3. SHARE CAPITAL AND PREMIUMDetails of share capital and premium are reflected in note 21 on page 112 of the Sanlam Limited group financial statements.
4. NON-DISTRIBUTABLE RESERVESPre-acquisition reserves arising on acquisition of subsidiaries 9 342 9 342
5. DIVIDENDS RECEIVEDThe rationalisation of group companies in 2002 resulted in extraordinary investment surpluses being realised by certain subsidiaries, which were subsequently distributed as special dividends.
Normal dividends Sanlam Life Insurance Limited 900 660
Sanlam Trust Managers Limited 350 —
Other 98 152Special dividends
Sanlam Life Insurance Limited 3 596 —
Genbel Securities Limited 1 799 —Reversal of extraordinary investment surpluses in excess of book values
Sanlam Life Insurance Limited (3 596) —
Genbel Securities Limited (1 799) —
Total dividends received 1 348 812
6. DIVIDENDS PAIDDetails of dividends paid are reflected in the directors’ report on page 88 and in note 13 of the Sanlam Limited group financial statements.
7. REPORT OF THE DIRECTORSThe directors’ report is included on page 88 of the Sanlam Limited group financial statements.
8. COMMITMENTS AND CONTINGENCIESAs detailed in note 31 of the Sanlam Limited group financial statements, the company provided a capital maintenance guarantee of R5 billion to Genbel Securities Limited.
9. CASH UTILISED IN OPERATIONSRetained income for the year 360 13
Items separately disclosed – dividends received (1 348) (812)– dividends paid 929 797
Increase in accounts receivable (45) (9)
Increase in accounts payable 23 2
Cash utilised in operations (81) (9)
Page 130
Principal Subsidiariesas at 31 December 2002
Issued Fair value of interest in subsidiariesordinary
capital Shares Loans% 2002 2002 2001 2002 2001
interest R million R million R million R million R million
Long term insuranceSanlam Life Insurance Ltd 100 5 000 17 001 19 909 (182) (147)Investment bankingGenbel Securities Ltd 100 253 2 327 (1) (511) (1)
Investment management and consultingSanlam Investment Management (Pty) Ltd 100 (2) (2) (1) (2) (1)
Sanlam Netherlands Holdings BV(5) 100 1 093 2 042 — — —Property managementGensec Property Services (Pty) Ltd 100 (4) 60 (1) — (1)
Investment administrationTasc Administration (Pty) Ltd 100 (4) 12 (1) — (1)
General insuranceSantam Ltd (Listed) 5 3 607 189 (1) — (1)
Investment companiesBeldiv Investments (Pty) Ltd 100 (3) 65 404 (57) 3 331Sanlam Health (Pty) Ltd 100 (3) (29) 396 258 1Money transfer businessMulti-Data (Pty) Ltd 100 (2) (2) — (2) 68Management of unit trust schemesSanlam Trust Managers Ltd 100 (2) (2) 874 (2) (228)Trust servicesSanlam Trust Ltd 100 (2) (2) — (2) 2Other (4) — 4 —
Total 21 663 21 583 (488) 3 027
(1)In 2001 the interest in Santam and Gensec was held indirectly by Sanlam Life Insurance Limited and Beldiv Investments (Pty) Limited. In 2002 a portion ofthe interest in Santam was held indirectly by Sanlam Life Insurance Limited (see below).
(2)The interest is held indirectly by Sanlam Life Insurance Limited.(3)Issued share capital is R100.(4)Issued share capital is R1 000.(5)Incorporated in The Netherlands.
A register of all subsidiary companies is available for inspection at the registered office of Sanlam Limited. All investments above areunlisted and incorporated in South Africa, unless otherwise indicated.
Analysis of the Group’s holding in Santam: 2002 2001% %
Shareholders• Sanlam Life Insurance Limited 39 21• Sanlam Limited 5 21
Policyholders• Sanlam Life Insurance Limited 10 17
54 59
Page 131
Sanlam Limited GroupFinancial Information for the Shareholders’ Funds
CONTENTS
132 Segmental Income Statement
134 Segmental Balance Sheet
136 Balance Sheet with all businesses consolidated at
Net Asset Value
137 Balance Sheets with businesses not consolidated,
but reflected at Fair Value
138 Notes to the Financial Statements
144 Eight-Year Review
145 Stock Exchange Performance
146 Auditors’ Report on the Group Embedded Value
Report
147 Report on the Sanlam Group Embedded Value
Page 132
Sanlam Limited Segmental Income Statementfor the year ended 31 December 2002
Sanlam Life Sanlam InternationalR million 2002 2001 2002 2001
Financial services income 6 961 6 515 627 385Sales remuneration (1 158) (1 098) — —
Income after sales remuneration 5 803 5 417 627 385Underwriting policy benefits (2 237) (1 918) — —Administration costs (2 033) (2 124) (552) (282)
Operating profit before tax 1 533 1 375 75 103Tax on operating profit (428) (183) (13) (19)
Operating profit after tax 1 105 1 192 62 84Minority shareholders’ interest — 10 (10) (13)
NET OPERATING PROFIT 1 105 1 202 52 71
Net investment income 421 501 — —
Investment income 474 452 — —Tax on investment income (53) 49 — —Minority shareholders’ interest — — — —
Net equity accounted earnings — — — —
HEADLINE EARNINGS 1 526 1 703 52 71Net investment surpluses (3 462) 1 671 268 —
Investment surpluses (3 649) 1 901 268 —Tax on investment surpluses 187 (230) — —Minority shareholders’ interest — — — —
Long term rate of return adjustment 3 818 (672) (268) —
LTRR HEADLINE EARNINGS 1 882 2 702 52 71Short term investment fluctuations after tax and minorities (3 818) 672 268 —Goodwill written off — — (69) —
ATTRIBUTABLE EARNINGS (1 936) 3 374 251 71Dividends (net of rationalisation adjustment) (900) (660) — —
NET EARNINGS (2 836) 2 714 251 71
RatiosAdmin ratio(1) 35,0% 39,2% 88,0% 73,2%Net operating margin(1) 26,4% 25,4% 12,0% 26,8%
Net operating profit epsAdjusted weighted average number of shares (million)Net operating profit 42,0 45,3 2,0 2,7
Return on equityMonthly average capitalOperating profit before taxOperating profit after tax
(1)Calculated as a percentage of income earned by the shareholders’ funds less sales remuneration.
Page 133
Sanlam InvestmentManagement Gensec Bank Gensec Properties Santam Corporate and other Total
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
486 434 553 508 128 171 5 663 4 851 106 250 14 524 13 114— — — — — — (698) (636) — — (1 856) (1 734)
486 434 553 508 128 171 4 965 4 215 106 250 12 668 11 380— — — — — — (3 925) (3 367) — — (6 162) (5 285)
(301) (250) (441) (317) (104) (123) (783) (660) (143) (247) (4 357) (4 003)
185 184 112 191 24 48 257 188 (37) 3 2 149 2 092(60) (53) 53 18 (4) (14) (85) (57) (12) (22) (549) (330)
125 131 165 209 20 34 172 131 (49) (19) 1 600 1 762— — — — — — (108) (89) — — (118) (92)
125 131 165 209 20 34 64 42 (49) (19) 1 482 1 670
— — — — — — 81 77 (100) (63) 402 515
— — — — — — 218 230 (72) (38) 620 644— — — — — — (29) (34) (28) (25) (110) (10)— — — — — — (108) (119) — — (108) (119)
— — — — — — (1) 2 397 441 396 443
125 131 165 209 20 34 144 121 248 359 2 280 2 628(12) (83) (230) — — — (18) 41 833 (33) (2 621) 1 596
(16) (83) (230) — — — (39) 245 844 (64) (2 822) 1 9994 — — — — — (2) (50) (12) 31 177 (249)
— — — — — — 23 (154) 1 — 24 (154)
12 83 230 — — — 92 12 (316) (113) 3 568 (690)
125 131 165 209 20 34 218 174 765 213 3 227 3 534(12) (83) (230) — — — (92) (12) 316 113 (3 568) 690(10) (44) (6) — — — (3) — (171) (171) (259) (215)
103 4 (71) 209 20 34 123 162 910 155 (600) 4 009(62) — — — — — — — 41 (130) (921) (790)
41 4 (71) 209 20 34 123 162 951 25 (1 521) 3 219
61,9% 57,6% 79,7% 62,4% 81,3% 71,9% 15,8% 15,7% 134,9% 98,8% 34,4% 35,2%38,1% 42,4% 20,3% 37,6% 18,8% 28,1% 5,2% 4,5% (34,9%) 1,2% 17,0% 18,4%
2 631 2 6534,8 4,9 6,3 7,9 0,8 1,3 2,4 1,6 (1,9) (0,7) 56,3 62,9
20 701 20 35110,4% 10,3%7,2% 8,2%
Page 134
Sanlam Limited Shareholders’ Funds – Segmental Balance Sheet(All businesses consolidated at Net Asset Value)
at 31 December 2002
Sanlam Investment SanlamSanlam Life Management International
R million 2002 2001 2002 2001 2002 2001
ASSETS
Non-current assetsFixed assets 120 106 34 20 30 28Owner-occupied properties 333 — — — — —Goodwill — — 40 16 438 277Investments 20 315 23 455 — — 413 —
Investment properties 659 1 241 — — — —Equities 12 778 15 759 — — — —Public sector stocks and loans 1 473 1 781 — — — —Mortgages, debentures and other loans 1 993 1 385 — — 386 —Cash, deposits and similar securities 3 412 3 289 — — 27 —
Net deferred tax (1) (230) 16 13 3 —Net current assets 925 908 150 197 64 542
Total assets 21 692 24 239 240 246 948 847
EQUITY AND LIABILITIES
Capital and reservesShareholders’ funds 17 001 19 909 223 245 439 291Minority interest — — — — 34 157Term finance 4 691 4 330 17 1 475 399
Total equity and liabilities 21 692 24 239 240 246 948 847
Page 135
Gensec Corporate ConsolidationGensec Bank Santam Properties and other entries Total
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
19 33 41 36 5 25 11 47 — — 260 29526 — — — — — 22 — — — 381 —
112 7 33 — — — 1 369 1 540 — — 1 992 1 8401 544 915 3 424 3 600 — — 1 750 3 376 (3 420) (6 251) 24 026 25 095
— — — 3 — — — — — — 659 1 244408 87 2 654 2 280 — — 137 1 374 (3 420) (6 251) 12 557 13 249
— — 133 612 — — 147 86 — — 1 753 2 4791 136 828 421 705 — — — 274 — — 3 936 3 192
— — 216 — — — 1 466 1 642 — — 5 121 4 931
149 62 (20) (116) 4 6 50 65 — — 201 (200)198 972 (64) (258) 40 44 (171) (230) — 11 1 142 2 186
2 048 1 989 3 414 3 262 49 75 3 031 4 798 (3 420) (6 240) 28 002 29 216
1 459 1 444 1 479 1 370 49 75 3 031 4 797 (3 030) (5 900) 20 651 22 231— — 1 935 1 892 — — — — — — 1 969 2 049
589 545 — — — — — 1 (390) (340) 5 382 4 936
2 048 1 989 3 414 3 262 49 75 3 031 4 798 (3 420) (6 240) 28 002 29 216
Page 136
Shareholders’ Funds Balance Sheet(All businesses consolidated at Net Asset Value)
at 31 December 2002
2002 2001Note R million R million
ASSETSNon-current assets
Fixed assets 260 295Owner-occupied properties 381 —
Goodwill 1 992 1 840Investments 7 24 026 25 095
Investment properties 659 1 244
Equities 12 557 13 249Public sector stocks and loans 1 753 2 479
Mortgages, debentures and other loans 3 936 3 192
Cash, deposits and similar securities 5 121 4 931
Deferred tax 236 146
General reinsurance provisions 8 2 072 1 647Current assets 24 839 25 394
Trade and other receivables 9 12 114 15 085
Cash, deposits and similar securities 12 725 10 309
Total assets 53 806 54 417
EQUITY AND LIABILITIESCapital and reserves
Share capital and premium 10 3 455 3 514Non-distributable reserves 9 415 9 415
Investment reserve — 2 145
Retained income 7 781 7 157
Shareholders’ funds 20 651 22 231
Minority interest 1 969 2 049
Outside shareholders 1 623 1 503
Sanlam policyholders 346 546
Non-current liabilities
Term finance 5 382 4 936
Deferred tax 35 346Gross general insurance provisions 8 4 226 3 296
Current liabilities 11 21 543 21 559
Total equity and liabilities 53 806 54 417
Page 137
Shareholders’ Funds Balance Sheets at Fair Valueat 31 December 2002
(Santam, Sanlam Unit Trusts, Sanlam Investment Management, Sanlam International, Gensec Bank and Gensec Properties notconsolidated, but reflected as investments at fair value)
Sanlam LifeSanlam Limited Insurance Limited
2002 2001 2002 2001Note R million R million R million R million
ASSETSFixed assets 153 158 120 107
Owner-occupied properties 333 — 333 —
Investments Sanlam businesses 6 5 447 7 262 2 941 5 691
• Sanlam Investment Management 1 289 2 166 1 289 —
• Sanlam International 1 071 1 539 — —• Gensec Bank 1 186 1 442 — —
• Gensec Properties 60 65 — —
• Sanlam Unit Trusts 260 341 260 —• Gensec group (58%) — — — 4 833
Strategic investment – Santam 1 581 1 709 1 392 858
Associated company – Absa 3 957 4 036 3 957 4 033Other investments
• Other equities 5 772 6 990 5 967 6 028
• Public sector stocks and loans 1 611 1 859 1 464 1 781• Investment properties 659 1 241 659 1 241
• Other interest-bearing investments 6 859 7 035 5 393 4 674
Deferred tax 50 88 — —
Current assets 5 028 4 531 5 033 4 557
Total assets 29 869 33 200 25 867 28 112
EQUITY AND LIABILITIESShareholders’ funds 20 947 24 399 17 001 19 909Term finance 4 581 4 331 4 691 4 330Deferred tax 1 244 1 230
Current liabilities 4 340 4 226 4 174 3 643
Total equity and liabilities 29 869 33 200 25 867 28 112
Page 138
Notes to the Shareholders’ Funds Financial Statements for the year ended 31 December 2002
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The basis of presentation and accounting policies in respect of the financial statements for the shareholders’ funds of the SanlamLimited group are the same as set out on pages 89 to 94.
Basis of consolidationSantam, Sanlam Unit Trusts (SUT), Sanlam Investment Management, Sanlam International, Gensec Bank and Gensec PropertyServices are consolidated in the Sanlam Limited group shareholders’ financial statements at net asset value. The policyholders’and outside shareholders’ interests in these companies are treated as minority shareholders’ interest on consolidation. A separatebalance sheet reflecting the investment in these companies at fair value is presented for information purposes.
Total Life Insurance* Life Licence* OtherR million 2002 2001 2002 2001 2002 2001 2002 2001
2. ANALYSIS OF NEW BUSINESS
Sanlam Life 21 604 21 271 11 823 11 948 1 194 965 8 587 8 358
Individual Life 9 181 8 770 9 181 8 770 — — — —
Recurring 1 540 1 532 1 540 1 532 — — — —
Single 5 839 5 044 5 839 5 044 — — — —Continuations 1 802 2 194 1 802 2 194 — — — —
Unit Trust 4 388 4 908 — — — — 4 388 4 908
Group Life 2 642 3 178 2 642 3 178 — — — —
Recurring 156 171 156 171 — — — —
Single 2 486 3 007 2 486 3 007 — — — —
Innofin 5 393 4 415 — — 1 194 965 4 199 3 450
Sanlam Investment Management 2 300 6 245 — — 106 384 2 194 5 861
Life 106 384 — — 106 384 — —
Recurring — — — — — — — —
Single 132 459 — — 132 459 — —Less: Intergroup switches (26) (75) — — (26) (75) — —
Unit Trust wholesale business 1 521 2 382 — — — — 1 521 2 382
Segregated funds 673 3 479 — — — — 673 3 479
Total inflow 756 4 818 — — — — 756 4 818
Less: Intergroup switches (83) (1 339) — — — — (83) (1 339)
Sanlam International 830 276 — — — — 830 276
Sanlam Health — 547 — — — — — 547
Santam 5 548 4 760 — — — — 5 548 4 760
Unit Trust White Label 1 975 3 482 — — — — 1 975 3 482
Total new business 32 257 36 581 11 823 11 948 1 300 1 349 19 134 23 284
*Life licence business relates to investment products provided by Sanlam Investment Management and Innofin by means of a life insurance policy where there is very little or no insurance risk.
Page 139
Total Life Insurance* Life Licence* OtherR million 2002 2001 2002 2001 2002 2001 2002 2001
3. ANALYSIS OF GROSS FUNDS RECEIVED FROM CLIENTSSanlam Life 31 107 30 209 21 326 20 886 1 194 965 8 587 8 358Individual Life 16 275 15 574 16 275 15 574 — — — —
Recurring 8 634 8 336 8 634 8 336 — — — —Single 7 641 7 238 7 641 7 238 — — — —
Unit Trust 4 388 4 908 — — — — 4 388 4 908
Group Life 5 051 5 312 5 051 5 312 — — — —
Recurring 2 565 2 305 2 565 2 305 — — — —
Single 2 486 3 007 2 486 3 007 — — — —
Innofin 5 393 4 415 — — 1 194 965 4 199 3 450
Sanlam Investment Management 2 638 6 850 — — 444 989 2 194 5 861Life 444 989 — — 444 989 — —
Recurring 338 605 — — 338 605 — —Single 132 459 — — 132 459 — —
Less: Intergroup switches (26) (75) — — (26) (75) — —
Unit Trust wholesale business 1 521 2 382 — — — — 1 521 2 382Segregated funds 673 3 479 — — — — 673 3 479
Total inflow 756 4 818 — — — — 756 4 818Less: Intergroup switches (83) (1 339) — — — — (83) (1 339)
Sanlam International 830 276 — — — — 830 276
Sanlam Health — 547 — — — — — 547Santam 5 548 4 760 — — — — 5 548 4 760
Unit Trust White Label 1 975 3 482 — — — — 1 975 3 482
Gross funds received 42 098 46 124 21 326 20 886 1 638 1 954 19 134 23 284
*Life licence business relates to investment products provided by Sanlam Investment Management and Innofin by means of a life insurance policy where there is very little or no insurance risk.
Page 140
Notes to the Shareholders’ Funds Financial Statements (continued)for the year ended 31 December 2002
Total Life Insurance(1) Life Licence(1) OtherR million 2002 2001 2002 2001 2002 2001 2002 2001
4. ANALYSIS OF PAYMENTS TO CLIENTS
Sanlam Life 30 036 28 768 23 730 22 701 314 226 5 992 5 841
Individual Life 17 291 16 593 17 291 16 593 — — — —
Surrenders 4 867 4 186 4 867 4 186 — — — —
Other 12 424 12 407 12 424 12 407 — — — —
Unit Trust 3 712 4 064 — — — — 3 712 4 064
Group Life 6 439 6 108 6 439 6 108 — — — —
Terminations(2) 2 033 2 240 2 033 2 240 — — — —
Other benefits 4 406 3 868 4 406 3 868 — — — —
Innofin 2 594 2 003 — — 314 226 2 280 1 777
Sanlam Investment Management 10 717 14 071 — — 3 852 6 007 6 865 8 064Life 3 852 6 007 — — 3 852 6 007 — —
Terminations(2) 2 760 5 723 — — 2 760 5 723 — —
Other benefits 1 201 1 696 — — 1 201 1 696 — —Less: Intergroup switches(3) (109) (1 412) — — (109) (1 412) — —
Unit Trust wholesale business 1 841 3 648 — — — — 1 841 3 648Segregated funds 5 024 4 416 — — — — 5 024 4 416
Total outflow 5 045 4 416 — — — — 5 045 4 416
Less: Intergroup switches (21) — — — — — (21) —
Sanlam International — — — — — — — —
Sanlam Health — 487 — — — — — 487
Santam 3 925 3 367 — — — — 3 925 3 367
Unit Trust White Label 1 354 381 — — — — 1 354 381
Total payments to clients 46 032 47 074 23 730 22 701 4 166 6 233 18 136 18 140
(1)Life licence business relates to investment products provided by Sanlam Investment Management and Innofin by means of a life insurance policy where there is very little or no insurance risk.
(2)Includes taxation paid on behalf of certain retirement funds.(3)Included in terminations.
Page 141
Total Life Insurance* Life Licence* OtherR million 2002 2001 2002 2001 2002 2001 2002 2001
5. ANALYSIS OF NET (OUTFLOW)/INFLOW OF FUNDS
Sanlam Life 1 071 1 441 (2 404) (1 815) 880 739 2 595 2 517Individual Life (1 016) (1 019) (1 016) (1 019) — — — —
Unit Trust 676 844 — — — — 676 844
Group Life (1 388) (796) (1 388) (796) — — — —Innofin 2 799 2 412 — — 880 739 1 919 1 673
Sanlam Investment Management (8 079) (7 221) — — (3 408) (5 018) (4 671) (2 203)Life (3 408) (5 018) — — (3 408) (5 018) — —
Total (3 491) (6 355) — — (3 491) (6 355) — —Less: Intergroup switches 83 1 337 — — 83 1 337 — —
Unit Trust wholesale business (320) (1 266) — — — — (320) (1 266)
Segregated funds (4 351) (937) — — — — (4 351) (937)
Total (4 289) 402 — — — — (4 289) 402Less: Intergroup switches (62) (1 339) — — — — (62) (1 339)
Sanlam International 830 276 — — — — 830 276
Sanlam Health — 60 — — — — — 60
Santam 1 623 1 393 — — — — 1 623 1 393
Unit Trust White Label 621 3 101 — — — — 621 3 101
Total net outflow (3 934) (950) (2 404) (1 815) (2 528) (4 279) 998 5 144
*Life licence business relates to investment products provided by Sanlam Investment Management and Innofin by means of a life insurance policy where there is very little or no insurance risk.
Page 142
Notes to the Shareholders’ Funds Financial Statements (continued)for the year ended 31 December 2002
6. EXCESS OF FAIR VALUE OVER NET ASSET VALUE OF SUBSIDIARIES
The shareholders’ funds balance sheets at fair value include the value of the companies below based on directors’ valuation, apart from Santam which is valued according to ruling share prices.
2002 2001
R million R million
Fair value of businesses per the fair value balance sheet 5 447 7 262Less: Tangible Net Asset Value 3 782 3 537
Sanlam Investment Management 223 245
Sanlam International 439 291
Gensec Bank 1 459 1 444Gensec Properties 49 75
Sanlam Unit Trusts 133 112
Santam 1 479 1 370
Less: Goodwill in respect of above businesses 1 369 1 540
Deferred capital gains tax on investments at fair value — 17
Revaluation adjustment of interest in businesses to fair value 296 2 168
2002 2001
% %
7. INVESTMENTS
Spread of investments in equities by sector(1)
Industrial 25 19
Financial 52 59
Resources 23 22
100 100
(1)Excludes offshore equities, derivatives, unit trusts and unlisted investments and includes the appropriate underlying investments of Santam.
R million R million
Offshore investmentsEquities 1 457 2 696
Interest-bearing investments 1 901 2 372
Total offshore investments 3 358 5 068
Unlisted equity investmentsAs a percentage of total investment in equities 8,6% 8,5%
Page 143
R million R million
8. GENERAL INSURANCE PROVISIONS
Details of general insurance provisions are reflected in note 19 on page 111 of the Sanlam Limited group financial statements.
9. TRADE AND OTHER RECEIVABLESPremiums receivable 930 615
Accrued investment income 217 339Trading account and money market investments 6 459 10 335
Accounts receivable 4 508 3 796
Total trade and other receivables 12 114 15 085
10. SHARE CAPITAL AND PREMIUMDetails of share capital and premium are reflected in note 21 on page 112 of the Sanlam Limited group financial statements.
11. CURRENT LIABILITIESTrading account and money market liabilities 14 284 12 793Accounts payable 4 902 6 715
Policy benefits payable 1 631 1 509
Taxation 726 542
Total current liabilities 21 543 21 559
Page 144
Eight-year Review
Averageannual
2002 2001 2000 1999 1998 1997(1) 1996(1) 1995(1) growthR million R million R million R million R million R million R million R million rate %
EXTRACTS FROM FINANCIAL STATEMENTSOperating profit 2 149 2 092 1 656 1 722 1 237 1 026 1 070 1 079 10Headline earnings 2 280 2 628 2 406 1 955 — — — — —Headline earnings basedon the LTRR 3 227 3 534 3 495 2 721 — — — — 6Shareholders’ funds 20 651 22 231 19 012 18 075 14 904 10 172 9 005 7 182 16Policy liabilities 129 329 145 248 133 952 134 319 114 176 119 506 114 647 107 839 3Total assets under management 245 953 256 396 224 911 215 924 176 792 166 382 147 969 135 984 9Tangible net asset value per share (cents)(2) 798 927 831 810 630 528 466 376 11Group administration cost ratio (%) 34,4 35,2 32,3 29,8 27,8 — — — —Group operating margin (%) 17,0 18,4 16,5 17,9 12,9 — — — —
NEW BUSINESSLong term insurance businessIndividual insurance 10 375 9 735 9 795 7 704 6 319 7 743 6 733 7 244 5
• Recurring premiums – indexed growth 564 558 525 527 500 500 425 385 6– other 976 974 1 149 749 830 1 039 1 301 1 366 (5)
• Single premiums 7 033 6 009 5 881 4 804 3 107 5 458 4 376 4 862 5• Continuations 1 802 2 194 2 240 1 624 1 882 746 631 631 16
Group Life 2 748 3 562 4 399 2 633 5 247 5 154 3 503 2 252 3
• Recurring premiums 156 171 219 139 137 — (3) — (3) — (3) —• Single premiums
– gross 2 618 3 466 4 180 2 494 5 110 5 154 3 503 2 252 2– intergroup switches (26) (75) — — — — — — —
Total long term insurance business 13 123 13 297 14 194 10 337 11 566 12 897 10 236 9 496 5Other business 19 134 23 284 23 506 15 473 18 280 12 214 8 757 5 978 18
• Unit trusts 4 388 4 908 9 342 8 154 8 266 2 957 1 164 890 26• Linked products 4 199 3 450 1 687 1 706 1 423 431 — — 58• Segregated funds –
Sanlam Investment Management 673 3 479 7 973 2 310 4 498 5 519 4 666 2 714 (18)
• Segregated funds – Sanlam International 830 276 — — — — — — —
• SIM – Unit Trust wholesale business 1 521 2 382 — — — — — — —
• General insurance 5 548 5 307 4 504 3 303 4 093 3 307 2 927 2 374 13• Unit Trust White Label 1 975 3 482 — — — — — — —
Total new business 32 257 36 581 37 700 25 810 29 846 25 111 18 993 15 474 11
RECURRING PREMIUMSLong term insurance business
Individual insurance 8 634 8 336 8 455 8 344 8 496 8 354 7 781 6 961 3Group Life 2 903 2 910 3 050 3 029 2 740 3 000 2 958 2 579 2
Total recurring premiums 11 537 11 246 11 505 11 373 11 236 11 354 10 739 9 540 3
STAFFOffice staff (excluding marketing staff) 9 716 10 024 9 709 10 159 11 669 12 756 12 635 12 406 (4)
(1)Pro forma figures to reflect the demutualisation and restructuring of Sanlam in 1998.(2)Shareholders’ interest in Santam and Gensec adjusted from net asset value to fair value. (3)Figures not readily available as the definition of new business was only introduced in 1999.
Page 145
Stock Exchange Performance
2002 2001 2000 1999 1998(1)
Number of shares traded (million) 1 531 1 118 1 030 1 463 350Value of shares traded (R million) 12 807 10 780 8 578 9 451 2 035
Percentage of issued shares traded (%) 58 42 39 55 13Price/LTRR earnings ratio (times) 6,2 6,9 7,3 8,4 —
Return on Sanlam share price since listing(2) (%) 9 17 27 41 —
LTRR headline earnings return on equity (%) 15,6 17,4 18,7 16,3 —Market price per share (cents)• Year-end closing price 760 919 956 860 585
• Highest closing price 1 000 1 145 1 000 890 599• Lowest closing price 700 830 675 440 567
Net asset value per share (cents) 798 927 831 810 630
Embedded value per share (cents) 1 032 1 167 1 067 1 004 827Market capitalisation at year-end (R million) 20 175 24 192 25 381 22 833 15 531
Sanlam share price relative to
• Financial index 9,22 9,71 8,87 8,02 6,94
• Life insurance index 8,33 8,83 7,92 7,07 6,85
(1)Sanlam Limited was listed on 30 November 1998.(2)Annualised growth in the Sanlam share price since listing plus dividends paid.
Share price vs embedded value
400
600
800
1 000
1 200
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Share price Embedded value
Sanlam share price relative to FINDI30*
0,04
0,06
0,08
0,10
0,12
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*30 day moving average
Page 146
Report of the independent auditors on the Sanlam Group Embedded Value Report
TO THE DIRECTORS OF SANLAM LIMITED
We have audited the Report on the Sanlam Group Embedded
Value for the year ended 31 December 2002 on pages 147 to 151
which has been prepared in accordance with the applicable
guidelines of the Actuarial Society of South Africa (PGN107)
and the policies of the Group set out on pages 89 to 94. This
report should be read in conjunction with the audited annual
financial statements where the policy liabilities, calculated on
the financial soundness valuation basis, and the profit
entitlement rules are set out on pages 95 to 97.
Respective responsibilities of directors and auditors
The directors are responsible for the annual financial
statements, as described on page 85, as well as the Report on the
Sanlam Group Embedded Value. Our responsibilities in relation
to the annual financial statements are set out on page 87.
Our responsibilities, as independent auditors, in relation to
the Report on the Sanlam Group Embedded Value are to
report to the Board of Directors our opinion as to whether the
embedded value and the value of new life insurance business
were calculated in accordance with the applicable guidelines of
the Actuarial Society of South Africa and the policies of the
Group as set out in the Report on the Sanlam Group
Embedded Value.
Scope of audit
We conducted our audit in accordance with Statements of
South African Auditing Standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance that the Report on the Sanlam Group Embedded
Value is free of material misstatement.
Our audit included:
• an examination, on a test basis, of evidence supporting the
amounts and disclosures in the Report on the Sanlam Group
Embedded Value;
• an assessment of the significant assumptions, estimates and
judgements made by management in the preparation of the
Report on the Sanlam Group Embedded Value, and of
whether the guidelines of the Actuarial Society of South
Africa, the methodologies and the policies of the Group,
were consistently applied and adequately disclosed; and
• an evaluation of the overall adequacy of the presentation of
information in the Report on the Sanlam Group Embedded
Value in accordance with the guidelines of the Actuarial
Society of South Africa.
We believe our audit provided a reasonable basis for our
opinion.
Opinion
In our opinion the Group embedded value and the value of the
new life insurance business at 31 December 2002 and the
embedded value earnings and analysis of earnings for the year
then ended fairly present, in all material respects, these values
in accordance with the guidelines of the Actuarial Society of
South Africa for the preparation and presentation of such a
report and the policies and assumptions of the Group as set out
on pages 147 to 149 of the Report on the Sanlam Group
Embedded Value.
Ernst & Young
Chartered Accountants (SA)
Registered Accountants and Auditors
Cape Town
5 March 2003
Page 147
INTRODUCTION
The life policy liabilities in the financial statements are based
on the financial soundness valuation. The financial soundness
valuation includes both prescribed and discretionary margins,
which can be expected to emerge as profits in the future. The
value placed on these future expected profits after taxation is
the value of the in-force life business.
The embedded value is defined as the net assets of the
shareholders, plus the value of the in-force business less the
cost of capital at risk.
The economic value of the company is then derived by
adding to the embedded value an estimate of the value of
the future sales of new life insurance business, often
calculated as a multiple of the value of new business
written over the past year.
PRESENTATION
This report presents the embedded value of the Sanlam
group, rather than that of Sanlam Life Insurance Limited. In
addition, the report also presents the net value of new life
insurance business.
BASIS OF PREPARATION
The embedded value is determined in accordance with
generally accepted actuarial practice described by the
Actuarial Society of South Africa, as set out in its Professional
Guidance Note (PGN) 107.
The value of the in-force business, the cost of capital at risk
and the value of new business are based on the best estimate
assumptions used for determining the financial soundness
value of the policy liabilities in the financial statements. The
embedded value does not place a value on future new business.
The embedded values are net of company tax and do not
allow for the tax position of an investor in Sanlam Limited.
Value of in-force business
The value of in-force business is calculated as the discounted
value, using a risk-adjusted discount rate, of the projected
stream of future after-tax profits. The profits are determined
on the financial soundness valuation basis for life business in
force at the valuation date. This value excludes the discounted
value of the release of the risk capital over the life of the in-
force business.
Cost of capital at risk
The cost of capital at risk is calculated as the capital at risk at
year-end less the discounted value, using a risk-adjusted
discount rate, of the expected annual release of the capital
over the life of the in-force business, allowing for the after-tax
investment return on the expected level of capital held in
each year.
Net assets of shareholders
The net assets of the shareholders equal the excess of
the assets at fair value over liabilities on the financial
soundness valuation basis. The net assets are adjusted
for the following:
• Subsidiaries, other than life insurance subsidiaries, are
included at fair value (refer to shareholders’ funds balance
sheet on page 137).
• A delay before incurring the capital gains tax liability
included in the fair value.
• The present value of corporate expenses by multiplying the
cost after tax by the market price per share of Sanlam
Limited and dividing it by the headline earnings per share
based on the long term rate of return.
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 financial soundness
valuation profits for new business issued during the
financial year-end under review. The value of new
business is reduced by the cost of capital at risk over the
life of this business to obtain the net embedded value of
new business.
Report on the Sanlam Group Embedded Valuefor the year ended 31 December 2002
Page 148
Report on the Sanlam Group embedded value (continued)for the year ended 31 December 2002
In determining the value of new business:
• a policy is only taken into account if at least one premium
that was not subsequently refunded was recognised in the
financial statements;
• premium increases that are allowed for in the value of in-force
business are not counted again as new business at inception;
• premium increases in existing recurring premium contracts
associated with indexation arrangements are not included,
but instead are allowed for in the value of in-force 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;
• continuations of individual policies and deferrals of
retirement annuity policies after the maturity dates in the
contracts are treated as new business if they have been
included in the exits at their respective maturity dates;
• for group business, 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;
• the renewable recurring premiums under group insurance
contracts are treated as in-force business.
Profitability of new business is measured by the ratio of the
net value of new business to the annual premium equivalent
(APE). The APE is calculated as new recurring premiums
excluding indexed growth premiums plus 10% of single
premiums.
Embedded value earnings
The return on embedded value is the embedded value
earnings as a percentage of the embedded value at the
beginning of the year.
The growth from life business is expressed as a percentage
of the value of in-force business at the beginning of the year.
Sensitivity analysis
Sensitivities have been determined at the indicated risk
discount rate. 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 of Sanlam Life Insurance Limited (Sanlam Life).
For each sensitivity, all other assumptions have been left
unchanged. The different sensitivities do not indicate that they
have a similar chance of occurring.
Share incentive scheme
The embedded values do not include an allowance for the
cost of the share incentive scheme. In respect of share
options, where shares have not yet been issued, the number of
shares used to calculate the embedded value per share will be
increased as and when these options are granted.
ASSUMPTIONS
Investment return and inflation
The investment return on assets supporting the capital at risk
is based on the long term asset mix for these funds.
Inflation indexation for individual life premiums is
assumed to be equal to consumer price index inflation, while
that for group business is assumed to equal expected salary
inflation. Unit cost inflation is assumed to be at the same level
as salary inflation.
Cost of capital at risk
The assumed composition of the assets backing the capital at
risk is consistent with Sanlam’s practice and with the asset
distribution assumed when calculating the capital
requirements.
Decrements, expenses and bonuses
Future mortality, morbidity and discontinuance rates and
future expense levels were based on recent experience where
appropriate.
Future rates of bonuses for traditional participating
business, stable bonus business and participating annuities
were set at levels that were supportable by the assets backing
the respective product asset funds at the respective valuation
Page 149
dates.
Sanlam Life’s current surrender and paid-up bases were
assumed to be maintained in the future.
HIV/Aids
Allowance was made, where appropriate, for the impact of
expected HIV/Aids-related claims, consistent with the
recommendations of the Actuarial Society of South Africa as
set out in its latest proposed Professional Guidance
Note (PGN) 105.
Premiums were 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.
Recurring expenses and project costs
Future investment expenses were based on the current scale of
fees in place between Sanlam Investment Management
(Proprietary) Limited and Sanlam Life. To the extent that this
scale of fees includes profit margins for Sanlam Investment
Management, these margins have not been included in the
value of in-force and new business.
In determining the value of in-force business, the value of
expenses for certain planned projects focusing on both
administration and distribution aspects of the life insurance
business has been deducted. These projects are of a short-term
nature, although similar projects may be undertaken from time
to time. No allowance has been made for the expected positive
impact these projects may have on the future operating
experience of Sanlam Life.
Taxation
Projected corporate tax was allowed for at a rate of 30%.
Allowance was made for capital gains tax. The assumed
rollover period for realisation of investments is five years for
property and equity assets supporting capital at risk and
policy reserves. For strategic equity assets the assumed
rollover period is ten years.
Allowance for secondary tax on companies was made by
placing a present value on the tax liability generated by the net
cash dividends paid that are attributable to the life company. It
was assumed that over the long term the proportion of cash
dividends paid would fall to a level of 50% from the current
100% level.
Sensitivity analysis
Risk premiums relating to mortality are assumed to be
increased consistent with mortality experience (where
appropriate).
Mortality of annuities is assumed unchanged because a
decrease, rather than an increase, in mortality increases the
mortality risk on annuities.
EMBEDDED VALUE METHODOLOGY
The embedded value methodology applied in preparing the
embedded value report is consistent with the methodology
used in the previous year.
SANLAM GROUP EMBEDDED VALUE
TABLE 1 2002 2001
Risk discount rate 13,3% 14,3%
Notes R million R million
Shareholders’ assets at fair value(refer to page 137 for the shareholders’ funds balance sheet at fair value) 20 947 24 399Adjustment for discounting capital gains tax — 61Present value of corporate expenses (1) (600) (664)
Adjusted shareholders’ net assets at fair value 20 347 23 796Value of in-force 8 251 8 756
Individual business 7 011 7 354Group business 1 240 1 453Corporate — (51)
Cost of capital at risk (1 511) (1 815)
Individual business (1 056) (1 210)Group business (455) (605)
Sanlam group embedded value 27 087 30 737Embedded value per share (cents) 1 032 1 167Number of shares (million) 2 625 2 632
Notes:(1) The value was calculated by multiplying the corporate costs after
tax of R97 million (2001: R96 million) by the market price pershare of 760 cents (2001: 919 cents) and dividing this by theheadline earnings per share based on the long term rate of returnof 122,7 cents (2001: 133,2 cents).
Page 150
Report on the Sanlam Group embedded value (continued)for the year ended 31 December 2002
EMBEDDED VALUE EARNINGS
TABLE 2 2002 2001Notes R million R million
Net value of new business 320 290Earnings from existing life insurance business 1 353 1 111
Expected return 1 208 1 204Operating experience variations (1) 96 32Operating assumption changes (2) 49 (125)
Embedded value earnings from operations 1 673 1 401Economic and other assumption changes 117 105Tax changes — (613)Investment variances (907) 200
Growth from life insurance business 883 1 093Adjusted investment return on net assets (3) (3 612) 2 356
Total embedded value earnings (2 729) 3 449Dividends paid (921) (790)
Increase in the Sanlam group embedded value (3 650) 2 659
Return on embedded value (8,9%) 12,3%Growth in life business 883 1 093
Value of in-force business at end of the year 6 740 6 941
Plus: Net operating profit for the year (4) 1 084 1 134
Less: Value of in-force business at beginning of the year (6 941) (6 982)
Percentage growth in life business 12,7% 15,7%
Notes:(1) The main contributor to the operating experience variation was
positive risk experience of R140 million.(2) The main contributor to operating assumption changes was
changes to assumed future mortality. (3) The investment return experience includes the effect of realised
and unrealised investment surpluses, which was negativelyinfluenced by stock market conditions and exchange ratemovements in 2002.
(4) Sanlam Life segmental net operating profit of R1105 million(2001: R1 202 million) less net operating profit from subsidiariesof R21 million (2001: R68 million).
VALUE OF NEW LIFE INSURANCE BUSINESS
NEW BUSINESS PREMIUMS
TABLE 4 2002 2001R million R million
Financial statementsNew business premiums (refer eight year review on page 144) 13 123 13 297Less: Premium increases (index growth) (564) (558)Plus: Optional reduction in premiums 34 39Less: Other life business (1) (1 300) (1 396)
Premiums used in the calculation of annual premium equivalent 11 293 11 382
New business embedded value premiumsRecurring premiums 1 166 1 184Single premiums 10 127 10 198
Premiums used in the calculation of annual premium equivalent 11 293 11 382
Notes:(1)The majority of profits in respect of these premiums accrue to Sanlam
Investment Management and Innofin (refer to page 138).
TABLE 3 2002 2001R million R million
Value of new business 365 359
Individual business 266 228Group business 99 131
Cost of capital at risk (45) (69)
Individual business (19) (20)Group business (26) (49)
Net value of new business 320 290
Net value of new business as a percentage of the annual premium equivalent:
Annual premium equivalent (APE) 2 179 2 204
Individual business 1 774 1 737Group business 405 467
Net value of new business 320 290
Individual business 247 208Group business 73 82
APE margin 14,7% 13,2%
Individual business 13,9% 12,0%Group business 18,0% 17,6%
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ASSUMPTIONS
TABLE 6 2002 2001% p.a. % p.a.
Fixed-interest securities 10,8 11,8Equities and offshore investments 12,8 13,8Hedged equities(1) 9,8 10,8Property 11,8 12,8Cash 8,8 9,8Risk discount rate 13,3 14,3Return on capital at risk(2) 11,9 12,7Unit cost and salary inflation 6,3 7,3Consumer price index inflation 4,8 5,8
Notes:(1)The assumed future return for these assets is lower than that of
equities, which are not hedged, reflecting the cost of derivativeinstruments.
(2)The investment return on assets supporting the capital at risk is basedon the long term asset mix for these funds (refer in Table 7).
LONG TERM ASSET MIX FOR ASSETS SUPPORTING
THE CAPITAL AT RISK
TABLE 7 2002 2001% %
Equities and offshore investments 58 54Hedged equities 18 18Property 12 16Fixed-interest securities 10 10Cash 2 2
100 100
SENSITIVITY ANALYSIS AT 31 DECEMBER 2002
TABLE 5 Gross value Cost of Net value ofof in-force capital in-force
business at risk business %R million R million R million change
VALUE OF IN-FORCE BUSINESSBase value 8 251 (1 511) 6 740Increase risk discount rate by 1,5% to 14,8% 7 607 (2 016) 5 591 (17%)Decrease risk discount rate by 1,5% to 11,8% 9 016 (913) 8 103 20%Increase investment return (and inflation) by 1,5%, coupled with an increase in risk discount rate of 1,5% to 14,8%, and with bonus rates changing commensurately 8 177 (1 578) 6 599 (2%)Increase expense inflation by 1,5%, without adjustment to nominal investment return 8 246 (1 525) 6 721 (0%)Non-commission expenses (excluding investment expenses) increase by 10% 8 012 (1 506) 6 506 (4%)Discontinuance rates increase by 10% 8 073 (1 460) 6 613 (2%)Increase mortality of products providing death benefits by 10%(1) 8 006 (1 498) 6 508 (4%)
VALUE OF NEW BUSINESSBase value 365 (45) 320Increase risk discount rate by 1,5% to 14,8% 320 (59) 261 (18%)Decrease risk discount rate by 1,5% to 11,8% 415 (27) 388 21%Increase investment return (and inflation) by 1,5%, coupled with an increase in risk discount rate of 1,5% to 14,8%, and with bonus rates changing commensurately 348 (51) 297 (7%)Increase expense inflation by 1,5%, without adjustment to nominal investment return 362 (45) 317 (1%)Non-commission expenses (excluding investment expenses) increase by 10% 299 (44) 255 (20%)New business volumes decrease by 10% 298 (40) 258 (19%)Increase mortality of products providing death benefits by 10%(1) 337 (42) 295 (8%)
Notes:(1)Mortality of annuities is assumed unchanged because a decrease, rather than an increase, in mortality increases the mortality risk on annuities.
Page 152
Definitions and Glossary of Technical Terms
“billion” – one thousand million;
“bonus pension” – a bonus pension is a policy which provides immediate annuities, the benefits of
which are increased annually with bonuses declared;
“capital adequacy” – capital adequacy implies the existence of a buffer against experience worse than that
assumed in the financial soundness valuation. The sufficiency of the buffer is
measured by comparing available capital with the capital adequacy requirement.
The main element in the calculation of the capital adequacy requirement is the
determination of the effect of an assumed fall in asset values on the excess of assets
over liabilities;
“embedded value” – embedded value represents the net assets of a life company together with the value of
the portfolio of business in force, net of the cost of capital at risk in relation to this
business;
“immediate annuity” – a policy providing a series of regular benefit payments for a defined period, in
consideration for a single premium.
“linked policy” – a non-participating policy which is allotted units in an investment portfolio.
The value of the policy at any stage is equal to the number of units multiplied by the
unit price at that stage less the value of unrecouped expenses;
“market-related policy” – a participating policy which participates in non-vesting investment growth.
This growth reflects the volatility of the market value of the underlying assets
of the policy;
“non-participating policy” – a policy which provides benefits that are fixed contractually, either in monetary terms
or by linking them to the return of a particular investment portfolio, eg a linked or
fixed-benefit policy;
“participating policy” – a policy which provides guaranteed benefits as well as discretionary bonuses. The
declaration of such bonuses will take into account the return of a particular
investment portfolio. Reversionary bonus, stable bonus, market related and bonus
pension policies are participating policies;
“policy” – unless the context indicates otherwise, a reference to a policy in this report means an
insurance policy issued by Sanlam Life Insurance Limited in accordance with the
Long Term Insurance Act;
“reversionary bonus policy” – a conventional participating policy which participates in reversionary bonuses, i.e.
bonuses
of which the face amounts are only payable at maturity or on earlier death or
disability. The present value of such bonuses is less than their face amounts;
“Sanlam Life” – a business consisting of Sanlam Life Insurance Limited, Sanlam Unit Trust, Sanlam
Trust and Multi Data.
“Sanlam Life Insurance Limited” – a wholly-owned subsidiary of Sanlam Limited conducting mainly life insurance
business;
“Sanlam Limited” – the holding company listed on the JSE Securities Exchange South Africa and the
Namibian Stock Exchange;
“Sanlam” and “Sanlam group” – Sanlam Limited and its subsidiaries;
“stable bonus policy” – a participating policy under which bonuses tend to stabilise short term volatility in
investment performance; and
“surrender value” – the surrender value of a policy is the cash value, if any, which is payable in respect of
that policy upon cancellation by the policyholder.
Page 153
Notice of Annual General Meeting
SANLAM LIMITED
(Incorporated in the Republic of South Africa)
(Registration No 1959/001562/06)
Notice is hereby given that the fifth annual general meetingof the members of Sanlam Limited (“the company”) will beheld on Wednesday, 4 June 2003 at 09:00 in the SandtonSun, 5th Street, Sandhurst, Sandton for the followingpurposes:
1. To consider and adopt the annual financial statementsand the group annual financial statements of thecompany for the year ended 31 December 2002.
2. To re-appoint the auditors of the company.
3. To elect the following retiring directors* appointed bythe Board of Directors of the company (“the Board”) incasual vacancies or as additional directors in terms ofarticle 13.2 of the company’s articles of association (“thearticles”), and who are eligible and offer themselves forre-election:E van AsVP Khanyile
4. To elect the following directors* of the company, retiringin terms of article 14 of the articles, and who are eligibleand offer themselves for re-election:DC BrinkPEI SwartzJ van ZylT Vosloo
5. To authorise the Board to determine the remuneration of the auditors.
6. To table and approve the total amount of directors’remuneration.
7. To consider and, if approved, to pass, with or withoutmodification, the following ordinary resolution number 1:
“Resolved that the authorised but unissued ordinaryshares in the share capital of the company be and arehereby placed at the disposal and under the control of
the Board, and such directors are hereby authorised andempowered to allot, issue or otherwise dispose thereof tosuch person or persons and on such terms andconditions as the directors may from time to timedetermine, but subject to the provisions of theCompanies Act, No 61 of 1973, as amended (“theCompanies Act”), the requirements of the JSE SecuritiesExchange South Africa (“the JSE”) and any other stock exchange upon whichthe shares of the company may be quoted or listed fromtime to time.”
8. To consider and, if approved, to pass, with or withoutmodification, the following special resolution number 1:
“Resolved that the Board of Directors of the companyand any subsidiary of the company be authorised by wayof a general authority, up to and including the date ofthe following annual general meeting of the company, toapprove:(a) the purchase of any of its securities by the company
or its subsidiaries, including ordinary shares of R0,01each in the capital of the company; and
(b) the purchase of such securities by the company inany holding company of the company, if any, andany subsidiary of any such holding company,
subject to the provisions of the Companies Act andthe requirements of the JSE and any other stockexchange upon which the shares of the company may bequoted or listed from time to time, and subject to suchother conditions as may be imposed by any otherrelevant authority, provided that:• the general authority shall only be valid until the
company’s next annual general meeting, provided thatit does not extend beyond 15 months from the date ofthis resolution;
• the general authority to repurchase be limited to amaximum of 10% of the relevant company’s issuedshare capital of that class at the time the authority isgranted; and
• repurchases must not be made at a price more than5% above the weighted average of the market value ofthe securities for the five business days immediatelypreceding the date of the repurchases.”
(*)Brief curricula vitae appears on pages 10 and 22.
The reason for and effect of special resolution number 1is to grant the directors a general authority to enable thecompany to acquire shares which have been issued by it, or itsholding company, if any, and any subsidiary of any suchholding company.
Statement of intentThe Board shall implement a general repurchase of thecompany’s shares, only if prevailing circumstances (includingthe tax dispensation and market conditions) warrant same,and should they be of the opinion, after considering the effectof such repurchase of shares, that the following requirementshave been and will be met:• the company will be able to pay its debts in the ordinary
course of business;• the consolidated assets of the company, fairly valued in
accordance with generally accepted accounting practice, arein excess of the consolidated liabilities of the company;
• the company will have adequate capital; and• the working capital of the company will be sufficient for
the company’s requirements for the year ahead.A member entitled to attend and vote at the meeting may
appoint a proxy to attend, speak and vote in his or her stead. A proxy form is enclosed for use by members who are
unable to attend the meeting. Same is also obtainable fromthe registered office of the company. Duly completed proxyforms must be received by the company no later than48 hours before the time of the meeting.
The said proxy forms must be lodged as follows:• Proxy forms from holders of share certificates or holders of
share account statements from Sanlam Share Account(Proprietary) Limited or Sanlam Fundshares Nominee
(Proprietary) Limited must be lodged with or posted to thecompany’s registered office at 2 Strand Road, Bellville,7530 (PO Box 1, Sanlamhof, 7532), or at ComputershareInvestor Services, 70 Marshall Street, Johannesburg 2001(Private Bag X105, Marshalltown 2107).
• Proxy forms from all other shareholders must be lodged viatheir chosen CSDP’s.
A person representing a corporation/company is not deemed to be a proxy as such corporation/company canonly attend a meeting through a person, duly authorised byway of a resolution to act as representative. A notariallycertified copy of such power of attorney or otherdocumentary evidence establishing the authority of theperson signing as proxy must be attached to the proxy form.Such person enjoys the same rights at the meeting as theshareholding corporation/company.
A member whose shares are held by Sanlam ShareAccount (Proprietary) Limited or Sanlam FundsharesNominee (Proprietary) Limited is empowered by suchrelevant nominee company to act and vote at the meeting.
By order of the Board
JP Bester
Company Secretary
Bellville
10 March 2003
Page 154
Notice of Annual General Meeting (continued)
Shareholding and AdministrationAnalysis of shareholders
on 31 December 2002
Shareholders Shares held
Number % Number %
DISTRIBUTION OF SHAREHOLDING
1 – 1 000 591 749 82,00 243 987 393 9,19 1 001 – 5 000 114 119 15,82 227 763 378 8,58 5 001 – 10 000 10 133 1,40 69 346 831 2,61
10 001 – 50 000 4 421 0,61 77 216 677 2,91 50 001 – 100 000 245 0,03 17 756 007 0,67
100 001 – 1 000 000 697 0,10 256 435 567 9,66
1 000 000 and over 259 0,04 1 762 064 814 66,38
721 623 100,00 2 654 570 667 100,00
Public and non-public shareholders % Shareholder structure %
Institutional shareholdingPublic shareholders 98,81 – Offshore 19,82Non-public shareholders – South Africa 53,38– Directors’ interest 0,04 Individuals 20,84– Employee pension fund 0,38 Demutualisation Trust 2,38
– Sanlam Limited Share Incentive Trust 0,77 Other SA shareholding 3,58
Total 100,00 Total 100,00
HOLDINGS OF FIVE PERCENT OR MORE– Public Investment Commissioner (SA) 9,65%
Page 155
Shareholders’ Diary and Administrationfor the year ended 31 December 2002
SHAREHOLDERS’ DIARY
Financial year-end 31 DecemberAnnual general meeting 4 June 2003
REPORTS– Interim report for
30 June 2003 September 2003– Announcement of the
results for the year ended 31 December 2003 March 2004
– Annual report for year ended 31 December 2003 April 2004
DIVIDENDS– Dividend for 2002 declared 5 March 2003– Last date to trade for
2002 dividend 4 April 2003– Shares will trade
ex-dividend from 7 April 2003– Record date for
2002 dividend 11 April 2003– Payment of dividend
for 2002 7 May 2003– Declaration of dividend
for 2003 March 2004– Payment of dividend
for 2003 May 2004
To allow for the dividend calculation, Sanlam’s share register (includingSanlam’s two nominee companies namely Sanlam Share Account (Pty)Limited and Sanlam Fundshares Nominee (Pty) Limited) will be closed forall transfers, off market transactions and de- or rematerialisations between29 March 2003 and 11 April 2003, both dates included. Transactions on the JSE via STRATE are not affected by this arrangement.
ADMINISTRATION
SANLAM LIMITED
Registration No 1959/001562/06
Incorporated in South Africa
SANLAM LIFE INSURANCE LIMITED
Registration No 1998/021121/06
GROUP SECRETARY
JP Bester
REGISTERED OFFICE
2 Strand Road, Bellville, South Africa
Telephone 021 947 9111
Telefax 021 947 3670
POSTAL ADDRESS
PO Box 1
Sanlamhof
7532
South Africa
INTERNET ADDRESS
http://www.sanlam.co.za
INVESTOR RELATIONS
H Malherbe
TRANSFER SECRETARIES
Computershare Investor Services Limited
(Registration No 1958/003546/06 )
70 Marshall Street
Johannesburg
2001
South Africa
PO Box 61051
Marshalltown
2107
South Africa
Telephone 011 370 5320
Telefax 011 370 5486
Page 156