How we measure ourselves

The Sanlam Group’s performance measurement and financial communication philosophy is based on its values which include transparency, honesty and integrity.

We are therefore passionate about providing useful, clear and value added information in our financial statements to our shareholders and other stakeholders. This is why the Sanlam Annual Report contains significant additional information than prescribed by International Financial Reporting Standards (IFRS). We view the requirements of IFRS and other relevant regulations and legislation as the minimum compliance standards. Our disclosures are further aligned with the Group’s internal reporting structure to ensure that external users of the financial statements have the same insight into the Group’s financial results as Sanlam’s management.

Optimising shareholder value through maximising Return on Group Equity Value is the primary goal of the Group. Sanlam’s strategic focus areas of capital efficiency, earnings growth, costs and efficiencies, diversification and transformation are aimed at achieving this objective.

The interaction of these strategies can be illustrated as follows:

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The performance indicators used by the Group to measure the success of the main components of its strategy are classified into the following categories:

• Shareholder value (all strategic focus areas)
• Business volumes (future earnings growth)
• Earnings (earnings growth and costs and efficiencies)
• Diversification
• Transformation
• Capital Management

Shareholder value

Group Equity Value
GEV is the aggregate of the following components:

• The embedded value of covered business, being the life insurance businesses of the Group, which comprises the required capital supporting these operations and the net present value of their in-force books of business (VIF);
• The fair value of other Group operations based on longer-term assumptions, which includes the investment management, capital markets, credit, short-term insurance and the non-covered wealth management operations of the Group; and
• The fair value of discretionary and other capital. GEV provides an indication of the value of the Group¡¦s operations, but without placing any value on future new covered business to be written by the Group¡¦s life insurance businesses. Sustainable return on GEV is the primary performance benchmark used by the Group in evaluating the success of its strategy to maximize shareholder value.

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Business volumes

Business flows
The Group achieved growth of 9% in new business volumes, a satisfactory performance in the difficult operating environment of 2011. New life business recorded exceptional growth of 25%, with investment and short-term insurance business increasing by 5% and 8% respectively. The strategic focus on the quality of new business written is reflected in good retention levels and a continuance of strong net fund inflows.

Value of new covered business
The value of new life business (VNB) written during 2011 increased by 38% on 2010 to reach R1 051 million, breaching the R1 billion mark for the first time. After minorities, VNB increased by 44% to R958 million. The replacement of STC in South Africa with a withholding tax basis, results in an increase in the future profitability of new business written and commensurately VNB. The change in tax basis increased net VNB by R50 million for 2011. Excluding this, net VNB increased by 36% at overall improved margins, testimony to the success of the Group’s strategic focus on the quality of new business.

Earnings

Earnings growth
Key to our strategy is to grow earnings in a responsible and sustainable manner. We will therefore not push short-term profits at the expense of long-term earnings growth. To encourage this, Group remuneration structures are aligned to this strategy through some direct link of the vesting of bonuses and long-term incentives to the sustainable management and growth of the business over the long term.

So, how have we done in 2011?
Despite the economic challenges of 2011, the Group achieved a satisfactory 14% growth in net operating profit. Sanlam Personal Finance (SPF) performed exceptionally with excellent earnings growth of 18%, the result of sound contributions from all its South African retail market segments and all its major businesses.

Sanlam Emerging Markets (SEM) and Sanlam Investments recorded 8% and 7% growth respectively, both clusters benefiting from their diversified composition as strong performances from certain individual businesses compensated for relatively weaker performances by other. Businesses in the latter category are essentially either start-ups or growth phase entities or businesses more directly and severely impacted by the adverse economic conditions. Santam again made a material contribution to the Group bottom line as favourable underwriting conditions continued during 2011. Some reduction in margin in the second half of 2011 resulted in only a relatively small increase in Santam’s operating profit for the year.

The Sanlam headline earnings were affected by the flat equity market performance in 2011 relative to the buoyant markets in 2010 and ended the year marginally down on that reported for 2010.

Cost and efficiencies
The business restructuring referred to below should ensure improved focus and coordination across businesses, resulting in reduced operating costs and greater efficiencies. The Sanlam for Sanlam programme, introduced in November 2010, has proven successful in encouraging effective collaboration between clusters with the goal of achieving greater growth and profitability.

Managing an efficient business also requires stringent risk, compliance and corporate governance systems. As a Group we spent around R400 million in 2011 on various initiatives aimed at ensuring that we remain a good corporate citizen, including internal and external audits, reporting of results and Board activities. We have also significantly enhanced our compliance capabilities over the last few years.

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Diversification

Our diversification strategy has resulted in a mix of business that has provided us with the resilience required to withstand the extreme global turmoil over the past four years.

We have successfully achieved geographic, product, distribution and market segment diversification in recent years, which has served us well. In 2003, for example, 74% of our net operating profit was derived from our life business. In 2011 life business, while double in size compared to 2003, contributed only 52% of net operating profit. So while our life business is still important to the Sanlam Group, it forms part of a much more balanced portfolio of businesses that is better equipped to withstand harsh conditions.

However, in order to ensure the sustainability of our business well into the future, we need to do more. Currently our international operations contribute around 14% of operating profit. We are aiming to double this contribution over the next five years as these international markets have been identified as key growth engines for the future.

We have identified significant growth potential in the international markets and more specifically in the developing economies of Africa and certain areas in the East and Pacific Rim. Our restructuring in 2011 will facilitate further diversification in 2012.

We will also be looking at further diversifying our distribution channels by entering into joint ventures with affinity groups such as retailers and unions. Where we already have a presence, further diversification efforts will be focused on branching into different markets. In the UK, for example, we are looking at expanding our current private client offering into the mass affluent market.

Expansion in developed markets will mostly be of an organic nature, with no large capital investments required.

Transformation

Transformation is one of the pillars of our business strategy, because only through focused transformation will we ensure that this business remains viable. While the internal transformation of Sanlam is a key priority, we are also concerned with the transformation of the savings and investment landscape of South Africa.

South Africa’s low savings rate is of concern and we believe we have an important role to play in helping more South Africans achieve financial stability by providing access to appropriate products that offer value. We have therefore done away with products that no longer offer value and are focused on delivering innovative products through unconventional channels into the low-income market. Other transformation initiatives are detailed in the Sustainability Report published on our website.

I would, however, like to highlight the following achievements for 2011:

• At the end of 2011, black shareholding in the Sanlam Group came close to 28% as measured against the Department of Trade and Industry’s BEE scorecard. Sanlam has pro-actively been transforming ownership of the Group since 1993.
• Our black:white employee ratio was 61:39 at the end of 2011, compared to 59:41 at the end of 2010. Our target is to increase the current black staff complement to around 62% by the end of 2012. I am confident that we will achieve this target.
• Our Sustainability Management Framework was finalised and implemented and group-wide key performance indicators on sustainability approved.
• We launched the Graduate Leadership Programme as well as a disability learnership.
• The Sanlam Foundation was launched in September 2011 to facilitate more focused and coordinated efforts linked to Sanlam’s core business, and to achieve more sustainable socioeconomic benefits. Our annual CSI spend in 2011 was R34,6 million representing 0,77% of Group net profit after tax. In 2010 the CSI spend was R22,1 million (0,47% of Group net profit after tax).
• Sanlam was ranked eighth overall on the South African Carbon Disclosure Leadership Index. We have set ambitious targets for reducing our greenhouse gas emissions and energy usage, informed by a baseline assessment and performance benchmark.
• Sanlam’s WWF partnership was effective throughout 2011 and renewed in January 2012 for another three years. The focus of the WWF Sanlam Living Waters programme is on water conservation. As a key sponsor, we contributed more than R3 million in 2011 towards this programme.

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Capital Management

Optimal capital allocation and management remains a key priority for the Group and any discretionary capital that will not be used for corporate activity within a reasonable timeframe will be returned to shareholders. The Group held discretionary capital of R4 billion at the end of2010, which reduced to R3,9 billion as at 31 December 2011. The following corporate activity released additional discretionary capital during 2011:

• R168 million was added to the discretionary capital portfolio through the disposal of the Group’s interest in Fundamo.
• The Group had direct and indirect exposures to Vukile units, the majority of which were acquired when the Group sold its property asset management business to Vukile. Most of the Vukile units were sold in the latter half of the year, which released R790 million of illiquid assets into discretionary capital.
• In terms of the agreement for the disposal of MiWay to Santam, Santam exercised its option to early settle the deferred consideration component of the transaction. A final amount of R103 million was received from Santam.

Utilisation of discretionary capital comprised the following:

• In terms of the Group’s share buy-back programme 36,1 million Sanlam shares were acquired in the market for a total consideration of R979 million.
• The Group increased its effective interest in Santam to 59,9% through the acquisition of 3,5 million Santam shares for a total consideration of R476 million.
• Sanlam Investments augmented its proposition for private clients through the acquisition of three new international businesses: Border Asset Management (a UK private clients asset management business) for R71 million, Merchant Securities (a UK stockbroking business) for R129 million and Summit Trust (a trust and fiduciary business in Switzerland) for R83 million.

Sanlam Investments augmented its proposition for private clients through the acquisition of three new international businesses: Border Asset Management (a UK private clients asset management business) for R71 million, Merchant Securities (a UK stockbroking business) for R129 million and Summit Trust (a trust and fiduciary business in Switzerland) for R83 million.

Other movements in discretionary capital included:

• Seeding capital of R200 million was provided for new products launched by the asset management operations. These new products require seeding capital while a performance track record is being established.
• Investment return earned on the discretionary capital and other small transactions. The discretionary capital is substantially earmarked for corporate activity and expansion of the Group’s footprint in Africa and India, including the potential R2 billion investment in Shriram Capital announced late in 2011. Further share buy-backs will also be considered in periods of share price weakness.

The discretionary capital is substantially earmarked for corporate activity and expansion of the Group’s footprint in Africa and India, including the potential R2 billion investment in Shriram Capital announced late in 2001.  Further share buy-backs will also be considered in periods of share price weakness.

Sanlam is a participant in the Financial Services Board (FSB)’s implementation of a third country equivalent of the European Solvency II regime in South Africa (called Solvency Assessment and Management (SAM)). The Group’s SAM implementation project is progressing according to plan. The FSB conducted its first quantitative impact study in South Africa in the latter half of 2011, in which Sanlam participated. The results of the study confirmed the Group’s view that the capital allocated to the life insurance operations is appropriate.

Group Five-year Review

Click here to view the Group Five-year Review

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