EXECUTIVE REVIEW

• Business environment
• Performance review
• Delivering on strategy
• Sanlam Demutualisation Trust
• Looking ahead

Business environment

The turmoil in international financial markets that started to emerge in the second half of 2007, intensified during 2008. A worldwide confidence crisis caused by major capital write-offs in the financial services sector culminated in a general melt-down in international investment markets, impacting on the operating environment in both South Africa and the other countries in which the Sanlam group operates. The South African economy with its open currency and investment markets has not been shielded from the international events.

Global equity and debt markets remained under pressure during the year. As for most international markets, the South African equity market fell well short of the performance achieved in 2007. The FTSE/JSE All Share Index lost 26% (excluding dividends) during 2008 versus a gain of 16% in the comparable period in 2007. These conditions set the stage for a difficult trading environment.

Performance review

In the context of this challenging business environment, the Group achieved solid operating results for the 2008 financial year. The diversified nature of the Group’s operations provided some resilience in the turbulent market conditions, with the short-term insurance and life businesses recording strong operational performances that largely offset some deterioration in the operating results of the investments and capital markets operations. The lower performance level of the latter operations reflects the impact of the prevailing market volatility but should also be measured against the extraordinary impact that the strong investment markets of the past few financial years had on their operating profit and business flows. The results of the life insurance operations are reported after the upfront cost associated with the strong growth in new business volumes, which masks the positive result flowing from the in-force book of business. Notwithstanding the pressure on earnings, the core operations of all the major Group businesses remained sound.

The primary performance target of the Group is to optimise shareholder value through maximising the return on Group Equity Value (GEV). The Group embarked on a strategy of transformation into a diversified financial services organisation five years ago, with a clear focus on maximising return for our shareholders and other stakeholders. A target has been set for the growth in GEV to exceed the Group’s cost of capital on a sustainable basis. Cost of capital is set at the government long bond yield plus 3%. The target is to exceed this return by at least 1%. The negative return per share of 1,7% achieved in 2008 fell short of the target of some 12% due to the adverse impact of the investment markets. On a normalised basis, i.e. assuming a normalised investment market performance and excluding any once-off items, the return of 12,4% met the target. Over a running five-year period the total return on Group Equity Value (ROGEV) comfortably exceeded the growth target.

Delivering on strategy

Despite the challenges facing the Group in the current business environment, the Board and management remain committed to the Group’s key objective of maximising shareholder value. The Group has a sound platform and strategic base from which to continue to grow. The focus during 2008 remained on optimal capital utilisation, earnings growth, costs and efficiencies, diversification and transformation.

Last year’s difficult economic conditions, particularly the substantial drop in equity markets, put a damper on earnings, particularly in respect of investment returns. The Group was, however, still able to gain market share on a profitable basis by attracting substantial new business, particularly in the retail area. In spite of substantial increased new business strain caused by the growth in new business, core earnings per share increased by 1% from 2007, bearing testimony to our excellent operational results in tough conditions.

Reducing costs while at the same time upping efficiency has been a strategic focus for the past five years. However, given the intensified pressure on capital last year, we took a decision to increase our efforts. Steps taken include cost-cutting initiatives such as freezing non-essential staff positions, especially in the more mature parts of our business. As was to be expected, our United Kingdom based businesses felt the global events significantly harder than what we did in South Africa. As a result a strong focus was placed on containment of costs and achieving greater efficiency by identifying and exploiting synergies and partnerships across our business interests in the UK.

Capital management is an ongoing theme in the Group. Discretionary Group capital amounted to R6,1 billion at the end of 2007. A total amount of R2,2 billion was used to buy back 117 million Sanlam shares in the market. Some R1,1 billion was applied towards corporate activity aimed at further diversifying the Group’s solution offering and distribution reach. The following are the largest transactions concluded:

• A total amount of R561 million was utilised to strengthen our business presence in the United Kingdom. Sanlam UK acquired an 86% interest in Principal Investment Holdings, a UK-based private client business, as well as a 60% interest in Buckles Holdings, a financial advisory and ancillary services company. These acquisitions, together with Merchant Investors, Intrinsic, Nucleus and our interest in the Punter Southall Group form the new Sanlam UK cluster.  
  
• MiWay Finance, a direct financial services company, was launched in February 2008. The Group has a direct 55% interest in MiWay, as well as an indirect interest of 25% through Santam. Sanlam contributed R110 million to the start-up capitalisation of the business.    
  
• The success of the Group’s Shriram Life joint venture with the Shriram group of India was extended during the year with the formation of Shriram General Insurance, a joint venture between Sanlam and the Shriram Group to further expand and diversify the Group’s financial services offering in this market. Sanlam obtained a 26% interest in the new joint venture for a total consideration of R115 million.     
  
• Approximately R200 million of discretionary capital was invested to acquire an additional 2,5 million Santam shares in the market, increasing the Group’s effective interest in Santam to 57%.   
  
• The Group disposed of its interest in the Safair Lease Finance joint venture with the Imperial Group towards the end of 2008 for a consideration of R434 million.  
  
• It was announced in February 2009 that the Group will acquire the PSG Group’s 34,6% interest in Channel Life (including loan accounts) for an amount of R197 million, subject to regulatory approval. This will increase the Group’s interest in Channel Life to 97,6%.

The application of capital for the share buy-back programme, corporate activity, negative investment market performance and some allowance for illiquid investments reduced the level of discretionary capital in the Group to R2,1 billion at the end of 2008. The Board remains committed to the utilisation of the remaining discretionary capital in the most efficient manner. The preference is to utilise such capital on new initiatives that will further the Group’s strategic goals. Unemployed capital is value dilutive and will in time be returned to shareholders. The buy back of Sanlam shares continues to be an attractive option in periods of share price weakness.

In 2008 a major focus area included achieving employment equity and training targets. We can proudly announce that for the first time, more than 50% of our employees were black last year. However, achieving targets at middle and senior management level remains challenging and in 2009 we will be investigating creative ways of speeding up progress. We also welcomed the first black Executive Director to the Sanlam board in May 2008. Raisibe Morathi, Chief Executive of Sanlam Group Services, was previously an independent non-executive director on the Sanlam board.

Sanlam Demutualisation Trust

In one of the largest empowerment and wealth creation transactions in South African history, Sanlam Limited listed on the JSE Securities Exchange and the Namibian Stock Exchange in November 1998. As part of the demutualisation of Sanlam, free Sanlam Limited shares were distributed to more than 2 million Sanlam policyholders. Shares allocated to policyholders that Sanlam could not trace at that stage, were transferred to the Sanlam Demutualisation Trust, managed by an independent board of trustees. The Trust’s mandate was to find as many of the beneficiaries of these shares as possible, to ensure that all policyholders receive the benefit of their free shares.

The Trust’s term ended on 22 October 2008. Over the ten years, the Trust has been extremely successful in finding these beneficiaries. Shares due to just over 48 600 beneficiaries, representing less than 2,5% of the number of policyholders to whom free shares were originally allocated in 1998, remained unclaimed in the Trust. The number of shares (about 19 million) represents only 1% of the free shares originally allocated to policyholders.

 

Looking ahead

Recessionary conditions in most of the major international economies are likely to have a negative impact on South African trade, with an expected lower demand for commodities and reduced economic growth for the foreseeable future. These conditions will have an unavoidable impact on the Group’s operations, in particular on the investment management and capital markets operations that are more exposed to the market volatility and negative sentiment, but also on the life insurance businesses that are reliant on the level of consumer confidence and disposable income in its target client base. Some slowdown in new business flows can therefore be expected.

This sets the stage for a challenging 2009 and although we are confident that our businesses are robust enough to weather these challenges, it will impact on our ability to repeat our 2008 operational performance.

 

Forward-looking statements

In this report we make certain statements that are not historical facts and relate to analyses and other information based on forecasts of future results not yet determinable, relating, amongst others, to new business volumes, investment returns (including exchange rate fluctuations) and actuarial assumptions. These are forward-looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. Words such as “believe”, “anticipate”, “intend”, “seek”, “will”, “plan”, “could”, “may”, “endeavour” and “project” and similar expressions are intended to identify such forward-looking statements, but are not the exclusive means of identifying such statements. Forward-looking statements involve inherent risks and uncertainties and, if one or more of these risks materialise, or should underlying assumptions prove incorrect, actual results may be very different from those anticipated. Forward-looking statements apply only as of the date on which they are made, and Sanlam does not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise.