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2007 Annual results
CONTENT | Salient features | Executive review | Comments | Shareholders' fund information
| Embedded value | Group financial statements
 
EMBEDDED VALUE OF COVERED BUSINESS
at 31 December 2007
 

EMBEDDED VALUE OF COVERED BUSINESS at 31 December 2007
    2007  2006 
  Note  R million  R million 
Sanlam Personal Finance   21 010   18 702  
   Adjusted net worth   8 732   8 325  
   Net value of in-force covered business   12 278   10 377  
      Value of in-force covered business   13 958   12 010  
      Cost of capital (1)   (1 587)  (1 582) 
      Minority shareholders’ interest   (93)  (51) 
       
Sanlam Developing Markets   2 160   1 953  
   Adjusted net worth   860   650  
   Net value of in-force covered business   1 300   1 303  
      Value of in-force covered business   1 833   1 762  
      Cost of capital (1)   (268)  (142) 
      Minority shareholders’ interest   (265)  (317) 
       
Sanlam Employee Benefits   5 262   6 748  
   Adjusted net worth   5 118   6 165  
   Net value of in-force covered business   144   583  
      Value of in-force covered business   961   974  
      Cost of capital (1)   (817)  (391) 
      Minority shareholders’ interest   -   -  
       
Embedded value of covered business   28 432   27 403  
Adjusted net worth   14 710   15 140  
Net value of in-force covered business 1   13 722   12 263  
Embedded value of covered business   28 432   27 403  
       
(1) From 31 December 2007 the cost of capital is based on the higher of an internally assessed
     required capital and the statutory capital adequacy requirement, previously based on the
     statutory capital adequacy requirement.
       
CHANGE IN EMBEDDED VALUE OF COVERED BUSINESS for the year ended
31 December 2007
    2007 2006  
      Value of   Adjusted    
R million Note   Total   in-force   net worth   Total  
           
Embedded value of covered business at the beginning of the year   27 403   12 263   15 140   26 880  
   Value of new business (1) 2   565   1 494   (929)  434  
   Net earnings from existing covered
   business		   2 085   (384)  2 469   1 717  
      Expected return on value of in-force
      business		   1 493   1 493   –   1 256  
      Expected transfer of profit to adjusted
      net worth		   –   (2 096)  2 096   –  
      Operating experience variances 3   315   (30)  345   277  
      Operating assumption changes   277   249   28   184  
   Net project expenses 4   (77)  –   (77)  –  
           
Embedded value earnings from
life operations		   2 573   1 110   1 463   2 151  
   Economic assumption changes 5   (128)  (136)  8   (5) 
   Tax changes 6   291   289   2   47  
   Investment variances   210   123   87   1 015  
   Exchange rate movements   (22)  (22)  –   119  
   Change in minority shareholders’
   interest		   (85)  (85)  –   (76) 
   EEV changes 8   272   272   –   –  
Growth from covered business 7   3 111   1 551   1 560   3 251  
   Investment return on adjusted net worth   1 589   –   1 589   2 973  
Embedded value earnings from
covered business		   4 700   1 551   3 149   6 224  
   Acquired value of in-force   –   9   (9)  –  
   Transfers to other Group operations   (205)  (101)  (104)  –  
   Net transfers to/from covered business   (3 466)  –   (3 466)  (5 701) 
Embedded value of covered business at
the end of the year		   28 432   13 722   14 710   27 403  

(1)  Value of new business in the above table is calculated on the closing assumptions before EEV changes.
           
Analysis of earnings from covered business          
   Sanlam Personal Finance   4 016   1 924   2 092   4 469  
   Sanlam Developing Markets   351   72   279   559  
   Sanlam Employee Benefits   333   (445)  778   1 196  
Embedded value earnings from
covered business		   4 700    1 551    3 149    6 224  
 
VALUE OF NEW BUSINESS (VNB)
for the year ended 31 December 2007
 
VALUE OF NEW BUSINESS as at 31 December 2007      
    2007 2006  
    After EEV   Before EEV    
R million Note   changes   changes   Published  
         
Value of new business (at point of sale):        
   Gross value of new business   657   618   472  
      Sanlam Personal Finance   376   343   276  
      Sanlam Developing Markets   233   229   149  
      Sanlam Employee Benefits   48   46   47  
         
   Cost of capital   (90)  (53)  (38) 
      Sanlam Personal Finance   (44)  (21)  (15) 
      Sanlam Developing Markets   (30)  (24)  (15) 
      Sanlam Employee Benefits   (16)  (8)  (8) 
         
   Value of new business   567   565   434  
      Sanlam Personal Finance   332   322   261  
      Sanlam Developing Markets   203   205   134  
      Sanlam Employee Benefits   32   38   39  
         
Value of new business attributable to:        
   Shareholders’ fund 2   493   489   379  
      Sanlam Personal Finance   329   318   259  
      Sanlam Developing Markets   132   133   81  
      Sanlam Employee Benefits   32   38   39  
         
   Minority shareholders’ interest   74   76   55  
      Sanlam Personal Finance   3   4   2  
      Sanlam Developing Markets   71   72   53  
      Sanlam Employee Benefits   -   -   -  
         
Value of new business   567   565   434  
         
Geographical analysis:        
   South Africa   426   420   346  
   Africa   125   130   84  
   Other international   16   15   4  
Value of new business   567   565   434  
         
Analysis of new business profitability:        
   Before minorities:        
    Present value of new business premiums   23 886   23 886   20 308  
      Sanlam Personal Finance   16 312   16 312   13 735  
      Sanlam Developing Markets   5 476   5 476   3 107  
      Sanlam Employee Benefits   2 098   2 098   3 466  
         
    New business margin   2,37%   2,37%   2,14%  
      Sanlam Personal Finance   2,04%   1,97%   1,90%  
      Sanlam Developing Markets   3,71%   3,74%   4,31%  
      Sanlam Employee Benefits   1,53%   1,81%   1,13%  
         
   After minorities:        
    Present value of new business premiums   21 886   21 886   19 426  
      Sanlam Personal Finance   16 200   16 200   13 663  
      Sanlam Developing Markets   3 588   3 588   2 297  
      Sanlam Employee Benefits   2 098   2 098   3 466  
         
    New business margin   2,25%   2,23%   1,95%  
      Sanlam Personal Finance   2,03%   1,96%   1,90%  
      Sanlam Developing Markets   3,68%   3,71%   3,53%  
      Sanlam Employee Benefits   1,53%   1,81%   1,13%  
         
 
NOTES TO THE EMBEDDED VALUE OF COVERED BUSINESS
for the year ended 31 December 2007
 
1. VALUE OF IN-FORCE SENSITIVITY ANALYSIS
    Gross     Net    
    value of     value of   Change 
    in-force  Cost of   in-force  from 
    business  capital  business  base value 
    R million  R million  R million  % 
           
  Base value 16 362  (2 640) 13 722   
           
  • Increase risk discount rate by 1,0% 15 341  (3 461) 11 880  (13)
  • Decrease risk discount rate by 1,0% 17 489  (1 857) 15 632  14 
  • Investment return (and inflation) decrease by
  1,0%, coupled with a 1,0% decrease in risk
  discount rates, and with bonus rates changing
  commensurately		 16 626  (2 577) 14 049  2 
  • Investment return (and inflation) decrease by
  1,0% and with bonus rates changing
  commensurately		 15 781  (3 322) 12 459  (9)
  • Non-commission maintenance expenses
  (excluding investment expenses) increase by 10%		 15 867  (2 619) 13 248  (3)
  • Discontinuance rates increase by 10% 15 980  (2 547) 13 433  (2)
  • Mortality and morbidity increase by 10% for
  assurances, coupled with a 10% decrease in
  mortality for annuities		 15 405  (2 615) 12 790  (7)
  • Equity assets fall by 10% 15 671  (2 536) 13 135  (4)
           
2. VALUE OF NEW BUSINESS SENSITIVITY
ANALYSIS		 Gross value    Net value  Change 
    of new  Cost of  of new   from 
    business  capital  business  base value 
    R million  R million  R million  % 
           
  Base value (after EEV changes) 579  (86) 493   
           
  • Increase risk discount rate by 1,0% 477  (89) 388  (21)
  • Decrease risk discount rate by 1,0% 675  (62) 613  24 
  • Investment return (and inflation) decrease by
  1,0%, coupled with a 1,0% decrease in risk
  discount rates, and with bonus rates changing
  commensurately		 588  (67) 521  6 
  • Investment return (and inflation) decrease by
  1,0% and with bonus rates changing
  commensurately		 499  (84) 415  (16)
  • Non-commission maintenance expenses
  (excluding investment expenses) increase by 10%		 523  (75) 448  (9)
  • Discontinuance rates increase by 10% 522  (71) 451  (9)
  • Mortality and morbidity increase by 10% for
  assurances, coupled with a 10% decrease in
  mortality for annuities		 440  (75) 365  (26)
           
3. OPERATING EXPERIENCE VARIANCES     2007  2006 
        R million  R million 
    Risk experience     254  280 
    Group stabilised business outflows     (20) (108)
    Working capital and other     81  105 
    Total operating experience variances     315 277
           
4. DEVELOPMENT EXPENSES        
  Development expenses relate to once-off expenditure on the Group’s distribution platform that has not been allowed for in the embedded value assumptions.
           
5. ECONOMIC ASSUMPTION CHANGES        
    Investment yields and inflation gap     (95)  (51) 
    Long-term asset mix assumptions     (33)  46 
    Total economic assumption changes     (128) (5)
           
6. TAX CHANGES     2007  2006 
        R million  R million 
    Changes in policyholders’ fund tax rate     141  117 
    Reduction in STC rate from 12,5% to 10,0%     150  – 
    STC modelling changes and other     –  (70)
    Total tax changes     291 47
           
7. RECONCILIATION OF GROWTH FROM COVERED BUSINESS        
  The profit from covered business reconciles as follows to net        
  result from financial services for the year :        
  Net result from financial services of covered business     1 731  1 465 
  Differences between profits recognised under        
  IFRS and the embedded value methodology     (2) 139 
     Investment return included in IFRS equity-
   accounted earnings		     (6) 8 
     Other     4  131 
  Less net project expenses     (77) – 
  Less STC projected on dividends from        
  covered business profits for the year     (92) (6)
  Growth from covered business: value of in-force     1 551  1 653 
  Growth from covered business     3 111 3 251
           
8.

ECONOMIC ASSUMPTIONS – BEFORE EEV CHANGES

    

% 

%
  Gross investment return, risk discount rate
and inflation 		       
  SANLAM LIFE:        
    Fixed-interest securities     8.3  7.9 
    Equities and offshore investments     10.3  9.9 
    Hedged equities