EXECUTIVE REVIEW

Overview
Performance review
Delivering on strategy
Looking ahead

Overview

We are pleased to be reporting on a financial year that saw the Group achieve significant growth for its shareholders.

Shareholders were rewarded with a return of 29% for the year ended 31 December 2007, which exceeded the performance of the JSE All Share Index by a margin of 10%. This return consists of a R4,45 increase in the Sanlam share price for the year and a 77 cents dividend per share.

Last year’s performance was not an isolated event - the Sanlam share price also outperformed its peer group as measured by the South African Life Assurance Index over the five year period ended 31 December 2007 by an average of 7% per annum. This bears testimony to the Group’s ability to adapt and perform in an environment where uncertainty prevails and challenges are the norm.

Sanlam remains on a growth trajectory. Supported by a loyal and sizeable existing policyholder and investor base, diversification into other financial services opportunities continues to gain momentum. The goal is to achieve a world-class South African financial services group that delivers wealth creation and protection for clients both in South Africa and beyond our borders across a variety of different financial services solutions. Therefore, each Sanlam share not only comes with the credentials of solid past performance, but also with a commitment from the Sanlam board and management to keep on delivering long-term value and growth.

Sanlam is well positioned to continue to maximise shareholder value. During 2007 the Group delivered improved performances in both new business margin and efficiency terms and enhanced its non-traditional distribution channels significantly within a very competitive operating environment. The effective management of the Group’s capital base remains a key component of our strategy to maximise shareholder value.

Performance review

The Group delivered a solid performance in 2007. A cause for celebration is the fact that we reached two important milestones during the 2007 financial year: new business volumes exceeded R100 billion for the first time and core earnings passed the R4 billion mark.

In 2007 we changed over from Embedded Value to Group Equity Value (GEV) as the preferred term for reporting on the aggregate value of the Group operations. Reporting on GEV is considered a more meaningful method of disclosing information for the combined Group given the transformation of Sanlam into a diversified financial services organisation. At the end of 2007, the GEV per share amounted to R23,50 compared to R20,47 at the end of the previous financial year. A return on GEV per share of 18,8% was achieved during the year, again well in excess of the Group’s target.

There has also been an improvement in consumer confidence in the life insurance industry since hitting an all time low around three years ago. A strong contributor to last year’s new business flows was our life business – life sales grew by 25%.  Combined with 32% growth in new investment business, the Group’s total new business volumes increased by 26% to reach R102 billion in 2007. The value of new life business of R567 million is 31% up on the comparable 2006 period with an increase in the average margin from 2,14% in 2006 to 2,37% in 2007.

Core earnings for the year amounted to R4 146 million, up by 23% on 2006. When analysing the sources of this earnings growth, it becomes apparent that our strong diversification focus in recent years is continuing to pay off. An increase of 16% in the net result from financial services contributed towards the earnings growth, together with an increase in net investment income of 47%. All the major businesses performed satisfactorily within the context of a challenging business environment and volatile debt and equity markets in the latter part for 2007. In addition, we have managed to contain costs within inflationary limits, with a marginal increase of 0,7% in the group administration cost ratio over 2006 substantially due to new ventures and an increase in capacity.

A relatively lower investment market performance in 2007, compared to the exceptional returns in 2006, largely contributed to a 22% decline in normalised headline earnings. Diluted headline earnings per share, including the IFRS impact of Sanlam shares held by the policyholders’ funds, are 28% lower than in 2006.

Delivering on strategy

Our strategy continues to centre around five pillars: capital efficiency, earnings, costs and efficiencies, transformation and diversification. However, two of these pillars attracted additional focus last year for strategic reasons, namely transformation with regard to people and diversification. Only five years ago more than three quarters of all inflows were generated by our life insurance business. Last year only about a quarter of our inflows came from the life side - a direct result of our successful diversification strategy.

Over the past two years most of our growth has emanated from new efforts such as:

• Focusing on the Gauteng market where we were under-represented.
• Venturing into the South African entry-level market with African Life, Channel Life and Safrican.
• Our diversification into Africa where we now have some 1 500 intermediaries selling our solutions.
• Expansion into India where some 16 400 people represent us, and the UK market where we have more than 500 people on the ground. 
• Focusing on the institutional market where Sanlam Investment Management and Sanlam Capital Markets have grown their income base substantially by leveraging off the life platform.

We are also proud to boast the fastest growing private client business in the country. Sanlam Private Investments now boasts assets under management of more than R50 billion. Six years ago this operation was making a loss – in 2007 it generated pre-tax profits of more than R80 million.

One of the significant new initiatives launched last year is SanlamConnect, a revolutionary new distribution model that will help position Sanlam as a leader in our rapidly changing financial services industry. We also introduced Sanlam Liquid, our transactional banking initiative, with the aim of increasing the choice of solutions available to our clients as part of our client retention strategy. And towards the end of 2007, we became the first big South African financial services company to launch more affordable and flexible life and disability cover for people living with HIV, known as the Sanlam LifePower range.

Maximising Return on Group Equity Value through improved capital efficiency and earnings growth remains a central target of our strategy since this is the most relevant measure of value creation. In this regard, the Group has set a target of outperforming the 10-year bond yield plus 3% to 4% on a sustainable basis. This has been achieved in 2007, with a total return on GEV of 19,1%. All of the businesses contributed to the growth, with a particular strong performance from the investment in Santam.

In our ongoing focus on capital efficiency we succeeded in freeing up a further R3 billion of capital last year. This has increased the current level of our discretionary capital to just more than R6 billion. This we will invest in new projects that will spearhead the growth of this business well into the future or return it to shareholders. Much of our focus this year will be on pursuing and bedding down these initiatives.

R2,9 billion was utilised to buy back Sanlam shares in 2007. The aggregate amount of capital returned through share buy-backs since the start of 2005 now amounts to R9 billion (588,8 million shares or 21,3% of Sanlam’s issued share capital as at the beginning of 2005). Recent market weakness, in particular in respect of the Sanlam share price, created a further opportunity to add value through the buy back of Sanlam shares. The Sanlam Board is of the opinion that share buy-backs remain the most efficient way of returning capital to shareholders under these conditions and has therefore committed to a continuance of the Sanlam buy back programme.

Looking ahead

A number of significant challenges started to emerge onto the South African investment horizon towards the end of last year and at the beginning of 2008. Together with the intense volatility that started to plague international financial markets, the threat of continuing rising interest rates, increasing inflation, and Eskom’s power supply dilemma have started impacting on investor confidence as measured by the Sanlam Investment Management (SIM) Investor Confidence Index. Adding to the negative sentiment is the continued weakness in the US housing market and the potential of a US and European slowdown.

It is unlikely that Sanlam as a Group would not be impacted by the current challenges in the investment environment. But we are confident that our strong focus on diversification will make a difference and assist performance in what will be a challenging year.