Navigating to Win : A Sustainable Strategy UBS Financial Services Conference 2008 Johan van Zyl Agenda “Navigating the down-cycle” � Challenging Operating Environment � A Sustainable Strategy � Results of Strategy � Outlook � Conclusion
1. Challenging Operating Environment “The down-cycle” Macro Picture � Economic down-cycle in SA: � Rising inflation (particularly food and fuel inflation) � Increasing interest rates � Economic growth under pressure � Compounded by concerns over global financial markets � Uncertainty and volatility in global financial markets � Continuation of credit crises � Culminating in liquidity issues in various developed-market financial “power- houses” (Lehman Brothers, AIG, Merrill Lynch, etc) � Recent escalation of political uncertainty in SA � Additional changes facing the SA life industry � New commission environment � Other regulatory changes (NSSS, empowerment targets)
Inflation and Higher Interest Rates � Generally, moderate inflation benefits recurring saving products: � Recurring investment charges are more palatable � Perceived “award” for saving is higher � However, impact of negative to zero real salary inflation is significant: � Disposable income under severe pressure � Particularly in the lower middle market (food and fuel inflation) � New savings-related recurring premiums under pressure � Lapse and surrender rates also under pressure � But higher interest rates introduces a number of benefits: � Increased demand for guaranteed products � Working capital profits increasing � Cash is king! Significant benefits in the money market space Collective Impact Deteriorating consumer disposable income Split of Average Monthly Household Income of SPF client 100% Net Discretionary 90% -45% Other expenses Financial products 80% Vehicle and other credit 70% Mortgage Fuel 60% Food 50% Tax 40% 30% 20% 10% 0% 1H07 1H08 Consumer under pressure � Inflation: >10% � Prime rate: +250bps since Jun 2007 � Fuel price: +38% in 12 months
2. Sustainable Strategy “Navigating” through the challenging environment Blueprint for Navigation Capital Operating Manage- Efficiencies ment Diversification Strategic acquisitions Long-term strategy positions Group to succeed through the cycle
a) Diversification Capital Operating Mange- Efficiencies ment Diversification Increasing diversification underpins resilience Strategic acquisitions Split of Group Net Operating Profit 10% 13% 5% 2% 11% 1H03 1H08 49% 20% R736m R1,385m 9% 65% 6% 4% 6% SPF SDM SUK SEB SIM SCM SNT ● Increased diversification of Group portfolio, plus more diversified revenue streams within each cluster ● Life insurance creates stability Retail Life Assurance Strategy Underpins the defensive qualities of the Group Retail – Defensive qualities (Increased diversification) � Different market segments impacted differently � Wider range of competitive offerings, as well as various non-correlated revenue streams (able to meet needs of clients through the cycle) � Wider offering including non-life financial solutions (across the entire value chain) � In the current environment - business lines are either impacted positively, negatively or are ambivalent
Single Premium Business � Given range of solutions, able to Discretionary Lump Sum Business Increased preference for Guaranteed Investments meet the needs of clients through the cycle � Discretionary business moving towards guaranteed products � Compulsory business less sensitive 2006/6 2006/12 2007/6 2007/12 2008/6 to the economic cycle: Equity Based Investment Guaranteed or money market � Sanlam has significant market share of retirement annuities All Lump Sum Business Continued growth in annuity business � Feeding our compulsory annuity business 2006/6 2006/12 2007/6 2007/12 2008/6 Discretionary Retirement savings Annuities Continuations Recurring Contribution Business � Main business lines include: � Discretionary savings business � Retirement provision � Protection business � Complex issues may distort the trends. Most significant: � Shift towards risk / protection business continuing (+20% in 1H08) � Retirement provision still recovering from adjudicator issues � Sanlam enjoys huge market share in escalating premiums � Direct consequence of market share in retirement provision � Remarkably resilient – provides a healthy buffer in terms of cash flow
Institutional Strategy Businesses are in a healthier position to face challenges Institutional – Diversified Businesses: � Stable top management team � Focussed smaller independent businesses with increased specialisation � Entrepreneurial culture proving to be a competitive edge � Outsourcing / partnering where no competitive edge � Growth in annuity income, particularly in debt-related business However, the state of the market will always have a large impact on performance and ability to transact Capital Operating Manage- Efficiencies ment Diversification b) Operational Efficiencies Strategic acquisitions Continuous group-wide focus on business and efficiency improvements: � Cost base � Quality of sales (persistency & retention) � Volumes and average premium sizes � New sales channels
Operational Efficiencies Costs SPF - Admin Costs (Rm) SPF - Maintenance Costs perPolicy 2002 2003 2004 2005 2006 2007 1H08 2005 2006 2007 2008E(june) Nominal Real terms Real-terms Nominal � Increased competition & inflationary pressures demand a stringent focus on costs � Overriding focus on maintaining the increase in the unit cost per policy below inflation Operational Efficiencies Cost Ratios Admin Cost Ratio 55% 50% 45% 40% 35% 30% 25% 2001 2002 2003 2004 2005 2006 2007 1H08 Group admin cost ratio SPF admin cost ratio
Operational Efficiencies Progress: Cost Efficiencies � Budgeted salary inflation estimate 10% for 2008 � Given sharp up-tick in inflation, Sanlam needs to continue to focus on initiatives to lower overall cost burden � Introducing Programme Helix: (Synergies between Sanlam / Santam) � To date: Merger of Sanlam and Santam’s call centres in Bellville � Further countrywide consolidation of Santam/Sanlam offices � Procurement: Strategic sourcing aimed at consolidation Group’s supply base and third-party spend � SDM : 10-20% cost efficiencies following migration to new IT system Operational Efficiencies Quality of sales Persistency: � Focus on longer term improvement, but slight deterioration yoy at SPF SPF Sanlam Sky No. of lapses & surrenders as % of in-force No. of lapses & surrenders as % of in-force 4.50% 7.50% 7.00% 4.00% 6.50% 6.00% 3.50% 5.50% 5.00% 3.00% 4.50% 4.00% 2.50% 3.50% 2.00% 3.00% 2003 2004 2005 2006 2007 2008 2006 2007 2008 H1 H2 H1 H2
Operational Efficiencies Average premium size Growth in average premiums (rebased: Index = 100) 200 180 160 140 120 100 80 2002 2003 2004 2005 2006 2007 2008E(june) Topaz - Ave Recurring premium Topaz - Ave Single premium Glacier - Ave Single premium Inflation (CPIX) ● Concerted effort to increase average premium size ● Improving revenues, while large component of costs are fixed ● Resulting in improvements in profits and VNB c) Strategic Ventures Capital Operating Manage- Efficiencies ment Diversification Provide new growth opportunities Strategic acquisitions Lower Income Market (Including other emerging markets – Rest of Africa & India) Strong Strong cashflow cashflow generator generator SPF Institutional Businesses International (Retail middle (Asset management, capital income (Developed markets) market & EB Solutions) market) Increase share of Increase share of Wallet Wallet Retail Mass Affluent
Sanlam Group Transactions 2000 – 2008 P&C venture with Shriram Formation of Sanlam UK 2008 Asset/wealth Establishment of MiWay Acquisition of Principal / management venture with Buckles SMC 2007 Health Administration Blue Ink Sanlam Liquid 2006 Nuclues : UK Inv Mgmnt. SMMI: Merger Coris Capital admin African Life SA & Africa 2005 Intrinsic : UK distribution 26% JV with Shriram Acquire 50% stake in Channel 2004 55% interest in Safrican Sanlam Home Loans (ABSA) SIM Global established 2003 Acquisition of Innofin SMMI established minorities MIA acquired 2002 Merrill Lynch Private Clients Octane acquired acquired 2001 Direct Axis 70% JV : Personal PSigma Group acquired Loans (Punter Southall incl) ABN Amro Private Clients 2000 SIM Namibia launched Gensec minorities acquired Innofin est., JV with Macquarie Low-income market Retail mass-affluent & Institutional International (UK, (and International) Increase penetration of Europe and Namibia) SPF Sound Platform Created Strategic base from which to grow 1H08 results: � Lower Income Market � New business flows: Aflife SA +65%, RoA +42% & India +89% � Established Shriram General Insurance JV � Recently established asset / wealth management JV with SMC � Retail Affluent Market � New business flows: Glacier flows +39% � International � Sanlam UK: Consolidation of UK activities � New business flows: MIA +43%
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