Agenda Navigating the down-cycle Challenging Operating Environment - - PDF document

SLIDE 1

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

SLIDE 2

• 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)

SLIDE 3

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

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1H07 1H08 Net Discretionary Other expenses Financial products Vehicle and other credit Mortgage Fuel Food Tax

• 45%

Consumer under pressure

Inflation: >10% Prime rate: +250bps since Jun 2007 Fuel price: +38% in 12 months

SLIDE 4

• 2. Sustainable Strategy

“Navigating” through the challenging environment

Blueprint for Navigation

Long-term strategy positions Group to succeed through the cycle

Strategic acquisitions Capital Manage- ment Diversification Operating Efficiencies

SLIDE 5

a) Diversification

Increasing diversification underpins resilience Split of Group Net Operating Profit

• Increased diversification of Group portfolio, plus more diversified revenue

streams within each cluster

• Life insurance creates stability

49% 6% 4% 6% 20% 2% 13% 9% 11% 5% 10% 65%

SPF SDM SUK SEB SIM SCM SNT

1H03 R736m 1H08 R1,385m

Strategic acquisitions Capital Mange- ment Diversification Operating Efficiencies

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

SLIDE 6

Single Premium Business

Given range of solutions, able to

meet the needs of clients through the cycle

Discretionary business moving

towards guaranteed products

Compulsory business less sensitive

to the economic cycle:

Sanlam has significant market

share of retirement annuities

Feeding our compulsory

annuity business

Discretionary Lump Sum Business Increased preference for Guaranteed Investments All Lump Sum Business Continued growth in annuity business

2006/6 2006/12 2007/6 2007/12 2008/6 Equity Based Investment Guaranteed or money market 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

SLIDE 7

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

b) Operational Efficiencies

Continuous group-wide focus on business and efficiency improvements:

Cost base Quality of sales (persistency & retention) Volumes and average premium sizes New sales channels

Strategic acquisitions Diversification Capital Manage- ment Operating Efficiencies

SLIDE 8

Operational Efficiencies

Costs

SPF - Admin Costs (Rm)

Increased competition & inflationary pressures demand a stringent focus on

costs

Overriding focus on maintaining the increase in the unit cost per policy

below inflation SPF - Maintenance Costs perPolicy

2005 2006 2007 2008E(june) Real-terms Nominal 2002 2003 2004 2005 2006 2007 1H08 Nominal Real terms

Admin Cost Ratio

Operational Efficiencies

Cost Ratios

25% 30% 35% 40% 45% 50% 55% 2001 2002 2003 2004 2005 2006 2007 1H08

Group admin cost ratio SPF admin cost ratio

SLIDE 9

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

• No. of lapses & surrenders as % of in-force

Sanlam Sky

• No. of lapses & surrenders as % of in-force

2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 2003 2004 2005 2006 2007 2008 H1 H2 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 2006 2007 2008 H1 H2

SLIDE 10

Operational Efficiencies

Average premium size Growth in average premiums (rebased: Index = 100)

• Concerted effort to increase average premium size
• Improving revenues, while large component of costs are fixed
• Resulting in improvements in profits and VNB

80 100 120 140 160 180 200 2002 2003 2004 2005 2006 2007 2008E(june) Topaz - Ave Recurring premium Topaz - Ave Single premium Glacier - Ave Single premium Inflation (CPIX)

Retail Mass Affluent Lower Income Market

(Including other emerging markets – Rest of Africa & India)

Institutional Businesses

(Asset management, capital market & EB Solutions)

International

(Developed markets)

c) Strategic Ventures

Provide new growth opportunities

Strong Strong cashflow cashflow generator generator Increase share of Increase share of Wallet Wallet

SPF

(Retail middle income market)

Strategic acquisitions Diversification Capital Manage- ment Operating Efficiencies

SLIDE 11

2000 2001 2002 2003 2004 2005 2006 2007 Low-income market (and International) Retail mass-affluent & Increase penetration of SPF Institutional International (UK, Europe and Namibia)

Sanlam Group Transactions

2000 – 2008

SIM Namibia launched PSigma Group acquired (Punter Southall incl) Octane acquired SMMI established MIA acquired Intrinsic : UK distribution Nuclues : UK Inv Mgmnt. admin ABN Amro Private Clients Innofin est., JV with Macquarie Direct Axis 70% JV : Personal Loans Merrill Lynch Private Clients acquired SIM Global established Health Administration Sanlam Liquid SMMI: Merger Coris Capital Acquisition of Innofin minorities 55% interest in Safrican African Life SA & Africa 26% JV with Shriram Acquire 50% stake in Channel

2008

Formation of Sanlam UK Acquisition of Principal / Buckles Gensec minorities acquired Sanlam Home Loans (ABSA) Blue Ink P&C venture with Shriram Asset/wealth management venture with SMC Establishment of MiWay

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%

SLIDE 12

d) Capital Management

6.1 2.9 10.6 3.3 4.8 3.0 1.6 1.1 0.4 9.4 3.0 4 8 12 16 20 24 2005 & 2006 2007 1H08 Cumulative

Share buy-backs Acquisitions/ Strategic Partnerships Discretionary Capital 18.4 5.7 3.3

Over R18bn of capital earmarked for redeployment since 2005 Utilisation of Discretionary Capital (Rbn)

Strategic acquisitions Diversification Capital Manage- ment Operating Efficiencies

Discretionary Capital

Ongoing focus on efficient utilisation of capital in 2008 …

Application of remaining discretionary capital of R3bn:

Value-adding strategic initiatives (maximise return on GEV) Buy back of Sanlam shares continues to be an attractive option in periods

• f price weakness

Timeframe:

Strategic projects assessed on an ongoing basis

Further optimisation of capital remains a priority:

Reduce exposure to capital intensive products SEB restructuring away from capital intensive businesses Introduction of additional gearing on balance sheet

Capital management opportunities far from over…

SLIDE 13

• 3. Results of Strategy

Setting sail for North

Results of Retail Strategy – 1H08

Defensive qualities of life businesses shining through

Profitability:

Retail Cluster’s profits up 15% (before new business strain) Life-only profits up 21% (before new business strain)

Net life cash flows:

Retail net life cash inflows of R1.6bn in 1H08

VNB & new business margin:

Retail VNB up 18% to R276m Average retail margins of 2.45% for 1H08

Persistency:

Longer term improvement, but slight deterioration yoy at SPF

SLIDE 14

Results of Institutional Strategy – 1H08

Solid performance, notwithstanding turbulent market conditions

Profitability:

Sanlam Investment Management’s profits more volatile

(up 8% before gross performance fees)

Sanlam Employee Benefits profit up 73%

New business volumes:

Segregated fund flows +25%, Sanlam Private Investments +8% However, Sanlam Collective Investments -24% and

Multi-Manager -43%

Net business flows:

Net investment inflows of R3.1bn Sanlam Employee Benefits +53% to -R0.5bn

• 4. Outlook

SLIDE 15

• 45%

+?%

Improving Operating Environment

Marginal recovery in consumer disposable income

• Salary Inflation: +10%
• Prime rate: flat, to marginally lower
• Fuel price: recently moving lower

Split of Average Monthly Household Income of SPF Client

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1H07 1H08 ? Net Discretionary Other expenses Financial products Vehicle and other credit Mortgage Fuel Food Tax

Improving Operating Environment

Turbulent & volatile financial market conditions

ALSI +5% over 1H08, but -25%

since June

Out performance of resources vs

Findi’s has reversed since Jun

In 2H08, Financials up 9%, and

Resources down 44%

60 70 80 90 100 110 120 130 140

24-06-2007 05-08-2007 16-09-2007 28-10-2007 09-12-2007 20-01-2008 02-03-2008 13-04-2008 25-05-2008 06-07-2008 17-08-2008 28-09-2008

Alsi Resources Financials 10 100 15 150 20 200 25 250 30 300 35 350 40 400

2 4

• 6
• 2

7 2 2

• 7
• 2

7 1 9

• 8
• 2

7 1 6

• 9
• 2

7 1 4

• 1
• 2

7 1 1

• 1

1

• 2

7 9

• 1

2

• 2

7 6

• 1
• 2

8 3

• 2
• 2

8 2

• 3
• 2

8 3

• 3
• 2

8 2 7

• 4
• 2

8 2 5

• 5
• 2

8 2 2

• 6
• 2

8 2

• 7
• 2

8 1 7

• 8
• 2

8 1 4

• 9
• 2

8

7. 7.0 7. 7.5 8. 8.0 8. 8.5 9. 9.0 9. 9.5 10. 10.0 10. 10.5 11. 11.0

Eme r e rg i g in M Ma r a rk e t s k e t s J JP M Mo r

• rg a n

g a n EMBI I Spre a d e a d ( (lhs) SA SA Go Go vt 1 10-y

• yr

r bo bo nd (rhs) nd (rhs)

Divergence in Equity Markets Divergence in Equity Markets Credit & Bond Markets Credit & Bond Markets

10-year bond yield up 242bp in 1H08

(RDR up 240bp)

However, moved lower by 180bp

after June

Positive impacts on VNB & VIF

SLIDE 16

Global Financial Markets

SA relatively immune to global financial strife

Global “melt-down” in financial-related stocks

US government’s bail-out plans of $700bn to rescue financial system are

approved

Europe implementing guarantee plans for depositors Germany guarantees €568bn for private deposit accounts to prevent

panic withdrawals

However, SA relatively immune due to foreign exchange controls Sanlam has limited exposure to embattled foreign financial institutions

(ie. AIG, Merrill Lynch, HSBOS, etc)

More concerned about secondary impacts on SA’s financial market

• 5. Conclusion

SLIDE 17

Delivering on Strategy

Underpins future growth and return opportunities

Progress on strategic focus (maximising shareholder value):

Capital efficiencies (share buybacks of R1.6bn ytd) Growth & diversification (R1.3bn applied to grow & diversify Group in 2008) Cost efficiencies (IT savings, further integration opportunities between Sanlam and

Santam)

Created a sound platform from which to grow:

Diverse businesses, consisting of smaller building blocks Emphasis is placed on different businesses, depending on the market

conditions

SDM + Retail Affluent Market (strong new business flows) Established Shriram General Insurance JV, JV with SMC + Sanlam UK

Innovation continues:

MiWay, Liquid (rated best savings account), SPE (Launch of Agri-Vie Fund)

Sustainable Strategy

Final remarks

Strategy is robust and flexible Diversification provides scope to reallocate capacity where required

(depending on trends in customer demand and economic conditions)

New growth and innovation opportunities provide significant upside

potential

SLIDE 18

Thank You

Questions