SANLAM LIFE INSURANCE LIMITED (Registration no. 1998/021121/06) Annual Financial Statements

Transcription

1 (Registration no. 1998/021121/06) Annual Financial Statements 2003

2 1 REGISTRATION NO. 1998/021121/06 Company incorporated in South Africa Directors Non Executive VP Khanyile JP Möller (alternate)* GE Rudman (Chairman) J van Zyl* CE Maynard P de V Rademeyer* CG Swanepoel* JJM van Zyl *full time employees but not actively involved in an executive capacity in the operations of the company. Executive L Lambrechts (Chief executive officer) HC Werth (Chief Financial Officer) Company Secretary JP Bester Registered office Postal address 2 Strand Road PO Box 1 Bellville Sanlamhof Auditors Ernst & Young P.O. Box 504 SANLAMHOF 7532

3 2 CONTENTS Directors Responsibility for Financial Reporting Page 3 Certificate by Company Secretary Page 3 Report of the Statutory Actuary Page 4 Report of the Independent Auditors Page 5 Directors Report Page 6 Basis of Presentation and Accounting Policies Page 9 Income Statement Page 21 Balance Sheet Page 22 Statement of Changes in Equity Page 23 Cash Flow Statement Page 24 Notes to the Annual Financial Statements Page 25 Principal Subsidiaries Page 42

4 3 DIRECTOR S RESPONSIBILITY FOR FINANCIAL REPORTING The Board of Sanlam Life Insurance Limited accepts responsibility for the integrity, objectivity and reliability of the financial statements. Adequate accounting records have been maintained. The Board endorses the principle of transparency in financial reporting. The responsibility for the preparation and presentation of the financial statements has been delegated to management. The responsibility of the external auditors is to express an independent opinion on the fair presentation of the financial statements based on their audit of Sanlam Life Insurance Limited. The audit committee has confirmed that adequate internal financial control systems are being maintained. There were no material breakdowns in the functioning of the internal financial control systems during the year. The Board is satisfied that the financial statements fairly present in all material respects the financial position, the results of operations and cash flows in accordance with relevant accounting policies, based on South African Statements of Generally Accepted Accounting Practice. The Board is of the opinion that Sanlam Life Insurance Limited is financially sound and operates as a going concern. The financial statements have accordingly been prepared on this basis. The financial statements on pages 6 to 42 were approved by the Board and signed on their behalf by: GE Rudman Chairman L Lambrechts Chief Executive Officer 26 February 2004 CERTIFICATE BY COMPANY SECRETARY In my capacity as Company Secretary, I hereby certify, in terms of the Companies Act, that for the year ended 31 December 2003, the company has lodged with the Registrar of Companies all such returns as are required of a public company in terms of this Act, and that all such returns are, to the best of my knowledge and belief, true, correct and up to date. JP Bester Company Secretary 26 February 2004

5 4 REPORT OF THE STATUTORY ACTUARY FINANCIAL SOUNDNESS VALUATION I certify that: the valuation of Sanlam Life Insurance Limited as at 31 December 2003, the results of which are included in the annual financial statements set out on page 6 to 42, has been conducted and this report has been produced in accordance with the guidelines (Professional Guidance Notes 103, 104 and 110) of the Actuarial Society of South Africa ( ASSA ); in my view the financial statements fairly present the financial position of Sanlam Life Insurance Limited as at 31 December 2003; Sanlam Life Insurance Limited was financially sound at the valuation date and in my opinion is likely to remain financially sound for the foreseeable future; and the management actions assumed for the calculation of the capital adequacy requirements have been approved by the Board of Directors of Sanlam Life Insurance Limited and I expect that these actions would be taken if the corresponding risks were to materialise. CG Swanepoel FIA, FASSA Statutory Actuary 26 February 2004

6 5 REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF We have audited the annual financial statements of Sanlam Life Insurance Limited for the year ended 31 December 2003 as set out on pages 6 to 42. These annual financial statements are the responsibility of the directors of Sanlam Life Insurance Limited. It is our responsibility to express an opinion on these financial statements based on our audit. SCOPE We conducted our audit in accordance with statements of South African Auditing Standards. These standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatements. An audit includes: examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. AUDIT OPINION In our opinion, the annual financial statements of Sanlam Life Insurance Limited fairly present, in all material respects, the financial position of the company at 31 December 2003 and the results of its operations and cash flows for the year then ended in accordance with South African Statements of Generally Accepted Accounting Practice, and in the manner required by the Companies Act in South Africa. Ernst & Young Chartered Accountants (SA) Registered accountants and auditors Bellville 26 February 2004

7 6 DIRECTOR S REPORT FOR THE YEAR ENDED 31 DECEMBER 2003 NATURE OF BUSINESS Sanlam Life Insurance Limited conducts long-term insurance business in South Africa. CORPORATE GOVERNANCE The Board of Sanlam Life Insurance Limited subscribes to and is fully committed to complying with the Code of Corporate Practices and Conduct as set out in the King Committee Report on Corporate Governance ( the King Code ). The directors constantly pursue the implications of the King Code and are of the opinion that the company does substantially comply with the requirements of the King Code. In supporting the Code, the directors recognise the need to conduct the enterprise with integrity, transparency, accountability and in accordance with generally accepted corporate practices. COMPANY RESULTS Operating profit before tax increased from R1 381 million in 2002 to R1 391 million in 2003 and net income before tax increased from R1 783 million in 2002 to R2 361 million in Further details regarding the company s results are included in the financial statements on pages 21 to 42. During the course of the year a prudent valuation of the financial position of the Participating Annuity Portfolio in terms of prevailing actuarial guidelines, indicated the need to bolster the funding level of the portfolio by an additional R190 million (R153 million in 2002). In addition, it was decided to support the Monthly Bonus Fund with R100 million in view of this portfolio s relatively low funding level at the time. Full provision was made for this assistance against the investment return for the shareholder s fund. The possible repayment of the support will in both instances be determined by the future performance of its underlying assets and will be reviewed on a regular basis. INTERNATIONAL FINANCIAL REPORTING STANDARDS The migration to new International Financial Reporting Standards (IFRS) for insurers will last a number of years, as there is currently no such standard. The exposure draft on the first phase of the proposals for IFRS on insurance contracts was only recently issued. Future results may however be impacted, as the development of guidance for the long-term insurance industry, both from an accounting and actuarial perspective, is an ongoing process. SHARE CAPITAL There were no changes in the authorised and issued share capital of the company during the financial year. TRANSFER OF INVESTMENT MANAGEMENT BUSINESS The Board approved the acquisition of the investment management activities relating to the company s own assets from its wholly owned subsidiary, Sanlam Investment Management (Pty) Ltd with effect from 1 January 2003.

8 7 DIRECTORS REPORT FOR THE YEAR ENDED 31 DECEMBER 2003 (CONTINUED) DIVIDENDS A final dividend of R1 071 million was declared in respect of the 2003 financial year on 26 February The following dividends were declared in respect of the 2002 financial year: A special dividend of R3 596 million was declared on 28 November 2002 as part of the rationalisation of the Sanlam Limited group of companies. (Refer the Directors Report in the 2002 annual financial statements) The payment of a single cash dividend of R615 million was ratified on 29 May The payment of a final in-specie dividend of R435 million was ratified on 27 November The inspecie dividend consisted of the company s investment in Sanlam Collective Investments Limited and Innofin (Pty) Limited. SUBSIDIARIES Details of the company s principal subsidiaries are set out on page 42. DIRECTORS AND SECRETARY Particulars of the directors and secretary of the company are set out on page 1. The following appointments and resignations were made to the company s Board of Directors during the period under review: Ms CE Maynard and Mr VP Khanyile was appointed on 18 March Dr J van Zyl was appointed on 29 May Mr PC le Roux resigned on 31 May Mr JPL Alberts and Ms DNM Mokhobo resigned on 31 December Mr D Lessing resigned on 4 February Mr AP Zeeman resigned on 12 February 2004.

9 8 DIRECTORS REPORT FOR THE YEAR ENDED 31 DECEMBER 2003 (CONTINUED) DIRECTORS INTEREST IN CONTRACTS No material contracts involving directors interest were entered into in the current year. HOLDING COMPANY Sanlam Life Insurance Limited is a wholly-owned subsidiary of Sanlam Limited, a company incorporated in South Africa and listed on the Johannesburg Securities Exchange and the Namibia Stock Exchange. EMPLOYMENT EQUITY The required report in terms of section 21 of the Employment Equity Act has been submitted and a compliance certificate has been issued. BLACK ECONOMIC EMPOWERMENT TRANSACTION Sanlam Limited announced in December 2003 that it has reached an agreement in principle with the Ubuntu-Botho Investment Limited Consortium ( UB ), led by Mr Patrice Motsepe, in respect of an empowerment transaction that will result in UB acquiring an initial 10% equity holding in Sanlam Limited. The shareholders of Sanlam Limited will consider the transaction at a shareholders meeting on 25 March Sanlam Life Insurance Limited s proposed participation in this transaction is to sell the Sanlam Limited shares held by the shareholders portfolio to UB at the weighted 60 day traded average price up to the signing of a Memorandum of Understanding with Mr Motsepe on 21 October The investment in these Sanlam Limited shares have been reflected at this value in the financial statements. POST BALANCE SHEET EVENTS No material facts or circumstances have arisen between the dates of the balance sheet and this report which affect the financial position of Sanlam Life Insurance Limited as reflected in these financial statements. By order of the Board JP Bester Company Secretary 26 February 2004

10 9 BASIS OF PRESENTATION AND ACCOUNTING POLICIES BASIS OF PRESENTATION POLICYHOLDERS AND SHAREHOLDERS ACTIVITIES The assets, liabilities and activities of the policyholders and shareholders are managed separately and are governed by the valuation bases for policy liabilities and profit entitlement rules which are determined in accordance with prevailing legislation, generally accepted actuarial practice and the stipulations contained in the demutualisation proposal. The valuation bases in respect of policy liabilities and profit entitlement of shareholders are set out on pages 16 to 20. FUNDS RECEIVED FROM CLIENTS Funds received from clients consist of single and recurring long term insurance premium income. FINANCIAL SERVICES INCOME Financial services income for the shareholders consists of income earned from long term insurance activities and includes investment and administration fees, risk underwriting premiums, assets mismatch profits or losses and income earned on working capital. COMPARATIVES Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. ACCOUNTING POLICIES The Sanlam Life Insurance Limited financial statements are prepared applying the principal accounting policies below which are in accordance with and comply with South African Statements of Generally Accepted Accounting Practice, some of which apply specifically to the life insurance industry. The accounting policies applied in preparing the financial statements are consistent with those of the previous year, except for the changes related to the introduction of AC133 referred to below. CHANGE IN ACCOUNTING POLICY The adoption of AC133 (Financial Instruments: Recognition and Measurement) which became effective in the current financial year resulted in certain changes in the presentation of the financial statements of the company: The company has categorised its life policies between investment contracts, which fall within the scope of AC133, and insurance contracts.

11 10 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) An insurance contract is a contract under which the company accepts significant insurance risk by agreeing with the policyholder to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder or other beneficiary. Insurance contracts fall outside the scope of AC133 and will continue to be valued on the current financial soundness valuation basis. Investment contracts are measured at fair value, as specified by AC133. Currently the financial soundness approach is considered to be an appropriate valuation method for investment contracts issued by long-term insurers. This is in accordance with interim solutions developed in conjunction with the South African Institute of Chartered Accountants, which are being implemented in order to limit significant temporary changes to the treatment of investment and insurance contracts within South Africa, while adhering to the principles of AC133. The liabilities under insurance and investment contracts are disclosed separately on the balance sheet. As detailed in the accounting policies below, the fair value basis of accounting was applied to the following financial assets and liabilities: financial assets and liabilities classified as available for sale, and derivative financial instruments Interest bearing assets and liabilities which are classified as held to maturity are valued on an amortised cost basis. All investments of the shareholders fund are classified as available-for-sale in terms of AC133 and the company elected to recognise unrealised investment surpluses directly in the investment reserve. Realised investment surpluses are recognised in the income statement, but do not form part of net income. In terms of the requirements of AC133, the presentation of prior year results were not restated. FINANCIAL INSTRUMENTS Financial instruments carried on the balance sheet include cash and bank balances, investments, receivables and trade creditors. These instruments are generally carried at their fair value which is determined on the bases set out below. INVESTMENTS Investments are classified as available-for-sale in terms of AC133 and are reflected at fair value, with the exception certain classes of interest bearing assets, which are held to maturity and consequently valued on an amortised cost basis. Fair values have been determined on the following bases:

12 11 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) The fair value of fixed property, which generates income, is determined by discounting expected future cash flows at appropriate market interest rates. Other fixed property is valued at cost less provision for impairment in value, where appropriate; Listed shares and units in unit trusts are valued at the stock exchange and repurchase prices respectively; The value of unlisted shares, including the investment in Sanlam Investment Management (Pty) Limited, is determined by the directors using appropriate valuation bases; Interest-bearing investments are valued by discounting expected future cash flows at appropriate market interest rates; Listed bonds are valued at the stock exchange prices; Listed derivative instruments are valued at the South African Futures Exchange price and the value of unlisted derivatives is determined by the directors using generally accepted valuation models; Loans of investment scrip to third parties are not treated as sales and purchases; and Unlisted subsidiaries, excluding Sanlam Investment Management (Pty) Limited, are valued at their net asset value, which is determined after the fair value of each subsidiary s underlying assets has been determined on the bases set out above. OWNER-OCCUPIED PROPERTY Owner occupied property is property held for use in the supply of services or for administration purposes. These properties are valued at carrying amount less provisions for impairment in value, where appropriate. Depreciation is provided against the gross carrying amount of the properties, taking into account the residual value and estimated useful life of the property. DERIVATIVE INSTRUMENTS Derivative instruments are held for hedging purposes as part of the company s risk management strategy against assets, liabilities, positions or cash flows measured at fair value as well as structures incorporated in the product design for policyholder products. Derivative financial instruments used for hedging purposes by the shareholders funds are marked to market and any gains or losses are recognised in the income statement as net investment surpluses. Gains and losses on derivative financial instruments incorporated in policyholder products are included in the policyholders liabilities.

13 12 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) ASSOCIATED COMPANIES An associated company is a company, not being a subsidiary, in which Sanlam Life Insurance Limited has a long term investment and over which it has the ability, because of the extent of its investment, to exercise significant influence. The holdings in associated companies by Sanlam Life Insurance Limited are treated as equity investments and are not equity accounted for in its financial statements. GOODWILL Goodwill may arise on the acquisition or change in the holding ( adjustment ) in a subsidiary company or business. It represents the excess of the cost of an acquisition or adjustment over the fair value of the company s share of the net assets of the subsidiary or business at the date of acquisition or adjustment. Goodwill is written off on a straight-line basis over the lesser of its estimated useful life or twenty years. The carrying amount of goodwill is reviewed annually and written down for impairment where this is considered necessary. INTANGIBLE ASSETS No value is attributed to internally developed trademarks or similar rights and other intangible assets (excluding goodwill). Costs incurred on these items, whether purchased or created by the company, are charged to the income statement in the period in which they are incurred. PROVISIONS Provisions are recognised when the company has a present, legal or constructive, obligation as a result of past events and it is possible that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. FIXED ASSETS Fixed assets are reflected at their depreciated cost prices. Depreciation is provided for on a straight-line basis, taking into account the residual value and estimated useful lives of the assets, which may vary from three to ten years. LEASES Leases of assets, under which the lessor effectively retains all the risks and benefits of ownership, are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated, any payment required by the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

14 13 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) INVESTMENT INCOME Interest and rental income are accounted for on the accrual basis. Rental income, including rentals in respect of space occupied in buildings owned by policyholders funds, is reflected net of property expenditure. Dividend income is recognised once the last day for registration has passed. Capitalisation shares received in terms of a capitilisation issue from reserves, other than share premium or a reduction in share capital, are treated as dividend income. Dividend income from subsidiaries is recognised when the dividends are declared by the subsidiary. Investment income earned on working capital is included in operating profit. INVESTMENT SURPLUSES Investment surpluses consist of net realised surpluses and deficits on the sale of investments and net unrealised surpluses and deficits on the valuation of investments to fair value. These surpluses are recognised in the income statement or taken directly to the investment reserve, based on the classification of shareholder investments, or recognised in policy liabilities on the date of sale or on the valuation to fair value date. INVESTMENT RESERVE Net unrealised investment surpluses arising on the valuation to fair value of investments held by the shareholders funds as available-for-sale, are transferred directly to the investment reserve. Realised and unrealised investment surpluses attributable to policyholders are included in policyholders liabilities. PREMIUM INCOME The full annual premiums on individual insurance policies that are receivable in terms of the policy contracts are accounted for on policy anniversary dates, notwithstanding that premiums are payable in instalments. The monthly premiums in respect of certain new products are in terms of their policy contracts accounted for when due. Group life insurance premiums are accounted for when receivable. Where premiums are not determined in advance they are accounted for on receipt. Gross premium income is reduced by reinsurance premiums applicable to the same period.

15 14 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) POLICY BENEFITS Policy claims received up to the last day of each financial period and claims incurred but not reported (IBNR) are provided for and included in policy benefits. Past claims experience is used as the basis for determining the extent of the IBNR claims. Underwriting policy benefits in respect of long term insurance business include the change in the corresponding actuarial liabilities. Policy benefits are reflected net of amounts recoverable from reinsurers. SALES REMUNERATION Sales remuneration consists of commission payable to non-salaried sales staff on long term insurance business and expenses directly related thereto and bonuses payable to sales staff. Commission is accounted for on all in-force policies in the financial period during which it is incurred. ADMINISTRATION COSTS Administration costs include, inter alia, indirect taxes such as revenue stamps payable on insurance policy contracts and VAT, rental of space occupied in own buildings which are mainly held as property investments of the policyholders, property and administration expenses relating to owner-occupied property, investment expenses related to the management of the policyholders investments, product development and training costs. Internal systems development costs and purchased system costs are included in administration expenses when incurred. DEFERRED INCOME TAX Deferred income tax is provided at current tax rates for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Deferred tax assets relating to unused tax losses are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. Deferred capital gains tax relating to the assets underlying the policyholders funds is included in policy liabilities. Deferred tax balances are reflected at current values and have not been discounted. FOREIGN CURRENCIES Assets and liabilities in foreign currencies are converted to South African Rand at exchange rates ruling at the financial period end. Differences arising from this translation are included in unrealised investment surpluses as substantially all foreign assets and liabilities are in respect of investments. Foreign currency income statement items are translated at the weighted average exchange rates for the period.

16 15 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) RETIREMENT BENEFITS Retirement benefits for employees are provided by a number of defined benefit and defined contribution pension and provident funds. The assets of these funds, including those relating to any actuarial surpluses, are held separately from those of the company. The retirement plans are funded by payments from employees and the company, taking into account the recommendations of the retirement fund valuator. The company s contributions to the defined contribution and defined benefit funds are charged to the income statement in the year in which they are incurred. A valuation in accordance with AC116 is performed on the balance sheet date. For the purpose of calculating pensions, medical contributions are deemed to be a part of pensionable salary. Retirement fund contributions are made on the pensionable salary. Therefore pensioners fund post-retirement medical contributions themselves from their increased pensions. The company has provided in full for its medical contribution commitments in respect of pensioners and disabled members who are not covered under the current scheme. Defined benefit plans The schemes are valued using the valuation basis for past service. Any deficits advised by the actuaries are funded either immediately or through increased contributions to ensure the ongoing soundness of schemes. Contributions are expensed during the year in which they are funded. The net surplus or deficit in the benefit obligation is the difference between the present value of the funded obligation and the fair value of plan assets. The company recognises the estimated liability using the projected unit credit method. The present value of the overfunded portion of these schemes is recognised as an asset to the extent that there are material benefits available in the form of refunds and reductions in contributions. Defined contribution plans Company contributions to the pension and provident funds are based on a percentage of the payroll and are charged against income when incurred. Post retirement medical aid benefits The present value of the post-retirement medical aid obligation is actuarially determined annually and any deficit or surplus is immediately recognised in the income statement. The company recognises the estimated liability using the projected unit credit method. The company has no significant exposure to any other post-retirement benefit obligation. MEDICAL AID BENEFITS The Company s contributions to medical funds are charged to the income statement in the year in which they are incurred. DIVIDENDS Dividends proposed or declared after the balance sheet date, but which relate to the current financial year, are not recognised at the balance sheet date.

17 16 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) POLICY LIABILITIES AND PROFIT ENTITLEMENT INTRODUCTION The valuation bases used to calculate the policy liabilities of all material lines of long term insurance business and the corresponding shareholder profit entitlement are set out below. Changes to the Long-term Insurance Act, 1998 and the Regulations to the Act, the implementation of AC133 and additional actuarial guidance regarding the valuation of investment return guarantees affected the valuation of assets and liabilities. The actuarial value of the policy liabilities is determined using the financial soundness valuation method, which is consistent with the valuation method prescribed in the Long-term Insurance Act and consistent with the valuation of assets at fair value. The underlying philosophy is to recognise profits prudently over the term of each contract consistent with the work done and risk borne. In the valuation of liabilities, provision is made for: The best estimate of future experience; The margins prescribed in the guidelines of the Actuarial Society of South Africa ( ASSA ); and Second-tier margins determined to release profits to shareholders consistent with policy design and company policy. The liabilities exceeded the minimum requirements in terms of the Long-term Insurance Act and actuarial guidance notes PGN 104 and PGN 110. As a result of the implementation of AC133, a distinction is made between investment contracts (which fall within the scope of AC133) and insurance contracts. A contract is classified as insurance where Sanlam accepts significant insurance risk by agreeing with the policyholder to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder or other beneficiary. Liabilities in respect of investment contracts are valued to be consistent with the valuation of assets. The financial soundness method is considered to be an appropriate valuation method for this purpose (refer Change in Accounting policy on page 9). Assets are valued at fair value as set out in the accounting policy for investments. The value of intangible assets included in the assets of the company are adjusted to fair value for valuation purposes.

18 17 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) APPLICATION OF VALUATION METHODOLOGY A number of changes were made to the valuation methodology and assumptions, inter alia in view of the new requirements noted above. The overall effect of these changes on the policy liabilities and earnings reported for 2003 was not material. BEST ESTIMATE OF FUTURE EXPERIENCE The best estimate of future experience is determined as follows: Future investment return assumptions are derived from market-related interest rates on fixed-interest securities. The asset composition of the various asset funds, investment management expenses, taxes at current tax rates and charges for investment guarantees are taken into account. Unit expenses are based on the 2003 experience of Sanlam Life Insurance Limited on a going-concern basis and escalated at estimated expense inflation rates per annum. Assumptions with regard to future mortality, disability and disability payment termination rates and surrender and lapse rates are consistent with the experience for the four and a half years up to 30 June Mortality and disability rates are adjusted to allow for expected deterioration in mortality rates as a result of Aids and for expected improvements in mortality rates in the case of annuity business. ASSET FUNDS Separate asset funds are maintained for each of the major lines of business. Bonus rates are declared for each class of participating business in relation to the funding level of each portfolio and the expected future net investment return on the assets of the particular investment portfolio. BONUS STABILISATION RESERVES The group and individual stabilised bonus portfolios are valued on a retrospective basis. If the fair value of the assets in such a portfolio is greater than the net premiums invested plus declared bonuses, a positive bonus stabilisation reserve is created which will be used to enhance future bonuses. Conversely, if assets are less than the net premiums invested plus declared bonuses, a negative bonus stabilisation reserve is created. A negative bonus stabilisation reserve will be limited to the amount that the Statutory Actuary expects will be recovered through the declaration of lower bonuses during the ensuing three years, if investment returns are in line with long-term assumptions. PROVISION FOR FUTURE BONUSES It was assumed for reversionary bonus business that the last declared bonus rates would be maintained over the lifetime of the policies, except that part of the non-vested bonuses, equal in total to 3% of liabilities, would be cancelled during the next two bonus declarations if investment conditions do not improve. For the remainder of the participating business the last declared bonus rates were assumed for the next three bonus declarations, except in the case of participating annuities where 1% per annum lower than the last declared bonus rates was assumed. Bonus rates equal to the assumed future investment returns less provision for expense recoveries thereafter were assumed after the next three bonus declarations.

19 18 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) REVERSIONARY BONUS BUSINESS The liability is set equal to the fair value of the underlying assets. This is equivalent to a best estimate prospective liability calculation using the bonus rates as set out in the previous paragraph, and allowing for the shareholders share of one-ninth of the cost of these bonuses. The present value of the shareholders entitlement is sufficient to cover the margins prescribed in the Longterm Insurance Act and the ASSA guidelines for the valuation of policy liabilities. The prescribed margins are thus not provided for in addition to the shareholders entitlement. INDIVIDUAL STABLE BONUS AND MARKET-RELATED BUSINESS For investment policies where the bonuses are stabilised or directly related to the return on the underlying investment portfolios, the liabilities are equated to the retrospectively accumulated fair value of the underlying assets less any unrecouped expenses. These retrospective liabilities are higher than the prospective liabilities calculated at the present value of expected future benefits and expenses less future premiums at the relevant discount rates. To the extent that the retrospective liabilities exceed the prospective liabilities, the basis contains secondtier margins. The valuation methodology results in the release of these margins to shareholders on a fees minus expenses basis consistent with the work done and risks borne over the lifetime of the policies. GROUP STABLE BONUS AND LINKED BUSINESS In the case of group linked business and group policies where bonuses are stabilised, the liabilities are equated to the fair value of the retrospectively accumulated underlying assets. To the extent that future fees exceed expenses, including allowance for the prescribed margins, the basis contains second-tier margins. These margins are released to shareholders consistent with the work done and risks borne over the lifetime of the policies. PARTICIPATING ANNUITIES The liabilities are equated to the fair value of the retrospectively accumulated underlying assets. This is equivalent to a best estimate prospective liability calculation allowing for future bonus rates as described above and expected future investment returns. Shareholder entitlements emerge on a fees minus expenses basis consistent with work done and risks borne over the lifetime of the annuities. The present value of the shareholders entitlement is sufficient to cover the prescribed margins for the valuation of policy liabilities. The prescribed margins are thus not provided for in addition to the shareholders entitlement. NON-PARTICIPATING ANNUITY BUSINESS Non-participating life and term annuity instalments and future expenses in respect of these instalments are discounted at market-related interest rates. All profits or losses accrue to the shareholders when incurred. GUARANTEED PLANS Guaranteed maturities and expected future expenses are discounted at market-related interest rates. All profits or losses accrue to the shareholders when incurred.

20 19 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) OTHER NON-PARTICIPATING BUSINESS Other non-participating business forms less than 6% of the total liabilities. The greater part of the other non-participating business liabilities is valued on a retrospective basis. The remainder is valued prospectively and contains second-tier margins via an explicit interest rate deduction of approximately 3% on average. For non-participating business other than life and term annuity business and guaranteed plans, an asset mismatch provision is maintained. The interest and asset profits arising from the non-participating portfolio are added to this provision. The asset mismatch provision accrues to shareholders at the rate of 1,33% monthly, based on the balance of the provision at the end of the previous quarter. The effect of holding this provision is to dampen the impact on earnings of short-term fluctuations in fair values of assets underlying these liabilities. The asset mismatch provision represents a second-tier margin. A negative asset mismatch provision will not be created, but such shortfall will accrue to shareholders in the year in which it occurs. HIV/AIDS A specific provision for HIV/Aids-related claims is maintained. A prospective calculation according to the relevant guidelines is performed for non-participating individual policies. The provision for other individual policies (80% of the total HIV/Aids provision for individual policies) is built up by increasing the opening provision by the HIV/Aids risk premiums and investment returns on the underlying assets. It is then reduced by claims attributed to HIV/Aids and further limited to a maximum of the prospective calculation without allowance for future increases in HIV/Aids risk premiums. This retrospectively builtup provision is higher than a prospective calculation done according to the relevant guidelines allowing for possible increases in future HIV/Aids risk premiums. This difference can be regarded as a second-tier margin. It is the intention of the company to re-rate premiums as experience develops. Premium rates for group business are reviewed more frequently. The HIV/Aids provision is based on the expected Aids claims in a year and the time that may elapse before premium rates and underwriting conditions can be suitably adjusted should actual experience be worse than expected. PROVISIONS FOR MINIMUM INVESTMENT RETURN GUARANTEES In addition to the liabilities described above, provision is made consistent with actuarial guidance note PGN 110 for the possible cost of minimum investment return guarantees provided by some participating and market-related policies. WORKING CAPITAL To the extent that the management of working capital gives rise to profits, no credit is taken for this in determining the policy liabilities. This could be viewed as a second-tier margin.

21 20 BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) CAPITAL ADEQUACY REQUIREMENTS The excess of assets over liabilities of life insurance operations should be sufficient to cover its capital adequacy requirements in terms of the Long-term Insurance Act, PGN 104 and PGN 110. The capital adequacy requirements provide a buffer against experience worse than that assumed in the financial soundness valuation. On the valuation date the ordinary capital adequacy requirements (OCAR) were used as they exceeded the termination capital adequacy requirements (TCAR). The largest element of the capital adequacy requirements relates to stabilised bonus business. Consistent with an assumed fall in the fair value of the assets (the resilience scenario), which is prescribed in the ASSA guidance notes, the calculation of the capital adequacy requirements takes into account a reduction in non-vesting bonuses and future bonus rates and for the capitalisation of some expected future profits (held as part of the liabilities as second-tier reserves). EMBEDDED VALUE A separate embedded value report for Sanlam Life Insurance Limited is not presented, as a consolidated embedded value report of the Sanlam Limited Group, which includes Sanlam Life Insurance Limited, is included in the Group s annual report.

22 21 INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER Note R million R million Funds received from clients Financial services income Sales remuneration (1 092) (1 145) Income after sales remuneration Underwriting policy benefits 3 (2 400) (2 173) Administration costs 4 (2 145) (1 957) Operating profit Investment income Net income before taxation Income tax on net income 6.2 (484) (473) Net income after taxation Net realised investment surpluses/(deficits) (1) 137 (3 318) Realised investment surpluses/(deficits) (3 503) Income tax on investment surpluses 6.2 (34) 185 Amortisation of goodwill 9 (98) - Earnings attributable to shareholders (2 008) (1) In accordance with AC133, which became effective during the current financial year, investments are classified as available for sale and the company elected to account for unrealised investment surpluses directly to the investment reserve. Previously both realised and unrealised investment surpluses were included in the income statement. In terms of the requirements of AC133, prior year results were not restated.

23 ASSETS 22 BALANCE SHEET AT 31 DECEMBER Note R million R million Non-current assets Fixed assets Owner-occupied properties Goodwill Investments Investment properties Equities Public sector stocks and loans Debentures, long term insurance policies and other loans Cash, deposits and similar securities Investment in subsidiaries Current assets Trade and other receivables Cash, deposits and similar securities Total assets EQUITY AND LIABILITIES Capital and reserves Share capital and premium Non-distributable reserves Investment reserve Retained income Shareholders funds Non-current liabilities Policy liabilities Insurance contracts Investment contracts Deferred tax Current liabilities Trade and other payables Provisions Taxation Total equity and liabilities

24 23 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003 R million Share capital & premium Nondistributable reserve Investment reserve (1) Retained income Total Balance at 1 January (2) Attributable earnings for the year (2 008) (2 008) Transfer to investment reserve - - (3 318) Extraordinary fair value adjustments (3) Dividends paid (4 496) (4 496) Balance at 1 January Attributable earnings for the year Transfer from investment reserve - - (541) Net unrealised investment surpluses Unrealised investment surpluses Tax on unrealised investment surpluses - - (266) - (266) Dividends paid (1 050) (1 050) Balance at 31 December (1) In accordance with AC133, which became effective during the current financial year, investments are classified as availablefor-sale and the company elected to account for unrealised investment surpluses directly to the investment reserve. Previously both realised and unrealised investment surpluses were transferred to the investment reserve. In terms of the requirements of AC133, prior year results were not restated and the realised investment surpluses included in the opening balance of the investment reserve, was transferred to retained income in the current year. (2) Represents the transfer from the Sanlam mutual capital fund on demutualisation. (3) The extraordinary net fair value adjustments arising from the rationalisation of the Sanlam Limited group of companies was not transferred to the investment reserve and was declared as a special dividend to Sanlam Limited. (Refer the Directors Report in the 2002 annual financial statements).

25 24 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER Note R million R million Cash flow from operating activities Cash flow from operations before working capital changes Interest received Interest paid (43) (21) Working capital changes Taxation 6.2 (413) (428) Cash flow from investment activities (874) Net investment disposals Interest received Dividends received Rental income received Movement in policy liabilities 22.8 (10 640) (11 873) Taxation 22.9 (105) (45) 1 Net cash flow before dividends paid Dividends paid (615) (4 496) Net decrease in cash and cash equivalents 10 (1) Cash, deposits and similar securities at beginning of year Cash, deposits and similar securities at end of year

26 25 NOTES TO THE ANNUAL FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER R million R million 1. FUNDS RECEIVED FROM CLIENTS Long term insurance premium income (refer note 13.2) Funds received from clients are disclosed net of reinsurance premiums FINANCIAL SERVICES INCOME Included in financial services income is: Interest received Interest paid (43) (21) UNDERWRITING POLICY BENEFITS Death, disability and cash bonuses Individual insurance Group business Total underwriting policy benefits ADMINISTRATION COSTS INCLUDE: 4.1 Directors remuneration Total remuneration paid by Sanlam Life Insurance Limited to its present, retired and previous directors: Director s fees 0,4 Other services 14,3 Basic remuneration 9,1 Company contributions 1,6 Other benefits 2,5 Bonus 1,1 Total directors remuneration 14,7 Executive directors 7,2 Non-executive directors 7,5 Total directors remuneration 14,7 4.2 Auditors remuneration Audit fees 10,7 6,8 Other services 1,2 1,0 Total auditors remuneration 11,9 7,8

27 26 NOTES TO THE ANNUAL FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2003 (CONTINUED) R million R million 4.3 Other disclosable items Depreciation 26,4 31,2 Operating leases 53,1 28,8 Consultancy fees 160,8 196,7 Technical, administrative and secretarial fees paid 20,6 9,6 Office staff costs 1 037,2 790,1 Office staff (number of people) GROSS INVESTMENT RETURN: SHAREHOLDERS Investment income Interest-bearing investments Equities Dividends received from wholly-owned subsidiaries Properties Realised investment surpluses included in income statement 171 (3 503) Investment return included in income statement (3 101) Unrealised investment surpluses recognised directly to investment reserve Gross investment return TAXATION: SHAREHOLDERS 6.1 Income Tax Income tax current year Normal income tax: RSA Capital gains tax Deferred income tax 266 (225) Capital gains tax Current year Prior year - (230) Income tax: shareholders

28 27 NOTES TO THE ANNUAL FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2003 (CONTINUED) 6.2 Analysis of income tax on earnings of shareholders R million R million Operating profit current year Investment income current year Income tax on net income Capital gains tax on investment surpluses (1) 34 (185) Current year Prior years - (230) Income tax charged to income statement Capital gains tax on unrealised investment surpluses (recognised directly to investment reserve) current year Income tax: shareholders (1) Refer footnote 1 to the income statement regarding the change in accounting treatment of realised and unrealised investment surpluses. Capital gains tax on investment surpluses was treated accordingly. 6.3 Reconciliation of tax rate on net income Standard rate of taxation 30,0% 30,0% Adjusted for: Non-taxable income (9,5)% (4,3)% Other - 0,8% Effective income tax rate on net income 20,5% 26,5% 6.4 Other taxes In addition to income tax, the following indirect taxes and levies were paid which are included in the appropriate items: included in administration costs included elsewhere in the income statement included in policyholders investment return Indirect taxes and levies include value-added tax, revenue stamps paid on insurance policy contracts and Statutory levies payable to the Regional Services Councils and the Financial Services Board. Tax of R163 million (2002: R141 million) was also paid on policyholders funds (note 13.5)

29 28 7. FIXED ASSETS NOTES TO THE ANNUAL FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2003 (CONTINUED) R million R million Computer equipment Cost Accumulated depreciation (129) (121) Furniture, equipment and vehicles Cost Accumulated depreciation (82) (72) Total fixed assets The reconciliation of the movement in the book value of fixed assets is not provided as it is not considered material in relation to the company s activities. 8. OWNER-OCCUPIED PROPERTIES Balance at beginning of year Transfer (to)/ from investment properties at fair value (6) 333 Balance at end of year No depreciation is provided on the owner occupied buildings as it is expected that the residual value is equal to or greater than the carrying value. 9. GOODWILL Additions during the year Amortisations (98) - Balance at end of year The estimated useful life of goodwill is eight years and it is amortised with effect from the acquisition date. The additions to goodwill during 2003 arose from the acquisition of part of the investment management business from Sanlam Investment Management (Pty) Limited. (refer the directors report) 10. INVESTMENTS 10.1 Equities Listed Unlisted Total equity investments A further segmental analysis of equities is not provided as it is not deemed to be meaningful in relation to the company s investments Interest bearing investments Total interest bearing investments of R million is analysed into the following categories of residual term to contractual maturity. <1 year 1-5 years > 5 years open-ended 35% 21% 42% 2%