UNDERSTANDING THE FOUR STRATEGIC PILLARS...we operate. It enhances the stability of our overall...

05OUR STRATEGIC VALUE CREATION

121INTEGRATED REPORT 2019

UNDERSTANDING THE FOUR STRATEGIC PILLARS

In this section we unpack the four strategic pillars in more detail. Find our Strategy at a glance on page 20 and read the Group Chief Executive’s report on page 51 for commentary on performance in terms of the four strategic pillars in 2019. Sanlam’s strategy has remained largely consistent since 2003, with minor refinements applied each year following a Board review.

Our purposeOur purpose is to build a world that supports

people in living their best possible lives through financial resilience and prosperity.

Our strategic intentOur strategic intent is to create sustainable

value for all stakeholders.

Vision statements per geographical region

Our strategic pillars

Profitable top-line growth through a culture of client-centricity

Enhancing Sanlam’s resilience and earnings growth through diversification

Extracting value through innovation and improved efficiencies

Responsible capital allocation and management

TransformationContinuous transformation is central to Sanlam’s ability to adapt

to a changing world and underpins all of the strategic pillars.

Our purpose statement explains why we exist

Sanlam’s strategy is not unique. Our ability to consistently execute on the strategy in a sustainable manner has proven to be a key differentiator. It has been a driver of success in the past and forms the foundation for Sanlam’s sustainable performance over the long term. We continue to consistently outperform our RoGEV hurdle rate over the long term. Read more about RoGEV and our performance against our RoGEV target on page 28.

Our strategic intent defines the desired outcome of our strategy

Our vision statements direct what we want to achieve

The four pillars focus on strategic execution, with RoGEV serving as the overall measure of success

Execution relies on Sanlam’s ability to continuously transform and ensure that we remain relevant in a changing world. We define transformation broadly to include: economic transformation to reduce wealth inequality; transforming employees to reflect the demographic profile of our client base and societies where we operate; and transforming distribution channels and operations in line with technological and regulatory developments. Most importantly, we believe in transformation that is in line with the changing needs and preferences of clients.

122 SANLAM


Top-line growth is a key focus area as fund flows, fee income and investment returns remain under pressure due to a persistently challenging operating environment.

Since listing in 1998 Sanlam has differentiated itself from many global peers by emphasising new business profitability over increased market share at any cost. When competitors priced too aggressively, for example, we would rather forego short-term market share than add unprofitable business to our base. This aligns with Sanlam’s capital management approach to set minimum hurdle rates for the clusters and link these to remuneration. This ensures that clusters manage the internal rate of return of new business in the same way as they would any capital deployment decision. Sanlam’s new business margin has therefore improved from being one of the lowest in the market 16 years ago to the higher end of our peer group.

This strategic pillar is one of the main contributors to shared value creation for Sanlam stakeholders:

• Shareholders benefit from Sanlam’s enhanced profitability.

• Advisers and other distribution partners benefit from upfront and recurring commission and advice fees earned from new business written.

• Employees benefit from additional employment and career opportunities that are created as the size of Sanlam’s business grows.

• Clients benefit from wealth creation, management and protection that supports their long-term financial resilience and prosperity.

• Societies in which we operate benefit from a more profitable and successful Sanlam that is better able to contribute to resilience and prosperity.

Key strategic risks associated with this pillar:

• Poor economic growth

• Political and social instability

• Disruptive threats/Fourth Industrial Revolution

• Severe weather/climate change

• Transformation and diversity

New business volumes (R billion)

20192015 2016 2017 2018

205

225 221 223

249

Net value of new covered business (R million)

20192015 2016 2017 2018

1 360

1 605

1 8411 985

2 280

Net result from financial services (R million)

20192015 2016 2017 2018

7 2697 969

8 549 8 890

9 674

UNDERSTANDING THE FOUR STRATEGIC PILLARS (continued)


Pillar connections and dependencies

Enhancing resilience and earnings growth through diversification

Volatility in top-line growth is strategically managed through diversification.


Our ability to develop client-centric solutions depends on our ability to innovate.


We achieve top-line growth organically and by investing discretionary capital in new growth opportunities.

Client-centricity is at the core of our ability to grow top-line in a profitable manner. We meet our clients’ needs and expectations for wealth creation, management and protection through appropriately priced solutions. These are supported by a strong and trusted brand and exceptional service delivery. We are thus able to maintain and grow our market share of profitable new business while improving the retention of our existing client base.

Sanlam’s approach to client-centricity is driven by the following fairness outcomes:

Clients are confident that they are dealing with a Group where the fair treatment of clients is central

to our culture and values.

Products and services marketed and sold are designed to meet the needs of the identified client groups and

are targeted accordingly.

Clients are given clear information and are kept appropriately informed before, during and

after the time of contracting.

Where clients receive advice, the advice is suitable and takes account of their circumstances.

Clients are provided with products that perform as the Group has led them to expect, and the associated

service is both of an acceptable standard and what they have been led to expect.

Clients do not face unreasonable post-sale barriers to change a product, switch providers, submit a

claim or make a complaint.

The Sanlam Customer Interest committee is mandated by the Board to review and monitor that all client-related decisions adhere to these fairness outcomes. The committee tracks, for example, indicators relating to:

• Product design

• Information provided

• Advice

• Product performance

• Service

• Claims

• Complaints handling

• Product accessibility

Client persistency – covered business experience variances (R million)

-50

0

50

100

150

200

147

174

-11

67

-10020192015 2016 2017 2018

-22


124 SANLAM


Our objective is to enhance Sanlam’s international positioning and grow the relative importance and contribution of the international business to the Group, with a specific Pan-African focus.



Sanlam’s resilience depends on our ability to attract and retain clients through a client-centric culture.


Enhancing our resilience and earnings growth depends on our ability to innovate.


We ensure resilience and generate earnings growth through responsible capital allocation and management.

Diversification across geographies and lines of business enables us to manage the earnings and currency volatility that can emanate from the countries in which we operate. This provides more stability in overall earnings generation and dividend payment capability to our shareholders. Diversification through SEM is into higher-growth regions that enhance future earnings growth potential. This supports the main attraction of the Sanlam investment case: stable real dividend growth combined with accelerated future growth prospects.

Given our diversified business profile, the challenge for Sanlam is to maintain operational controls and governance oversight. The Sanlam Group Business Philosophy defines how the Group acts and behaves as “one firm”. It applies to all Sanlam clusters and subsidiaries and includes a summary of Sanlam’s culture, values and responsibilities, thereby encapsulating the way in which it does business and allocates resources.

Geographical diversification per cluster is depicted on pages 22 to 23.







Enhancing Sanlam’s resilience has a positive outcome for clients, shareholders and the communities where we operate. It enhances the stability of our overall solvency, enabling us to protect our clients against the potential negative financial consequences of unexpected events through a range of insurance solutions and investment options. Our continued ability to pay claims enhances resilience for clients and their communities.



Key long-term measurements of progress and execution

Net result from financial services (%)

South Africa Namibia Botswana Other African Operations India/Malaysia Other international

78

25

5

67

3

11

132

62

14

19

6 (1)

55

24

9

12<1

Group Equity Value (%)

77

2

8

7

60

2

19

10

6

46

15

14

10

15

42

30

12

8

8

Life insurance General insurance Investment management Credit and structuring Admin, health and other

South Africa Namibia Botswana Rest of Africa India/Malaysia Other international

5

5

4

3

3

3

20192015

20192015

20192015

20192015

Life insurance General insurance Investment management Credit and structuring Admin, health and other


126 SANLAM


To attract and retain clients, Sanlam provides innovative financial solutions that are testimony to the diversity of our people and their creative thinking.

To execute this pillar, we enhance and adapt financial solutions along the full extent of the wealth creation, management and protection value chain. We consider the full life cycle of our clients and the systems they rely on for their personal or business protection and prosperity.

To develop these solutions, we invest in our employees and value their diversity, particularly as this contributes to innovative thinking. We invest in their training and development and focus on upskilling employees where digital solutions reduce the need for human intervention. We focus on innovation across our products and services, distribution channels and back office processes to enhance Sanlam’s attractiveness in the market and to ensure efficiency across our business model.

Digital innovation is a key focus area. Our approach is threefold:

We are enhancing our omni-channel distribution approach by incorporating digital offerings and

technology-enabled product solutions.

We are implementing a Group-wide business intelligence platform to assist with product

development, underwriting, client service and cost efficiencies through big data and

enhanced data analytics.

We are enhancing operational efficiencies through robotics.



• Cyber-risk

• Human resource scarcity and stretched resources


Recent Sanlam digital and technology-based offerings include:

Focused, quick and effective financial planning: clients can use Sanlam’s Secure Services to view portfolios, statements and personal information online.

Agile, digitally enhanced ways of working: the Sanlam Now app enables intermediaries to complete a client’s application for death and disability cover in as little as 15 minutes. In addition, it is constantly improved according to the needs of the market and intermediaries.

Comfortable, convenient and cost-effective client communication: a WhatsApp channel that operates 24/7 offers digital services and interactive voice response.

Enhanced accounting and calculation capacity: the new SanPay system oversees all payments, contracting and expenses for intermediaries in SPF Distribution – handling 76 000 commission accounts per month and more than 50 billion accounting transactions per year.

Automated processes and lower costs of execution: robotics has been introduced in selected business areas to improve client and intermediary experiences, increase value and reduce costs





Understanding clients’ needs is at the core of value creation and innovation.


Improved efficiency is a driver of enhanced resilience and earnings growth. Diversification further relies on innovation in products, services and markets.

Responsible capital allocation and management By allocating capital to research and development initiatives, innovation can be tested and scaled.

Expense experience variances – covered business (R million)

Net value of new covered business margin (%)

Sanlam has a track record of delivering operational efficiencies. This is evident in our ability to largely maintain new business margins on a per-product level, despite cost and fee pressures, as well as negligible expense experience variances recognised in life insurance RoGEV over the past 10 years. Operational efficiencies are about cost management and creating the ability to more effectively service the changing needs of clients, from a product and engagement perspective. As such, it is a core mechanism to ensure client satisfaction and persistency, which enhances top-line growth.

We are optimising operating and cost efficiencies through:

• investments in distribution and administration systems and processes;

• automation;

• restructuring to enhance focus;

• system integration; and

• implementation of business intelligence and data analytics solutions.

2,62 2,67

20192018201720162015

2,692,94 2,98

30

-16

-9

43

20192018201720162015

83


128 SANLAM


We aim to enhance capital efficiency on an ongoing basis by ensuring appropriate levels of capital allocation to our businesses and redeploying discretionary capital for investment in future growth opportunities. This optimises RoGEV over the long term.

Our capital base is a primary safeguard to our clients and regulators that we will remain solvent and able to honour our value creation commitments. Sanlam must therefore proactively understand and manage the risks it is exposed to and manage the trade-off between the level of capital held by the Group and clients’ and regulators’ trust in our future solvency.

Our internal Group Estate committee reviews and oversees the management of Sanlam’s shareholder capital base in terms of specific strategies approved by the Board. By their nature, the life and general insurance operations require the largest levels of allocated capital.

To optimise RoGEV over the long term, we manage capital allocation at the efficient frontier by balancing:

The level of capital required to meet target solvency cover ratios over the long term

(the higher the target solvency cover ratios, the higher the amount of capital held)

The strategic asset allocation of the allocated capital (the more conservative the portfolio is invested, the lower the amount of capital held)

Expected net investment return to be earned on the allocated capital (the more conservative

the portfolio is invested, the lower the expected investment return will be)



• Simultaneous regulatory implementation

• Diversified growth initiatives

• Implementation of the Group’s Pan-African strategy



The Group is well capitalised and has solvency cover ratios in excess of the upper end of the target range. Read more about capital management in the Financial review.

Efficient capital management has contributed largely to Sanlam’s ability to deliver a cumulative RoGEV of 14,6% over the last 10 years.



Volatility in top-line growth is strategically managed through diversification.


Our ability to develop client-centric solutions depends on our ability to innovate.

Capital adequacy cover ratio – Sanlam Group

0

50

100

150

200

250

300

2017 2018 2019

Actual RoGEV

218% 215% 211%



We have a dual focus in how we allocate capital: ensuring stable dividend growth while providing appropriate investment for future growth.

Responsible use of discretionary capital

Our priority is to use available discretionary capital for investment opportunities that will enhance RoGEV and overall earnings growth. If discretionary capital cannot be used for investment in the foreseeable future, it is returned to shareholders through:

• Share buy-backs as a preference: We use GEV per share as an approximate ceiling for buy-backs – not as an indicator of the value of a Sanlam share, but because buying Sanlam shares at this level will be undisputedly value-accretive to shareholders.

• Special dividends if share buy-backs are not feasible: No share buy-backs or special dividends are currently under consideration.

What shareholders need to know about dividends

• Investment return on capital is not considered when determining dividend cash flows.

• Our dividend is thus not impacted by short-term volatility caused by the net investment return component of earnings.

• Potential volatility in net investment return is taken into account in setting our required capital levels. We can withstand severe investment market volatility and remain within our target solvency range.

Strong cash generation in mature markets support real dividend growth, allowing SEM to reinvest for growth

We are prudent: we only use free cash flow to fund dividends. Our dividend philosophy is embedded in our capital management approach – we therefore do not manage our capital and solvency through our dividend policy. We maintain a cash dividend cover ratio of between 1,0 and 1,2 times to manage smooth real dividend growth of 2% to 4% per annum over a three-year rolling period.

Sources of cash earnings

Net result from financial services

Cash earnings generated by operations available to

fund Sanlam dividend

Any excess dividend cover is added to the discretionary

capital portfolio

Allocated capital for SA life operations assumes that investment return will be free cash flow under normal conditions

Investment return on capital

Funding for increased capital requirements and to maintain

targeted solvency levels

Any excess investment return is added to the discretionary

capital portfolio

Investment return not allowed for in dividend

cash flows

Discretionary capital redeployed for structural growth or returned to shareholders

245

Dividend per share (cents)

2015 2016 2017 2018 2019

268290

312334


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