BIHL AnnualReport 2007

Touching and changing lives

BOTSWANA INSURANCE HOLDINGS LIMITED ANNUAL REPORT 2007

Purpose of this report Botswana Insurance Holdings Limited’s reporting aims to provide a balanced, understandable, complete and easily comparable view of the business, performance and prospects over the course of a financial year. Alongside the interactions and communications expected of a listed company committed to accountability, the report provides a complete view of the Group’s business, strategy, performance against objectives, and prospects.

Touching and

Contents BOTSWANA INSURANCE HOLDINGS LIMITED (BIHL)

BIHL (Continued)

Timeline

02

Corporate Governance

46

Group Profile and structure

03

Corporate Social Investment

56

The life blood of our nation

04

Embedded Value Report

58

Group highlights

05

Financial highlights

06

Ten year review

08

Value added statement

12

Share analysis

13

Board of Directors

14

Chairman’s letter

16

Financial review

22

changing lives BOTSWANA LIFE INSURANCE LIMITED (BLIL) Botswana Life in brief and Key Data

30

Executive Management

31

Highlights

32

CEO’s Report

34

BOTSWANA INSURANCE FUND MANAGEMENT LIMITED (BIFM) BIFM in brief and Key Data

40

Executive Management

41

Highlights

42

CEO’s Report

43

02

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BIHL | Timelines

1975

1987

1993

2000

2005

April Legislation passed to establish a central bank with the framework to govern financial institutions that will fall under its supervision.

August Botswana Insurance Company formed as a 51% subsidiary of the Botswana Development Corporation.

The Insurance Industry Act of Botswana is promulgated, regulating all aspects of insurance in Botswana and requiring separate legal entities for the underwriting of long- and short-term insurance businesses.

November BIHL acquires control of IGI Botswana Holdings Limited, which is delisted and restructured into BIHL which continues to handle short-term and long-term insurance.

With the development of the group’s local information and actuarial systems. BIHL becomes the first company in Botswana to report on the embedded value performance. This brings the group in line with leading world accounting reporting.

Botswana Life invests in Funeral Services Group to extend service to policyholders and their families at the time when they most need assistance.

Bifm expands into Zambia.

The top management of BIHL and its subsidiaries is fully localised with Batswana.

BIHL’s majority shareholder, African life Assurance Company Limited, is acquired by Sanlam Limited.

Established in 1918, Sanlam is a leading financial services group in South Africa, listed on the JSE Limited in Johannesburg and on the Namibian Stock Exchange.

In compliance with global corporate governance best practice, Bifm sold its remaining 25% shareholding in Glenrand Botswana to Glenrand M.I.B.

1977 Botswana Insurance Company sells its first life policy.

1979 First Insurance Act of Botswana promulgated.

1981 Botswana Insurance Company starts development of the country’s first major residential estate, Tapologo, on behalf of its life and pension funds.

1991

1995

Exchange control liberalised, permitting diversification of investments offshore.

Botswana Insurance Company is restructured to separate its general insurance business and life insurance business. Botswana Insurance Holdings Limited (BIHL), which consists of Botswana Life Insurance Limited and Botswana General Insurance Limited, is the result.

August BIHL lists on the Botswana Stock Exchange Shares are floated at P0.22 and the issue is 273% over subscribed. Some 25% of the BIHL equity is held by the general public comprising some 1,500 Individual and corporate shareholders December BIHL shares rise to P0.32 - a 46.5% increase on the listing price.

African life acquires a major shareholding in BIHL from Southern Life and Botswana Development Corporation.

1997

2001

Group refocuses on the long-term life assurance, pension administration and asset management and sells the short-term subsidiary to St Paul, a US-based insurer.

African Life acquires St Paul’s interest in BIHL, raising its share of the company to 57,5%.

Botswana Life introduces extended family funeral benefits and the option of automatic premium and benefit increases to counter inflation.

Botswana Life launches Khumo 2016, which offers a savings benefit and the ability to select additional risk benefits as required. The product matures in 2016 to support the government’s plans to commemorate the country’s 50th anniversary.

1999 In conjunction with the Botswana Accountancy College, Botswana Life launches insurance courses at the college with the company’s initial funding of the project matched by government. Botswana Life also funds 15 of the first 25 students to register for the certificate course.

2006 BLIL launched three new products - Mmoloki, Motlhokomedi and a Mortgage Protector Plan.

2003

2007

Bifm unveils its new Corporate Identity and a definitive positioning statement, “Dynamic Wealth Management”.

BIHL Board approves establishment of community development trust to address its Corporate Social Investment obligations.

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00 03

Group Profile and Structure

Botswana Insurance Holdings Limited (BIHL) is one of the top companies listed on the Botswana Stock Exchange and has three wholly-owned subsidiaries, Botswana Life Insurance Limited (Botswana Life), Botswana Insurance Fund Management Limited (Bifm) and BLI Investments (Pty) Limited. The companies hold dominant positions in their respective market sectors with Botswana Life being the largest and oldest insurance company in Botswana. Sanlam Limited, one of the largest financial service groups in Africa, is the majority shareholder in the BIHL Group, while 47% of its equity is owned by Botswana citizens. The BIHL Group plays a key role in Botswana’s economy and, based on its high rate of growth, will continue to do so in future. The Group itself has total assets of P10.8 billion. In addition to its commercial business interests, the BIHL Group has established, funds and administers the BIHL Social Investment Trust which is devoted to promoting the self-sufficiency and sustainability of disadvantaged communities in Botswana.

Sanlam Limited Listed on the JSE Limited 53%

Publicly held on Botswana Stock Exchange 47%

Botswana Insurance Holdings Limited Listed on the BSE 100%

100%

100%

BLI Investments (Pty) Limited

Botswana Life Insurance Limited

Bifm Holdings Botswana Limited

27%

100%

72.5%

100%

Funeral Services Group

Botswana Life Properties (Pty) Limited

Botswana Insurance Fund Management Limited

Bifm Holdings and Financial Services Limited (Isle of Man) 70%

African Life Financial Services (Zambia) Limited

50%

100%

62.9%

51%

100%

Khumo (Pty) Limited

Photon Private Equity Management Company

KYS Investments (Pty) Ltd

Bifm Capital (Pty) Ltd

Motheo Apartments (Pty) Ltd

100%

100%

Bifm Capital Fund 1 (Pty) Ltd

Bifm Capital Fund 2 (Pty) Ltd

04

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The lifeblood of our Nation

As the oldest and largest insurance and investments company in Botswana, Botswana Insurance Holdings Limited (BIHL) is proud of its contribution to the wealth of the nation and the services it has rendered to its policyholders and clients over the past thirty-two years.

It can justifiably claim to be an integral element of the lifeblood of the Nation alongside the mining and non-mining, industrial, commercial and the agricultural sectors.

The Minister of Finance and Development Planning succinctly summarised the position of the insurance and pension in his 2008 budget speech: “The insurance industry reported at the end of December 2006... an asset increase of 32% since 2005. Meanwhile, the pension industry continued to show significant growth... reflecting an increase of 17.9% from December 2006. This growth was mainly driven by healthy investment returns earned on assets of pension funds. The Botswana Public Officers Pension Fund continues to be the largest fund with assets in excess of P26.6 billion... constituting about 78% of total pension funds.� (Quote from the budget speech) BIHL touches the daily lives of all men, women and children in one way or another. It assists in the creation of real wealth for our people, no matter what their age, gender, where they live or the level of their income. Everyone benefits from the wealth that life insurance and investment creates.

In the short term, policyholders may regard insurance as only providing for old age, or the means of educating children or saving for a specific event in their lives, such as purchasing a house. This is correct, but it also provides for much more than this in the longer term. To provide the funds required to generate the benefits policyholders and clients are entitled to, large investments are made by BIHL into large-scale, long-term projects that develop the nation’s infrastructure, improve the standard of living and stimulate the creation of further wealth in areas such as water supply, telecommunications, transport services, mining and agriculture, and the development of commercial and industrial properties.

These investments generate financial returns that accrue to policyholders and clients by way of benefits.

When new buildings appear on the skylines of our cities, or new factories are constructed to produce more products and to provide additional employment, they represent the contribution made by individual policyholders to the prosperity of Botswana. When the individual policies have served their purpose; when children have completed their education, or loved ones laid to rest, that investment can still be seen as a memorial on the skyline or in the dams and water pipelines that serve the nation and future generations.

BIHL REALLY DOES CONTRIBUTE TO THE LIFEBLOOD OF OUR NATION.

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00 05

Group Highlights

The highlights achieved by BIHL in 2007 attest to the Group’s strong overall results. ° Retained business The Group retained considerable proportions of its existing business with Bifm successfully tendering to retain its share of the Botswana Public Officers Pension Fund and being awarded a higher share than previously administered. ° Information technology (IT) Good progress was made with the development of the Integrated Insurance Management System which will take the Group’s Corporate Division into a new IT generation and facilitate greatly improved management systems, internal and external communication. ° Human resources (HR) HR was a major focus during 2007 with the Board updating its HR mandate. Emphasis is being placed on employee skills development and the commensurate revision of the performance management and recognition policy. ° Sale of minority stake On 31 March 2007, Bifm Holdings, a 100% subsidiary of BIHL which in turn held 100% of BIFM Botswana Limited sold 10% of BIFM Botswana to a local company called Kelsoft Pty Ltd. The shareholders in Kelsoft are citizens of Botswana and made up of the 2 executive directors of the BIHL group along with 2 non-executive directors of the BIHL group. These citizen directors are the members of the Business Retention Committee and are responsible for all business development and retention issues in the local market. Kelsoft was also given a further option to acquire an additional 2.5% of BIFM Botswana from BIFM Holdings which option period expired on 31 March 2008. The transaction formally empowered the key citizens within the group; whose efforts and counsel has helped the BIFM group enormously over the years. This therefore now ensures the sustainability of the BIFM business targets through the continued long-term commitment of its now empowered citizen shareholders.

BIFM Holdings, as an integral part of the same transaction, also sold 17.5% of BIFM Botswana to AFM Holdings, a holding company set up under the IFSC regulations and currently awaiting an IFSC licence. Once the licence is obtained, AFM Holdings will be the preferred vehicle through which Sanlam Investment Management Ltd is expected to expand in the region. 10% of AFM Holdings has been acquired by BIFM Botswana thereby ensuring their participation in the regional expansion as applicable for the benefit to then flow back into the BIHL group from such expansion. The setting up of AFM Holdings has also secured a much needed direct involvement of Sanlam Investments and its expertise into the operations of BIFM group specifically and also at the same time facilitating the participation of BIFM in the region.

Finally, as part of the same transaction, an option to acquire an additional 2.5% in Bifm has been given to Kelsoft or any other citizen or citizen-owned company if agreed upon by the three parties i.e. Bifm Holdings, AFM Holdings and Kelsoft out of the 17.5% acquired by AFM Holdings on or before 31 March 2010. This leaves scope for the group to invite other suitable shareholders into the company. If such an option is not exercised by that time, the 2.5% will resort back to BIFM Holdings Limited.

All of the above represents the ongoing commitment of the group to ensuring appropriate local participation at the appropriate levels for the ultimate benefit of all the stakeholders of the BIHL group. ° BIHL Trust that is tasked with CSI The Group’s ongoing commitment to corporate social investment in disadvantaged communities was formalised with the establishment of a BIHL Corporate Social Investment Trust during 2007. It will be funded by an annual grant amounting to 1% of post-tax profit. ° Future prospects The international economic uncertainty will remain a feature during 2008 compounded by escalating fossil fuel prices, electric energy shortfalls and indications of rising domestic inflation. Nonetheless, the Group anticipates another year of good operating results.

06

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Financial Highlights

Operating surplus increased 21% to P216.2m

Embedded value increased by 35% to P1.78 billion

Assets under management increased 20% to P15.1 billion

Value of new business increased by 32% to P84.4 million

Year to

December 2007

P million Group summary Premium income (net of reinsurance) 791 Value of new business 84 Operating surplus 216 Total surplus 554 Assets under management 15,115 Ordinary shareholders’ equity 1,317 Total assets 10,784 Embedded value 1,781 Productivity Operating expenses to premium income and asset management fees 16% Return on embedded value 49% Selling expenses to premium income 15% Shareholder investment returns to average shareholder equity 34% Solvency and liquidity Capital required (times) 5.40 Dividend cover on core earnings** (times) 1.85 Ordinary share performance Basic earnings thebe per share 205.81 Diluted earnings thebe per share 201.99 Dividend thebe per share 56.00 Embedded value thebe per share 634.00 Trading prices (thebe per share) closing price 1,690.00 high 1,825.00 low 850.00 Price: earnings ratio 9.00 Domestic Companies Index (DCI) 8,426.72 Number of shares in issue (‘000) 281,071 Number of shares traded 9,224 Market capitalisation (P million) 4,750 Number of shareowners 2,900 Earnings yield (%) 11.00 Dividend yield (%) 2.82 ** Core earnings include operating surplus and shareholder investment income, excluding investment surpluses.

Year to December 2006 P million

% change

679 64 179 316 12,462 849 9,262 1,324

16% 32% 21% 75% 20% 55% 16% 35%

15% 46% 11% 14% 7.50 1.97 119.16 117.77 42.00 480.00

73% 72% 33% 32%

850.00 850.00 350.00 7.13 6,195.45 275,684 6,995 2,343 2,290 14.02 4.20

99% 115% 143% 26% 36% 2% 32% 103% 27% -22% -33%

2 10.0

-

400

200

(100) -

DIVIDEND PER SHARE thebe

8 40.0

6 30.0

4 20.0

31 Dec 07

100

31 Dec 06

600

31 Dec 05

200

31 Mar 05

400

31 Mar 04

800

31 Mar 03

300

31 Mar 02

500

31 Dec 07

31 Dec 06

9 Mths to Dec 05

31 Mar 05

31 Mar 04

31 Mar 03

31 Mar 02

31 Mar 01

31 Mar 00

31 Mar 99

31 Dec 07

31 Dec 06

9 Mths to Dec 05

31 Mar 05

31 Mar 04

31 Mar 03

31 Mar 02

31 Mar 01

31 Mar 00

31 Mar 99

31 Dec 07

31 Dec 06

9 Mths to Dec 05

31 Mar 05

31 Mar 04

SURPLUS AFTER TAXATION P million

31 Mar 01

50.0

31 Dec 06

10

31 Dec 07

60.0

9 Mths to Dec 05

12

31 Mar 05

INVESTMENTS P billion

31 Mar 04

1,000

31 Mar 03

100

31 Mar 03

400

31 Mar 02

300

31 Mar 02

1,200

31 Mar 01

600

31 Mar 01

500

31 Mar 00

800

31 Mar 00

1,400

31 Mar 99

PREMIUM INCOME P million

31 Mar 99

31 Dec 07

31 Dec 06

9 Mths to Dec 05

31 Mar 05

31 Mar 04

31 Mar 03

31 Mar 02

31 Mar 01

31 Mar 00

900 600

-

31 Mar 99

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00 07

SHAREHOLDERS’ EQUITY P million

700

200

ASSETS UNDER MANAGEMENT P million

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

08

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Ten-year Review

Year to

Year to

9 months to

Year to

31-Dec-07

31-Dec-06

31-Dec-05

31-Mar-05

P’000

P’000

P’000

P’000

Group income statement Net insurance

791,281

678,984

450,647

527,492

— Recurring

447,885

371,751

255,517

297,406

— Single

343,396

307,233

195,130

230,086

through profit or loss and fee revenue

1,973,983

2,418,434

1,666,697

697,659

Total income

2,765,264

3,097,418

2,117,344

1,225,151

Pension and investment contribution Net gains from financial assets held at fair value

Selling expenses

(118,067 )

(73,241 )

(51,124 )

(67,837 )

Administrative expenses

(139,670 )

(117,363 )

(81,275 )

(77,364 )

Goodwill impaired and amortised

—

—

—

Net insurance claims and benefits

(343,149 )

(257,557 )

(149,194 )

(158,008 )

(1,038,206 )

(1,700,829 )

(1,299,982 )

(438,329 )

(526,488 )

(557,652 )

(328,113 )

(289,338 )

(2,165,580 )

(2,706,642 )

(1,909,688 )

(1,030,876 )

599,684

390,776

207,656

4,001

2,304

3,083

Change in liabilities under investment contracts Change in liabilities under insurance contracts

Surplus from operations Share of results of associates

—

194,275 (3,853 )

Surplus before tax

603,685

393,080

210,739

Tax

(49,867 )

(77,021 )

(38,150 )

(33,664 )

Surplus after tax

553,818

316,059

172,589

156,758

205.81

119.2

64.9

62.1

56.0

42.0

27.5

27.5

259,519

259,833

259,291

252,616

190,422

Earnings per share (thebe) — basic Gross dividends per share (thebe) Weighted average shares in issue (‘000)

B O T S WA N A I N S U R A N C E H O L D I N G S L I M I T E D A N N U A L R E P O R T 2 0 0 7

09

Year to

Year to

Year to

Year to

Year to

Year to

31-Mar-04

31-Mar-03

31-Mar-02

31-Mar-01

31-Mar-00

31-Mar-99

P’000

P’000

P’000

P’000

P’000

P’000

488,892

354,299

249,558

244,935

171,746

112,675

289,468

261,063

217,828

162,685

148,786

101,638

199,424

93,236

31,730

82,250

22,960

11,037

69,304

63,884

57,656 87,941

1,100,923

(484,819 )

292,371

146,372

268,115

1,589,815

(130,520 )

541,929

391,307

439,861

(54,015 )

(45,374 )

(39,504 )

(43,122 )

(28,301 )

(21,551 )

(71,733 )

(67,620 )

(59,437 )

(35,737 )

(28,518 )

(23,773 )

200,616

(3,705 )

(3,705 )

(2,482 )

—

(812 )

(812 )

(151,555 )

(81,947 )

(66,538 )

(107,088 )

(90,442 )

(59,744 )

(830,867 )

482,416

(358,943 )

(32,261)

(240,126 )

(200,778 )

(327,060 )

(125,421 )

(1,470,818 )

251,509

(408,087 )

(386,725 )

(475,133 )

(231,301 )

118,997

120,989

133,842

4,582

(35,272 )

(30,685 )

(1,537 )

2,427

9,709

8,544

4,552

117,460

123,416

143,551

13,126

(30,720 )

— (30,685 )

(13,620 )

(21,576 )

(54,266 )

(22,685 )

(44 )

(7,317 )

103,840

101,840

89,285

(9,559 )

(30,764 )

(38,002 )

38.3

37.0

52.6

22.7

132.4

23.5

20.0

15.0

10.0

40.0

82.2 24.0

269,369

267,257

275,684

261,481

24,844

23,920

00 10

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Ten-year Review (continued)

At

At

At

At

31-Dec-07

31-Dec-06

31-Dec-05

31-Mar-05

P’000

P’000

P’000

P’000

Property, plant and equipment

13,962

20,666

43,873

47,527

Intangible assets

16,337

14,649

15,610

16,632

10,661,753

9,112,637

6,767,586

5,390,907

91,807

81,042

98,568

86,096

10,783,859

9,228,994

6,925,637

5,541,162

1,317,057

849,136

644,588

506,506

55,006

21,172

17,723

13,051

Policyholder liabilities

9,129,979

8,140,007

6,114,114

4,882,945

— insurance contracts

2,683,973

2,157,459

1,599,913

1,287,454

— investment contracts

6,446,006

5,982,548

4,514,201

3,595,491

70,246

50,664

17,494

13,785

Trade and other payables

211,571

168,015

131,718

124,875

Total equity and liabilities

10,783,859

9,228,994

6,925,637

5,541,162

1,203,245

260,844

73,619

15,157

212,345

148,523

85,280

164,903

(134 )

(50,044 )

(10,850 )

1,415,457

359,323

148,049

158,222

39,710

(46,095 )

(48,438 )

(68,922 )

Group balance sheet

Investments Trade and other payables Total assets Ordinary shareholders’ equity Minority interest

Deferred tax

Group cash flow Cash generated from operating activities Interest received Tax paid Cash flow from operations Dividends (paid)/received

(21,838 )

Net cash retained

1,455,167

313,228

99,611

Net cash invested

(1,038,196 )

(1,267,948 )

319,082

416,971

(954,720 )

418,693

—

—

—

1,124

Net financing raised Increase in shareholder funding Net cash flow from financing activities Increase/(decrease) in cash and cash equivalents

89,300 (89,455 ) (155 )

—

—

—

1,124

416,971

(954,720 )

418,693

969

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11

At

At

At

At

At

At

31-Mar-04

31-Mar-03

31-Mar-02

31-Mar-01

31-Mar-00

31-Mar-99

P’000

P’000

P’000

P’000

P’000

P’000

16,497

18,091

17,296

7,582

7,903

7,375

16,121

18,649

22,020

24,648

11,137

11,849

6,007,611

4,423,241

2,970,647

1,727,043

1,491,613

1,114,366

214,203

189,301

158,881

99,138

70,738

64,469

6,254,432

4,649,282

3,168,844

1,858,411

1,581,391

1,198,059

549,852

483,167

450,864

171,001

107,530

73,468

17,207

7,396

7,441

5,642

314

—

5,567,539

3,989,152

2,497,034

1,564,096

1,386,281

1,059,221

1,020,160

661,002

628,741 1,868,293

4,547,379

3,328,150

7,434

305

1,152

—

—

—

112,400

169,262

212,353

117,672

87,266

65,370

6,254,432

4,649,282

3,168,844

1,858,411

1,581,391

1,198,059

611,092

2,270,601

1,279,560

223,882

157,553

126,148 18,850

57,550

60,932

19,419

33,456

25,639

(74,871 )

(54,750 )

(32,056 )

(7,124 )

(1,088 )

593,771

2,276,783

1,266,923

250,214

182,104

144,702

(60,650 )

(45,761 )

(12,766 )

(449 )

(27 )

(7)

(296 )

533,121

2,231,022

1,254,157

249,765

182,077

144,695

(534,013 )

(2,232,460 )

(1,254,937 )

(248,427 )

(183,498 )

(145,504 )

(892 )

(1,438 )

(780 )

1,338

(1,421 )

(809 )

1,489

—

2,585

2,543

1,983

1,489

—

2,585

2,543

1,983

597

(1,438 )

1,805

3,881

562

— — (809 )

12

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Value Added Statement

Year to 31 Year to 31

December 2007 December 2006

P’000 P’000 Value Added Income from operations 1,204,572 841,241 (254,079 ) (183,980 ) Operating expenditure (343,149 ) (257,557 ) Policyholder benefits paid

607,343 399,704 Value Distributed To employees Salaries, wages and other benefits 51,990 65,520 To ordinary shareholders Dividends 139,609 105,486 To minority shareholders 19,697 6,450 To Government Taxation 49,867 77,021 To expansion and growth Reinvested in the business for future growth 322,942 106,153 1,066 2,823 Amortisation 2,591 3,801 Depreciation 19,582 32,450 Deferred taxation

346,181 145,227

607,343 399,704

Summary Employees 9% 16% 23% 26% Shareholders 3% 3% Minority shareholders 8% 19% Government 57% 36% Retained for expansion and growth

100% 100% Value Added Distribution 2007

Value Added Distribution 2006

Employees

Employees

Shareholders

Shareholders

Minority shareholders

Minority shareholders

Government

Government

Retained for expansion and growth

Retained for expansion and growth

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Share Analysis - Ordinary Shareholders

Shareholders

Number of % of

holders holders Range of Shareholding

1 — 5,000 2,127 73 5,001 — 10,000 295 10 10,001 — 50,000 333 11 50,001 — 100,000 54 2 100,001 — 500,000 59 2 500,001 — 1,000,000 13 0 0VER 1,000,000 19 1

2,900 100 Top ten shareholders Sanlam Limited Stanbic Nominees Botswana (Pty) Ltd [Re: BIFM BPOPF] Barclays Bank of Botswana Limited Nominees [Re: IAM 030/14] Stanbic Nominees Botswana (Pty) Ltd [Re: BIFM] Botswana Motor Vehicle Accident Fund Barclays Bank of Botswana Limited Nominees [Re: FAM BPOPF] BIHL Employee Share Scheme Trust Barclays Bank of Botswana Limited Nominees [Re: SSB 001/1] Barclays Bank of Botswana Limited Nominees [Re: AG 211/002] Stanbic Nominees Botswana (Pty) Ltd [Re: AG 13001100] Other

Shareholders Category Number % Corporate bodies 106 3.75 Nominee companies 169 2.36 Trust accounts 4 0.13 Private individuals 2,621 93.76

2,900 100.00 Breakdown of Shareholders 2007

Breakdown of Shares held 2007

Corporate bodies

Corporate bodies

Nominee companies

Nominee companies

Trust accounts

Trust accounts

Private individuals

Private individuals

S hares held Shares held % of shares 2,136,838 2,117,130 7,315,166 3,579,959 11,256,983 9,669,293 244,995,283 281,070,652

1 1 3 1 4 3 87 100

149,519,224 53 17,252,732 6 12,571,370 4 12,447,490 4 10,735,164 4 10,259,135 4 5,076,615 2 4,949,768 2 3,849,992 1 3,185,251 1 51,223,911 18 281,070,652 100 S hares held Number % 165,410,288 60.27 91,354,959 32.46 5,457,788 0.54 18,847,617 6.73 281,070,652 100.00

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Board of Directors

1

2

3

4

5

6

7

8

9

10

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1. Maclean C. Letshwiti BA (UB); PMD (UCT) Chairperson: BIHL Independent Non-executive director Other Directorships: Avis (Pty) Ltd; Fedics Food Services (Pty) Limited; Micro Provident Botswana Ltd. Appointed Chairman on 25 November 2003.

2. Regina D. Sikalesele - Vaka LLB (UB) Joint MD BIHL; CEO Botswana Life Insurance Limited, Executive director.

Other Directorships: Trustee: FNBB Foundation, Member: University of Botswana Council. Member: BOCCIM. Appointed to the board on 1 July 2003.

3. Victor J. Senye BCom (Accounting) (UB); MSc (Management), (Arthur D Little School of Management, Boston, USA) Joint MD BIHL; CEO Bifm Limited Executive director.

Other Directorships: Healthcare Holdings Ltd, Healthcare Management Services, KYS Investments, Turnstar Holdings.

Appointed to the board on 1 January 2005.

4. John A. Burbidge FCA; CA (SA) Non-executive director Other Directorships: Micro Provident Botswana Limited, Funeral Services Group. Appointed to the board on 22 November 1995.

5. Margaret M. Dawes BSc (Hons) (University of London), ACA (UK); CA (SA); HDip Tax Law (Wits) Non-executive director Executive director: Finance - African Life Assurance Co Limited. Appointed to the board on 2 February 2005.

6. Happy N. Fidzani BA (Econ) (UB); Dip Population Studies (University of Ghana); MEcon (Williams College, USA); MPolitical Economy (Boston); PhD (Boston) Independent Non-executive director Executive Director: Botswana Institute for Development Policy Analysis (BIDPA) Other Directorships: International Financial Service Centre (IFSC) Board member: Botswana Meat Commission. Appointed to the board on 22 November 2004.

7. Sanjeev Gupta BCom Hons FCA (India); Non-executive director Managing director: Emerging Markets, SIM director: Other Directorships: Healthcare Holdings Ltd. KYS Investments Appointed to the board: 1 July 2003.

8. Keith R. Jefferis BSc (Economics) (University of Bristol); MSc (Economics) (University of London); PhD (Economics) (Open University UK) Independent Non-executive director Managing director: Consult (Pty) Ltd Member: Committee of Botswana Stock Exchange. Appointed to the board on 1 April 2005.

9. Francois J. Kellerman B. Acc (Hons); CA(SA) CFA Non-executive director Head of Finance: Sanlam Investment Management Other Directorships: BIHL Satrix Managers. Appointed to the board on 15 August 2007.

10. Douglas N. Lacey B.Com (Hons) MBL FCII Non-executive director Divisional Chief Executive - Rest of Africa.

Other Directorships: Pan African Insurance Holdings, African Life Botswana. Appointed to the board on 15 August 2007.

11. Heinie C. Werth BACC, CA (SA), MBA, EDP Non-executive director Chief Executive Officer: Sanlam Developing Markets. Appointed to the board on 15 May 2006.

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BIHL Audit Committee Margaret M. Dawes (Chairperson) Maclean C. Letshwiti Regina D. Sikalesele - Vaka Victor Senye Sanjeev Gupta Francois J. Kellerman BLIL Investment Committee Margaret M. Dawes (Chairperson) Francois J. Kellerman Maclean C. Letshwiti Regina D. Sikalesele - Vaka BIFM Investment Committee Keith R. Jefferis (Chairperson) Victor Senye Sanjeev Gupta Happy N. Fidzani Human Resources Committee Happy N. Fidzani (Chairperson) Sanjeev Gupta Douglas N. Lacey Nomination Committee Heinie C. Werth (Chairperson) Sanjeev Gupta Douglas N. Lacey Maclean C. Letshwiti Ad Hoc Committee for Review of Excess Capital Heinie C. Werth Maclean C. Letshwiti Douglas N. Lacey Regina D. Sikalesele - Vaka Victor Senye

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Chairman’s Letter

Lekwalo la Modulasetilo

“BIHL is a truly Botswana company, efficiently run and managed by Batswana for the benefit of Batswana.

As chairman of the Group, that makes me very proud.”

“BIHL ke kompone ya Botswana tota.

E tsamaisiwa ka manontlhotlho ke Batswana, go sologela Batswana molemo. Se se ntira motlotlo jaaka modulasetilo wa lekgotla la botsamaisi la kompone.”

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DEAR STAKEHOLDER, It is once again my privilege to report to you on the creditable financial performance recorded by BIHL during 2007.

Go bana le seabe, Ke boitumelo mo gonna go bona sebaka se sengwe gape sa go le rolela pego e e supang ka fa kompone ya rona BIHL e dirileng ka teng mo go tsa madi mo ngwageng wa 2007.

By most accounts, the economic conditions in Botswana during 2007 saw a significant improvement on 2006. Real GDP grew by 6.2%; the mining sector recorded growth of 5.2% and the non-mining sector 6.8% growth. The financial services sector’s growth, including insurance, grew by an average of 6.6%. 2007 was also a year of achievement for the Group; the most important being the realisation of benefits flowing from the restructuring process of the last two years. They have produced results confirming the Group’s leading position in the insurance and fund management industries in Botswana.

Ka kakaretso seemo sa itsholelo se ne se le botoka fela thata mo ngwageng wa 2007 fa o tshwantshanngwa le wa 2006. Seemo sa ntsho dikungo se godile ka 6.2 %, mhama wa meepo o nnile le kgolo ya 5.2% mme mehama e e seng ya meepo e bone kgolo ya 6.8%. Mhama wa tsa madi o o akaretsang di inshorense o godile ka 6.6%. 2007 e nnile ngwaga wa kgolo mo dikomponeng tsotlhe tsa rona, mme kgolo e tona thata ele maduo a kago sesha ya kompone mo dingwageng tse pedi tse di fetileng.

Maduo a kago sesha a netefaditse fa re santse re le kompone e e kwa go dimo mo mererong ya inshorense le dipeeletso tsa madi.

The Group’s operating surplus increased by 21% during 2007 to P216.2 million. Assets under management increased by 20% to P15.1 billion, and embedded value grew by 35% to P1.78 billion. The total net dividend declared for 2007 increased by 33% to 47.60 thebe per share.

These significantly improved results for 2007 attest to the inherent strength and sustainability of the Group and to the excellent performance of its management team.

ECONOMIC ENVIRONMENT Historically, Botswana’s GDP has grown between 8% and 9% per annum, but following the devaluations of the pula in 2004 and 2005, the growth slowed to between 4% and 5% during 2006. The real GDP grew by 6.2% by the end of 2007. The recovery is indicated by the significant increase in the export to import ratio, illustrating the benefits of the earlier devaluations.

The 2007 national budget set the scene for renewed growth. It was followed by a marked improvement in business optimism with increased activity in the mining sector. Markets were vibrant, consumer confidence and demand grew, although inflation became a cause for concern towards year-end.

Until the second half of 2007, Botswana was relatively immune from the turmoil in the international financial markets following the mortgage

Madi a a setseng mo go aa dirisiwang go tsamaisa dikompone tsa rona a godile ka 21%, eleng P216.2 million mo ngwageng wa 2007. Dithoto tsa babeeletsi tse di mo tlhokomelong ya rona di godile ka 20%, eleng P15.1 billion, mme kgolo ya dithoto tse re nang le tsone(EMBEDDED VALUE) e nnile 35%, e leng P1.78 billion. Madi a a neelwang bana le seabe mo ngwageng wa 2007 a godile ka 33% go nna dithebe dile 47.60 mo seabeng sengwe le sengwe.

Kgolo e e kanakana e e supagalang mo maduong a rona ke sekao sa botsamaisi bo bo nonofileng, go itsetlela ga mmogo le go dira sentle ga dikompne tsa rona.

SEEMO SA ITSHOLELO Mo dingwageng tse di fetileng selekanyo sa ntsho dikungo mo Botswana se ntse se le magareng ga 8% le 9% ka ngwaga, mme e rile morago ga go fokotswa bokete jwa ledi la Pula ka 2004 le 2005 selekanyo se sa boela tlase go magareng ga 4% le 5%. Selekanyo sa ntsho dikungo se godile ka 6.2% fa ngwaga wa 2007 o ya bokhutlong. Itsetsepelo gape ya itsholelo e supilwe ke kgolo e e kwa godimo ya dithoto tse di romelwang kwa ntle fa e bapisiwa le ya tse di tlang mono gae mme se se supa maduo a phokotso ya bokete jwa ledi la Pula.

Tekanyetso kabo madi ya 2007 ene ya tsisa seemo se se siametseng kgolo ya itsholelo. Maemo ane a supa fa gona le mowa wa tsholofelo mo dikgwebong, se se supiwa ke kgolo mo ditirong tsa meepo. Meberaka ene e phophoma, baji bareki bane ba tiile moko mme ebile keletso ya bone ya go reka e ile godimo le ntswa seemo sa kgolo ya ditlhwatlhwa se ile sa tsenya tlhobaelo fa ngwaga o ya phelelong.

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Chairman’s Letter (continued)

subprime crisis. However, the resultant general economic slowdown and rising domestic inflation towards the end of 2007 could impact adversely on Botswana during 2008.

The rise in business confidence in 2007 is attributable to a number of factors. Domestically, government spending increased with expenditure in the first nine months rising 22% compared with 2006. Most of this increase was in development spending that stimulates the domestic economy through employment and expenditure on locally supplied goods and services. The increased mineral prospecting activity, new mining and processing projects and the likelihood of further large mining-related developments in the medium term revealed a new dynamism in this sector of the economy.

The regional and international economic environments were supportive most of the year with buoyant global economic growth also in the Southern African region prior to the emergence of the mortgage subprime crisis.

The increase in inflationary pressure was driven primarily by developments in the global food and energy markets.

PERFORMANCE The key financial statistics that traditionally reflect the measure of BIHL’s success are, in the case of Botswana Life, return on embedded value and, in the case of Botswana Insurance Fund Management, the value of assets under management. The Group’s embedded value at the end of 2007 was P1.78 billion, 35% higher than the P1.3 billion of the previous year. The value of assets under Bifm’s management increased by 20% from P12.1 billion in 2006, to P15.1 billion during 2007.

These results once again attest to BIHL’s remarkable performance. At the same time, we cannot rely on this historic trend and expect to achieve the consistent high levels of growth our shareholders justifiably expect of us.

Our biggest future challenge is to seek new and innovative business opportunities while maximising our existing markets.

Advantages in the short term will flow from the government’s privatisation programme and we will partner with government and other industry players to this end. Meanwhile, your board has evolved a strategy to address long-term sustainable growth.

Pele ga sephatlo sa bobedi sa 2007, Botswana o ne ale sego ka jaana ane a sa amiwe ke tlhakatlhakano e e nnileng teng mo mebarakeng e megolo ya madi go latela mathata a (SUB PRIME). Kwelo tlase mo kgolong ya itsholelo ga mmogo le kgolo ya ditlhwatlhwa (inflation) tse di nnileng teng fa ngwaga wa 2007 o ya fifing di ka nna le ditlamorago tse di sa siamang mo ngwageng wa 2008.

Go mabaka ale mantsi a a bakileng tsholofelo e e kwa godimo mo dikgwebong ka ngwaga wa 2007. Mono gae, madi a a diriswang ke goromente go reka le go dira ditiro mo dikgweding tsa ntlha dile robongwe e nnile 22%fa e tshwantshanngwa le ka 2006. Bontsi jwa kgolo e ene ele mo mading a ditlhabololo tseo di rotloetsang kgolo ya itsholelo ka go tlhama ditiro ga mmogo le go rekwa ga dithoto tse di tswang mono gae.

Kgolo mo go dupeng ditswa mmung ga mmogo le kgonagalo ya koketsego ya ditiro tsa meepo mo nakong e e gaufi e supile phetogo mo mhameng o wa itsholelo.

Seemo se se phophomang sa itsholelo mo mahatsheng a re bapileng nao ga mmogo le lefatshe ka kakaretso se re thusitse fela thata. Kgolo ya ditlhwatlhwa e tlhotlheleditswe ke dilo tse di neng di diragala mo mebarakeng ya dijo ga mmogo le ya maatla/kgotetso.

RE DIRILE JANG Dipalo tse di botlhokwa tse di supang ka fa BIHL e dirileng sentle ka teng di eme jaana: kgolo ya dithoto (EMBEDDED VALUE) tse Botswana Life e nang le tsone , ga mmogo le kgolo ya dithoto tsa babeeletsi tse o di tsamaisiwang ke Botswana Insurance Fund Management. Kgolo ya dithoto tsotlhe tsa kompone (EMBEDDED VALUE) fa ngwaga wa 2007 o wela ene ele P1.78 billion, e eleng kgolo ya 35% fa a bapisiwa le P1,4 billion mo ngwageng o o fetileng. Tlhwatlhwa ya dithoto tsa babeeletsi tse di tlhokometsweng ke BIFM e godile ka 20% gotswa go P12.1 billion ka 2006 go ya go P15.1 billion ka 2007.

Maduo a ke sekao sa tiro e e manontlhotlho e e dirwang ke BIHL. Le fa gontse jalo re ka se ikaege ka tse re di direleng mme ra solofela fa re tlaa tswelela re dira bontle jaaka babeeletsi mo komponeng ya rona ba solofela.

Kgwetlho ya rona e kgolo ke go batla metlhala e mesha ya go dira madi ga mmogo le go lwela go nna le seabe se segolo me mebarakeng ya jaanong.

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On a domestic level, the greatest challenge for BIHL is to develop more efficient processes in the way we do business, particularly by improving our IT capability and human resources development. Business becomes more complex as it grows and we must position ourselves in the forefront of technological development. We need to examine everything we do, every process we employ, because there is bound to be a better way of doing it. This is the challenge of innovation. The board took the initiative with BIHL’s recently completed restructuring phase. BIHL management will continue to pay close attention to the imperatives of modernisation and localisation. We are bringing about a paradigm shift - we must meet the challenges of change and we need to manage that change energetically.

We are seriously evaluating our attitude towards business on an ongoing basis. Notwithstanding the technological revolution taking place, we are also looking at the basics of doing business. We are examining and asking ourselves how relevant we are to our customers in this modern day, and how we can add value to their investments. We will maintain and expand BIHL’s relevance to the society as a whole.

To achieve all this, we will retain and develop our innovative management teams. Thus, the recruitment, training and development of our human capital resources constitute an even more essential component than before.

To expand business growth, we intend diversifying into other income generating activities within the financial services industry, and there is a great deal of opportunity within Botswana without having to look elsewhere in the region. In this process of expansion and diversification, we will contain the rising costs of delivering service to retain profitability. This also emphasises the importance of state-of-the-art information technology.

We are developing strategic relationships with other organisations that have a nationwide reach to existing and potential customers.

We are also developing a good working relationship with Sanlam and are gaining an understanding of each others’ capabilities and needs. We are exploring positive synergies to our mutual advantage and have seconded a senior management team to the Sanlam head office to access experience in the field of human resource development and other business areas.

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Mo nakong e khuthswane re ka solofela sengwe mo lenaneong la itholo ditiro la mmuso. Re tlaa ikopanya le puso ga mmogo le dikgwebo tse dingwe go bona gore re ka ungwa eng mo lenaneong le. Le fa go ntse jalo, lekgotla la batsamaisi le tlile ka lenaneo le le tlaa godisang kompone mo sebakeng se se leele.

Kgwetlho e nngwe e re nang nayo ke go tla ka ditsela tse di botoka tsa go dira kgwebo, bogolo jang mo go tsa maranyane ga mmogo le tlhabololo ya bodiredi. Kgwebo e nna marara ga e ntse e gola mme re tshwanelwa ke go ipaa mo seemong se se kwa pele mo mererong ya tsa boranyane.

Re tshwanelwa ke go sekaseka tsotlhe tse re di dirang, sengwe le sengwe se re se dirisang ka jaana go seka go tlhokafala tsela e e botoka ya go dira sepe fela. Lekgotla la botsamaisi le ile la tsaya kgato, eleng ntshafatso ya kompone e e sa tswang go wela. Botsamaisi jwa kompone bo tlaa tswelela bo tlhomile leitlho tlhokego ya go baa kompone mo dinakong le diphetogo ga mmogo le go naya beng gae ditiro. Re fetola mokgwa wa go dira dilo, re tshwanelwa ke go itebaganya le dikgwetlho tse di re lebaneng.

Re tsweletse ka go sekaseka mokgwa wa rona wa go dira tiro. Re etse tlhoko ditsetla tsa konokono tsa go tsamaisa kgwebo mme fela ga re itlhokomolose tiriso ya maranyane e e golelang pele. Re a Itshekatsheka mme re Ipotsa gore aa re santse re na le mosola ga mmogo le go tlisa boleng mo go bao re ba direlang mo dinakong tsa segompieno. Re tlaa tswelela re dira gore BIHL enne botlhokwa mo setshabeng ka kakaretso.

Go kgona se, re tlaa tlhabolola le go tlhomamisa gore batsamaisi ba rona ba ba botlhokwa ga ba re tlogele. Ka jalo go ngoka, go rutuntsha le go tlhabolola bodiredi e tlaa nna kgang ya konokono go gaisa jaaka pele.

Go gidisa kgwebo, re ikaelela go kabakanya mme re beeletse mo dilong tse dingwe mo mhameng wa tsa madi ka jaana gona le le ditshono dile dintsi hela thata mono gae moo ebile go sa tlhokegeng gore re lebe ko ntle. Mo thulaganyong e ya go godisa kgwebo le kabakanyo re tlaa tlhomamisa gore ditshenyegelo di nna kwa tlase gore re tle re kgone go bona dipoelo.

Se se gatelela botlhokwa jwa go nna le didirisiwa tsa maranyane tsa maemo a a kwa godimo. Re tsweletse gape ka go ikgolaganya le ditheo tse dingwe tse di kgonang go fitlhella batho lefatshe ka bophara go re kgontsha go fitlhella bao re dirang le bone ga mmogo le bao re ka dirang le bone mo isagong.

Re tsweletse sentle ka go betla tirisanyo le Sanlam, mme ebile re simolotse go tlhaloganyana. Re sekaseka dilo tse re ka di kopanelang mme tsa re ungwela rotlhe. Ka go rialo re rometse bangwe ba batsamaisi ba rona ba bagolwane kwa Sanlam goya go tsaya botsipa mo mererong ya bodiredi ga mmogo le e megwe ya kgwebo.

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Chairman’s Letter (continued)

Over the years, we have become the custodians of the people’s savings.

I think we have done that remarkably well and I believe the significant acceptance of our latest range of products confirms this. By expanding our infrastructure and reach into all areas of Botswana, we are continuing to meet the needs of our society, thereby securing the future of our policyholders and their families. The major challenge facing BIHL is to sustain the high standards we set ourselves, and we rededicate ourselves to our pledge to serve all our stakeholders to the best of our ability as a Group.

BIHL is one of the largest listed companies in Botswana, serving the life insurance and investment needs of its society, and we accept our responsibility for contributing to the development of communities in which we do business. In the past, we have done this on a relatively informal basis as needs presented themselves.

Our approach became more structured during 2007, when the Board established a Corporate Social Investment Trust into which BIHL will invest 1% of its post-tax profit annually to fund community activities as set out in the Deed of Trust. The broad purpose is to contribute to self-sufficiency and self-sustainability in disadvantaged communities in Botswana.

As opposed to donations, investments in these self-sufficiency projects will instil a sense of pride and achievement into these communities.

During the year, the sale of a minority stake of 27.5% in Bifm Botswana was successfully concluded to a local consortium and Sanlam Investment Management. We anticipate this will facilitate a closer linkage to the Group’s asset management business and will also result in increased and more direct citizen empowerment. This will better position the Group to manage its staff retention and technical expertise.

Ke dingwaga di le dintsinyana re ntse re le batlhokomedi ba dipoloko tsa batho. Ke dumela gore go bo babeeletsi ba tsweletse ka go amogela ditsela tsa rona tse disha tsa go beeletsa madi a bone e le sesupo sa gore re dirile go tlala diatla. Go tsharololela diphuka tsa rona lefatshe ka bophara ke sesupo sa gore re tsweletse ka go batla go fitlhelela dikeletso tsa Batswana mme ka go rialo re sireletsa isago ya bao ba beeleditseng mo go rona (POLICY HOLDERS) ga mmogo le ba malwapa a bone.

Kgwetlho e kgolo e e lebaneng BIHL ke go tshegetsa seemo se se kwa godimo se re se ipeetseng, mme ka jalo re boa re itlama gape go direla bao re dirang le bone ka manontlhotlho.

BIHL ke nngwe ya dikompone tse ditona tse di kwadisitsweng kwa mmarakeng wa diabe wa Botswana, e direla di inshorense tsa matshelo ga mmogo le dikeletso tsa dipeeletso tsa setshaba. Re amogela boikarabelo jwa rona jwa go nna le seabe mo go tlhabololeng setshaba seo re direlang mo go sone. Mo nakong e e fetileng re ne re dira se fela fa gone go na le kopo e e dirlweng ese gore ke boikarabelo jwa rona. Ene yare ka 2007, ra fetola se mme lekgotla la botsamaisi la tlhama letlole la dithuso tsa setshaba. BIHL e abela letlole le peresente ele nngwe ya dipoelo tsa yone morago ga lekgetho ngwaga le ngwaga go thusa setshaba. Maikaelelo magolo a thulaganyo e ke go rotloetsa boipelego mo bathong bao ba tlhaelang. Re dumela gore ditiro tse re thusang batho ba ka tsone di mosola fela thata ka jaana di ba thusa go ikemela ka nosi gona le go ba fa madi gangwe le gape.

Theko ya seabe se sebotlana sa 27.5% mo BIFM Botswana ke dikompone tsa mono gae tseo di neng di ikopantse le Sanlam Investments Management e tsamaile sentle. Re solofela gore se se tlaa tiisa kgolagano le BIFM le go nonotsha go neela beng gae ditiro/dikgwebo. Se mme se tlaa boa se thusa kompone go tlhomamisa gore bodiredi ga bo re tlogele.

OUTLOOK We entered 2008 witnessing disturbing levels of uncertainty in the global economy for a variety of reasons. Fears of recession in the US are intensifying. This could have a widespread impact on the world economy and Botswana is unlikely to be left unscathed.

TEBELOPELE Tshimologo 2008 e nnile le mabaka ale mantsi a a neng a tsisa ketsaetsego mabapi le seemo sa itsholelo lefatshe ka bophara. Letshogo mabapi le kwelo tlase ya seemo sa itsholelo kwa Amerika e golela pele. Seemo se se ka nna le ditla morago tse dintsi mo itsholelong ya lefatshe mme le rona mo Botswana ga gona jaaka re ka tlhoka go amega.

Domestically, the main economic problem is likely to be inflation, especially during the first half of 2008, which could lead to higher interest rates.

During the latter part of 2007, inflation showed an upward trend resulting mainly from higher international crude oil prices and some higher food prices. Energy resources are under pressure and costs are likely to increase

Mono gae mathata a magolo mo itsholelong e ka nna kgolo ya ditlhwatlhwa bogolo thata mo dikgweding tse thataro tsa ntlha tsa ngwaga. Seemo se se ka baka kgolo ya merokotso ya kadimo madi. Kgolo ya ditlhwatlhwa e ile ya gakala mo befelong jwa ngwaga wa 2007 ntateng ya ditlhwatlhwa tse di kwa godimo tsa ole e e sa tlhotlhiwang ga mmogo le tlhwatlhwa tsa dijo.

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because Botswana is exposed to both tariff increases and supply disruptions from South Africa. This constitutes not only a price threat, but could also hinder investment and growth.

Although disturbing, these threats have been identified early and can be factored into future planning.

Notwithstanding these negative indicators, there are strong indications of continued growth in most sectors of the Botswana economy and BIHL expects the strong growth experienced in recent years to be maintained.

THE BOARD AND APPRECIATION During the year under review, the board reluctantly took leave of Mr Johan van der Merwe, a Sanlam representative, who was appointed in August 2006. I thank him for his valued contribution. Mr Heinie Werth continues to represent Sanlam on the board. I have pleasure in welcoming Messrs Douglas Lacey and Francios Kellerman, experienced insurance and asset management practitioners respectively who were appointed to the board in August 2007. We look forward to benefitting from their expertise and experience in the years ahead.

I especially thank the Joint Group Managing Directors, the Group’s Executive Management teams and all BIHL members of staff for their hard work and dedication to the Group during 2007. Their enthusiasm, expertise and skills played a major role in achieving the successes recorded in this annual report.

Finally, but most important, I thank the hundreds of thousands of BIHL customers, agents, brokers and business associates for their continued loyal support and without whom BIHL would have no purpose.

We at BIHL look forward to contributing to an even greater Botswana during 2008.

Maclean C Letshwiti

Metswedi ya kgotetso/maatla e mo kgatelelong ka jaana Botswana o lebanwe ke kgolo ya ditlhwatlhwa ga mmogo le mathata a tlhaelo ya motlakase kwa Aforika Borwa. Se gase tlise matshosetsi mo ditlhwatlhweng fela mme se tshosetsa le yone peeletso mo lefatsheng leno ga mmogo le kgolo ya itsholelo.

Se se nametsang ke gore matshosetsi a a lemogilwe go sale gale mme ka jalo ka elwa tlhoko fa go dirwa mananeo a ditogamaano. Ere le ntswa gona le dilo tse di tshwenyang fela gone gona le tsholofelo ya kgolo mo mehameng e le mentsi ya Itsholelo mme ka jalo BIHL e solofela gore kgolo e e Itemogetsweng mo dingwageng tse di sa tswang go feta e tlaa tswelela e nna teng.

MALEBO GO TSWA LEKGOTLENG LA BOTSAMAISI Mo ngwageng o re o sekasekang o, lekgotla la botsamaisi le ile la amogela ka meno a maleele go rola tiro ga ga Rre Johan van de Merwe, moemedi wa Sanlam yo o neng a tlhomiwa mo lekgotleng la botsamaisi ka kgwedi ya Phatwe, ngwaga wa 2006. Ke mo lebogela gobo a nnile le seabe se segolo mo go rona. Rre Heinie Werth o tswelela ka go emela Sanlam mo lekgotleng la botsamaisi. Ke boitumelo jo bogolo go amogela Borre Douglas Lancey mo go tsa inshorense le Francios Kellerman mogo tsa tlhokomelo ya dipeeletso tsa setshaba. Bobedi jo bo tlhomilwe mo lekgotleng la botsamaisi ka Phatwe ka 2007 mme re solofela fa re tlaa anya sengwe mo mo botsipeng jwa bone.

Ke leboga thata Baokamedi Bagolo ba rona ba babedi, bogogi ga mmogo le bodiredi jotlhe jwa BIHL ka manontlhotlho a ba dirileng tiro ka one ga mmogo le boineelo mo tirong mo ngwageng wa 2007. Maikaelelo a bone, botsipa ga mmogo le bokgoni di nnile le seabe se segolo mo katlegong ya rona e e nankotsweng mo pegong e ya ngwaga le ngwaga.

Sa bofelo, mme ebile se le botlhokwa thata ke leboga makgolokgolo a badirisi ba rona ga mmogo le botlhe ba re dirang le bone ka thotloetso e e kanakana eo ntleng le yone BIHL e ka se nneng teng.

Ke maikaelelo a rona go nna le seabe mo go ageng Botswana mo ngwageng wa 2008.

Maclean C Letshwiti

Chairman Botswana Insurance Holdings Limited 14 February 2008

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Modulasetilo wa Botswana Insurance Holdings Limited 14 February 2008

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Financial Review

The purpose of this review is to provide further insight into the financial performance and position of the Group. Readers are advised to read this review, in conjunction with the annual financial statements presented on page 67.

Global equity markets have remained very volatile following the downturn in the US economy. Nonetheless, the MSCI World Total Return Index added 9.56% since December 2006. The offshore bond market reflected a sluggish performance on the back of the US mortgage subprime concerns.

Key features Earnings • Operating surplus profit before tax, excluding investment returns, increased 21% to P216.2 million • Total surplus after tax increased by 73% to P534.1 million Assets Under Management (AUM) • AUM increased by 20% to P15.1 billion Embedded Value • Embedded value increased by 35% to P1.78 billion • Value of new business increased by 32% to P84.4 million • European Embedded Value (EEV) adopted principles Dividends • Dividend payment net of tax. Final 24.65 thebe per share and a

special dividend of 5.1 thebe per share. Interim dividends already paid were 17.85 thebe per share; making the total dividend payments for the year 47.6 thebe per share

Solvency • Capital adequacy requirement covered 5.4 times Economic Environment By most accounts, the economic conditions in 2007 represented a significant improvement on 2006. The inflation rate declined sharply from 8.5% at the end of 2006; however, it increased thereafter and ended the year at 8.1%. This was driven primarily by developments in global food and energy markets. The Bank of Botswana reduced the interest rate by 0.5% in June 2007 leading to a reduction in the bank rate to 14.5%.

The Botswana Stock Exchange experienced a “year of two halves” with a continuation of the rapid growth in the Domestic Companies Index (DCI) experienced during 2006 being carried through to August 2007. Thereafter, the situation reversed and the DCI declined by 14% from its peak in the last quarter. Year-on-year, the DCI increased by 36%.

Accounting policies and presentation The accounting policies adopted for the year comply in all material respects with International Financial Reporting Standards (IFRS) as well as the Botswana Companies Act. These policies are consistent with those applied in prior periods.

The accounting treatment of the Group’s share scheme for managers has been reclassified as “Equity Settled”. At 31 December 2006, the scheme was classified as “Equity settled with a cash alternative”. The reclassification resulted from changes in the rules of the scheme. It has no income statement effect but results in a reclassification of P10.3 million between Liabilities and Share-based Payment Reserve on the Balance Sheet.

Financial overview The BIHL group delivered exceptionally strong overall results:

Analysis of earnings

Year to 31 Dec 2007 P’000

Year to 31 Dec 2006 P’000

% change

Operating surplus Investment income on shareholders’ assets Investment surpluses on shareholders’ assets Tax Surplus attributable to ordinary shareholders

216,202

179,263

21%

74,789

48,365

55%

292,999 (49,867 )

159,001 (77,021 )

84%

534,123

309,608

73%

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The contribution to the Group’s results by the operating segments was as follows:

The performance over the past five years is as follows:

Contribution to earnings - year to 31 December 2007

Contribution to earnings - year to 31 December 2006

Life Asset Consolidation insurance management adjustments business business and other P’000 P’000 P’000

Operating surplus Investment income on shareholders’ assets Investment surpluses on shareholders’ assets Tax Surplus attributable to ordinary shareholders Minority shareholders’ interest Surplus after tax

167,225

58,395

(9,418 ) 216,202

37,386

22,491

14,912

239,775 (35,156 )

58,940 (13,990 )

(5,716 ) 292,999 (721 ) (49,867 )

409,230

125,836

(943 ) 534,123

— 409,230

19,695 145,531

— 19,695 (943 ) 553,818

Total P’000

74,789

Life Asset Consolidation insurance management adjustments business business and other P’000 P’000 P’000

Operating surplus Investment income on shareholders’ assets Investment surpluses on shareholders’ assets Tax Surplus attributable to ordinary shareholders Minority shareholders’ interest Surplus after tax

2007 Contribution to earnings

17,873

1,551 179,263

29,166

10,196

9,003 48,365

144,398 (67,046 )

18,119 (9,052 )

(3,516 ) 159,001 (924 ) (77,021 )

266,357

37,136

6,115 309,608

— 266,357

6,451 43,587

— 6,451 6,115 316,059

2006 Contribution to earnings

500

300 200

Operating surplus Investment income

0

2005**

2006

2007

31 Dec

Dec

2005

31 Dec

2004

31 Mar

Investment surpluses -100

31 Mar

P’000

400

100

Year

Surplus attributable to ordinary shareholders

Asset Management Business Life Insurance Business

Total P’000

159,839

Five-year review 600

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Asset Management Business Life Insurance Business

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Financial Review (continued)

Operating surplus, a measure of the Group’s ‘normalised’ earnings, increased by 21% to P216.2 million. Operating surplus comprises the operating profit and excludes investment income and surpluses earned on the shareholders’ funds.

The two major group businesses, Botswana Life and BIFM, both contributed to the improvement in operating surplus. The strong growth in operating surplus resulted from an increase in new business volumes, an increase in assets under management, prudent underwriting, improved client retention and strong investment returns on policyholder funds.

The decrease in tax charge results from (i) a tax refund because of overpayments in prior period; (ii) current year surpluses mainly comprising returns from local listed equities that are not subject to tax, and (iii) the increase in withholding tax credited to the tax charge because of a special dividend payment.

Investment income consists of dividends, interest and rental income earned on shareholders’ funds.

Surplus attributable to ordinary shareholders of P534.1 million is 73% up from 2006, benefiting from the significantly stronger equity markets during the period, and local equities in particular.

Embedded value The Group’s embedded value of P1.78 billion as at 31 December 2007 is 35% up from 2006. This is after allowing for the P152.8 million dividend paid during the year.

Embedded value disclosure changes The embedded value disclosures for BIHL have underwent two significant changes to bring them in line with best international practice. a)

Distinction between life and asset management business In line with the wider Sanlam Group’s embedded value disclosure methodology, there is a distinction between life and asset management businesses.

With effect from 2007, Bifm has been included at fair value in the shareholder adjusted net assets; previously this was included in the value of in-force. The value of in-force and the value of new life business relate only to the life insurance business, which is referred to as the covered business.

The disclosure for the December 2006 embedded value has been restated to reflect this change. There is no change in the total embedded value.

a)

European Embedded Value Principles (EEV) The covered business continues to be valued in accordance with a basis that is materially consistent with guidance provided by the Actuarial Society of South Africa (ASSA). Revised embedded value guidance from ASSA has been aligned to EEV, and becomes effective for reporting periods ending on or after 31 December 2008. The methodology and assumptions used to determine the embedded value of the covered business on 31 December 2007, has been adjusted in preparation for the revised guidance, as follows:

<

<

The equity risk premium assumption is increased from 2,0% to 3,5%; and The cost of capital is based on the higher of an internally assessed level of required capital and the minimum statutory capital adequacy requirement. In line with the wider Group methodology, the internally assessed level of required capital is now set at double the minimum statutory capital adequacy requirement that has been used in the past.

The effect of these changes is recognised separately in the analysis of change in embedded value of covered business and is not included in the embedded value earnings. The value of new life business information for the year is shown both before and after these changes.

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Embedded value results

31 Dec

31 Dec

2007 P’000

2006 P’000

1,545,951

1,096,424

1,303,923 242,028

836,560 259,864

Value of in-force Value before cost of capital Fair value adjustments Cost of capital

235,212 373,059 (36,089 ) (101,758 )

227,757 281,221 (16,506 ) (36,958 )

Embedded value at end of year

1,781,163

1,324,181

287,075 5.4

124,652 8.8

6.34

4.80

Shareholders’ net assets after fair value adjustments Shareholders’ net assets, excluding goodwill Fair value adjustments

Required Capital Required Capital Cover Embedded value per share (Pula)

These earnings can be analysed as follows:

31 Dec 2007 P’000

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31 Dec 2006 P’000

423,055

235,177

498,830

215,605

36,034 (111,809 )

41,214 (21,642)

224,865

200,619

84,384 79,033 5,351

63,976 59,257 4,719

Change in assumptions and methodology Experience variations

(7,556 ) 148,037

(19,929 ) 156,572

Total earnings

647,920

435,796

84,384 79,033 5,351

63,976 59,257 4,719

Roll forward Investment return on free assets after tax Expected return on life business in force Staff share-based costs Change over the year Value of new business Value at point of sale Expected return to end of year

Value of new life business

Embedded value earnings

Embedded value at end of year Embedded value at beginning of year Change in embedded value Consolidation of the staff share scheme EEV Methodology Change Dividends paid Embedded value earnings

31 Dec 2007 P’000

31 Dec 2006 P’000

1,781,163 1,324,181 456,982 — 51,329 139,609

1,324,181 995,155 329,026 2,288 — 104,482

647,920

435,796

Value of new business Value at point of sale Expected return to end of year

The value of new life business, before application of the new EEV principles, is P84.4 million for the year to 31 December 2007. This is 33% up on the P59.3 million for the comparable period in 2006. This is due to improved new business volumes and improving retention of policies.

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Financial Review (continued)

Overview of operations Life insurance business Recurring premium income increased by 20% to P447.9 million. The business has implemented a more client-centric model with increased emphasis on client service delivery through the extensive branch network. During the year, four new satellite offices were opened in Ghanzi, Kasane, Tshabong and Letlhakane. Focused training of intermediaries has contributed to an increase in new business volumes Operational efficiencies have improved service delivery resulting in better client retention, as seen by the decline of policy lapses. Operating expenses have been well managed resulting in unit costs being maintained at acceptable levels. The value of new business improved due to an increase in business volumes, lower lapse rates and good operating expense management. Botswana Life is actively pursuing other distribution channels to complement those used at present to increase future sales.

The corporate business succeeded in retaining large corporate clients and also acquired new group life schemes. However, this was affected by a decline in the single premium annuity new business. Overall single premium business increased by 12% to P343.4 million.

Botswana Life continues to pursue strategic partners for bancassurance opportunities with the local banks and sees growth potential in this line of business. The contribution of the Life insurance business to the profit of the Group has been pleasing.

Asset management business Bifm continued to maintain its leading position in the Botswana asset management industry. Assets under management grew by more than 20% to P15.1 billion. Notably, Bifm retained its major clients and acquired new ones, in spite of the highly competitive environment. A consortium, in which Bifm is a shareholder, was awarded public private partnership (PPP) contracts for the construction of office space for the new SADC Headquarters and Office of the Ombudsman and Land Tribunal. The projects have commenced. This shows Bifm’s commitment to utilising Botswana funds to contribute to the country’s development.

There was a major downturn in the equity markets of developed countries, especially in Europe and the USA. Furthermore, the domestic equity market registered declines during the fourth quarter of the year, with the DCI shedding more than 13%. Despite this, the overall returns for Bifm and its clients were positive for the year, in both real and nominal terms.

During the year, the sale of a minority stake of 27.5% of Bifm to a local consortium and Sanlam Investment Management, was successfully concluded.

We expect this to facilitate a close linkage to the Group’s asset management business and also to result in increased and more direct citizen empowerment, thereby positioning the company better to manage its staff retention and technical expertise.

Capital management and solvency The effective management of BIHL’s capital base, as a key component of its drive to maximise return on embedded value, is a primary focus area of the Group. A board sub-committee was appointed to determine the amount of excess capital in the Group and to consider how best to utilise this capital.

Progress has been made in this regard and further communication will be made in due course once these deliberations are finalised.

Dividend The Directors proposed to declare a final dividend for the year, net of tax, of 24.65 thebe per share and a special dividend of 5.1 thebe per share. The total dividend payment for the year, net of tax, is as follows:

Normal dividend Special dividend

Interim, already paid Final 12.75 5.10 17.85

24.65 5.10 29.75

Year to 31 Dec 2007

Year to 31 Dec 2006

37.40 10.20 47.60

31.45 4.25 35.70

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Ordinary shareholders’ assets

Issued share capital

Equity attributable to equity holders of parent company was represented by:

The issued share capital was increased during the year by 5 386 250. The increase related to the Group’s Share Scheme and was in line with the approval granted by the company’s shareholders at the Annual General Meeting held on 18 August 1998.

ASSETS Property, equipment and computer software Goodwill Investments Investment properties Equity-accounted investments Equities and similar securities Public sector stocks and loans Debentures, insurance policies, and other loans Cash, deposits and similar securities Net trade and other payables, deferred tax Cash, deposits and similar securities Minority interest

Composition of 2007 Investments

Investment properties Equity-accounted investments Equities and similar securities Public sector stocks and loans Debentures, insurance policies, preference shares and other loans Cash, deposits and similar securities

2007 P’000

2006 P’000

17,164 13,135 1,531,774 45,648 34,091 671,992 46,236

22,736 12,579 986,719 75,123 21,731 602,630 49,335

190,512 543,295 (216,051 ) 26,043 (55,006 ) 1,317,059

53,942 183,958 (181,961 ) 9,063 (21,172 ) 849,136

Composition of 2006 Investments

Investment properties Equity-accounted investments Equities and similar securities Public sector stocks and loans Debentures, insurance policies, preference shares and other loans Cash, deposits and similar securities

BIHL recogises the importance of constant stakeholder engagement.

Thus through out the the year both Botswana Life and Bifm spent significant time, energy and resources on engaging with all its stakeholders utilising various platforms such as business breakfasts and stakeholder cocktails. The view of the BIHL group is that the good business is grown on strong relationships. This mind set has seen BIHL continue to grow from strength to strength.

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Botswana Life | Report “It is our aim to achieve increased return on embedded value as a benchmark for our performance. During 2007 we experienced a 12% increase on return on embedded value to 48%. During this period we have also exercised a firm control over expenses, keeping them below the rate of income and profit increase” Regina Sikalesele-Vaka CEO Botswana Life

Botswana Life has clients across Botswana. To engage with them all, we have created very thoughtful campaigns. Industrial theatre and marketing and campaigns such as “A Re Bueng” have been held across Botswana. We must demonstrate creativity in all we do to maintain our leadership position.

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Botswana Life in brief 2007 proved to be another highly successful year for Botswana Life; retail new business volumes increased. On the Corporate and group business all major clients were retained. The annuity business continues to perform well and it is pleasing to note government’s intention to support the development of the capital market with a regular bond issuance policy during 2008 which will provide long-term asset for the portfolio. Botswana Life has shifted its focus from standard-format products to being more client-centric and sensitive to the requirements of customer needs across the board. During 2007, the distribution and customer service outlets were expanded to include four satellite offices in, Ghanzi, Letlhakane, Kasane and Tsabong.

A new Information System for the Corporate division was implemented in 2007 to facilitate more effective and efficient processes in line with the client-centric model. Human resources (HR) have become a major internal focus during 2007. The Board’s HR Committee reviewed its HR mandate which has given rise to new initiatives within the Group.

We currently have a select team of middle and senior managers on secondment to Sanlam to draw on its expertise. We are maintaining close liaison with the Registrar of Companies to ensure all our agents are registered and obtain Certificates of Proficiency to offer a professional service to our clients. Botswana Life intends building on these achievements during 2008. In terms of real growth, the embedded value of the company increased by 30%.

our mission

KEY DATA

We offer quality client-centric financial solutions and services to grow and protect the wealth of all our stakeholders.

Premium income (net of reinsurance) Value of new business Operating profit Surplus after tax Embedded value

our VIsion To be the personalised financial service provider of choice.

our VALUES » Integrity » Botho » Teamwork » Creativity

Year to 31 Dec 2007 P million 791 79 168 409 1,178

Year to 31 Dec 2006 P million 679 54 160 266 906

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Executive Management

1

2

3

4

5

6

7

8

1. Regina Sikalesele-Vaka (Chief Executive Officer) LLB

5. Elias Magosi (Human Resources) Ms Org Development, BA:Economics & Statistics

2. Gaffar Hassam (Chief Operating Officer) FCCA, ACPA (Botswana), COP

6. Linah Sekwababe (Business Support) MSC in Business Systems Analysis & Design, BA: Social Sciences.

3. Jaco van Loggerenberg (Individual Life) Msc Business Leadership, BA Law

7. Philip Van Rooijen (Actuary) BSc (Actuarial Science), FIA

4. Catherine Lesetedi-Letegele (Corporates and High Value Brokers) BA: Statistics & Demography, COP

8. Kathiresan Subburaj (Information) MBA: Technology management, COP, PGDCA

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Botswana Life | Highlights

PREMIUM INCOME P million

NUMBER OF RECURRING PREMIUM POLICIES 250,000

900 800

200,000

700 600

150,000

500 400

100,000

300 200

50,000

31 Dec 06

31 Dec 07 31 Dec 06

31 Mar 05

9 Mnths to 31 Dec 05

31 Mar 04

31 Mar 03

9 Mnths to 31 Dec 05

TOTAL ASSETS P million

31 Mar 02

-

31 Mar 01

31 Dec 07

31 Dec 06

9 Mnths to 31 Dec 05

31 Mar 05

31 Mar 04

31 Mar 03

31 Mar 02

31 Mar 99

-

31 Mar 01

100

NET INSURANCE BENEFITS AND CLAIMS P million

4,500

400

4,000

350

3,500

300

3,000

250

2,500 200 2,000 150

1,500

31 Dec 07

31 Mar 05

31 Mar 04

31 Mar 03

31 Mar 02

31 Mar 99

31 Dec 07

31 Dec 06

9 Mnths to 31 Dec 05

31 Mar 05

31 Mar 04

31 Mar 03

-

31 Mar 02

-

31 Mar 01

50

31 Mar 99

500

31 Mar 01

100

1,000

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The ‘A re bueng’ (let’s talk) campaign by Botswana Life was created as a means of updating its extensive client data base. By doing so Botswana Life can continue to improve its services to its clients. The Dancers seen above performed at the very popular A re bueng finals where hundreds came to witness fantastic prizes being won.

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BLIL | Chief Executive Officerâ&#x20AC;&#x2122;s Report

OVERVIEW I am pleased to report that Botswana Life produced an excellent set of results for 2007. There was significant growth in new business volumes year-on-year, coupled with a higher rate of retention of existing business.

Consequently, the year experienced double-digit growth in its key imperatives, namely; net premium income grew to P791 million (2006: P679 million) and the value of new business increased to P83 million (2006: P70 million). The total surplus after tax increased to P409 million (2006: P266 million). We have exercised firm control over expenses, keeping them below the rate of income and profit increases. It is our aim to grow the embedded value by 25% annually as a benchmark for our performance and the growth during 2006 was 46% and 48% in 2007.

These results are confirmation that Botswana Life is reaping the benefits of the major restructuring exercise undertaken during 2005 and 2006. The restructuring established a new strategic direction intended to reshape Botswana Life and position it for greater and sustained future growth.

As with any restructuring, it was a time of uncertainty and disruption, but Botswana Life adopted new strategies and processes during the restructuring and has emerged a more robust company with a rejuvenated management team that has successfully addressed the resultant operational, recruiting, and training and development requirements of a changing environment. The positive energy and enthusiasm are clearly discernable and reflect the vibrant new generation and its fresh approach to the market.

Our philosophy and strategy have shifted substantially with client-centric products based on thorough research of customersâ&#x20AC;&#x2122; needs for the high and low-income groups. This has resulted in lower lapse rates. The rejuvenated empowered branches have rolled out enhanced services to the customer reducing the need to travel long distances to access centralised service, bringing us closer to the customer.

PRODUCTS Life insurance is a challenging business as it entails the sale of intangible benefits based on life events. These benefits would only become evident upon the occurrence of the life event. Our products are broadly classified to cover major life events such as death, accidents, sickness, and retirement or to cater for long-term savings.

Prior to the re-engineering, Botswana Lifeâ&#x20AC;&#x2122;s main focus was on the distribution of Individual Life products tailored for individuals. The restructuring introduced a client-centric philosophy, which segmented clients into different categories. It created organisational as well as infrastructural capacity for Botswana Life to focus on Corporate or group products to grow the corporate market. Notwithstanding the diversification of the distribution channels to include group business, the client-centric philosophy ensured that the focus on traditional Individual Life was enhanced resulting in increased new business volumes as well as higher retention levels.

NEW FOCUS Botswana Life is the dominant Life Insurance Company with more than 70% market share in both individual Life and Group life products. This is an extremely difficult position to retain given the fast changing landscape of the Life insurance and financial services sector in Botswana. The new focus entails establishing and maintaining close ties with our constituents.

The current management focus is to constantly identify potential markets and positioning Botswana Life in those new markets, whilst maximising existing markets.

Penetrating new markets requires a flexible and dynamic approach to the market, which is present in the dynamic rejuvenated team. The enhanced technical capacity provides much needed flexibility and increased responsiveness to both product development and distribution, the combination of which has contributed to the growth seen in 2007.

Group Life Product Classification In house actuarial capacity was utilised to review, design and modify group products to meet the expectations of the corporate client.

Group Life Cover - life cover provided to groups of individuals usually through the employer as employee benefits and participation in the schemes is compulsory for all members of the particular group. These are renewable on an annual basis and are these are mainly distributed through the broker channel.

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Group Funeral - This is a funeral cover sold to a group of individuals with a common interest and participation is generally compulsory.

Botswana Life’s hitherto seven outlets have been extended to eleven with new distribution points in Ghanzi, Kasane, Letlhakane and Tshabong.

Group Credit Life - offers life cover to a loan holder so that in the event of death, the outstanding loan will be settled by Botswana Life thereby protecting both the estate of the deceased and the bank.

In addition, the traditional distribution channels of brokers and agents have been carefully integrated into the Botswana Life expanding IT systems such as the Integrated Insurance Management System, to enable them to communicate with product administration and development.

Banc assurance - These are life insurance products distributed through a relationship with a bank usually embedded in the bank products or sold as stand-alone products offered to the clients of a particular bank.

Annuity General - the customer deposits and accumulates money into an account (the deferral phase) and in turn Botswana Life makes income payments until the death of the insured (the “annuitants”) named in the contract.

Immediate annuity - the annuitant will be paid a series of payments with either level or increasing amounts for a fixed term of years or until the ending of a life or two lives, or whichever is longer.

Annuity with period certain - pays the annuitant for a designated number of years (i.e., a period certain) and is used to fund a need that will end when the period is up (for example, it might be used to fund the premiums for a term life insurance policy).

Life annuities - is used to provide an income for the life of the annuitant similar to a defined benefit or pension plan.

DISTRIBUTION CAPABILITIES Botswana Life’s citizen management understands the needs of the local market and have utilised the client-centric philosophy to connect with its customers and to bring the business closer the people we serve. This presents unique challenges in Botswana with its distinctive population spread but management has overcome the challenge through various regular client interactions in all parts of the country by executive management.

To reinforce the connection to our clients, the existing branch network and traditional national agent distribution channel was expanded in 2007 to include four satellite offices in outlying areas where the population is more widely dispersed and infrastructure less developed.

At Botswana Life we believe in “Botho” which means respect and dignity for those around us. Thus we invested in the communities we operate in and at the same time recognise our long serving employees.

Without our dedicated staff we would not continue to grow.

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BLIL | Chief Executive Officerâ&#x20AC;&#x2122;s Report

The integration provides protected access to policyholder information thus allowing rapid updating of client data and improved service.

Botswana Life has expanded beyond its traditional distribution channels by strengthening strategic alliances with its associates especially the Funeral Services Group (Lynnâ&#x20AC;&#x2122;s and Kagiso Funeral Undertakers) who have nationwide outlets that serve the public and also by creating new strategic partnerships with other entities. This provides an opportunity to tap into new customer bases that have not been reached by the traditional channels.

Our collaboration with the bank s has opened a window of opportunity for banc assurance, which caters for an individualâ&#x20AC;&#x2122;s banking and insurance needs. We are exploring further forms of co-operation with other financial institutions. The collaboration addresses the key challenge of skills shortage because banc assurance constitutes a combination of different corporate services in a unique operating environment, which does not have that diversity of skills. We believe that each of the sectors can contribute to this joint service within its own field of expertise.

PERFORMANCE Individual Life Insurance An extensive actuarial product review conducted in the latter part of 2006 resulted in the revamping and re-positioning of existing products as well as the launching of new products, one of which continues to excel in the market contributing P35 million to the value of new business. A further three products were launched in the first part of 2008 and three more will be launched in the second half of 2008 to further address client needs.

Corporate Business Corporate insurance business had a particularly good year highlighted by the retention of all our major private and parastatal corporate clients.

Given the small size of the market, it was a substantial achievement to be able to expand the portfolio to include new major clients in the banking sector and also the Unions. Extensive education has been conducted for corporate clients to raise awareness of this type of cover and our key brokers have been similarly upgraded to participate in this market.

(continued)

Annuities Our annuity business continues to perform well. The greatest challenge remains in finding assets with a long duration and proper credit rating to match the liability. In other countries, governments regularly issue government bonds, which serve as an investment base for annuities but the Botswana Government, has not issued bonds regularly as it has no need to borrow. The few bonds that have been issued by government have been hugely oversubscribed. We are fortunate in that we are able to utilise BIHL group resources to generate long-term assets in the local market to meet the annuity requirements.

In general, investment returns for the year under review were most satisfactory allowing Botswana Life to deliver sound returns to policyholders.

INFORMATION TECHNOLOGY During the year under review our IT Systems were further improved by introducing a new world class Integrated Insurance Management System (IIMS). This IIMS has proved robust, flexible and suited to our business requirements. This will facilitate greater process efficiencies, effective communication within Botswana Life and its distribution network. It will further improve the quality of customer service. It is a point of pride that all our processes reside and are managed within Botswana thus enhancing our service delivery levels and flexibility.

HUMAN RESOURCES DEVELOPMENT A major strategic focus is the development of staff, which was intensified following the structuring in conjunction with the ongoing upgrading of technical requirements of our processes and systems. Botswana Life considers the employees as the single biggest investment of our business; as such their development constitutes an essential short and long-term investment.

Botswana Life management has access to the broader Sanlam group for skills transfer, which will provide essential diversity and enhancement of skills in the BIHL Group.

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2007 saw significant developments across the whole HR spectrum. The board reviewed its HR mandate, which gave rise to a number of initiatives within the organisation, which aimed at enhancing succession, localisation and the retention of key personnel to ensure business continuity. BLIL continues to be an employer of choice.

Human resource synergies have been exploited within the BIHL group for greater rationalisation of resources. The corporate values and performance management systems have been embedded in the operations so as to drive organisational culture of performance.

Botswana Life has 200 permanent employees, about 350 direct agents and a further 500 agents within the broker segment.

IMAGE AND VISIBILITY The enhancement of Botswana Life’s image and visibility received close attention during the year.

Botswana Life is the largest insurance company in Botswana and is part of the significant BIHL Group. It is, therefore, essential that Botswana Life actively markets’ its image and products while pointing out the benefits of insurance as an investment and asset to the consumer.

The ‘Botswana Life’ brand has been repositioned through advertising to reinforce the enhanced image of strength and security consistent with the largest insurer in the country. Botswana Life is a company that is of Botswana, managed by Batswana for the benefit of Batswana.

During 2008, we will continue to seek ways and means of improving our client service, especially developing improved communication with our clients. We will also seek opportunities to co-operate with other organisations in the provision of services to our mutual advantage.

Regina D Sikalesele-Vaka Chief Executive Officer

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BIFM | Report “In our Quest to achieve long-term capital growth in assets under management, we follow a three pronged strategy; the retention of exciting business, growth into new business and the close management of costs and efficiencies.”

Victor Senye CEO of BIFM

In Bifm’s quest to grow its local investment portfolio for the benefit of its pension funds, two major Public Private Partnership (PPP) deals where concluded in 2007. The new home of the SADC Head Quarters in the Central Business District of Gaborone and Plot 21 for the Ministry of Works and Transport in the Main Mall respectively.

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Botswana Insurance Fund Management in brief Bifm recorded outstanding growth during 2007. Assets under management increased by 20% to P15.1 billion.In order to achieve long-term capital growth for investors, Bifm works towards retaining existing business, growing into new business areas and closely managing costs and efficiencies. The highlight during 2007 was undoubtedly retaining our mandate by tender for the Botswana Public Officers Pension Fund. The mining industry in Botswana is gaining fresh momentum thereby stimulating demand for our fund management products.

The Diamond Trading Centre and its downstream developments also constitute important business opportunities for Bifm.

Khumo Property Asset Management experienced significant growth especially in commercial and industrial projects. Three further projects were undertaken during 2007 including a new property development project of about P100 million in northern Botswana. Bifm Capital experienced a year of consolidation with substantial growth and is seeking to expand capital sources, including offshore funds. Bifm’s Public Private Partnership concluded the financing of a number of major building projects during 2007 and a new headquarters building for SADC is under way. Bifm is growing from a traditional asset management company and is re-inventing itself in a very mature market. This bodes well for the future.

our mission

KEY DATA

To provide best industry practices to the independent management and administration of savings originating from life assurance, pension and provident funds, large corporates and individual savers, through: • Service excellence at all levels • Sound and professional advice • Superior investment performance • Cost efficient delivery • Generation of diversified investment portfolios

Assets under management Asset management fees Operating profit before tax Cost to fee income ratio

our VIsion To be recognised as a vibrant, Pan African, financial services provider offering proactive solutions to rejuvenate the faith in long-term savings and investments.’

our VALUES » Entrepreneurial » Client-Centric » Trust

Year to 31 Dec 2007 P million 15,115 110 162 0.46

Year to 31 Dec 2006 P million 12,462 81 54 0.53

B O T S WA N A I N S U R A N C E H O L D I N G S L I M I T E D A N N U A L R E P O R T 2 0 0 7

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Executive Management

1. Victor J. Senye (Chief Executive Officer)

B.Com (Accounting), University of Botswana; PIAM, Harvard;

MSc (Management), Arthur D Little School of Management in Boston,

USA.

2. Nthisana Phillips (Deputy Chief Executive Officer)

1

2

B.Com (Accounting), University of Botswana; Associate Diploma in

Banking, Botswana Institute of Bankers; MBA (Computer Information

Systems), City University of New York.

3. Simon Ipe (Chief Operations Officer)

BSc (Chemistry), University of Madras (India); B.Com,

University of Madras, India.

4. Vikas Agarwal (Head of Finance)

3

4

B.Com (Hons), Calcutta University.

FCA, (India), ACPA, (Botswana)

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BIFM | Highlights

OVERVIEW The year under review marked another milestone of outstanding growth for Bifm. Bifm’s assets under management increased by 20% to P15.1 billion. This achievement is particularly significant in the light of a difficult last quarter of 2007, when local equities on the Botswana Stock Exchange (BSE) performed poorly. Approximately 60% of Bifm assets are offshore.

The dollar has declined in value and the US market is reeling under the subprime crisis. This will certainly have some effect on Bifm, although it is not likely to be felt until 2008.

ASSETS UNDER MANAGEMENT P million

MLF INVESTMENT RETURNS (Since 31 Dec 1997) vs. Inflation 600%

16,000 14,000

500%

12,000 400%

10,000

300%

8,000 6,000

200%

4,000

17.89

31 Dec 03

18.61

31 Dec 04

20.86

31 Dec 05

32.86

31 Dec 06

44.03

31 Dec 07

52.41

Dec-07

Dec-06

Sept-07

Dec-05

Dec-04

Dec-03

Dec-02

Dec-01

2004

2003

Dec-00

21.05

31 Dec 02

Dec-99

15.95

31 Dec 01

0%

31/12/07

31 Dec 00

31/12/05

14.56

31/12/06

11.11

31 Dec 99

31/03/05

31 Dec 98

2002

-

*MLF

2001

Date

100%

2,000

Dec-98

UNIT PRICE HISTORY

Returns Inflation

PERFOMANCE TREND (Since 31 December 1997)

UNIT PRICE HISTORY 60

250.00%

50

200.00%

40

150.00%

*MLF — Market Linked Fund, a flagship product of Bifm 30

100.00%

20

31 Dec 07

31 Dec 06

31 Dec 05

31 Dec 04

31 Dec 03

31 Dec 02

31 Dec 01

0

31 Dec 00

0.00%

31 Dec 99

Q4 2007 1 year 3 years 5 years 3 years 5 years Annualised Annualised Returns -3.16% 19.04% 151.23% 192.98% 35.94% 23.98% BenchMark -3.17% 15.40% 102.99% 131.19% 26.62% 18.25%

10

31 Dec 98

Performance

50.00%

1 year

3 years Returns Benchmark

5 years

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BIFM | Chief Executive Officerâ&#x20AC;&#x2122;s Report

PERFORMANCE Botswana Insurance Fund Management Limited (Bifm) aims to achieve long-term capital growth for investors and to increase the value of assets under management. To this end, we follow a three-pronged business strategy: the retention of existing business, growth into new business areas and the close management of costs and efficiencies.

The highlight for Bifm during 2007 was undoubtedly retaining our mandate for the Botswana Public Officers Pension Fund (BPOPF), which is the dominant player in the pension fund industry. The total industry represents assets of at least P35 billion and the BPOPF controls a substantial portion of those assets.

The BPOPF was previously managed by four asset management companies, of which we were one, holding an approximate 25% share. During 2007, the BPOPF placed their fund management out to tender and it was awarded to six managers, two more than previously. The six were not awarded equal portions, however. Bifm substantially retained the share it held. This is a major contribution to our total assets under management.

Botswana Life Insurance Limited (BLIL), our sister company, is another major client. BLIL continues to grow its business. As a result, this also increases the amount of capital available for management by Bifm. However, we still have to meet their performance benchmarks, a challenge that we take seriously.

There are not many new companies that have come onto the Botswana market. In such a mature market, the retention of assets already under management is fundamental to our performance.

Our ability to retain mandates, as illustrated by the BPOPF renewal, is underpinned by our good investment performance, superior service delivery and sound corporate governance. A large percentage of our corporate effort is directed at maintaining these criteria.

At the same time, we fully realise that, as a dominant player in the asset management arena, we are a target for other investment companies seeking to increase their market share at our expense. This is to be expected in a competitive environment. However, it is important that clients make well-researched decisions that do not prejudice their funds.

Our major challenges are the enlargement of our asset base and diversifying our income. In this business, there is no middle ground. One either grows or declines.

The mining industry in Botswana is gaining fresh momentum creating a demand for supporting service enterprises. They, in turn, could create opportunity for pensions, office accommodation, industrial buildings, equipment finance and such like. Mining therefore creates significant downstream business opportunities for Bifm.

Moscow came to Botswana for one night during 2007 thanks to Bifm who sponsored a performance of the world-renowned Ballet Moscow in Gaborone, which was attended by the former President of Botswana and the Ambassador of the Russian Federation.

Added to this a workshop was run by the ballerinas from Moscow for local dancers to try and impart some of their incredible skills. Bifm is a strong believer of capacity building in the community it operates in.

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BIFM | Chief Executive Officerâ&#x20AC;&#x2122;s Report

One of the most significant developments to emerge is the establishment of the Diamond Trading Company (DTC). This is of major benefit to Botswana and also promises potential additional business opportunities. The DTC will become the international focal point for the aggregation, valuation, cutting and selling of diamonds and approximately fifteen licences have thus far been granted to international companies wanting to participate. They will set up undertakings in Botswana engaging in diamond beneficiation.

The move to Botswana is a major shift undertaken as the initiative of the Botswana Government and Debswana, and holds far-ranging benefits for the economy as a whole, creating further opportunities for BIHL.

Bifm spends a lot of time and energy on keeping its clients informed of developments on their investment portfolios. During the year Bifm held numerous breakfasts and cocktails to keep the lines of communication clear and open. We are a client-centric business and keeping them all informed is vital to our success.

(continued)

DIVERSIFICATION The diversification efforts of Bifm, primarily driven by the need to enhance portfolio performance, continue to derive value. The contribution of the subsidiaries and associated companies to the bottom line of Bifm is gradually increasing.

These diversification efforts are not only bearing fruit with respect to the profitability, but are also serving to provide investable products for the pension business in a market with limited opportunities.

We are currently reviewing several investment opportunities, some of which are undergoing implementation. This is essential in a volatile market where past performance is no guarantee for future performance.

COSTS AND EFFICIENCIES Bifmâ&#x20AC;&#x2122;s top management pays close attention to cost and efficiencies control and maintains a close check on cost to income ratios. We run a lean and hungry organisation to optimise growth, shareholder and client returns. In this respect, we also tap into our relationship with Sanlam to seek synergies with and benefits from their considerable experience in the asset management field, risk and compliance.

Bifm strongly maintains its core business of asset management while concentrating on asset allocation and portfolio construction to ensure that the core business grows, thereby achieving superior investment returns.

HUMAN RESOURCES We are deeply aware that our business is a people-driven initiative.

This constitutes a significant challenge to Bifm as a company. Our industry is still in its infancy and the pool of skilled specialists is limited.

There is a lot of poaching amongst the players and one faces the ever-present risk of losing valuable skills. It is a field of dynamic manpower movement. This places challenges on all industry players to attract and retain those skills available in Botswana. We communicate with Sanlam on these issues and a consultant has been appointed to review our HR strategy including the overall remuneration and benefits structure.

This should ensure that individual and organisational objectives are aligned.

It is very much a matter of developing synergies to contain costs. We are doing this in conjunction with Botswana Life, for example, where our IT and HR skills are jointly managed.

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REGIONAL DIVERSIFICATION Bifm actively pursues every opportunity to expand its traditional business, including through regional diversification. We have a successful subsidiary operation in Zambia, African Life Financial Services (Zambia), which meets many of our criteria as an investment destination and contributes positively to Bifm’s operating profit.

However, Sanlam’s initiative with SIM-EM, has resulted in new business investments that we make into Africa being handled through that division.

Bifm will derive its share of growth through that entity. This should be seen in conjunction with the Botswana Government’s initiative through the Botswana International Financial Services Centre (IFSC), through which capital can be invested, for example by offshore companies wanting to invest into Africa while enjoying the benefits offered by domiciling their activities in Botswana. This, and other investment opportunities and benefits to be derived by a closer relationship with IFSC, will be high on our agenda for 2008.

Victor Senye Chief Executive Officer

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BIHL | Corporate Governance

STATEMENT OF COMMITMENT The BIHL board of directors is committed to the principles of the Code of Corporate Practices and Conduct set out in the King Report on Corporate Governance (King II), and to the highest level of corporate governance and best practice. It sees value in subscribing to a system whereby ethics, personal and corporate integrity and governance practices set the standards for compliance. Adherence to sound principles of corporate governance will remain both a board and a management priority. The board is of the opinion that BIHL complies with the prevailing standards in all material respects.

The board recognises the responsibility of the Group to conduct its affairs with prudence and integrity, transparency, accountability, fairness and social responsibility, and in accordance with generally accepted accounting practices to safeguard the interests of its stakeholders. The board also appreciates that corporate governance is a component of equity risk and acknowledges the relationship between managed risk, equity performance and corporate profitability.

The business structures in the Group: Life and Asset Management are supported by clear approval frameworks and agreed-upon business principles, ensuring a coherent and consistent governance approach throughout the Group.

SUSTAINABLE PERFORMANCE In as much as the inherent value of a company can be determined by its marketability, the BIHL Group also believes that long-term viability may be equated to measurable investment in human and other intellectual capital. In recognition of its obligation to contribute to socio-economic goals and general social upliftment, the BIHL Group strives to conduct its business with due regard to environmental concerns, and is committed to developing operating policies that address the potential environmental impacts of its business activities.

CORPORATE CODE OF ETHICAL CONDUCT Business ethics and organisational integrity The Group remains committed to the highest standards of integrity and ethical conduct in dealing with all stakeholders. This commitment is confirmed at board and general management level by their endorsement of the code of ethics for the Group.

The human resources departments monitor compliance with the principles underlying the code of ethics and investigate all matters brought to its attention. In terms of BIHL’s code of ethics, no director or employee within the Group may offer or receive any gift, favour or benefit that may be regarded as an attempt to exert influence or unduly favour any party. BIHL has a formal Group gift/gratuity policy that requires the official declaration and recording of all corporate gifts received or made by any Group director or employee.

BOARD’S GOVERNANCE AND STRUCTURE The Group is governed by a unitary board of directors which may not, in terms of its articles of association, comprise fewer than three nor more than eleven members. The board is assisted in fulfilling its responsibilities by the following sub-committees: • • • • •

Audit and risk committee Human resources committee Investment committee - Bifm Investment committee - Botswanan Life Nominations committee.

Corporate governance in the Group is managed and monitored by the board in conjunction with the above sub-committees. The board is chaired

by Mr Maclean Letshwiti, an independent non-executive director, and comprises: • Two executive directors; • Two independent non-executive directors; and • Five non-executive directors.

The roles of the chairman and the Group chief executives are separate with clear division of their responsibilities to ensure a balance of power and authority between them. The chairman has no executive function. He meets regularly with senior executive management to monitor progress and discuss relevant business issues and is available to respond to shareholder queries or issues relating to the Group. Non-executive directors have the opportunity to meet separately without the Group chief executives as and when circumstances warrant.

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BOARD CHARTER In accordance with the principles of sound corporate governance, the BIHL board charter, modelled on the charter principles recommended by King II, incorporates the powers of the board providing a clear division of responsibilities and accountability of the board members, collectively and individually, to ensure a balance of power and authority. The annual evaluation process to review the effectiveness of the board, its committees and individual directors has been entrenched. Copies of the board charter are available on request.

The charters of the board sub-committees that describe the terms of reference of the committees, as delegated and approved by the board, are reviewed at least annually. Copies of the various sub-committees charters are also available on request.

APPOINTMENT OF DIRECTORS The directors are chosen for their business acumen and wide range of skills and experience. The board gives strategic direction to the company, appoints the chief executive officers and ensures that succession is planned.

In appointing directors, emphasis is placed on achieving the balance of skills, experience and professional and industry knowledge necessary to meet the Group’s strategic objectives. The selection and appointment of directors is formal and transparent and a matter for the board as a whole, assisted by the nominations committee. The issue of appropriate training of new and existing directors is consistently reviewed. All directors are subject to an annual performance evaluation. Succession planning is also reviewed regularly.

During the year under review, the following new directors were appointed to the board. The credentials of Messrs Douglas Lacey and Francois Kellerman were reviewed by the board prior to their appointment and each received induction material and information relevant to his obligations as director.

On appointment, a new director has: • Discussions with the chairman regarding the Group’s expectations of the director, the potential contribution of the director to the Group and the areas of such director’s expertise; and • The benefit of an induction programme aimed at broadening the director’s understanding of the Group as well as the business environment and markets within which the Group operates.

00 47

In accordance with the company’s articles of association, the term of office for non-executive directors is three years. One-third of the directors retire by rotation annually, with each retiring director eligible for re-election, if available, at the annual general meeting. The non-executive directors do not hold service contracts with the Group and their remuneration is not dependent on their respective performance.

The board reviews the status of its members on an ongoing basis and the board comprises a majority of non-executive directors.

At BIHL we have a very firm belief that the best way to learn is to watch a Pro do it! Every year, as part of Bifm’s contribution to the development of Golfers in Botswana, the Ladies and Legends Open is held. This format provides for one professional golfer to play with three non pros on round of 18 holes. The goal of the tournament is to expose our local golfers to international standard golf. Every year this tournament is over subscribed and maintains a top position in Botswana’s golfing calendar.

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BIHL | Corporate Governance

(continued)

BOARD MEETINGS The board meets at least four times per annum to consider business philosophy and strategic issues, to set risk parameters, approve financial results and budgets, and monitor the implementation of delegated responsibilities. Feedback from its committees, as well as a number of key performance indicators, variance reports and industry trends are considered. A summary of meetings held and attended is indicted below:

Board Director MC Letshwiti

4 / 4

BOARD SUB-COMMITTEES To assist the board in discharging its responsibilities, specialised board sub-committees have been established.

Certain functions of the board are facilitated through the main sub-committees, including the audit and risk, investment, human resources and nominations sub-committees. They are chaired by non-executive directors who report to the board.

Audit committee

BLIL investment committee

BIFM investment committee

Remuneration committee

4 / 4

4 / 4

–

–

JA Burbidge

4 / 4

2 / 4

2 / 4

–

2/4

M Dawes

3 / 4

3 / 4

3 / 4

–

–

H Fidzani

3 / 4

–

–

7 / 12

3/4

K Jefferis

4 / 4

–

–

12 / 12

–

S Gupta

3 / 4

3 / 4

–

7 / 12

3/4

H Werth

4 / 4

–

–

–

–

V Senye

4 / 4

3 / 4

–

–

–

RD Sikalesele -Vaka

4 / 4

4 / 4

4 / 4

–

–

D Lacey

2 / 2

–

–

–

2/2

F Kellerman

1 / 2

2 / 2

1 / 2

–

–

Indicates number of meeting attended by director during the year while the director was a member of the board or committee

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The terms of reference for all board committees have been confirmed by the board. There is a full disclosure from these committees to the board and their minutes are submitted to the board for noting. In addition, all authorities delegated by the board are reviewed and updated annually by the board.

Audit committee Members: Mrs. Margaret Dawes; Ms. Regina Sikalesele-Vaka; Mr. Victor Senye; Mr. Sanjeev Gupta; Mr. Maclean Letshwiti; Mr. Francois Kellerman Composition: Four non-executive members and two executive members.

This committee is chaired by Mrs. Margaret Dawes, a chartered accountant.

The committee has a formal written charter which sets out its responsibilities.

The committee meets at least four times per annum. The internal and external auditors attend these meetings and have unrestricted access to the chairman of the committee.

The main responsibilities of this committee are to assist the board in discharging its responsibilities under the Companies Act, Insurance Industry Act and common law, with regard to the financial affairs of the Group. In particular, it monitors financial controls, accounting systems and reporting, compliance with legal and statutory requirements, evaluating the management of risk areas and internal control systems, and the effectiveness of external and internal auditors. The committee also evaluates the Group’s exposure and response to significant risks, including sustainability issues.

Investment committees Members of the Bifm investment committee: Names: Dr. Keith Jefferis; Dr. Happy Fidzani; Mr. Victor Senye; Mr. Sanjeev Gupta Members of the Botswana Life investment committee: Names: Mrs. Margaret Dawes; Ms. Regina Sikalesele-Vaka; Mr. Maclean Letshwiti; Mr. Francois Kellerman Due to the unique nature of investment risks for the life and asset management businesses, there are two investment committees for Botswana Life and Bifm respectively.

49

The investment committee of Bifm is chaired by Dr Keith Jefferis, an independent non-executive director. Mrs. Margaret Dawes, a non-executive director, chairs the Botswana Life committee.

The Bifm investment committee meets on a monthly basis, while Botswana Life’s meets at least once per quarter. The committees are responsible for formulating investment strategy and monitoring the performance of asset managers. In addition, the committees review the matching of assets against policyholder liabilities and shareholder investment. The committees also ensure compliance with investment mandates set for each of the asset portfolios managed by each asset manager.

Human resources committee Members: Mr. Douglas Lacey, Dr. Happy Fidzani; and Mr. Sanjeev Gupta Composition: Three non-executive directors.

Chaired by Mr. Douglas Lacey, an independent non-executive director, and includes two other non-executive directors. This committee is responsible for monitoring and advising on the status of the Group’s human intellectual capital and the transformation processes regarding employees. In particular, the committee approves executive appointments and reviews succession planning. The committee is also responsible for the remuneration strategy within the Group, and approval of guidelines for incentive schemes and the annual determination of remuneration packages for BIHL’s executive committee. The committee takes cognisance of local and international industry benchmarks, ensures that incentive schemes are aligned with good business practice and that excellent performance is rewarded. It also makes recommendations to the board regarding directors’ remuneration.

The chief executive officers and heads of human resources attend the meetings by invitation.

Non-executive directors do not participate in an incentive bonus nor do they receive share options.

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BIHL | Corporate Governance

(continued)

Nominations committee Members: Mr. Heinie Werth; Mr. Maclean Letshwiti and Mr. Douglas Lacey Composition: Three non-executive directors.

The procedure for the appointment of new directors is formal and transparent, and a matter for the board as a whole. The committee’s responsibility is to make recommendations to the board on the appointment of new directors, including recommendations on the general composition of the board. The appointments are subject to shareholder confirmation at the following annual general meeting. The committee meets as and when appropriate.

Ad hoc board committees The board has the right from time to time to appoint and authorise special ad hoc board committees to perform specific tasks. The appropriate board members make up these committees. A board sub-committee was appointed to determine the amount of excess capital in the Group and to consider how best to utilise this capital. This was the only ad-hoc sub committee to be established in 2007.

REMUNERATION PHILOSOPHY Responsibility for the remuneration strategy of the Group resides with the human resources committee which also approves mandates for incentive schemes within the Group and determines the remuneration of executive committee members, relative to local and international benchmarks.

It also makes recommendations to the board regarding the remuneration of the directors. The board is convinced that appropriate remuneration for executive directors is inextricably linked to the development and retention of top-level talent and intellectual capital within the Group.

Employee remuneration The following principles are used to determine appropriate remuneration levels: • All remuneration principles are structured to provide clear differentiation between individuals with regard to performance; • A clear and meaningful distinction is made between high performers, average performers and underperformers, with remuneration reflecting these gradients; • Strong incentives are created for superior performance by individuals and teams; • Top contributors are rewarded significantly higher performance bonuses; and

• Underperformers are not rewarded and active steps are taken to encourage the individual either to improve performance or leave the Group, in line with accepted practices.

Executive directors The package for executive directors includes a basic salary, a variable performance-linked payment and an allocation of share options. All of these are established in terms of the determined remuneration principles.

In line with the Group’s remuneration philosophy, remuneration is reviewed annually by the human resources committee after evaluating each executive director’s performance.

Non-executive directors Fee structures are recommended to the board by the human resources committee and reviewed annually with the assistance of external service providers. The committee takes cognisance of market norms and practices, as well as the additional responsibilities placed on board members by new acts, regulations and corporate governance guidelines. The board recommends the fee structure for the next year to the company’s shareholders for their approval at the annual general meeting.

Non-executive directors receive an annual fee for their services. In addition, a fee is paid for attending and contributing to board meetings. The Group pays for all travelling and accommodation expenses in respect of board meetings. Disclosure of individual directors’ emoluments is detailed on page 51 EVALUATION OF PERFORMANCE The directors complete questionnaires on an annual basis to evaluate the effectiveness of the board and its members. This mechanism is used to ensure that the responsibilities chartered by the board are complied with, and that adequate attention is paid to matters of both performance and conformance. The results of the exercise are collated by the company secretary, considered by the chairman and discussed with the board for purposes of performance improvement. The performance of the individual directors is also reviewed during individual discussions between each director and the chairman. The chairman’s performance is, in turn, reviewed by the other directors. The recent evaluations indicate that the directors are satisfied with the effectiveness of the board’s performance and that of its individual members.

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Annual retainer

Board meeting

Audit committee

BLIL Investment committee

BIFM Investment committee

Remuneration committee

Totals

MC Letshwiti

55,000

30,800

30,800

30,800

—

—

147,400

JA Burbidge **

49,500

30,800

15,400

15,400

—

15,400

126,500

M Dawes **

49,500

23,100

23,100

23,100

—

—

118,800

H Fidzani

49,500

23,100

—

—

53,900

23,100

149,600

K Jefferis

49,500

30,800

—

—

92,400

—

172,700

S Gupta **

49,500

23,100

23,100

—

53,900

23,100

172,700

H Werth **

49,500

30,800

—

—

—

—

80,300

D Lacey **

20,625

15,400

—

—

—

15,400

51,425

F Kellerman **

20,625

7,700

15,400

7,700

—

—

51,425

107,800

77,000

Total fees

393,250

215,600

200,200

77,000 1,070,850

** fees paid for the services of these directors are paid to their respective companies and not the individuals

CONFLICT OF INTEREST Directors are required to inform the board timeously of conflicts or potential conflicts of interest that may exist in relation to particular items of BIHL business. Directors are obliged to recuse themselves from discussions of matters in which they may have a conflicting interest, unless resolved otherwise by the remaining members of the board. Directors are required to disclose their shareholding in BIHL, their other directorships, and their interests in contracts that the Group may conclude, at least annually and as and when changes occur. All directors are required to consult with and obtain consent of the chairman (and, in the case of executive directors, the Group Managing Directors) in regard to appointments to the boards of other companies.

DEALINGS IN BOTSWANA STOCK EXCHANGE (BSE) SECURITIES BIHL complies with the BSE requirements in respect of the share dealings of its directors. In terms of BIHL’s closed period policy, all directors and staff are precluded from dealing in BIHL securities from 1 January and 1 July, until the release of the Group’s final and interim results respectively.

The same arrangements apply for closed periods during other pricesensitive transactions (e.g. during a period covered by a cautionary announcement). A pre-approval policy and process for all dealings in BIHL securities by directors and selected key employees are strictly followed.

Even more stringent trading policies regarding personal transactions in all financial instruments are enforced at BIHL’s investment management companies. A summary of directors’ dealings is listed on page 127 of this annual report.

ADVICE All directors have access to the advice and services of the company secretary and are entitled to obtain independent and professional advice at the Group’s expense.

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BIHL | Corporate Governance

(continued)

STATUTORY ACTUARY Mr. Giles Waugh is an independent statutory actuary who is not in the employ of the company. He is responsible for assisting the board in all actuarial matters and conducts the actuarial valuation of the Group. He is also responsible for all regulatory reporting to the Registrar of Insurance and for safeguarding the interests of policyholders. The statutory actuary attends the interim and year-end board meetings as well as the audit committee meetings. The report of the statutory actuary is set out on page 70.

COMMUNICATION WITH STAKEHOLDERS The Group is committed to a policy of effective communication and engagement with its stakeholders on issues of mutual interest. These include statutory, regulatory and other directives regulating the dissemination of information by the company and its directors and officers.

Communications also include the rationale behind major new business developments. Financial results presentations are made to financial analysts at least annually. In addition, personal meetings with analysts and fund managers/trustees are arranged when appropriate. The Group publishes its annual and interim results in the media in addition to mailing its annual report to all shareholders.

Each item of special business included in the notice of the annual general meeting is accompanied by a full explanation of the implications of the proposed resolution. In the course of the annual general meeting, as at other shareholder meetings, the chairperson provides reasonable time for discussion. Shareholders are encouraged to attend the annual general meeting.

FORENSICS The Group recognises that financial crime and unlawful conduct conflict with the principles of ethical behaviour, as set out in the code of ethics, and undermine the organisational integrity of the Group. The financial crime combating policy for the BIHL Group is designed to counter the threat of financial crime and unlawful conduct. A zero tolerance approach is applied to these matters and all offenders are prosecuted.

A Group Forensic Services function at the Sanlam Group level oversees the prevention, detection and investigation of incidents of unlawful conduct that are of such a nature that may have an impact on the Group. Group Forensic Services are also responsible for the formulation of Group standards in respect of the combating of unlawful conduct and the implementation of measures to ensure compliance with these standards.

Quarterly reports are submitted by Group Forensic Services to the BIHL audit and risk committee on the incidence of financial crime and unlawful conduct in the Group and on measures taken to prevent, detect, investigate and deal with such conduct.

STRATEGIC RISK MANAGEMENT In acknowledging its responsibility for strategic risk management (SRM) within the Group, the board has tasked the audit and risk committee to ensure that SRM responsibilities are fulfilled. A major function of the committee is, therefore, to analyse and report back to the board on the status of various risks and risk management.

Considered an integral part of the decision-making process in the Group, the primary objective of the Group’s SRM programme is to optimise the Group’s risk-adjusted return on capital and embedded value. To ensure an optimal return, the Group determines an acceptable level of risk in conducting its operations.

The role of risk management is, therefore, to enhance the organisation’s ability to manage, and not necessarily avoid or eliminate every risk, but to ensure that the overall risk profile remains acceptable. This may involve various risk responses or a combination thereof, namely acceptance, mitigation and/or avoidance of the risk. The processes in place provide reasonable, but not absolute assurance, that the risks are adequately managed. These processes have been in place during the period under review, and cover all material activities of the Group.

The SRM policy is regularly reviewed and updated where necessary, evaluating risk as a combination of impact and likelihood. Amendments to SRM policy require board approval. The assessment of the various risks in the Group is evaluated on both a quantitative and qualitative basis.

Risks characterised by a low likelihood of occurrence but with a potentially catastrophic impact, are regarded as unacceptable and are consciously avoided as far as practically possible. The SRM policy sets out the minimum standard of risk management that BIHL’s businesses have to adopt and adhere to.

Rigorous policies, procedures and methodologies have been adopted and implemented throughout the Group, enabling the effective identification and management of risks. All processes and procedures have been designed to provide reasonable assurance that risks are adequately managed.

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EMPLOYMENT EQUITY AND LOCALISATION Employment and localisation remain a high priority business imperative.

Both Group businesses have implemented their respective plans for the period to 31 December 2008. These plans are reviewed annually to ensure they remain aligned with business objectives and industry needs.

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GOING CONCERN The board has considered and recorded the relevant facts and assumptions and has concluded that BIHL will continue as a going concern during the 2008 financial year. Their statement in this regard is also contained in the statement of directors’ responsibility for annual financial statements.

FINANCIAL REPORTING The standards of BIHL financial reporting are prepared in accordance with international Financial Reporting Standards and the Botswana Companies Act. INTERNAL AUDIT The Group’s internal audit function is co-ordinated at Sanlam Group level by the chief audit executive of Sanlam Limited. An internal audit charter, approved by the BIHL board, governs internal audit activity within the Group. Regular risk-focused reviews of internal control and risk management systems are carried out. The chief audit executive of Sanlam Limited is appointed in consultation with the chairman of the Sanlam audit and risk committee and has unlimited access to the chairman of the BIHL committee. The authority, resources, scope of work and effectiveness of these functions are reviewed regularly.

EXTERNAL AUDIT The external auditors provide an independent assessment of BIHL’s systems of internal financial control and express an independent opinion on the annual financial statements. The external audit function provides reasonable, but not absolute, assurance on the accuracy of the financial disclosures. The external auditor’s plan is reviewed by the audit committee to ensure that significant areas of concern are covered, without infringing on the external auditor’s independence and right to the audit. Close cooperation between the internal and external auditors ensures appropriate combined audit and minimisation of duplicated effort.

COMPANY SECRETARY AND PROFESSIONAL ADVICE The company secretary appointed by the board is Mrs. Spankie Boitumelo.

All directors have unlimited access to the advice and services of the company secretary, who is accountable to the board for ensuring that prescribed procedures are complied with and that sound corporate governance and ethical principles are adhered to. Individual directors are entitled to seek independent professional advice concerning the discharge of their responsibilities at BIHL’s expense.

The Bifm Maitisong Festival Concert is arguably the most magical night at Maitisong. 2007 marked the 20th year anniversary of this festival of which Bifm has been a sponsor for over 15-years. This festival forms an important component in the development of local musicians

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BIHL | Corporate Social Investment â&#x20AC;&#x153;With the establishment of the BIHL Trust we will look to improve the lives of many Batswana in a sustainable manner. The establishment of this trust heralds a very important milestone in our history formalising our compassion for those less fortunate than us. Botho (compassion) is a cornerstone of our culture and our business is very much a part of our Nation.â&#x20AC;?

Maclean C Letshwiti Chairperson BIHL

Pictures taken at the Results Announcement Breakfast of 2007. The strong financial position of the BIHL group allows for significant funds to be reserved for the newly established Corporate Social Investment (CSI) Trust. Over P1.5 million was spent on CSI during 2007.

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BIHL | Corporate Social Investment

During the course of 2007, the board approved the BIHL Corporate Social Investment (CSI) Trust with the purpose of alleviating poverty and suffering, and to uplift the livelihood of Batswana through the identification of beneficiaries in need and deserving of assistance.

GROWTH IN EXPENDITURE ON CSI ACTIVITIES BY BIHL

% SPLIT OF CSI FUNDS SPENT DURING 2007

1600

No single corporate undertaking in Botswana can meet all these needs and BIHL will focus on worthy projects in conjunction with leaders who are closely associated with communities and organisations in need of support.

This is particularly important as funds are not unlimited and must be allocated on a priority basis according to where the needs are greatest.

1400

The principal areas of BIHL CSI activity, not mentioned in any sequence of priority, are mentioned below.

1200

P’000

1000 800 600 400

Business Outreach 200

Sports and (Education) Culture

0 2005

2006

2007

Wellness

BIHL has always recognised its responsibility towards disadvantaged communities and the nation at large. With the establishment of the CSI Trust, BIHL has undertaken to contribute 1% of its post-tax profits to the trust fund thereby providing it with a secure source of income with which it can budget its future activities on a sustainable basis. The Group expended P1.5 million on CSI during 2007.

There are a great number of organisations in Botswana that perform laudable work in their efforts to alleviate the needs of disadvantaged communities across a variety of fields of endeavour. They range from empowering people to become materially self-sufficient to promoting wellness and developing the creative talents of our people through the arts and culture.

Business outreach The need for job creation as a counter to joblessness and provide additional resources for small, medium and micro enterprises (SMMEs) is self-evident.

During 2007, the following were undertaken.

• Bifm hosted the June 2007 FinMark Forum on housing finance in Botswana as part of its outreach initiative to promote financial awareness and development in Botswana’s financial sector.

• Bifm organised and hosted the October 2007 Global Investment Conference as part of its ongoing commitment to training, knowledge and skills transfer within the pension fund industry in Botswana.

• BIHL also sponsored the Botswana Stock Exchange Investment Forum held in June 2007. The CEO of BLIL made a presentation at the forum promoting the need for a vibrant stock exchange in Botswana’s developing economy.

• Bifm recognises that in many instances trustees offer their services on a part-time basis due to their full-time commitments. Bifm thus offers bi-annual General Trustee Training programmes to all its clients.

• Bifm continued its six-month Socially Responsible Apprenticeship Programme which is geared towards offering work experience to unemployed graduates.

• Bifm awarded scholarships to University of Botswana MBA students.

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Welfare BIHL’s welfare programmes reflect the Group’s desire to care for the less fortunate and disabled members of society, whether they be children or adults. We initiated the following first steps in this initiative.

• During 2007, BIHL donated P100 000 to the Lady Khama Charity Trust.

• On 3 November 2007, the BLIL Staff Wellness Committee donated food and other goods to the Tsogang Support Group (TSG) in Mogoditshane. TSG takes care of approximately 100 children who have been infected by HIV and AIDS. • In December 2007 Bifm, Bifm Capital and Khumo Property Asset Management identified the Bana Ba Keletso Orphan Care Facility where it commemorated World Aids Day by hosting a Christmas Party for the children. In addition, Bifm and its subsidiaries are sponsoring the costs of two staff members at the Centre for a periodof twelve months.

• BLIL hosted a Christmas lunch for the Francistown School of the Deaf.

Sport Sporting activity plays an important role in an individual’s physical health, the development of team spirit and, at a national level, in fostering patriotism and pride in the international arena. It also plays an equally important therapeutic role in the treatment of the physically disabled.

• Botswana Life Kgale classic marathon took place in Gaborone in September 2007. It is our contribution towards promoting a healthier lifestyle in Botswana.

• In October 2007, Bifm donated golf equipment to the Botswana Golf Union’s Junior Golf Development, to be used by underprivileged junior golfers, as part of its ongoing CSI programme.

Culture The value of culture is often underestimated. Many maintain that culture reflects the creative spirit of a nation and provides a channel through which to express individual talent and community tradition. Art reminds us of who we are and where we have come from. A nation without culture is surely a nation without a soul.

• Botswana Life sponsored the BTU National Eisteddfod in Serowe in July 2007. The event unearthed and showcased emerging musical talent amongst our school children and makes a valuable contribution towards developing music in Botswana.

• Bifm sponsored a one-night performance of the Ballet Moscow in Gaborone, which was attended by His Excellency, The former President of Botswana and His Excellency the Ambassador of the Russian Federation and Igor Liakin Frolovand. This represented part of Bifm’s arts and culture element of its CSI Programme, and in support of international understanding.

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Wellness and HIV policy BIHL regards wellness indivisible from its HIV and AIDS policy, especially as it affects our own employees. Regrettably, there is no outstanding, dramatic development that can be reported in the course of one financial year. This is ongoing work at national, corporate and personal levels.

Our policy continues to rest on the four pillars of • Education; • Support and networking; • Medical treatment; and • Care and support.

Education and knowledge of the nature of the illness and the relevant medical facts empower employees to deal with it. They are informed how to reduce the risk of infection and how to determine their own personal status. Treatment commences immediately on knowledge of infection, although testing remains voluntary and employees not wishing to do so are not required to disclose their HIV and AIDS status.

Support and networking is available for those infected and their families.

This includes counselling and mobilising employer and family support in combating the illness. Support is also available through support groups where sufferers can exchange experiences and provide mutual support.

Medical treatment and assistance are provided to those infected by HIV and AIDS. The illness is approached on the same basis as any other life-threatening or serious health condition. Support is also available through the relevant medical aid benefit societies.

Care and support play an important role in helping the sufferer to remain healthy. Employees with AIDS are entitled to all normal employee benefits and are permitted to continue with their normal duties for as long as this is possible. Should they reach a stage where they need to stop working, the company policy regarding ill health applies.

Wellness Programme In addition, but not related to HIV and AIDS, a Group Staff Wellness Programme exists within the Group to initiate and implement health awareness programmes for lifestyle-related conditions.

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Embedded Value Report

1. DEFINITION OF EMBEDDED VALUE

The embedded value represents an estimate of the economic value of the company excluding the value attributable to future new business and the value attributable to minority interests. The embedded value comprises: — The value of the shareholders’ net assets; — Fair value adjustments; and — The value of the in-force business.

The value of in-force business is the present value of future after-tax profits arising from business in force at the valuation date, discounted at the risk discount rate, and adjusted for the cost of capital required to support the business.

Other operations have been taken at net asset value.

The value of new business represents the value of projected after-tax profits at the point of sale arising from new policies sold during the period to 31 December 2007, accumulated to the end of the year at the risk discount rate. The value is adjusted for the cost of capital required to support the new business.

2. EMBEDDED VALUE RESULTS

Year to 31 December 2007 P’000

Year to 31 December 2006 P’000

Shareholders’ net assets excluding goodwill Fair value adjustments

Value of in-force business

Value before cost of capital

Fair value adjustments

Cost of capital

1,303,923 242,028 1,545,951

836,560 259,864 1,096,424

Embedded value

1,781,163

1,324,181

Group required capital Required capital cover

287,075 5.4

124,652 8.8

235,212 373,059 (36,089 ) (101,758 )

227,757 281,221 (16,506 ) (36,958 )

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3. EMBEDDED VALUE EARNINGS

The embedded value earnings are derived as follows:

Embedded value at the end of the year

Embedded value at beginning of the year Change in embedded value Consolidation of the staff share scheme EEV methodology change Dividends and new capital Embedded value earnings These earnings can be analysed as follows: Roll forward

Investment return on free assets

Expected return on life business in force

Staff share based costs Value of new business at end of the period

Value of new business at point of sale

Expected return on new business to end of the period Changes in assumptions and methodology

Expenses

Mortality

Persistency

Data and methodology changes

Total operational

Economic

Total Experience variations

Mortality and morbidity

Persistency

Expenses and commission

Other

Total operational

Investment returns

Taxation

Total

Total earnings

Year to 31 December 2007 Pâ&#x20AC;&#x2122;000

Year to 31 December 2006 Pâ&#x20AC;&#x2122;000

1,781,163 1,324,181 456,982 0 51,329 139,609 647,920

1,324,181 995,155 329,026 2,288 0 104,482 435,796

423,055 498,830 36,034 (111,809 ) 84,384 79,033 5,351

235,177 215,605 41,214 (21,642 ) 63,976 59,257 4,719

(17,935 ) 7,929 1,930 3,860 (4,216 ) (3,340 ) (7,556 )

(20,515) 14,812 (14,078 ) (2,425 ) (22,206 ) 2,277 (19,929 )

32,502 5,368 (7,736 ) 3,450 33,584 38,512 75,941 148,037 647,920

29,437 4,612 2,804 37,547 74,400 65,841 16,331 156,572 435,796

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Embedded Value Report (continued)

3. EMBEDDED VALUE EARNINGS (continued)

Fair value adjustments

Staff share scheme

BIFM write-up to fair value

Group holding expenses

Funeral Services Group write-up to fair value

Reversal of treasury shares

Total Consisting of

Net asset value adjustments

Value of in-force business adjustments

Year to 31 December 2007 P’000

Year to 31 December 2006 P’000

(152,539 ) 178,986 (36,089 ) 5,218 210,363 205,939

(28,434 ) 159,080 (16,506 ) 5,218 124,000 243,358

242,028 (36,089 )

259,864 (16,506 )

4. VALUE OF NEW BUSINESS

The value of new business represents the value of projected after-tax profits at the point of sale arising from new policies sold during the period to 31 December 2007, accumulated to the end of the period at the risk discount rate. The value is adjusted for the cost of capital required to support the new business.

Year to 31 December 2007 P’000

Value of new business at end of the period before EEV changes

Value at point of sale after cost of capital

Value at point of sale before cost of capital

Recurring premium

Single premium

Cost of capital at point of sale

84,384 79,033 82,906 53,935 28,971 (3,873 )

Expected return

5,351

Year to 31 December 2006 P’000 63,977 59,258 61,821 28,125 33,696 (2,563 ) 4,719

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4. VALUE OF NEW BUSINESS (continued)

Year to 31 December 2007 P’000

Value of new business at end of the period after EEV changes

Value at point of sale after cost of capital

Value at point of sale before cost of capital

Recurring premium

Single premium

Cost of capital at point of sale

Expected return

81,443 76,019 84,041 55,070 28,971 (8,022 ) 5,424

5. SENSITIVITY TO THE RISK DISCOUNT RATE

The risk discount rate appropriate to an investor will vary depending on the investor’s own requirements, tax position and perception of the risks associated with the realisation of the future profits of the Botswana Insurance Holdings Limited Group. The sensitivity of the embedded value to the risk discount rate is set out below.

Risk Discount Rate

Shareholder’s net assets and fair value adjustments, excluding goodwill Value of in-force business

Value before cost of capital Fair value adjustments Cost of capital

Embedded value

Value of one year’s new business at valuation date

Value before cost of capital

Cost of capital

13.0% P’000

14.0% P’000

15.0% P’000

1,545,951 260,772

1,545,951 235,212

1,545,951 211,876

387,728 (36,089 ) (90,867 )

373,059 (36,089 ) (101,758 )

1,806,723

1,781,163

81,843 89,174 (7,332 )

76,019 84,041 (8,022 )

359,677 (36,089 ) (111,712 ) 1,757,827 70,778 79,391 (8,613 )

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Embedded Value Report (continued)

6. ASSUMPTIONS

The assumptions used in the calculation of the embedded value are the same best estimate assumptions used for the Financial Soundness Valuation.

The main assumptions used are as follows:

6.1 Economic Assumptions

Best estimate economic assumptions are the same as assumed in the Financial Soundness Valuation as shown in the financial statements.

The main assumptions (% p.a.) used are as follows:

31-Dec-07 31-Dec-06

% p.a % p.a

Risk discount rate Overall investment return (before taxation) Expense inflation rate

14.00 11.60 7.50

14.50 12.14 8.00

6.2 Mortality Rates

The assumptions for future mortality rates are based on the results of recent experience investigations conducted by the company.

Allowance has been made for expected future AIDS mortality allowing for the effect of the roll-out of Anti Retroviral Treatment.

6.3 Expenses

The maintenance expense assumption is based on the results of conducted expense investigations on 31 December 2007.

6.4 Premium Escalations

The embedded value of in-force business includes the expected value of future premium increases resulting from premium indexation

arrangements on in-force business. The value of new business includes the expected value of future premium increases resulting from premium

indexation arrangements on new business written during the period to 31 December 2007.

6.5 Persistency / Surrender Basis

The assumptions for lapse and surrender rates are based on the results of experience investigations conducted on 30 September 2007 by the

company.

6.6 Tax

Allowance was made for the current life office taxation basis, including capital gains tax.

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6.7 Mix of assets backing the Capital Adequacy Requirement

Asset Class

31-Dec-07

31-Dec-06

Fixed interest Property Equities Offshore assets Total

64.0% 5.0% 21.0% 10.0% 100.0%

23.8% 1.1% 75.0% 0.0% 100.0%

6.8 Other Assumptions

The embedded value per share does not include an allowance for the future cost of the share option scheme. Where shares have not yet been

issued, the number of shares used to calculate the embedded value per share will be increased as and when these options are granted. Granting

share options will therefore influence the embedded value per share in future.

7. SENSITIVITIES

This section illustrates the effect of different assumptions on the value of in-force business net of cost of capital. The effect of assumption changes in the Financial Soundness Valuation has been included in the value of in-force business. For each sensitivity illustrated all other assumptions have been left unchanged.

Value of

in-force

P’000

Embedded value at 31 December 2007 Base Lapse increases by 10% Future expenses increase by 10% Mortality experience increases by 10% Investment returns decrease by 1% Risk discount rate decreases by 1% Risk discount rate increases by 1%

271,301 254,271 260,514 265,894 258,537 296,861 247,965

Cost of capital over base Capital P’000

Value before cost of capital Total P’000

101,758 101,758 101,758 101,758 112,916 90,867 111,712

373,059 356,029 362,273 367,652 371,453 387,728 359,677

% Change

(4.6% ) (2.9% ) (1.4% ) (0.4% ) 3.9% (3.6% )

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Embedded Value Report (continued)

7. SENSITIVITIES (continued)

Value of one yearâ&#x20AC;&#x2122;s new business as at 31 December 2007 Base Lapse increases by 10% Future expenses increase by 10% Maintenance and acquisition costs increase by 10% Mortality experience increases by 10% Investment returns decrease by 1% Risk discount rate decreases by 1% Risk discount rate increases by 1% Assumed management action No management action has been assumed.

GT Waugh STATUTORY ACTUARY FIA FASSA 14 February 2008

Value of new business

Cost of capital

Value before cost of capital

% change

76,019 69,180 69,423 67,846 70,372 74,914 81,843 70,778

8,022 8,022 8,022 8,022 8,022 8,902 7,332 8,613

84,041 77,202 77,445 75,868 78,394 83,815 89,174 79,391

(8.1% ) (7.8% ) (9.7% ) (6.7% ) (0.3% ) 6.1% (5.5% )

BOTSWANA INSURANCE HOLDINGS LIMITED ANNUAL REPORT 2007

Annual Financial Statements

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BIHL Annual Financial Statements For the year ended 31 December 2007

Directors’ Report

67

Directors’ Statement of Responsibility

68

Independent Auditors’ Report

69

Report of the Statutory Actuary

70

Basis of presentation and accounting policies

74

Balance Sheets

104

Income statements

105

Statement of changes in equity

106

Cash flow statements

108

Notes to the financial statements

109

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Directors’ Report

The Board of Directors of Botswana Insurance Holdings Limited (“the Company”) has pleasure in submitting its report and the audited financial statements of the Company and its subsidiaries for the year ended 31 December 2007.

Nature of Business The Company and its subsidiaries (“the Group”) underwrite all classes of long-term insurance, administer deposit administration schemes, manage investments and administer life and pension funds. It also provides funeral services through one of its associated companies. The Company is listed on the Botswana Stock Exchange.

Results for the Period The Group reported a surplus after tax for the year to 31 December 2007 of P553,519 million (31 December 2006: P316.1 million). Shareholders’ equity at 31 December 2007 was P1,317 million (31 December 2006: P849.1million). The results are fully explained in the financial statements.

Share Capital The authorised share capital of the Company consists of 1,200,000,000 ordinary shares with a nominal value of 5 thebe each. The issued share capital consists of 281,070,652 (31 December 2006: 275,684,402) ordinary shares of 5 thebe each. The increase during the year was due to an issue of shares to the staff share scheme and in accordance with the shareholders’ approval granted at the AGM in 1998.

Events Subsequent to the Balance Sheet Date The directors are not aware of any matters or circumstances arising since the end of the financial period, not otherwise dealt with in this report or the Group Financial Statements that would have a significant effect on the operations of the Group or the results of its operations.

Directorate The composition of the Board is as follows: MC Letshwiti Chairman JA Burbidge M Dawes H Fidzani S Gupta D Lacey Appointed August 2007 H Werth K Jefferis J van der Merwe Resigned August 2007 F Kellerman Appointed August 2007 V Senye Joint Group Managing Director RD Sikalesele-Vaka Joint Group Managing Director Company Secretary and Registered Address S Boitumelo, Block A: Fairgrounds Office Park, Plot 50676, Gaborone P O Box 336, Gaborone

Dividends An interim dividend of 21.0 thebe per share was declared during the period. The directors propose a final dividend of 29.0 thebe per share and a special dividend of 6.0 thebe per share; making the total dividend for the year 56.0 thebe per share (31 December 2006: 42.0 thebe per share).

Independent Auditors Ernst and Young

Directors’ Shareholdings The aggregate number of Botswana Insurance Holdings Limited shares held directly or indirectly by directors of the Company is 75,741 (31 December 2006: 59,942). Details of the holding of these shares are disclosed in note 19 to the financial statements.

Bankers First National Bank of Botswana Limited Barclays Bank of Botswana Limited Stanbic Bank Botswana Limited Standard Chartered Bank Botswana Limited Bank of Baroda (Botswana) Ltd

Statutory Actuary GT Waugh

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Directorsâ&#x20AC;&#x2122; Statement of Responsibility

The directors of the Company are responsible for the annual financial statements and all other information presented therewith. Their responsibility includes the maintenance of true and fair financial records and the preparation of annual financial statements in accordance with International Financial Reporting Standards and in the manner required by the Insurance Industry Act and the Botswana Companies Act (CAP 42:01).

The Company maintains systems of internal control which are designed to provide reasonable assurance that the records accurately reflect its transactions and to provide protection against serious misuse or loss of company assets. The directors are also responsible for the design, implementation, maintenance, and monitoring of these systems of internal financial control. Nothing has come to the attention of the directors to indicate that any significant breakdown in the functioning of these systems has occurred during the year under review.

The going concern basis has been adopted in preparing the annual financial statements. The directors have no reason to believe that the Company will not be a going concern in the foreseeable future based on forecasts and available cash resources.

Our external auditors conduct an examination of the financial statements in conformity with International Standards on Auditing, which include tests of transactions and selective tests of internal accounting controls. Regular meetings are held between management and our external auditors to review matters relating to internal controls and financial reporting. The external auditors have unrestricted access to the Board of Directors.

The annual financial statements set out here were authorised for issue by the board of directors on 14 February 2008 and were signed on their behalf by:

(MC Letshwiti) Chairman

(V Senye) Joint Group Managing Director

(RD Sikalesele - Vaka) Joint Group Managing Director

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Independent Auditor’s Report

TO THE MEMBERS OF BOTSWANA INSURANCE HOLDINGS LIMITED Report on the Financial Statements We have audited the accompanying Group and Company annual financial statements of Botswana Insurance Holdings Limited, which comprise the directors’ report, balance sheet as at 31 December 2007, the income statement, the statement of changes in equity and cash flow statement for the year then ended, a summary of significant accounting policies and other explanatory notes, as set out on pages 74 to 145 Directors’ Responsibility for the Financial Statements The Company’s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of Botswana (Companies Act, 2003).This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements present fairly, in all material respects the financial position of Botswana Insurance Holdings Limited as of 31 December 2007, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of Botswana (Companies Act, 2003).

Report on Other Legal and Regulatory Requirements In accordance with Section 189 of the Companies Act of Botswana (Companies Act, 2003), we confirm that: • in our opinion, it appears that the company has kept proper books of account.

Certified Public Accountants 2nd Floor, UN Place Khama Crescent PO Box 41015 Gaborone Botswana

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Report of the Statutory Actuary For the Year 31 December 2007

Group

Statement of actuarial values of assets and liabilities Total assets as per balance sheet Current liabilities, deferred taxation and minorities as per balance sheet Net assets Actuarial value of policy liabilities Excess of assets over liabilities Capital Adequacy Requirement Capital Adequacy Requirement cover Analysis of change in excess of assets over liabilities Excess assets as at beginning of the year Excess assets as at end of reporting period Change in excess assets over the reporting period This change in the excess assets is due to the following factors: Investment income Capital gains Total investment return on shareholders’ funds Changes in valuation methods or assumptions Operating profit Taxation Surplus for the year after tax Currency translation Realised investment surpluses on sale of treasury shares Changes in share based payment and treasury shares Total earnings Capital Raised and dividends paid Total change in excess assets

31 December 2007 P’000

10,783,859 (336,823 ) 10,447,036 9,129,979 1,317,057 143,537 9.18

31 December 2006 P’000

9,228,994 (239,851 ) 8,989,143 8,140,007 849,136 124,652 6.81

849,136 1,317,057 467,921

644,588 849,136 204,548

74,789 292,999 367,788 10,351 205,849 (49,867 ) 534,121 6,787 47,824 18,798 607,530 (139,609 ) 467,921

48,365 159,001 207,366 9,703 169,561 (77,021 ) 309,609 1,191 — (766 ) 310,034 (105,486 ) 204,548

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Certification of financial position I hereby certify that: •

the valuation of Botswana Insurance Holdings Limited as at 31 December 2007, the results of which are summarised above, has been conducted in accordance with, and this Statutory Actuary Report has been produced in accordance with the Botswana Insurance Industry Act (Chapter 46:01) and the professional guidance notes of the Actuarial Society of South Africa (“ASSA”), PGN103 (2005) and PGN104;

• the Group was financially sound as at the valuation date and, in my opinion, is likely to remain financially sound for the foreseeable future.

Changes in valuation methods or assumptions of assets and liabilities The value of the policyholder liabilities as at 31 December 2007 decreased

by P10.4 million as a result of changes in valuation assumptions and methodology. The components of this were as follows:

Mortality Lapse and surrender assumptions Expenses Economic Other Total

P million 6.7 0.3 0.3 1.6 2.1 10.4

The result of the valuation methods and assumptions is that profits for insurance contracts and for investment contracts with participation in profits on a discretionary basis are released appropriately over the term of each policy, to avoid the premature recognition of profits that may give rise to losses in later years.

Assets and policy liabilities have been valued using methods and assumptions that are consistent with each other. A financial soundness valuation gives a statement of the financial position of a life assurance company, according to a realistic or best estimate set of assumptions regarding future investment returns, bonus rates, expenses, persistency, mortality and other factors that may impact on the financial position of the company. These assumptions are based on past experience and anticipated future trends. In particular, provision is made for the expected impact of AIDS on the experience of the company. The liability calculations also make allowance for the reasonable benefit expectations of policyholders, which may exceed the minimum contractual obligations of the company.

Liability Valuation Methods and Assumptions Insurance contracts and investment contracts with participation in profits on a discretionary basis

Valuation Methods and Assumptions

In the calculation of the policy liabilities for insurance contracts and for investment contracts with participation in profits on a discretionary basis, compulsory margins prescribed in the ASSA guidelines have been added to the various realistic assumptions regarding future experience. In addition, discretionary margins have been added in line with policy design.

The valuation was performed using the Financial Soundness Valuation method for insurance contracts and for investment contracts with participation in profits on a discretionary basis. Investment contracts without discretionary participation features have been valued in terms of IAS 39 Financial Instruments: Recognition and Measurement.

The purpose of these margins is to introduce an appropriate degree of prudence, to allow for possible adverse deviations in the experience of the company and to avoid the premature recognition of profits that may give rise to losses in later years. Profits are recognised in line with work done and the risk borne by the company.

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Report of the Statutory Actuary (continued)

For market-related unbundled business (e.g. those where a portion of the premium is allocated to an accumulation account) the liability was taken as the market value of the units notionally credited to the policies, less the present value of future charges not required for risk benefits and renewal expenses. For the purpose of calculating the Pula reserves, the discount rates as supplied below, were used.

Appropriate reserves for the unexpired risk portion and for claims incurred but not reported were held for group risk premium benefits.

In the case of group policies for which the bonuses are stabilised, the liabilities are equal to the balances of the investment accounts plus corresponding bonus stabilisation reserves. Group linked business was valued at the market value of the underlying assets.

Liabilities for life and term annuities and guaranteed non-profit endowment policies were valued on a discounted cash flow basis at interest rates based on the bond yield curve at the valuation date.

For reversionary bonus policies, a gross premium valuation was done.

Future bonuses were provided for at the latest declared reversionary bonus rates and at final bonus rates supported by the assumed investment return of 11.8% p.a. A discount rate of 11.8% per annum (previous year: 12.1%) was used. Bonus stabilisation reserves were held to equate the liabilities to the market/fair value of the corresponding assets.

For individual unbundled policies of which the bonuses are stabilised/ smoothed, a gross premium valuation was done. Future bonuses were provided for at bonus rates that would be declared should an investment return of 11.8% per annum be earned. A discount rate of 11.8% per annum (previous year: 12.1%) was used to place a present value on assumed future cash flows. A negative Pula reserve has been allowed for, equal to the present value of future charges not required for risk benefits and renewal expenses. Bonus stabilisation reserves were held to equate the liabilities to the market value of the corresponding assets.

Where policyholders participate on a discretionary basis in the proceeds of the business, their reasonable benefit expectations have been interpreted as their share in the funds accumulated to them as a group over their in force lifetime. To achieve a steady build up via bonus declarations it is necessary to apply some smoothing of investment returns experienced by these funds. For this purpose a Bonus Stabilisation Reserve is held that represents the difference between the funds set aside and the value of policy liabilities based on declared bonuses, ensuring that excess investment returns are held back to provide for future payment of policy benefits. No bonus stabilisation reserve for any class of business was more negative than -7.5% of corresponding liabilities at the valuation date.

Where relevant, liabilities include provisions to meet maturity, mortality and disability guarantees and for losses in respect of potential lapses and surrenders; < plus the compulsory margins prescribed by PGN104 < plus discretionary margins as follows to release profits consistent with policy design: •

•

•

•

•

•

The mortality basis has been increased to reflect uncertainty due to AIDS, by the addition of an extra 10% of the AIDS mortality table The expense inflation has been increased by 1.3% p.a. (inclusive of prescribed margin) The discount rate on single premium guaranteed annuities has been decreased by 0.75% p.a.

The renewal expenses have been increased by 17.8% (inclusive of prescribed margin) The surrender rates have been increased by 25% of the best estimate assumption (inclusive of prescribed margin) Additional reserves are created to ensure that no policy is treated as an asset

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A more detailed description of the individual elements of the basis follows below.

Economic parameters The best estimate assumptions for the major investment parameters are based on estimated future inflation. The current Botswana inflation rate was not used as it was believed to be a short term spike. The estimate for the future expected Botswana inflation was obtained from an economist.

The assumptions quoted below are before the allowance for compulsory and discretionary margins and tax:

Dec Dec

2007 2006

% % 10.5 11.0 Gilt return 14.0 13.0 Equity return 11.5 12.0 Property return 8.5 9.0 Cash return 11.6 12.1 Average return 7.5 8.0 Expense inflation

Bonus Rates Bonus rates on smoothed bonus policies have been assumed at a self-supporting rate.

Policy Decrements The assumptions (before adding margins) with regard to future surrender, lapse, disability payment termination, mortality, medical claims and morbidity rates were consistent with the companyâ&#x20AC;&#x2122;s recent experience and provision has been made for the expected increase in the occurrence of AIDS-related claims. The most recent experience investigations were done as at the end of September 2007.

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Valuation basis of policy liabilities for Investment contracts without discretionary participation features In the calculation of liabilities for investment contracts that provide investment management services, e.g. market-related investment contracts, the account balance has been held as the value of the liability.

No negative Pula reserves have thus been held for these contracts.

Valuation of assets The assets (including the excess of assets over liabilities) are valued at fair value, as per the accounting policies in the financial statements. Goodwill has been excluded from the value of the assets.

Capital Adequacy Requirements The capital adequacy requirement is the minimum level of capital that is necessary to provide for more extreme adverse deviations in future experience than those assumed in the calculation of policy liabilities. The capital adequacy requirements have been calculated in accordance with section 6 of PGN 104 of the Actuarial Society of South Africa.

Botswana Life Insurance Limited calculates its capital adequacy requirement on the termination capital adequacy requirement (TCAR) basis. In determination of the amount of the capital adequacy requirement, no allowance has been made for action by management.

For the purpose of grossing up the intermediate ordinary capital adequacy requirements (IOCAR) to determine the ordinary capital adequacy requirements (OCAR), it has been assumed that assets backing the capital adequacy requirements are invested 64% in fixed interest assets, 21% in equities, 5% in property and 10% in offshore assets.

The ratio of accumulated surplus to the Capital Adequacy Requirement of P143.5 million (December 2006: P124.7million) is 9.2 times (December 2006: 6.8 times).

Expenses Provision for expenses (before adding margins) starts at a level consistent with the companyâ&#x20AC;&#x2122;s current experience and allows for a 7.5% escalation per annum thereafter (previous year: 8%).

GT WAUGH Statutory Actuary 14 February 2008

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Basis of Presentation and Accounting Policies

1 General information The Company and its subsidiaries (“the Group”) underwrite all classes of long-term insurance, administer deposit administration schemes, manage investments and administer life and pension funds. It also provides funeral services through one of its associated companies.

The Company is a limited liability company incorporated in Botswana.

The Company is listed on the Botswana Stock Exchange.

The Group’s major shareholder, Sanlam Limited, holds 53% of the Company’s share capital. Sanlam Limited was established in 1918, Sanlam is one of the leading financial services groups in South Africa.

It is listed on the JSE Securities Exchange in Johannesburg and on the Namibian Stock Exchange.

2 Basis of presentation The Group annual financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and in the manner required by the Botswana Companies Act (Companies Act, 2003) and the Botswana Stock Exchange Act. The Group annual financial statements have been prepared on the historical cost convention, modified by the revaluation of certain financial assets and liabilities, investment properties and land and buildings which are measured at fair value.

All amounts in the notes are shown in thousands of Pula which is the Company’s functional and presentation currency. All values are rounded to the nearest thousand, unless otherwise stated.

The assets, liabilities and activities of the policyholders and shareholders in respect of the life insurance business 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, IFRS and generally accepted actuarial practice. The valuation bases in respect of policy liabilities and the profit entitlement of shareholders are set out on page 91. The Financial Soundness Valuation methodology as outlined in the report of the Statutory Actuary is equivalent to the liability adequacy test.

3 Statement of compliance The financial statements have been prepared in accordance with IFRS, the Botswana Companies Act (Companies Act, 2003) and the Botswana Stock Exchange Act. 4 Changes in accounting policies The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted the following new and amended IFRSs during the year. Adoption of these revised standards did not have any effect on the financial statements of the Group. They did however, in certain instances, give rise to additional disclosures.

• IFRS 7 Financial Instruments: Disclosures • IAS 1 Amendment: Capital disclosures • IFRIC 8 Scope of IFRS 2 • IFRC 10 Interim reporting and impairment IFRS 7 Financial Instruments IFRS 7 is effective for annual periods beginning on or after 1 January 2007. This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Group’s financial instruments and the nature and extent of risks arising from those financial instruments. IFRS 7 includes all of the disclosure requirements relating to financial instruments and will replace the disclosure section of IAS 32 Financial Instruments. The required disclosures are found throughout the financial statements, even though the standard had no impact on the financial position and financial performance of the group, the comparative information has been revised where required.

Additional disclosure about these financial assets are shown in note 26 including comparative figures.

Amendment to IAS 1 Capital Disclosure This amendment to the standard requires the entity to disclose its objectives, policies and processes for managing capital; quantitative data about what the entity regards as capital; whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance.

These disclosure requirements are effective for annual periods beginning on or after 1 January 2007. This standard had no impact on the financial position and financial performance of the group. These new disclosures are shown on the Capital Management policy Note 8.

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IFRIC 8 Scope of IFRS 2 This interpretation, which is effective for accounting periods beginning on or after 1 May 2006, requires IFRS 2 Share Based Payment to be applied to any arrangements where equity instruments are issued for consideration which appears to be less than fair value. As equity instruments are only issued to employees in accordance with the employee share scheme, they have no impact on the financial and financial performance of the Group.

Share - Based Payment Scheme As detailed in note 8.15 (vi) below, there are two elements to the Group’s share based payment scheme, one for management staff and one for other staff. The share scheme for management was in 2006 classified as ‘a share based payment with a cash alternative”. During the year the scheme has been re classified as “equity settled” as there was clarification that shares of the scheme will only be sold to the market.

The impact of changing from the share based payment with a cash alternative to Equity settled is the transfer of the liability for the cash component to Equity per the SOCE. IFRIC 10 Interim Financial Reporting and Impairment This interpretation, which became effective for accounting periods beginning on or after 1 November 2006, requires that any impairment loss recognised on goodwill in an interim period may not be reversed in subsequent interim periods. This standard had no impact on the financial position and financial performance of the group since the group did not impair goodwill during its interim reporting.

The Group has also early adopted the following IFRS and IFRIC interpretations. Adoption of these standards and interpretations did not have any effect on the financial performance or position of the Group. They did however give rise to additional disclosures, including revisions to accounting policies.

• IFRC 11 (IFRS2)Group and treasury share transactions • IFRC 14 (IAS 19) - The limit on a defined benefit asset, minimum funding requirements and their interaction IFRIC 11 in relation to IFRS 2 Share Based Payment IFRIC 11 is effective for annual periods beginning on or after 1 March 2007. This IFRIC provides guidance on the way in which subsidiaries, in their separate financial statements, account for schemes when their employees receive rights to equity instruments of the parent.

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It also covers situations where an entity chooses or is required to buy the equity instruments which it granted to its employees from another party or the shareholders of the entity provide the equity instruments required. Share based payments previously were recognised at a holding company level only. In the current period, the Group’s subsidiaries applied the provisions of IFRS 2 for the first time, using the guidance provided by IFRIC 11. This standard has been early adopted; however this did not have an impact on the financial position and financial performance of the Group.

IFRIC 14 (IAS 19) - The limit on a defined benefit asset, minimum funding requirements and their interaction IFRIC 14 provides guidance as to how entities should determine the limit placed by IAS 19 Employee Benefits on the amount of a surplus in a pension plan they can recognise as an asset; how a minimum funding requirement affects that limit and when a minimum funding requirement creates an onerous obligation that should be recognised as a liability in addition to that otherwise recognised under IAS 19. This new standard has an impact on the financial position of the Group; however the adjustment was not made because of its insignificant impact. IFRIC 14 is mandatory for annual periods beginning on or after 1 January 2008 and the group will adopt it when it becomes effective.

The standard will not have a major impact on the group’s financial reporting.

Standards issued but not yet effective and not adopted The Company has not applied the following new and amended IFRSs and IFRIC Interpretations which have been issued but which are not yet effective. The company will however adopt these statements when they become effective at their relevant dates: • • • •

• • • •

Amendment to IFRS 2 Vesting Conditions and Cancellations IFRS 8 Operating Segments Amendment to IAS 1 Presentation of Financial Statements - revised Amendment to IAS 27 Consolidated and Separate Financial Statements Amendment to IAS 28 Investment in Associates Amendment toIAS 31 Interests in Joint Ventures Amendment to ISA 32 Financial Instruments: Presentation IFRS 3 Business Combinations

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Basis of Presentation and Accounting Policies (continued)

During the current period, the Group changed its accounting policy in respect of its share based payment scheme.

Only IFRSs and IFRIC Interpretations which are applicable to the Group have been listed above. The principal effects of the changes are as follows: Amendment to IAS 1: Presentation of Financial Statements The revised IAS 1 Presentation of Financial Statements was issued in September 2007 and becomes effective for financial years beginning on or after 1 January 2009. The Standard separates owner and non owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with all non - owner changes in equity presented as a single line. In addition, the standard introduces the statement of comprehensive income: it presents all items of income and expense recognised in profit or loss, together with all other items of recognised income and expense, either in one single statement, or in linked statements. The Group is still evaluating whether it will have one or two statements. This standard will have no impact on the financial position and financial performance of the group IFRS 2: Share - based payment - Vesting Conditions and Cancellations This amendment of IFRS 2 Share-based payments was published in January 2008 and becomes effective for financial years beginning on or after 1 January 2009. The standard restricts the definition of â&#x20AC;&#x2DC;vesting conditionsâ&#x20AC;&#x2122; to a condition that includes explicit or implicit requirements to provide services. Any other vesting conditions are nonvesting conditions, which have to be taken into account to determine the fair value of the equity instruments granted. In the case the award does not vest as the result of a failure to meet a non-vesting condition that is within the control of either the entity or the counter party, this must be accounted for as a cancellation. The Group has not entered into the share-based payment schemes with non-vesting conditions attached and, therefore, does not expect significant implications on its accounting for share-based payments IFRS 3 R Business Combinations and IAS 27R Consolidated and Separate Financial Statements The revised standards were issued in January 2008 and become effective for financial years beginning on or after 1 July 2009. IFRS 3R introduces a number of changes in the accounting for business combinations that

will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and the future reported results.

IAS 27R requires that a change in the ownership interest of a subsidiary is accounted for as an equity transaction. Therefore, such a change will have no impact on goodwill, nor will it give raise to a gain or loss.

Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary.

The changes introduced by IFRS 3R and IAS 27R must be applied prospectively and will affect future acquisition and transactions with minority interests. The standard will not have any effect on the position and financial performance of the company.

IFRS 7 Financial Instruments: Disclosures This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Groupâ&#x20AC;&#x2122;s financial instruments and the nature and extent of risks arising from those financial instruments. The new disclosures are included throughout the financial statements. While there has been no effect on the financial position or results, comparative information has been revised where needed.

5 Abbreviations and key A list of insurance specific abbreviations used throughout the publication: DPF Discretionary participation features PVIF Present value of in-force business DAC Deferred acquisition cost IBNR Claims incurred but not reported A glossy of insurance specific terminology: Insurance contract Contract under which insurance risk is

accepted and upon occurrence of the insured

event, the policyholder will receive

compensation.

Investment contract Investment policy, which may contain

insignificant insurance risk, but which will not

be classified as an insurance contract.

Life Insurance Contract under which the term of insurance

covers a period longer than 12 months. For

example: Whole life or term insurance.

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Investment management services

Reinsurance

Premiums earned

Premiums written

Unearned premiums

DPF

Liability adequacy test

PVIF

DAC

Deferred revenue

Assumptions

Benefit experience variation

IBNR

Managing of investments, for which a service fee will be charged.

Insurance risk is ceded to a reinsurer, but the ultimate obligation to the policyholder remains with the entity who issued the original insurance contract.

Premiums earned are when it is payable by the policyholder.

Premiums written are on accepting the insurance contract by the policyholder.

Reserve for premiums received for which the underlying risks have not yet expired. This reserve is released over the term of the contract as the underlying risk expires.

Policyholder has a contractual right to receive, as a supplement to its guaranteed benefits, additional benefits.

Reassessment of the sufficiency of the insurance liability to cover future insurance obligations.

Present value of the entityâ&#x20AC;&#x2122;s interest in the expected pre-tax cash flows of the in-force business acquired.

Direct and indirect costs incurred during the writing or renewing of an insurance contract, which are deferred, to the extent that these costs will be recovered out of future revenue margins.

Initial and other front end fees for rendering future investment management services, which are deferred and recognised as revenue when the related services are rendered.

Underlying variables and uncertainties which are taken into account in determining values, which could be insurance contract liabilities or financial assets fair value.

Difference between the expected benefit payout and the actual payout.

Claims incurred by the policyholder but not yet reported to the insurance company.

Unit holder/unit linked

Embedded value

IFRS 4

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Investor in unit linked products, where the insurance risk is born by the policyholder and not the insurance company.

This is an estimate of the economic worth of a life insurance business. The measurement principles however do differ from the measurement principles under IFRS. International Financial Reporting Standard that regulates Insurance Contracts.

A glossy of share-based payment specific terminology: Equity-settled share-based payment transaction

Employees and others providing similar services

Equity instrument

Equity instrument granted

A share-based payment transaction in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options).

Individuals who render personal services to the entity and either (a) the individuals are regarded as employees for legal or tax purposes, (b) the individuals work for the entity under its direction in the same way as individuals who are regarded as employees for legal or tax purposes, or (c) the services rendered are similar to those rendered by employees. For example, the term encompasses all management personnel, ie those persons having authority and responsibility for planning, directing and controlling the activities of the entity, including non-executive directors.

A contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

The right (conditional or unconditional) to an equity instrument of the entity conferred by the entity on another party, under a share-based payment arrangement.

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Basis of Presentation and Accounting Policies (continued)

Fair value

Grant date

Intrinsic value

Market condition

Measurement date

The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.

The date at which the entity and another party (including an employee) agree to a share-based payment arrangement, being when the entity and the counterparty have a shared understanding of the terms and conditions of the arrangement. At grant date the entity confers on the counterparty the right to cash, other assets, or equity instruments of the entity, provided the specified vesting conditions, if any, are met.

If that agreement is subject to an approval process (for example, by shareholders), grant date is the date when that approval is obtained.

The difference between the fair value of the shares to which the counterparty has the (conditional or unconditional) right to subscribe or which it has the right to receive, and the price (if any) the counterparty is (or will be) required to pay for those shares. For example, a share option with an exercise price of P15 on a share with a fair value of P20 has an intrinsic value of P5.

A condition upon which the exercise price, vesting or exercisability of an equity instrument depends that is related to the market price of the entity’s equity instruments, such as attaining a specified share price or a specified amount of intrinsic value of a share option, or achieving a specified target that is based on the market price of the entity’s equity instruments relative to an index of market prices of equity instruments of other entities.

The date at which the fair value of the equity instruments granted is measured for the purposes of this IFRS. For transactions with employees and others providing similar

Share-based payment arrangement

Share-based payment transaction

Share option

Vest

Vesting conditions

services, the measurement date is grant date. For transactions with parties other than employees (and those providing similar services), the measurement date is the date the entity obtains the goods or the counterparty renders service.

An agreement between the entity and another party (including an employee) to enter into a share-based payment transaction, which thereby entitles the other party to receive cash or other assets of the entity for amounts that are based on the price of the entity’s shares or other equity instruments of the entity, or to receive equity instruments of the entity, provided the specified vesting conditions, if any, are met.

A transaction in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options), or acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price of the entity’s shares or other equity instruments of the entity.

A contract that gives the holder the right, but not the obligation, to subscribe to the entity’s shares at a fixed or determinable price for a specified period of time.

To become an entitlement. Under a sharebased payment arrangement, a counterparty’s right to receive cash, other assets, or equity instruments of the entity vests upon satisfaction of any specified vesting conditions.

The conditions that must be satisfied for the counterparty to become entitled to receive cash, other assets or equity instruments of the entity, under a share-based payment arrangement. Vesting conditions include service conditions, which require the other

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Vesting period

party to complete a specified period of service, and performance conditions, which require specified performance targets to be met (such as a specified increase in the entity’s profit over a specified period of time).

The period during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied.

6 Significant accounting judgements, estimates and assumptions The Group makes judgements, estimates and assumptions that affect the reported amounts of of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date.

Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (i) Estimate of future benefit payments and premiums arising from long-term insurance contracts and other intangible assets The estimation of the ultimate liability arising from claims made under insurance contracts is the Group’s most critical accounting estimate.

There are several sources of uncertainty that need to be considered in the estimate of the liability that the Group will ultimately pay for such claims. In particular, the claims arising from HIV and AIDS related causes.

The determination of the liabilities under long-term insurance contracts is dependent on estimates made by the Group. Estimates are made as to the expected number of deaths for each of the years in which the Group is exposed to risk. The Group bases these estimates on standard industry and national mortality tables that reflect recent historical mortality experience, adjusted where appropriate to reflect the Group’s own experience. The estimated number of deaths determines the value of the benefit payments and the value of the valuation premiums. The main source of uncertainty is that epidemics such as AIDS and wideranging lifestyle changes, such as in eating, smoking and exercise habits, could result in future mortality being significantly worse than in the past for the age groups in which the Group has significant exposure to mortality risk. However, continuing improvements in medical care and social conditions could result in improvements in longevity. For contracts without fixed terms, it is assumed that the Group will be able to increase mortality risk charges in future years in line with emerging mortality experience.

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Estimates are also made as to future investment income arising from the assets backing long-term insurance contracts. These estimates are based on current market returns as well as expectations about future economic and financial developments.

The balance of policyholder liabilities at 31 December 2007 was P2, 684 million (31 December 2006: 2,157 million). (ii) Fair value of investments in un-quoted equity, debentures, insurance policies and other loans The investments in un-quoted equity instruments, debentures, insurance policies and other loans have been valued based on the expected cash flows, discounted at the current rates applicable for items with similar terms and risk characteristics. This valuation requires the Group to make estimates about expected future cash flows and discount rates and hence they are subject to significant judgement. Carrying amount at year end P366, 516 million (2006: P273, 238 million). (iii) Impairment of financial assets The investments in unlisted equity instruments, debentures and other loans have been impaired based on the expected cash flows, discounted at the current rates applicable for items with similar terms and risk characteristics. This impairment requires the Group to make estimates about expected future cash flows and discount rates and hence they are subject to significant judgement uncertainty. There were no impairment losses written off in the current year. (31 December 2006: P4.4 million). (iv) Impairment of non-financial assets The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and otherindefinite life intangibles are tested for impairment annually and at other times when such indicators exist. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. There were no impairment losses written off during the year.

7 Off-balance sheet segregated funds The Group also manages and administers assets for the account of and the risk of clients. As these are not assets of the Group, they are not recognised in the Group’s balance sheet in terms of IFRS but are disclosed as a note. Refer to note 9.

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Basis of Presentation and Accounting Policies (continued)

8 Summary of significant accounting policies Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the amount of revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable excluding discounts, rebates and VAT. Specifically revenue is recognised as follows: Fees for investment management services Fees for investment management services in respect of investment contracts are recognised as services are rendered on the accrual basis.

Fees consist primarily of investment management fees arising from services rendered in conjunction with the issue and management of investment contracts where the Group actively manages the consideration received from its customers to fund a return that is based on the investment profile that the customer selected on origination of the instrument.

Investment income Interest income is accounted for on a time proportionate basis that takes into account the effective yield on the asset and includes the gross amounts of interest received or receivable and interest expense paid or payable.

Rental income is recognised on accrual basis, apart from operating leases that contain fixed escalation clauses, where it is recognised on a straight-line basis over the lease term. The difference between rental income on a straight-line and accrual basis is recognised as part of the carrying amount of properties in the balance sheet.

Dividend income is recognised when the shareholderâ&#x20AC;&#x2122;s right to receive payment is established through approval by the shareholders.

Deposit administration fund income Deposit administration income consists of share of investment surpluses generated on the Deposit administration fund. These surpluses are recognised in the income statement when realised or upon revaluation to fair value.

Fee income - long-term policy contracts Investment and insurance contract policyholders are charged for policy administration, risk underwriting and other services. These fees are recognised as revenue on an accrual basis as the related services are rendered.

Premium income The monthly premiums in terms of their policy contracts are accounted for when due. Group life insurance premiums are accounted for when receivable. Single premiums on insurance contracts are recognised as income when received. Premium income is reflected gross of reassurance premiums.

Reinsurance recoveries The Group cedes insurance risk in the normal course of business for all of its businesses. Recoverable amounts are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contract. Gains or losses on buying reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised. Ceded reinsurance arrangements do not relieve the Group from its obligations to policyholders.

Basis of consolidation (i) Subsidiaries These consolidated financial statements have incorporated the assets, liabilities, results and cash flows of the Company and its subsidiaries.

The reporting dates of the subsidiaries and the Group are within three months of the Companyâ&#x20AC;&#x2122;s reporting date and all use consistent accounting policies.

Subsidiaries are those entities in which the Group has an interest and control; where control represents the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The existence and effect of potential voting rights that are presently exercisable are also taken into consideration when assessing whether the Group has the power to govern the financial and operating policies of another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases.

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Where the reporting date of the subsidiary is different from the Group, adjustments are made for the effects of any major transactions or events that occur between the reporting date of the subsidiary and that of the Group.

The cost of an acquisition is measured as the aggregate of the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net identifiable assets of the subsidiary acquired is recorded as goodwill.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. (ii) Special Purpose entities The Group consolidates special purpose entities (“SPE”) when the substance of the relationship between the Group and the SPE indicates that the Group controls the SPE. (iii) Associates Investments in associates are accounted for using the equity method of accounting. Under this method the Group’s share of the postacquisition profits or losses of associates is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

The Group’s investment in associates includes goodwill on acquisition.

When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates.

The year ends of some of the associates do not coincide with that of the Group and fall on 30 September. Where the reporting date of any of the associates is different from that of the Group, adjustments are

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made for the effects of any major transactions or events that occur between the reporting date of the associate and that of the Group. (iv) Interest in a joint venture The Group has an interest in a joint venture which is a jointly controlled entity. A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control, and a jointly controlled entity is a joint venture that involves the establishment of a separate entity in which each venture has an interest. The Group recognises its interest in the joint venture using equity accounting.

The year end of the joint venture company is 31 October. Adjustments are made for any significant transactions or events in the intervening period. (v) Acquisition of minority interest Minority interests represent the portion of profit or loss and net assets not held by the Group and are presented separately in the income statement and within equity in the consolidated balance sheet, separately from parent shareholders’ equity. Acquisitions of minority interests are accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired is recognised in goodwill.

Investment properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day to day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the balance sheet date. Gains or losses arising from changes in the fair values of investment properties are included in the income statement in the year in which they arise.

Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the income statement in the year of retirement or disposal.

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Basis of Presentation and Accounting Policies (continued)

Financial Instruments Financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables, held to maturity investments and available for sale financial assets as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

The Group determines the classification of its financial assets on initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year end.

All regular way purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss.

Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments or a financial guarantee contract. Gains or losses on financial assets held at fair value through profit or loss are recognised in the profit and loss.

Where a contract contains one or more embedded derivatives, the entire hybrid contract may be designated as a financial asset at fair value through profit or loss, except where the embedded derivative does not significantly modify the cash flows or it is clear that separation of the embedded derivative is prohibited.

Financial assets may be designated at initial recognition as at fair value through profit or loss if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognising gains or losses on them on a different basis; or (ii) the assets are part of a group of

financial assets which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management strategy; or (iii) the financial asset contains an embedded derivative that would need to be separately recorded. As at 31 December 2007, no financial assets have been designated as at fair value through profit and loss The fair values of quoted investments are based on current bid prices, including the use of recent arm’s length transactions, reference to other instruments that are substantially the same and discounted cash flow analysis.

For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; discounted cash flow analysis or other valuation models.

Loans and receivables The company’s trade and receivables are classified as Loans and receivables.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition loans and receivables are subsequently carried at amortised cost using the effective interest method less any accumulated allowances for impairment. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs.

Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Derecognising financial assets A financial asset or part thereof is derecognised when: • •

The rights to receive cash flows from the asset have expired; The Group retains the right to receive cash flows from the assets but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or

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•

The Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the assets, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset;

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. The continuing involvement that takes the form of a guarantee over the transferred asset if measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and / or purchased option (including a cash settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may re-purchase, except in the case of a put option (including a cash settled option or a similar provision) on an asset measured at fair value, the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit and loss.

Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on financial liabilities held at fair value through profit or loss are recognised in profit or loss.

Financial liabilities may be designated at initial recognition as at fair value through profit or loss if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the liabilities or recognising gains or losses on them on a different basis; (ii) or the liabilities are part of a group of financial liabilities which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management strategy; (iii) or the financial liability contains an embedded derivative that would need to be separately recorded.

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Other financial liabilities Other liabilities such as trade payables are initially measured at fair value.

Subsequent to initial recognition, they are measured at amortised cost using the effective interest rate method.

Derecognising financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amount is recognised in the income statement.

Impairment of financial assets and non-financial assets Financial assets A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is an objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The amount of the loss is recognised in the income statement.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events: (a) significant financial difficulty of the issuer or obligor; (b) a breach of contract, such as a default or delinquency in interest or principal payments; (c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; (d) it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; (e) the disappearance of an active market for that financial asset because of financial difficulties; or

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Basis of Presentation and Accounting Policies (continued)

(f)

observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the company.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant.

If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.

Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics.

Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the issuerâ&#x20AC;&#x2122;s ability to pay all amounts due under the contractual terms of the debt instrument being evaluated.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in profit or loss, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.

Non- financial assets Assets that are subject to depreciation/amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an assetâ&#x20AC;&#x2122;s fair value less costs to sell and value

in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used.

These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. For the purpose of assessing impairment, assets are grouped at the lowest levels for which they are separately identifiable cash flows (cash-generating units).

Impairment losses of continuing operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset, except for property previously revalued where the revaluation was taken to equity. In this case the impairment is also recognised in equity up to the amount of any previous revaluation.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group makes an estimate of recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the assetâ&#x20AC;&#x2122;s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount.

That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase.

Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating unit (or group of cashgenerating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount of the cash-generating unit (group of cash-generating units) to which goodwill has been allocated, an

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impairment loss is recognised. Impairment losses relating to Goodwill cannot be reversed in future periods. The Group performs its annual impairment test of goodwill as at 31 December. The entire carrying amount of the investment is tested for impairment, by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount Goodwill on acquisition of associates is included in the carrying amount of an associate and is not separately recognised therefore it is not annually tested for impairment separately.

Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at amortised cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand and at bank and funds on deposit.

Foreign currency translation (i) Functional and presentation currency The consolidated financial statements are presented in Botswana pula, which is the Companyâ&#x20AC;&#x2122;s functional and presentation currency. Each entity in the group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency (ii) Transactions and balances Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date.

All differences are taken to profit or loss. Non monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.

Non monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.

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(iii) Foreign operation financial statements The functional currency of the foreign operation, BIFM Zambia, is Zambian Kwacha. As at the reporting date, the assets and liabilities of the subsidiary are translated into the presentation currency of the Group at the rate of exchange ruling at the balance sheet date and the income statement is translated at the weighted average exchange rate for the year. The exchange differences arising on the translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

Equipment Equipment is stated at cost less accumulated depreciation and impairment losses. Depreciation is calculated on straight line basis to write off the cost of each asset to their residual value over their estimated useful lives as follows; Furniture and fittings Computer equipment Motor vehicles Leasehold improvements

5 - 10 years 4 years 4 years lesser of lease period and 4 years

Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset if the recognition criteria are met. Major renovations are depreciated over the remaining useful life of the related asset.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised.

The assetâ&#x20AC;&#x2122;s residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end.

Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.

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Basis of Presentation and Accounting Policies (continued)

Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment at each reporting date and whenever there is an indication that the intangible asset is impaired.

The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least each financial year end. Changes in the expected useful life and the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method as appropriate and treated as changes in accounting estimates. The amortisation expense is recognised in the income statement in the expense category consistent with the function of the intangible asset.

The estimated useful life of intangible assets is 3 years. (i) Computer software Generally costs associated with researching computer software programmes are recognised as an expense as incurred. However, costs that are clearly associated with an identifiable system, which will be controlled by the Group and has a probable benefit beyond one year, are recognised as an asset. Computer software development costs recognised as assets are amortised in the income statement on the straight-line method over their useful lives, not exceeding a period of 3 years and are carried in the balance sheet at cost less accumulated amortisation and accumulated impairment losses.

The useful lives of assets and amortisation methods are reviewed and adjusted if appropriate at each balance sheet date. (ii) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Groupâ&#x20AC;&#x2122;s share of the net identifiable assets, liabilities and contingent liabilities recognised in accordance with IFRS 3 Business Combinations. Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in the carrying amount of an associate and is not separately recognised.

Subsequent to initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Groupâ&#x20AC;&#x2122;s cash generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

The expense relating to any provision is presented in profit or loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Taxes and Value Added Tax (VAT) Deferred income tax Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences, except: â&#x20AC;˘

where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

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•

•

•

•

in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except: where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

Current income tax Taxation is provided in the financial statements using the gross method of taxation. Current taxation is charged on the net income for the year after taking into account income and expenditure, which is not subject to taxation, and capital allowances on fixed assets. Withholding tax on dividends paid is set off against the additional company taxation of the Group in the year in which the dividends are paid.

Current tax assets and liabilities for the current period and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those enacted or substantively enacted by the balance sheet date.

VAT Revenue, expenses and assets are recognised net of the amount of the VAT except:

•

•

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where the VAT incurred on the purchase of assets or services is not recoverable from the taxation authority, in which case the VAT is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable, and receivables and payables that are stated with the amount of VAT included.

The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

Share capital Ordinary share capital is recognised at the fair value of the consideration received by the Company. Ordinary shares are classified as equity.

Incremental external costs directly attributable to the issue of new shares, other than in connection with business combinations, are shown in equity as a deduction, net of tax, from the proceeds.

Where any Group entity purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes,) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of.

Own equity instruments which are reacquired (treasury shares) are deducted from equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments.

Employee benefits (i) Pension obligations The Group operates a defined benefit pension scheme for its postemployment benefits to employees. Under the defined benefit plan, the Group’s obligation is to provide the agreed benefits to current and former employees. The actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, to the Group. The scheme is funded through payments to a trustee administered fund as determined by actuarial calculations that are performed at the end of every financial year.

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Basis of Presentation and Accounting Policies (continued)

The Group determines the estimated liability using the projected unit credit method. The present value of the over funded portion of the scheme is recognised as an asset to the extent that there are material benefits available in the form of refunds and reductions in contributions.

The amount of actuarial gains and losses recognised in the income statement is equal to the amount that the cumulative actuarial gains and losses at the end of the previous reporting period exceed the greater of 10% of the present value of the defined benefit obligation or 10% of the fair value of the plan assets at that date, amortised over the years’ average working life.

The past service cost is recognised as an expense on a straight line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognised immediately.

The defined benefit asset or liability comprises the present value of the defined benefit obligation less past service cost not yet recognised and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of: unrecognised net actuarial losses, any past service cost not yet recognised and the present value of any future economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. (ii) Medical aid In terms of employment contracts and the rules of the relevant medical aid scheme, medical benefits are provided to employees. The Group subsidises a portion of the medical aid contributions for certain employees. Contributions in relation to the Group’s obligations in respect of these benefits are charged against income in the period of payment.

There are no post-retirement medical funding requirements. (iii) Termination benefits Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits.

The Group recognises termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits are normally paid off within 12 months, hence they are not discounted. (iv) Leave pay provision The Group recognises, in full, employee’s rights to annual leave entitlement in respect of past service. The recognition is made each year end and is calculated based on accrued leave days not taken during the year. The charge is made to expenses in the income statement and trade and other payables in the balance sheet. (v) Profit sharing and bonus plans A liability for employee benefits in the form of profit sharing and bonus plans is recognised in other provisions when there is no realistic alternative but to settle the liability and at least one of the following conditions is met: • there is a formal plan and the amounts to be paid are determined before the time of issuing the financial statements; or • past practice has created a valid expectation by employees that they will receive a bonus/profit share payment and the amount can be determined before the time of issuing the financial statements.

Liabilities for profit sharing and bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled. (vi) Share-based compensation Employees of the Group receive remuneration in the form of sharebased payment compensation, whereby employees render services as consideration for equity instruments. There are two elements to the Group’s share based payment scheme; one for management staff and one for other staff. The objective of the scheme is to retain staff.

Transactions within the management scheme and the staff scheme are accounted for as equity settled.

The cost of equity settled transactions is recognised, together with a corresponding increase in equity, over the period in which the service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the “vesting date”).

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The cumulative expense recognised for equity settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of the period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance and/or service conditions are satisfied.

Where the terms of an equity-settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified.

An additional expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

Policy contract benefits Life insurance policy claims received up to the last day of each financial period are provided for and included in policy benefits.

Maturity and annuity payments are recognised when due. Surrenders are recognised at the earlier of payment date or the date on which the policy ceases to be included in long-term policy liabilities.

Provision is made for underwriting losses that may arise from unexpired insurance risks when it is anticipated that unearned premiums will be insufficient to cover future claims.

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Income from reinsurance policies are recognised concurrently with the recognition of the related policy benefit.

Premiums payable on assumed reinsurance are recognised when due.

Claims handling costs are accounted for separately.

Dividends Dividends are recorded in the Group’s financial statements in the period in which they are approved by the shareholders. Hence dividends proposed or declared after the period ends are not recognised at the balance sheet date. Dividends that are approved after the balance sheet date but before the financial statements are authorised for issue are disclosed by way of a note to the financial statements together with the related per share amount.

Selling expenses Selling expenses consist of commission and bonuses payable to sales staff on long-term insurance business and expenses directly related thereto. Commission on life business is accounted for on all in-force policies in the financial period during which it is incurred.

Administration expenses Administration expenses include, inter alia, property and administration expenses relating to owner-occupied property, property and investment expenses related to the management of the policyholders’ investments, claims handling costs, product development and training costs and are recognised on the accrual basis. Expenses incurred by functional departments are allocated to group and individual business, and then furthermore for individual business by acquisition and maintenance in accordance with the function performed by the departments. Premium collection costs are accounted for on the accrual basis.

Leases (where the Group is the lessee) Operating leases An operating lease is one in which all the risks and benefits of ownership are effectively retained by the lessor. Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term or on a systematic basis when the straight line basis does not reflect the physical usage of the asset unless another systematic basis is more representative of the time pattern of the Group’s benefit.

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Basis of Presentation and Accounting Policies (continued)

Contingent liabilities and Assets Possible obligations of the Group arising from past events whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group and present obligations of the Group arising from past events where it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or where the amount of the obligation cannot be measured reliably, are not recognised in the Group balance sheet but are disclosed in the notes to the financial statements.

Possible assets of the Group arising from past events whose existence will only be confirmed by the occurrence or non-occurrence of uncertain future events not wholly within the control of the Group are not recognised in the Group balance sheet and are only disclosed in the notes to the financial statements where an inflow of economic benefits is probable.

Non-distributable reserves Non-distributable reserves include the capital reserve account as required by section 9 of the Botswana Insurance Industry Act (Chapter 46:01). The provisions of the Botswana Insurance Industry Act require that 25% of the surplus arising in a year should be transferred to this reserve. This reserve is to be utilised at least once every five years to increase the paid up share capital of the Company. The last utilisation was for balances at 31 March 2004.

Consolidation reserve The consolidation reserve is created for differences in the valuation bases of long-term policy liabilities and investments supporting those liabilities. Certain assets held in policyholder portfolios may not be recognised at fair value in terms of IFRS, whereas the valuation of the related policy liabilities is based on the assets at fair value. This creates a mismatch with a corresponding impact on the shareholders’ fund. A separate reserve is created for these valuation differences due to the fact that they represent accounting differences and not economical losses for the shareholders’ fund. Valuation differences also arise from investments in the Group’s shares, which are treasury shares deducted from equity on consolidation and consequently valued at zero.

The reserve represents temporary differences insofar as the mismatch is reversed when the affected investments are realised.

Long-term reinsurance contracts Contracts entered into with reinsurers under which the Group is compensated for losses on one or more long-term policy contracts issued by the Group and that meet the classification requirements for insurance contracts are classified as long-term reinsurance contracts.

The expected claims and benefits to which the Group is entitled under these contracts are recognised as assets. The Group assesses its longterm reinsurance assets for impairment bi-annually. Impairment occurs when objective evidence exists that the Company may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Company will receive from the reinsurer can be measured reliably. The impairment loss is charged to the income statement.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in profit or loss, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

Insurance contracts The Group’s main insurance products are; • non-participating annuities; • employee benefits; • universal individual life product “Mompati” and; • insurance contracts with discretionary participation features Mompati is a product designed to provide death cover for the policyholder and his family members. The main purpose of the policy is to provide a death benefit to meet funeral expenses but also includes an investment account. The value of the investment account is paid in the event of maturity or surrender (after deducting a surrender penalty, if applicable). The investment account is credited with premiums received and investment returns. Deductions are made from the investment account to cover the cost of funeral benefits, expenses and commission.

The policyholder liability for annuities includes a mismatch and reinvestment reserve. Its purpose is twofold:

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â&#x20AC;˘

â&#x20AC;˘

To ensure that the company have sufficient assets in the event that liabilities exceed the value of assets, To provide against reinvestment risk that arises as a result of the duration of the assets being shorter than the liabilities. The shorter term of the assets may result in future asset proceeds being re-invested on less favourable terms than were available at policy inception. The Company is exposed to financial risk if the investment returns on re-invested asset proceeds are lower than were allowed for in the product pricing.

Valuation bases and methodology The valuation bases and methodology 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.

Life insurance contract liabilities Life insurance liabilities are recognised when contracts are entered into and premiums are charged. These liabilities are measured by using the net premium method. The liability is determined as the sum of the discounted value of the expected future benefits, claims handling and policy administration expenses, policyholder options and guarantees and investment income from assets backing such liabilities, which are directly related to the contract, less the discounted value of the expected theoretical premiums that would be required to meet the future cash outflows based on the valuation assumptions used. The liability is based on current assumptions.

Furthermore, the liability for life insurance comprises provision for unearned premiums and unexpired risks, as well as for claims outstanding, which includes an estimate of the incurred claims that have not yet been reported to the Group. Adjustments to the liabilities at each reporting date are recorded in the income statement. The liability is derecognised when the contract expires, is discharged or is cancelled.

Investment Contract Liabilities Investment contracts are classified between contracts with and without DPF. The accounting policies for investment contract liabilities with DPF are the same as those for life insurance contract liabilities. Investment contract liabilities without DPF are recognised when contracts are entered into and premiums are charged.

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Deposits and withdrawals are recorded directly as an adjustment to the liability in the balance sheet, known as deposit accounting.

Fees charged and investment income received is recognised in the income statement when earned.

Fair value adjustments are performed at each reporting date and are recognised in the income statement. For unitised contracts, fair value is calculated as the number of units allocated to the policyholder in each unit-linked fund multiplied by the unit-price of those funds at the balance sheet date. The fund assets and liabilities used to determine the unit-prices at the balance sheet date are valued on the bases as set out in the accounting policy for investments. It was not considered necessary to exclude intangible assets, which are inadmissible assets for prudential regulatory purposes, from the value of the assets for the purposes of the financial statements.

The liability is derecognised when the contract expires, is discharged or is cancelled. For a contract that can be cancelled by the policyholder, the fair value cannot be less than the surrender value.

Classification of contracts A distinction is made between investment contracts (which fall within the scope of IAS 39 Financial Instruments: Recognition and Measurement), investment contracts with discretionary participating features and insurance contracts (where the Financial Soundness Valuation (FSV) method continues to apply, subject to certain requirements specified in IFRS 4 Insurance Contracts). A contract is classified as insurance where the Company accepts significant insurance risk by agreeing with the policyholder to pay benefits if a specified uncertain future event (the insured event) adversely affects the policyholder or other beneficiary.

Significant insurance risk exists where it is expected that for the duration of the policy or part thereof, policy benefits payable on the occurrence of the insured event will significantly exceed the amount payable on early termination, before allowance for expense deductions at early termination. Once a contract has been classified as an insurance contract, the classification remains unchanged for the remainder of its lifetime, even if the insurance risk reduces significantly during this period.

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Basis of Presentation and Accounting Policies (continued)

Insurance contracts with discretionary participating feature (DPF): DPF is a contractual right to receive, as a supplement to guaranteed benefits, additional benefits that are: • likely to be a significant portion of the total contractual benefits, • whose amount or timing is contractually at the discretion of the issuer and • that are contractually based on the performance of a specified pool of contracts or a specified type of contract, realised and or unrealised investment returns on a specified pool of assets held by the issuer or the profit or loss of the company, fund or other entity that issues the contract.

For life insurance contracts, the same accounting treatment is applied to contracts with and without DPF Liability for Life Insurance Contracts The liability for Life Insurance contracts is either based on current assumptions or on assumptions established at inception of the contract, reflecting the best estimate at the time increased with a margin for risk and adverse deviation. All contracts are subject to a liability adequacy test, which reflect management best current estimates of future cash flows.

Certain acquisition costs to the sale of new policies and the purchase of already in force policies are recorded in PVIF and are amortised to the income statement over time. If the assumptions relating to future profitability of these policies are not realised, the amortisation of these costs could be accelerated and may require additional write-offs to the income statement.

The main assumptions used relate to mortality, morbidity, longevity, investment returns, expenses, lapse and surrender rates and discount rates. The Group base mortality and morbidity tables on standard industry and national tables which reflect historical experiences, adjusted where appropriate to reflect the Group’s unique risk exposure, product characteristics, target markets and own claims severity and frequency experiences. For those contracts that insure risk to longevity, prudent allowance is made for expected future mortality improvements, but epidemics, as well as wide ranging changes to life style, could result in significant changes to the expected future mortality exposure.

Estimates are also made as to future investment income arising from the assets backing Life Insurance contracts. These estimates are based on current market returns as well as expectations about future economic and financial developments.

Assumptions on future expense are based on current expense levels, adjusted for expected expense inflation adjustments if appropriate.

Lapse and surrender rates depend on product features, policy duration and external circumstance, such as sale trends. Credible own experience are used in establishing these assumptions.

Discount rates are based on current industry risk rates, adjusted for the Group’s own risk exposure.

The carrying value at the balance sheet date for Life Insurance contract liabilities are P2,683m (2006: P2,157m) Bonus stabilisation reserves The group business 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 actuarial liabilities, a positive bonus stabilisation reserve is created which will be used to enhance future bonuses.

Conversely, if the fair value of assets is less than the actuarial liabilities, 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. There are no negative bonus stabilisation reserves. Bonus stabilisation reserves are included in long-term policy liabilities. The carrying value included in the liabilities is P 37.6m (2006: P28.6m) Provision for future bonuses Future bonuses of 3% per annum are allowed for in the Financial Soundness Valuation.

There are no participating annuities currently paying bonuses.

The current ones have been in force for less than one year.

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Reversionary bonus business The business is valued on a prospective basis assuming 3% per annum bonus rates going forward and allowing for prescribed margins. Bonus stabilisation reserves have been established.

Individual stable bonus and market-related business For 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. No second tier margins are held on this business, except to the extent that negative Pula reserves are eliminated. The carrying amount is P23m ( Dec 2006: 22.7m) Participating annuities There are very few such policies on the book. Those that are participating annuities, have been in force for two years. A reserve equal to the purchase price is held. The carrying amount of participating annuities is P49.6m ( Dec 2006: P3.4m) Non-participating annuity business Non-participating life annuity instalments and future expenses in respect of these instalments are discounted at market interest rates based on the bond yield curve at the valuation date, reduced by the prescribed and additional margin, as well as investment management expenses. All profits or losses accrue to the shareholders when incurred.

A discretionary margin is held for this block of business. The carrying amount for non participating annuity business is P1,132m ( Dec 2006: P951m) Other non-participating business Other non-participating business forms less than 1% of the total liabilities. Most of the other non-participating business liabilities are valued on a discounted cash flow basis at interest rates based on the bond yield curve at the valuation date. The carrying amount for other non participating business is P2.9m (Dec 2006: P2.6m) HIV and AIDS No specific provision is set up for HIV and AIDS claims. Reserves are calculated prospectively and contain allowances for HIV and AIDS claims.

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Premium rates for group business are reviewed annually. The HIV and AIDS provision is based on the expected HIV and 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.

Provision 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 the annuity business. Additional mismatch reserves are also held on the annuity business. The carrying amount for the mismatch reserve is P29.6m (Dec 2006: P23.2m) 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.

Reinsurance The Group cedes insurance risk in the normal course of business for all of its businesses. Reinsurance assets represent balances due from reinsurance companies. Recoverable amounts are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contract.

An impairment review is performed at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when objective evidence exists that the Group may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Group will receive from the reinsurer can be measured reliably. The impairment loss is charged to the income statement.

Gains or losses on buying reinsurance are recognised in the income statement immediately at the date of purchase and are not amortised.

Ceded reinsurance arrangements do not relieve the Group from its obligations to policyholders

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Basis of Presentation and Accounting Policies (continued)

Capital and Risk Management The business is exposed to various risks in connection with its current operating activities. These risks contribute to the key financial risk that the proceeds from the business’s financial assets are not sufficient to fund the obligations arising from insurance and investment policy contracts and the operating activities conducted by the business. The business has an integrated approach towards the management of its capital base and risk exposures with the main objective being to achieve a sustainable return on embedded value at least equal to the business’s cost of capital.

The business is exposed to various risks that have a direct impact on the business’s capital base and earnings, and as such return on embedded value. The management of these risks is therefore an integral part of the business’s strategy to maximise return on embedded value. The business’s risk exposures can be classified into the following broad categories: •

• •

Financial risks affecting the net asset value of the shareholders’ fund; (Note 26) General operational risks; and Long-term insurance risks;

Capital management The effective management of BIHL capital base is an essential component of meeting the Group’s strategic objective of maximising shareholder value. The capital value used by the Group as the primary performance measurement base is the Group Equity Value. The Group Equity Value is the aggregate of the following components: •

•

•

The embedded value of covered business, which comprises the long-term required capital supporting these operations and their net value of in-force business (refer embedded value report on page 58); The fair value of other Group operations, which includes the investment management, and Discretionary capital.

The management of the Group’s capital base requires a continuous review of optimal capital levels, including the use of alternative sources of funding, to maximise return on Group Equity Value. The Group has an integrated capital and risk management approach.

The amount of capital required by the various businesses is directly linked to their exposure to financial and operational risks. Risk management is accordingly an important component of effective capital management.

Capital allocation methodology Group businesses are each allocated an optimal level of capital and are measured against appropriate return hurdles.

The following methodology is used to determine the allocation of longterm required capital to the covered business: The level and nature of the supporting capital is determined by minimum regulatory capital requirements as well as economic, risk and growth considerations. Regulatory capital must comply with specific requirements. A stochastic modelling process is used to determine longterm required capital levels that, within a 95% confidence level, will be able to cover the minimum statutory capital adequacy requirement (CAR) at least 1,5 times over each of the next 10 year-ends.

The fair value of other Group operations includes the working capital allocated to the respective operations. The Group’s approach to ensure appropriate working capital levels is twofold: •

•

The Group dividend policy is based on the annual declaration of all discretionary capital that is not required for normal operations or expansion; and Performance targets are set for other Group operations based on an expected return on the fair value of the businesses, equal to their internal hurdle rates. This ensures that all non-productive working capital is declared as a dividend to the Group.

Capital management Long-term required capital - covered business The Group’s covered business requires significantly higher levels of allocated capital than the other Group operations. The optimisation of long-term required capital is accordingly a primary focus area of the Group’s capital management philosophy given the significant potential to enhance shareholder value. The following main strategies are used to achieve this objective:

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•

•

•

•

•

Appropriate matching of assets and liabilities for policyholder solutions. This is especially important for long-duration policyholder solutions that expose the Group to interest rate risk, eg non-participating annuities, but also for participating business where asset/liability matching and investment strategy have a direct impact on capital requirements.

Managing the impact of new business on capital requirements by limiting volumes of capital-intensive new business per business.

The asset mix of the long-term required capital also impacts on the overall capital requirement. An increased exposure to hedged equity and interest-bearing instruments reduces the volatility of the capital base and accordingly also the capital requirement. The expected investment return on these instruments are however lower than equity with a potential negative impact on the return on Group Equity Value. There is accordingly a trade-off between lower capital levels and the return on capital. The Group’s stochastic capital model is used to determine the optimal asset mix that will ensure the highest return on capital.

The introduction of long-term debt into the life insurance operations’ capital structure and the concurrent investment of the proceeds in bonds and other liquid assets, to reduce the volatility in the regulatory capital base with a consequential lower overall capital requirement.

Certain of the Group’s investments in other Group operations qualify, to a varying degree, to be utilised as regulatory capital for the covered business. Maximum capital efficiency can therefore be achieved by optimising the level of such investments held in the life companies’ regulatory capital.

The Group continues to improve and further develop its capital management models and processes in line with international best practice and the current significant international developments surrounding solvency and capital requirements (for example the Solvency II initiative in the European Union).

Other Group operations The performance measurement of other Group operations is based on the return achieved on the fair value of the businesses. Risk adjusted return targets are set for the businesses to ensure that each business’ return target takes cognisance of the inherent risks in the business.

This approach ensures that the management teams are focused on operational strategies that will optimise the return on fair value, thereby contributing to the Group’s main objective of optimising return on Group Equity Value.

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Discretionary capital Any capital in excess of requirements, and not optimally utilised, is identified on a continuous basis. The pursuit of structural growth initiatives has been set as the preferred application of Group capital, subject to such initiatives yielding the applicable hurdle rate and being complementary to or in support of Group strategy. Any discretionary capital not being efficiently redeployed will be returned to shareholders in the most effective form. Refer to the financial review on page 22 for additional information on the current level of discretionary capital and the utilisation thereof.

The Group includes within net debt, trade and other payables, less cash and cash equivalents. Capital includes equity attributable to the equity holders of the parent.

Trade and other payables Less cash and short term deposits Net debt

Dec 2007 193,301 (26,043 ) 167,258

Dec 2006 164,960 (19,038 ) 145,922

Equity Total equity Capital and net debt Capital Requirement

1,372,065 1,372,065 1,539,323 9.18

870,308 870,309 1,016,230 6.81

Governance structure The agenda of the BIHL Board focuses on Group strategy, capital management, accounting policies, financial results, dividend policy, human resource development and corporate governance and BSE requirements. The BIHL Board is responsible for statutory matters across all BIHL businesses as well as monitoring operational efficiency and risk issues throughout the Group. Refer to the Corporate Governance Report on page 46 for further information on the responsibilities of the BIHL Board and its committees.

The Group operates within a decentralised business model environment.

In terms of this philosophy, the BIHL Board sets the Group risk management policies and frameworks and the individual businesses take responsibility for all operational and risk-related matters on a business level, within the limits set by these policies and frameworks.

The following diagram generically depicts the flow of risk management information from the individual businesses to the BIHL Board.

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BIHL Board Responsible for the Group’s risk management strategy and policies, as well as monitoring the effectiveness and disclosure thereof, in accordance with best practice.

BIHL Audit, Actuarial and Risk Committee Assists the BIHL Board in fulfilling its responsibilities.

BIHLGroup Executive Committee Responsible as the BIHL Board’s executive overseer, to ensure that the businesses achieve optimal risk-adjusted returns.

Group Risk Management Develops Group risk management policies and guidelines for approval by the BIHL Board, co-ordinates reporting responsibilities and improves risk management across the Group.

Business Level Risk Management Identifies and manages risks faced by the business.

Business Level Management Committees Additional committees that may be established by a business to assist their Executive Committees in certain areas of risk management.

Business Level Audit and Risk Committees/Forums Assists the business level Board in fulfilling its responsibilities to the BIHL Board.

A number of other risk monitoring mechanisms are operating within the Group as part of the overall risk management structure.

The most important of these are illustrated in the following table.

OTHER RISK MONITORING MECHANISMS BIHL Board Reviews and oversees the management of the Group’s capital base.

Actuarial Committee Determines appropriate investment policies and guidelines for policyholder portfolios where guarantees are provided.

Compliance Facilitates management of compliance through analysing of statutory and regulatory requirements, and monitoring implementation and execution thereof.

Group Risk Forum Aids co-ordination and transfer of knowledge between businesses and the Group, and assists Group Risk Management in identifying risks requiring escalation to the BIHL Board.

Non-listed Asset Review Reviews and approves the valuation of all unlisted assets in the Group for recommendation to the BIHL Board.

Financial Director Ensures that sound financial practices are followed, adequate and accurate reporting occurs, and financial statement risk is minimised.

Actuarial Monitors and reports on key risks affecting the life insurance operations. Determines capital requirements of the life insurance operations and the potential impact of strategic decisions thereon, by using appropriate modelling techniques.

Group Governance/ Secretariat and Public Officers Reviews and reports on corporate governance practices and structures. Reports on applicable legal and compliance matters.

Forensics Investigates and reports on fraud and illegal behaviour in businesses.

Investment Committees Determines and monitors appropriate investment strategies for policyholder solutions.

Group IT Risk Management Manages and reports Group-wide IT risks.

Risk Officer (per business) Assists business management in their implementation of the Group risk management process, and to monitor the business’ entire risk profile.

Internal Audit Assists the BIHL Board and management by monitoring the adequacy and effectiveness of risk management in businesses.

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Group risk policies and guidelines All risks are managed in terms of the policies and guidelines of the Board and its committees. Some of the main policies are: • The BIHL Group Strategic Risk Management (SRM) Policy; • Group Risk Escalation Policy; • Group Business Continuity Policy; • Group Information and Information Technology (I & IT) Risk Management Policy; and • Investment Cluster Credit Risk Policy and Strategy.

These policies were developed by Group Risk Management and have to be implemented by all Group businesses. The maturity of the implementation does however vary from business to business due to different cost/benefit scenarios, complexity of risks and the degree of risk integration. At the quarterly Group Risk Forum meetings, risk management reports by each business are tabled that must also indicate the extent of compliance with the SRM Policy.

The aim of the Group Escalation Policy is to ensure that key risks and risk events in any business in the Group are reported to the appropriate governance level. The Group Business Continuity Policy ensures that effective vertical and horizontal recovery abilities, consistent with business priorities, exist across the Group, to deal with disasters and related contingencies. The Group I & The BIHL Group Strategic Risk Management Policy is briefly summarised below: BIHL Group Strategic Risk Management Policy Definition SRM is a high-level over-arching approach to ensure that: • All risks which could jeopardise or enhance achievement of the Group’s strategic goals are identified; • Appropriate structures, policies, procedures and practices are in place to manage these risks; • Sufficient organisational resources are applied to, and corporate culture is fully supportive of, the effective implementation of these structures, policies, procedures and practices; • The organisation’s risks are indeed being managed in accordance with the foregoing; and • The impact of strategic decisions on the risk-adjusted return on Group Equity Value is considered by way of appropriate modelling techniques prior to such decisions being implemented.

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Objective The primary objective of SRM is to optimise the Group’s risk-adjusted return on Group Equity Value.

Philosophy SRM is achieved by: • Applying a decentralised philosophy, in that the individual businesses are responsible for the identification of risks in their business and to apply appropriate risk management. Only significant risks are escalated to the BIHL Group level, in accordance with the BIHL Group Risk Escalation Policy (mentioned above). This policy guides the businesses to assess the impact of the risk (on a scale of insignificant to catastrophic), type of risk (on a scale of unlikely to already occurred/highly probable), and accordingly to determine the role players to whom the risk should be reported (from the Risk Officer of the business to the chairman of the BIHL Audit and Risk Committee).

• Implementing maximum loss limits, by using measures such as “value at risk”, long-term solvency requirements, capital adequacy requirements and sensitivities on return on embedded value/value of new business; and • Clearly defining and documenting the business’s risk appetite, being the degree of uncertainty that a business is willing to accept in pursuit of its goals, and describing it both qualitatively and quantitatively.

Risk is inherent in doing business, and includes all of the uncertain consequences of business activities that could prevent BIHL from achieving its strategic goals. BIHL’s SRM process is aimed at managing three elements of risk: • Opportunity: managing risk on the upside as an “offensive” function; focusing on actions taken by management to increase the probability of success and decrease the probability of failure.

• Hazard: managing risk on the downside as a “defensive” function; focusing on the prevention or mitigation of actions that can generate losses; and • Uncertainty: managing the uncertainty associated with risk, focusing on achieving overall financial performance that falls within a defined acceptable range.

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Process Each business has a documented process that links into the business’s normal management process and includes: • Strategic organisational and risk management context: • Strategic context (defining the business’s strengths, weaknesses, opportunities and threats relative to its environment), • Organisational context (understanding the business’s goals, strategies, capabilities and values), • Risk management context (setting of scope and boundaries), • Developing risk evaluation criteria, defining a logical framework for risk identification, establishing a risk identification process, analysing the risks identified, evaluating the risks against established risk criteria, deciding on the appropriate action and communication, with the aim of continuous management and improvement.

1.2 General operational risks

Operational risk Operational risk is the risk of loss due to factors such as inadequate systems, management failure, inadequate internal controls, fraud or human error. The business mitigates these risks through its culture and values, a comprehensive system of internal controls, internal audit, forensic and compliance functions and other measures such as back-up facilities, contingency planning and insurance.

The initiation of transactions and their administration is conducted on the basis of the segregation of duties, designed to ensure the correctness, completeness and validity of all transactions. Control is further strengthened by the settlement of transactions through custodians. The custodians are also responsible for the safe custody of the business’s securities. To ensure validity, all transactions are confirmed with counter-parties independently from the initial executors.

The business has a risk-based internal audit approach, in terms of which priority is given to the audit of higher risk areas, as identified in the planning phase of the audit process. The internal control systems and procedures are subject to regular internal audit reviews.

The Investment Committee of the Life and Asset Management businesses is responsible for the implementation and monitoring of risk management processes to ensure that the risks arising from trading positions are within the approved risk parameters.

The following functionaries assist in mitigating operational risk: Internal audit A board-approved internal audit charter governs internal audit activity within the Group. Regular risk-focused reviews of internal control and risk management systems are carried out. The internal audit function is appointed in consultation with the chairman of the Audit and Risk Committee and has unrestricted access to the chairman of the Committee. The authority, resources, scope of work and effectiveness of the functions are reviewed regularly.

External audit The Group’s external auditors are Ernst & Young Inc. The report of the independent auditors for the year under review is contained on page 69 of this annual report.

The external auditors provide an independent assessment of certain systems of internal financial control and express an independent opinion on the annual financial statements. Non-audit services rendered by the external auditors are strictly governed by a Group policy in this regard.

A compulsory rotation of audit partners has also been implemented.

External consultants The Group appoints external consultants to perform an annual review of the Group’s risk management processes. The purpose of this review is to continuously identify potential areas for improved risk management in line with developing international best practice.

Information and technology risk The “Group Information and Technology (I&IT) Risk Management Policy” is authorised by the Group Risk Forum and the Group IT Governance Committee and ratified by the Group Executive Committee. It stipulates the role of the Information and IT Risk manager that each business is responsible for appointing. Furthermore, it provides a framework of IT risk management, the methods of reporting, assessment and action, appropriate documentation and management of all risk-related IT incidents that have occurred, timing of communication and liaison with other functions in the Group.

Reliance on and the continuous availability of IT systems and processes are inherent to the nature of the Group’s operations. An important objective of the Group Information and Technology Risk Management

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Policy is accordingly to ensure that the Group’s IT resources and platforms are maintained and developed in line with changes in the Group’s businesses environment and requirements, and that proper back-up processes and disaster recovery measures are in place.

Going concern / business continuity risk The Board regularly considers and records the facts and assumptions on which it relies to conclude that BIHL will continue as a going concern.

Reflecting on the year under review, the directors considered a number of facts and circumstances and are of the opinion that adequate resources exist to continue business in the foreseeable future and that BIHL will remain a going concern in the year ahead. The Board’s statement to this effect is also contained in the statement on the responsibility of directors in the annual financial statements.

Compliance risk Laws and regulations: BIHL considers compliance with applicable laws, industry regulations and codes an integral part of doing business. The Group compliance function, together with the compliance functions of the Group businesses, facilitates the management of compliance through the analysis of statutory and regulatory requirements, and monitoring the implementation and execution thereof.

Compliance with client mandates: Rules for clients’ investment instructions are loaded on an order management system, which produces post trade compliance reports that are continuously monitored. On a monthly basis, these reports are manually compared with the investment instructions. When a possible breach is detected, the portfolio manager is requested to confirm whether a breach has taken place, to explain the reason for the breach and indicate when it will be rectified (which is expected to be as soon as possible). Further action may be taken, depending on the type of breach. The detailed results of the mandate monitoring process are discussed with the Head of Investment Operations on a monthly basis.

Fraud risk The BIHL group recognises that financial crime and unlawful conduct are in conflict with the principles of ethical behaviour, as set out in the Group’ code of ethics, and undermines the organisational integrity of the Group. The financial crime combating policy for the BIHL group is designed to counter the threat of financial crime and unlawful conduct.

A zero-tolerance approach is applied in combating financial crime

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and all offenders will be prosecuted. The forensic services function at Group level oversees the prevention, detection and investigation of incidents of unlawful conduct that are of such a nature that they may have an impact on the Group or the executive of a business cluster.

Group Forensic Services is also responsible for the formulation of Group standards in respect of the combating of unlawful conduct and the implementation of measures to monitor compliance with these standards.

The chief executive of each business cluster is responsible for the implementation of the policy in his or her respective business and is accountable to the Board of BIHL. Quarterly reports are submitted by Group Forensic Services to the BIHL Audit and Risk committee on the incidence of financial crime and unlawful conduct in the Group and on measures taken to prevent, detect, investigate and deal with such conduct.

Legal risk Legal risk is the risk that the business will be exposed to contractual obligations that have not been provided for, particularly in respect of policy liabilities. The risk also arises from the uncertainty of the enforceability, through legal or judicial processes, of the obligations of Group’s counter-parties, including contractual provisions intended to reduce credit exposure by providing for the netting of mutual obligations.

During the development stage of any new product and for material transactions entered into by the business, the legal resources of the business monitor the drafting of the contract documents to ensure that rights and obligations of all parties are clearly set out. The Group seeks to minimise uncertainties through continuous consultation with internal and external legal advisers, to understand the nature of risks and to ensure that transactions are appropriately structured and documented.

Lapse risk Distribution models are used by the business to identify high risk clients.

Client relationship management programmes are aimed at managing client expectations and relationships to reduce lapse rates. The design of insurance products excludes material surrender value guarantees, subject to regulatory constraints, to limit financial loss at surrender.

Lapse experience is monitored to ensure that negative experience

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Basis of Presentation and Accounting Policies (continued)

is timeously identified and corrective action taken. The business’s reserving policy is based on actual experience to ensure that adequate provision is made for lapses.

Legislation risk The risk is managed as far as possible through clear contracting.

The business monitors and influences events to the extent possible by participation in discussions with legislators, directly and through industry organisations.

Taxation risk The risk is addressed through clear contracting to ensure that policy contracts entitle policyholders to after tax returns, where applicable.

The business’s internal tax resources monitor the impact of changes in tax legislation, participate in discussions with the tax legislator to influence changes in legislation and are involved in the development of new products. External tax advice is obtained as required.

Reputation risk Actions with a potential reputational impact are escalated to the appropriate level of senior management. The Audit Committee and Board of Directors are involved as required. Events with an industrywide reputational impact are addressed through industry representative groups.

Strategy risk The Group’s governance structure and various monitoring tools in place ensure that any events that affect the achievement of the Group’s strategy are escalated and addressed at the earliest opportunity. The Board has no tolerance for any breach of guidance.

Group strategy is addressed on a continuous basis at various forums within the Group, the most important of which are: •

•

The Group’s strategic direction and success is discussed and evaluated at an annual special strategic session of the BIHL Board as well as at the scheduled Board meetings during the year; As part of the annual budgeting process, the Group businesses present their strategic plans and budgets to the BIHL group Executive Committee, who ensures that the businesses’ strategies are aligned with the overall Group strategy; and

•

The BIHL Executive Committee, which includes the chief executives of the various Group businesses, meets on a regular basis to discuss, among others, the achievement of the businesses’ and Group’s strategies. Any strategic issues are identified at these meetings and corrective actions are immediately implemented.

1.3 Long term insurance risk The business’s long-term insurance operations are subject to the general operational risks described in section 1.2, but also to specific long-term insurance risks, which include the following: The Investment Committee and Actuarial Committee are also established within the long-term insurance businesses. The principle aim of these committees is to ensure that insurance and investment contract liabilities are matched with appropriate supporting assets based on the type of benefits payable to the contract holders. Separate asset portfolios are maintained for the different products and categories of long-term policy liabilities.

Risk management: per type of risk

Underwriting risk Underwriting risk is the uncertainty about the ultimate amount of net cash flows from premiums, commissions, claims, and claim settlement expenses paid under a contract and (b) timing risk, defined as “uncertainty about the timing of the receipt and payment of those cash flows.

Insurance events are random and the actual number and amount of claims will vary from estimates. The business manages these risks through its product development process and underwriting policy to prevent anti-selection and ensure appropriate premium rates (loadings) for substandard risks. It also ensures adequate reinsurance arrangements are in place to limit exposure per individual and manage concentration of risks, the claims handling policy and adequate pricing and reserving.

Half yearly actuarial valuations are also performed to assist in the timely identification of experience variances.

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Underwriting strategy The following policies and practices are used by the business as part of its underwriting strategy to mitigate underwriting risk: • All long-term insurance product additions and alterations are required to pass through the approval framework that forms part of the life insurance business’ governance process. The Statutory Actuary approves the policy conditions and premium rates of new and revised products; •

Specific testing for HIV and AIDS is carried out in all cases where the applications for risk cover exceed a set limit. Product pricing and reserving policies also include specific allowance for the risk of HIV and AIDS;

• Applications for risk cover are reviewed by experienced underwriters and evaluated against established standards.

Retention limits are applied to limit the exposure per individual life; • Reasonable income replacement levels apply to disability insurance; • The experience of reinsurers is used where necessary for the rating of substandard risks; •

The right to re-rate premiums is retained as far as possible.

The risk premiums for group risk business and most of the in-force individual risk business can be adjusted within 12 months should claims experience deteriorate to the extent that such an adjustment is considered necessary. Most of the individual new business is sold with a guarantee that risk premiums would not be increased for the first 5 to 15 years;

• Risk profits are determined monthly; and • Regular investigations into mortality and morbidity experience are conducted to ensure that corrective action, for example re-rating of premiums, is taken where necessary.

• Expenses are continuously monitored and managed through the business’s budgeting process

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Reinsurance All risk exposures in excess of specified monetary limits are reinsured.

Credit risk in respect of reinsurance is managed by limiting the business’s exposure to companies with high international or similar credit ratings.

Claims risk The risk that the business may pay fraudulent claims (claims risk) is mitigated by training client service staff to ensure that fraudulent claims are identified and investigated timeously. The legitimacy of claims is verified by internal, financial and operating controls that are designed to contain and monitor claims risks. The forensic investigation team also advises on improvements to internal control systems.

Non-participating annuities Interest rate risk is the principle financial risk in respect of nonparticipating annuities, given the long-term profile of these liabilities.

Liabilities are matched with assets, mostly interest-bearing, to ensure that the duration of assets and liabilities are closely matched. The impact of changes in interest rates is continuously tested and for a 1% parallel movement in interest rates the impact on profit will be immaterial.

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Basis of Presentation and Accounting Policies (continued)

December 2007

The mean duration of non-participating annuity liabilities is: 7.01 years The mean duration for the supporting assets is: 5.97 years The loss from a 1% parallel fall in interest rates is approximately P11m.

2007

Investment Expenses Pâ&#x20AC;&#x2122;000 Base value returns Expense inflation

December 2006 7.58 years 6.59 years

Lapse and surrender rates

Mortality and morbidity rates

+1% 1,166,092 1,166,092 1,967 48,459 50,426

+10% or -10% 1,164,303 1,164,303 1,975 48,653 50,628

+10% or -10% 1,165,739 1,165,739 2,074 51,100 53,175

2006

Investment Expenses Pâ&#x20AC;&#x2122;000 Base value returns Expense inflation

Lapse and surrender rates

Mortality and morbidity rates

Non-participating annuities Individual business 1,164,303 Non-participating annuities policy liability 1,164,303 Non-participating life business Individual business 1,965 Employee benefits business 48,411 Non-participating life business policy liability 50,376

Non-participating annuities Individual business 977,214 Non-participating annuities policy liability 977,214 Non-participating life business Individual business 1,965 Employee benefits business 12,504 Non-participating life business policy liability 14,469

+1% or -1% 1,250,674 1,250,674 2,001 49,288 51,289

+10% 1,165,549 1,165,549 1,985 48,895 50,880

+1% or -1% 977,214 977,214

+10% 978,697 978,697

+1% 979,870 979,870

+10% or -10% 977,214 977,214

+10% or -10% 988,896 988,896

1,966 12,509 14,475

1,987 12,641 14,628

1,974 12,559 14,532

1,975 12,565 14,540

1,993 12,680 14,673

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Capital adequacy risk The business must maintain a shareholders’ fund that will be sufficient to meet obligations in the event of substantial deviations from the main assumptions affecting the business. A stochastic modelling process is used to simulate a number of investment scenarios which in turn is used to determine required capital levels that will ensure sustained solvency within an acceptable confidence level. Capital adequacy requirements were covered as indicated by the Companies’ shareholders’ fund, (as determined according to regulations and the guidelines issued by the Actuarial Society of South Africa). The CAR is covered 9.18 times (31 December 2006: 6.81 times).

Concentration of insurance risk Long-term insurance risks do not vary significantly in relation to the location of the risk insured. Concentration by amounts insured could however increase the relative portfolio risk. The tables below provide analyses of the concentration of insured benefits per individual life insured (excluding annuity payments) as well as per annuity payable per annum per life assured, expressed as percentages of the relevant long-term policy liabilities:

Benefits insured per individual life Before reinsurance After reinsurance

2007 2006 2007

Number of lives Pula Pula Pula 0 - 500 500 - 1 000 1 000 - 5 000 5 000 - 8 000 > 8 000

381,172 203 88 3 3

10,592 586,616 1,393,116 5,296,253 12,461,733

9,297 777,085 1,861,198 7,271,248 10,019,914

Non-participating annuity payable per annum per life insured

Number of lives 0 - 20 20 - 40 40 - 60 60 - 80 80 - 100 > 100

Annuity business is not reinsured

1,541 689 530 279 167 196 3,402

2007 P’000 14,107 20,180 26,066 19,419 14,896 28,263 122,930

2006 P’000 11,290 17,428 23,906 16,468 12,693 19,227 101,013

9,533 100,000 100,000 100,000 100,000

2006 Pula 4,455 50,000 50,000 50,000 50,000

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Balance sheets As at 31 December 2007

Group Company

At Dec 2007 At Dec 2006 At Dec 2007 At Dec 2006 P’000 P’000 P’000 P’000

Note ASSETS Equipment 2 13,962 20,666 — — 16,337 14,649 — — Intangible assets 3 10,661,753 9,112,637 63,247 63,247 Investments Held at fair value through profit or loss 10,527,647 9,009,220 — — 1,231,775 1,091,343 — — Government and public authority 4.1 863,890 466,473 — — Fixed interest securities 4.2 7,453,430 6,963,685 — — Equity investments 4.3 332,425 251,559 — — Mortgage and other loans 4.4 646,127 236,160 — — Funds on deposit 4.5 Other investments 134,106 103,417 63,247 63,247 100,015 81,686 — — Property investments 4.6 — — 63,247 63,247 Interest in subsidiaries 4.7 34,091 21,731 — — Interest in associates 4.7 Trade and other receivables 5 Tax recoverable Cash, deposits and similar securities 24 Total assets

65,764 — 26,043 10,783,859

47,066 14,938 19,038 9,228,994

7,394 — 3,292 73,933

7,543 — 9,975 80,765

EQUITY AND LIABILITIES Equity attributable to equity holders of parent Stated capital 6 Non - distributable reserves 7 Retained earnings Total equity attributable to equity holders of parent Minority shareholders’ interest 8 Total equity

40,601 155,244 1,121,212 1,317,057 55,006 1,372,063

40,601 103,550 704,985 849,136 21,172 870,308

40,601 9,762 (16,847 ) 33,516 — 33,516

40,601 9,762 (8,988 ) 41,375 — 41,375

Liabilities Policyholder liabilities 9 Insurance contracts Investment contracts Deferred taxation 10 Trade and other payables 11 Tax payable Total equity and liabilities

9,129,979 2,683,973 6,446,006 70,246 193,301 18,270 10,783,859

8,140,007 2,157,459 5,982,548 50,664 164,960 3,055 9,228,994

— — — — 40,417 — 73,933

— — — — 39,390 — 80,765

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Income statements For the year ended 31 December 2007

Group Company

Year to Year to Year to Year to

31 Dec 31 Dec 31 Dec 31 Dec

2007 2006 2007 2006 P’000 P’000 P’000 P’000

Note Income Net insurance premium revenue 12 791,281 678,983 — — 814,113 705,041 — — Insurance premium revenue (22,832 ) (26,058 ) — — Insurance premium ceded to reinsurers 110,316 81,466 — — Fee revenue 604,233 490,223 140,308 109,445 Investment income 13.1 80,682 23,221 — — Fair value gains on investment properties 4.6 1,178,752 1,823,525 — — Net gain from financial assets held at fair value through profit or loss 13.2 Net income

2,765,264

3,097,418

140,308

Expenses Sales remuneration Administration expenses 15

(257,737 ) (118,067 ) (139,670 )

(190,604 ) (73,241 ) (117,363 )

(8,539 ) — (8,539 )

(8,890 ) — (8,890 )

Net insurance and investment contract benefits and claims

Net insurance benefits and claims 14 Change in liabilities under investment contracts Change in liabilities under insurance contracts 9 Total expenses

(1,907,843 ) (343,149 ) (1,038,206 ) (526,488 ) (2,165,580 )

(2,516,038 ) (257,557 ) (1,700,829 ) (557,652 ) (2,706,642 )

— — — — (8,539 )

— — — — (8,890 )

Surplus from operations Share of results of associates 4.7 Surplus before tax

599,684 4,001 603,685

390,776 2,304 393,080

131,769 — 131,769

100,555 — 100,555

Tax 16 Surplus after tax

(49,867 ) 553,818

(77,021 ) 316,059

(20,993 ) 110,776

(16,300 ) 84,255

534,121 19,697 553,818

309,609 6,450 316,059

110,776 — 110,776

84,255 — 84,255

205.56 203.16

119.16 117.77

Attributable to: — ordinary shareholders — minority shareholders

Earnings per share (thebe) — basic 17 — diluted 17

109,445

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Statement of changes in equity For the year ended 31 December 2007

Share Share Share Treasury

capital premium capital shares GROUP (For the year ended 31 December 2006) P’000 P’000 P’000 P’000 Balance at 01 January 2006 13,784 26,817 — (2,148 ) Net surplus for the year — — — — Share-based payment — — — — Net realised investment surpluses on other treasury shares — — — — (Transfer to statutory reserve) / Transfer from retained income — — — — Foreign currency translation — — — — (Transfer from consolidation reserve) / Transfer to retained income — — — — Dividends paid — — — — Balance at 31 December 2006 13,784 26,817 — (2,148 ) For the year ended 31 December 2007 Balance at 1 January 2007 13,784 26,817 — (2,148 ) Net surplus for the year — — Transfer from share capital to stated capital (13,784 ) 13,784 — Transfer from share premium to stated capital (26,817 ) 26,817 — Net realised investment surpluses on other treasury shares — Cost of treasury shares acquired — — — (54,713 ) Share-based payment - movement for the year — — — — Share-based payment - reclassification from liabilities — — — — (Transfer to statutory reserve) / Transfer from retained income — — — — Foreign currency translation — — — — (Transfer from consolidation reserve) / Transfer to retained income — — — — Dividends paid — — — — Acquisitions of minority interests (note 8) Balance at 31 December 2007 — — 40,601 (56,861 ) COMPANY (For the year ended 31 December 2006) Balance at 1 January 2006 Net surplus for the period Dividends paid Balance at 31 December 2006

Share based payment reserve P’000 1,921 — 1,523 — — — — — 3,444

3,444 — — — — 8,470 10,328 — — — — 22,242

13,784 — — 13,784

26,817 — — 26,817

— — — —

— — — —

— — — —

For the year ended 31 December 2007 Balance at 1 January 2007 13,784 Transfer from share capital to stated capital (13,784 ) Transfer from premium to stated capital Net surplus for the year — Dividends paid — Balance at 31 December 2007 —

26,817 — (26,817 ) — — —

— 13,784 26,817 — — 40,601

—

—

— — —

— — —

Subsequent to the year end, the directors approved a final gross dividend of 35 thebe per share amounting to P98,4million. This dividend is payable on 4 April 2008

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Statutory Foreign currency capital translation Consolidation reserves reserve reserves P’000 P’000 P’000 153,962 7,363 (53,801 ) — — — — — — — — — 68,854 — — — 1,191 — — — (75,315 ) — — — 222,816 8,554 (129,116 )

Total non-distributable reserve P’000 107,297 — 1,523 — 68,854 1,191 (75,315 ) — 103,550

Retained income Total P’000 P’000 496,690 644,588 309,609 309,609 — 1,523 (4,557 ) (4,557 ) (66,586 ) 2,268 — 1,191 75,315 — (105,486 ) (105,486 ) 704,985 849,136

222,816 8,554 (129,116 ) 103,550 704,985

— — — — 534,121

— — — — —

— — — — —

— — — — 47,824

— — 5,767 (48,946 ) —

— — 48,946 57,416 —

— — — 10,328 —

107,732 — — 107,732 (107,732 )

— 4,601 — 4,601 2,186

— — (79,437 ) (79,437 ) 79,437

— — — — (139,609 )

330,548 13,155 (153,840 ) 155,244 1,121,212

9,762 — — 9,762

— — — —

107

Minority interest P’000 17,723 6,450 — — — (3,001 ) — — 21,172

Total Equity P’000 662,311 316,059 1,523 (4,557 ) 2,268 (1,810 ) — (105,486 ) 870,308

849,136 21,172 534,121 19,697 — — — — 47,824 — (48,946 ) 57,416 — 10,328 — — — 6,787 — — — (139,609 ) (13,231 ) — 27,369 1,317,057 55,007

870,308 553,818 — — 47,824 (48,946 ) 57,416 10,328 — 6,787 — (152,840 ) 27,369 1,372,064

— — — —

9,762 — — 9,762

490 84,255 (93,733 ) (8,988 )

50,853 84,255 (93,733 ) 41,375

— — — —

50,853 84,255 (93,733 ) 41,375

9,762 — —

— — —

— — —

9,762 — —

9,762 — — — — 9,762

(8,988 ) — — 110,776 (118,635 ) (16,847 )

41,375 — — 110,776 (118,635 ) 33,516

— — — — — —

41,375 — — 110,776 (118,635 ) 33,516

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Cash flow statements For the year ended 31 December 2007

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006 P’000 P’000 P’000 P’000

Note Cash generated (utilised) in operations

Cash generated (utilised) in operations 23 Interest received 13.1 Dividends received from investments 13.1 Dividends received from associates 4.7 Tax refund receipt Tax paid Dividends paid

1,421,080 1,401,701 45,495 168,945 2,055 14,938 (59,214 ) (152,840 )

127,132 106,098 32,502 125,032 2,154 — (50,044 ) (88,610 )

(6,683 ) (28,356 ) 1,195 139,113 — — — (118,635 )

Cash outflows in investing activities Purchase of property plant and equipment Purchase of computer software Purchase of investments

(1,004,108 ) (1,631 ) (2,198 ) (1,000,279 )

(1,081,852 ) (3,396 ) (1,085 ) (1,077,371 )

— — — —

— — — —

Increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year

416,972 255,198

(954,720 ) 1,209,918

(6,683 ) 9,975

6,942 3,033

Cash and cash equivalents at the end of the year

672,170

255,198

3,292

9,975

24

6,942 (8,770 ) 1,092 108,353 — — — (93,733 )

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Notes to the financial statements For the year ended 31 December 2007

1 Segmental analysis Basis of segmentation The Group operates in two principal areas of business providing life insurance and asset management services to its customers through its two main subsidiaries, Botswana Life and BIFM. Segment results, assets and liabilities include items directly attributable to a segment as well as those items that can be allocated on a reasonable basis. Capital expenditure includes cash incurred on property and equipment, investment properties and intangible assets.

Inter-segment transactions that occurred during 2007 and 2006 between business segments are set on an arm’s length basis in a manner similar to transaction with third parties. Segmental income, segment expense and segment results will then include those transfers between business segments, which will then be eliminated on consolidation.

Primary segment - Business segments At 31 December 2007, the Group’s operating businesses are organised and managed separately according to the nature of the products and services offered, with each segment representing a strategic business unit that offers varying products and serves different markets. This is the basis on which the Group reports its primary segment information. The Group is therefore organised into two principal areas of business - Life Insurance and Asset Management Services.

Secondary segment - Geographical segments The Group under its 100% owned subsidiary, BIFM Holdings, has a 70% subsidiary in African Life Financial Services (Zambia) Limited. For management purposes, the Zambia operations are reported under BIFM Holdings as they are considered insignificant. The Group therefore only has significant operations in Botswana hence a geographical segment analysis has not been provided.

1.1 Segment information by products and services Premium revenue Fee revenue Fair value gains and losses Total net income Surplus for the period after tax Depreciation Amortisation Total Assets Total Liabilities Capital expenditure Associates and joint venture share of profit investment in associates

LIFE BUSINESS

ASSET MANAGEMENT

Individual Life and Employee Benefits Annuity Year to 31 Year to 31 Year to 31 Year to 31 Year to 31 Year to 31 Dec 2007 Dec 2006 Dec 2007 Dec 2006 Dec 2007 Dec 2006 P’000 P’000 P’000 P’000 P’000 P’000

514,129 — 598,414 1,112,543

INTER GROUP TRANSACTIONS

TOTAL

Year to 31 Year to 31 Year to 31 Year to 31 Dec 2007 Dec 2006 Dec 2007 Dec 2006 P’000 P’000 P’000 P’000

277,152 — 117,689 394,841

286,996 — — 110,316 58,868 1,449,524 345,864 1,559,840

— 81,466 1,843,558 1,925,024

361,068 243,872 48,163 1,322 2,470 1,606 1,013 587 53 2,728,406 2,030,369 1,208,920 1,736,628 1,368,281 1,208,920 3,198 870 371

22,484 145,532 145 1,116 31 — 980,164 9,829,771 980,164 9,532,222 3,369 259

40,745 (945 ) 8,958 553,818 316,059 195 — — 4,044 2,810 807 — — 1,066 1,425 7,978,537 (2,983,237 ) (1,760,076 ) 10,783,861 9,228,994 7,794,303 (3,065,974 ) (1,784,062 ) 9,411,796 8,358,686 242

— 3,828 4,481

1,858 4,255

391,988 — 541,671 933,659

1,527 4,452

— —

— —

2,143 29,837

777 17,279

—

(301,960 ) (301,960 )

— —

— — (107,128 ) (107,128 )

— —

791,281 678,984 110,316 81,466 1,863,667 2,336,969 2,765,264 3,097,419

4,001 34,091

2,304 21,731

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Notes to the financial statements (continued) For the year ended 31 December 2007

2

Equipment

Group

Computer equipment P’000

Furniture and fittings P’000

Motor vehicles P’000

Leasehold improvements P’000

Total P’000

Year to 31 December 2007 Opening net book value Additions Disposals Depreciation charge Closing net book value

3,101 1,000 — (1,378 ) 2,723

13,715 579 (3,685 ) (1,060 ) 9,549

158 — — — 158

3,692 52 (606 ) (1,606 ) 1,532

20,666 1,631 (4,291 ) (4,044 ) 13,962

At 31 December 2007 Cost Accumulated depreciation Net book value

12,578 (9,855 ) 2,723

16,162 (6,613 ) 9,549

4,597 (4,439 ) 158

9,704 (8,172 ) 1,532

43,041 (29,079 ) 13,962

Year to 31 December 2006 Opening net book value Additions Disposals Depreciation charge Closing net book value

3,306 1,317 — (1,522 ) 3,101

13,351 954 — (590 ) 13,715

51 137 — (30 ) 158

4,672 — (312 ) (668 ) 3,692

21,380 2,408 (312 ) (2,810 ) 20,666

At 31 December 2006 Cost Accumulated depreciation Net book value

11,578 (8,477 ) 3,101

20,801 (7,086 ) 13,715

4,597 (4,439 ) 158

5,853 (2,161 ) 3,692

42,829 (22,163 ) 20,666

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111

Intangible assets

Goodwill

P’000 Group

Computer software P’000

Total P’000

Year to 31 December 2007 Opening net book value Additions Foreign currency translation difference Impairment/amortisation Closing net book value

12,579 — 556 — 13,135

2,070 2,198 — (1,066 ) 3,202

14,649 2,198 556 (1,066 ) 16,337

At 31 December 2007 Cost Accumulated impairment/amortisation Net book value

13,135 — 13,135

13,650 (10,448 ) 3,202

26,785 (10,448 ) 16,337

Year to 31 December 2006 Opening net book value Foreign currency translation difference Additions Amortisation Closing net book value

13,200 (621 ) — — 12,579

2,410 — 1,085 (1,425 ) 2,070

15,610 (621 ) 1,085 (1,425 ) 14,649

At 31 December 2006 Cost Accumulated impairment/amortisation Net book value

12,579 — 12,579

11,925 (9,855 ) 2,070

24,504 (9,855 ) 14,649

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Notes to the financial statements (continued) For the year ended 31 December 2007

4

Investments The BIHL Group through its asset management company, Bifm that is a traditional investment manager. Manages a comprehensive range of distinct asset classes, each against an appropriate benchmark that acts as the neutral position. Bifm is an active investment manager who implement positions that deviate from the benchmark within predetermined constraints. Bifm aims to capture and create value from long-term relative valuation differences, both between asset classes and within an asset class between individual securities.

Bifm implements a value-style bias that complements itsr investment philosophy. Bifm is of the view that pockets of inefficiency exist in capital markets. This presents opportunities to purchase undervalued securities and hold them until their market value equals or exceeds their intrinsic value. Bifm aims to realise these relative value anomalies over the long term and avoid short term fluctuations or market noise.

Bifm combines investment strategies with the aim of delivering superior investment returns given a level of risk over the long term (3 years and more). For local equity security selection, Bifm uses a bottom-up approach. The bottom-up approach is research intensive and focuses on individual companies as a starting point. Companies, sectors and geographic regions not covered by a portfolio managerâ&#x20AC;&#x2122;s universe may be neglected.

To compensate, Bifm also applies a top-down decision-making process to implement tactical positions. The top-down approach utilises macro-economic data, relative asset class valuations, market sector valuations and the prospects of geographical regions.

Bifm adopts fundamental analysis to place a fair value on individual securities and to identify mispriced securities with upside potential.

Fundamental analysis is a primary function and of high importance as it guides us on security-selection.

When selecting offshore managers, Bifm appoints managers with differing styles and approaches. The rationale for using the different styles reflects our appreciation of the fact that style diversification is a risk-management tool as well as a way of taking advantage of the anomalies that could be identified by each style.

1. Equity - Bifm invests for the long-term, 3 to 5 year period, to maximise returns at the lowest possible risk. Bottom-up stock-picking and fundamental stock analysis coupled with a value-style bias, are used for portfolio construction.

2. Fixed Income - The approach used for long dated bonds and short-dated money-market instruments differs: (a) Long-dated Bonds - Bifm believes that value can be created through active duration management, taking into account

macro-economic factors such as inflation and interest rates.

This reflects a top-down approach for the management of

bonds, which is applied both locally and offshore. Bifm utilises

fixed and floating instruments as different assets to match

different liabilities, to benefit from the shape of the yield curve,

and as a tool to manage duration. (b)

Cash and money market: Bifm manages cash and shortdated money-market instruments primarily for liquidity purposes. Bifm avoids credit risk by investing with reputable banks. Bifm negotiates to get high interest rates on behalf of its clients.

3. Property - Property is a unique asset class, with bond-like and equity-like features, that matches the liability profiles of a large number of pension funds. Enhanced yields and rental escalations are received over time. The philosophy is to invest in A-grade properties that we believe are more likely to attract and retain corporate tenants.

Property investments constitute a significant area of Bifmâ&#x20AC;&#x2122;s drive to develop the local economy and capital markets. Bifmâ&#x20AC;&#x2122;s subsidiary, Khumo Property Asset Management, is a fully-fledged property development and management company.

4. Alternatives - The alternative assets that Bifm invests in are private equity, private debt, and hedge funds. Alternatives are utilised where the risk-reward trade-off is believed to be superior. Examples are: (a)

Private equity is becoming a more important asset class globally. In the Botswana context, private equity is a progressive approach to investment management because it is a catalyst for economic development. Bifm invests in local, regional and global private equity funds.

(b)

Specialised portfolios and insurance portfolios utilise private debt instruments for matching purposes. In Botswana, private debt is a substitute for listed debt instruments. Listed debt instruments are in short supply in Botswana.

(c) Offshore hedge funds are currently used as an alternative to

offshore bonds given our bearish view on the prospects for

offshore bonds.

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Fair values At 31 December 2007 and 31 December 2006, the carrying value of financial instruments reported in the financial statements approximate their value.

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 Investments held at fair value thorugh profit or loss At the beginning of the year 9,009,220 6,567,588 — ­ — 435,490 323,686 — — Purchase of investments 1,082,937 2,117,946 — — Revaluations 10,527,647 9,009,220 — — At the end of the year 4.1 Government and public authority Shareholder investments Policyholder investments

4.2 Fixed interest securities Shareholder investments Policyholder investments

4.3 Equity investments Listed in Botswana Listed foreign markets Unlisted

Sectoral analysis Consumer discretionary Consumer staples Industrials Financials Health care Information technology Energy Materials Telecommunication services Utilities

46,236 1,185,539 1,231,775

49,335 1,042,008 1,091,343

— — —

— — —

451,200 412,690 863,890

79,985 386,488 466,473

— — —

— — —

1,588,305 5,838,629 26,496 7,453,430

1,175,578 5,766,428 21,679 6,963,685

— — — —

— — — —

1,156,267 537,717 681,108 1,658,510 832,173 759,725 453,459 424,748 624,156 325,567 7,453,430

1,080,292 502,385 636,354 1,549,534 777,493 709,806 423,663 396,839 583,144 304,175 6,963,685

— — — — — — — — — — —

— — — — — — — — — — —

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Notes to the financial statements (continued) For the year ended 31 December 2007

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 Shareholder investments Policyholder investments

671,992 6,781,438 7,453,430

624,361 6,339,325 6,963,685

— — —

— — —

Listed financial assets: The last traded prices have been used to value these investments.

Unlisted financial assets: These investments have been valued based on an independent valuation done by third parties. The fair value of unlisted financial assets has been calculated by discounting expected future cash flows at prevailing interest rates / market rates of return.

4.4 Mortgages and other loans Opening balance New loans Interest charges Repayments Loss from changes in fair values

251,559 165,847 42,921 (127,902 ) — 332,425

181,517 66,615 29,797 (24,497 ) (1,873 ) 251,559

— — — — — —

104 — — — (104 ) —

Loans secured against the company’s insurance policies Other loans

300,528 31,897

246,290 5,269

— —

— —

Shareholder investments Policyholder investments

190,512 141,913 332,425

158,460 93,099 251,559

— — —

— — —

The loans secured against the company’s insurance policies have no fixed repayment term; interest rate is variable depending on market conditions. The effective interest rate at 31 December 2007 was 18% (2006: 18%).

The impairment arose as a result of reduction in policy values, (policy values being the security of the loans) due to market conditions. The discount rate used was 14.5%. There was no imparement loss for 2007.

As at year end there were no receivables that were overdue.

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Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 4.5 Funds on deposit Shareholder investments Policyholder investments

92,095 554,032 646,127

103,973 132,187 236,160

— — —

— — —

Funds on deposit are made for varying periods of between one day and three months depending on the immediate cash requirements of the company.

All deposits are subject to an average variable interest rate of 10% (2006: 10%).

The carrying amounts disclosed above reasonably approximate fair values at year end.

4.6 Property investments At beginning of the year Disposals in exchange of shares Revaluations

81,686 (62,353 ) 80,682 100,015

178,417 (119,952 ) 23,221 81,686

— — — —

— — — —

Shareholder investments Policyholder investments

45,648 54,367 100,015

20,350 61,336 81,686 ­

— — —

— — —

Investment properties are stated at fair value which has been determined based on valuations performed by Knight Frank; an accredited independent valuer, as at 31 December 2007 and 31 December 2006 for the current and previous years respectively. Knight Frank is an industry specialist in valuing these types of investment properties.

The fair value represents the amount at which assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable willing seller in an arm’s length transaction at the date of valuation, in accordance with International Assets Valuation Committee.

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Notes to the financial statements (continued) For the year ended 31 December 2007

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 4.7 Interest in associates / joint ventures and subsidiaries for company’s only Carrying amounts at beginning of the period Share of results Dividend received Payments Acquisition of interest in an associate Closing balance

21,731 4,001 (2,055 ) — 10,414 34,091

21,581 2,304 (2,154 ) — — 21,731

63,247 — — — — 63,247

63,247 — — — — 63,247

Investment in associates at 31 December 2007 and 31 December 2006 includes goodwill of P901 (2006:P901) There was no impairment loss during the period.

During the year, the Group through its 100% owned subsidiary Bifm invested in various associates being Plot 21, Bongwe, Re mmogo. All these three are Public Private Partnerships (PPP) management companies. The Group also invested in AFM, a dormant investment company.

4.7 Interest in associates (continued)

Gaborone Funeral Plot 21 AFM

Sun Services Investments Bongwe ReMogo Holdings Group As at 31 December 2007 Carrying amount Interest in issued share capital Shareholders’ fund Share of earnings after tax for current year Shareholders’ fund Distributions received Shareholders’ fund Assets and liabilities of associated company: Non-current assets Current assets Current liabilities Revenue Earnings attributable to shareholders

Total

19,145

4,255

1,184

2,184

322

6,724

12%

27%

33%

33%

33%

10%

2,137

1,400

—

—

—

—

3,537

928

1,127

—

—

—

—

2,055

25,279 3,307 (25,004 ) — —

— 6,552 — — —

— 967 — — —

— 67,241 — — —

62,690 33,445 14,528 19,266 (12,388 ) (10,545 ) 92,029 35,159 14,087 9,493

33,814

121,414 111,861 (47,937 ) 127,188 23,580

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4.7 Interest in associates (continued)

Gaborone Funeral Plot 21 AFM

Sun Services Investments Bongwe ReMogo Holdings Group As at 31 December 2006 Carrying amount Interest in issued share capital Shareholders’ fund Share of earnings after tax for current year Shareholders’ fund Distributions received Shareholders’ fund Assets and liabilities of associated company: Non-current assets Current assets Current liabilities Revenue Earnings attributable to shareholders

Total

17,279

4,452

—

—

—

— 21,731

12%

27%

—

—

—

—

1,405 342

155,456 5,295 (11,790 ) 1,360

891 3,812

15,518 7,568 (6,597 ) 4,678

2,296

—

—

—

—

— — — —

— — — —

— — — —

— — — —

2,154

170,974 12,863 (18,387 ) 6,038

The Group has a 50% interest in Khumo Property Asset Management (Pty) Ltd.

The share of the assets, liabilities, income and expenses of the jointly controlled entity at 31 December 2007 and 2006 and for the years then ended,

which are included in the consolidated financial statements, are as follows:

Joint venture’s balance sheet: Current assets Non-current assets Current liabilities Non-current liabilities Net assets

At 31 Dec 2007 2,164 268 (945 ) — 1,487

At 31 Dec 2006 1,080 187 (713 ) (42 ) 512

6,501 (5,573 ) 928

3,841 (3,825 ) 16

Joint venture’s income and expenses: Income Expenses Profit before tax

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Notes to the financial statements (continued) For the year ended 31 December 2007

5

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 Trade and other receivables Outstanding premiums 17,235 16,182 — — Due from related companies 989 1,019 3,914 1,909 Other amounts receivable 25,934 10,487 3,480 5,634 Due from reinsurers 21,606 19,378 — — — opening balance 19,378 20,595 — — — premiums paid (12,190 ) (16,641 ) — — — claim recoveries 14,418 15,424 — —

65,764 47,066 7,394 7,543 Trade receivables are non-interest bearing and are generally on 30 days terms. No impairment loss has been provided for during the current year.

The ageing analysis of these receivables is as analysed below: Neither past due nor impaired Past due but not impaired: Less than 30 days 30 - 60 days 60 - 90 days

48,529 17,235 9,373 6,310 1,552 65,764

28,170 18,896 8,233 6,320 4,343 47,066

7,394 — — — — 7,394

7,543 — — — — 7,543

As at 31 December 2007 outstanding premiums with a nominal value of P2,7 million (2006:P3,5 million) were impaired and fully provided for.

Movements in the provision for impairment of outstanding premiums were as follows: At 1 January (Utilised)/Charge for the year At 31 December 6

Stated capital Authorised 1,200,000,000 ordinary shares of 5 thebe each Issued and fully paid Transfer from issued share capital Transfer from share premium Total stated capital

3,464 (814 ) 2,650

— 3,464 3,464

60,000

60,000

60,000

60,000

13,784 26,817 40,601

13,784 26,817 40,601

13,784 26,817 40,601

13,784 26,817 40,601

The Companies Act (Chapter 42:01) was revised and replaced with the Companies Act, 2003 Act No. 32 of 2004.The new Act came into effect from the 3rd of July 2007. Under the revised Act all shares to be issued after the 3rd of July 2007 will be of no par value (Section 47.1) and all shares already issued are deemed to have been converted to no par value shares (Section 47.2) as of the same date. The conversion of the shares from par value shares to no par value shares will however not affect the rights of all shareholders. This change will not affect the operations of the Group but will however affect the disclosure and presentation of share capital and share premium. Issued share capital and share premium and any new shares that may be issue

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7

119

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 Non-distributable reserves Foreign currency translation reserve Opening balance 8,554 7,363 — — 4,601 1,191 — — Movement for the year 13,155 8,554 — — Balance at end of year Consolidation reserve Opening balance Transfer from retained earnings Treasury shares Balance at end of year Number of shares held at 31 December: Shareholders’ fund 000s Policyholders’ fund 000s

Shareholders’ fund Cost of shares held Cost of shares held at beginning and end of year Market value of shares held Market value of shares held at beginning of year Unrealised market value adjustment on shares held Market value of shares held at end of year Policyholders’ fund Cost of shares held Cost of shares held at beginning and end of year Market value of shares held Market value of shares held at beginning of year Unrealised market value adjustment on shares held Market value of shares held at end of year Total in consolidation reserve Treasury shares Opening balance Transfer from surplus for the year

Share based payment reserve Opening balance Transfer from surplus for the year

Statutory capital reserve Opening balance Transfer from surplus for the year

Total non-distributable reserves

(129,116 ) (79,437 ) 54,713 (153,840 )

(53,801 ) — (75,315 ) (129,116 )

—

—

— —

— —

3,345 9,102 12,447

4,179 10,410 14,589

— — —

— — —

629

626

—

—

35,520 5,817 41,337

14,960 20,560 35,520

— — —

— — —

1,565

1,558

—

—

93,596 18,907 112,503 153,840

38,841 54,755 93,596 129,116

— — —

— — —

(2,148 ) (54,713 ) (56,861 )

— (2,148 ) (2,148 )

—

—

3,444 18,798 22,242

1,921 1,523 3,444

— — —

— — —

222,816 107,732 330,548 155,244

153,962 68,854 222,816 103,550

9,762 — 9,762 9,762

9,762 — 9,762 9,762

In accordance with the requirements of section 9 of the Botswana Insurance Industry Act (Chapter 46:01), 25% of the annual after-tax income of those subsidiaries registered under the Act is transferred to the Statutory Capital Reserve. This reserve is utilised at least once every five years to increase the paid up share capital of the respective subsidiary companies. The last utilisation was for balances at 31 March 2004.

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Notes to the financial statements (continued) For the year ended 31 December 2007

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 8

Minority interest 21,172 19,697 (13,231 ) 27,368 55,006

17,723 6,450 — (3,001 ) 21,172

— — — — —

— — — — —

Policyholder liabilities Insurance contracts Opening balance Transfer from income statement Other transfers Closing balance Financial Soundness Valuation (FSV) Unearned premium reserve (UPR) Annuity mismatch and re-investment reserve Claims incurred but not yet reported (IBNR) reserve

2,157,459 526,488 26 2,683,973 2,603,970 41,038 32,262 6,703

1,599,913 557,652 (106 ) 2,157,459 2,129,914 2,748 23,181 1,616

— — — — — — — —

— — — — — — — —

Investment contracts Balance at the beginning of the year Pension and investment contributions Net investment return Benefits paid and withdrawals Balance at end of the period

5,982,548 234,465 751,975 (522,982 ) 6,446,006

4,514,201 363,366 1,666,929 (561,948 ) 5,982,548

— — — — —

— — — — —

Total policyholder liabilities

9,129,979

8,140,007

—

—

Off balance sheet segregated funds

3,749,550

2,669,406

—

—

Balance at beginning of the year Share of net profit Dividend payment Currency translation difference Balance at end of the year 9

Segregated funds are excluded from investments and liabilities under investment management contracts on the balance sheet.

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Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 10

Deferred tax Balance at the beginning of the year Charge to the income statement Foreign currency translation Balance at end of the year Representing: Unrealised gains on shareholders’ investments

50,664 19,582 — 70,246

17,494 32,450 720 50,664

— — — —

— — — —

70,246

50,664

—

—

There were no temporary differences associated with investment in subsidiaries, associates and interest in joint ventures for which deferred tax liabilities have not been recognised.

11 Trade and other payables Insurance claims payable Amounts due to group companies Premiums received in advance Intermediary retention balance Other accounts payable Reassurance payable — opening balance — premiums due — claim recoveries

69,501 — 47,549 19,763 35,191 21,297 14,604 18,330 (11,637 ) 193,301

53,991 — 31,496 17,136 47,733 14,604 3,377 21,305 (10,078 ) 164,960

693,418 696,587 408,190 288,397 (3,169 ) 97,863 117,526 62,527 54,999 (19,663 ) 791,281

646,433 652,521 352,189 300,332 (6,088 ) 32,550 52,520 45,619 6,901 (19,970 ) 678,983

— 29,104 — — 11,313 — — — — 40,417

— 38,624 — — 766 — — — — 39,390

— — — — — — — — — — —

— — — — — — — — — — —

Terms and conditions of the the above financial liabilities are: — Trade payables are non-interest bearing and are normally setteled on 30 - 60 days terms.

— Other payables are non-interest bearing and have an average term of 90 days.

12 Premium revenue Individual life Gross premium — Gross premium — Single Premium ceded to reinsurers Group and employee benefits Gross premium — Recurring premium — Single Premuim ceded to reinsurers

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Notes to the financial statements (continued) For the year ended 31 December 2007

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 13.1 Investme income

(i) shareholder Interest Rental income on investment properties Dividends

(ii) policyholder insurance contracts Interest Rental income on investment properties Dividends

(iii) policyholder investment contracts Interest Rental income on investment properties Dividends

Total investment income

45,495 881 168,945 215,321

32,502 694 125,032 158,228

1,195 — 139,113 140,308

1,092 — 108,353 109,445

167,193 5,635 23,606 196,434

116,012 4,260 27,165 147,437

— — — —

— — — —

83,034 10,869 98,575 192,478 604,233

72,833 4,963 106,762 184,588 490,223

— — — — 140,308

— — — — 109,445

328,781 (9,324 ) 124,862 (6,616 ) 4,187 (134,784 ) 307,106

154,043 2,312 81,023 (3,610 ) 3,419 (75,315 ) 161,872

— — — — — — —

— — — — — — —

269,809 (10,197 ) (17,103 ) 242,509

239,596 — 50,605 — (10,663 ) 279,538 —

— —

13.2 Net gain from financial assets held at fair value through profit or loss

(i) shareholder Realised fair value surpluses on investments Foreign exchange gains Unrealised fair value surpluses on investments Investment management fees Other income Less treasury share adjustment

(ii) policyholder insurance contracts Realised fair value surpluses on investments Foreign exchange gains Investment management fees

—

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Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 13.2 Net gain from financial assets held at fair value

through profit or loss (continued) (iii) policyholder investment contracts Fair value adjustments on consolidation (441,659) (253,665) — — 1,070,796 1,635,780 — — Unrealised fair value surpluses on investments

629,137 1,382,115 — — 1,178,752 1,823,525 — — Total net gain from financial assets held at fair value through profit or loss Total Shareholders Policyholders

1,782,985 522,427 1,260,558

2,313,748 320,100 1,993,648

140,308 140,308 —

109,445 109,445 —

All financial investments are designated at fair value through profit or loss on initial recognition

14 Net insurance claims and benefits Individual life Death and disability claims Maturity claims Policy surrenders Annuities Reinsurance share on death and disability claims Total individual life

53,740 65,564 90,367 115,377 (1,695 ) 323,353

51,605 38,371 63,595 94,322 (2,410 ) 245,483

— — — — — —

— — — — — —

Group and employee benefits Death and disability claims Reinsurance share on death and disability claims

37,590 (17,794 ) 19,796

25,563 (13,489 ) 12,074

— — —

— — —

Total

343,149

257,557

—

—

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Notes to the financial statements (continued) For the year ended 31 December 2007

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 15 Administration expenses include: Auditors’ remuneration 2,301 1,600 — audit fee current period 860 100 — audit fee previous period 184 25 — other services 4,044 2,810 Depreciation on property, plant and equipment (note 10) 1,066 1,425 Amortisation of computer software (note 11) Directors’ fees — for services as directors 900 1,041 3,077 2,642 — for managerial services 204 148 — pension contribution 1,391 4,248 Operating lease rentals Staff costs Salaries and wages for administration staff Salaries and wages included in selling expenses Pension costs Medical aid Share based payment — for managers — for staff Total staff costs Average number of employees 16 Tax Corporate tax Deferred tax Withholding tax on dividends Tax charge

464 169 — — — — 900 — — —

1,041 — — —

193 — 25 — —

49,782 2,301 4,120 927 8,470 5,328 3,142 65,600 560

28,183 25,310 1,181 711 10,135 8,612 1,523 65,520 490

409 — 51 — — — — 460 2

230 — 72 — — — — 302 2

56,211 19,582 (25,926 ) 49,867

60,727 32,451 (16,157 ) 77,021

— — 20,993 20,993

— — 16,300 16,300

603,685 150,922

393,080 98,270

131,769 32,942

100,555 25,139

Tax reconciliation The tax on income before tax differs from the theoretical amount that would arise using the basic tax rate as follows: Surplus before tax Tax calculated at a tax rate of 25%

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Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 16 Tax (continued) Income not subject to tax Withholding tax on dividends Tax charge

(75,129 ) (25,926 ) 49,867

(5,092 ) (16,157 ) 77,021

(11,949 ) — 20,993

(8,839 ) — 16,300

Additional company tax The Group had additional Company Tax (ACT) available for set off against withholding tax on dividends as at 31 December 2007 of P67 million (31 December 2006: P62 million).

17 Earnings per share The calculation of earnings per share has been based on the weighted average number of shares in issue during the year and earnings as detailed below

P’000 P’000 Number of shares in issue 277,031 275,684 Staff share scheme and treasury shares (17,512 ) (15,851 ) Weighted average number of shares used for calculating basic earnings per share 259,519 259,833 Weighted number of dilutive options 4,906 3,068 Weighted average number of shares used for calculating diluted earnings per share 264,425 262,901 Earnings per share (thebe) — basic 205.56 119.16 — diluted 203.16 117.77 18 Dividends per share paid during the period (net) Record date Thebe per share Final dividend for the year to 31 December 2006 30-Mar-2007 29.500 Interim dividend for six months to 30 June 2007 5-Oct-2007 21.000

50.500 Final dividend for the year to 31 December 2007 21-Mar-2008 29.000 Special dividend for the year to 31 December 2007 21-Mar-2008 6.000

35.000 Withholding tax on dividends (5.250 ) Dividend proposed for approval at AGM (not recognised as liability at 31 December) 29.750

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Notes to the financial statements (continued) For the year ended 31 December 2007

Group Company

Year to 31 Year to 31 Year to 31 Year to 31

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 19 Related party transactions (a) Transactions on insurance contracts Sanlam Limited (54% shareholder of BIHL) 8,942 9,523 — — — Premium ceded to reinsurer (1,695 ) (2,410 ) — — — Claim recoveries from reinsurer (b) Year end balances arising from transactions on insurance contracts Net due from/(to) — Sanlam Limited

(8,347 )

3,957

—

—

(c) Year end balances arising from transactions on other services other than insurance contracts — BLIL (100% owned by BIHL) — BIFM(100% owned by BIHL)

— —

— —

29,104 3,914

34,007 3,141

2,427 (486) 1,941

2,994 (567) 2,427

— — —

— — —

9,846 682 2,125 12,653 681

6,234 230 276 6,740 260

The above transactions were carried out on commercial terms and conditions and at market prices. (d) Loans to associates At beginning of the period Less repayments received Balance at end of the period The loan is due from Funeral Services Group, bears interest at bank’s prime rate, repayable within 36 months and is unsecured. (e) Loans to directors There were no loans to directors. (f) Transactions with key management (i) Compensation — Short-term employee benefits — Pension costs - defined contribution plans — Other long-term benefits

(ii) Holding in Company’s policies

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19 Related party transactions (continued)

(g) Directors’ shareholding Purchases/ Sales/

Opening balance appointments resignations

K R Jefferis MC Letshwiti (indirect holding) R Sikalesele-Vaka H Fidzani Total

10,175 21,871 25,200 2,696 59,942

— — 18,495 — 18,495

— — — (2,696 ) (2,696 )

127

Closing balance 10,175 21,871 43,695 — 75,741

20 Principal subsidiaries

Country of incorporation

% of interest held Dec 2007 Dec 2006

Directly held Botswana Life Insurance Limited Botswana 100 100 Bifm Holdings Company Limited Botswana 100 100 BLI Investments (Pty) Limited Botswana 100 100 IGI Insurance Holdings Limited Botswana 100 100 Indirectly held Botswana Insurance Fund Management Limited Botswana 72.5 100 Botswana Life Properties (Pty) Limited Botswana 100 100 Bifm Holdings and Financial Services Limited Isle of Man 100 100 Khumo Property Asset Management Co. Botswana 50 50 Bifm Capital (Pty) Limited Botswana 51 51 Bifm Capital 1 Botswana 100 100 Bifm Capital 2 Botswana 100 100 Bifm Projects (Pty) Limited Botswana 100 100 African Life Financial Services (Zambia) Limited Zambia 70 50

KYS Investments (Pty) Limited Botswana 63 58 Photon Private Equity Fund Managers (Pty) Limited: Botswana 100 70

Nature Business

Life insurance Holding company Holding company Dormant Asset management Property investment Holding company Property management company Corporate finance Corporate finance Corporate finance Building projects Asset management and pension administration Holding company Private equity

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Notes to the financial statements (continued) For the year ended 31 December 2007

Group Company

Year to Year to Year to Year to

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 21 Commitments Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements Property, plant and equipment Operating lease commitments The future minimum lease payments under non-cancellable operating leases Within one year Within two to five years

60,000

3,300

—

—

4,235 10,323

18,897 53,991

— —

— —

22 Employee benefits (a) Retirement benefits The group provides retirement benefits of employees by means of defined benefit pension fund. The pension plan is registered under the Pension and Provident Funds Act (Chapter 27:03). Expatriate employees are provided with gratuity in terms of their conditions of employment.

Valuation is performed annually on 30 November, the last valuation was performed on 30 November 2007. The fund is financially sound according to the latest valuation based on reasonable actuarial assumptions about future experience. The employer’s contribution as a fairly constant percentage of the remuneration of the members of the funds is sufficient to meet the promised benefits of the fund.

At 30 Nov 2007

At 30 Nov 2006

Number of employees covered by the fund Contributions to defined pension fund during the year (P 000) Principal actuarial assumptions at latest valuation date: Pre-retirement discount rate per annum Post-retirement discount rate

per annum Future salary increases

per annum Expected return on plan assets at beginning of the year

per annum

186 1,158

152 2,743

11% 11% 9% 12%

10% 10% 8% 10%

Changes in the present value of the defined benefit obligation and in the fair value of the plan assets

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(a) Retirement benefits (continued) Opening present value of defined benefit obligation Interest cost Current service cost Contribution by fund participant Past service cost-vested benefits Benefits paid Actuarial gain loss on obligation Closing present vale of defined benefit obligation The defined benefit obligation is wholly funded

P’000 21,490 2,174 2,377 — 41 (1,863 ) (729 ) 23,490

P’000 18,990 1,893 1,335 686 614 (3,998 ) 1,970 21,490

Opening fair value of plan assets Expected return on plan assets Member contributions Employer contributions Benefits paid Actuarial gain on plan assets Closing fair value of plan assets

32,124 3,750 — 1,158 (1,863 ) 3,619 38,788

25,949 2,534 686 2,057 (3,998 ) 4,896 32,124

Asset allocation by major categories Local equity Offshore equity Local bonds and fixed interest Offshore money market Other Total

26% 46% 12% 12% 4% 100%

17% 49% 16% 14% 4% 100%

1,453

815

3,750 3,619 7,369

2,534 4,896 7,430

The expected return on plan assets is based on the weightings above and expected rates of return on the different asset classes.

Fair value of BIHL’s own financial instruments included in plan assets Actual return on plan assets Expected return on plan assets Actuarial gain on plan assets Actual return on plan assets Amounts recognised in the balance sheet Present value of the obligation Fair value of plan assets

Unrecognised actuarial gains Asset recognisable in the balance sheet per IAS 19 The assets in 2007(P2.739) and 2006 have not been recognised in the balance sheet as they are not material.

23,490 (38,788 ) (15,298 ) 12,558 (2,740 )

21,490 (32,124 ) (10,634 ) 8,567 (2,067 )

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Notes to the financial statements (continued) For the year ended 31 December 2007

(a) Retirement benefits (continued) Amounts recognised in the income statement Current service cost Interest cost Expected return on plan assets Net actuarial gain recognised in year Past service cost-vested benefits Net expense included in staff costs

2007 2,377 2,174 (3,750 ) — 41 842

2006 1,335 1,893 (2,534 ) (127 ) 614 1,181

Plan surplus for the current and previous four periods is as follows;

Dec ‘07, P’000 Dec ‘06, P’000 Dec ‘05, P’000 Mar ‘04, P’000 Mar ‘03, P’000 Plan surplus trend analysis Present value of funded obligations 23,490 21,490 18,990 14,240 11,120 Fair value of plan assets (38,788 ) (32,124 ) (25,949 ) (16,190 ) (12,370 ) Surplus of plan assets over defined benefit obligation (15,298 ) (10,634 ) (6,959 ) (1,950 ) (1,250 ) The Group expects to contribute P4,905m to its defined benefit pension plans in 2008. (b) Share-based payment The group has a share based payment scheme. The scheme is dividend for (a) Management Staff (b) Other Staff. (i) Management Staff scheme The objective of the scheme is to retain staff. Management staff are granted share after a period of 2 continuous service to the Group. The shares vest after a period of 6 years, of continuous service, from the grant date; 1/3 vesting after every 2 years. The shares are issued at the ruling market price on the date of issuing. On vesting, the manager has the option of purchasing the shares for cash or opting that a portion or all of the shares be sold.

In the previous year the manager had the option to sell to the market or to a fellow group entity and this formed the basis of classifying the scheme as equity settled with a cash alternative.

(i) Management Staff scheme (continued) During the year the scheme was changed to equity settled and all transactions go through the stock market.

After the shares have vested, employees are given a period of 10 years from the date of vesting to exercise their option. The amount carried in the share based reserve at 31 December 2007 is P18 million (31 December 2006: P12 million). The expense recognised in the income statement is P8,470 million (2006: P8,612 million).

Year to 31 December 2007 Year to 31 December 2006

Number of share Weighted average Number of share Weighted average

options ‘000 exercise price Pula options ‘000 exercise price Pula Movement during the year Outstanding at the beginning 8,535 3.00 8,902 2.53 Granted 897 8.50 2,175 3.65 Forfeited (852 ) 3.00 (1,463 ) 2.53 Exercised (1,292 ) 3.00 (1,079 ) 2.53 Outstanding at the end 7,288 6.50 8,535 3.00 Exercisable at 31 December 290 3.00 82 2.50

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(i) Management Staff scheme (continued) The weighted average remaining contractual life for the shares outstanding as at 31 December 2007 is 7 years (2006: 8 years) The weighted average fair value of options granted during the year was P8.50 (2006: P4.50).

The range of exercise prices for options outstanding at the end of the year was P2.80 - P2.80 (2006: P2.15 - P2.50). (ii) Other Staff The objective of the scheme is to retain staff. Staff are granted shares after a period of 2 continuous years service to the Company. The shares vest after a period of 3 years of continuous service from the grant date; therefore the employee has to be continuously employed with the Company for 5 years.

Staff do not pay for the shares. As the settlement is by way of shares, the scheme is classified as equity settled for accounting purposes. The carrying amount of the share based payment reserve was P22,242million (2006: P3,444million). The expense recognised in the income statement was P3,142 million (2006: P1,523million).

Year to 31 December 2007 Year to 31 December 2006

Number of shares ‘000 Number of shares ‘000 Movement during the year 3,781 3,604 Outstanding at the beginning 1,033 1,646 Granted (115 ) (644 ) Forfeited (1,041 ) (825 ) Exercised 3,658 3,781 Outstanding at the end The weighted average remaining contractual life for the shares outstanding as at 31 December 2007 is 8 years (2006: 8 years) The weighted average fair value of shares granted during the year was P8.50 (2006: P3.65).

The following assumptions have been used in the valuations model of the scheme.

Dividend yield Volatility Risk free interest rate Spot price (thebe) % of remaining employees

Year to 31 December 2007

Year to 31 December 2006

4.86% 23.25% 12.00% 16.90 80.00%

6.00% 23.36% 12.70% 8.50 80.00%

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Notes to the financial statements (continued) For the year ended 31 December 2007

(iii) Options pricing model Since the BIHL employee share options are not tradable, IFRS 2 requires that the fair value of these options be calculated using a suitable option-pricing model. In terms of best practice, we have adopted a modified binomial tree model for valuation purposes, which can be described, at a high-level, as follows: i) The life of the option is divided into a large number of small time periods. ii) A binomial tree is developed with time-dependent nodes corresponding to projected upward and downward movements of the BIHL share. This projection is calculated as a function of the volatility of the underlying share, and by assuming that the share price follows a stochastic process. iii) Starting from the maturity date of the option, the model works backward through the tree, and at each node determines two possible values for the option: (a) the value of the option if one were to continue to hold it at that point in time, and (b) the value of the option if one were to exercise it at that node. Value (a) above is calculated using arbitrage-free principles and risk-neutral valuation theory, while value (b) is calculated simply as the difference between the projected spot price of the underlying share at that node and the strike price of the option. iv) For time periods subsequent to the vesting date of each option, the model uses the greater of the two values referred to above to estimate the option’s value at that node. For time periods prior to the vesting date, only value (1) is used to estimate the option’s value, reflecting the fact that the option cannot be exercised prior to vesting date. v) Once the value at a particular node has been determined, that value is discounted to the prior period using the risk-free yield curve, and taking into account the probability of realising that value. Eventually, the value at the first node (i.e. corresponding with valuation date) is calculated. This represents the fair value of the option. (iv) Other inputs used Generally, there are seven variables that determine the price of an employee share option: i) The market price of the underlying share at the grant date; ii) The strike price of the option; iii) The time remaining until the option expires (i.e. the expiry date of the option); iv) The time remaining until the option vests; v) The expected dividend yield of the underlying share over the life of the option; vi) The expected volatility of the underlying share over the life of the option; and vii) The risk-free interest rate over the life of the option. (v) Volatility The volatility input to the pricing model is a measure of the expected price fluctuations of the underlying security over a given period of time. Volatility is measured as the annualised standard deviation of the daily price changes in the underlying share under the assumption that the share price is log-normally distributed. This is in line with market practice. All else being equal, the more volatile the underlying share, the greater the price of the option.

There are two common approaches to calculating volatility. The first method uses historical price data of the underlying share, while the second technique employs data from the options market itself (provided that an active market exists for the options under consideration). Because there are no options trading in the market that are similar to the BIHL share options, historical data from a period prior to each grant date, which is commensurate with the options’ contractual term to maturity, was used to calculate the expected volatility of the BIHL shares over the options’ lifetimes.

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Group Company

Year to Year to Year to Year to

Dec 2007 Dec 2006 Dec 2007 Dec 2006

P’000 P’000 P’000 P’000 23 Cash generated / (utilised ) in operations Surplus before tax as per income statement 603,685 393,080 110,776 84,255 1,002,813 (142,680 ) — 1,201 Non cash flow items 4,044 2,810 — — Depreciation 4,286 — — — Loss on sale of fixed assets 1,066 1,425 — — Armotisation (556 ) — — — Goodwill translation differences — (159,458 ) — — Unrealised investment surpluses on shareholder assets — 104 — 1,201 Impairment of investments 4,001 2,304 — — Equity accounted earnings 989,972 Change in policyholder liabilities — 10,135 — — Share - based payments (214,440 ) (191,038 ) (140,308 ) (109,445 ) Items disclosed separately (45,495 ) (148,523 ) (1,195 ) (1,092 ) Interest received (168,945 ) (42,515 ) (139,113 ) (108,353 ) Dividends Received 9,643 46,736 1,176 15,219 Working capital changes: (18,698 ) 22,106 149 (1,301 ) Net (increase) decrease in trade and other receivables 28,341 24,630 1,027 16,520 Net increase in trade and other payables 1,401,701 106,098 (28,356 ) (8,770 ) Cash generated / (utilised ) in operations

24 Cash and bank Funds on deposit (Note 4.5) Cash and cash equivalents

26,043 646,127 672,170

19,038 236,160 255,198

3,292 — 3,292

9,975 — 9,975

Cash and cash equivalents are made for varying periods of between one day and three months depending on the immediate cash requirements of the company. All deposits are subject to an average variable interest rate of 10% (2006: 10%).

In the current year funds on deposit, which have a maturity value of three months or less, have been included as cash and cash equivalents, in line with IAS 7 Cash Flow Statements. The prior year balances have been restated accordingly.

The carrying amounts disclosed above reasonably approximate fair values at year end.

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Notes to the financial statements (continued) For the year ended 31 December 2007

25 Risk management 1. Financial risks

The main categories of financial risks associated with the financial instruments held by the businessâ&#x20AC;&#x2122;s shareholdersâ&#x20AC;&#x2122; fund are summarised in the following table: Type of risk

Description

Financial risk

Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in the market.

Market risk includes: Equity risk: the risk that the value of a financial instrument will fluctuate as a result of changes in equity prices.

Interest rate risk: the risk that the value of an unmatched financial instrument will fluctuate as a result of changes in interest rates and the risk that mismatches losses will be incurred in respect of a matched asset/liability position following changes in interest rates.

Currency risk: the risk that the Rand value of a financial instrument or liability will fluctuate owing to changes in foreign exchange rates.

Credit risk

Credit risk arises from the inability or unwillingness of counterparty to a financial instrument to discharge its contractual obligations. Credit risk includes: Reinsurance risk: concentration risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings.

Liquidity risk

Liquidity risk is the risk that the business will encounter difficulty in raising cash to meet commitments associated with financial liabilities. Liquidity risk arises when there is a mismatch between the maturities of liabilities and assets.

Insurance risk

Insurance risk includes: Underwriting risk: the risk that the actual experience relating to mortality, disability, medical and short-term insurance risks will deviate negatively from the expected experience used in the pricing/valuation of solutions.

Lapse risk: the risk of financial loss due to negative lapse experience.

Expense risk: the risk of loss due to actual expense experience being worse than that assumed in premium rates and the valuation of policy liabilities.

Concentration risk: the risk of financial loss due to having written large proportions of business with policyholders of the same/similar risk profile.

Capital adequacy risk

Capital adequacy risk is the risk that there are insufficient reserves to provide for variations in actual future experience, worse (to the extent as defined) than that which has been assumed in the financial soundness valuation.

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Market risk Shareholders’ fund investments are exposed to market risk. Market risk arises from the uncertain movement in the fair value of financial instruments that stems principally from potential changes in sentiment towards the instrument, the variability of future earnings that is reflected in the current perceived value of the instrument and the fluctuations in interest rates and foreign currency exchange rates.

The shareholders’ fund investments in equities and interest-bearings instruments are valued at fair value and are therefore susceptible to market fluctuations.

Comprehensive measures and limits are in place to control the exposure to market risk. Continuous monitoring takes place to ensure that appropriate assets are held in support of the life operations’ long-term solvency capital and the business’s investment return targets. Limits are applied in respect of the exposure to asset classes and individual counters.

1(a) Interest rate risk

Interest rate risk is the risk that the value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

Floating rate instruments expose the Group to cash flow interest risk, whereas fixed interest rate instruments expose the Group to fair value interest risk.

The Group’s interest risk policy requires it to manage interest rate risk by maintaining appropriate mix of fixed and variable rate instruments. The policy also requires it to manage the maturities of interest bearing financial assets and interest bearing financial liabilities. Interest on floating rate instruments is re-priced at intervals of less than one year. Interest on fixed interest rate instruments is priced at inception of the financial instrument and is fixed until the maturity.

The Investment committee set the limits in the investmnent mandates, and meet quarterly to review compliance with the agreed mandates, and where necessary change the mandates

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Notes to the financial statements (continued) For the year ended 31 December 2007

2

Interest rate risk (continued)

Sensitivity analysis to interest rate risk December 31, 2007

Change in variables Value (P000 )

BWP 0.5% 3,329,310 BWP -0.5% (3,329,310 ) USD 0.5% 776,477 USD -0.5% (776,477 )

Increase / (decrease) on profit before tax (P000) 16,648 (16,648 ) 3,882 (3,882 )

Increase / (decrease) on equity (P000) 12,486 (12,486 ) 2,912 (2,912 )

Increase / (decrease) on profit before tax (P000) 863 (863 ) 137 (137 )

Increase / (decrease) on equity (P000) 647 (647 ) 103 (103 )

December 31, 2006

Change in variables Value (P000 )

BWP 0.5% 172,637 BWP -0.5% (172,637 ) USD 0.5% 27,439 USD -0.5% (27,439 )

1(b) Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Groupâ&#x20AC;&#x2122;s principal transactions are carried out in Botswana Pula and its exposure to foreign exchange risk arises primarily with US dollar.

The main foreign exchange risk arises from recognised assets denominated in currencies other than those in which Insurance and Investment liabilities are expected to be settled. Forward currency contracts are in place to eliminate the currency exposure on individual foreign transactions.

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26 Risk management (continued) The following assets and liabilities included in the shareholders’ funds are denominated in foreign currencies and are therefore subject to currency risk: December 31, 2007

Equities and similar securities Public sector stocks and loans Cash, deposits and similar securities Foreign currency exposure Average rate Closing rate

United States Dollar (P000) 524,463 — 776,477 1,300,940 7.04 6.83

Other currencies (P000) — 21,166 — 21,166 585 577

Total (P000) 524,463 21,166 776,477 1,322,106 — —

December 31, 2006

Equities and similar securities Public sector stocks and loans Cash, deposits and similar securities Foreign currency exposure Average rate Closing rate

United States Dollar (P000) Other currencies (P000) Total (P000) 212,000 — 212,000 — 16,113 16,113 65,000 — 65,000 277,000 16,113 293,113 6.73 656 7.05 620

The analysis below is performed for the effect of a reasonable possible movement of the currency rate against the Botswana Pula with all other variables held constant, on the income statement and equity.

December 31, 2007

Change in variables Value (P000)

USD 5% 1,330,940

Increase / (decrease) on profit before tax (P000) 65,047

Increase / (decrease) on equity (P000) 48,785

Increase / (decrease) on profit before tax (P000) 13,850

Increase / (decrease) on equity (P000) 10,388

December 31, 2006

Change in variables Value (P000)

USD 5% 277,000

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Notes to the financial statements (continued) For the year ended 31 December 2007

25 Risk management (continued) 1(c) Price risk Price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.

The Groupâ&#x20AC;&#x2122;s price risk exposure relates to financial assets and liabilities whose values will fluctuate as a result of changes in market prices, principally investment securities not held for the account of unit linked business.

The Groupâ&#x20AC;&#x2122;s price risk policy requires it to manage such risks by setting and monitoring objectives and constraints on investments, diversification plans, limits on investments in each country, sector and market.

December 31, 2007

Change in variables Value (P000 )

DCI -15% (143,200 ) DCI 15% 143,200 MSCI -10% (526,404 ) MSCI 10% 526,404

Increase / (decrease) on Increase / (decrease) on profit before tax (P000) equity (P000) (21,480 ) (16,110 ) 21,480 16,110 (52,640 ) (39,480 ) 52,640 39,480

December 31, 2006

Change in variables Value (P000 )

DCI -15% (105,402 ) DCI 15% 105,402 MSCI -10% (517,015 ) MSCI 10% 517,015

Increase / (decrease) on Increase / (decrease) on profit before tax (P000) equity (P000) (15,810 ) (11,858 ) 15,810 11,858 (51,702 ) (38,776 ) 51,702 38,776

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Credit risk Credit risk in the Group arises from the possibility of investments in Offshore money markets, local money markets and cash and bank balances with banks will not be redeemed by the relevant counter parties when they become due.

The following policies and procedures are in place to mitigate the Group’s exposure to credit risk: A Group credit risk policy setting out the assessment and determination of what constitutes credit risk for the Group. Compliance with the policy is monitored and exposures and breaches are reported to the Group Investment Committee. The policy is regularly reviewed for pertinence and for changes in the risk environment.

Net exposure limits are set for each counterparty or group of counterparties, geographical and industry segments; i.e. limits are set for investments and cash deposits, foreign exchange trade exposures and minimum credit ratings for investment that may be held.

Reinsurance is placed with highly rated counterparties and concentration of risk is avoided by following policy guidelines in respect of counterparties’ limits that are set each year and are subject to regular reviews. At each reporting date, the Group sets the maximum amounts and limits that may be advanced to corporate counterparties by reference to their long term credit ratings.

The credit risk in respect of customer balances, incurred on non payment of premiums or contributions will only persist during the grace period specified in the policy document or trust deed until expiry, when the policy is either paid up or terminated. Commission paid to intermediaries is netted off against amounts receivable from them to reduce the risk of doubtful debts.

It is the Group’s policy to maintain accurate and consistent risk ratings across its credit portfolio. This enables management to focus on the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Group’s rating policy. The attributable risk ratings are assessed and updated regularly.

Maximum credit risk exposure The table below shows the maximum exposure to credit risk for the components of the balance sheet and so called off balance sheet exposures, such as future commitments. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting or collateral agreements and the use of credit derivatives.

December 31, 2007 December 31, 2006

Total P000 Total P000 Public sector stocks and loans 1,231,775 1,091,343 Debentures, insurance policies, preference shares and other loans 332,425 251,559 Cash, deposits and similar securities 1,536,060 721,671 Trade and other receivables 65,764 62,004 Trade and other payables 281,817 218,679 maximum credit risk exposure 3,447,841 2,345,256 Financial assets pledged as collateral There are no finacial assets that have been pledged as collateral for finacial liabilities or contingent liabilities.

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Notes to the financial statements (continued) For the year ended 31 December 2007

2

Credit risk (continued) Credit exposure by rating The table below provides information regarding the credit risk exposure of the Group at 31 December 2007 by classifying assets according to Standard and Poor credit ratings of the counterparties. AAA is the highest possible rating. Assets that fall outside the range of AAA to BBB are as follows:

AAA Not rated Assets backing policy liabilities Public sector stocks and loans 262,364 923,175 Debentures, insurance policies, preference shares and other loans — 141,913 Cash, deposits and similar securities — 966,722

262,364 2,031,810 Capital portfolio Public sector stocks and loans 10,631 35,605 Debentures, insurance policies, preference shares and other loans — 190,512 Cash, deposits and similar securities — 569,338 Net working capital assets — (216,053 )

10,631 579,402 31 December 2006

AAA Not rated Assets backing policy liabilities Public sector stocks and loans 223,902 818,106 Debentures, insurance policies, preference shares and other loans — 93,099 Cash, deposits and similar securities — 518,675

223,902 1,429,880 Capital portfolio Public sector stocks and loans 11,103 38,232 Debentures, insurance policies, preference shares and other loans — 158,460 Cash, deposits and similar securities — 202,996 Net working capital assets — (156,675 )

11,103 243,013

Total P’000 1,185,539 141,913 966,722 2,294,174 46,236 190,512 569,338 (216,053 ) 590,033

Total P’000 1,042,008 93,099 518,675 1,653,782 49,335 158,460 202,996 (156,675 ) 254,116

Collateral held as security for financial assets Generally the Group holds shareholder guarantees for the financial assets advanced. These assets are given first preference to any other cessions that the issuer may grant. All the fixed assets of the entity which has been advanced must have full insurance cover for all risks.

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Investment Policy The BIHL Group through its asset management company, Botswana Insurance Fund Managers (Bifm) that is a traditional investment manager, manages a comprehensive range of distinct asset classes, each against an appropriate benchmark that acts as the neutral position. Bifm is an active investment manager who implement positions that deviate from the benchmark within predetermined constraints. Bifm aims to capture and create value from long-term relative valuation differences, both between asset classes and within an asset class between individual securities.

Bifm implements a value-style bias that complements its investment philosophy. Bifm is of the view that pockets of inefficiency exist in capital markets. This presents opportunities to purchase undervalued securities and hold them until their market value equals or exceeds their intrinsic value. Bifm aims to realize these relative value anomalies over the long term and avoid short term fluctuations or market noise.

Bifm combines investment strategies with the aim of delivering superior investment returns given a level of risk over the long term (3 years and more). For local equity security selection, Bifm uses a bottom-up approach.

The bottom-up approach is research intensive and focuses on individual companies as a starting point. Companies, sectors and geographic regions not covered by a portfolio managerâ&#x20AC;&#x2122;s universe may be neglected.

To compensate, Bifm also applies a top-down decision-making process to implement tactical positions. The top-down approach utilises macroeconomic data, relative asset class valuations, market sector valuations and the prospects of geographical regions.

Bifm adopts fundamental analysis to place a fair value on individual securities and to identify mispriced securities with upside potential.

Fundamental analysis is a primary function and of high importance as it guides us on security-selection.

When selecting offshore managers, Bifm appoints managers with differing styles and approaches. The rationale for using the different styles reflects our appreciation of the fact that style diversification is a risk-management tool as well as a way of taking advantage of the anomalies that could be identified by each style.

1

2

3

4

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Equity - Bifm invests for the long-term, 3 to 5 year period, to maximise returns at the lowest possible risk. Bottom-up stock-picking and fundamental stock analysis coupled with a value-style bias, are used for portfolio construction.

Fixed Income - The approach used for long dated bonds and shortdated money-market instruments differs: (a) Long-dated Bonds - Bifm believes that value can be created through active duration management, taking into account macroeconomic factors such as inflation and interest rates. This reflects a top-down approach for the management of bonds, which is applied both locally and offshore. Bifm utilises fixed and floating instruments as different assets to match different liabilities, to benefit from the shape of the yield curve, and as a tool to manage duration. (b) Cash and money market: Bifm manages cash and short-dated money-market instruments primarily for liquidity purposes. Bifm minimises credit risk by investing with reputable banks. Bifm negotiates to get high interest rates on behalf of its clients.

Property - Property is a unique asset class, with bond-like and equitylike features, that matches the liability profiles of a large number of pension funds. Enhanced yields and rental escalations are received over time. The philosophy is to invest in A-grade properties that we believe are more likely to attract and retain corporate tenants.

Property investments constitute a significant area of Bifmâ&#x20AC;&#x2122;s drive to develop the local economy and capital markets. Bifmâ&#x20AC;&#x2122;s subsidiary, Khumo Property Asset Management, is a fully-fledged property development and management company.

Alternative investments - The alternative assets that Bifm invests in are private equity, private debt, and hedge funds. Alternatives are utilised where the risk-reward trade-off is believed to be superior.

Examples are: (a) Private equity is becoming a more important asset class globally.

In the Botswana context, private equity is a progressive approach to investment management because it is a catalyst for economic development. Bifm invests in local, regional and global private equity funds. (b) Specialised portfolios and insurance portfolios utilise private debt instruments for matching purposes. In Botswana, private debt is a substitute for listed debt instruments. Listed debt instruments are in short supply in Botswana. (c) Offshore hedge funds are currently used as an alternative to offshore bonds given our bearish view on the prospects for offshore bonds.

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Notes to the financial statements (continued) For the year ended 31 December 2007

Liquidity risk The liquidity risk arises from the potential inability of the Group paying its policy holders and short term creditors when they become due or they mature, because assets are not properly matched. There is an Actuarial committee that meets monthly to review the matching of assets and liabilities; the Group is continually looking for investments that match its liabilities.

1. Maturity analysis of Financial Liabilities: P’000

< 1 year

Policy holders liabilities Trade and other payables Tax payable

107,304 193,301 88,516 389,121

368,850 — — 368,850

Policy holders liabilities Trade and other payables Tax payable

52,745 164,960 53,719 271,424

314,037 — — 314,037

2. Maturity analysis of Financial assets: P’000

< 1 year

Financial Assets: Government and public authority Fixed interest securities Equity investments Mortgage and other loans Funds on deposit Trade and other receivables Cash, deposits and similar securities

— 863,891 — — 646,126 65,764 26,043 1,601,824

31 December 2007 1-5 years > 5 years

Open ended

Total

1,048,407 — — 1,048,407

7,605,418 — — 7,605,418

9,129,979 193,301 88,516 9,411,796

839,199 — — 839,199

6,934,026 — — 6,934,026

8,140,007 164,960 53,719 8,358,686

Open ended

Total

— — — — — — — —

1,231,776 863,891 7,453,431 332,425 646,126 65,764 26,043 10,619,456

31 December 2007 1-5 years > 5 years

1,231,776 — 7,453,431 332,425 — — — 9,017,632

— — — — — — — —

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< 1 year

Financial Assets: Government and public authority Fixed interest securities Equity investments Mortgage and other loans Funds on deposit Trade and other receivables Cash, deposits and similar securities

— 466,473 — — 236,160 62,004 19,038 783,675

Financial Liabilities: Policy holders liabilities Trade and other payables Tax payable

52,745 164,960 53,719 271,424

31 December 2006 1-5 years > 5 years

1,091,343 — 6,963,685 251,559 — — — 8,306,587

314,037 — — 314,037

— — — — — — — —

839,199 — — 839,199

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Open ended

Total

— — — — — — — —

1,091,343 466,473 6,963,685 251,559 236,160 62,004 19,038 9,090,262

6,934,026 — — 6,934,026

8,140,007 164,960 53,719 8,358,686

Stable, reversionary bonus and participating annuity business (smoothed-bonus business) These policyholder solutions do not expose the Group to significant liquidity risks. Expected cash flows are taken into account in determining the investment guidelines and asset spread of the portfolios. Limits are also placed on the exposure to illiquid investments.

Non-participating annuities As discussed above, the liabilities are matched as far as possible with assets, mostly interest-bearing, to ensure that the duration of assets and liabilities are closely matched. The average duration of non-participating annuity policy liabilities and the supporting assets held by the Group’s life insurance operations are reflected in the table below, indicating that the Group’s non-participating annuity books are well matched, which also limits the interest rate risk exposure discussed on page 136.

Years Non participating annuities and supporting assets

Assets 1,164

December 31, 2007 Policy liabilities 1,164

December 31, 2006 Assets Policy liabilities 977 977

Guarantee plans Liquidity risk is managed by matching the liabilities with assets that have similar maturity profiles as the liabilities.

Other policyholder business Policyholder portfolios supporting linked and market-related business, participating annuities and other non-participating life business are invested in appropriate assets, taking into account expected cash outflows.

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Notes to the financial statements (continued) For the year ended 31 December 2007

26 Categories of financial assets and financial liabilities The table below summarises categories of finacial assets and finacial liabilities held by the Group

December 31, 2007 Financial assets Government and public authority Fixed interest securities Equity investments Mortgage and other loans Funds on deposit Premiums receivable Amounts due from reinsurers Other receivables Cash,deposits and similar securities Total financial assets Financial liabilities Long term policyholder liability — insurance contracts Long term policyholder liability — investment contracts Trade and other payables Tax payable Total financial liabilities

Financial assets held at fair value through profit Loans and or loss receivables

Financial liabilities held at fair value through profit or loss

— — — — — — — — — —

Financial liabilities measured at amortised cost

— — — — — — — — — —

Total

1,231,776 863,891 7,453,431 332,425 646,126 — — — — 10,527,649

— — — — — 17,235 21,606 26,923 26,043 91,807

1,231,776 863,891 7,453,431 332,425 646,126 17,235 21,606 26,923 26,043 10,619,456

—

—

2,683,973

—

2,683,973

— — — —

— — — —

6,446,006 — — 9,129,979

— 193,301 88,516 281,817

6,446,006 193,301 88,516 9,411,796

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27 Categories of financial assets and financial liabilities (continued)

December 31, 2006 Financial assets Government and public authority Fixed interest securities Equity investments Mortgage and other loans Funds on deposit Premiums receivable Amounts due from reinsurers Other receivables Cash,deposits and similar securities Total financial assets Financial liabilities Long term policyholder liability — insurance contracts Long term policyholder liability — investment contracts Trade and other payables Tax payable Total financial liabilities

Financial assets held at fair value through profit Loans and or loss receivables

Financial liabilities held at fair value through profit or loss

Financial liabilities measured at amortised cost

Total

1,091,343 466,473 6,963,685 251,559 236,160 — — — — 9,009,220

— — — — — 16,182 19,378 26,444 19,038 81,042

— — — — — — — — — —

— — — — — — — — — —

1,091,343 466,473 6,963,685 251,559 236,160 16,182 19,378 26,444 19,038 9,090,262

—

—

2,157,459

—

2,157,459

— — — —

— — — —

5,982,548 — — 8,140,007

— 164,960 53,719 218,679

5,982,548 164,960 53,719 8,358,686

BIHL | Administration and Management

REGISTERED OFFICE Block A: Fairgrounds Office Park P O Box 336, Gaborone

SELEBI PHIKWE BRANCH OFFICE Botswana Building Society House The Mall, Private Bag 0081, Selebi Phikwe Tel: 2614 226; Fax: 2615 834

Information Technology Kathiresan Subburaj - IT Manager Finance Lorato Mosetlhanyane - Finance Manager

PALAPYE BRANCH OFFICE Mam Estate Unit 3 P O Box 10449, Palapye Tel: 4922 332; Fax: 4922 416

Human Resources Gaeyo Moshodi - Services Delivery Mooketsi Maphane - Business Partner

AUDITORS Ernest & Young 2nd Floor UN Place Khama Crescent PO Box 41015 Gaborone

MAUN BRANCH Ngami Centre Private Bag 140, Maun Tel: 6860 129; Fax: 6860 126

Botswana Insurance Fund Management Limited

COMPANY SECRETARY Spankie Boitumelo

LOBATSE BRANCH OFFICE Botswana Life Insurance House Private Bag 105, Lobatse Tel: 5331 422; Fax: 5331 423

Investment Management Seagiso Ramatshaba - Portfolio Manager Moaisi Matlhaku - Portfolio Manager Moipone Lopang - Head of Research

Botswana Life Insurance Limited

Operations Vikas Agarwal - Head of Finance Ruth Tidi - Investment Accounting Manager Keedo Segakise - Financial Manager Mompati Keabetswe - IT Administration Manager

TRANSFER SECRETARIES PricewaterhouseCoopers (Pty) Limited Plot 50371, Fairground Office Park PO Box 294, Gaborone

STATUTORY ACTUARY GT Waugh GROUP BANKERS Barclays Bank of Botswana Limited First National Bank of Botswana Limited Stanbic Bank Botswana Limited Standard Chartered Bank Botswana Limited

MANAGEMENT

BOTSWANA INSURANCE FUND MANAGEMENT LIMITED Block A: Fairgrounds Office Park Private Bag BR 185, Gaborone Tel: 3951 564; Fax: 3900 358 www.bifm.co.bw

High Value Brokers Moletlanyi Tshosa - Relationship Manager

BOTSWANA LIFE INSURANCE LIMITED Block A: Fairgrounds Office Park Private Bag 00296, Gaborone Tel: 3951 791; Fax: 3905 884 www.botswanalifeinsurance.com FRANCISTOWN BRANCH OFFICE Botswana Insurance Building Private Bag F283, Francistown Tel: 2413 581; Fax: 2414 614

Corporate Business Florence Matome - Relationship Manager Martha Seipato - Relationship Manager

Business Support Daphne Smuts - Relationship Manager Irene Mangope - Relationship Manager Robert Holgate - Transition Manager

MANAGEMENT

Corporate Communications, Marketing & Client Liaison Glen Lekoma - Head: Corporate Communications, Marketing & Client Liaison Tebogo Hirschfeldt - Corporate Communications & Marketing Manager

Individual Life Beauty Buka - Branch Manager (Maun) Benjamin Mokobela - Branch Manager (Palapye) Evelyn Modise - Branch Manager (Lobatse) Gillian Rakwela - Branch Manager (Selebi Phikwe) Keba Moshe - Branch Manager (Francistown) Thomas Masifhi - Branch Manager (Gaborone) HOTWIREPRC 00267 392 3579

BIHL Block A Fairgrounds Office Park Gaborone, Botswana

BIFM Block A Fairgrounds Office Park Gaborone, Botswana

Botswana LIFE Block A Fairgrounds Office Park Gaborone, Botswana

P O Box 336 Gaborone, Botswana

Private Bag BR 185 Gaborone, Botswana

Private Bag 00296 Gaborone, Botswana

Tel.: +(267) 3951 791 Facsimile: +(267) 3900 386

Tel.: +(267) 3951 564 Facsimile: +(267) 3900 358 www.bifm.co.bw

Tel.: +(267) 3645 100 Facsimile: +(267) 3906 386 www.botswanalifeinsurance.com