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DSY
DSY
DSY - Discovery Holdings - Unaudited Interim Results And Cash Dividend
Declaration For The Six Months Ended 31 December 2007
Discovery Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
JSE share code: DSY
ISIN: ZAE000022331
UNAUDITED INTERIM RESULTS AND CASH DIVIDEND DECLARATION FOR THE SIX MONTHS
ENDED 31 DECEMBER 2007
- Diluted embedded value per share +19% to R27,64
- Operating profit before new ventures +35% to R726 million
- Net profit after tax +34% to R541 million
- Diluted HEPS +14% to 74,9 cents per share
- Interim dividend of 21,5 cents per share
www.discovery.co.za
Commentary
Discovery performed pleasingly in the period under review. The results achieved
reflect a combination of:
* excellent operational performance from the Group`s local businesses
* increasing traction in the UK through PruHealth - its joint venture with the
Prudential plc; and
* a change of direction for its US business, Destiny Health.
In addition, during the period under review, Discovery launched both Discovery
Invest - its South African long-term savings business - and PruProtect, its UK
Protection joint venture.
Discovery`s core purpose of making people healthier and enhancing and
protecting their lives has translated into a philosophy of consumerism in
healthcare, life assurance and financial services. The manifestation of this on
the ground is products that use Vitality, the incentive-based wellness
programme, as a foundation, both to engage clients and to integrate products.
This has enabled Discovery to create a strong and powerful competitive
advantage as well as to maximise its value propositions to its clients.
During the period under review, the efficacy of this approach was clearly
demonstrated.
For the period under review, operating profit grew 31% before the impact of the
BEE transaction to R843 million (2006: R645 million), while profit after tax
rose by 34% to R541 million. Diluted headline earnings per share increased 14%
to 74,9 cents (2006: 65,9 cents) and new business, excluding Destiny, grew by
12% to R2,19 billion (2006: R1,96 billion).
Discovery Health
Discovery Health performed particularly pleasingly and exceeded expectations.
Operating profits rose by 14% to R389 million (2006: R342 million) with new
business improving to R1 265 million (2006: R1 233 million). The number of
lives under management grew to 2 054 270 in total (2006: 1 974 675).
Several substantial strategies have been embarked upon over the last two years
and, during the period under review, virtually all of these came to fruition.
They are:
* The number of GPs in the Discovery GP Network, and the number of specialists
contracted to the specialist payment arrangement exceeded target, and
approached approximately 80% of all doctors in the private sector by January
2008. The effect going forward is Discovery Health Medical Scheme members will
have certainty of cover and limited out-of-pocket expenses when visiting these
doctors. Importantly, a foundation has been built from which to work with
doctors more widely and constructively.
* Utilising the scale of Discovery Health, structures and contracts have been
entered into throughout the healthcare system, so that benefits can be offered
at maximum quality and at contained cost. This has been achieved despite the
hospital oligopoly that exists within the private healthcare system.
* Significant efficiencies have been achieved in the operational,
administrative and risk management structures within Discovery Health, enabling
administration fees charged to the Discovery Health Medical Scheme to continue
to reduce.
* The significant investment in risk-management and managed care has meant that
medical costs have been controlled, and the resulting medical inflation
contained, despite the adverse selection and aging population of the private
healthcare system.
* The Discovery Health Medical Scheme generated in excess of R1 billion in
surpluses for the calendar year 2007, enabling it to achieve its stated
solvency target for the year. It is well on track to achieve the 25% statutory
solvency requirement at December 2008.
Most importantly, from a client perspective, the Discovery Health Medical
Scheme has been providing - and will continue to provide - sustainable access
to private healthcare. During the period under review, more than 98% of members
of the Discovery Health Medical Scheme either remained on their current plan,
or bought up to higher benefit levels. This is the antithesis of the sentiment
that surrounds private healthcare, reflecting the reality that, with sound
management and appropriate investment, access to private healthcare can be
sustained and advanced.
Discovery Life
Discovery Life`s performance was excellent and exceeded expectations. The
company increased operating profits by 46%, while gross inflows under
management increased by 31% to R1 446 million (2006: R1 107 million).
Annualised new business premium income rose by 31%, to R627 million (2006: R480
million). The value of business in force improved significantly, growing by 31%
to R6 623 million (2006: R5 068 million).
The effectiveness of Discovery Life`s approach to life assurance was clearly
demonstrated during the period under review. Discovery Life estimates that it
transacts more new business in the pure risk market than any other company in
South Africa. The combination of innovative and relevant benefit structures,
with the use of Vitality to enable dynamic pricing, allowed Discovery Life to
achieve unique levels of competitiveness, and better risk selection - both in
terms of new business and lapses. The result of this was substantial flows of
new business, and mortality and morbidity experiences that significantly
surpassed expectations. In addition, Discovery Financial Consultants,
Discovery`s tied agency force continues to grow successfully with production
per consultant in line with expectation, producing in excess of 9 % of the
total individual life new business flow of Discovery Life.
Discovery Invest
During the period under review, Discovery launched its investment business,
Discovery Invest. The launch, implementation, and market receptivity to this
new offering, have exceeded expectations. The strategy behind Discovery Invest
is to harness the significant sophistication of the investment markets - as
evidenced by the breadth and skill of the asset management industry - while
adding value from an insurance-structural product perspective. The
manifestation of this strategy consists of three components:
1. The breadth of the product range, which encompasses all forms of long-term
savings from pre-retirement to in-retirement products;
2. To utilise Vitality as a foundation and an enabler for integration with
other Discovery products, so that administration and asset management fees paid
by clients can be reduced significantly; and
3. To partner with the appropriate asset management capabilities in order to
offer the best and most appropriate asset management component for the
Discovery Invest product range. To this end, Discovery has chosen Investec
Asset Management to provide local asset management capabilities and Deutsche
Bank London to provide the expertise and capacity for the complex structures it
requires to complement these capabilities.
The result of this approach has been pleasing. The Discovery Invest product
range has proved to be particularly appealing and competitive. Investment
choices like RightChoiceT, which enables investors to have the benefit of
hindsight, and the Escalated Products, which enable investors to have the
benefit of dynamic guarantees, have proved particularly popular. The Integrated
Endowment, which enables investors who are Discovery Life policyholders to
invest without any asset management or administrative fees whatsoever, has also
been well received. Discovery Invest was launched before the end of the period
under review and only began transacting new business two months ago; however,
early indications are particularly positive.
Approximately 80% of inflows are to Discovery Invest funds and over 1 000
intermediaries have written business with Discovery Invest.
PruHealth
The performance of PruHealth was pleasing, demonstrating a concerted focus on
the quality of the business. In the period under review, significant progress
was made, creating an important foundation for profitability and profitable
growth. PruHealth continues to achieve strong leadership in the UK private
medical insurance market, evidenced by the quantum of new business transacted
and by the number of important awards the company continues to receive. Once
again, PruHealth was awarded the Health Insurance Company of the Year in the UK
for 2007.
Having said this, considerable focus was placed on the key drivers of the
quality and profitability of the business:
* In addition to the quantum of new business transacted, the spread by
distribution channel widened considerably with the direct-to-consumer and
online channels generating over 30% of the new business result. The independent
financial adviser channel achieved the remainder. This balance of distribution
channel bodes well for the sustainability of new business going forward.
* Considerable investment was made in risk management and managed care with
broad successes achieved across the spectrum of healthcare cost containment.
The effect was to reduce the loss ratio from calendar year 2006 to calendar
year 2007 by 12%. The structures created are expected to continue this success
going forward.
* Considerable focus was placed on the management of lapses with the result
that the lapse rate of PruHealth was 5% lower than that of the industry.
Importantly, the link to Vitality has ensured positive lapse selection - on
average, sicker members leave PruHealth rather than stay.
* Given the increasing critical mass of the business, focus was placed on
administrative efficiency, achieving a 40% reduction in per-member-operating-
cost levels over the last year. It is expected that further efficiencies will
be achieved in 2008 with the renewal cost per member, per month, projected to
be 12% less than in 2007.
The upfront nature of PruHealth`s acquisition costs and the fact that premium
loading emerges in the longer term - because premiums are linked to both age
and medical inflation - means that accounting profits will invariably be
dampened by the rapid growth rate of the business. In this context, embedded
value is an appropriate measure for the progress made. Embedded value results
have been included for the first time in these results. Embedded value results
have been included for the first time in these results. The total embedded
value is estimated at R1 250 million and Discovery`s portion thereof is R625
million in value, comprising R282 million of value-in-force and R343 million of
net asset value.
PruProtect
During the period under review, PruProtect - Discovery`s UK life assurance
joint venture with the Prudential plc - was launched. PruProtect`s strategy
mirrors that of Discovery Life, as it is based on the Vitality structure and
enables dynamic pricing to be employed in the UK life assurance market. Built
into this strategy is the expectation that premium levels will be competitive
and risk-selection will be improved. While the company has just recently been
launched, initial market feedback from the public has been positive and
encouraging.
A fundamental decision in the creation of PruProtect is the belief that the
business requires a dedicated high-advice distribution channel in the broker
market. To this end, PruProtect has begun rolling out a franchise distribution
channel, wherein owner-managed branch offices are created that market
PruProtect to independent financial advisers across the UK. The approach is
similar to that used by Discovery Life in South Africa. It is still early in
the evolution of the strategy and, by the end of the period, 11 franchises had
been launched. Discovery is optimistic of its ability to build PruProtect
successfully and to link it to PruHealth, achieving in the UK what Discovery
has set out to achieve in South Africa.
Destiny Health
At the 2007 financial year results, Discovery announced that a strategic review
of Destiny Health would be undertaken and an announcement of the final strategy
would be made during the period. Whilst a clear strategy was decided upon, the
complexity of its execution meant that it could only be communicated at this
announcement. Destiny Health will be exiting the US retail insurance market and
will continue to market its Vitality product on a stand-alone basis to employer
groups and health plans. It is important to put this change of strategy into
context:
* While Destiny Health was making progress in its attempt to build a retail
health insurance business, in 2004 and 2005 the Illinois health insurance
market in which it operated became particularly difficult. Destiny Health found
itself in a position of structural disadvantage, wherein the price it paid for
the healthcare of its members was significantly higher than the price paid by
its large competitors. This relative disadvantage continued to deteriorate over
time.
* In an attempt to address this, Destiny Health restructured its relationship
with the Guardian Life Insurance Company of America, formed a strategic
partnership with AEGON, reworked its healthcare network arrangements - and
attempted to move into a number of markets wherein network discounts were
competitive.
* Despite the considerable progress made, the operating losses incurred for the
financial year to June 2007 exceeded the Discovery Board`s parameters that were
set for this strategy.
In order to execute on this strategy, Destiny Health will be transferring its
insured block of business to a well-respected health insurance carrier. The new
carrier will assume operating the Destiny Health business from 1 April 2008
and, as policies reach their renewal date, they will be transferred to an
appropriate replacement health plan. Destiny Health will continue to carry the
risk of these members until the transfer has taken place. The approach is a
favourable one for all stakeholders, protecting members and freeing Destiny up
to pursue other strategies. While the Destiny Health staff in the US will be
significantly reduced as a result of the change in focus, Discovery has
estimated a provisional cost of $25 - 30 million to run off this business over
the next 18 months.
Going forward, Discovery is clear that while its execution in the US was not
satisfactory and it suffered structural strategic disadvantage, its products,
most notably Vitality, were particularly well received, were considered unique,
and addressed many of the fundamental trends taking place in the US healthcare
system. In particular, the shift to focusing on wellness and the uniqueness of
the Vitality approach have meant that Discovery will continue to offer the
Vitality programme in the US, but will do so on a stand-alone basis, by
wrapping it around other health plans and employer groups. In just six months,
ten employers consisting of just under 50 000 total subscribers have purchased
Vitality on a stand-alone basis. Importantly, the approach plays to Discovery`s
strengths by utilising the chassis already built in the US, as well as the
unique research and development and data capabilities Discovery has established
in South Africa, the UK and the US. It is also important that, unlike retail
insurance, the approach is not capital intensive - and capital invested will be
done so on a success basis as the business evolves.
Prospects
Discovery`s businesses remain well positioned for growth going forward without
requiring additional capital.
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
25 February 2008
Income statement
for the six months ended 31 December 2007
Group Group Group
Six months Six months Year
ended ended ended
December December June
2007 2006 % 2007
R million Unaudited Unaudited change Audited
Insurance premium 1 995 1 776 3 710
revenue
Reinsurance premiums (361) (292) (593)
Net insurance premiums 1 634 1 484 3 117
Fee income from 1 159 1 007 2 142
administration business
Investment income 99 77 175
Net realised gains on
financial instruments
held as available-for- 147 40 195
sale
Net fair value gains on
financial instruments
at fair value through 17 93 151
profit or loss
Vitality income 387 355 721
Net income 3 443 3 056 6 501
Insurance benefits and (1 007) (952) (1 919)
claims
Insurance claims 275 261 475
recovered from
reinsurers
Net insurance benefits (732) (691) (1 444)
and claims
Acquisition costs (559) (509) (1 015)
Marketing and (1 783) (1 441) (3 069)
administration expenses
Recovery of expenses 42 - 91
from reinsurer
Transfer from
assets/liabilities
under
insurance contracts 452 325 587
- change in assets 428 349 651
arising from insurance
contracts
- change in liabilities
arising from insurance
contracts 25 (23) (60)
- change in liabilities
arising from
reinsurance
contracts (1) (1) (4)
Fair value adjustment
to liabilities under
investment contracts (20) (95) (141)
Profit before BEE 843 645 31 1 510
expenses
BEE expenses (11) (17) (34)
Profit from operations 832 628 1 476
Finance costs (36) (11) (21)
Foreign exchange profit 4 1 3
- unrealised
Share of profit from - 2 -
associate
Profit before taxation 800 620 29 1 458
Taxation (259) (216) (385)
Profit for the year 541 404 34 1 073
Attributable to:
Equity holders 538 403 1 073
Minority interests 3 1 -
541 404 1 073
Earnings per share for
profit attributable
to the equity holders
during the year
(cents):
- basic 99,5 75,3 32 200,0
- diluted 98,4 72,1 36 196,4
Balance sheet
at 31 December 2007
Group Group
December June
2007 2007
R million Unaudited Audited
ASSETS
Property and equipment 282 228
Intangible assets including deferred 172 113
acquisition costs
Assets arising from insurance contracts 3 542 3 114
Investment in associate 1 1
Financial assets 4 384 4 056
- Equity securities 2 124 2 155
- Debt securities 281 313
- Money market 698 577
- Equity linked notes 173 123
- Loans and receivables including insurance 1 108 888
receivables
Deferred income tax 106 80
Current income tax asset - 4
Reinsurance contracts 56 51
Cash and cash equivalents 804 996
Total assets 9 347 8 643
EQUITY
Capital and reserves
Share capital and share premium 1 427 1 393
Other reserves 801 912
Retained earnings 3 462 3 057
Total equity 5 690 5 362
LIABILITIES
Liabilities arising from insurance contracts 788 742
Liabilities arising from reinsurance 17 20
contracts
Financial liabilities
- Investment contracts at fair value through 792 735
profit or loss
- Borrowings at amortised cost 94 73
Deferred income tax 939 806
Deferred revenue 66 122
Provisions 61 48
Trade and other payables 881 735
Current income tax liabilities 19 -
Total liabilities 3 657 3 281
Total equity and liabilities 9 347 8 643
Cash flow statement
for the six months ended 31 December 2007
Group Group Group
Six months Six months Year
ended ended ended
December December June
2007 2006 2007
R million Unaudited Unaudited Audited
Cash flow from operating 128 90 575
activities
Cash generated by operations 256 181 799
Working capital changes (146) 32 (42)
110 213 757
Dividends received 23 17 43
Interest received 85 59 143
Finance costs (11) (12) (23)
Taxation paid (79) (187) (345)
Cash flow from investing (231) (388) (625)
activities
Net purchases of investments (97) (332) (456)
Purchase of equipment (91) (37) (108)
Purchase of intangible assets (43) (19) (61)
Cash flow from financing (77) (144) (283)
activities
Proceeds from shares issued 35 44 48
Dividends paid to equity holders (131) (160) (239)
Minority share buy-back (5) (3) (5)
Increase/(repayment)of 24 (25) (87)
borrowings
Net decrease in cash and cash (180) (442) (333)
equivalents
Cash and cash equivalents at 996 1 322 1 322
beginning of year
Effects of exchange rate changes (12) 2 7
on cash and cash equivalents
Cash and cash equivalents at end 804 882 996
of year
Statement of changes in equity
for the six months ended 31 December 2007
Attributable
to equity
holders of
the Company
Share Share-
capital based
and pay- Invest- Trans-
share ment ment lation
R million premium reserve reserve reserve
31 December 2007
Balance at 1 July 2007 1 393 257 542 115
Issue of capital 34 - - -
Share-based payments - 16 - -
Unrealised gains on - - 10 -
investments
Capital gains tax on
unrealised
gains on investments - - (5) -
Realised gains on
investments
transferred to income - - (147) -
statement
Capital gains tax on
realised
gains on investments - - 19 -
Currency translation - - - (7)
differences
Transfer to hedging - - - -
reserve
Net profit for the - - - -
period
Dividends paid to - - - -
equity holders
Realised loss on
minority
share buy-back - - - -
Balance at 31 December 1 427 273 419 108
2007
31 December 2006
Balance at 1 July 2006 1 348 205 319 112
Issue of capital 39 - - -
Share-based payments - 27 - -
Unrealised gains on - - 257 -
investments
Capital gains tax on
unrealised
gains on investments - - (34) -
Realised gains on
investments
transferred to income - - (40) -
statement
Capital gains tax on
realised
gains on investments - - 3 -
Currency translation - - - 3
differences
Transfer from hedging - - - -
reserve
Net profit for the - - - -
period
Dividends paid to - - - -
equity holders
Realised loss on
minority
share buy-back - - - -
Balance at 31 December 1 387 232 505 115
2006
Statement of changes in equity
for the six months ended 31 December 2007
Attributable to
equity holders of the
Company
Hedging Retained Minority
R million reserve earnings interest Total
31 December 2007
Balance at 1 July 2007 (2) 3 057 - 5 362
Issue of capital - - (3) 31
Share-based payments - - - 16
Unrealised gains on - - - 10
investments
Capital gains tax on
unrealised
gains on investments - - - (5)
Realised gains on
investments
transferred to income - - - (147)
statement
Capital gains tax on
realised
gains on investments - - - 19
Currency translation - - - (7)
differences
Transfer to hedging 3 - - 3
reserve
Net profit for the - 538 3 541
period
Dividends paid to - (131) - (131)
equity holders
Realised loss on
minority
share buy-back - (2) - (2)
Balance at 31 December 1 3 462 - 5 690
2007
31 December 2006
Balance at 1 July 2006 4 2 224 - 4 212
Issue of capital - - (1) 38
Share-based payments - - - 27
Unrealised gains on - - - 257
investments
Capital gains tax on
unrealised
gains on investments - - - (34)
Realised gains on
investments
transferred to income - - - (40)
statement
Capital gains tax on
realised
gains on investments - - - 3
Currency translation - - - 3
difference
Transfer from hedging (7) - - (7)
reserve
Net profit for the - 403 1 404
period
Dividends paid to - (155) - (155)
equity holders
Realised loss on
minority
share buy-back - (1) - (1)
Balance at 31 December (3) 2 471 - 4 707
2006
Segmental information
for the six months ended 31 December 2007
Health
United
South States United
of
R million Africa America Kingdom
31 December 2007
New business annualised
premium income* 1 265 209 248
Gross inflows under 9 977 520 431
management*
Income statement
Insurance premium revenue 7 347 215
Reinsurance premiums (1) (33) (45)
Net insurance premiums 6 314 170
Fee income from
administration business 1 137 - -
Investment income 24 4 10
Net realised gains on
financial instruments
held as available-for- - - -
sale
Net fair value gains on
financial instruments at
fair
value through profit or - - -
loss
Vitality income - - -
Net income 1 167 318 180
Insurance benefits and (7) (330) (140)
claims
Insurance claims
recovered
from reinsurers 2 25 25
Net insurance benefits (5) (305) (115)
and claims
Acquisition costs - (16) (23)
Marketing and
administration
expenses (752) (108) (153)
Recovery of expenses from
reinsurer - - 41
Transfer from
assets/liabilities
under insurance contracts
- change in assets
arising from
insurance contracts - - -
- change in liabilities
arising
from insurance contracts 3 35 (3)
- change in liabilities
arising
from reinsurance - - -
contracts
Fair value adjustment to
liabilities
under investment - - -
contracts
Profit/(loss) before BEE 413 (76) (73)
expenses
BEE expenses
Profit from operations
Finance costs
Foreign exchange profit -
unrealised
Profit before taxation
Taxation
Profit for the year
31 December 2006
New business annualised
premium income* 1 233 474 198
Gross inflows under
management* 8 905 643 218
Income statement
Insurance premium revenue 75 485 109
Reinsurance premiums (1) (35) (3)
Net insurance premiums 74 450 106
Fee income from
administration business 1 006 - -
Investment income 24 6 3
Net realised gains on
financial instruments
held as available-for- - - -
sale
Net fair value gains on
financial instruments
at fair value through
profit or loss - - -
Vitality income - - -
Net income 1 104 456 109
Insurance benefits and (59) (363) (84)
claims
Insurance claims
recovered
from reinsurers 1 40 -
Net insurance benefits
and claims (58) (323) (84)
Acquisition costs - (22) (14)
Marketing and
administration expenses (681) (130) (120)
Transfer from
assets/liabilities
under insurance contracts
- change in assets
arising from
insurance contracts - - -
- change in liabilities
arising
from insurance contracts 1 (8) (11)
- change in liabilities
arising
from reinsurance - - -
contracts
Fair value adjustment to
liabilities
under investment - - -
contracts
Profit/(loss) before BEE 366 (27) (120)
expenses
BEE expenses
Profit from operations
Finance costs
Foreign exchange profit -
unrealised
Share of profit from
associate
Profit before taxation
Taxation
Profit for the year
Life
South United
R million Africa Kingdom Vitality Holdings Total
31 December 2007
New business annualised
premium income* 627 5 46 - 2 400
Gross inflows under 1 446 3 387 - 12
management* 764
Income statement
Insurance premium 1 424 2 - - 1 995
revenue
Reinsurance premiums (282) - - - (361)
Net insurance premiums 1 142 2 - - 1 634
Fee income from
administration business 22 - - - 1 159
Investment income 50 - 10 1 99
Net realised gains on
financial instruments
held as available-for- 147 - - - 147
sale
Net fair value gains on
financial instruments
at fair
value through profit or 17 - - - 17
loss
Vitality income - - 387 - 387
Net income 1 378 2 397 1 3 443
Insurance benefits and (530) - - - (1
claims 007)
Insurance claims
recovered
from reinsurers 223 - - - 275
Net insurance benefits (307) - - - (732)
and claims
Acquisition costs (490) (4) (26) - (559)
Marketing and
administration
expenses (374) (38) (340) (18) (1
783)
Recovery of expenses
from
reinsurer - 1 - - 42
Transfer from
assets/liabilities
under insurance
contracts
- change in assets
arising from
insurance contracts 428 - - - 428
- change in liabilities
arising
from insurance (7) (3) - - 25
contracts
- change in liabilities
arising
from reinsurance (1) - - - (1)
contracts
Fair value adjustment
to liabilities
under investment (20) - - - (20)
contracts
Profit/(loss) before 607 (42) 31 (17) 843
BEE expenses
BEE expenses (11)
Profit from operations 832
Finance costs (36)
Foreign exchange profit
-
unrealised 4
Profit before taxation 800
Taxation (259)
Profit for the year 541
31 December 2006
New business annualised
premium income* 480 - 46 - 2 431
Gross inflows under
management* 1 107 - 355 - 11
228
Income statement
Insurance premium 1 107 - - - 1 776
revenue
Reinsurance premiums (253) - - - (292)
Net insurance premiums 854 - - - 1 484
Fee income from
administration business 1 - - - 1 007
Investment income 36 - 6 2 77
Net realised gains on
financial instruments
held as available-for- 40 - - - 40
sale
Net fair value gains on
financial instruments
at fair value through
profit or loss 93 - - - 93
Vitality income - - 355 - 355
Net income 1 024 - 361 2 3 056
Insurance benefits and (446) - - - (952)
claims
Insurance claims
recovered
from reinsurers 220 - - - 261
Net insurance benefits
and claims (226) - - - (691)
Acquisition costs (443) - (30) - (509)
Marketing and
administration expenses (211) - (299) - (1
441)
Transfer from
assets/liabilities
under insurance
contracts
- change in assets
arising from
insurance contracts 349 - - - 349
- change in liabilities
arising
from insurance (5) - - - (23)
contracts
- change in liabilities
arising
from reinsurance (1) - - - (1)
contracts
Fair value adjustment
to liabilities
under investment (95) - - - (95)
contracts
Profit/(loss) before 392 - 32 2 645
BEE expenses
BEE expenses (17)
Profit from operations 628
Finance costs (11)
Foreign exchange profit 1
- unrealised
Share of profit from 2
associate
Profit before taxation 620
Taxation (216)
Profit for the year 404
*New business annualised premium income and gross inflows under management
include flows of the schemes Discovery administers and 100% of the business
conducted together with its joint venture partners.
Embedded value statement
for the six months ended 31 December 2007
The embedded value of Discovery at 31 December 2007 is calculated as the sum of
the following components:
* the excess assets over liabilities at the valuation date (i.e.
shareholders` funds); and
* the value of in-force business at the valuation date (less an
allowance for the cost of capital and secondary tax on
companies (STC)).
Assumptions underlying the projection of in-force business were based on the
results of recent experience investigations.
An abridged embedded value statement is shown below. The complete embedded
value statement is available on our website at www.discovery.co.za.
The auditors, PricewaterhouseCoopers Inc., have reviewed the consolidated value
of in-force business and value of new business of Discovery Holdings Limited
and its subsidiaries for the six months ended 31 December 2007. A copy of the
auditors` unqualified report is available for inspection at the company`s
registered office.
Table 1: Group embedded value
31 December % 30 June
2007
R million 2007(1) 2006 Change Restated
Shareholders` funds 5 690 4 707 21 5 362
Adjustment to shareholders`
funds
from published basis(2) (3 318) (2 394) (2 833)
Adjusted net worth 2 372 2 313 2 529
Run-down costs for Destiny (300) - -
Health(3)
Value of in-force business
before
cost of capital 13 648 10 956 11 776
Cost of capital (60) (132) (32)
Cost of STC (310) (293) (275)
PruHealth value of in-force
after cost
of capital and STC at 30 - - 168
June 2007(4)
Discovery Holdings embedded 15 350 12 844 20 14 166
value
Number of shares (millions) 542,7 537,4 538,7
Embedded value per share R28,28 R23,90 18 R26,30
Diluted number of shares 574,7 559,4 559,7
(millions)
Diluted embedded value per R27,64 R23,29 19 R25,64
share
(1) The term of the Health and Vitality projection has been
increased from 10 years to 20 years. The comparative figures
at 31 December 2006 and 30 June 2007 have also been
calculated assuming a 20 year term.
(2) The published Shareholders` funds has been adjusted to
eliminate assets under insurance contracts and deferred
acquisition costs at December 2007 of R3 287 million
(December 2006: R2 394 million; June 2007: R2 813 million)
and deferred acquisition cost asset in respect of PruHealth
of R31 million (June 2007: R20 million )
(3) For Destiny Health, no published value has been placed on
the current in-force business. An allowance has been made
for the expected costs of the run-down of the existing
Destiny Health business over the next 18 months.
(4) The PruHealth business has grown and is expected to make a
contribution to future profits for Discovery. The
profitability indicators for the business are clearer and
more predictable, and Discovery`s share of the embedded
value and value of new business are included in the embedded
value for the group. The 30 June 2007 embedded value has
been restated to include Discovery`s 50% share of the
PruHealth value of in-force after cost of capital and STC.
No adjustment has been made to the December 2006 embedded
value due to the relatively small size of the PruHealth book
of business at that date.
Table 2: Value of in-force business at 31 December 2007
Value
Value before after cost
cost of capital Cost of Cost of of capital
R million and STC capital STC and STC
Health and 6 521 - (148) 6 373
Vitality
Life(1) 6 817 (39) (155) 6 623
PruHealth(2) 310 (21) (7) 282
Total 13 648 (60) (310) 13 278
(1) Included in the Life value of in-force is R6 million in
respect of investment management services provided on off-
balance sheet investment business. The Life cost of capital
is based on a statutory capital adequacy requirement at
December 2007 of R183 million. (June 2007: R145 million).
(2) The values shown for PruHealth reflect Discovery`s 50%
shareholding in PruHealth.
Table 3: Group embedded value earnings
Six months ended Year ended
31 31 December 30 June
December 2007
R million 2007 2006 Restated
Embedded value at 15 350 12 844 14 166
end of period
Less: Embedded (14 166) (10 587) (10 587)
value at beginning
of period
Increase in 1 184 2 257 3 579
embedded value
Net issue of (31) (38) (45)
capital
Dividends Paid 131 155 239
Minority share buy- 5 1 1
back
Transfer to hedging (3) 7 6
reserve
Extension of
modelling term for
Health and Vitality
from 10 years to 20 - (1 094) (1 031)
years(1)
Embedded value 1 286 1 288 2 749
earnings
Annualised return
on opening embedded
value
(including run-down 19.0% 25.8% 26.0%
costs for Destiny
Health)
Annualised return
on opening embedded
value
(excluding run-down 23.6% 25.8% 26.0%
costs for Destiny
Health)
(1) The embedded value earnings for June 2007 and December 2006
have been adjusted to exclude the impact of the extension of
the modelling term for Health and Vitality from 10 to 20
years.
Table 4: Components of Group embedded value earnings
Six months ended Year ended
31 December 31 December % 30 June 2007
R million 2007 2006 change Restated
Total profit from 444 371 20 742
new business (at
point of sale)
Profit from
existing business
* Expected return 674 502 1 030
* Change in 238 (52) (13)
methodology and
assumptions(1)
* Experience 415 357 645
variances(2)
Reversal of
Destiny Health
opening value
of in-force - - (5)
Inclusion of - - 168
PruHealth value of
in-force
Other initiative (247) (112) (353)
costs(3)
Acquisition (20) (49) (27)
costs(4)
Adjustment for
minority interest
in
Destiny Health - (1) -
Adjustment for
Guardian profit
share in
Destiny Health - 15 -
Foreign exchange (13) 2 3
rate movements
Cost of STC 6 (27) 23
Return on 89 282 536
shareholders`
funds
Embedded value
earnings excluding
run-down costs for 1 586 1 288 23 2 749
Destiny Health
Run-down costs for (300) - -
Destiny Health
Embedded value
earnings including
run-down costs for 1 286 1 288 (0) 2 749
Destiny Health
(1) Included in the methodology and assumptions change item are
amounts of R328 million in respect of Health and Vitality and
negative R90 million in respect of Life. For PruHealth, there
are no basis changes as the value at 30 June 2007 has been
calculated using company experience between July 2007 and
December 2007 and the December 2007 basis thereafter.
(2) Included in the experience variance item are amounts of R324
million in respect of Health and Vitality, R101 million in
respect of Life and negative R10 million in respect of
PruHealth.
(3) For December 2006 and June 2007, the other initiative costs
reflect the expenses relating to the establishment of
PruHealth. For June 2007 and December 2007, this also
includes the expenses relating to the establishment and
support of PruProtect, Discovery Invest and Destiny Health.
These costs have not been projected on a recurring basis in
the embedded value due to the fact that income from business
sold under these initiatives has not been projected or the
costs are not expected to recur. The split between PruHealth,
PruProtect and Destiny Health is shown in the segmental
income statement.
(4) Acquisition costs relate to commission paid on Life business
and expenses incurred in writing Health and Vitality business
that has been written over the period but that will only be
activated and on risk after the valuation date. These
policies are not included in the embedded value or the value
of new business and thus the costs are excluded.
Table 5: Embedded value of new business
Six months ended % Year ended
31 December 31 December change 30 June 2007
R million 2007 2006 Restated
Health and
Vitality
Net profit from 79 65 22 126
new business at
point of sale
New business 449 370 21 1 011
annualised premium
income
Life
Net profit from 344 346 (1) 616
new business at
point of sale
New business 435 359 21 696
annualised premium
income
Annualised profit 9,6% 10,7% 10,1%
margin
PruHealth(1)
Net profit from 21 - -
new business at
point of sale
New business 94 - -
annualised premium
income
Annualised profit 2,6% - -
margin
(1) The values shown for PruHealth reflect Discovery`s 50%
shareholding in PruHealth.
Review of Group results
Gross inflows under management increased 14% for the six months ended 31
December 2007. Gross inflows under management includes flows of the schemes
Discovery administers and 100% of the business conducted together with its
joint venture partners.
Gross inflows under management
December December %
R million 2007 2006 change
Discovery Health 9 977 8 905 12
Discovery Life 1 446 1 107 31
Discovery Vitality 387 355 9
Destiny Health 520 643 (19)
PruHealth 431 218 98
PruProtect 3 -
Gross inflows under management 12 764 11 228 14
Less: collected on behalf of third (9 223) (8 090) 14
parties
Discovery Health (8 833) (7 824)
Destiny Health (173) (157)
PruHealth (216) (109)
PruProtect (1) -
Gross income of Group 3 541 3 138 13
Earnings
The following table shows the main components of the increase in Group profit
from operations excluding investment income for the six months ended 31
December:
Earnings source
December December %
R million 2007 2006 change
Discovery Health 389 342 14
Discovery Life 479 327 46
Discovery Vitality 21 26 (19)
Destiny Health (80) (33) (142)
PruHealth (83) (123) 33
Operating profit before new venture 726 539 35
and unbundling costs
Discovery Invest (66) (9)
PruProtect (42) - -
Group operating profit before
investment income and
unbundling costs 618 530 17
Unbundling costs (18) - -
Investment income 99 77
Realised gains on shareholders` 147 40
portfolios
Investment returns on assets backing 17 93
policyholder liabilities
Fair value adjustment to liabilities (20) (95)
under investment contracts
Profit from operations before BEE 843 645 31
expenses
Headline earnings
The reconciliation between earnings and headline earnings is shown below:
December December %
R million 2007 2006 change
Net profit attributable to equity 538 403 33
shareholders
Adjusted for:
- realised profit on available-for- (128) (37)
sale investments net of CGT
Headline earnings 410 366 12
BEE expenses 11 17
Headline earnings before BEE 421 383 10
transaction
Headline earnings per share before
BEE transaction (cents):
- undiluted 77,9 71,6 9
- diluted 77,0 70,1 10
Headline earnings per share (cents):
- undiluted 75,8 68,4 11
- diluted 74,9 65,9 14
Weighted number of shares in issue 540 929 535 202
(000`s)
Diluted weighted number of shares 547 095 591 953
(000`s)
Taxation
All South African entities are in a tax paying position. South African income
tax has been provided at 29% and secondary tax on companies at 10% in the
financial statements and embedded value statements. The results for the full
financial year will measure income tax at 28%. Destiny operations have
significant tax losses but no deferred tax asset has been accounted for on the
foreign losses incurred in the US.
Discovery obtains tax relief on the PruHealth and PruProtect start-up losses
through Prudential Assurance Company Limited ("Prudential") in the UK.
R26 million has been included in finance charges relating to a settlement
discount on early payment by Prudential for UK tax losses ceded to them.
Investments
Equity investments have decreased due to the realisation of equity investments
and investment into money market investments.
Balance sheet
The increase in the assets arising from insurance contracts of R441 million is
as a result of profitable new business written by Discovery Life.
The deferred tax liability is primarily attributable to the application of the
Financial Services Board directive 145. This directive allows for the zeroing
on a statutory basis of the assets arising from insurance contracts. The
statutory basis is used when calculating tax payable for Discovery Life,
resulting in a timing difference between the tax base and the accounting base.
Accounting policies
The interim financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) as well as the South African
Companies Act 61 of 1973, as amended, and are consistent with the accounting
policies applied in the annual report and the corresponding prior year period.
These abridged financial statements comply with IAS 34.
Share-based payments
The issue of 38.7 million shares by Discovery in terms of its BEE transaction
in 2005 has been accounted for in terms of IFRS2. These shares are not
accounted for as issued in the consolidated accounts of Discovery but rather as
a share option transaction. These shares have been considered in the
calculation of diluted HEPS and diluted EPS.
The BEE transaction has resulted in a charge to the income statement of R11
million in the six month period ended 31 December 2007 (2006: R17 million) in
accordance with the requirements of IFRS 2.
An additional R19 million (2006: R26 million) in respect of options granted
under employee share incentive schemes has been expensed in the income
statement for the year in accordance with the requirements of IFRS 2.
Directorate
Mr AL Owen was appointed as a non-executive director of the board of Discovery
with effect from 6 December 2007. With effect from 1 January 2008, Mr P Cooper
and Ms T Slabbert were appointed as non-executive directors of the board of
Discovery
Mr LL Dippenaar, Mr PK Harris and Mr JP Burger resigned as non-executive
directors of the board of Discovery with effect from 31 December 2007.
Restatement of comparatives
An error was identified in the calculation of new business annualised premium
income for PruHealth. The comparative results for previous reporting periods,
reflecting 100% of the new business annualised premium income are:
Six months ended GBP R million
million
31 December 2004 0,4 4,5
30 June 2005 2,6 29,3
31 December 2005 6,3 72,2
30 June 2006 13,7 156,2
31 December 2006 14,3 197,9
30 June 2007 15,6 217,7
Dividend policy and Capital
The directors are of the view that the Discovery Group is adequately
capitalised at this time.
On the statutory basis the capital adequacy requirements of Discovery Life were
R184.0 million (2006: R126.4 million) and were covered 7.4 times (2006: 12.4
times).
Dividend Declaration:
The board has declared a cash dividend of 21,5 cents per share. The salient
dates are as follows:
- Last date to trade "cum" dividend Thursday, 13 March 2008
- Date trading commences "ex" dividend Friday, 14 March 2008
- Record date Thursday, 20 March 2008
- Date of payment Tuesday, 25 March 2008
Share certificates may not be dematerialised or rematerialised between Friday,
14 March 2008 and Thursday, 20 March 2008, both days inclusive.
Transfer secretaries
Computershare Investor Services 2004 (Pty) Limited
(Registration number 2004/003647/07) Ground Floor, 70 Marshall Street,
Johannesburg, 2001 PO Box 61051, Marshalltown, 2107
Sponsors
Rand Merchant Bank (A division of FirstRand Bank Limited)
Secretary and registered office
MJ Botha
155 West Street, Sandton, 2146 PO Box 786722, Sandton, 2146 Tel: (011) 529
2888 Fax: (011) 529 2958
Directors
MI Hilkowitz (Chairperson), A Gore (Chief Executive Officer), Dr BA Brink, JP
Burger****, P Cooper***, LL Dippenaar****, Dr NJ Dlamini, SB Epstein (USA), PK
Harris****, NS Koopowitz*, Dr TV Maphai, HP Mayers*, AL Owen (UK)**, A
Pollard*, JM Robertson* (CIO), SE Sebotsa, T Slabbert***, B Swartzberg*, SV
Zilwa
*Executive **Appointed 6 December 2007 ***Appointed 1 January 2008 ****
Resigned 31 December 2007
Date: 26/02/2008 08:01:00 Produced by the JSE SENS Department.
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