| Wed 3 Sep 2008, 9:00 | | DSY - Discovery Holdings Limited - Audited group results and cash dividend |
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DSY
DSY
DSY - Discovery Holdings Limited - Audited group results and cash dividend
declaration for the year ended 30 June 2008
Discovery Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
JSE share code: DSY
ISIN: ZAE000022331
* Operating profit from established businesses +39% to R1 763 million
* Two new substantial businesses launched, Discovery Invest and PruProtect
* New business API excluding Destiny +18% to R4 799 million
* Net profit before tax +14% to R1 664 million
* Diluted embedded value per share +15% to R29.61
* Final dividend of 23 cents per share
AUDITED GROUP RESULTS AND CASH DIVIDEND DECLARATION FOR THE YEAR ENDED 30 JUNE
2008
Introduction
The year under review has been important and successful. Discovery`s core
purpose of "making people healthier and enhancing and protecting their lives"
has manifested in a consumer-engaged approach to life and health insurance and
financial services, which has created significant competitive advantage,
enabling strong organic growth across its businesses and a wide range of
opportunities for the future. Discovery`s established businesses have performed
particularly well, despite a challenging economic environment. In addition,
during the year under review, Discovery launched two substantial businesses,
Discovery Invest and PruProtect (the UK life insurance joint venture with the
Prudential plc), and commenced the wind-down of Destiny Health, its US health
insurance subsidiary.
Operating profits of established businesses - Discovery Health, Discovery Life,
Vitality and PruHealth - increased by 39% to R1.8 billion. After the costs of
launching Discovery Invest and PruProtect, and the wind-down costs of Destiny
Health, operating profits increased by 13% to R1.3 billion.
Annual recurring new business increased by 18% to R4.8 billion (excluding
Destiny Health).
The embedded value grew by 16% to R16.4 billion (despite an increase in the risk
discount rate of 2.25% due to increasing interest rates). The quality of the
businesses is clearly illustrated by positive experience variances of
R728?million that arose during the year under review - a clear indication of
performance exceeding expectation.
Established businesses
Discovery Health
Discovery Health`s performance over the period surpassed expectation. Given its
size, social importance, and the complexity of the environment in which it
operates, the expectations for Discovery Health are based on an approach that
demands excellence in every aspect of its business. The performance during the
year across every key performance measure exceeded expectation, and placed
Discovery Health in a uniquely strong position in its chosen market.
Operating profit grew by 21% to R891 million - membership grew by 3.2% from 896
143 families to 924 725 families - the lapse rate, despite difficult economic
conditions remained stable at 4% and efficiencies increased dramatically with
the staff headcount per 1 000 lives covered, decreasing by 9%. The level of
solvency capital within the Discovery Health Medical Scheme increased in line
with the stated targets crossing the R5 billion level as at 30 June 2008, and
the scheme is on target to achieve the 25% level by December 2008.
Healthcare environments are typically characterised by regulation and policy
debate and, during the year under review, a considerable number of significant
policy issues emerged. Included in this is the potential regulation of hospital
costs and doctor tariffs, the ongoing technical considerations around the
implementation of the risk-equalisation fund for medical schemes and changes to
medical scheme benefit structures. In particular, the National Health Amendment
Bill and the Medical Schemes Amendment Bill reflect these policy considerations.
Also, the ANC`s Polokwane Conference in October 2007 placed the concept of a
National Health Insurance system firmly on the agenda.
While the scale and breadth of these issues invariably stimulate policy debate,
Discovery Health is of the view that the policy debates will manifest in an
acceptable regulatory and policy framework. It expects the emerging environment
to provide fertile ground for increased cooperation between the public and
private components of the healthcare system, and to see private healthcare
continue to play an integral role within the healthcare landscape. Discovery
Health firmly remains of the view that the private healthcare sector`s role is a
pivotal one in the future of SA, and attention must not be diverted from
ensuring its excellence and sustainability. Discovery Health is a central role-
player in these discussions and is committed to using its scale, expertise and
data to play a meaningful and constructive role in these debates.
Discovery Health is cognisant that its real challenge is to ensure that its
members have access to the best quality healthcare, at an affordable price and,
to this end, a substantial investment was made - and continues to be made - into
actuarial, clinical and technological skills and infrastructure. The performance
of the Discovery Health Medical Scheme is testimony to this, with the scheme
generating a surplus of R1 146 million for its 2007 calendar year. In addition,
Vitality has had a significant impact on ensuring demographic balance and
controlled lapse rates, both of which are pivotal to sustainability.
A notable feature of Discovery Health`s performance during the year has been a
considerable gain in operating efficiencies. This has been achieved through a
combination of scale and the use of technology without compromising service
levels - which, in fact, have been at their highest levels in the company`s
history. These efficiencies have been passed on to members through lower
administration fees. Administration fees have been increased over the last five
years by only 2.3% per annum, 4.0% less than CPI over the period. Discovery
Health is particularly well placed for the year ahead.
Discovery Life
Discovery Life`s performance exceeded expectations. Despite the difficult
economic climate - which negatively impacts on life assurance - the company`s
performance across virtually all aspects of its business was exceptional: new
business performance exceeded target; the distribution channels performed well
with the recently established tied agency force producing significant new
business, and the quality of the business transacted was pleasing. In addition,
Discovery Life rolled out a number of important innovations within its core
product range. The only area wherein the environment impacted somewhat
negatively, was the lapse rate, which moved upwards, but not significantly above
expectation.
Operating profit grew by 38% to R978 million, new business (including Discovery
Invest) grew by 45% to R1.4 billion and the value of in-force business grew by
22% to R7.3 billion.
It is estimated that Discovery Life transacted more new risk business over the
period than any of its competitors. From a quality perspective, the company
managed to achieve positive experience variances over the year, reflecting a
performance that exceeded expectations - expectations which were set prior to
the emerging economic climate. In addition to this, the rate of take-up of
ancillary benefits - an important barometer of product acceptability and key
driver of profitability - has increased compared with the corresponding period
last year. While the lapse rate did increase, Discovery Life`s integration
strategy, which integrates Vitality and creates dynamic premium pricing, ensured
that its products are more persistent and is proving to be an essential
immunising strategy against economic downturns.
A notable feature during the year has been the performance of Discovery Life`s
distribution strategy. Discovery Life`s performance during the year under review
can largely be attributed to the success of Discovery`s growing tied agency
force as a means of product distribution in addition to the 6 961 financial
advisers who actively support Discovery Life. The agency force, Discovery
Financial Consultants (DFC), has been developed based on the hypothesis that
given the quality of products available across Discovery, the group would be
able to attract and retain the best tied agents. During the year the number of
agents grew by 289% to 144, and the average new business produced by agents
increased to R136 747 per month- estimated to be around eight times the industry
average. In addition to the substantial business generated throughout the year,
it is expected that DFC will play a central role in the group`s growth going
forward.
Toward the end of the period under review, Discovery Life launched a range of
important innovations. The Cover Integrator, which reduces the cost of life
cover, and the LifeTime Impact approach to severe illness and disability
benefits, which flexes benefit payouts based on policyholders` personal
requirements, are expected to further entrench Discovery Life`s leadership
position. Accelerating new business production post the reporting period
reflects the acceptance of the approach.
Discovery Life is positioned particularly well for the year ahead.
PruHealth
PruHealth, Discovery`s UK health insurance joint venture with the Prudential
plc, is an important initiative for Discovery. It constitutes a fundamental
beachhead that Discovery is building in the UK and the approach to this
initiative has been without compromise: the quality of the team, the product
proposition and the infrastructure incorporate all of Discovery`s learnings.
There has been a concerted effort in terms of growth and quality, based on the
shareholders` strategic view that building a business of sustainability and
success requires relevance and scale. During the period under review, an intense
focus was applied to new business production, innovation and the drivers of
quality and profitability. While it is important that PruHealth generates an
accounting profit, the collective view of Discovery and the Prudential is that
this should not be achieved at the expense of growth potential and quality. (In
fact, approximately 61% of PruHealth`s expense base was spent on acquisition
costs in the year under review.) Within this context, the year`s performance has
been pleasing.
New business increased by 28% from R418 million to R533 million. Industry
statistics illustrate that PruHealth captured 11% of total new business
transacted in the UK private medical insurance market. In addition, over the
period under review, the fundamental barometers of quality and sustainability,
such as the claims-loss-ratio, lapse rates, and expense efficiencies, all
improved dramatically, positioning the business for substantial embedded value
growth going forward. Operating losses were cut by 29% from R218 million to R155
million, and notably, comparing the last six months of the year with the
corresponding period in the previous year, Discovery`s share of the losses
reduced by 37% from GBP7.2 million to GBP4.6 million. Discovery expects
PruHealth to be profitable during the 2009 calendar year.
A crucial component of a health insurer`s quality and viability is its loss
ratio. During the period significant investments were made in the managed care
capabilities of PruHealth and consequentially, the loss ratio reduced by 7%.
A component of the product strategy was to create an exciting Vitality gym
benefit offering. PruHealth has since broadened the focus of its gym benefit
from purely incentivising the number of gym visits to measuring improvements in
members` overall health, as indicated by their Vitality status.
PruHealth continued its focus on product leadership and, during the period,
launched a number of important innovations. In particular, Vitality Interactive
is a remarkably powerful online capability, which allows members to interface
more intimately with Vitality. It facilitates a more powerful and personal way
for them to manage their health and access the Vitality rewards. This capability
is now being rolled out across all of Discovery`s businesses. In addition, a
number of valuable new partners, such as Eurostar and Mark Warner, have been
added to Vitality, further enhancing the value proposition and demonstrating the
ability to leverage Vitality`s intellectual capital in other markets.
Vitality
Vitality`s performance over the year was both pleasing and important. While
Vitality performed well from a financial perspective and exceeded expectations,
its real significance is the foundational impact it has on Discovery`s
businesses. In this regard, considerable developments and innovations took place
within Vitality during the year.
Operating profit increased by 14% from R43 million to R49 million and the number
of members increased by 2% from 1.28 million to 1.30 million. It was encouraging
to see engagement levels increase a great deal across a number of areas,
including an 8% increase in the number of members exercising at Virgin Active
and Planet Fitness gyms.
The most notable progress in the year under review was made in terms of the core
clinical capabilities within Vitality and the structures used to create
behavioural change.
In addition to Vitality Interactive (discussed in the PruHealth section),
fundamental innovations have been the development of Personal Pathways and the
Vitality Age concept, which has been developed in cooperation with the Sports
Science Institute of South Africa at the University of Cape Town. These product
features enable members to understand their risk-adjusted age and set
appropriate goals and activities based on their individual circumstances. The
combination of these developments creates a powerful platform for future
differentiation and added-value for all of Discovery`s businesses, and
importantly, reflects a deeper understanding of the use of incentives to change
behaviour. Other exciting initiatives were launched, such as Vitality`s wellness
initiatives for children, which aim to reduce the growing problem of childhood
obesity by encouraging better nutrition and increased physical activity in our
youth. Over 1 000 schools are currently participating in the Vitality Schools
Programme, developed as part of the initiative.
Importantly, the extent of Vitality`s data and its applicability in Discovery`s
life and health insurance markets were focused on during the period. This has
manifested in a number of important studies that will provide Discovery with
deeper insight into the correlations between healthy behaviour and its effect on
mortality and morbidity. These studies will soon be submitted to respected
international journals for publication.
New businesses
Discovery Invest
During the period, the Group`s investment business, Discovery Invest, was
launched. Over the year, R157 million was spent developing, launching and
transacting Invest`s initial new business.
The strategy behind Invest is to harness the sophistication of an open
architecture investment platform, offering a broad range of long-term savings
products, but differentiating within the products and funds.
Despite Invest`s launch at almost the precise moment the investment markets
became difficult and volatile, its performance to date has exceeded expectation.
Total new business produced amounted to R1.2 billion, consisting of R181 million
recurring premium business, and R984 million single premiums - this yielded
R206.1 million in annual premium equivalent (APE) for the period under review.
Total assets under management, including Discovery Invest seed capital, exceeded
R1.4 billion at the year end.
Industry surveys illustrate that in the "Endowment and Voluntary Annuity Linked
Investment Services Platforms" category in which the bulk of Discovery Invest`s
business resides, it managed to capture 11% market share of new business.
Importantly from an acceptance and profit perspective, the performance has been
particularly pleasing: 55% of all funds flow through Discovery`s on-balance
sheet products, and 88% of funds flow into Discovery`s in-house portfolios.
There are the two important thrusts of innovation: the use of integration with
Vitality and the LIFE PLAN to significantly reduce the asset management and
operational fees that the investor pays and, secondly, funds such as RightChoice
Investments and the Escalator Funds, which provide the upside of the chosen
investment markets, but provide unique and dynamic downside protection. Both of
these thrusts are appropriate in volatile investment markets, and the concept of
reduced fees has been particularly well received.
Discovery expects an accelerating pace of growth from Discovery Invest. Given
the accounting treatment of investment business, which limits the extent of
acquisition cost deferral, the strong expected growth is likely to result in a
delay in the emergence of accounting profit, despite a positive contribution to
Discovery`s embedded value.
PruProtect
PruProtect, Discovery`s UK life assurance joint venture with the Prudential plc,
performed below expectation for the year under review. While the amount spent on
PruProtect is in line with budget, the new business production is lower than
anticipated.
PruProtect`s strategy is predicated on the deployment of the Discovery Life
product methodology, wherein benefits are differentiated and modernised.
Vitality is used to enable dynamic pricing so that the price points achieved are
competitive. This ability to offer a differentiated product at a competitive
price is important in a fiercely competitive and commoditised market, such as
the UK life assurance industry. To achieve this, a substantial life assurance
capability has been built and the migration of the product technology and
capability has been successful, along with pleasing receptivity from financial
advisers.
However, given the differentiated nature of the product range, a fundamental
element of the strategy has been the need to build a high advice distribution
channel which interfaces face-to-face with independent financial advisers
(IFAs). In this regard, the execution has been behind schedule. The strategic
intention was to deploy a franchise distribution channel across the UK that
mirrors the successful approach taken in the South African market. This requires
a careful establishment of distribution franchises run by hand-picked franchise
directors who, in turn, recruit exceptional account managers who call on the
IFAs. The structures and algorithms within this approach have been well
developed within Discovery, with specifications and account-manager density
predetermined based on the distribution of financial advisers within a
geographic area, as well as other factors.
During the period the progress made was slow and the migration of skills from
Discovery ineffective. The result was that by March 2008 there were seven
franchises and 10 account managers, significantly short of the numbers required
to achieve the new business targets.
Remedial actions have been taken, including a significant increase and intensity
in sales leadership resources and an injection of key Discovery distribution
skills. PruProtect has also recruited a number of leading resources from within
the UK life assurance market. By 31 August 2008, real progress had been made,
with 10 franchises created and an expectation of 100 account managers expected
to be operational by December 2008. This channel is also being supported by
active telephonic account management. As these channels gain traction, it is
expected the business will move in line with expectation.
The wind-down of Destiny Health
During the period under review, Discovery announced its intention to cease
transacting health insurance business in the US and, as a consequence, that
Destiny Health would exit the US retail insurance market. It would, however,
continue to market the Vitality product on a standalone basis to employer groups
and health plans. Discovery stated that the wind-down would cost approximately
$30 million and take a number of years to achieve, given the need to transfer
the members to other carriers.
The execution of this market withdrawal has progressed according to plan, with
all contracts concluded, and regulatory approval received. Plan members have
begun transferring coverage - a process that will take approximately 24 months,
with the greater part of the base moving on 1 January 2009. The extent and
complexity of this is substantial: the business is underwritten on four
different insurance licenses, within six different US states. Importantly,
Discovery`s approach has been based on maintaining and enhancing its reputation
with state regulators, Discovery`s insurance partners, plan members, employers
and other stakeholders, and the methodology used for the wind-down has kept this
mandate top-of-mind. The transfer of business to Trustmark and the exiting of
the Guardian Life Insurance Company partnership have been implemented carefully
and methodically to ensure this. Discovery is pleased that every single employer
group will be offered state-approved alternative coverage with a credible
carrier as the process unfolds.
For the year under review, the costs of the wind-down have been achieved within
the financial budgets laid down. The membership base had decreased from 33 282
in March 2008 to 26 502 in June 2008, and the cost of the wind-down amounted to
US$10 million out of a total budget of $30 million. It is therefore anticipated
that a further $20 million will be spent over the next 20 months on the wind-
down. The pace of the wind-down is slightly ahead of schedule, reflecting the
robustness of the alternative coverages that have been provided.
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
Income statement
for the year ended 30 June 2008
Group Group %
R million 2008 2007 change
Insurance premium revenue 4 293 3 710
Reinsurance premiums (780) (593)
Net insurance premiums 3 513 3 117
Fee income from administration business 2 532 2 142
Investment income 210 175
Net realised gains on financial instruments
held
as available-for-sale 252 195
Net fair value gains on financial instruments
at fair value
through profit or loss 25 151
Vitality income 791 721
Net income 7 323 6 501
Claims and policyholder benefits (2 156) (1 919)
Insurance claims recovered from reinsurers 601 475
Net claims and policyholder benefits (1 555) (1 444)
Acquisition costs (1 132) (1 015)
Marketing and administration expenses (3 784) (3 069)
Recovery of expenses from reinsurer 148 91
Transfer from assets/liabilities under 749 587
insurance contracts
- change in assets arising from insurance 806 651
contracts
- change in liabilities arising from insurance (55) (60)
contracts
- change in liabilities arising from (2) (4)
reinsurance contracts
Fair value adjustment to liabilities under
investment contracts (14) (141)
Profit before BEE expenses 1 735 1 510 15
BEE expenses (23) (34)
Profit from operations 1 712 1 476
Finance costs (52) (21)
Foreign exchange profit - unrealised 4 3
Profit before taxation 1 664 1 458 14
Taxation (506) (385)
Profit for the year 1 158 1 073 8
Attributable to:
Equity holders 1 156 1 073
Minority interests 2 -
1 158 1 073
Earnings per share for profit attributable
to the equity holders during the year (cents):
- basic 212.9 200.0 6
- diluted 211.1 196.4 8
Balance sheet
at 30 June 2008
Group Group
R million 2008 2007
ASSETS
Property and equipment 291 228
Intangible assets including deferred 243 113
acquisition costs
Assets arising from insurance contracts 3 920 3 114
Investment in associate 1 1
Financial assets 5 299 4 056
- Equity securities 2 055 2 155
- Equity linked notes 459 123
- Debt securities 173 313
- Inflation linked securities 65 -
- Money market 1 034 577
- Derivatives 35 -
- Loans and receivables including insurance 1 478 888
receivables
Deferred income tax 128 80
Current income tax asset - 4
Reinsurance contracts 99 51
Cash and cash equivalents 812 996
Total assets 10 793 8 643
EQUITY
Capital and reserves
Share capital and share premium 1 468 1 393
Other reserves 721 912
Retained earnings 3 975 3 057
Total equity 6 164 5 362
LIABILITIES
Liabilities arising from insurance contracts 1 061 742
Liabilities arising from reinsurance contracts 15 20
Financial liabilities 1 273 810
- Investment contracts at fair value through 1 230 735
profit or loss
- Borrowings at amortised cost 37 73
- Derivatives 6 2
Deferred income tax 1 031 806
Deferred revenue 70 122
Provisions 54 48
Trade and other payables 1 116 733
Current income tax liabilities 9 -
Total liabilities 4 629 3 281
Total equity and liabilities 10 793 8 643
Cash flow statement
for the year ended 30 June 2008
Group Group
R million 2008 2007
Cash flow from operating activities 385 450
Cash generated by operations 972 799
Policyholder net investments (638) (125)
Working capital changes 131 (42)
465 632
Dividends received 33 43
Interest received 194 143
Finance costs (25) (23)
Taxation paid (282) (345)
Cash flow from investing activities (274) (500)
Net purchase of investments (76) (331)
Purchase of equipment (132) (108)
Purchase of intangible assets (66) (61)
Cash flow from financing activities (329) (283)
Proceeds from shares issued 50 48
Dividends paid to equity holders (236) (239)
Minority share buy-back (8) (5)
Repayment of borrowings (31) (87)
Loan to share trust participants (109) -
Decrease in non-current receivables 5 -
Net decrease in cash and cash equivalents (218) (333)
Cash and cash equivalents at beginning of year 996 1 322
Effects of exchange rate changes on cash and cash 34 7
equivalents
Cash and cash equivalents at end of year 812 996
Statement of changes in equity
for the year ended 30 June 2008
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
30 June 2007
Balance at 1 July 2006 1 348 205 319 112
Issue of capital 45 - - -
Share-based payments - 52 - -
Unrealised gains on investments - - 458 -
Capital gains tax on unrealised
gains on investments - - (48) -
Realised gains on investments
transferred to income statement - - (195) -
Capital gains tax on realised
gains on investments - - 8 -
Currency translation - - - 3
differences
Transfer to hedging reserve - - - -
Net profit for the period - - - -
Dividends paid to equity - - - -
holders
Realised loss on minority
share buy-back - - - -
Balance at 30 June 2007 1 393 257 542 115
30 June 2008
Balance at 1 July 2007 1 393 257 542 115
Issue of capital 75 - - -
Share-based payments - 32 - -
Unrealised losses on - - (25) -
investments
Capital gains tax on unrealised
gains on investments - - 4 -
Realised gains on investments
transferred to income statement - - (252) -
Capital gains tax on realised
gains on investments - - 30 -
Currency translation - - - 36
differences
Transfer to hedging reserve - - - -
Net profit for the period - - - -
Dividends paid to equity - - - -
holders
Realised loss on minority
share buy-back - - - -
Balance at 30 June 2008 1 468 289 299 151
Attributable to equity
holders of the Company
Hedging Retained Minority
R million reserve earnings interest Total
30 June 2007
Balance at 1 July 2006 4 2 224 - 4 212
Issue of capital - - - 45
Share-based payments - - - 52
Unrealised gains on - - - 458
investments
Capital gains tax on
unrealised
gains on investments - - - (48)
Realised gains on investments
transferred to income - - - (195)
statement
Capital gains tax on realised
gains on investments - - - 8
Currency translation - - - 3
differences
Transfer to hedging reserve (6) - - (6)
Net profit for the period - 1 073 - 1 073
Dividends paid to equity - (239) - (239)
holders
Realised loss on minority
share buy-back - (1) - (1)
Balance at 30 June 2007 (2) 3 057 - 5 362
30 June 2008
Balance at 1 July 2007 (2) 3 057 - 5 362
Issue of capital - - (2) 73
Share-based payments - - - 32
Unrealised losses on - - - (25)
investments
Capital gains tax on
unrealised
gains on investments - - - 4
Realised gains on investments
transferred to income - - - (252)
statement
Capital gains tax on realised
gains on investments - - - 30
Currency translation - - - 36
differences
Transfer to hedging reserve (16) - - (16)
Net profit for the period - 1 156 2 1 158
Dividends paid to equity - (236) - (236)
holders
Realised loss on minority
share buy-back - (2) - (2)
Balance at 30 June 2008 (18) 3 975 - 6 164
Segmental information Health
for the year ended 30 June 2008
United
South States of United
R million Africa America Kingdom
30 June 2008
Income statement
Insurance premium revenue 23 667 520
Reinsurance premiums (2) (70) (109)
Net insurance premiums 21 597 411
Fee income from
administration business 2 458 - -
Investment income 39 7 22
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 - 9 -
Net income 2 518 613 433
Claims and policyholder benefits (12) (629) (290)
Insurance claims recovered
from reinsurers 2 56 60
Net claims and policyholder benefits (10) (573) (230)
Acquisition costs - (34) (54)
Marketing and administration
expenses (1 582) (236) (359)
Recovery of expenses
from reinsurer - - 136
Transfer from assets/liabilities
under insurance contracts
- change in assets arising from
insurance contracts - - -
- change in liabilities arising
from insurance contracts 4 45 (59)
- change in liabilities arising
from reinsurance contracts - - -
Fair value adjustment to liabilities
under investment contracts - - -
Profit/(loss) before BEE expenses 930 (185) (133)
BEE expenses
Profit from operations
Finance costs
Foreign exchange profit -
unrealised
Profit before taxation
Taxation
Profit for the year
30 June 2007
Income statement
Insurance premium revenue 158 921 278
Reinsurance premiums (3) (65) (25)
Net insurance premiums 155 856 253
Fee income from administration
business 2 138 - -
Investment income 52 13 4
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 2 345 869 257
Claims and policyholder benefits (128) (707) (207)
Insurance claims recovered
from reinsurers 2 64 16
Net claims and policyholder benefits (126) (643) (191)
Acquisition costs - (44) (32)
Marketing and administration
expenses (1 432) (256) (314)
Recovery of expenses
from reinsurer - - 91
Transfer from assets/liabilities
under insurance contracts
- change in assets arising from
insurance contracts - - -
- change in liabilities arising from
insurance contracts 1 (15) (25)
- change in liabilities arising from
reinsurance contracts - - -
Fair value adjustment to liabilities
under investment contracts - - -
Profit/(loss) before BEE expenses 788 (89) (214)
BEE expenses
Profit from operations
Finance costs
Foreign exchange profit -
unrealised
Profit before taxation
Taxation
Profit for the year
Life
South United
R million Africa Kingdom
30 June 2008
Income statement
Insurance premium revenue 3 076 7
Reinsurance premiums (599) -
Net insurance premiums 2 477 7
Fee income from
administration business 43 -
Investment income 109 -
Net realised gains on
financial instruments
held as available-for-sale 252 -
Net fair value gains on
financial instruments at fair
value through profit or loss 25 -
Vitality income - -
Net income 2 906 7
Claims and policyholder benefits (1 222) (3)
Insurance claims recovered
from reinsurers 481 2
Net claims and policyholder benefits (741) (1)
Acquisition costs (956) (36)
Marketing and administration
expenses (775) (102)
Recovery of expenses
from reinsurer - 12
Transfer from assets/liabilities
under insurance contracts
- change in assets arising from
insurance contracts 806 -
- change in liabilities arising
from insurance contracts (31) (14)
- change in liabilities arising
from reinsurance contracts (2) -
Fair value adjustment to liabilities
under investment contracts (14) -
Profit/(loss) before BEE expenses 1 193 (134)
BEE expenses
Profit from operations
Finance costs
Foreign exchange profit -
unrealised
Profit before taxation
Taxation
Profit for the year
30 June 2007
Income statement
Insurance premium revenue 2 353 -
Reinsurance premiums (500) -
Net insurance premiums 1 853 -
Fee income from administration
business 4 -
Investment income 88 -
Net realised gains on financial
instruments held as
available-for-sale 195 -
Net fair value gains on financial
instruments at fair value
through profit or loss 151 -
Vitality income - -
Net income 2 291 -
Claims and policyholder benefits (877) -
Insurance claims recovered
from reinsurers 393 -
Net claims and policyholder benefits (484) -
Acquisition costs (888) -
Marketing and administration
expenses (404) (36)
Recovery of expenses
from reinsurer - -
Transfer from assets/liabilities
under insurance contracts
- change in assets arising from
insurance contracts 651 -
- change in liabilities arising from
insurance contracts (21) -
- change in liabilities arising from
reinsurance contracts (4) -
Fair value adjustment to liabilities
under investment contracts (141) -
Profit/(loss) before BEE expenses 1 000 (36)
BEE expenses
Profit from operations
Finance costs
Foreign exchange profit -
unrealised
Profit before taxation
Taxation
Profit for the year
R million Vitality Holdings Total
30 June 2008
Income statement
Insurance premium revenue - - 4 293
Reinsurance premiums - - (780)
Net insurance premiums - - 3 513
Fee income from
administration business 31 - 2 532
Investment income 20 13 210
Net realised gains on
financial instruments
held as available-for-sale - - 252
Net fair value gains on
financial instruments at fair
value through profit or loss - - 25
Vitality income 782 - 791
Net income 833 13 7 323
Claims and policyholder benefits - - (2 156)
Insurance claims recovered
from reinsurers - - 601
Net claims and policyholder benefits - - (1 555)
Acquisition costs (52) - (1 132)
Marketing and administration
expenses (712) (18) (3 784)
Recovery of expenses
from reinsurer - - 148
Transfer from assets/liabilities
under insurance contracts
- change in assets arising from
insurance contracts - - 806
- change in liabilities arising
from insurance contracts - - (55)
- change in liabilities arising
from reinsurance contracts - - (2)
Fair value adjustment to liabilities
under investment contracts - - (14)
Profit/(loss) before BEE expenses 69 (5) 1 735
BEE expenses (23)
Profit from operations 1 712
Finance costs (52)
Foreign exchange profit -
unrealised 4
Profit before taxation 1 664
Taxation (506)
Profit for the year 1 158
30 June 2007
Income statement
Insurance premium revenue - - 3 710
Reinsurance premiums - - (593)
Net insurance premiums - - 3 117
Fee income from administration
business - - 2 142
Investment income 15 3 175
Net realised gains on financial
instruments held as
available-for-sale - - 195
Net fair value gains on financial
instruments at fair value
through profit or loss - - 151
Vitality income 721 - 721
Net income 736 3 6 501
Claims and policyholder benefits - - (1 919)
Insurance claims recovered
from reinsurers - - 475
Net claims and policyholder benefits - - (1 444)
Acquisition costs (51) - (1 015)
Marketing and administration
expenses (627) - (3 069)
Recovery of expenses
from reinsurer - - 91
Transfer from assets/liabilities
under insurance contracts
- change in assets arising from
insurance contracts - - 651
- change in liabilities arising from
insurance contracts - - (60)
- change in liabilities arising from
reinsurance contracts - - (4)
Fair value adjustment to liabilities
under investment contracts - - (141)
Profit/(loss) before BEE expenses 58 3 1 510
BEE expenses (34)
Profit from operations 1 476
Finance costs (21)
Foreign exchange profit -
unrealised 3
Profit before taxation 1 458
Taxation (385)
Profit for the year 1 073
Embedded value statement
for the year ended 30 June 2008
The embedded value of Discovery at 30 June 2008 is calculated as the sum of the
following components:
- the excess assets over liabilities at the valuation date (ie 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)).
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 year ended 30 June 2008. A copy of the auditors`
unqualified report is available for inspection at the company`s registered
office.
Table 1: Group embedded value
30 June 30 June %
2008(1) 2007 change
R million Restated(2)
Shareholders` funds 6 164 5 362 15
Adjustment to shareholders` funds from (3 879) (2 833)
published basis(3)
Adjusted net worth 2 285 2 529
Run-down costs for Destiny Health(4) (190) -
Value of in-force business before cost 14 864 11 964
of capital
Cost of capital (75) (49)
Cost of STC (420) (278)
Discovery Holdings embedded value 16 464 14 166 16
Number of shares (millions) 546.0 538.7
Embedded value per share R30,15 R26,30 15
Diluted number of shares (millions) 574.5 559.7
Diluted embedded value per share R29,61 R25,64 15
(1) The term of the Health and Vitality projection has been increased from 10
years to 20 years. The comparative figures at 30 June 2007 have also been
calculated assuming a 20-year term.
(2) The PruHealth business continues to grow in the UK health insurance market,
with in excess of R1 billion in premium income written during the period and 173
000 lives covered at 30 June 2008. The key profitability metrics of the business
(sales, loss ratio and unit expenses) are stable, and Discovery`s share of the
PruHealth embedded value is included in Discovery`s group embedded value. 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. The PruHealth
value of in-force at June 2007 was calculated using known company experience at
December 2007 and the June 2008 assumptions are based on current best estimates.
(3) The published Shareholders` funds has been adjusted to eliminate assets
under insurance contracts and deferred acquisition costs at June 2008 of R3 845
million (June 2007: R2 813 million) in respect of Life and R34 million (June
2007: R20 million) in respect of PruHealth.
(4) The wind-down costs for Destiny Health relate to the expected future
operational costs and risk profits/losses expected in the course of running down
the existing block of in-force business.
Table 2: Value of in-force business at 30 June 2008
Value
Value before after cost
cost of Cost of Cost of of capital
capital
R million and STC capital STC and STC
Health and Vitality 7 186 - (203) 6 983
Life(1) 7 317 (39) (207) 7 071
PruHealth(2) 361 (36) (10) 315
Total 14 864 (75) (420) 14 369
(1) Included in the Life value of in-force is R41 million in respect of
investment management services provided on off-balance sheet investment
business. The net assets of the investment service provider are included in the
adjusted net worth. The Life cost of capital is based on a statutory capital
adequacy requirement at June 2008 of R174 million. (June 2007: R145 million).
(2) The values shown for PruHealth reflect Discovery`s 50% shareholding in
PruHealth.
Table 3: Group embedded value earnings
Year ended Year ended
30 June 30 June
2008 2007
R million Restated
Embedded value at end of period 16 464 14 166
Less: Embedded value at beginning of period (14 166) (10 587)
Increase in embedded value 2 298 3 579
Net issue of capital (73) (45)
Dividends paid 236 239
Minority share buy-back 2 1
Transfer to hedging reserve 16 6
Extension of modelling term for Health and
Vitality
from 10 years to 20 years(1) - (1 031)
Embedded value earnings 2 479 2 749
Annualised return on opening embedded value
(including run-down costs for Destiny 17.5% 26.0%
Health)
Annualised return on opening embedded value
(excluding run-down costs for Destiny 18.8% 26.0%
Health)
(1) The embedded value earnings for June 2007 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
Year ended Year ended
30 June 30 June %
2008 2007 change
R million Restated
Total profit from new business (at 805 742 8
point of sale)
Profit from existing business
Expected return 1 401 1 030
Change in methodology and 203 (13)
assumptions(1)
Experience variances(2) 728 645
Reversal of Destiny Health opening - (5)
value of in-force
Inclusion of PruHealth value of in- n/a 168
force(3)
Other initiative costs(4) (563) (353)
Acquisition costs(5) 4 (27)
Foreign exchange rate movements 64 3
Cost of STC (63) 23
Return on shareholders` funds 90 536
Embedded value earnings excluding
run-down costs
for Destiny Health 2 669 2 749 (3)
Run-down costs for Destiny Health (190) -
Embedded value earnings including
run-down costs
for Destiny Health 2 479 2 749 (10)
(1) Included in the methodology and assumptions change item are amounts of R740
million in respect of Health and Vitality and R30 million in respect of Life and
negative R42 million in respect of PruHealth.
(2) Included in the experience variance item are amounts of R490 million in
respect of Health and Vitality, negative R240 million in respect of Life and
negative R47 million in respect of PruHealth.
(3) The June 2008 values are included in the figures above.
(4) For June 2007, the other initiative costs reflect the expenses relating to
the establishment of PruHealth, PruProtect and Discovery Invest and the support
of Destiny Health. For June 2008, this item reflects the expenses relating to
the establishment of PruProtect and Discovery Invest and the support of 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.
(5) Acquisition costs relate to commission paid on Life 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
Year ended Year ended
30 June 30 June %
2008 2007 change
R million Restated
Health and Vitality
Gross profit from new business at 213 129
point of sale
Cost of capital - -
Cost of STC (6) (3)
Net profit from new business at 207 126 64
point of sale
New business annualised premium 1 079 1 011 7
income
Life
Gross profit from new business at 589 639
point of sale
Cost of capital (12) (8)
Cost of STC (16) (15)
Net profit from new business at 561 616 (9)
point of sale
New business annualised premium 964 695 39
income
Annualised profit margin 7.3% 10.1%
Annualised profit margin excluding 8.4% 10.1%
Invest Business
PruHealth(1)
Gross profit from new business at 48
point of sale
Cost of capital (10)
Cost of STC (1)
Net profit from new business at 37
point of sale
New business annualised premium 219
income
Annualised profit margin 2.3%
The values shown for PruHealth reflect Discovery`s 50% shareholding in
PruHealth.
Review of Group results
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.
New business annualised premium income excluding Destiny increased 18% for the
year ended 30 June 2008.
New business annualised premium income
June June %
R million 2008 2007 change
Discovery Health 2 731 2 577 6
Discovery Life 1 407 971 45
Discovery Vitality 103 100 3
PruHealth 533 418 28
PruProtect 25 -
New business API excluding 4 799 4 066 18
Destiny
Destiny Health 345 768 (55)
New business API of Group 5 144 4 834 6
Gross inflows under management
increased 16% for the year ended
30 June 2008.
Gross inflows under management
June June %
R million 2008 2007 change
Discovery Health 21 118 18 828 12
Discovery Life 3 719 2 357 58
Discovery Vitality 813 721 13
Destiny Health 999 1 449 (31)
PruHealth 1 040 556 87
PruProtect 15 -
Gross inflows under management 27 704 23 911 16
Less: collected on behalf of (20 088) (17 338) 16
third parties
Discovery Health (18 637) (16 532)
Discovery Life (601) -
Destiny Health (323) (528)
PruHealth (520) (278)
PruProtect (7) -
Gross income of Group 7 616 6 573 16
Earnings
The following table shows the main components of the increase in Group profit
from operations for the year ended 30 June:
Earnings source
June June %
R million 2008 2007 change
Discovery Health 891 736 21
Discovery Life 978 707 38
Discovery Vitality 49 43 14
PruHealth (155) (218) 29
Operating profit from established 1 763 1 268 39
businesses
Discovery Invest (157) -
PruProtect (134) (36) >100
Destiny Health (192) (102) (88)
Group operating profit before
investment income
and unbundling costs 1 280 1 130 13
Unbundling costs (18) -
Investment income 210 175 20
Realised gains on shareholders` 252 195 29
portfolios
Investment returns on assets 25 151 (83)
backing policyholder liabilities
Fair value adjustment to (14) (141) 90
liabilities under investment
contracts
Profit from operations before BEE 1 735 1 510 15
expenses
Headline earnings
The reconciliation between
earnings and headline earnings is
shown below:
June June %
R million 2008 2007 change
Net profit attributable to equity 1 156 1 073 8
shareholders
Adjusted for:
- realised profit on available- (222) (187)
for-sale investments net of CGT
Headline earnings 934 886 5
BEE expenses 23 34
Headline earnings before BEE 957 920 4
transaction
Headline earnings per share
before BEE transaction (cents):
- undiluted 176,2 171,5 3
- diluted 174,7 168,4 4
Headline earnings per share
(cents):
- undiluted 172,0 165,2 4
- diluted 170,6 162,2 5
Weighted number of shares in 543 016 536 560
issue (000`s)
Diluted weighted number of shares 547 530 546 579
(000`s)
Taxation
All South African entities are in a tax paying position. South African income
tax has been provided at 28% (2007: 29%) and secondary tax on companies at 10%
in the financial statements and embedded value statements. 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 half of the PruHealth losses and 100% of the
PruProtect start-up losses through Prudential Assurance Company Limited
("Prudential") in the UK.
R27 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
Investments have increased due to the sale of the new Discovery Invest products.
These investments directly match the policyholder liabilities. Discovery Invest
was launched in October 2007.
Balance sheet
The increase in the assets arising from insurance contracts of R806 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 annual financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) including IAS34, 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.
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 R23
million in the year ended 30 June 2008 (2007: R34 million) in accordance with
the requirements of IFRS 2.
An additional R19 million (2007: R63 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.
Discovery has acquired cash-settled share options to hedge approximately 66.6%
of its obligations in respect of options granted under the employee share
incentive scheme.
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.
Dividend policy and capital
An interim dividend of 21.5 cents per share was paid on 25 March 2008.
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
R174 million (2007: R145 million) and were covered 7.0 times (2007: 10.7 times).
Cash dividend declaration:
The board has declared a final dividend of 23 cents per share. The salient dates
are as follows:
- Last date to trade "cum" dividend Friday, 10 October 2008
- Date trading commences "ex" dividend Monday, 13 October 2008
- Record date Friday, 17 October 2008
- Date of payment Monday, 20 October 2008
Share certificates may not be dematerialised or rematerialised between Monday,
13 October 2008 and Friday, 17 October 2008, both days inclusive.
Audit
The auditors, PricewaterhouseCoopers Inc, have issued their opinion on the Group
financial statements for the year ended 30 June 2008. A copy of the auditors`
unqualified report is available for inspection at the company`s registered
office.
Transfer secretaries
Computershare Investor Services (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
Discovery Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
JSE share code: DSY
ISIN: ZAE000022331
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: 03/09/2008 09:00:01 Produced by the JSE SENS Department.
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