| Thu 19 Feb 2009, 10:00 | | DSY - Discovery - Unaudited Interim Results And Cash Dividend Declaration For |
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DSY
DSY
DSY - Discovery - Unaudited Interim Results And Cash Dividend Declaration For
The Six Months Ended 31 December 2008
Discovery Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
JSE share code: DSY
ISIN: ZAE000022331
("Discovery")
UNAUDITED INTERIM RESULTS AND CASH DIVIDEND DECLARATION FOR THE SIX MONTHS
ENDED 31 DECEMBER 2008
Operating profit from established businesses +31% to
R1 052 million
New business API excluding Destiny +28% to R2 798 million
Headline earnings increase 19% to R489 million
Diluted embedded value per share +20% to R36.17
Interim dividend of 25.5 cents per share
Introduction
The results under review are for the first half of Discovery`s 2009 financial
year.
During this period, Discovery performed exceptionally well. Discovery`s
business model is based on organic growth driven by innovation to meet
clients` needs. Today, Discovery stands for financial strength and product
excellence. This placed the Group in a strong position during difficult
economic conditions where consumer behaviour is often driven by caution, a
flight to quality and a pursuit of value for money. Combined with an intense
focus on driving excellence in all of its businesses, this has led to
increased financial strength, continued innovation, and record levels of new
business. Discovery also used the opportunity to focus on its capital base,
increasing its capabilities and flexibility, positioning it well for further
growth and additional opportunities.
Operating profit of established businesses - Discovery Health, Discovery
Life, Discovery Vitality and PruHealth - increased 31% to R1.1 billion. For
all businesses, operating profit, including Discovery Invest, PruProtect and
the wind-down of Destiny Health Inc., increased by 21% to R746 million.
Record levels of new business
Discovery`s strong conviction that innovation is a fundamental strategy that
determines success, ensured that despite the economic conditions, the
businesses continued growing. This has enabled the Group to create further
product differentiation and excellence in markets that are often commoditised
and highly price-sensitive. A wide range of new products and structures were
rolled out across all of Discovery`s businesses. For example, Discovery Life
launched the Cover Integrator that significantly reduces the cost of life
cover, while Discovery Health launched the Delta Plans, thereby bringing down
the cost of health cover for those members who use its hospital network.
Vitality launched the HealthyFoodTrade Mark benefit in partnership with Pick
n Pay that saves members up to 25% on HealthyFoodTrade Mark products. In the
UK, PruHealth significantly enhanced its Vitality offering, and PruProtect
restructured its life insurance offering significantly to ensure enhanced
price competitiveness. The effect of this approach generated record levels of
new business, and assisted in strengthening the Group`s distribution
channels.
New business annualised premium income increased by 28% from
R2.2 billion to R2.8 billion (excluding Destiny Health).
Capital strength and structure
Discovery`s approach to capital management is based on prudence and a
commitment to conservative gearing levels. The Group focused on enhancing its
capital strength and increasing its flexibility. In particular, within
Discovery Life, considerable work was done with Discovery Life`s R4.5 billion
negative reserve. This asset is of considerable quality with substantial
margins and returns that are consistent and more than the Group`s risk
discount rate. However, it lacks flexibility and as it grows, it constitutes
a concentration of resources. Two distinct structural changes were made:
- The first was to convert R750 million of the negative reserve into cash
through reinsurance and, in the process, transfer risk from the Discovery
Life balance sheet, while retaining the upside margins of the negative
reserve.
- The second, the transfer of the lapse risk of up to a further
R1 billion of the negative reserve through reinsurance created the
opportunity for Discovery Life to raise R1 billion of cash by selling retail
investment products that can be backed by the remaining guaranteed negative
reserve. This enables Discovery Invest to offer uniquely competitive
investment products.
The combination of these initiatives was created to enable Discovery to
realise up to R1.8 billion in cash and transfer risk while maintaining
margins.
Overall, Discovery`s financial position is excellent: the Group has no debt;
Discovery Life covers its capital adequacy requirement by 6.4 times; the
Discovery Health Medical Scheme`s solvency reserves amount to more than R5.2
billion thereby exceeding the 25% statutory level, and in the UK, PruHealth
covers its minimum capital requirements 2.2 times.
Discovery Health
Discovery Health`s fundamental purpose is to provide affordable access to
quality healthcare on a sustainable basis. The company`s performance over the
period exceeded expectation. Given its size and social relevance, there can
be no compromise in operating and building Discovery Health. The results
illustrate that across every aspect of the business, its performance was
excellent.
In addition, the scale and sophistication of its assets and positioning will
enable it to assist in building a robust healthcare system, not only for its
members, but for broader society.
Through Discovery Health`s network, relationships with healthcare
professionals and hospitals, as well as further research and development,
healthcare costs were kept under control, and benefit choices to members
increased further. Notably, despite the difficult financial environment, new
business increased to its highest level in the company`s history. An
important barometer of success and a counter-intuitive result to the current
economic climate, less than 3% of members reduced their benefit choices,
while 97% of members opted to stay at or enhance their current benefit
choice. An important milestone has been achieved with the Discovery Health
Medical Scheme crossing the 25% statutory reserve level with more than R5.2
billion reserves. From an inter-structural perspective, Discovery Health
achieved significant efficiencies while providing the most consistent service
in the company`s history. This positions Discovery Health uniquely from a
competitive standpoint.
Operating profit grew by 22% to R475 million, while members grew by 4% to 2.1
million lives. The lapse rate remained at less than 4%.
Discovery Life
Discovery Life`s performance was pleasing and exceeded expectation. The
company is committed to leadership in the life insurance industry by
developing a business of unique quality that meets clients` needs. The
company`s methodology focuses strongly on product distribution and financial
excellence. The results illustrate this with new business (including
Discovery Invest) growing by 58% to R993 million and operating profit growing
by 29% to R618 million.
Nearly all strategies followed during the period were successful: the roll-
out of the Cover Integrator and LifeTime benefits assisted in the growth of
new business to record levels, while in terms of distribution, Discovery
Life`s agency force, Discovery Financial Consultants, continued to grow with
agents` production significantly more than industry standards. The
restructuring of the negative reserve created considerable capital robustness
and flexibility, enabling the company to continue its growth going forward
without recourse to additional shareholder funding. This also provides an
open market check on the value of the negative reserve, embedded value and
the assumptions underlying them.
The business transacted has been of exceptional quality resulting in positive
experience variances over the period, notably, the claims loss ratio
continues to exceed expectation and is dramatically below industry levels.
This shows the sound risk management strategies applied and the benefits of
integration with Vitality. Although the lapse rate did increase over the
period, reflecting the tough economic conditions, it was not significantly
above expectations. Considerable work has been done on conservation and the
company`s embedded value assumptions have been strengthened appropriately.
Discovery is committed to building a life assurer of considerable scale and
quality and, to this end, has invested in excess of R2 billion into Discovery
Life since inception. The embedded value generated reflects a return on
capital of 24%. Given its product, capital and distribution strength,
Discovery Life is well positioned going forward.
Discovery Invest
Discovery Invest`s performance was in line with expectations. Clearly, given
market conditions, the environment in which Discovery Invest operates is a
difficult one and, in this context, expectations have to be moderated. Having
said this, Discovery Invest`s approach of harnessing the market`s asset
management sophistication and choice of open architecture, together with
products that protect investors from volatility and downside, have resonated
well. During this period Discovery Invest was focused on building its
capabilities and products to ensure that it is well positioned as market
conditions improve. Distribution channels continue to grow with more than 1
600 brokers transacting business for Discovery Invest. Significant resources
were put toward new product technology and online capabilities to ensure
competitiveness. Many of these initiatives will be rolled out in the next
quarter.
Vitality and DiscoveryCard
Vitality`s performance exceeded expectation in terms of its strategic role.
Its foundational purpose of making people healthier and providing a platform
for all of Discovery`s businesses, is well entrenched. The usage of its wide
range of benefits increased substantially over the period, indicating a
strong engagement of Discovery`s clients in their wellness and in the Group`s
products. Over the last two years, considerable work has been done on the
behavioural economics and incentives required to achieve the appropriate
behavioural change. During the period, Vitality Age, Vitality Interactive and
Personal Pathways were rolled out in the UK and will be rolled out in South
Africa during the year. Vitality provides an excellent foundation for
Discovery`s future competitiveness, risk management and integration
capabilities. A fundamental gap in the Vitality strategy has been the need to
focus on nutrition. The new HealthyFoodTrade Mark Benefit was developed to
address this and is one of the largest Vitality initiatives to date. It
involves international experts in the creation of its methodology and
algorithms and importantly, will be a key product differentiator for Vitality
and Discovery. Vitality is particularly well placed going forward.
DiscoveryCard`s performance over the period was pleasing. Clearly, given the
difficult economic environment brought about by the credit crisis, and the
impact of the National Credit Act, the environment in which DiscoveryCard
operates was a difficult one. DiscoveryCard`s focus was therefore on the
quality of its book, careful risk management, and developing further product
offerings. The effect of these strategies has been positive with the credit
book performing pleasingly and a continued steady growth in the number of
cards being issued. DiscoveryCard`s link to the HealthyFoodTrade Mark Benefit
will provide added impetus to its potential going forward.
PruHealth
PruHealth, Discovery`s joint venture with the Prudential plc, performed well
and is on track to achieve profitability during the calendar year. From a
strategic perspective, in addition to profitability, the quality and scale of
PruHealth is of considerable importance to Discovery, as it forms the
foundation for the Discovery business model in the UK. Vitality and the
integration of PruProtect and PruHealth will provide the same product, risk
management and integration advantages as in the South African market. This is
particularly important, given the level of commoditisation and price-
competitiveness. To this end, there is considerable focus on the quality of
PruHealth and its competitive position. Despite the difficult economic
environment in the UK, PruHealth made substantial progress, with considerable
new business transacted, and improvements in the claims loss ratio and
expense levels. Lapse rates, particularly for SMEs and corporates, remain
particularly low while levels of new business remain in line with
expectation. New business grew by 9% to R271 million.
An important development during the period was the revision of the Vitality
Gym Benefit Structure. Vitality`s benefits are traditionally tiered by
Vitality status, enabling members to enjoy richer benefits the higher their
status level. The PruHealth Gym Benefit was structured on a usage basis where
members paid lower monthly gym subscriptions based on their usage. While this
is intellectually consistent with the Vitality Behaviour Model, it created
considerable opportunities for adverse selection - members purchasing
PruHealth products to gain access to the gyms, simply because they were
already high gym users. During the early part of 2008 it became evident that
a considerable number of individual members acquired online had joined
PruHealth only for this reason. The incentives created by the usage model
also resulted in a dramatic increase in gym usage among existing members. The
analysis indicated that while this activity supported a very low level of
health claims, it created considerable Vitality subsidy costs in the short
term. It was felt that while a long-term argument for keeping these members
on the existing gym structure could be made, it was necessary to secure the
business model from adverse selection and to ensure that products meet the
right customer need. PruHealth therefore followed a prudent approach to
change the gym benefit to a status-based model, despite the fact that a
proportion of members were likely to lapse. The decision took place during
the period under review and has been rolled out successfully. A considerable
number of those members lapsed, as expected, and therefore despite high
volumes of new business, the total number of members covered by PruHealth has
increased at a lower rate than what would otherwise have been the case.
Importantly, the short-term cost of this adverse selection amounted to GBP3
million and reversing this out of the operating loss of PruHealth illustrates
more accurately the company`s progress to profitability.
The quality of the business and its leadership position in the UK market,
places PruHealth in a positive position going forward.
PruProtect
PruProtect, Discovery`s UK life assurance joint venture with the Prudential
plc, had a particularly active and pleasing period. At the previous
announcement, PruProtect`s performance was significantly below expectation,
and in particular, the distribution channels were poorly developed. During
the period under review, the company particularly focused on:
i. Improving the franchise distribution channel with more efficient incentive
and management structures. By January 2009, there were 12 franchises with 91
account managers actively deployed across the UK. Early signs of traction are
good. The company focused on building a telephone account management system
which is the more traditional approach to distribution in the UK. PruProtect
has also been working actively to secure contracts with a variety of multi-
tier and single-tier organisations that will be serviced by these two
distribution channels. The combination of these distribution channels will
provide a significant distribution capability for PruProtect.
ii. The product structure was relaunched during November 2008. While
Discovery`s Vitality and Life Assurance technology resonated well in the UK
market, the concept of increasing premium rates during the term of the policy
was difficult to market. To overcome this, Vitality was streamlined with
premium rates declining with health engagement. Early indications are that
this has been well received by the UK market.
While many of these strategies are in their infancy, early signs are
particularly positive. The application count has increased from 25
applications per day at the start of the period to 75 applications at the
end. From a financial perspective, PruProtect`s operating losses are largely
in line with expectation.
Destiny
The wind-down of Destiny Health has progressed in line with budget. The
membership base has decreased from 33 282 in March 2008 to 3 000 in February
2009. Discovery stated that the wind-down would cost approximately US$30
million and the company is on target to achieve this. In addition to the
financial rigour applied, Discovery is pleased that service levels to
members, and engagement with our partners and regulators have been performed
in such a way as to maintain our reputation. Discovery continues to support
the existing Vitality business and to explore opportunities in this regard.
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
Income statement
for the six months ended 31 December 2008
Group Group Group
Six months Six months Year
ended ended ended
December December June
2008 2007 % 2008
R million Unaudited Unaudited change Audited
Insurance premium 2 535 1 995 4 293
revenue
Reinsurance premiums (384) (361) (780)
Net insurance premiums 2 151 1 634 3 513
Fee income from 1 356 1 159 2 532
administration business
Receipt arising from 750 - -
reinsurance contract
Investment income 115 99 210
Net realised gains on 62 147 252
financial instruments
held as available-for-
sale
Net fair value (93) 17 25
(losses)/gains on
financial instruments
at fair value through
profit or loss
Vitality income 443 387 791
Net income 4 784 3 443 7 323
Claims and policyholder (1 238) (1 007) (2 156)
benefits
Insurance claims 362 275 601
recovered from
reinsurers
Net claims and (876) (732) (1 555)
policyholder benefits
Acquisition costs (753) (559) (1 132)
Marketing and (2 116) (1 783) (3 784)
administration expenses
Recovery of expenses 101 42 148
from reinsurers
Transfer from (337) 452 749
assets/liabilities
under insurance
contracts
- change in assets 584 428 806
arising from insurance
contracts
- change in liabilities (27) - -
arising from insurance
contracts - Premium
deficiency reserve
- change in liabilities (120) 25 (55)
arising from insurance
contracts - Other
- change in liabilities (774) (1) (2)
arising from
reinsurance contracts
Fair value adjustment 59 (20) (14)
to liabilities under
investment contracts
Profit before 862 843 2 1 735
impairment and BEE
expenses
Impairment of financial (63) - -
instruments held as
available-for-sale
BEE expenses (7) (11) (23)
Profit from operations 792 832 (5) 1 712
Finance costs (9) (36) (52)
Foreign exchange profit - 4 4
- unrealised
Profit before taxation 783 800 (2) 1 664
Taxation (282) (259) (506)
Profit for the period 501 541 (7) 1 158
Attributable to:
Equity holders 490 538 1 156
Minority interests 11 3 2
501 541 1 158
Earnings per share for
profit attributable to
the equity holders
during the period
(cents):
- basic 89.3 99.5 (10) 212.9
- diluted 88.7 98.4 (10) 211.1
Balance sheet
at 31 December 2008
Group Group
December June
2008 2008
R million Unaudited Audited
ASSETS
Property and equipment 231 291
Intangible assets including deferred 414 243
acquisition costs
Assets arising from insurance contracts 4 504 3 920
Investment in associate 1 1
Financial assets 5 567 5 299
- Equity securities 1 839 2 055
- Equity linked notes 901 459
- Debt securities 247 173
- Inflation linked securities 64 65
- Money market 864 1 034
- Derivatives 58 35
- Loans and receivables including insurance 1 594 1 478
receivables
Deferred income tax 181 128
Current income tax asset 36 -
Reinsurance contracts 115 99
Cash and cash equivalents 1 507 812
Total assets 12 556 10 793
EQUITY
Capital and reserves
Share capital and share premium 1 579 1 468
Other reserves 524 721
Retained earnings 4 338 3 975
Total equity 6 441 6 164
LIABILITIES
Liabilities arising from insurance contracts 1 358 1 061
Liabilities arising from reinsurance 785 15
contracts
Financial liabilities 1 495 1 273
- Investment contracts at fair value 1 442 1 230
through profit or loss
- Borrowings at amortised cost 47 37
- Derivatives 6 6
Deferred income tax 1 209 1 031
Deferred revenue 76 70
Provisions 67 54
Trade and other payables 1 125 1 116
Current income tax liabilities - 9
Total liabilities 6 115 4 629
Total equity and liabilities 12 556 10 793
Headline earnings
for the six months ended 31 December 2008
Group Group Group
Six months Six months Year
ended ended ended
December December June
2008 2007 % 2008
R million Unaudited Unaudited change Audited
Headline earnings per
share (cents):
- undiluted 89.2 75.8 18 172.0
- diluted 88.6 74.9 18 170.6
The reconciliation
between earnings and
headline earnings is
shown below:
Net profit attributable 490 538 1 156
to equity shareholders
Adjusted for:
- realised profit on (55) (128) (222)
available-for-sale
investments net of CGT
- impairment on 54 - -
available-for-sale
investments net of CGT
Headline earnings 489 410 19 934
Weighted number of 548 060 540 929 1 543 016
shares in issue (000`s)
Diluted weighted number 551 819 547 095 1 547 530
of shares (000`s)
Cash flow statement
for the six months ended 31 December 2008
Group Group Group
Six months Six months Year
ended ended ended
December December June
2008 2007 2008
R million Unaudited Unaudited Audited
Cash flow from operating activities 458 61 385
Cash generated by operations 1 184 256 972
Policyholder net investments (652) (67) (638)
Working capital changes (4) (146) 131
528 43 465
Dividends received 27 23 33
Interest received 107 85 194
Interest paid (9) (11) (25)
Taxation paid (195) (79) (282)
Cash flow from investing activities 264 (164) (269)
Net sales/(purchases) of 328 (30) (76)
investments
Net sales/(purchases) of equipment 30 (91) (132)
Purchase of intangible assets (94) (43) (66)
Decrease in loans receivable - - 5
Cash flow from financing activities (17) (77) (334)
Proceeds from issuance of ordinary 111 35 50
shares
Dividends paid to equity holders (134) (131) (236)
Minority share buy-back (4) (5) (8)
Loan to share trust participants - - (109)
Increase/(repayment) of borrowings 10 24 (31)
Net increase/(decrease) in cash and 705 (180) (218)
cash equivalents
Cash and cash equivalents at 812 996 996
beginning of the year
Exchange gains on cash and cash (10) (12) 34
equivalents
Cash and cash equivalents at end of 1 507 804 812
the period
Statement of changes in equity
for the six months ended 31 December 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
31 December 2008
Balance at 1 July 2008 1 468 289 299 151
Issue of capital 111 - - -
Share-based payments - 9 - -
Unrealised losses on - - (230) -
investments
Capital gains tax on - - 34 -
unrealised gains on
investments
Realised gains on - - (62) -
investments transferred to
income statement
Capital gains tax on - - 7 -
realised gains on
investments
Impairment of investments
transferred to income - - 63 -
statement
Capital gains tax on - - (9) -
impairment on investments
Currency translation - - - (21)
differences
Transfer from hedging - - - -
reserve
Net profit for the period - - - -
Dividends paid to equity - - - -
holders
Realised profit on - - - -
minority share buy-back
Balance at 31 December 1 579 298 102 130
2008
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 - - (5) -
unrealised gains on
investments
Realised gains on - - (147) -
investments transferred to
income statement
Capital gains tax on - - 19 -
realised gains on
investments
Currency translation - - - (7)
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 1 427 273 419 108
2007
Attributable to
equity
holders of the
Company
Hedging Retained Minority
R million reserve earnings interest Total
31 December 2008
Balance at 1 July 2008 (18) 3 975 - 6 164
Issue of capital - - (11) 100
Share-based payments - - - 9
Unrealised losses on - - - (230)
investments
Capital gains tax on - - - 34
unrealised gains on
investments
Realised gains on - - - (62)
investments transferred to
income statement
Capital gains tax on - - - 7
realised gains on
investments
Impairment of investments
transferred to income - - - 63
statement
Capital gains tax on - - - (9)
impairment on investments
Currency translation - - - (21)
differences
Transfer from hedging 12 - - 12
reserve
Net profit for the period - 490 11 501
Dividends paid to equity - (134) - (134)
holders
Realised profit on - 7 - 7
minority share buy-back
Balance at 31 December (6) 4 338 - 6 441
2008
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 - - - (5)
unrealised gains on
investments
Realised gains on - - - (147)
investments transferred to
income statement
Capital gains tax on - - - 19
realised gains on
investments
Currency translation - - - (7)
differences
Transfer from hedging 3 - - 3
reserve
Net profit for the period - 538 3 541
Dividends paid to equity - (131) - (131)
holders
Realised loss on minority - (2) - (2)
share buy-back
Balance at 31 December 1 3 462 - 5 690
2007
Segmental information
for the six months ended 31 December 2008
Health Life
United
South States of United South
R million Africa America Kingdom Africa
31 December 2008
Income statement
Insurance premium revenue 12 211 350 1 951
Reinsurance premiums (1) (10) (55) (318)
Net insurance premiums 11 201 295 1 633
Fee income from administration 1 302 - - 43
business
Receipt arising from - - - 750
reinsurance contract
Net fair value losses on - - - (59)
financial instruments at fair
value through profit or loss
backing investment contracts
Vitality income - 17 - -
Net income 1 313 218 295 2 367
Claims and policyholder (4) (257) (236) (738)
benefits
Insurance claims recovered 1 29 35 295
from reinsurers
Net claims and policyholder (3) (228) (201) (443)
benefits
Acquisition costs - (10) (25) (658)
Marketing and administration (835) (113) (211) (494)
expenses
Recovery of expenses from - - 88 -
reinsurer
Transfer from - - - 584
assets/liabilities under
insurance contracts
- change in assets arising
from insurance contracts
- change in liabilities - (27) - -
arising from insurance
contracts - Premium deficiency
reserve
- change in liabilities - 14 (10) (106)
arising from insurance
contracts - Other
- change in liabilities - - - (774)
arising from reinsurance
contracts
Fair value adjustment to - - - 59
liabilities under investment
contracts
Profit/(loss) before 475 (146) (64) 535
investment income, impairment
and BEE expenses
Investment income
Net realised gains on
financial instruments held as
available-for-sale
Net fair value losses on
financial instruments at fair
value through profit
or loss backing insurance
contracts
Impairment on financial
instruments held as available-
for-sale
BEE expenses
Profit from operations
Finance costs
Profit before taxation
Taxation
Profit for the period
Life
United
R million Kingdom Vitality Total
31 December 2008
Income statement
Insurance premium revenue 11 - 2 535
Reinsurance premiums - - (384)
Net insurance premiums 11 - 2 151
Fee income from administration - 11 1 356
business
Receipt arising from reinsurance - - 750
contract
Net fair value losses on financial - - (59)
instruments at fair value through
profit or loss backing investment
contracts
Vitality income - 426 443
Net income 11 437 4 641
Claims and policyholder benefits (3) - (1 238)
Insurance claims recovered from 2 - 362
reinsurers
Net claims and policyholder benefits (1) - (876)
Acquisition costs (33) (27) (753)
Marketing and administration expenses (76) (387) (2 116)
Recovery of expenses from reinsurer 13 - 101
Transfer from assets/liabilities under - - 584
insurance contracts -
change in assets arising from
insurance contracts
- change in liabilities arising from - - (27)
insurance contracts - Premium
deficiency reserve
- change in liabilities arising from (18) - (120)
insurance contracts - Other
- change in liabilities arising from - - (774)
reinsurance contracts
Fair value adjustment to liabilities - - 59
under investment contracts
Profit/(loss) before investment (104) 23 719
income, impairment and BEE expenses
Investment income 115
Net realised gains on financial 62
instruments held as available-for-sale
Net fair value losses on financial (34)
instruments at fair value through
profit or loss backing insurance
contracts
Impairment on financial instruments (63)
held as available-for-sale
BEE expenses (7)
Profit from operations 792
Finance costs (9)
Profit before taxation 783
Taxation (282)
Profit for the period 501
Health Life
United
South States of United South
R million Africa America Kingdom Africa
31 December 2007
Income statement
Insurance premium revenue 7 347 215 1 424
Reinsurance premiums (1) (33) (45) (282)
Net insurance premiums 6 314 170 1 142
Fee income from administration 1 137 - - 22
business
Net fair value gains on - - - 20
financial instruments at fair
value through profit or loss
backing investment contracts
Vitality income - - - -
Net income 1 143 314 170 1 184
Claims and policyholder (7) (330) (140) (530)
benefits
Insurance claims recovered 2 25 25 223
from reinsurers
Net claims and policyholder (5) (305) (115) (307)
benefits
Acquisition costs - (16) (23) (490)
Marketing and administration (752) (108) (153) (374)
expenses
Recovery of expenses from - - 41 -
reinsurer
Transfer from
assets/liabilities under
insurance contracts
- change in assets arising - - - 428
from insurance contracts
- change in liabilities 3 35 (3) (7)
arising from insurance
contracts
- change in liabilities - - - (1)
arising from reinsurance
contracts
Fair value adjustment to - - - (20)
liabilities under investment
contracts
Profit/(loss) before
investment income and BEE
expenses 389 (80) (83) 413
Investment income
Net realised gains on
financial instruments held as
available-for-sale
Net fair value losses on
financial instruments at fair
value through profit or loss
backing insurance contracts
BEE expenses
Profit from operations
Finance costs
Foreign exchange profit -
unrealised
Profit before taxation
Taxation
Profit for the period
Life
United
R million Kingdom Vitality Holdings Total
31 December 2007
Income statement
Insurance premium revenue 2 - - 1 995
Reinsurance premiums - - - (361)
Net insurance premiums 2 - - 1 634
Fee income from administration - - - 1 159
business
Net fair value gains on - - - 20
financial instruments at fair
value through profit or loss
backing investment contracts
Vitality income - 387 - 387
Net income 2 387 - 3 200
Claims and policyholder - - - (1 007)
benefits
Insurance claims recovered - - - 275
from reinsurers
Net claims and policyholder - - - (732)
benefits
Acquisition costs (4) (26) - (559)
Marketing and administration (38) (340) (18) (1 783)
expenses
Recovery of expenses from 1 - - 42
reinsurer
Transfer from
assets/liabilities under
insurance contracts
- change in assets arising - - - 428
from insurance contracts
- change in liabilities (3) - - 25
arising from insurance
contracts
- change in liabilities - - - (1)
arising from reinsurance
contracts
Fair value adjustment to - - - (20)
liabilities under investment
contracts
Profit/(loss) before (42) 21 (18) 600
investment income and BEE
expenses
Investment income 99
Net realised gains on 147
financial instruments held as
available-for-sale
Net fair value losses on (3)
financial instruments at fair
value through profit or loss
backing insurance contracts
BEE expenses (11)
Profit from operations 832
Finance costs (36)
Foreign exchange profit - 4
unrealised
Profit before taxation 800
Taxation (259)
Profit for the period 541
Embedded value statement
The embedded value of Discovery at 31 December 2008 consists of the following
components:
the free surplus attributed to the covered business at the valuation date;
plus: the required capital to support the in-force covered business at the
valuation date;
plus: the present value of future shareholder cash flows from the in-force
business;
less: the cost of required capital and secondary tax on companies (STC).
The present value of future shareholder cash flows from the in-force covered
business is calculated as the value of projected future after-tax shareholder
cash flows of the business in force at the valuation date, discounted at the
risk discount rate.
The value of new business is the present value, at the point of sale, of the
projected future after-tax shareholder cash flows of the new business written
by Discovery, discounted at the risk discount rate, less an allowance for the
reserving strain (for Life), initial expenses, cost of capital and STC. The
value of new business is calculated on revised assumptions as at the current
reporting date.
For Life, the shareholder cash flows are based on the release of margins
under the Statutory Valuation Method (SVM) basis.
The embedded value includes the insurance and administration profits of all
the subsidiaries in the Discovery Holdings Group. In particular, it covers
business written through Discovery Life, Discovery Invest, Discovery Health,
Discovery Vitality and PruHealth. For Destiny Health and PruProtect, no
published value has been placed on the current in-force business.
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 as included in the embedded value statement for
the six months ended 31 December 2008. A copy of the auditors` unqualified
report is available for inspection at the company`s registered office.
Impact of changes to Professional Guidance
The embedded value of Discovery has been calculated in accordance with the
Actuarial Society of South Africa`s updated Professional Guidance Note PGN
107: Embedded Value Reporting (Version 4). The prior period results for Life,
Invest, Health and Vitality have been restated. The PruHealth embedded value
continues to be calculated using European Embedded Value Principles and
Guidance as specified by the CFO Forum, accordingly no restatement of the
PruHealth results are required.
This has resulted in a number of changes to the calculation methodology for
Life, Invest, Health and Vitality:
The risk discount rate has been determined using a top-down weighted average
cost of capital approach, with the required equity return calculated using
Capital Asset Pricing Model (CAPM) theory. The risk discount rate has been
set equal to the risk-free rate increased by a risk premium determined as a
market equity risk premium multiplied by the company`s beta coefficient. To
avoid short-term volatility, the Discovery beta coefficient is determined
using a 3-year moving average. Specifically for PruHealth, the risk discount
rate includes an additional margin to allow for additional risk and
uncertainty for this more recently established subsidiary in the current
economic environment.
This change in methodology has resulted in a reduction in the risk margin
from 3% previously to 1.54% at 31 December 2008. The risk discount rate,
calculated using the CAPM approach with specific reference to the Discovery
beta coefficient, reflects the historic performance of the Discovery share
price relative to the market and contains a lower allowance for non-market
related and non-financial risk. Previously, these risks were allowed for
through a higher margin in the risk discount rate. Investors may want to
consider the impact of the change in methodology and form their own view on
an appropriate allowance for the non-financial risks which have not been
modelled explicitly. The sensitivities of the value of in-force covered
business and the value of new business to changes in the risk discount rate
are shown in Tables 10 and 11 below.
The cost of capital has been calculated using the greater of the level of
statutory capital and the level of economic capital required to cover the
risks inherent in the in-force business. For Life, the required capital was
set equal to two times the statutory Capital Adequacy Requirement (CAR). For
Health and Vitality, the required capital was set equal to two times the
monthly renewal expense and Vitality benefit cost. For PruHealth, the
required capital was set equal to the statutory requirement and was
calculated as 18% of the annualised premium income.
It is assumed that, for the purposes of calculating the cost of required
capital, the Life required capital amount will be backed by surplus assets
consisting of 100% equities and the Health, Vitality and PruHealth required
capital amounts will be fully backed by cash. Allowance has been made for tax
and investment expenses in the calculation of the cost of capital. In
calculating the CGT liability, it is assumed that the portfolio is realised
every 5 years. The Life cost of capital is calculated using the difference
between the gross of tax equity return and the equity return net of tax and
expenses. The Health and PruHealth cost of capital is calculated using the
difference between the risk discount rate and the net of tax cash return.
The impact of these changes are shown in Table 1:
Table 1: Impact of PGN 107 changes on embedded value and value of new
business
30 June 31 December
R million 2008 2007
Published embedded 16 464 15 350
value
Impact of:
Change to risk 1 527 1 573
discount rate margin
Change to cost of (128) (114)
required capital
Restated embedded 17 863 16 809
value
Published value of 805 444
new business
Impact of:
Change to risk 284 153
discount rate margin
Change to cost of (16) (7)
required capital
Restated value of 1 073 590
new business
Table 2: Group
embedded value
Table 2: Group embedded value
31 December 30 June
31 December 2007 % 2008
R million 2008 Restated change Restated
Shareholders` funds 6 441 5 690 13 6 164
Adjustment to (3 809) (3 318) (3 879)
shareholders` funds
from published
basis(1)
Adjusted net worth 2 632 2 372 2 285
- Free Surplus 1 734 1 651 1 543
- Required 898 721 742
Capital(2)
Run-down costs for (75) (300) (190)
Destiny Health(3)
Value of in-force 18 536 15 348 16 560
covered business
before cost of
capital
Cost of required (245) (173) (203)
capital
Cost of STC(4) (425) (438) (589)
Discovery Holdings 20 423 16 809 22 17 863
embedded value
Number of shares 554.4 542.7 546.0
(millions)
Embedded value per R36.84 R30.97 19 R32.71
share
Diluted number of 592.0 592.0 592.0
shares (millions)
Diluted embedded R36.17 R30.15 20 R32.02
value per share(5)
(1) The published Shareholders` funds has been adjusted to eliminate net
assets under insurance contracts and deferred acquisition costs at December
2008 of R3,777 million (December 2007: R3,287 million; June 2008: R3,845
million) in respect of Life and R32 million (December 2007: R31 million; June
2008: R34 million) in respect of PruHealth.
(2) The required capital at December 2008 for Life is R484 million (December
2007: R365 million; June 2008: R348 million), for Health and Vitality is R314
million (December 2007: R281 million; June 2008: R291 million) and for
PruHealth is R100 million (December 2007: R75 million; June 2008: R103
million).
(3) The run-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.
(4) In line with Discovery`s current dividend policy, the cost of STC is
calculated assuming a 4.5 times dividend cover on the after-tax profits as
they emerge over the projection term. An STC rate of 10% is assumed. The
total STC charge has been allocated between the different business entities
based on their contribution to the total value of in-force covered business.
(5) The diluted embedded value per share is calculated by increasing the
embedded value by the value of the loan to the Discovery Holdings share
trust, and by increasing the number of shares by the number of shares issued
to the share incentive trust which have not been delivered to participants.
An allowance has been made for Discovery`s BEE transaction where the impact
is dilutive i.e. where the current embedded value per share exceeds the
current transaction value.
Table 3: Value of in-force covered business
Value before Cost of Value after
cost of required Cost cost of
capital capital
R million and STC capital of STC and STC
at 31 December
2008
Health and 8 613 (105) (196) 8 312
Vitality
Life and 9 515 (113) (220) 9 182
Invest(1)
PruHealth(2) 408 (27) (9) 372
Total 18 536 (245) (425) 17 866
at 31 December
2007
(Restated)
Health and 7 128 (94) (203) 6 831
Vitality
Life and 7 910 (58) (226) 7 626
Invest(1)
PruHealth(2) 310 (21) (9) 280
Total 15 348 (173) (438) 14 737
at 30 June
2008
(Restated)
Health and 7 798 (108) (277) 7 413
Vitality
Life and 8 401 (60) (299) 8 042
Invest(1)
PruHealth(2) 361 (35) (13) 313
Total 16 560 (203) (589) 15 768
(1) Included in the Life and Invest value of in-force covered business is
R121 million (December 2007: R7 million; June 2008: R47 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.
(2) The values shown for PruHealth reflect Discovery`s 50% shareholding in
PruHealth.
Table 4: Group embedded value earnings
Year
Six months ended ended
31 December 31 December 30 June
2008 2007 2008
R million Restated Restated
Embedded value at end of 20 423 16 809 17 863
period
Less: Embedded value at (17 863) (15 395) (15 395)
beginning of period
Increase in embedded value 2 560 1 414 2 468
Net issue of capital (100) (31) (73)
Dividends Paid 134 131 236
Minority share buy-back (7) 5 2
Transfer to hedging (12) (3) 16
reserve
Embedded value earnings 2 575 1 516 2 649
Annualised return on 30.9% 20.7% 17.2%
opening embedded value
Table 5: Components of Group embedded value earnings
Value of
in-force
covered
Cost of business
required less Cost Embedded
R million Net Worth capital of STC Value
Total profit from new (885) (29) 1 611 697
business (at point of
sale)
Profit from existing
business
*Expected return 121 2 857 980
*Change in methodology 774 (16) 162 920
and assumptions(1)
*Experience variances (55) (3) 334 276
Other initiative (186) - - (186)
costs(2)
Acquisition costs(3) (35) - - (35)
Foreign exchange rate (21) 4 (52) (69)
movements
Cost of STC(4) - - 114 114
Return on (122) - - (122)
shareholders` funds(5)
Embedded value (409) (42) 3 026 2 575
earnings
(1) The profits from changes in methodology and assumptions will vary over
time to reflect adjustments to the model and assumptions as a result of
changes to the operating and economic environment. The current period`s
changes are described in detail in Table 6 below (for previous periods refer
to previous embedded value statements).
(2) 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.
(3) 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.
(4) The positive change in the cost of STC is due to the increase in the
present value of STC credits following a reduction in the risk discount rate.
(5) Return on shareholders` funds is shown net of tax and management charges.
Table 6: Methodology and assumption changes
Health and Life and PruHealth
Vitality Invest
Net Value of Net Value of Net
R million worth in-force worth in-force worth
Modelling changes - - 6 (52) -
Economic assumptions - 577 (71) 1 766 -
Benefit Enhancements(1) - (152) (82) (177) -
Lapse assumption(2) - - 103 (933) -
Premium Increases - - (1) (13) -
Mortality and Morbidity - - 1 (1) -
Expenses(3) - (106) - - -
Tax - - - (20) -
Reinsurance(4) - - 818 (833) -
Vitality - - - - -
Total - 319 774 (263) -
PruHealth
Value of
R million in-force Total
Modelling changes - (46)
Economic assumptions 139 2 411
Benefit Enhancements(1) - (411)
Lapse assumption(2) (29) (859)
Premium Increases - (14)
Mortality and Morbidity (55) (55)
Expenses(3) 32 (74)
Tax - (20)
Reinsurance(4) - (15)
Vitality 3 3
Total 90 920
(1) The Life and Invest benefit enhancements relate to improvements in the
risk benefits following the June 2008 product launch being made available to
existing policyholders. The change also includes benefit enhancements
relating to the launch of the 2009 Vitality benefits.
(2) The Life and Invest lapse assumption has been increased following higher
than expected lapse experience, and to allow for higher lapses in future as a
result of the uncertain economic environment.
(3) The Health and Vitality expense assumption has been increased to allow
for higher costs due to the provision of Pharmaceutical Benefit Management
(PBM) services to the Discovery Health Medical Scheme.
(4) The reinsurance change relates to the impact of financing reinsurance
arrangements which were effective from 31 December 2008.
Table 7: Experience variances
Health and Life and PruHealth
Vitality Invest
Net Value of Net Value of Net
R million worth in-force worth in-force worth
Renewal Expenses 23 - (10) - (19)
Other Expenses(1) (23) - (5) - -
Economic (1) 118 14 123 -
assumptions(2)
Extended modelling - 101 - 5 -
term(3)
Lapses and - 27 (11) (87) -
surrenders(4)
Policy alterations - 3 (104) 165 -
Premium income - - 3 5 -
Mortality and - - 89 7 (28)
morbidity
Backdated - - (16) (47) -
cancellations
Tax (1) - 12 (10) (12)
Gym start-up costs - - - - (11)
Reinsurance - - - - 94
Other 14 - (32) 30 (31)
Total 12 249 (60) 191 (7)
Value of
R million in-force Total
Renewal Expenses - (6)
Other Expenses(1) - (28)
Economic assumptions(2) - 254
Extended modelling 13 119
term(3)
Lapses and surrenders(4) (39) (110)
Policy alterations - 64
Premium income - 8
Mortality and morbidity - 68
Backdated cancellations - (63)
Tax - (11)
Gym start-up costs - (11)
Reinsurance (76) 18
Other (7) (26)
Total (109) 276
(1) Other expenses include expenses which are not expected to recur.
(2) For Life and Invest, the economic assumptions variance relates primarily
to higher than expected premium and benefit increases due to higher than
expected inflation over the period. For Health and Vitality, it relates to
the inflation-linked administration and managed care fee increase in 2009
which was higher than the long-term inflation assumption in the embedded
value model due to higher than expected inflation over the period.
(3) The projection term for Health, Vitality, PruHealth and Group Life at 31
December 2008 has not been changed from that used in the 30 June 2008
embedded value. Thus, an experience variance arises because the total term of
the in-force covered business is effectively increased by six months.
(4) Included in the Health and Vitality lapse experience variance is an
amount of R281 million in respect of members joining existing employer groups
during the period, offset by an amount of negative R302 million in respect of
members leaving existing employer groups. A positive variance of R48 million
is due to lower than expected lapses.
Table 8: Embedded value of new business
Six months ended Year
ended
31 December 31 December % 30 June
2007 2008
R million 2008 Restated change Restated
Health and Vitality
Present value of future 158 95 246
profits from new
business at point of
sale
Cost of required (4) (4) (9)
capital
Cost of STC (2) (3) (9)
Present value of future
profits from new
business
at point of sale after 152 88 73 228
cost of required
capital and STC
New business annualised 499 449 11 1,079
premium income(1)
Life and Invest
Present value of future 540 504 855
profits from new
business at point of
sale(2)
Cost of required (21) (9) (18)
capital
Cost of STC (12) (14) (29)
Present value of future 507 481 5 808
profits from new
business at point of
sale after cost of
required capital and
STC
New business annualised 654 435 50 964
premium income(3)
Annualised profit 8.3% 11.8% 8.4%
margin(4)
Annualised profit 10.2% 12.1% 9.2%
margin excluding Invest
Business
PruHealth(5)
Present value of future 45 25 48
profits from new
business at point of
sale
Cost of required (4) (3) (10)
capital
Cost of STC (3) (1) (1)
Present value of future 38 21 81 37
profits from new
business at point of
sale after cost of
required capital and
STC
New business annualised 108 94 15 219
premium income(6)
Annualised profit 3.9% 3.0% 2.3%
margin(4)
(1) Health new business annualised premium income is the gross contribution
to the medical schemes. For embedded value purposes, Health new business is
defined as individuals and members of new employer groups, and includes
additions to first year business. There have been no changes to the
definition of new business since the previous valuation.
The new business annualised premium income shown above excludes premiums in
respect of members who join an existing employer after the first year, as
well as premiums in respect of new business written during the period but
only activated after 31 December 2008.
The total Health and Vitality new business annualised premium income written
over the period was R1,505 million (December 2007: R1,311 million; June 2008:
R2,834 million).
The increase in the value of new business is due mainly to a favourable
change in the mix of business driven by strong membership growth on the non-
Keycare Discovery Health Medical Scheme benefit options over the period.
(2) Included in the Life and Invest value of new business is R26 million in
respect of investment management services provided on off balance sheet
investment business.
(3) Life new business is defined as policies which incepted during the
reporting period and which are on risk at the valuation date. Invest new
business is defined as business where at least one premium has been received
and which has not been refunded after receipt. There have been no changes to
the definition of new business since the previous valuation.
The new business annualised premium income of R654 million (single premium
APE: R88 million) shown above excludes automatic premium increases and
servicing increases in respect of existing business. The total Life new
business annualised premium income written over the period, including both
automatic premium increases of R201 million and servicing increases of R138
million was R993 million (single premium APE: R88 million). Single premium
business is included at 10% of the value of the single premium.
Policy alterations, including Discovery Retirement Optimisers added to
existing Life Plans are shown in Table 7 as experience variances and not
included as new business. Previously, Discovery Retirement Optimisers added
to existing Life Plans were included in the value of new business.
Term extensions on existing contracts are not included as new business.
(4) The annualised profit margin is the value of new business expressed as a
percentage of the present value of future premiums.
(5) The values shown in this table for PruHealth reflect Discovery`s 50%
shareholding in PruHealth.
(6) PruHealth new business is defined as individuals and employer groups
which incepted during the reporting period. The new business annualised
premium income shown above has been adjusted to exclude premiums in respect
of members who join an existing employer group after the first month as well
as premiums in respect of new business written during the period but only
activated after 31 December 2008. There have been no changes to the
definition of new business since the previous valuation.
Table 9: Embedded value economic assumptions
31 December 31 December 30 June
2008 2007 2008
Restated Restated
Beta coefficient
South Africa 0.44 0.41 0.44
United Kingdom 0.44 0.70 0.74
Equity risk premium
South Africa 3.50 3.50 3.50
United Kingdom 4.00 4.00 4.00
Risk discount rate
(%)
- Health and 9.04 10.19 12.54
Vitality
- Life and Invest 9.04 10.19 12.54
- PruHealth 6.00 8.00 8.70
Rand/GB Pound
exchange rate
Closing 13.60 13.63 15.60
Average 14.75 14.00 14.66
Medical inflation
(%)
South Africa 7.50 7.75 10.00
United Kingdom Current Current Current
levels levels levels
reducing reducing reducing
to 6.00% to 7.50% to 7.50%
over the over the over the
projection projection projection
period period period
Expense inflation
and CPI (%)
South Africa 4.50 4.75 7.00
United Kingdom 3.00 4.00 4.00
Pre-tax investment
return (%)
South Africa - Cash 6.00 7.25 9.50
- Bonds 7.50 8.75 11.00
- Equity 11.00 12.25 14.50
United Kingdom - Cash 3.75 5.25 5.25
Dividend cover ratio 4.5 times 4.5 times 4.5 times
Income tax rate (%)
South Africa 28.00 29.00 28.00
United Kingdom 28.00 28.00 28.00
Projection term
- Health and 20 years 20 years 20 years
Vitality
- Group Life 10 years 10 years 10 years
- PruHealth 20 years 20 years 20 years
Life mortality, morbidity and lapse assumptions were derived from internal
experience, where available, augmented by reinsurance and industry
information. An additional lapse rate is assumed over the next 18 months to
allow for the potential impact of the current economic climate on
policyholder lapses. A further increase to the future lapse rate assumptions
has been made to allow for the impact of the uncertain economic environment.
The Health lapse assumptions were based on the results of recent experience
investigations. The lapse rate for the projection term after 10 years was set
above current experience.
The PruHealth assumptions were derived from internal experience augmented by
industry information. Best estimate morbidity assumptions and forecast
Vitality costs allow for the impact of management actions. An additional
lapse rate is assumed over the next two years for group business to allow for
the potential impact of the current economic climate on lapses.
Renewal expense assumptions were based on the results of the latest expense
and budget information. A notional allocation of corporate overhead expenses
has been made to each of the subsidiary companies based on managements` view
of each subsidiary`s contribution to overheads.
The investment return assumption was based on a single interest rate derived
from the risk free zero coupon government bond yield curve. Other economic
assumptions were set relative to this yield. The current and projected tax
position of the policyholder funds within the Life company has been taken
into account in determining the net investment return assumption.
Sensitivity to the embedded value assumptions
The sensitivity of the embedded value and the value of new business at 31
December 2008 to changes in the risk discount rate is shown below. In
determining the values at different risk discount rates, all other
assumptions have been left unchanged.
Table 10: Embedded value sensitivity to risk discount rate
Risk Published Risk
discount risk discount discount
R million rate -1% rate rate +1%
Adjusted net worth less run- 2 557 2 557 2 557
down costs for Destiny Health
Value of in-force covered 20 398 18 536 16 976
business before cost of
capital
Cost of required capital (233) (245) (255)
Cost of STC (475) (425) (385)
Discovery Holdings embedded 22 247 20 423 18 893
value
Table 11: Value of new
business sensitivity to risk
discount rate
Risk Published Risk
discount risk discount discount
R million rate -1% rate rate +1%
Present value of future 919 743 600
profits from new business at
point of sale
Cost of required capital (32) (29) (28)
Cost of STC (20) (17) (13)
Present value of future 867 697 559
profits from new business at
point of sale after cost of
required capital and STC
Review of Group results
New business annualised premium income and gross inflows under management
include flows of the schemes Discovery administers as well as 100% of the
business conducted together with its joint venture partners.
New business annualised premium income (excluding Destiny Health) increased
by 28% for the six-months ended 31 December 2008.
New business annualised premium income
December December %
R million 2008 2007 change
Discovery Health 1 456 1 265 15
Discovery Life 993 627 58
Discovery Vitality 49 46 7
PruHealth 271 248 9
PruProtect 29 5 >100
New business API excluding Destiny 2 798 2 191 28
Health
Destiny Health* 80 209 -62
New business API of Group 2 878 2 400 20
* New business in Destiny Health relates to new members joining existing
business in the current year
Gross inflows under management increased by 18% for the six-months ended 31
December 2008.
Gross inflows under management
December December %
R million 2008 2007 change
Discovery Health 11 211 9 977 12
Discovery Life 2 380 1 446 65
Discovery Vitality 437 387 13
Destiny Health 283 520 -46
PruHealth 701 431 63
PruProtect 22 3 >100
Gross inflows under management 15 034 12 764 18
Less: collected on behalf of third (10 700) (9 223) 16
parties
Discovery Health (9 897) (8 833)
Discovery Life (386) -
Destiny Health (55) (173)
PruHealth (351) (216)
PruProtect (11) (1)
Gross income of Group 4 334 3 541 22
Earnings
The following table shows the main components of the increase in Group profit
from operations for the six-months ended 31 December 2008:
Earnings source
December December %
R million 2008 2007 change
Discovery Health 475 389 22
Discovery Life 618 479 29
Discovery Vitality 23 21 10
PruHealth (64) (83) 23
Operating profit from established 1 052 806 31
businesses
Discovery Invest (83) (66) -26
PruProtect (104) (42) >100
Destiny Health (119) (80) -49
Group operating profit before 746 618 21
premium deficiency reserve and
unbundling costs
Transfer to premium deficiency (27) -
reserve
Unbundling costs - (18)
Profit from operations before 719 600 20
investment income, impairment and
BEE expenses
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 obtained no tax relief for the PruHealth losses for the six-month
period to 31 December 2008. For the six-month period ending 31 December 2007,
Discovery obtained tax relief for 100% of the PruHealth losses as this tax
asset was ceded to Prudential Assurance Company in the UK ("Prudential"). R26
million was included in finance charges relating to a settlement discount on
early payment by Prudential for these tax losses in that period.
Tax relief is obtained for 100% of the PruProtect losses through Prudential.
Reinsurance contracts
Included in cash and cash equivalents at December 2008 is R750 million
received in terms of a quota share treaty entered into by Discovery Life.
This treaty effectively reinsures approximately 15% of the negative reserve
as at 31 December 2008. The liability in respect of this treaty has been
included in liabilities arising from reinsurance contracts. This amount has
been shown as a receipt arising from reinsurance contract on the face of the
income statement and the full amount has been transferred out through the
change in liabilities under reinsurance contracts.
Discovery Life also entered into a reinsurance contract to reinsure lapse
risk (for the next five years) of up to 22% of the negative reserve in force
as at 31 December 2008.
Investments
Investments have increased due to the sale of Discovery Invest products.
Discovery has classified its shareholder investments as available-for-sale
financial instruments. As such, gains and losses are ordinarily taken
directly to reserves, until realised. When realised, the resulting gain or
loss is taken to profit and loss but excluded from the calculation of
headline earnings.
Due to the significant decrease in the equity markets during the last six
months of 2008, Discovery had to assess at 31 December 2008 whether objective
evidence existed that the equity instruments classified as available-for-sale
financial assets were impaired at that date. A significant or prolonged
decline in the fair value of an investment in an equity instrument below its
cost is objective evidence of impairment. Discovery has taken the view that a
30% decline in the fair value of an investment in an equity instrument below
cost would be classified as significant and a period of nine months or more
would be a prolonged decline.
Based on this view, Discovery has impaired equity instruments classified as
available-for-sale financial assets that had a decline of 30% or more in the
fair value of the asset below cost. This amounted to R63 million and has been
taken through profit and loss. Had a decline of 20% or more been used, an
impairment of R89 million would have been taken through profit and loss.
The `prolonged decline` criteria was not met at this date.
Balance sheet
The increase in the assets arising from insurance contracts of R584 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.
At 31 December 2008, Destiny Health raised a Premium Deficiency Reserve of
US$2.8 million (R27 million). This relates to future losses that will be
incurred on a block of business due to an onerous contract. This reserve has
been included in liabilities arising from insurance contracts.
Accounting policies
The interim results have been prepared in accordance with International
Financial Reporting Standards (IFRS) including IAS 34, as well as the South
African Companies Act 61 of 1973, as amended, and are consistent with the
accounting policies applied in the last annual report as well as 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 R7
million in the six-month period ended 31 December 2008 (2007: R11 million) in
accordance with the requirements of IFRS 2.
An additional R37 million (2007: R19 million) in respect of options granted
under employee share incentive schemes has been expensed in the income
statement for the period 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
Dr Judy Dlamini has resigned as non-executive director from the board of
Discovery Holdings Limited, with effect from 30 November 2008, to pursue her
philanthropic and business interests. Judy has added tremendous value to the
Discovery board during her tenure and her contribution will be missed.
Dividend policy and capital
A final dividend of 23 cents per share was paid on 20 October 2008.
The directors are of the view that the Discovery Group is adequately
capitalised at this time. On the statutory basis the capital adequacy
requirement of Discovery Life was R242 million (2007: R183 million) and was
covered 6.4 times (2007: 7.4 times).
Cash dividend declaration:
The board has declared an interim cash dividend of 25.5 cents per share. The
salient dates are as follows:
- Last date to trade "cum" dividend Friday, 13 March 2009
- Date trading commences "ex" dividend Monday, 16 March 2009
- Record date Friday, 20 March 2009
- Date of payment Monday, 23 March 2009
Share certificates may not be dematerialised or rematerialised between
Monday, 16 March 2009 and Friday, 20 March 2009, both days inclusive.
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
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, P Cooper, Dr NJ Dlamini**, SB Epstein (USA),
NS Koopowitz*, Dr TV Maphai, HP Mayers*, AL Owen (UK), A Pollard*, JM
Robertson* (CIO), SE Sebotsa, T Slabbert, B Swartzberg*,
SV Zilwa
*Executive **Resigned 30 November 2008
Date: 19/02/2009 10:00:02 Produced by the JSE SENS Department.
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