| Wed 2 Sep 2009, 8:48 | | 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 2009
Discovery Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
JSE share code: DSY ISIN: ZAE000022331
Audited Group results and cash dividend declaration for the year ended 30 June
2009
Operating profit +32% to R1.7 billion
New business API excluding Destiny +20% to R5 775 million
Diluted embedded value per share +12% to R35.83
Total dividend for the year +31% to 58.5 cents
Introduction
The performance of Discovery Holdings Ltd ("Discovery", "the company" or "the
Group") over the year has exceeded expectation, despite the difficult economic
conditions and the environment`s complexity. The period has been characterised
by sound performances across all businesses, record levels of new business
production, and strong earnings growth. Discovery`s methodology of organic
growth through innovation to meet our clients` needs has proved successful in
negating the impact of adverse market conditions, with the following features
contributing to the group`s strong performance and success:
1. Client-centric innovation through Discovery`s integration strategy:
Discovery`s success is based on meeting the needs of its clients. To this end,
the product strategy is based on innovation that provides efficiency, value
for money and sustainability. Discovery offers consumers an integrated product
suite that spans their financial and protection needs, providing them with a
range of unique benefits and cost efficient, comprehensive product solutions
that are particularly appropriate in the current recessionary environment.
The launch of Vitality`s HealthyFoodTrade Mark Benefit in 2009 is one such
innovation, saving consumers up to 25% on a range of products at Pick n Pay
while promoting healthy nutrition. Other innovations rolled out during the
period included Discovery Health`s Delta Plans, which have generated a saving
of 20% on contributions for consumers, and the introduction of lower income
bands within the KeyCare Plans, resulting in a contribution saving of 30% for
families at the lowest income levels. Discovery Life`s Cover Integrator has
made life assurance more cost-efficient, enabling policyholders to purchase
additional life cover at a saving of up to 50% on the additional cover.
The combination of these factors culminated in the announcement in August 2009
that Discovery Health and Discovery Life were voted the best medical aid and
long-term insurance brands respectively in the business to business category
of the 2009 Sunday Times Top Brands survey.
2. Quality and financial strength: It is well documented that during difficult
economic times, consumers migrate to companies that display the attributes of
quality and financial strength. Discovery`s reputation for financial
stability, quality and innovation has proven to be a great asset in attracting
new business and retaining existing clients. Importantly, Discovery`s ethos
and methodologies are based on financial prudence as well as product
innovation and excellence. Discovery has no gearing and all its risk-taking
entities enjoyed record-levels of capital strength in the period. This enabled
Discovery to accelerate its investment into research and development, and
other growth strategies.
3. Distribution excellence: Discovery`s distribution capability is uniquely
powerful, comprising a substantial and efficient broker distribution network
and recently-formed tied agency force of exceptional quality. This combination
has also contributed strongly to Discovery`s resilience during the
recessionary cycle.
Discovery Health
Discovery Health`s performance exceeded expectation. The company operates in a
complex environment marked by continuous regulatory and policy shifts.
Further, it operates in areas of great necessity, impact and consequence. To
ensure its relevance and sustainability, Discovery Health`s fundamental
strategy is to create for its members an excellent healthcare system that is
affordable, comprehensive and sustainable. The central measure of Discovery
Health`s success, therefore, is its performance on behalf of the members of
the Discovery Health Medical Scheme and other schemes under its management.
In terms of this performance, the Scheme`s contribution inflation is
comfortably in line with member expectation while the value of benefits paid
per member has grown in excess of inflation. Over the 12 months to June 2009,
Scheme reserves are estimated to have grown by R700 million and are on track
to reach the R6 billion mark by the end of the calendar year, while membership
increased by 45 000 lives. In addition, the scale of Discovery Health`s
network arrangements has expanded, enabling more members to access care
without co-payments. Discovery Health`s GP Network now covers nearly 80% of
members and payment arrangements with specialists grew to 85%. The Delta Plan
technology and KeyCare Networks have enabled Discovery Health to offer
affordable plans across the widest range of income groups.
The strength and consistency of this performance has enabled the company to
grow its profitability, scale and infrastructure significantly, placing it in
a particularly strong position going forward. Discovery Health estimates that
the combination of its risk-management capability, provider networks, payment
arrangements and managed care interventions has created a healthcare network
that is 10% less expensive to scheme members than its competitors, within a
robust, high-touch service environment.
Due to its size and impact, Discovery Health is committed to building and
improving the healthcare system - not for its members alone, but for all South
Africans. Our aim is to work with Government in its pursuit of healthcare
reform and the implementation of a National Health Insurance System (NHI) to
the benefit of all South Africans. Discovery Health is convinced that the NHI
will require the constructive and creative co-operation of all stakeholders to
make it workable and sustainable. To this end, Discovery will continue to make
available its expertise and resources, and will engage positively and
constructively.
Discovery Life
Discovery Life`s performance over the period was particularly pleasing. The
company`s strategy is to pursue product and distribution excellence, based on
a foundation of financial strength, and to use the Group`s assets to innovate
and integrate its products in order to meet the needs of its clients. During
the period, the rigorous application of these strategies yielded excellent
results, with new business increasing by 31% and profits growing by 20%.
The product strategy was particularly successful during the period, with new
products gaining significant traction. Policyholders purchased life cover to
the value of approximately R30bn through the new Cover Integrator. The
Lifetime Benefit technology, also launched during the period and applied to
severe illness and disability benefits, served to increase the take-up of the
Severe Illness Benefit by 10%, Capital Disability Benefit by 5% and Income
Continuation Benefit by 10%.
In addition, the level of broker support increased, with the number of brokers
selling Discovery Life products increasing by more than 650 to a total of 5
722 brokers. Discovery`s tied agency force grew from 149 to 206 agents
nationwide, achieving exceptional levels of productivity.
During recessionary cycles, lapses of life policies tend to increase, and
Discovery Life`s lapse rate did escalate during this period. However, the
lapse rate remained below the assumptions used in the company`s reserving
basis, leading to a fairly minimal impact on Discovery Life`s profitability.
Applying a more conservative view of future lapses did affect the embedded
value. However, the other aspects of performance were exceptional and
sufficient to offset the effect of lapses, enabling the company to generate
positive experience variances despite the environment. In addition, record
levels of quality new business were transacted, with margins being maintained,
enabling the company to increase its embedded value by 8% to R8 686 million.
Having restructured its negative reserve during the period, Discovery Life
continues to enjoy considerable capital robustness and flexibility. This
positions it strongly for continued future growth with limited recourse to
shareholder funding.
Discovery Invest
Discovery Invest`s performance was pleasing, especially in the context of the
economic environment. Launched towards the end of 2007, the company began
actively trading during 2008, precisely at the start of the economic crisis
and the resulting turmoil in the financial markets. Discovery has used this
time to build significant capability and capacity within Discovery Invest,
manifesting in a business that is well positioned for its market, and assets
under management of R4.2 billion by year-end.
Using Discovery`s integration capabilities to offer differentiated and
superior products has proven a successful strategy. For example, Discovery
Invest recently launched the Upfront Investment Integrator, a product
structure that utilises the efficiency of integration to boost investors` fund
allocations by up to 26%, thereby mitigating the effects of falling markets.
Despite the depressed investment market, Discovery Invest`s new business
production was pleasing and in line with expectation. Importantly, Discovery
Invest`s distribution channels were increased and enhanced to facilitate
Discovery Invest`s offerings.
Initiatives like the Discovery Invest Leadership Summit were rolled out to
build the company`s presence, brand, and to showcase its capabilities.
Operating losses were narrowed during the period as assets under management
continue to grow.
Discovery Vitality
Vitality`s performance during the period exceeded expectation. The company`s
role is foundational within the broader group and Vitality`s role of
facilitating integration, driving better selection and enhancing mortality and
morbidity experience was particularly important during the period under
review.
In the early phases of Vitality`s roll-out, the company focused on creating
rewards and structures to drive behavioural change. During the period under
review, the focus shifted to understanding the science behind Vitality and
measuring the clinical and actuarial effects of Vitality on mortality,
morbidity, and persistency. Academic studies were conducted with researchers
from the Universities of Cape Town and the Witwatersrand and the Harvard
Medical School, manifesting in key papers that have been accepted for
publication in a range of international journals.
It is this understanding that provides the foundation for the further
integration of Discovery`s products, and their ability to offer unique value
to our clients. Particularly important was the launch of the HealthyFood
BenefitTrade Mark with Pick n Pay. This has been one of the boldest steps in
the evolution of Vitality and provides an exceptional foundation for future
product innovation. Some of the key Discovery innovations for 2010 will
incorporate elements of the HealthyFoodTrade Mark Benefit. The market`s
reception of the benefit has been exceptional and, by the end of the four-
month start-up period, over 715 000 trolleys of HealthyFoodTrade Mark had been
purchased.
PruHealth
The deep recession in the UK has had an impact on the performance of
PruHealth, Discovery`s health insurance joint venture with the Prudential
plc("Prudential"). Despite this, solid progress was made on a number of fronts
and the business remains well positioned in the UK private medical insurance
market.
Leveraging off Discovery`s consumer-directed health assurance and operational
infrastructure and Prudential`s established brand strength in the UK financial
services market, PruHealth`s performance since its launch has been
characterised by clear product leadership and consistent new business growth.
The number of lives insured grew to 212 000, an increase of 20% for the
period. PruHealth`s market share accounts for 2.5% of the market in terms of
in-force lives, and it currently ranks 5th in the UK`s private medical
insurance market overall. Premiums written in the period for the in-force
business increased by 37% to GBP86 million.
Loss ratios have deteriorated to some extent during the past six months,
largely due to the recessionary environment in the UK. Discovery`s share of
the losses reduced by 34% to R103 million. The deterioration in loss ratios
will delay the reaching of the breakeven target. However, evidence from
previous recessionary periods indicates that short-term increases in the loss
ratio are an industry phenomenon and are likely to return to normal as the
economy stabilises.
PruHealth has a comprehensive set of initiatives underway to manage the
profitability of the business and to position it well to continue to take
advantage of opportunities in the market. The UK is showing early signs of
economic recovery, and as government budgets tighten, the National Health
Service will face increasing funding pressure. This leaves private health
insurers to play a bigger role going forward.
PruHealth will continue to develop its competitive position through amendments
to the product offering, improving the clinical and financial robustness of
the Vitality programme, the introduction of lower cost hospital network plans,
and enhanced managed care initiatives.
Vitality is a key competitive differentiator for PruHealth and the level of
engagement of PruHealth members continues to be encouraging. Vitality impacts
positively on health costs, and has a significant impact on retention levels.
The focus for PruHealth continues to be on increasing sales, growing the in-
force book and managing its loss ratio, leading to sustainable profitability
over the longer term.
PruProtect
PruProtect`s performance was pleasing. During the period, the company focused
extensively on enhancing the product range and ensuring its appropriateness
for the UK market, as well as building a substantial distribution capability.
This resulted in a significant increase in the levels and quality of new
business, with average premiums and ancillary benefits purchased exceeding
expectation.
While the UK life assurance market is of considerable scale, transacting
business is highly capital intensive, and traditional products are
commoditised with low margins. PruProtect`s strategy of focusing on product
innovation and high-advice, face-to-face distribution capabilities are crucial
to penetrating the market and building a profitable business.
During the period, considerable development took place within the company`s
funding and capital structures to ensure the business is not overly capital
intensive and with scale, becomes highly profitable with significant returns
on capital. This approach uses the actuarial structures built within Discovery
Life, where the negative reserves generated by new business are funded by the
positive reserves within the Prudential`s Life Fund. This enables the capital
intensive nature of the business to be mitigated substantially, and ensures
that with increasing scale, the returns on capital will be superior.
Discovery remains optimistic about the potential of PruProtect, particularly
because of the combination of product receptivity, distribution capability and
capital efficiency.
Destiny Health and Vitality
The wind-down of Destiny Health, Discovery`s US health insurance subsidiary,
has progressed according to plan. Membership has reduced from 60 000 lives to
approximately 600 lives, with the cost base being dynamically realigned to
support the diminishing scale of the business. In addition to the wind-down,
we are in the process of building out the core Vitality capability in the
United States. This will serve as the research and development and clinical
and scientific hub for Vitality globally. The positioning of Vitality in the
US will enable Discovery to access the latest clinical and behavioural
research needed to support and enhance the Vitality programme, as well as to
pursue niche opportunities in the US as they arise.
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
Income statement
for the year ended 30 June 2009
Group Group %
R million 2009 2008 change
Insurance premium revenue 5 186 4 293 21
Reinsurance premiums (870) (780)
Net insurance premiums 4 316 3 513
Fee income from administration business 2 885 2 532 14
Receipt arising from reinsurance contracts 750 -
Investment income 236 210
Net realised gains on available-for-sale 65 252
financial assets
Net fair value (losses)/gains on financial (9) 25
assets at fair value through profit or
loss
Vitality income 944 791 19
Net income 9 187 7 323
Claims and policyholders` benefits (2 583) (2 156)
Insurance claims recovered from reinsurers 707 601
Net claims and policyholders` benefits (1 876) (1 555)
Acquisition costs (1 313) (1 132)
Marketing and administration expenses (4 329) (3 784)
Recovery of expenses from reinsurers 223 148
Transfer from assets/liabilities under 106 749
insurance contracts
- change in assets arising from insurance 1 292 791
contracts
- change in liabilities arising from
insurance contracts -
Premium deficiency reserve (21) -
- change in liabilities arising from (306) (55)
insurance contracts - Other
- change in liabilities arising from (859) 13
reinsurance contracts
Fair value adjustment to liabilities under (35) (14)
investment contracts
Profit before impairment and BEE expenses 1 963 1 735 13
Impairment of financial instruments held (96) -
as available-for-sale
BEE expenses (13) (23)
Profit from operations 1 854 1 712
Finance costs (16) (52)
Foreign exchange (loss)/profit (23) 4
Share of loss from associate (1) -
Profit before taxation 1 814 1 664 9
Taxation (590) (506)
Profit for the year 1 224 1 158 6
Attributable to:
Equity holders 1 212 1 156
Minority interests 12 2
1 224 1 158
Earnings per share for profit attributable
to the equity holders during the year
(cents):
- basic 219.9 212.9 3
- diluted 219.3 211.1 4
Headline earnings
for the year ended 30 June 2009
Group Group %
R million 2009 2008 change
Headline earnings per share (cents):
- undiluted 224.7 172.0 31
- diluted 224.1 170.5 31
The reconciliation between earnings and
headline earnings is shown below:
Net profit attributable to equity 1 212 1 156
shareholders
Adjusted for:
- realised profit on available-for-sale (56) (222)
investments net of CGT
- impairment on available-for-sale
investments net of CGT 82 -
Headline earnings 1 238 934 33
Weighted number of shares in issue (000`s) 551 043 543 016 1
Diluted weighted number of shares (000`s) 552 591 547 530 1
Balance sheet
at 30 June 2009
Group Group
R million 2009 2008
ASSETS
Property and equipment 199 291
Investment property 20 -
Intangible assets including deferred acquisition costs 520 243
Assets arising from insurance contracts 5 449 4 165
Investment in associate - 1
Financial assets
- Equity securities 2 469 2 055
- Equity linked notes 693 459
- Debt securities 488 173
- Inflation linked securities 20 65
- Money market 958 1 034
- Derivatives 68 35
- Loans and receivables including insurance 1 846 1 478
receivables
Deferred income tax 239 128
Current income tax asset 83 -
Reinsurance contracts 142 99
Cash and cash equivalents 1 737 812
Total assets 14 931 11 038
EQUITY
Capital and reserves
Share capital and share premium 1 548 1 468
Other reserves 540 721
Retained earnings 4 925 3 975
Total equity 7 013 6 164
LIABILITIES
Liabilities arising from insurance contracts 1 778 1 061
Liabilities arising from reinsurance contracts 1 104 260
Financial liabilities
- Investment contracts at fair value through profit or 2 161 1 230
loss
- Borrowings at amortised cost 32 37
- Derivatives 12 6
Deferred income tax 1 402 1 031
Deferred revenue 86 70
Provisions 65 54
Trade and other payables 1 278 1 116
Current income tax liabilities - 9
Total liabilities 7 918 4 874
Total equity and liabilities 14 931 11 038
Cash flow statement
for the year ended 30 June 2009
Group Group
R million 2009 2008
Cash flow from operating activities 1 211 385
Cash generated by operations 2 649 1 103
Policyholder net investments (1 270) (638)
Dividends received 67 33
Interest received 216 194
Interest paid (16) (25)
Taxation paid (435) (282)
Cash flow from investing activities (50) (269)
Net disposals/(purchases) of investments 105 (76)
Purchase of equipment (21) (132)
Purchase of intangible assets (134) (66)
Decrease in loans receivable - 5
Cash flow from financing activities (177) (334)
Proceeds from issuance of ordinary shares 111 50
Dividends paid to equity holders (278) (236)
Minority share buy-back (5) (8)
Loan to share trust participants - (109)
Repayment of borrowings (5) (31)
Net increase/(decrease) in cash and cash equivalents 984 (218)
Cash and cash equivalents at beginning of year 812 996
Exchange (losses)/gains on cash and cash equivalents (59) 34
Cash and cash equivalents at end of year 1 737 812
Statement of changes in equity
for the year ended 30 June 2009
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 2008
Balance at 1 July 2007 1 393 257 542 115
Staff scheme shares 75 - - -
released
Minority share buy-back - - - -
Share-based payments - 32 - -
Unrealised losses on - - (25) -
investments
Capital gains tax on - - 4 -
unrealised gains on
investments
Realised gains on - - (252) -
investments transferred
to income statement
Capital gains tax on - - 30 -
realised gains on
investments
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
30 June 2009
Balance at 1 July 2008 1 468 289 299 151
Staff scheme shares 103 - - -
released
Minority share buy-back - - - -
Increase in treasury (23) - - -
shares
Share-based payments - 18 - -
Unrealised losses on - - (253) -
investments
Capital gains tax on - - 39 -
unrealised gains on
investments
Realised gains on - - (65) -
investments transferred
to income statement
Capital gains tax on - - 9 -
realised gains on
investments
Impairment of investments - - 96 -
transferred to income
statement
Capital gains tax on - - (13) -
impairment of investments
Currency translation - - - (55)
differences
Transfer from hedging - - - -
reserve
Net profit for the period - - - -
Dividends paid to equity - - - -
holders
Realised profit on - - - -
minority share buy-back
Balance at 30 June 2009 1 548 307 112 96
Attributable to
equity holders of
the Company
Hedging Retained Minority
R million reserve earnings interest Total
30 June 2008
Balance at 1 July 2007 (2) 3 057 - 5 362
Staff scheme shares - - - 75
released
Minority share buy-back - - (2) (2)
Share-based payments - - - 32
Unrealised losses on - - - (25)
investments
Capital gains tax on - - - 4
unrealised gains on
investments
Realised gains on - - - (252)
investments transferred
to income statement
Capital gains tax on - - - 30
realised gains on
investments
Currency translation - - - 36
differences
Transfer to hedging (16) - - (16)
reserve
Net profit for the period - 1 156 2 1 158
Dividends paid to equity - (236) - (236)
holders
Realised loss on minority - (2) - (2)
share buy-back
Balance at 30 June 2008 (18) 3 975 - 6 164
30 June 2009
Balance at 1 July 2008 (18) 3 975 - 6 164
Staff scheme shares - - - 103
released
Minority share buy-back - - (12) (12)
Increase in treasury - - - (23)
shares
Share-based payments - - - 18
Unrealised losses on - - - (253)
investments
Capital gains tax on - - - 39
unrealised gains on
investments
Realised gains on - - - (65)
investments transferred
to income statement
Capital gains tax on - - - 9
realised gains on
investments
Impairment of investments - - - 96
transferred to income
statement
Capital gains tax on - - - (13)
impairment of investments
Currency translation - - - (55)
differences
Transfer from hedging 43 - - 43
reserve
Net profit for the period - 1 212 12 1 224
Dividends paid to equity - (269) - (269)
holders
Realised profit on - 7 - 7
minority share buy-back
Balance at 30 June 2009 25 4 925 - 7 013
Segmental information
for the year ended 30 June 2009
Health
United
South States of United
R million Africa America Kingdom
30 June 2009
Income statement
Insurance premium revenue 25 234 679
Reinsurance premiums (2) (11) (115)
Net insurance premiums 23 223 564
Fee income from administration 2 751 - 4
business
Receipt arising from reinsurance - - -
contract
Investment income - shareholders 31 1 6
Investment income - policyholders - - -
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 - 37 -
Net income 2 805 261 574
Claims and policyholders` benefits (10) (376) (515)
Insurance claims recovered from 1 37 29
reinsurers
Net insurance benefits and claims (9) (339) (486)
Acquisition costs - (11) (52)
Marketing and administration (1 737) (186) (371)
expenses
Recovery of expenses from - - 188
reinsurer
Transfer from assets/liabilities
under insurance contracts
- change in assets arising from - - -
insurance contracts
- change in liabilities arising - (21) -
from insurance contracts - Premium
deficiency reserve
- change in liabilities arising - 103 50
from insurance contracts
- change in liabilities arising - - -
from reinsurance contracts
Fair value adjustment to - - -
liabilities under investment
contracts
Profit/(loss) before BEE expenses 1 059 (193) (97)
Impairment on financial
instruments held as available-for-
sale
BEE expenses
Profit from operations
Finance costs
Foreign exchange loss
Share of loss from associate
Profit before taxation
Taxation
Profit for the year
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 2 458 - -
business
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 policyholders` benefits (12) (629) (290)
Insurance claims recovered from 2 56 60
reinsurers
Net insurance benefits and claims (10) (573) (230)
Acquisition costs - (34) (54)
Marketing and administration (1 582) (236) (359)
expenses
Recovery of expenses from - - 136
reinsurer
Transfer from assets/liabilities
under insurance contracts
- change in assets arising from - - -
insurance contracts
- change in liabilities arising 4 45 (59)
from insurance contracts
- 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
Life
South United
R million Africa Kingdom
30 June 2009
Income statement
Insurance premium revenue 4 218 30
Reinsurance premiums (730) (12)
Net insurance premiums 3 488 18
Fee income from administration business 101 -
Receipt arising from reinsurance contract 750 -
Investment income - shareholders 148 3
Investment income - policyholders 12 -
Net realised gains on financial instruments 65 -
held as available-for-sale
Net fair value gains on financial instruments (9) -
at fair value through profit or loss
Vitality income - -
Net income 4 555 21
Claims and policyholders` benefits (1 679) (3)
Insurance claims recovered from reinsurers 638 2
Net insurance benefits and claims (1 041) (1)
Acquisition costs (1 096) (96)
Marketing and administration expenses (1 050) (144)
Recovery of expenses from reinsurer - 35
Transfer from assets/liabilities under
insurance contracts
- change in assets arising from insurance 1 209 83
contracts
- change in liabilities arising from - -
insurance contracts - Premium deficiency
reserve
- change in liabilities arising from (479) 20
insurance contracts
- change in liabilities arising from (788) (71)
reinsurance contracts
Fair value adjustment to liabilities under (35) -
investment contracts
Profit/(loss) before BEE expenses 1 275 (153)
Impairment on financial instruments held as
available-for-sale
BEE expenses
Profit from operations
Finance costs
Foreign exchange loss
Share of loss from associate
Profit before taxation
Taxation
Profit for the year
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 252 -
held as available-for-sale
Net fair value gains on financial instruments 25 -
at fair value through profit or loss
Vitality income - -
Net income 2 906 7
Claims and policyholders` benefits (1 222) (3)
Insurance claims recovered from reinsurers 481 2
Net insurance benefits and claims (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 791 -
contracts
- change in liabilities arising from (31) (14)
insurance contracts
- change in liabilities arising from 13 -
reinsurance contracts
Fair value adjustment to liabilities under (14) -
investment contracts
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
R million Vitality Holdings Total
30 June 2009
Income statement
Insurance premium revenue - - 5 186
Reinsurance premiums - - (870)
Net insurance premiums - - 4 316
Fee income from administration business 29 - 2 885
Receipt arising from reinsurance contract - - 750
Investment income - shareholders 14 21 224
Investment income - policyholders - - 12
Net realised gains on financial instruments - - 65
held as available-for-sale
Net fair value gains on financial - - (9)
instruments at fair value through profit or
loss
Vitality income 907 - 944
Net income 950 21 9 187
Claims and policyholders` benefits - - (2 583)
Insurance claims recovered from reinsurers - - 707
Net insurance benefits and claims - - (1 876)
Acquisition costs (58) - (1 313)
Marketing and administration expenses (838) (3) (4 329)
Recovery of expenses from reinsurer - - 223
Transfer from assets/liabilities under
insurance contracts
- change in assets arising from insurance - - 1 292
contracts
- change in liabilities arising from - - (21)
insurance contracts - Premium deficiency
reserve
- change in liabilities arising from - - (306)
insurance contracts
- change in liabilities arising from - - (859)
reinsurance contracts
Fair value adjustment to liabilities under - - (35)
investment contracts
Profit/(loss) before BEE expenses 54 18 1 963
Impairment on financial instruments held as (96)
available-for-sale
BEE expenses (13)
Profit from operations 1 854
Finance costs (16)
Foreign exchange loss (23)
Share of loss from associate (1)
Profit before taxation 1 814
Taxation (590)
Profit for the year 1 224
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 - - 252
held as available-for-sale
Net fair value gains on financial - - 25
instruments at fair value through profit or
loss
Vitality income 782 - 791
Net income 833 13 7 323
Claims and policyholders` benefits - - (2 156)
Insurance claims recovered from reinsurers - - 601
Net insurance benefits and claims - - (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 - - 791
contracts
- change in liabilities arising from - - (55)
insurance contracts
- change in liabilities arising from - - 13
reinsurance contracts
Fair value adjustment to liabilities under - - (14)
investment contracts
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
Embedded value statement
for the year ended 30 June 2009
The embedded value of Discovery at 30 June 2009 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 using the current reporting date
assumptions.
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 year ended 30 June 2009. A copy of the auditors` unqualified report is
available for inspection at the company`s registered office.
Impact of Changes to Professional Guidance
The Actuarial Society of South Africa`s updated Professional Guidance Note PGN
107: Embedded Value Reporting (Version 4) applies for all reporting periods
ending on or after 31 December 2008. The embedded value of Discovery was
calculated in accordance with the updated guidance for the first time in
December 2008. The 30 June 2008 results shown below 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.
The updated professional guidance has resulted in a number of changes to the
calculation methodology since June 2008 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 1.575% at 30 June 2009. 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 is shown in Table 1 below:
Table 1: Impact of PGN 107 changes on embedded value and value of new business
30 June
R million 2008
Embedded value 16 482
Impact of:
Change to risk discount rate margin 1 527
Change to cost of required capital (128)
Restated embedded value 17 881
Published value of new business 805
Impact of:
Change to risk discount rate margin 284
Change to cost of required capital (16)
Restated value of new business 1 073
Table 2: Group embedded value
30 June 30 June %
2009 2008 Change
R million Restated
Shareholders` funds 7 013 6 164 14
Adjustment to shareholders` funds from (4 012) (3 861)
published basis(1)
Adjusted net worth 3 001 2 303
- Free Surplus 2 096 1 561
- Required Capital(2) 905 742
Run-down costs for Destiny Health(3) (42) (190)
Value of in-force covered business 17 939 16 560
before cost of capital
Cost of required capital (327) (203)
Cost of STC(4) (531) (589)
Discovery Holdings embedded value 20 040 17 881 12
Number of shares (millions) 553.6 546.0
Embedded value per share R36.20 R32.75 11
Diluted number of shares (millions) 591.3 592.0
Diluted embedded value per share(5) R35.83 R32.05 12
(1) The published Shareholders` funds has been adjusted to eliminate net
assets under insurance contracts, deferred tax and deferred acquisition costs
at June 2009 of R3 984 million (June 2008: R3 827 million) in respect of Life
and R28 million (June 2008: R34 million) in respect of PruHealth.
(2) The required capital at June 2009 for Life is R460 million (June 2008:
R348 million), for Health and Vitality is R333 million (June 2008: R291
million) and for PruHealth is R112 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 allows 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 Value after
before
cost of Cost of Cost cost of
capital required capital
R million and STC capital of STC and STC
at 30 June 2009
Health and Vitality 8 531 (115) (252) 8 164
Life and Invest(1) 9 118 (162) (270) 8 686
PruHealth(2) 290 (50) (9) 231
Total 17 939 (327) (531) 17 081
at 30 June 2008
(Restated)
Health and Vitality 7 798 (108) (277) 7 413
Life and Invest(1) 8 401 (60) (299) 8 042
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 R172
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 ended Year ended
30 June 30 June
R million 2009 2008
Restated
Embedded value at end of period 20 040 17 881
Less: Embedded value at beginning of period (17 881) (15 395)
Increase in embedded value 2 159 2 486
Net issue of capital (68) (73)
Dividends Paid 269 236
Minority share buy-back (7) 2
Transfer to hedging reserve (43) 16
Embedded value earnings 2 310 2 667
Annualised return on opening embedded value 12.9% 17.3%
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 (1 697) (62) 2 863 1 104
business (at point of
sale)
Profit from existing
business
Expected return 2 122 3 (98) 2 027
Change in 1 283 (43) (1 945) (705)
methodology and
assumptions(1)
Experience variances (227) (31) 634 376
Other initiative (303) - - (303)
costs(2)
Acquisition costs (4) - - (4)
Foreign exchange rate (49) 9 (64) (104)
movements
Cost of STC(3) - - 46 46
Return on (127) - - (127)
shareholders`
funds(4)
Embedded value 998 (124) 1 436 2 310
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) 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.
(4) Return on shareholders` funds is shown net of tax and management charges.
Table 6: Methodology and assumption changes
Health and Vitality Life and Invest
Net Value of Net Value of
R million worth in-force worth in-force
Modelling changes - - 126 (192)
Economic assumptions - (47) (26) 546
Benefit - 22 (134) (2)
Enhancements(1)
Lapse assumption(2) - (35) 47 (1 205)
Premium Increases - - 3 60
Mortality and - - 45 330
Morbidity(3)
Expenses - (90) (3) (6)
Commission - - - -
Tax - - - (42)
Reinsurance(4) - - 1 037 (1 019)
Vitality - - - -
Total - (150) 1 095 (1 530)
PruHealth
Net Value of
R million worth in-force Total
Modelling changes - - (66)
Economic assumptions - 102 575
Benefit Enhancements(1) - - (114)
Lapse assumption(2) - (93) (1 286)
Premium Increases - - 63
Mortality and Morbidity(3) - (53) 322
Expenses - 1 (98)
Commission - (68) (68)
Tax - - (42)
Reinsurance(4) 188 (174) 32
Vitality - (23) (23)
Total 188 (308) (705)
(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.
(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. The lapse rate has been
increased above current actual experience in the short term.
(3) Mortality and severe illness assumptions have been reduced marginally
following consistently better than expected claims experience in the past.
(4) The reinsurance change for Life relates to the impact of financing
reinsurance arrangements which were effective from 31 December 2008.
Table 7: Experience variances
Health and Vitality Life and Invest
Net Value of Net Value of
R million worth in-force worth in-force
Renewal expenses 30 - (13) -
Other expenses(1) (51) - (5) -
Economic 5 98 34 180
assumptions(2)
Extended modelling - 203 - 12
term(3)
Lapses and 9 83 (61) (290)
surrenders(4)
Policy alterations - 29 (152) 187
Mortality and - - 167 9
morbidity
Backdated - - (15) (51)
Cancellations
Tax (7) - (9) 27
Reinsurance - - (14) -
Other 35 12 (36) 34
Total 21 425 (104) 108
PruHealth
Net Value of
R million worth in-force Total
Renewal expenses - - 17
Other expenses(1) - - (56)
Economic assumptions(2) - - 317
Extended modelling term(3) - 22 237
Lapses and surrenders(4) - 51 (208)
Policy alterations - - 64
Mortality and morbidity (77) - 99
Backdated Cancellations - - (66)
Tax (61) (8) (58)
Reinsurance 10 - (4)
Other (16) 5 34
Total (144) 70 376
(1) Other expenses include expenses which are not expected to recur in future.
(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 30
June 2009 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 one year.
(4) Included in the Health and Vitality lapse experience variance is an amount
of R630 million in respect of members joining existing employer groups during
the period, offset by an amount of negative R553 million in respect of members
leaving existing employer groups. A positive variance of R15 million is due to
lower than expected lapses.
Table 8: Embedded value of new business
Year ended Year ended %
30 June 30 June change
2009 2008
R million Restated
Health and Vitality
Present value of future profits from 295 246
new business at point of sale
Cost of required capital (11) (9)
Cost of STC (9) (9)
Present value of future profits from 275 228 21
new business at point of sale after
cost of required capital and STC
New business annualised premium 1 204 1 079 12
income(1)
Life and Invest
Present value of future profits from 863 855
new business at point of sale(2)
Cost of required capital (34) (18)
Cost of STC (23) (29)
Present value of future profits from 806 808 (0)
new business at point of sale after
cost of required capital and STC
New business annualised premium 1 246 964 29
income(3)
Annualised profit margin(4) 7.7% 9.5%
Annualised profit margin excluding 9.9% 10.6%
Invest Business
PruHealth(5)
Present value of future profits from 41 48
new business at point of sale
Cost of required capital (17) (10)
Cost of STC (1) (1)
Present value of future profits from 23 37 (38)
new business at point of sale after
cost of required capital and STC
New business annualised premium 188 219 (14)
income(6)
Annualised profit margin(4) 0.9% 2.3%
(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 30 June 2009.
The total Health and Vitality new business annualised premium income written
over the period was R3 191 million (June 2008: R2 834 million).
(2) Included in the Life and Invest value of new business is R58 million in
respect of investment management services provided on off balance sheet
investment business.
(3) Life new business is defined as Life policies or Discovery Retirement
Optimiser 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.
The new business annualised premium income of R1 246 million (single premium
APE: R198 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 R415 million and servicing increases of R259
million was R1 920 million (single premium APE: R198 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
30 June 2009.
Table 9: Embedded value economic assumptions
30 June 30 June
2009 2008
Restated
Beta coefficient
South Africa 0.45 0.44
United Kingdom 0.45 0.74
Equity risk premium
South Africa 3.50 3.50
United Kingdom 4.00 4.00
Risk discount rate (%)
- Health and Vitality 10.575 12.54
- Life and Invest 10.575 12.54
- PruHealth 6.40 8.70
Rand/GB Pound Exchange Rate
Closing 12.71 15.60
Average 14.08 14.66
Medical inflation (%)
South Africa 8.00 10.00
United Kingdom Current Current
levels levels
reducing reducing
to 7.00% to 7.50%
over the over the
projection projection
period period
Expense inflation and CPI (%)
South Africa 5.00 7.00
United Kingdom 3.75 4.00
Pre-tax investment return (%)
South Africa - Cash 7.50 9.50
- Bonds 9.00 11.00
- Equity 12.50 14.50
United Kingdom - Cash 2.65 5.25
Dividend cover ratio 4.5 times 4.5 times
Income tax rate (%)
South Africa 28.00 28.00
United Kingdom 28.00 28.00
Projection term
- Health and Vitality 20 years 20 years
- Group Life 10 years 10 years
- PruHealth 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 24 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. An additional lapse rate is assumed over the next 24
months to allow for the potential impact of the current economic climate on
lapses.
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. The lapse rate over
the next 24 months for group business is assumed to be higher than the long-
term expected lapse rate to allow for the 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 initial expenses included in the calculation of the value of new business
are the actual costs incurred, except for Invest business where the initial
expenses are based on medium term expectations which are lower than the
current total costs. This reflects a realistic position for Invest.
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 30 June
2009 to changes in the assumptions is shown below. For each sensitivity
illustrated, all other assumptions have been left unchanged. No allowance has
been made for management action such as risk premium increases where future
experience is worse than the base assumptions.
Table 10: Embedded value sensitivity
Health and Vitality
Adjusted Value of Cost of Cost of
net worth in-force Capital STC
less
Destiny
run-down
costs
Base 2 959 8 531 (115) (252)
Impact of:
Risk discount rate
+ 1% 2 959 8 060 (129) (227)
Risk discount rate
- 1% 2 959 9 052 (98) (286)
Lapses - 10% 2 959 8 837 (120) (260)
Interest rates - 1%(1) 2 959 8 506 (109) (270)
Equity and property 2 843 8 531 (115) (252)
market value - 10%
Equity and property 2 959 8 531 (115) (252)
return + 1%
Renewal expenses
- 10% 2 959 9 337 (106) (276)
Mortality and morbidity - 2 959 8 531 (115) (251)
5%
Health, Vitality
and PruHealth: Projection
term
+ 1 year 2 959 8 611 (116) (254)
Life
Value of in- Cost of Cost of
force Capital STC
Base 9 118 (162) (270)
Impact of:
Risk discount rate
+ 1% 8 227 (143) (232)
Risk discount rate
- 1% 10 206 (185) (323)
Lapses - 10% 9 939 (179) (293)
Interest rates - 1%(1) 9 501 (170) (302)
Equity and property market value 9 091 (162) (269)
- 10%
Equity and property return + 1% 9 155 (172) (271)
Renewal expenses
- 10% 9 217 (162) (273)
Mortality and morbidity - 5% 9 704 (162) (286)
Health, Vitality
and PruHealth: Projection term
+ 1 year 9 118 (162) (270)
PruHealth
Value of in- Cost of Cost of
force Capital STC
Base 290 (50) (9)
Impact of:
Risk discount rate
+ 1% 241 (47) (7)
Risk discount rate
- 1% 343 (55) (11)
Lapses - 10% 347 (50) (10)
Interest rates - 1%(1) 245 (55) (8)
Equity and property market value 290 (50) (9)
- 10%
Equity and property return + 1% 290 (50) (9)
Renewal expenses
- 10% 316 (50) (9)
Mortality and morbidity - 5% 480 (50) (14)
Health, Vitality
and PruHealth: Projection term
+ 1 year 310 (52) (9)
Embedded value % Change
Base 20 040
Impact of:
Risk discount rate
+ 1% 18 702 (7)
Risk discount rate
- 1% 21 602 8
Lapses - 10% 21 170 6
Interest rates - 1%(1) 20 297 1
Equity and property market value - 10% 19 898 (1)
Equity and property return + 1% 20 066 0
Renewal expenses
- 10% 20 953 5
Mortality and morbidity - 5% 20 796 4
Health, Vitality
and PruHealth: Projection term
+ 1 year 20 135 0
(1) All economic assumptions were reduced by 1%.
The following table shows the effect of using different assumptions on the
value of new business:
Table 11: Value of new business sensitivity
Health and Vitality
Value of Cost of Cost of
in-force Capital STC
Base 295 (11) (9)
Impact of:
Risk discount rate
+ 1% 269 (12) (8)
Risk discount rate
- 1% 323 (9) (10)
Lapses - 10% 314 (11) (9)
Interest rates
- 1%(1) 294 (10) (9)
Acquisition costs
- 10% 307 (11) (9)
Renewal expense
- 10% 347 (10) (10)
Mortality and morbidity - 5% 295 (11) (9)
Health, Vitality
and PruHealth: Projection term
+ 1 year 298 (11) (9)
Equity and property return + 1% 295 (11) (9)
Life
Value of Cost of Cost of
in-force Capital STC
Base 863 (34) (23)
Impact of:
Risk discount rate
+ 1% 669 (30) (20)
Risk discount rate
- 1% 1 100 (39) (28)
Lapses - 10% 1 046 (37) (25)
Interest rates
- 1%(1) 964 (35) (26)
Acquisition costs
- 10% 924 (34) (23)
Renewal expense
- 10% 888 (34) (23)
Mortality and morbidity - 5% 976 (34) (25)
Health, Vitality
and PruHealth: Projection term
+ 1 year 863 (34) (23)
Equity and property return + 1% 879 (36) (23)
PruHealth
Value of Cost of Cost of
in-force Capital STC
Base 41 (17) (1)
Impact of:
Risk discount rate
+ 1% 25 (15) (1)
Risk discount rate
- 1% 56 (18) (2)
Lapses - 10% 56 (18) (2)
Interest rates
- 1%(1) 27 (16) (1)
Acquisition costs
- 10% 48 (16) (1)
Renewal expense
- 10% 49 (16) (1)
Mortality and morbidity - 5% 95 (16) (3)
Health, Vitality
and PruHealth: Projection term
+ 1 year 45 (17) (1)
Equity and property return + 1% 41 (17) (1)
Value of new % Change*
business
Base 1 104
Impact of:
Risk discount rate
+ 1% 877 (21)
Risk discount rate
- 1% 1 373 24
Lapses - 10% 1 314 19
Interest rates
- 1%(1) 1 188 8
Acquisition costs
- 10% 1 185 7
Renewal expense
- 10% 1 190 8
Mortality and morbidity - 5% 1 268 15
Health, Vitality
and PruHealth: Projection term
+ 1 year 1 111 1
Equity and property return + 1% 1 118 1
All economic assumptions were reduced by 1%.
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 20% for the
year ended 30 June 2009.
New business annualised premium income
June June %
R million 2009 2008 change
Discovery Health 3 039 2 731 11
Discovery Life 1 920 1 407 36
Discovery Vitality 152 103 48
PruHealth 559 533 5
PruProtect 105 25 320
New business API excluding Destiny 5 775 4 799 20
Destiny Health* 91 345 (74)
New business API of Group 5 866 5 144 14
* New business in Destiny Health relates to new members joining existing
business in the current year
Gross inflows under management increased 20% for the year ended 30 June 2009.
Gross inflows under management
June June %
R million 2009 2008 change
Discovery Health 23 853 21 118 13
Discovery Life 3 675 3 118 18
Discovery Invest 3 290 903 264
Discovery Vitality 936 813 15
Destiny Health 411 999 (59)
PruHealth 1 366 1 040 31
PruProtect 60 15 300
Gross inflows under management 33 591 28 006 20
Less: collected on behalf of third (24 576) (20 390) 21
parties
Discovery Health (21 077) (18 637)
Discovery Invest (2 646) (903)
Destiny Health (140) (323)
PruHealth (683) (520)
PruProtect (30) (7)
Gross income of Group 9 015 7 616 18
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 2009 2008 change
Discovery Health 1 028 891 15
Discovery Life 1 184 989 20
Discovery Vitality 40 49 (18)
PruHealth (103) (155) 34
Operating profit from established 2 149 1 774 21
businesses
Discovery Invest (122) (157) 22
PruProtect (156) (134) (16)
Destiny Health (173) (192) 10
Group operating profit before 1 698 1 291 32
premium deficiency reserve and
corporate costs
Transfer to premium deficiency (21) -
reserve
Corporate costs* (3) (18) 83
Profit from operations before 1 674 1 273 32
investment income, impairment and
BEE expenses
*Corporate costs include costs relating to the odd-lot offer in the current
year and the FirstRand unbundling in the prior year.
Taxation
All South African entities are in a tax paying position. South African income
tax has been provided at 28% (2008: 28%) and secondary tax on companies at 10%
in the financial statements and embedded value statements.
Discovery obtained no tax relief for the PruHealth losses for the year ended
30 June 2009. 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 30 June 2009 is the balance of R750
million received in terms of a quota share treaty entered into by Discovery
Life in December 2008. This treaty effectively reinsures approximately 15% of
the negative reserve as at that date. 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.
In December 2008, 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 that date.
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 2009
financial year, Discovery had to assess whether objective evidence existed
that the equity instruments classified as available-for-sale financial assets
were impaired at 30 June 2009. 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 or has met the prolonged decline criteria.
This amounted to R96 million and has been taken through profit and loss.
Balance sheet
The increase in the assets arising from insurance contracts of R1 284 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 30 June 2009, Destiny Health raised a Premium Deficiency Reserve of US$2.4
million (R21 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 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 IFRS 2. 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 R13
million in the year ended 30 June 2009 (2008: R23 million) in accordance with
the requirements of IFRS 2.
An additional R60 million (2008: R19 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.
The Group entered into transactions to hedge its exposure in the phantom share
scheme related to changes in the Discovery share price. As at 30 June 2009,
approximately 51.4% (2008: 66.6%) of this exposure was hedged.
Directorate
Dr Judy Dlamini 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.
Mr Richard Farber was appointed as an executive director of the board of
Discovery with effect from 1 July 2009.
Dividend policy and capital
An interim dividend of 25,5 cents per share was paid on 23 March 2009.
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 was R230 million (2008: R174 million) and was
covered 7.7 times (2008: 7.0 times).
Cash dividend declaration:
The board has declared a final dividend of 33 cents per share. The salient
dates are as follows:
- Last date to trade "cum" dividend Friday, 9 October 2009
- Date trading commences "ex" dividend Monday, 12 October 2009
- Record date Friday, 16 October 2009
- Date of payment Monday, 19 October 2009
Share certificates may not be dematerialised or rematerialised between Monday,
12 October 2009 and Friday, 16 October 2009, both days inclusive.
Comparative figures
Assets arising from insurance contracts where shown net of the associated
Liabilities arising from reinsurance contracts. These amounts have now been
disclosed on a gross basis and the comparative balance sheet has been
restated. The restatement results in an increase of R245 million in relation
to the Assets arising from insurance contracts and a corresponding increase in
the Liabilities arising from reinsurance contracts. The restatement has no
impact on the Group`s comparative net profit, nor the Group`s comparative
basic and diluted earnings per share, nor the Group`s comparative cash flows.
Audit
The auditors, PricewaterhouseCoopers Inc., have issued their opinion on the
Group financial statements for the year ended 30 June 2009. 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, P Cooper, SB Epstein (USA), R
Farber* **, 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 1 July 2009
Date: 02/09/2009 08:48:01 Produced by the JSE SENS Department.
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