| Wed 24 Feb 2010, 9:30 | | DSY - Discovery Holdings - Unaudited interim results and cash dividend |
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DSY
DSY
DSY - Discovery Holdings - Unaudited interim results and cash dividend
declaration for the six months ended 31 December 2009
Discovery Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
JSE share code: DSY & ISIN: ZAE000022331
UNAUDITED INTERIM RESULTS AND CASH DIVIDEND DECLARATION FOR THE SIX MONTHS
ENDED 31 DECEMBER 2009
www.discovery.co.za
UP 54%
Headline earnings
increase to R755 million
UP 49%
Profit from operations
increase to R1 184 million
UP 16%
New business API
R3 246 million
UP 29.4%
Interim dividend
33 cents per share
Introduction
Discovery Holdings posted pleasing results during the period under review,
with strong financial performance, healthy new business growth and important
structural progress for all Discovery`s businesses. The business environment
during this period remained complex and volatile, with the economy continuing
to experience the recessionary effects of the global economic crisis. Added
to this, the economic crisis has also caused significant shifts in health
policy debates and financial regulation internationally as governments face
dramatic budget deficit increases. In South Africa specifically, this
resulted in important healthcare regulatory debates around a National Health
Insurance system. To meet the challenges posed by the current macro-economic
and operating environment, and to achieve our long-term objectives, Discovery
focused strongly on the following strategies:
1. Ensuring that the business models and structures within each business
create a sustainable competitive advantage to uniquely meet clients`
needs. In particular, Discovery focused on restructuring PruHealth and
PruProtect to more effectively replicate Discovery`s integrated business
model
2. The pursuit of a number of new opportunities, most notably the pending
acquisition of a minority stake in Ping An Health, the health insurance
subsidiary of China`s second-largest insurer, Ping An Group
3. A continued and intensive focus on innovation and product excellence to
ensure that products across the group are competitive, unique and
provide exceptional value for money. This is particularly important
during the difficult economic climate
4. A focus on financial prudence to ensure risks are carefully managed to
significantly enhance the Group`s financial strength.
The result of these strategies is a strong financial performance, with
headline earnings increasing by 54% to R755 million, and operating profit
increasing by 49% in the comparative 2008 period.
The Group embedded value increased by 4% from June 2009, to R20.9 billion.
The main contributors to the embedded value growth were good profits from new
business, the expected return on existing business, positive experience
variances and strong investment performance. These positive impacts were to a
degree offset by strengthening of the assumption set. The Group embedded
value does not allow for the Health new business joining on 1 January 2010.
Allowing for this new business would have increased the Group embedded value
by a further 2% to R21.3 billion.
Discovery Health
Discovery Health`s performance was excellent and exceeded expectation. During
the period under review, we focused on strengthening the operational,
clinical and actuarial assets and capabilities of Discovery Health. At the
same time, Discovery Health continues to build a robust healthcare system,
while providing affordable access to high quality healthcare for our members.
Discovery Health`s strong performance, when viewed against the challenges the
industry faces, clearly illustrates that in the healthcare market, scale and
technological sophistication are fundamental attributes for success. To
further strengthen Discovery Health`s performance, we focused on three
specific areas during the period under review:
1. Ensuring members` benefits provided as comprehensive coverage as
possible. We specifically focused on closing gaps in coverage, for
example, the launch of the Medical Savings Booster enables members to
use discounts on HealthyFoodTrade Mark spend to close gaps in cover.
2. Continued and intense focus on achieving closer ties with doctors,
hospitals and other healthcare providers. By the end of the period, 80%
of members` consultations with GPs and 85% of visits with specialists
took place in the Discovery Health GP Network or specialist payment
arrangements, resulting in less out-of-pocket costs for members. In
terms of hospitalisation, the continued enhancement of the KeyCare and
Delta hospital networks and the benefit plans around them, created
enhanced efficiency and affordability for members.
3. Increased investment in operational, risk and managed care capabilities
resulted in the development of further healthcare assets for the
Discovery Health Medical Scheme. The successful launch of ProPBM,
Discovery`s inhouse pharmacy benefit management system, ensured that all
Discovery Health pharmacy claims were managed through this system, with
significant savings to the Discovery Health Medical Scheme.
The combination of these strategies translated into excellent results for
both Discovery Health and the Discovery Health Medical Scheme. The Discovery
Health Medical Scheme`s contribution increase for 2010, one of the lowest in
the industry, was in line with the industry benchmark set by the Council for
Medical Schemes. The Scheme also has one of the largest capital funds in
South Africa with reserves of R6 billion, exceeding the 25% statutory
requirement. New business levels accelerated dramatically during the period,
with total new business production the highest in Discovery Health`s history.
In addition, Discovery Health`s ability to retain members - the Scheme`s
record-low level lapse rate of 3.1% - illustrates our competitive ability.
Despite the real affordability challenge for members, 98% of members
maintained or enhanced their benefit choices for 2010 with only 2% opting to
buy down their benefit choice. KeyCare, Discovery Health`s product for the
lower-income market, also performed exceptionally well: during our year-end
process for January 2010, more than
22 000 members joined the KeyCare Plan and we estimate that almost 15 000 of
these members were not previously covered by medical schemes. KeyCare`s
performance continues to demonstrate Discovery Health`s ability to grow the
market and to extend the reach of private healthcare into the lower-income
market.
In terms of the broader South African healthcare environment, the debate
around healthcare policy and the implementation of a National Health
Insurance system continued. Discovery Health remains firmly committed to
assisting the healthcare reform process towards building a healthcare system
that is more inclusive and equitable for all South Africans. To this end, we
have been actively providing input into the debate. We have also been
focusing on areas where we can work with the Department of Health to build
capacity in the public healthcare system to help meet the Millennium
Development Goals to which South Africa has committed itself. The Discovery
Foundation, one of our capacity-building initiatives in the healthcare
sector, has entered its fourth year and has to date, awarded R37 million in
grants to 63 recipients for further medical research and training.
Over the course of 2010, Discovery Health will look to leverage our
sophisticated risk management, clinical and provider assets in the closed
schemes environment. Discovery Health`s current 8% market share in this
segment represents a significant growth opportunity given the breadth and
competitiveness of our managed care and wellness capability. We are pleased
with our early progress, with the activation of two new closed schemes,
Remedi and Altron, over the first half of 2010. This brings to 14 the number
of closed schemes that Discovery Health administers.
Discovery Life
The performance of Discovery Life was pleasing despite the current difficult
economic environment. Independent surveys and industry recognition illustrate
the company`s strong and dominant position in the life assurance protection
market. The company has enhanced its competitive position in the market with
a 24% market-share of all broker business, and a 26% market share in the
large policies market, which is Discovery Life`s core focus. While overall
new business decreased by 2%, this largely reflected the reduction in
inflation resulting in a decrease in the automatic increase component of new
business. However, the core individual risk new business grew by 16%.
During the period under review, Discovery Life worked on the following
strategies:
1. Continued focus on ensuring the business model is capital efficient and
cash flow generative. This was achieved by largely removing the lapse
risk from emerging negative reserve assets generated by the sale of new
business, and using these to back guaranteed capital bonds, sold through
Discovery Invest. The result is significantly enhanced liquidity with
reduced negative reserve risk. Discovery Life covered its Capital
Adequacy Requirement more than 8.6 times.
2. The understanding and management of policy lapses are particularly
important during the difficult economic climate, with lapse rates
falling within the assumptions laid out in the embedded value. While
Discovery Life took a conservative view of lapse rates going forward and
further strengthened the embedded value basis, during the period under
review, lapse rates stabilised and began to drift downwards.
3. A continued focus on relevant and appropriate product innovation and
excellence. During the period under review, we launched the Financial
IntegratorTrade Mark series - a range of products aimed at providing
policyholders with life assurance protection that flexes according to
economic conditions. This unique product range dynamically protects
policyholders during a life-changing event or should they retire during
weak economic conditions when assets are depressed. Despite this product
only being launched towards the end of 2009, by early 2010, 25% of all
new business written included the Financial IntegratorTrade Mark.
4. Enhancing and growing the company`s distribution capability with the
continued roll-out of an agency force of the highest quality and top-
producing agents. By December 2009, we employed over 250 agents,
generating an average monthly production of around R110 000 per agent.
The contribution of the agency force to new business has increased
steadily over the past year, with 20% of total Discovery Life and
Discovery Invest new business currently being generated by the agency
channel.
Discovery Invest
Over the period, Discovery Invest`s performance was exceptional in all
respects, despite the difficulties introduced to long-term savings businesses
by the economic climate. New business API grew by 74% over the comparative
period while maintaining margins. Intermediary support improved substantially
from the levels seen at the start of the year, and performance from the
company`s broad range of funds was excellent, with the flagship Equity Fund
consistently ranked as a top performer. Discovery Invest is currently
attracting approximately 8% of net industry inflows in the retail linked-
product market, equivalent to those of established players such as ABSA and
Investec. By 31 December 2009, Discovery Invest had grown its assets under
management to more than R6.5 billion. Importantly, the majority of assets
continue to be invested in Discovery Invest`s higher-margin, proprietary
funds.
During the period, we continued to develop our assets and capabilities, with
a specific emphasis on enhancing our distribution footprint and penetration.
Over 2009, the company`s products gained increasing recognition and support
in the intermediary market, with average broker support levels increasing
from around a 1 000 a month at the start of the year, to almost 3 000 every
month. In addition, Discovery Invest is in the process of developing a
Specialist Franchise that will target large investment brokers who are not
yet supporters of Discovery Invest. This initiative is currently in the early
stages of development, and will continue to be rolled out over 2010.
During the period, Discovery Invest focused on:
1. The launch of Discovery Invest Offshore, which enables clients to access
a broad range of best-of-breed international fund managers and apply
Discovery`s proprietary product design to these
2. Using Discovery`s integration capability to develop products that are
highly differentiated and offer added value. One of the initiatives
launched during the period, the InvestBoosterTrade Mark, leverages the
Vitality HealthyFoodTrade Mark structure to allow members to channel
discounts on their HealthyFoodTrade Mark spend into their investment
vehicles.
Financially, Discovery Invest made significant progress towards reaching a
break-even position, with a 75% reduction in losses over the comparative
period in 2008. We remain confident that the business is well positioned for
continued growth in assets in the coming period.
Discovery Vitality
Discovery Vitality serves as the primary point of integration across each of
Discovery`s businesses and facilitates the development of differentiated
products with unique appeal. Early in 2009, Vitality launched the Vitality
HealthyFoodTrade Mark benefit in conjunction with Pick n Pay and during the
second half of 2009 successfully rolled out the benefit.
Since the launch of the benefit, over 180 000 members have activated the
Vitality HealthyFoodTrade Mark benefit, buying over three million trolleys of
HealthyFoodTrade Mark valued at over R275 million.
Given the success of the HealthyFoodTrade Mark benefit, we see significant
opportunity to leverage the benefit in product development initiatives.
During the 2010 development cycle, a number of key initiatives were launched
with HealthyFoodTrade Mark at their core; as discussed in the Discovery
Health and Discovery Invest sections earlier, the Medical Savings Booster and
InvestBoosterTrade Mark allow members to forego the cash backs on
HealthyFoodTrade Mark spend for more significant health or investment
benefits. Discovery will continue to leverage the appeal of the benefit in
future product design.
The HealthyFoodTrade Mark benefit has further been instrumental in elevating
the profile of the DiscoveryCard, with almost 40% of HealthyFoodTrade Mark
activations being made through the DiscoveryCard. In December 2009, card
turnover exceeded R1 billion for the first time, thereby strengthening the
DiscoveryCard`s strong gain in point-of-sale market share at the expense of
the current banking institutions. Over the year, DiscoveryCard gained almost
1.5% market share, and now holds 7% of the total credit card market.
DiscoveryCard`s credit performance has also been exceptional, with our
current experience better than both competitor experience and credit cycle
averages.
Going forward, Vitality is investigating how best to evolve the credibility
of its science and broad-based appeal into a social development context. In
this regard, Discovery has successfully launched an employee Corporate Social
Investment initiative - the Vitality Healthy Giving campaign - that links
employees` Vitality engagement to donations to charities. During 2009, almost
R1 million was raised for charity through this initiative.
PruProtect and PruHealth
The period under review was a particularly significant one for Discovery`s
joint venture with The Prudential in the UK. The joint venture represents a
considerable initiative and opportunity for Discovery and, in this context,
important work was done with both PruHealth and PruProtect to facilitate
this. PruProtect made considerable strides during this period and the
company`s performance exceeded expectation. New business grew by 245% to R100
million, while operating losses reduced by 58%. Notably, the quality of new
business exceeded expectation with average premiums and the take-up of
additional benefits higher than expected. While still too early to gauge,
lapse rates and claims levels are better than expected. In addition, both the
franchise and telephone account management distribution channels grew
extensively and gained considerable traction.
PruHealth`s performance reflected the negative effects of the economy and the
impact of negative business mix changes, which saw a drop in the proportion
of individual members. In addition to the expected increased claims levels
during recessionary periods, the mix change further increased the loss ratio,
as the individual members were on average lower claimants. The combination of
these created an increased loss ratio during the period under review,
negatively impacting the financial performance. Despite the immediate
negative impact, the loss ratio has begun to decrease, as expected. PruHealth
has, however, made good progress with lives covered growing by 15% to 219 000
and operating losses reducing by 13% to R53 million.
Most importantly, the period under review reflected the significant strategy
of restructuring both PruHealth and PruProtect to create an integrated
business model that more effectively replicates the Discovery model in South
Africa. We anticipate that this will create greater expense efficiencies and
better profit margins that will enable more competitive product offerings.
Importantly, it will enable the joint venture to offer unique and powerful
integrated protection products to the UK market. In addition, the strong
distribution channels that already exist within PruHealth, combined with the
rapidly emerging franchise distribution channel of PruProtect, will provide
the joint venture with considerable reach for both products.
Prospects
The progress made and work done in all of Discovery`s businesses, positions
the Group well for further growth.
MI Hilkowitz
Chairperson
A Gore
Chief Executive Officer
Income statement
for the six months ended 31 December 2009
Group Group Group
Six months Six months Year
ended ended ended
December December June
2009 2008 % 2009
R million Unaudited Unaudited change Audited
Insurance premium 3 278 2 535 29 5 186
revenue
Premium revenue from 1 865 - -
investment contracts
transferred to insurance
contracts
Reinsurance premiums (592) (384) (870)
Net insurance premium 4 551 2 151 4 316
revenue
Fee income from 1 592 1 356 17 2 885
administration business
Receipt arising from - 750 750
reinsurance contracts
Investment income 106 115 236
Net realised gains on 86 62 65
available-for-sale
financial assets
Net fair value 326 (93) (9)
gains/(losses) on
financial assets at fair
value through income
Vitality income 525 443 19 944
Net income 7 186 4 784 9 187
Claims and (1 194) (1 238) (2 583)
policyholders` benefits
Insurance claims 393 362 707
recovered from
reinsurers
Net claims and (801) (876) (1 876)
policyholders` benefits
Acquisition costs (1 112) (753) (1 313)
Marketing and (2 249) (2 116) (4 329)
administration expenses
Recovery of expenses 74 101 223
from reinsurers
Transfer from (1 692) (337) 106
assets/liabilities under
insurance contracts
- change in assets 744 584 1 292
arising from insurance
contracts
- change in liabilities
arising from insurance
contracts -
premium deficiency 18 (27) (21)
reserve
- change in liabilities (2 454) (120) (306)
arising from insurance
contracts - other
- change in liabilities - (774) (859)
arising from reinsurance
contracts
Fair value adjustment to (219) 59 (35)
liabilities under
investment contracts
Profit before impairment 1 187 862 38 1 963
and BEE expenses
Impairment of financial
instruments held as
available-for-sale - (63) (96)
BEE expenses (3) (7) (13)
Profit from operations 1 184 792 49 1 854
Finance costs (5) (9) (16)
Foreign exchange loss (6) - (23)
Share of loss from - - (1)
associate
Profit before tax 1 173 783 50 1 814
Income tax expense (346) (282) (590)
Profit for the period 827 501 65 1 224
Profit attributable to:
- equity holders 829 490 1 212
- minority interests (2) 11 12
827 501 1 224
Earnings per share for
profit attributable to
the equity holders of
the company during the
period (cents):
- basic 149.6 89.3 68 219.9
- diluted 149.1 88.7 68 219.3
Statement of comprehensive income
for the six months ended 31 December 2009
Group Group Group
Six months Six months Year
ended ended ended
December December June
2009 2008 % 2009
R million Unaudited Unaudited change Audited
Profit for the year 827 501 65 1 224
Other comprehensive
income:
Change in available-for- 188 (197) (187)
sale financial assets
- unrealised 305 (230) (253)
gains/(losses)
- capital gains tax on (43) 34 39
unrealised
gains/(losses)
- realised gains (86) (62) (65)
transferred to income
- capital gains tax on 12 7 9
realised gains
- impairment - 63 96
transferred to income
- capital gains tax on - (9) (13)
impairment
Currency translation (19) (21) (55)
differences
Cash flow hedges (18) 12 43
- realised (30) 4 12
(gains)/losses
transferred to income
- tax on realised (1) (1) (2)
gains/(losses)
- unrealised gains 16 13 34
- tax on unrealised (3) (4) (1)
gains
Other comprehensive 151 (206) (199)
income for the period,
net of tax
Total comprehensive 978 295 232 1 025
income for the period
Attributable to:
- equity holders 980 284 1 013
- minority interests (2) 11 12
Total comprehensive 978 295 1 025
income for the period
Headline earnings
for the six months ended 31 December 2009
Group Group Group
Six months Six months Year
ended ended ended
December December June
2009 2008 % 2009
R million Unaudited Unaudited change Audited
Headline earnings per
share (cents):
- undiluted 136.4 89.2 53 224.7
- diluted 135.9 88.6 53 224.1
The reconciliation
between earnings and
headline earnings is
shown below:
Net profit attributable 829 490 1 212
to equity shareholders
Adjusted for:
- realised profit on (74) (55) (56)
available-for-sale
investments net of CGT
- impairment on
available-for-sale
investments
net of CGT - 54 82
Headline earnings 755 489 54 1 238
Weighted number of 553 796 548 060 1 551 043
shares in issue (000`s)
Diluted weighted number 555 733 551 819 1 552 591
of shares (000`s)
Balance sheet
at 31 December 2009
Group Group
December June
2009 2009
R million Unaudited Audited
ASSETS
Assets arising from insurance contracts 6 186 5 449
Property and equipment 243 199
Investment property 20 20
Intangible assets including deferred 387 520
acquisition costs
Financial assets
- Equity securities 3 331 2 469
- Equity linked notes 1 243 693
- Debt securities 546 488
- Inflation linked securities 19 20
- Money market 1 532 958
- Derivatives 61 68
- Loans and receivables including insurance 1 566 1 846
receivables
Deferred income tax 299 239
Current income tax asset 110 83
Reinsurance contracts 158 142
Cash and cash equivalents 2 240 1 737
Total assets 17 941 14 931
EQUITY
Capital and reserves
Share capital and share premium 1 553 1 548
Other reserves 695 540
Retained earnings 5 560 4 925
Total equity 7 808 7 013
LIABILITIES
Liabilities arising from insurance contracts 4 267 1 778
Liabilities arising from reinsurance contracts 1 098 1 104
Financial liabilities
- Investment contracts at fair value through 1 406 2 161
profit or loss
- Borrowings at amortised cost 28 32
- Derivatives 10 12
Deferred income tax 1 669 1 402
Deferred revenue 108 86
Provisions 78 65
Trade and other payables 1 469 1 278
Total liabilities 10 133 7 918
Total equity and liabilities 17 941 14 931
Cash flow statement
for the six months ended 31 December 2009
Group Group Group
Six months Six months Year
ended ended ended
December December June
2009 2008 2009
R million Unaudited Unaudited Audited
Cash flow from operating 1 066 458 1 211
activities
Cash generated by operations 2 229 1 184 2 547
Policyholder net investments (1 240) (652) (1 270)
Working capital changes 179 (4) 102
1 168 528 1 379
Dividends received 17 27 67
Interest received 96 107 216
Interest paid (5) (9) (16)
Taxation paid (210) (195) (435)
Cash flow from investing (343) 264 (50)
activities
Net (purchases)/disposals of (183) 328 105
investments
Net (purchases)/disposals of (108) 30 (21)
equipment
Purchase of intangible assets (52) (94) (134)
Cash flow from financing (199) (17) (177)
activities
Proceeds from issuance of 2 111 111
ordinary shares
Dividends paid to equity (194) (134) (278)
holders
Minority share buy-back - (4) (5)
(Repayment)/increase in (7) 10 (5)
borrowings
Net increase in cash and cash 524 705 984
equivalents
Cash and cash equivalents at 1 737 812 812
beginning of year
Exchange losses on cash and (21) (10) (59)
cash equivalents
Cash and cash equivalents at 2 240 1 507 1 737
end of period
Statement of changes in equity
for the six months ended 31 December 2009
Attributable to equity holders of
the Company
Share Share-
capital based
and pay- Invest- Trans-
share ment ment lation Hedging
R million premium reserve reserve reserve reserve
Period ended
31 December 2009
At beginning of 1 548 307 112 96 25
period
Profit for the - - - - -
period
Other - - 188 (19) (18)
comprehensive
income
Total
comprehensive
income for the - - 188 (19) (18)
period
Transactions with
owners:
Shares issued to - - - - -
minorities
Profit from the 5 - - - -
sale of treasury
shares
Employee share
option schemes:
- Value of - 4 - - -
employee services
Dividends relating - - - - -
to June 2009
Total transactions 5 4 - - -
with owners
At end of period 1 553 311 300 77 7
Period ended
31 December 2008
At beginning of 1 468 289 299 151 (18)
period
Profit for the - - - - -
period
Other - - (197) (21) 12
comprehensive
income
Total - - (197) (21) 12
comprehensive
income for the
period
Transactions with
owners:
Profit from the 4 - - - -
sale of treasury
shares
Employee share
option schemes:
- Proceeds from 107 - - - -
shares issued
- Value of - 9 - - -
employee services
Dividends relating - - - - -
to June 2008
Minority share buy- - - - - -
back
Realised profit on - - - - -
minority share buy-
back
Total transactions 111 9 - - -
with owners
At end of period 1 579 298 102 130 (6)
Attributable to equity
holders of the Company
Retained Minority
R million earnings Total interest Total
Period ended
31 December 2009
At beginning of period 4 925 7 013 - 7 013
Profit for the period 829 829 (2) 827
Other comprehensive - 151 - 151
income
Total comprehensive
income for the period 829 980 (2) 978
Transactions with
owners:
Shares issued to - - 2 2
minorities
Profit from the sale - 5 - 5
of treasury shares
Employee share option
schemes:
- Value of employee - 4 - 4
services
Dividends relating to (194) (194) - (194)
June 2009
Total transactions (194) (185) 2 (183)
with owners
At end of period 5 560 7 808 - 7 808
Period ended
31 December 2008
At beginning of period 3 975 6 164 - 6 164
Profit for the period 490 490 11 501
Other comprehensive - (206) - (206)
income
Total comprehensive 490 284 11 295
income for the period
Transactions with
owners:
Profit from the sale - 4 - 4
of treasury shares
Employee share option
schemes:
- Proceeds from shares - 107 - 107
issued
- Value of employee - 9 - 9
services
Dividends relating to (134) (134) - (134)
June 2008
Minority share buy- - - (11) (11)
back
Realised profit on 7 7 - 7
minority share buy-
back
Total transactions (127) (7) (11) (18)
with owners
At end of period 4 338 6 441 - 6 441
Segmental information
for the six months ended 31 December 2009
R million SA SA Life SA SA Vitality UK
Health Invest Health
31 December 2009
Income statement
Insurance premium revenue 13 2 076 833 - 321
Premium revenue from - - 1 865 - -
investment contracts
transferred to insurance
contracts
Reinsurance premiums (1) (448) - - (132)
Net insurance premium 12 1 628 2 698 - 189
revenue
Fee income from 1 469 46 50 20 1
administration business
Investment income 13 45 32 9 -
Net realised gains on - 86 - - -
available-for-sale
financial assets
Net fair value gains on - 132 194 - -
financial assets at fair
value through income
Vitality income - - - 510 -
Net income 1 494 1 937 2 974 539 190
Claims and policyholders` (6) (886) (34) - (237)
benefits
Insurance claims - 287 - - 104
recovered from reinsurers
Net claims and (6) (599) (34) - (133)
policyholders` benefits
Acquisition costs - (660) (304) (33) (29)
Marketing and (917) (464) (86) (480) (149)
administration expenses
Recovery of expenses from - - - - 69
reinsurers
Transfer from
assets/liabilities under
insurance contracts
- change in assets - 674 (2) - -
arising from insurance
contracts
- change in liabilities - - - - -
arising from insurance
contracts - premium
deficiency reserve
- change in liabilities - (47) (2 406) - (1)
arising from insurance
contracts - other
- change in liabilities - (2) - - -
arising from reinsurance
contracts
Fair value adjustment to - (57) (162) - -
liabilities under
investment contracts
Profit/(loss) before BEE 571 782 (20) 26 (53)
expenses
BEE expenses (3) - - - -
Profit/(loss) from 568 782 (20) 26 (53)
operations
Finance costs - - - - -
Foreign exchange loss (4) (2) - - -
Profit before tax 564 780 (20) 26 (53)
Income tax expense (159) (198) 6 (3) 9
Profit for the period 405 582 (14) 23 (44)
31 December 2008
Income statement
Insurance premium revenue 12 1 848 103 - 350
Reinsurance premiums (1) (318) - - (55)
Net insurance premium 11 1 530 103 - 295
revenue
Fee income from 1 302 27 16 11 -
administration business
Receipt arising from - 750 - - -
reinsurance contracts
Investment income 17 66 4 10 3
Net realised gains on - 62 - - -
available-for-sale
financial assets
Net fair value losses on - (88) (5) - -
financial assets at fair
value through income
Vitality income - - - 426 -
Net income 1 330 2 347 118 447 298
Claims and policyholders` (4) (737) (1) - (236)
benefits
Insurance claims 1 295 - - 35
recovered from reinsurers
Net claims and (3) (442) (1) - (201)
policyholders` benefits
Acquisition costs - (636) (22) (27) (25)
Marketing and (815) (417) (77) (387) (211)
administration expenses
Recovery of expenses from - - - - 88
reinsurer
Transfer from
assets/liabilities under
insurance contracts
- change in assets - 584 - - -
arising from insurance
contracts
- change in liabilities - - - - -
arising from insurance
contracts - premium
deficiency reserve
- change in liabilities - (3) (103) - (10)
arising from insurance
contracts - other
- change in liabilities - (774) - - -
arising from reinsurance
contracts
Fair value adjustment to - 53 6 - -
liabilities under
investment contracts
Profit/(loss) before 512 712 (79) 33 (61)
impairment and BEE
expenses
Impairment on financial - (63) - - -
instruments held as
available-for-sale
BEE expenses (6) (1) - - -
Profit/(loss) from 506 648 (79) 33 (61)
operations
Finance costs - - (3) - -
Profit before tax 506 648 (82) 33 (61)
Income tax expense (147) (164) 23 (9) (10)
Profit for the period 359 484 (59) 24 (71)
R million UK Life USA New business All other Total
Health development segments
31 December 2009
Income statement
Insurance premium 34 1 - - 3 278
revenue
Premium revenue from - - - - 1 865
investment contracts
transferred to
insurance contracts
Reinsurance premiums (11) - - - (592)
Net insurance premium 23 1 - - 4 551
revenue
Fee income from - - - 6 1 592
administration
business
Investment income - - - 7 106
Net realised gains on - - - - 86
available-for-sale
financial assets
Net fair value gains - - - - 326
on financial assets at
fair value through
income
Vitality income - - 15 - 525
Net income 23 1 15 13 7 186
Claims and (4) (27) - - (1 194)
policyholders`
benefits
Insurance claims 1 1 - - 393
recovered from
reinsurers
Net claims and (3) (26) - - (801)
policyholders`
benefits
Acquisition costs (77) - (9) - (1 112)
Marketing and (61) (15) (68) (9) (2 249)
administration
expenses
Recovery of expenses 5 - - - 74
from reinsurers
Transfer from
assets/liabilities
under insurance
contracts
- change in assets 72 - - - 744
arising from insurance
contracts
- change in - 18 - - 18
liabilities arising
from insurance
contracts - premium
deficiency reserve
- change in - - - - (2 454)
liabilities arising
from insurance
contracts - other
- change in 2 - - - -
liabilities arising
from reinsurance
contracts
Fair value adjustment - - - - (219)
to liabilities under
investment contracts
Profit/(loss) before (39) (22) (62) 4 1 187
BEE expenses
BEE expenses - - - - (3)
Profit/(loss) from (39) (22) (62) 4 1 184
operations
Finance costs - (1) - (4) (5)
Foreign exchange loss - - - - (6)
Profit before tax (39) (23) (62) - 1 173
Income tax expense 16 - 4 (21) (346)
Profit for the period (23) (23) (58) (21) 827
31 December 2008
Income statement
Insurance premium 11 211 - - 2 535
revenue
Reinsurance premiums - (10) - - (384)
Net insurance premium 11 201 - - 2 151
revenue
Fee income from - - - - 1 356
administration
business
Receipt arising from - - - - 750
reinsurance contracts
Investment income - 1 - 14 115
Net realised gains on - - - - 62
available-for-sale
financial assets
Net fair value losses - - - - (93)
on financial assets at
fair value through
income
Vitality income - - 17 - 443
Net income 11 202 17 14 4 784
Claims and (3) (257) - - (1 238)
policyholders`
benefits
Insurance claims 2 29 - - 362
recovered from
reinsurers
Net claims and (1) (228) - - (876)
policyholders`
benefits
Acquisition costs (22) (10) (11) - (753)
Marketing and (76) (50) (74) (9) (2 116)
administration
expenses
Recovery of expenses 13 - - - 101
from reinsurer
Transfer from
assets/liabilities
under insurance
contracts
- change in assets - - - - 584
arising from insurance
contracts
- change in - (27) - - (27)
liabilities arising
from insurance
contracts - premium
deficiency reserve
- change in (18) 14 - - (120)
liabilities arising
from insurance
contracts - other
- change in - - - - (774)
liabilities arising
from reinsurance
contracts
Fair value adjustment - - - - 59
to liabilities under
investment contracts
Profit/(loss) before (93) (99) (68) 5 862
impairment and BEE
expenses
Impairment on - - - - (63)
financial instruments
held as available-for-
sale
BEE expenses - - - - (7)
Profit/(loss) from (93) (99) (68) 5 792
operations
Finance costs - (1) - (5) (9)
Profit before tax (93) (100) (68) - 783
Income tax expense 29 - 3 (7) (282)
Profit for the period (64) (100) (65) (7) 501
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 16% for
the six months ended 31 December 2009.
New business annualised premium income
December December %
R million 2009 2008 change
Discovery Health 1 787 1 456 23
Discovery Life 782 801 (2)
Discovery Invest 334 192 74
Discovery Vitality 78 53 47
PruHealth 165 271 (39)
PruProtect 100 29 245
New business API excluding Destiny 3 246 2 802 16
Destiny Health * 76
New business API of Group 3 246 2 878 13
* amount is less than R500 000
Gross inflows under management increased 19% for the six months ended 31
December 2009.
Gross inflows under management
December December %
R million 2009 2008 change
Discovery Health 12 758 11 211 14
Discovery Life 2 121 1 984 7
Discovery Invest 2 614 1 102 137
Discovery Vitality 545 454 20
Destiny Health 4 266 (99)
PruHealth 644 701 (8)
PruProtect 68 22 209
Gross inflows under management 18 754 15 740 19
Less: collected on behalf of third (13 359) (11 406) 17
parties
Discovery Health (11 269) (9 897) 14
Discovery Invest (1 732) (1 092) 59
Destiny Health (2) (55) (96)
PruHealth (322) (351) (8)
PruProtect (34) (11) 209
Gross income of Group 5 395 4 334 24
Reinsurance contracts
Included in cash and cash equivalents at 31 December 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. At
31 December 2008, this amount was shown as a receipt arising from reinsurance
contracts on the face of the income statement and the full amount was
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 R1.1 billion of the
negative reserve in-force as at that date.
LifeBooster benefit
In December 2009, the LifeBooster benefit was added to all Discovery Invest
Endowment Plans, Recurring Retirement Plans and Linked Retirement Income
Plans. The LifeBooster was added to existing and new policies. The
LifeBooster differentiates the Discovery Invest offering in an otherwise
commoditised environment by introducing a death benefit linked to Vitality
status. Given that significant insurance risk is introduced by this benefit
the status of the affected contracts change from Investment management
contracts to Insurance contracts under IFRS.
The policyholder liabilities relating to these Discovery Invest policies were
previously accounted for in terms of IAS 39: Financial instruments, as
Investment contracts at fair value through profit or loss. Insurance
contracts are accounted for under IFRS 4: Insurance contracts.
This had the following effect on the interim results:
- Policyholder liabilities under investment contracts were reduced by R1.8
billion, being the value of the Investment contracts as at 30 November 2009.
- R1.8 billion was included in insurance premium income and then transferred
to liabilities arising from insurance contracts, in the income statement.
- DAC and DRL previously raised in respect of the investment contracts were
reversed to acquisition costs and fee income respectively, and an asset under
insurance contracts (negative reserve) was raised in respect of the insurance
contracts. The net effect on the income statement is an increase in
acquisition costs deferred of approximately R58 million (R46 million relates
to contracts in-force at 30 June 2009).
Impairment of available-for-sale financial instruments
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 the 2008 calendar year, Discovery had to assess whether objective
evidence existed that the equity instruments classified as available-for-sale
financial assets were impaired at 31 December 2008. 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 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
R63 million at 31 December 2008 and was taken through profit and loss.
Subsequent to December 2008, the equity market has recovered somewhat and
many of the shares are above the December 2008 price. As noted previously,
the adjustment will be taken directly to the Investment Reserve in the
Statement of comprehensive income and will only be realised in the income
statement when the shares are sold.
No further impairments have been recorded in the income statement for the six
months ended 31 December 2009.
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 R3
million in the six months ended 31 December 2009 (2008: R7 million) in
accordance with the requirements of IFRS 2.
An additional R79 million (2008: R37 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.
The Group entered into transactions to hedge its exposure in the phantom
share scheme related to changes in the Discovery share price. As at 31
December 2009, approximately 62% (2008: 66.6%) of this exposure was hedged.
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 tax relief for half of the PruHealth losses in respect of
the calendar year ending 31 December 2009, as this tax asset was ceded to
Prudential Assurance Company in the UK ("Prudential"). R9 million in respect
of this tax relief has been included in income tax at 31 December 2009.
At 31 December 2008 however, Discovery obtained no tax relief for the
PruHealth losses in respect of the calendar year ending
31 December 2008. As Discovery recognised a tax benefit at 30 June 2008 in
respect of these losses, R10 million was reversed to income tax at 31
December 2008.
Tax relief is obtained for 100% of the PruProtect losses through Prudential.
Balance Sheet
Investments have increased due to the sale of Discovery Invest products.
The increase in the assets arising from insurance contracts of
R737 million is primarily 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 related to future losses that would be incurred
on a block of business due to an onerous contract. This reserve was included
in liabilities arising from insurance contracts and has been reversed in full
in the six months ending 31 December 2009.
Directorate
Mr Richard Farber was appointed as an executive director of the board of
Discovery with effect from 1 July 2009.
Dividend policy and capital
A final dividend of 33 cents per share was paid on 19 October 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 R258 million (2008: R242 million) and was
covered 8.6 times (2008: 6.4 times).
Cash dividend declaration:
The board has declared an interim dividend of 33 cents per share. The salient
dates are as follows:
- Last date to trade "cum" dividend Friday, 12 March 2010
- Date trading commences "ex" dividend Monday, 15 March 2010
- Record date Friday, 19 March 2010
- Date of payment Tuesday, 23 March 2010
Share certificates may not be dematerialised or rematerialised between
Monday, 15 March 2010 and Friday, 19 March 2010, both days inclusive.
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.
The accounting policies adopted are consistent with the accounting policies
applied in the last annual report and the corresponding prior year period
except as follows:
IAS 1 (Revised) Presentation of Financial Statements
The financial information set out herein incorporates changes introduced as a
result of the publication of a revised version of IAS 1 `Presentation of
Financial Statements`, effective for accounting periods commencing on or
after 1 January 2009. The principal change is that an entity must present all
non-owner changes in equity in a statement of comprehensive income. All owner
changes in equity are recognised in a statement of changes in equity. There
were no impacts on the Group`s results or net assets as a result of the
introduction of the revised standard.
IFRS 8 Operating segments
The Group has prepared its Segmental information using IFRS 8 Operating
Segments, which requires the disclosure of information based on the
"management approach" to reporting on the financial performance of operating
segments. Generally, the information to be reported would be what management
uses internally for evaluating segment performance and deciding how to
allocate resources to operating segments.
Reclassifications of comparative segment information have been made to align
to the Group management reporting structure described above. There was no
impact on net profit or net assets.
Comparative figures
There have been no changes to comparative figures except for the disclosure
changes mentioned above.
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, 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
Embedded value statement
for the six months ended 31 December 2009
The embedded value of Discovery at 31 December 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. The values for
PruHealth reflect Discovery`s 50% shareholding in 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 2009. A copy of the auditors` unqualified
report is available for inspection at the company`s registered office.
Embedded value statement (continued)
for the six months ended 31 December 2009
Table 1: Group embedded value
31 December 31 December % 30 June
R million 2009 2008 Change 2009
Shareholders` funds 7 808 6 441 21 7 013
Adjustment to (4 398) (3 809) (4 012)
shareholders` funds
from published
basis(1)
Adjusted net worth 3 410 2 632 30 3 001
- Free Surplus 2 418 1 734 2 096
- Required Capital(2) 992 898 905
Run-down costs for (30) (75) (42)
Destiny Health(3)
Value of in-force 18 371 18 536 17 939
covered business
before cost of
capital
Cost of required (324) (245) (327)
capital
Cost of STC(4) (540) (425) (531)
Discovery Holdings 20 887 20 423 2 20 040
embedded value
Number of shares 554.3 554.4 553.6
(millions)
Embedded value per R37.68 R36.84 2 R36.20
share
Diluted number of 591.3 592.0 591.3
shares (millions)
Diluted embedded R37.37 R36.17 3 R35.83
value per share(5)
(1) The published Shareholders` funds has been adjusted to eliminate net
assets under insurance contracts, deferred tax and deferred acquisition costs
at December 2009 of R4 374 million (June 2009: R3 984 million; December 2008:
R3 777 million) in respect of Life and R24 million (June 2009: R28 million;
December 2008: R32 million) in respect of PruHealth.
(2) The required capital at December 2009 for Life is R516 million (June
2009: R460 million; December 2008: R484 million), for Health and Vitality is
R367 million (June 2009: R333 million; December 2008: R314 million) and for
PruHealth is R109 million (June 2009: R112 million; December 2008: R100
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 2: Value of in-force covered business
R million Value before Cost of Cost of Value
cost of capital required STC after
and STC capital cost of
capital
and STC
at 31 December 2009
Health and Vitality 8 697 (129) (255) 8 313
Life and Invest(1) 9 409 (163) (277) 8 969
PruHealth(2) 265 (32) (8) 225
Total 18 371 (324) (540) 17 507
at 31 December 2008
Health and Vitality 8 613 (105) (196) 8 312
Life and Invest(1) 9 515 (113) (220) 9 182
PruHealth(2) 408 (27) (9) 372
Total 18 536 (245) (425) 17 866
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
(1) Included in the Life and Invest value of in-force covered business is
R153 million (June 2009: R172 million; December 2008: R121 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 PruHealth value of in-force has been converted using the closing
exchange rate of R11.90/GBP (June 2009: R12.71/GBP; December 2008:
R13.60/GBP).
Embedded value statement (continued)
for the six months ended 31 December 2009
Table 3: Group embedded value earnings
Six months ended Year ended
31 December 31 December 30 June
R million 2009 2008 2009
Embedded value at end of 20 887 20 423 20 040
period
Less: Embedded value at (20 040) (17 881) (17 881)
beginning of period
Increase in embedded value 847 2 542 2 159
Net increase in capital (5) (111) (80)
Dividends Paid 194 134 269
Minority share buy-back - 4 5
Shares issued to minorities (2) - -
Transfer to hedging reserve 18 (12) (43)
Embedded value earnings 1 052 2 557 2 310
Annualised return on opening 10.8% 30.6% 12.9%
embedded value
Table 4: Components of Group embedded value earnings
R million Net worth Cost of Value of Embedded
required in-force value
capital covered
business
less
cost of
STC
Total profit from new (922) (26) 1 561 613
business (at point of
sale)
Profit from existing
business
* Expected return 968 (2) (66) 900
* Change in methodology 488 18 (1 379) (873)
and assumptions(1)
* Experience variances (26) 11 318 303
Other initiative costs(2) (112) - - (112)
Non-recurring expenses (41) - - (41)
Acquisition costs(3) (38) - - (38)
Foreign exchange rate (17) 2 (18) (33)
movements
Cost of STC - - 5 5
Return on shareholders` 328 - - 328
funds(4)
Embedded value earnings 628 3 421 1 052
(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 5 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 therefore the costs are excluded.
(4) Return on shareholders` funds is shown net of tax and management charges.
Table 5: Methodology and assumption changes
Health and Vitality Life and Invest
Net Value of in- Net Value of
R million worth force worth in-force
Modelling changes - - (2) (84)
Economic assumptions - (96) 13 (192)
Benefit enhancements - - (43) (78)
Lapse assumption(1) - - 44 (182)
Premium and benefit - - 15 63
increases
Mortality and - - (43) 20
morbidity
Expenses - (185) (0) (0)
Commission - - - -
Reinsurance(2) - - 440 (474)
Vitality - (62) - -
Total - (343) 424 (927)
PruHealth
Net Value of Total
worth in-force
R million
Modelling changes - - (86)
Economic assumptions - (2) (277)
Benefit enhancements - - (121)
Lapse assumption(1) - - (138)
Premium and benefit increases - - 78
Mortality and morbidity - (14) (37)
Expenses - 4 (181)
Commission - 15 15
Reinsurance(2) 64 (71) (41)
Vitality - (23) (85)
Total 64 (91) (873)
(1) To allow for the potential impact of the economic climate on policyholder
lapses, the June 2009 lapse assumption allowed for an increased lapse rate
for 24 months until June 2011. Although actual lapse experience has been
better than assumed, the term of the additional lapse assumption has been
maintained at 24 months and now extends to December 2011.
(2) The reinsurance item relates to the impact of the financing reinsurance
arrangements.
Table 6: Experience variances
Health and Vitality Life and Invest
Net Value of in- Net Value of
R million worth force worth in-force
Renewal expenses (8) - (12) -
Economic assumptions(1) (1) 174 17 78
Extended modelling term - 109 - 6
Lapses and 2 64 22 6
surrenders(2)
Policy alterations - 5 (95) (49)
Mortality and morbidity - - 62 (2)
Backdated cancellations - - (21) -
Tax(3) (2) - 81 (66)
Reinsurance - - (9) 6
Premium income - - 2 (23)
Other (4) (1) (31) 31
Total (13) 351 16 (13)
PruHealth
Net Value of Total
worth in-force
R million
Renewal expenses 1 1 (18)
Economic assumptions(1) - - 268
Extended modelling term - 16 131
Lapses and surrenders(2) - - 94
Policy alterations - - (139)
Mortality and morbidity (22) (21) 17
Backdated cancellations - - (21)
Tax(3) 23 7 43
Reinsurance - - (3)
Premium income - - (21)
Other (31) (12) (48)
Total (29) (9) 303
(1) 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 2010
which was higher than the long-term inflation assumption in the embedded
value model due to higher than expected inflation over the period.
(2) Included in the Health and Vitality lapse experience variance is an
amount of R236 million in respect of members joining existing employer groups
during the period, offset by an amount of negative R257 million in respect of
members leaving existing employer groups. A positive variance of R87 million
is due to lower than expected lapses.
(3) The tax variance for Life and Invest arises due to a movement in the
deferred tax asset.
Embedded value statement (continued)
for the six months ended 31 December 2009
Table 7: Embedded value of new business
Six months ended Year ended
31 December 31 December % 30 June
R million 2009 2008 change 2009
Health and Vitality
Present value of
future profits from
new business at point 164 158 295
of sale
Cost of required (6) (4) (11)
capital
Cost of STC (10) (2) (9)
Present value of 148 152 (3) 275
future profits from
new business at point
of sale after cost of
required capital and
STC
New business 576 499 15 1 204
annualised premium
income(1)
Life and Invest
Present value of 478 540 863
future profits from
new business at point
of sale(2)
Cost of required (17) (21) (34)
capital
Cost of STC (14) (12) (23)
Present value of 447 507 (12) 806
future profits from
new business at point
of sale after cost of
required capital and
STC
New business 804 654 23 1 246
annualised premium
income(3)
Annualised profit 6.5% 8.3% 7.7%
margin(4)
Annualised profit 9.0% 10.2% 9.9%
margin excluding
Invest Business
PruHealth
Present value of 22 45 41
future profits from
new business at point
of sale
Cost of required (3) (4) (17)
capital
Cost of STC (1) (3) (1)
Present value of 18 38 (53) 23
future profits from
new business at point
of sale after cost of
required capital and
STC
New business 60 108 (44) 188
annualised premium
income(5)
Annualised profit 3.3% 3.9% 0.9%
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 2009.
The total Health and Vitality new business annualised premium income written
over the period was R1 862 million (June 2009: R3 191 million; December 2008:
R1 505 million).
(2) Included in the Life and Invest value of new business is R5 million (June
2009: R58 million; December 2008: R27 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 R804 million (June 2009: R1 246
million; December 2008: R654 million) (single premium APE: R210 million (June
2009: R198 million; December 2008: 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 R196 million (June
2009: R415 million; December 2008: R201 million) and servicing increases of
R116 million (June 2009: R259 million; December 2008: R138 million) was R1
116 million (June 2009: R1 920 million; December 2008: R993 million) (single
premium APE: R210 million (June 2009: R198 million; December 2008: 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 6 as experience variances and not
included as 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) 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 2009. There have been no changes to the
definition of new business since the previous valuation.
Table 8: Embedded value economic assumptions
31 31 30
December December June
2009 2008 2009
Beta coefficient
South Africa 0.51 0.44 0.45
United Kingdom 0.51 0.44 0.45
Equity risk premium
South Africa 3.50 3.50 3.50
United Kingdom 4.00 4.00 4.00
Risk discount rate (%)
- Health and Vitality 10.785 9.04 10.575
- Life and Invest 10.785 9.04 10.575
- PruHealth 6.99 6.00 6.40
Rand/GB Pound Exchange
Rate
Closing 11.90 13.60 12.71
Average 12.43 14.75 14.08
Medical inflation (%)
South Africa 8.00 7.50 8.00
United Kingdom Current Current Current
levels levels levels
reducing reducing reducing
to 7.00% to 6.00% to 7.00%
over the over the over the
projection projection projection
period period period
Expense inflation and
CPI (%)
South Africa 5.00 4.50 5.00
United Kingdom 3.75 3.00 3.75
Pre-tax investment
return (%)
South Africa - Cash 7.50 6.00 7.50
- Bonds 9.00 7.50 9.00
- Equity 12.50 11.00 12.50
United Kingdom - Cash 4.45 3.75 2.65
Dividend cover ratio 4.5 times 4.5 times 4.5 times
Income tax rate (%)
South Africa 28.00 28.00 28.00
United Kingdom 28.00 28.00 28.00
Projection term
- Health and Vitality 20 years 20 years 20 years
- 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 24 months to
allow for the potential impact of the current economic climate on
policyholder lapses.
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
18 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 short-term 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 embedded value has been calculated in accordance with the Actuarial
Society of South Africa`s Professional Guidance Note PGN 107: Embedded Value
Reporting. The updated guidance note was applied for the first time in
December 2008. The risk discount rate, calculated in accordance with the
updated guidance note, uses the CAPM approach with specific reference to the
Discovery beta coefficient. The Discovery beta coefficient reflects the
historic performance of the Discovery share price relative to the market and
infers a lower allowance for non-market related and non-financial risk.
Previously, the potential cost of these risks to shareholders was allowed for
through a higher margin in the risk discount rate. Investors may want to form
their own view on an appropriate allowance for the non-financial risks which
have not been modelled explicitly.
The sensitivity of the embedded value and the value of new business at 31
December 2009 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 9: Embedded value sensitivity to risk discount rate
R million Risk Published Risk
discount risk discount
rate - 1% discount rate + 1%
rate
Adjusted net worth less run- 3 380 3 380 3 380
down costs for Destiny Health
Value of in-force covered 20 108 18 371 16 903
business before cost of
capital
Cost of required capital (332) (324) (318)
Cost of STC (628) (540) (474)
Discovery Holdings embedded 22 528 20 887 19 491
value
Table 10: Value of new business sensitivity to risk discount rate
R million Risk Published Risk
discount risk discount
rate - 1% discount rate + 1%
rate
Present value of future
profits from new business at
point of sale 808 664 537
Cost of required capital (28) (26) (25)
Cost of STC (25) (25) (15)
Present value of future
profits from new business
at point of sale after cost of
required capital and STC 755 613 497
Date: 24/02/2010 09:30:02 Produced by the JSE SENS Department.
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