| Thu 1 Sep 2011, 10:00 | | DSY - Discovery Holdings Limited - Audited results announcement and cash |
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DSY
DSY
DSY - Discovery Holdings Limited - Audited results announcement and cash
dividend declaration for the year ended 30 June 2011
Discovery Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
JSE share code: DSY ISIN: ZAE000022331
AUDITED RESULTS ANNOUNCEMENT AND CASH DIVIDEND DECLARATION
FOR THE YEAR ENDED 30 JUNE 2011
Operating profit
up 32% to R2 838 million
Normalised headline earnings per share
up 31% to 365.8 cents
Embedded value per share
up 19% to R48.45
Gross inflows under management
up 21% to over R50 billion
Introduction
Discovery performed strongly during the past financial year. Despite economic
uncertainty, considerable policy debates and volatile markets both locally and
internationally, the year under review was a seminal one for Discovery - it
achieved considerable success in the context of growth, innovation and quality
across virtually all areas of the business. Not only did Discovery`s businesses
perform better than expected, but it also made significant progress in
furthering the development of the Vitality framework and its alternate
applications locally, and in translating Discovery`s business model into a
`repeatable` construct that underpins its expansion into new markets. This
manifested in a decisive year:
Discovery acquired Standard Life HealthCare, the UK`s fourth largest health
insurer and began its integration into PruHealth.
Discovery increased its shareholding in the Prudential plc joint venture from
50% to 75%.
Discovery concluded the joint venture with the US health insurer Humana and
launched HumanaVitality on 1 July 2011.
Discovery launched Discovery Insure, its short-term insurance business.
In addition, the period under review saw Discovery consolidating its capacity
and potential for growth going forward.
Discovery`s capital base was strengthened by the issuing of R800 million of
perpetual preference shares, placing the Group in a strong position to
experience continued growth without recourse to additional capital.
Notable highlights over the period include:
Financial performance: Discovery`s financial performance exceeded expectation.
Normalised profit from operations grew 32% with normalised headline earnings
growing 31%. In addition, the period under review saw embedded value increasing
by 19%, coupled with positive experience variances.
Existing businesses: Discovery`s existing businesses performed well. Its focus
on quality manifested in strong embedded value growth, improved new business
margins and significant positive experience variances. These outcomes illustrate
how these businesses have outperformed the actuarial assumptions made.
Emerging businesses: Discovery`s emerging businesses (PruHealth, PruProtect,
and Discovery Invest) performed better than expected, with all three generating
profits and positioning themselves strongly for profitability going forward. The
scale of these emerging businesses is demonstrated by the fact that their
combined run rate of new business at the end of the financial year now accounts
for almost a third of Discovery`s new business.
New international businesses: Discovery`s new international business,
HumanaVitality - a joint venture with the US insurer Humana - has been
exceptionally well received with over 480 000 members committed to Vitality in
the United States. This brings the total committed Vitality membership in the
United States to 680 000. Ping An Health, Discovery`s joint venture with the
Ping An Insurance Group of China, Ltd is showing early signs of the benefits of
Discovery`s health and wellness platform. Although still young, the business now
covers
300 000 lives, generating R155 million revenue over the six-month period to June
2011.
New local businesses: Discovery`s entry into the short-term insurance market
with Discovery Insure exceeded expectation, with strong market receptivity of
the business manifesting in a new business run rate in excess of R1 million per
day in just 12 weeks since its launch in May this year.
Development of the Vitality model: Underpinning Discovery`s performance is its
integrated business model of which Vitality forms the basis. During the period
under review, Discovery made considerable advances in furthering its
understanding of the effect of consumer engagement and wellness on health and
life insurance. In both cases, the scientific evidence is clear: Vitality
creates better selection, more accurate pricing, better mortality and morbidity,
and superior selective lapsation. The effect of this in both health and life
insurance is significant as it not only provides greater actuarial stability but
also adds unique value to Discovery`s customers. During the period under review,
work was done on the Vitality model to ensure its repeatability in markets such
as China, the United States and the United Kingdom. In addition, the model was
used as the basis for Discovery Insure, applying the principles of behavioural
economics to the science of driving, resulting in significant value for
consumers. While still embryonic, this model forms the foundation for the
internationalisation of Discovery`s assets and business.
Discovery Health
Discovery Health`s performance was pleasing and exceeded expectation. The period
under review saw strong growth in individual business with a 24% increase in
individual new business. In addition, operating profits increased by 14% to R1
357 million, with the total medical scheme membership managed by Discovery
Health increasing by 6% to 2.5 million lives, and the Discovery Health Medical
Scheme annualised lapse rate decreasing to 4.07%. New business decreased by 13%
compared to the previous year. This was however in line with expectation: the
previous year`s new business performance was off a high base, attributable to
the acquisition of the administration contracts for two large restricted schemes
and a large corporate scheme in DHMS that resulted in a 48% increase in the
quantum of new business since the 2009 period.
Discovery Health`s primary role is to ensure that the members of the schemes
under its management have access to quality healthcare on a sustainable basis.
This requires the management of clinical, actuarial, technological and
regulatory challenges. In addition, Discovery Health must play a fundamental
role in building the healthcare system,
not only for its members, but for all South Africans. Discovery Health remains
acutely aware of this responsibility. Its primary strategy has been to use its
scale and expertise and invest significantly in its assets to fulfil this
responsibility.During the year under review, the success of this strategy
continued to manifest with strong membership growth, lower and decreasing lapse
rates, and the rollout of enhanced services for members such as MedXpress,
Discovery Health`s pharmacy delivery service.
Most importantly, Discovery Health`s risk management capabilities and direct
payment arrangements with healthcare professionals as well as hospital
arrangements resulted in a low rate of medical inflation for the Discovery
Health Medical Scheme, compared to competitor schemes in the market. Over the
last four years, for a common basket of medical procedures, the Discovery Health
Medical Scheme experienced an effective medical inflation rate of 8.3%, versus a
market average of 11.6%. The cumulative effect of this over the four-year period
is a difference of 13%.
In addition, Discovery Health invested considerably in tools that enhance the
quality and minimise the cost of care for members. Most notably, it began
rolling out PracticeXpress - a comprehensive suite of technologies, based
initially on the iPad, that gives healthcare professionals access to patients`
electronic health records at the point of care, and allows them to interface
online with Discovery Health, and with various aspects of the healthcare system
such as pharmacies, MedXpress and other healthcare professionals. The purpose of
this is to ensure better coordination of care and to improve efficiency and
quality. Going forward, Discovery Health will be rolling out this technology
proactively to ensure its take-up nationally with healthcare professionals.
From a regulatory perspective, the period under review saw the National Health
Insurance (NHI) policy debate mature considerably, manifesting in the release of
the Department of Health`s Green Paper - the policy proposal for the
implementation of comprehensive NHI for all South Africans. Discovery Health
strongly supports the rollout of an NHI system, as we believe that South Africa
needs healthcare reform to ensure a comprehensive healthcare system for all
South Africans. The policy proposals set out are rational, appropriate and bold.
Importantly, they seek to address human resource shortages in the healthcare
system, raise additional revenue for healthcare delivery and recognise the role
of both the public and private healthcare sectors. Discovery Health is confident
that if properly executed, South Africa`s healthcare system will be
strengthened. Discovery Health remains confident of its role in this emerging
environment.
Discovery Life
Discovery Life`s performance was excellent with the value of in-force business
increasing by 25% from R9 437 million to R11 764 million and operating profit
growing by 16% from R1 341 million to R1 558 million. New business grew 5% from
R1 542 million to R1 620 million, and Core risk new business (excluding
Automatic Contribution Increases) increased by 10%. Given the scale of the
business and its rapid growth, Discovery Life`s primary strategy during the year
was to focus on the quality of the business. The success of this strategy
manifested in a number of key areas:
The rate of policy lapsation reduced significantly and came within the level of
the long-term lapse assumption inherent in the embedded value calculation. This
was a fundamental and important outcome given the elevated lapsation rates that
the industry has experienced during the financial crisis over the last few
years.
Work done by Discovery Life at statistically predicting the causes of lapses
illustrated clearly that a primary antidote to the consumer problem of lack of
affordability was the Vitality integrated model. Pleasingly, during the year
under review, engagement in Vitality among Discovery Life policyholders
continued to increase, and the effects of engagement, even at the blue Vitality
Status level, are significant.
Expense levels were significantly reduced during the period, with a significant
change in unit costs resulting in increasing new business margins and strong
experience variances.
A focus on innovation to meet the complex and unique needs of the Discovery
Life client base continued. During the period, a number of new products were
launched, most notably, the AccessCoverTrade Mark product, which makes life
cover fungible and gives policyholders the choice to cash in life cover during
life-changing events such as severe illness and disability; and the Philanthropy
Fund, allowing policyholders to buy additional life cover to meet their specific
philanthropic needs.
These combined strategies manifested in the new business margin increasing by
1.4% from 8.4% to 9.8%.
Discovery Invest
Discovery Invest`s performance was exceptional, with the business turning
significantly profitable with an operating profit of R101 million. Assets under
management exceeded R17,2 billion and importantly, Discovery Funds performed
exceptionally well with more fund choices made towards Discovery Funds,
resulting in improved margins.
Discovery Invest`s primary strategy is to provide products and services that
enable its investors to take advantage of an open architecture investment
environment, while being protected against volatile markets or poor investment
choices. A fundamental test of Discovery Invest`s value proposition is to
consider the performance of its products
since inception, a perfect test of efficacy given market volatility and the
financial crisis. A test in aggregate of this approach, is that a hypothetical
client investing in a basket of Discovery Funds would have outperformed the
equivalent benchmark of funds by a cumulative 7.1% over four years, with the
unique Discovery Invest features adding a further cumulative 5.5%.
During the period under review, Discovery Invest continued to launch new
products, predicated on the same philosophy. The Guaranteed Escalator Annuity is
a strong example of this, enabling customers to invest in equity-linked
annuities while enjoying a strong guaranteed underpin and financial protection
for longevity.
The cumulative effect of Discovery Invest`s increasing scale, competitiveness,
unique product propositions and fund choices led to a significant increase in
new business margins and business profitability.
PruHealth
The year under review was a defining one for Discovery`s UK businesses. During
the period, Discovery acquired Standard Life HealthCare (SLH), the UK`s fourth
largest health insurer and contributed this to the joint venture, thereby
increasing Discovery`s shareholding of both PruHealth and PruProtect from 50% to
75%. This gave Discovery the opportunity to focus on building both PruHealth and
PruProtect along the lines of its Vitality-integrated model, thereby providing a
unique value proposition in a market characterised by strong competition and
product commoditisation. PruHealth`s performance during the period exceeded
expectation despite the particularly difficult economic environment in the UK,
which has a dramatic effect on the Private Medical Insurance market. During the
period under review, PruHealth focused on four important strategic thrusts.
PruHealth:
Successfully decreased its loss ratio and expense levels.
Successfully completed the SLH acquisition with the business performing better
than the assumptions made during the due diligence.
Rolled out a best-of-breed product range incorporating the relative merits of
both the PruHealth and SLH product offerings.
Began work on rolling out Vitality to the entire combined membership base.
These strategies resulted in strong performance: the 2011 expense base of the
combined book decreased by 11% off the 2010 base; new business (including the
contribution of the ex-Standard Life HealthCare book) increased by 49%, and R61
million operating profit was achieved for the combined business.
PruProtect
PruProtect`s performance was exceptional across all performance metrics. The
company turned to profitability during the last six months of the financial
year, while capturing an estimated 6% to 8% of broker new business in the UK
life insurance market. Importantly, the PruProtect business model closely
resembles the Discovery Life model and demonstrates strongly the power of
Discovery`s ability to replicate the model in other markets. This performance
was underpinned by the Vitality chassis that enables dynamic pricing; innovative
risk benefits that led to multiple ancillary benefits per policy; the franchise
broker distribution model that enables high advice with variable costs; and an
efficient capital model utilising the Prudential Life Insurance Fund. The
combination of these manifested in policies in-force increasing by 92% from 35
915 to 68 880 and the average daily new business application count increasing
from 163 to 241. In addition, mortality experience was significantly lower than
expected and the number of policies indexed to inflation increased from 5% to
20%, thereby generating higher new business margins.
PruProtect continues to pursue rapid and focused innovation, with the product
launch during the period incorporating a number of powerful, new product
concepts, resulting in positive market receptivity and strong new business
growth. PruProtect saw new business API increasing 28% from R228 million to R290
million; and a maiden half-year after-tax profit of R7 million.
Vitality
Vitality`s performance was excellent and its role in product integration,
engagement and achieving superior levels of mortality and morbidity experience
was further enhanced during the period under review. Engagement levels of key
Vitality activities increased dramatically, with gym membership increasing to
400 000 members; HealthyFoodTrade Mark activations exceeding 260 000 and almost
12.5 million trolleys purchased since inception; as well as over R200 million in
HealthyFoodTrade Mark cash backs paid out since the launch of HealthyFoodTrade
Mark in February 2009.
The period under review also saw Vitality continue its work in understanding the
academic and scientific link between Vitality engagement and mortality and
morbidity experience, and the resulting impact on hospital-related costs.
In support of the cross-sectional studies published in 2009 and 2010 which
found evidence for the link between fitness engagement and reduced hospital
costs over time, a longitudinal study published in the Journal of Health
Promotion during the period validated Vitality`s ability to get people engaged
in complex fitness activities, and sustain this engagement over time.
In addition, further work was done to leverage existing Health and Vitality
data to assess the impact of Vitality on health systems. By levels of
engagement, further evidence was found for the proposition that the probability
of hospitalisation decreases as engagement increases, and engaged members make
for better patients on a yearly
cost-per-life basis. Furthermore, with regards to cancer-specific inquiries,
Vitality research found that engaged members have a far higher rate of early
detection of cancer incidence as a result of active screening, and screened
members experience significantly lower treatment costs when compared to non-
screened members.
The period under review also saw the conclusion of the first Healthy Company
Index, with over 100 companies participating in this survey on employee
wellness. Through the process, Vitality obtained additional evidence to validate
Vitality Age as a predictor of morbidity risk. Respondents whose Vitality Age
was greater than their actual age, experienced 35% more doctor visits in the
past month, 26% more hospital days in the last year, and missed 28% more work
days than their peers whose Vitality Age was less than or equal to their actual
age.
It is this significant and continually evolving knowledge and capability that
has been used to underpin both Discovery`s local and nternational businesses.
The DiscoveryCard performed pleasingly during the period under review and
reflected both the quality of Discovery`s client base and the improving economic
environment. The DiscoveryCard captured 8.9% of the point-of-sale market share
and the quality of the credit experience remained above expectation. It is
providing a further integration platform for the Discovery Insure product. In
addition, the period under review saw the launch of the Discovery Purple Card
aimed at providing the higher end market segment with unique value.
Ping An Health
The strategic vision of Ping An Health is to create the premier specialist
health insurer in China, offering innovative, consumer-centric products and
services. During the period under review, the Ping An Health team put in a
significant amount of work to build the operational and product structures that
will set up the company for strong growth, focusing on injecting Discovery`s
intellectual property and know-how into Ping An Health. Progress has been made
in a number of key areas of the business:
Ping An Health has built its products through an iterative process in order to
best understand the needs of the Chinese consumer. Additionally, the Discovery
Vitality chassis is being built in China and Ping An Health`s products are being
supported by innovative technical marketing campaigns.
The branch network is expanding. Three new branches were added in the last
year.
Discovery has injected systems, risk management and clinical tools that will
allow Ping An Health to offer consumers an integrated and efficient experience
and to gather and collect accurate and up-to-date data for analytics, thereby
transforming Ping An Health`s extensive medical network and service
infrastructure into powerful assets in the Chinese health insurance market.
Although still early in the joint venture, the business has shown rapid growth
in its premium income over the first half of 2011, compared to previous periods
and has accelerated its membership growth in 2011. Ping An Health will continue
to build from a strong foundation - the company now offers services to 1 500
group clients and administers a total of 300 000 lives.
Discovery Insure
Discovery Insure`s strategic rationale for entering into short-term insurance
was to leverage its behavioural economics experience built off the Vitality
chassis to encourage good driving behaviour and improved road safety.
Fundamental to this approach is the use of incentives in encouraging good
driving behaviour. The result is a telematics-enabled product construct that
allows for tailored driver feedback and education on a driver`s unique driving
style and patterns, coupled with a dynamic reward structure to initiate and
sustain good driving behaviour.
Discovery Insure launched in May 2011, and the market`s receptivity towards the
product and service offering has been overwhelmingly positive. In the third
month since launch, average daily new business API exceeded R1 million.
Furthermore, Discovery`s intent to further its integrated model through
alternate business model applications of Vitality has been successful, with 98%
of Discovery Insure policyholders having a Vitality policy, over 80% being
Discovery Health members, over 60% having a DiscoveryCard, and over 35% having a
Discovery Life policy.
Going forward, Discovery Insure will focus on driving new business volumes,
thereby accelerating mainstream adoption of the technology; and operationally
delivering on the distinctive service platform. The goal is a societal one,
making good driving within everyone`s grasp, and making South Africa`s roads
safer for everyone`s benefit.
The Vitality Group and HumanaVitality
Over the past financial year, The Vitality Group (TVG) has developed a strong
foundation for building a meaningful business in the US, achieving the
following:
Developing strategic partnerships through Johnson&Johnson in the business-to-
business channel and HumanaVitality in the insurance channel.
Maturing systems and operations infrastructure to support scale.
Developing the largest network of access through health clubs, devices and
retail outlets in the United States.
Driving a level of member engagement with Vitality that is the highest among
Discovery member companies (around 60% HRA completion rate amongst its ten
largest clients).
Delivering strong membership growth (over 200 000 committed members).
Furthermore, the considerable work done to evolve the science of Vitality,
coupled with TVG`s proactive thought leadership drive to showcase the Vitality
programme and build corporate reputation, led to strong external recognition for
the Vitality model over the period under review. One of TVG`s clients - Alcon
Laboratories - was awarded the C. Everett Koop National Health Award for its use
of Vitality in promoting wellness. This is a highly prestigious award
recognising outstanding workplace health improvement programmes that demonstrate
the ability to improve health risk status and reduce costs. This esteemed award
goes a long way in establishing both TVG`s and Vitality`s credibility in the
market.
In addition, a further chapter in the international deployment of Vitality was
concluded during the period, with HumanaVitality launching to market just six
months after signing the contract. With over 480 000
HumanaVitality members committed to the programme, Vitality`s membership in the
United States is now over 680 000, forming part of the two-million global
Vitality membership base.
Prospects
The work done over the past financial year has ensured that the Discovery Group
is both well positioned and capitalised for continued growth and profitability
into the future.
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
Income statement
FOR THE YEAR ENDED 30 JUNE 2011
R million Group Group %
2011 2010 change
Insurance premium revenue 12 486 7 860
Premium revenue from investment contracts
transferred to insurance contracts - 1 865
Reinsurance premiums (1 700) (1 172)
Net insurance premium revenue 10 786 8 553
Fee income from administration business 3 888 3 380
Investment income 205 239
Net realised gains on available-for-sale 202 200
financial assets
Net fair value gains on financial assets 661 276
at fair value through profit or loss
Vitality income 1 480 1 182
Net income 17 222 13 830
Claims and policyholders` benefits (5 573) (2 586)
Insurance claims recovered from 1 246 841
reinsurers
Recapture of reinsurance (313) -
Net claims and policyholders` benefits (4 640) (1 745)
Acquisition costs (2 116) (1 961)
Marketing and administration expenses (6 012) (4 807)
BEE expenses - (6)
Amortisation of intangibles from business (97) -
combinations
Recovery of expenses from reinsurers 139 95
Transfer from assets/liabilities under (1 530) (2 717)
insurance contracts
- change in assets arising from 1 760 1 639
insurance contracts
- change in liabilities arising from (3 184) (4 291)
insurance contracts
- change in liabilities arising from (106) (65)
reinsurance contracts
Fair value adjustment to liabilities (52) (175)
under investment contracts
Profit from operations 2 914 2 514
Gains and losses resulting from business 609 -
combinations
Write-off of software from business (95) -
combination
Realised gains on disposal of 87 -
intellectual property
Realised gains on disposal of investment 122 -
property
Finance costs (168) (14)
Foreign exchange loss (14) (3)
Share of loss from associate (4) -
Profit before tax 3 451 2 497 38
Income tax expense (872) (782) (12)
Profit for the year 2 579 1 715 50
Profit attributable to:
- equity holders 2 577 1 717 50
- non-controlling interest 2 (2)
2 579 1 715 50
Earnings per share for profit
attributable to the equity holders of the
company during the year (cents):
- basic 464.4 309.9 50
- diluted 464.2 308.7 50
Statement of comprehensive income
FOR THE YEAR ENDED 30 JUNE 2011
R million Group Group %
2011 2010 change
Profit for the year 2 579 1 715
Other comprehensive income:
Change in available-for-sale financial (122) 33
assets
- unrealised gains 61 238
- capital gains tax on unrealised gains (9) (33)
- realised gains transferred to profit (202) (200)
or loss
- capital gains tax on realised gains 28 28
Currency translation differences (146) (20)
- decrease in currency translation (127) (20)
reserve
- transfer to profit or loss on disposal (19) -
of joint venture
Cash flow hedges (30) 12
- unrealised gains/(losses) (31) 22
- tax on unrealised gains/losses 8 (12)
- realised (gains)/losses transferred (10) 2
to profit or loss
- tax on realised gains/losses 3 *
Other comprehensive income for the year, (298) 25
net of tax
Total comprehensive income for the year 2 281 1 740 31
Attributable to:
- equity holders 2 279 1 742 31
- non-controlling interest 2 (2)
Total comprehensive income for the year 2 281 1 740 31
* Amount is less than R500 000
Headline earnings
FOR THE YEAR ENDED 30 JUNE 2011
R million Group Group %
2011 2010 change
Normalised headline earnings per share
(cents):
- undiluted 365.8 279.9 31
- diluted 365.5 278.8 31
Headline earnings per share (cents):
- undiluted 295.3 278.8 6
- diluted 295.2 277.7 6
The reconciliation between earnings and
headline earnings is shown below:
Net profit attributable to equity 2 577 1 717
shareholders
Adjusted for:
- realised gains on available-for-sale (174) (172)
financial assets net of CGT
- realised gains on disposal of (57) -
intellectual property net of
deferred tax
- realised gains on disposal of (109) -
investment property net of CGT
- gain on disposal of joint venture (667) -
- write-off of software from business 68 -
combination net of deferred tax
Headline earnings 1 638 1 545 6
- recapture of reinsurance 313 -
- DAC expense reversed due to business (137) -
combination
- amortisation of intangibles from 70 -
business combinations net of deferred
tax
- once-off costs relating to acquisitions 58 -
- finance costs raised on puttable 86 -
non-controlling interest financial
liability
- BEE expenses - 6
Normalised headline earnings 2 028 1 551 31
Weighted number of shares in issue 554 847 554 117
(000`s)
Diluted weighted number of shares (000`s) 555 056 556 257
Statement of financial position
AT 30 JUNE 2011
R million Group Group
2011 2010
ASSETS
Assets arising from insurance contracts 9 044 7 076
Property and equipment 200 220
Investment property - 19
Intangible assets including deferred acquisition 1 440 325
costs
Goodwill 1 302 -
Investment in associates 260 -
Financial assets
- Equity securities 3 467 2 892
- Equity linked notes 4 742 2 861
- Debt securities 1 535 714
- Inflation linked securities 159 68
- Money market 2 680 1 453
- Derivatives 46 111
- Loans and receivables including insurance 2 269 1 885
receivables
Deferred income tax 296 303
Current income tax asset - 101
Reinsurance contracts 180 121
Cash and cash equivalents 3 285 2 845
Total assets 30 905 20 994
EQUITY
Capital and reserves
Share capital and share premium 1 542 1 541
Other reserves 278 574
Retained earnings 7 149 6 267
8 969 8 382
Non-controlling interest 4 -
Total equity 8 973 8 382
LIABILITIES
Liabilities arising from insurance contracts 10 621 6 198
Liabilities arising from reinsurance contracts 1 308 1 160
Financial liabilities
- Investment contracts at fair value through 2 063 1 544
profit or loss
- Borrowings at amortised cost 402 23
- Derivatives 22 12
- Puttable non-controlling interests 2 314 -
Deferred income tax 2 584 1 849
Deferred revenue 130 75
Employee benefits 97 70
Trade and other payables 2 391 1 681
Total liabilities 21 932 12 612
Total equity and liabilities 30 905 20 994
Statement of cash flows
FOR THE YEAR ENDED 30 JUNE 2011
R million Group Group
2011 2010
Cash flow from operating activities (6) 1 630
Cash generated by operations 4 060 4 472
Policyholder net investments (3 930) (2 988)
Working capital changes 156 330
286 1 814
Dividends received 83 31
Interest received 122 226
Interest paid (62) (14)
Taxation paid (435) (427)
Cash flow from investing activities 313 (105)
Net disposals of financial assets 1 369 112
Disposal of investment property 140 -
Purchase of equipment (40) (127)
Purchase of intangible assets (84) (90)
Purchase of subsidiary (1 072) -
Cash flow from financing activities 198 (396)
Proceeds from issuance of ordinary shares 282 2
Dividends paid to equity holders (461) (389)
Repayment of borrowings (23) (9)
Increase in borrowings 400 -
Net increase in cash and cash equivalents 505 1 129
Cash and cash equivalents at beginning of year 2 845 1 737
Exchange losses on cash and cash equivalents (65) (21)
Cash and cash equivalents at end of year 3 285 2 845
Statement of changes in equity
FOR THE YEAR ENDED 30 JUNE 2011
Attributable to equity holders of
the Company
R million Share Share- Revalua- Trans-
capital based tion lation
and payment reserve* reserve
share reserve
premium
Year ended 30 June 2010
At beginning of year 1 548 307 112 96
Profit for the year - - - -
Other comprehensive income - - 33 (20)
Total comprehensive income for - - 33 (20)
the year
Transactions with owners:
Increase in treasury shares (13) - - -
Non-controlling interest - - - -
share issue
Realised gains from 6 - - -
treasury shares
Employee share option schemes:
- Value of employee services - 9 - -
Dividends paid to equity holders - - - -
Total transactions with owners (7) 9 - -
At end of year 1 541 316 145 76
Year ended 30 June 2011
At beginning of year 1 541 316 145 76
Profit for the year - - - -
Other comprehensive income - - (122) (146)
Total comprehensive income for - - (122) (146)
the year
Transactions with owners:
Increase in treasury shares (16) - - -
Realised gains from 17 - - -
treasury shares
Non-controlling interest share - - - -
issues
Non-controlling interest - - - -
share buy-backs
Fair value adjustment of - - - -
non-controlling interest share
of subsidiary
Transfer to puttable - - - -
non-controlling interest liability
Employee share option schemes:
- Value of employee services - 2 - -
Dividends paid to equity holders - - - -
Total transactions with owners 1 2 - -
At end of year 1 542 318 23 (70)
Statement of changes in equity
FOR THE YEAR ENDED 30 JUNE 2011
Attributable to equity
holders of the Company
R million Hedging Retained Total Non- Total
reserve earnings con-
trolling
interest
Year ended 30 June 2010
At beginning of year 25 4 925 7 013 - 7 013
Profit for the year - 1 717 1 717 (2) 1 715
Other comprehensive 12 - 25 - 25
income
Total comprehensive 12 1 717 1 742 (2) 1 740
income for the year
Transactions with owners:
Increase in treasury - - (13) - (13)
shares
Non-controlling interest - - - 2 2
share issue
Realised gains from - - 6 - 6
treasury shares
Employee share
option schemes:
- Value of employee - - 9 - 9
services
Dividends paid to - (375) (375) - (375)
equity holders
Total transactions - (375) (373) 2 (371)
with owners
At end of year 37 6 267 8 382 - 8 382
Year ended 30 June 2011
At beginning of year 37 6 267 8 382 - 8 382
Profit for the year - 2 577 2 577 2 2 579
Other comprehensive (30) - (298) - (298)
income
Total comprehensive (30) 2 577 2 279 2 2 281
income for the year
Transactions with owners:
Increase in treasury - - (16) - (16)
shares
Realised gains from - - 17 - 17
treasury shares
Non-controlling interest - - - 1 070 1 070
share issues
Non-controlling interest - - - (2) (2)
share buy-backs
Fair value adjustment of - 51 51 (51) -
non-controlling interest
share of subsidiary
Transfer to puttable - (1 301) (1 301) (1 015) (2 316)
non-controlling interest
liability
Employee share option
schemes:
- Value of employee - - 2 - 2
services
Dividends paid - (445) (445) - (445)
to equity holders
Total transactions - (1 695) (1 692) 2 (1 690)
with owners
At end of year 7 7 149 8 969 4 8 973
Segmental information
FOR THE YEAR ENDED 30 JUNE
R million SA SA SA SA UK
Health Life Invest Vitality Health
30 June 2011
Income statement
Insurance premium revenue 21 5 142 3 295 - 3 738
Reinsurance premiums (3) (1 007) - - (609)
Net insurance premium 18 4 135 3 295 - 3 129
revenue
Fee income from 3 479 78 242 - 17
administration business
Investment income 22 135 7 7 12
Inter-segment funding - (216) 216 - -
Net realised gains on - 202 - - -
available-for-sale
financial assets
Net fair value gains on - 239 422 - -
financial assets at fair
value through profit
or loss
Vitality income - - - 1 367 71
Net income 3 519 4 573 4 182 1 374 3 229
Claims and policyholders` (6) (2 322) (501) - (2 659)
benefits
Insurance claims 1 695 - - 500
recovered from reinsurers
Net claims and (5) (1 627) (501) - (2 159)
policyholders` benefits
Acquisition costs - (1 265) (281) (57) (254)
Marketing and
administration expenses
- depreciation and (134) (32) - - (5)
amortisation
- other expenses (2 001) (955) (205) (1 292) (842)
Recovery of expenses from - - - - 139
reinsurers
Transfer from
assets/liabilities under
insurance contracts
- change in assets - 1 351 - - -
arising from insurance
contracts
- change in liabilities - (99) (3 067) - (18)
arising from insurance
contracts
- change in liabilities - (77) - - (17)
arising from
reinsurance contracts
Fair value adjustment to - (32) (20) - -
liabilities under
investment contracts
Profit/(loss) from 1 379 1 837 108 25 73
operations
Recapture of reinsurance - - - - -
Gains and losses - - - - -
resulting from business
combinations
DAC expense reversed due - - - - -
to business combination
Amortisation of - - - - -
intangibles from business
combinations
Write-off of software - - - - -
from business combination
Realised gains from the - - - - -
disposal of intellectual
property
Realised gains from the - - - - -
disposal of investment
property
Finance costs - - - - -
Foreign exchange loss (9) (4) (3) - -
Share of loss from - - - - -
associate
Profit/(loss) before tax 1 370 1 833 105 25 73
Income tax expense (381) (478) (29) (4) 7
Profit/(loss) for the 989 1 355 76 21 80
year
Attributable to:
- equity holders 989 1 355 76 21 80
- non-controlling - - - - -
interest
989 1 355 76 21 80
*All other segments include the impact from business combinations
30 June 2010
Income statement
Insurance premium revenue 29 4 310 2 848 - 587
Premium revenue for
investment contracts
transferred to insurance - - 1 865 - -
contracts
Reinsurance premiums (2) (870) - - (276)
Net insurance premium 27 3 440 4 713 - 311
revenue
Fee income from 3 114 95 104 44 2
administration business
Investment income 26 153 19 16 -
Inter-segment funding - (97) 97 - -
Net realised gains on - 200 - - -
available-for-sale
financial assets
Net fair value gains on - 67 209 - -
financial assets at fair
value through profit or
loss
Vitality income - - - 1 102 50
Net income 3 167 3 858 5 142 1 162 363
Claims and policyholders` (14) (1 816) (200) - (513)
benefits
Insurance claims 1 562 - - 270
recovered from reinsurers
Net claims and (13) (1 254) (200) - (243)
policyholders` benefits
Acquisition costs - (1 201) (449) (64) (53)
Marketing and
administration expenses
- depreciation and (159) (11) (15) - (1)
amortisation
- other expenses (1 769) (1 015) (137) (1 072) (277)
BEE expenses (5) (1) - - -
Recovery of expenses from - - - - 95
reinsurers
Transfer from
assets/liabilities under
insurance contracts
- change in assets - 1 479 (2) - -
arising from insurance
contracts
- change in liabilities - (131) (4 162) - (32)
arising from insurance
contracts
- change in liabilities - (78) - - -
arising from
reinsurance contracts
Fair value adjustment to - (5) (170) - -
liabilities under
investment contracts
Profit/(loss) from 1 221 1 641 7 26 (148)
operations
Finance costs (1) - - - (5)
Foreign exchange loss (1) (2) - - -
Profit/(loss) before tax 1 219 1 639 7 26 (153)
Income tax expense (343) (416) (2) (6) 10
Profit/(loss) for 876 1 223 5 20 (143)
the year
Attributable to:
- equity holders 876 1 223 5 20 (143)
- non-controlling - - - - -
interest
876 1 223 5 20 (143)
* All other segments include the impact from business combinations
Segmental information
FOR THE YEAR ENDED 30 JUNE
R million UK USA New All Total
Life Health business other
develop- segments
ment *
30 June 2011
Income statement
Insurance premium revenue 290 - - - 12 486
Reinsurance premiums (81) - - - (1 700)
Net insurance premium 209 - - - 10 786
revenue
Fee income from 60 - 1 11 3 888
administration business
Investment income 4 - 2 16 205
Inter-segment funding - - - - -
Net realised gains on - - - - 202
available-for-sale
financial assets
Net fair value gains on - - - - 661
financial assets at fair
value through profit or
loss
Vitality income - - 42 - 1 480
Net income 273 - 45 27 17 222
Claims and policyholders` (86) 1 - - (5 573)
benefits
Insurance claims 50 - - - 1 246
recovered from reinsurers
Net claims and (36) 1 - - (4 327)
policyholders` benefits
Acquisition costs (396) - - - (2 253)
Marketing and
administration expenses
- depreciation and - (5) - - (176)
amortisation
- other expenses (285) - (228) (28) (5 836)
Recovery of expenses from - - - - 139
reinsurers
Transfer from
assets/liabilities under
insurance contracts
- change in assets 409 - - - 1 760
arising from insurance
contracts
- change in liabilities - - - - (3 184)
arising from insurance
contracts
- change in liabilities (12) - - - (106)
arising from
reinsurance contracts
Fair value adjustment to - - - - (52)
liabilities under
investment contracts
Profit/(loss) from (47) (4) (183) (1) 3 187
operations
Recapture of reinsurance - - - (313) (313)
Gains and losses - - - 609 609
resulting from business
combinations
DAC expense reversed due - - - 137 137
to business combination
Amortisation of - - - (97) (97)
intangibles from business
combinations
Write-off of software - - - (95) (95)
from business combination
Realised gains from the - - - 87 87
disposal of intellectual
property
Realised gains from the - - - 122 122
disposal of investment
property
Finance costs (35) - - (133) (168)
Foreign exchange loss - - - 2 (14)
Share of loss from - - (4) - (4)
associate
Profit/(loss) before tax (82) (4) (187) 318 3 451
Income tax expense 55 - (29) (13) (872)
Profit/(loss) for the (27) (4) (216) 305 2 579
year
Attributable to:
- equity holders (27) (4) (218) 305 2 577
- non-controlling - - 2 - 2
interest
(27) (4) (216) 305 2 579
30 June 2010
Income statement
Insurance premium revenue 85 1 - - 7 860
Premium revenue for
investment contracts
transferred to insurance - - - - 1 865
contracts
Reinsurance premiums (24) - - - (1 172)
Net insurance premium 61 1 - - 8 553
revenue
Fee income from 8 - - 13 3 380
administration business
Investment income 1 - - 24 239
Inter-segment funding - - - - -
Net realised gains on - - - - 200
available-for-sale
financial assets
Net fair value gains on - - - - 276
financial assets at fair
value through profit
or loss
Vitality income - - 30 - 1 182
Net income 70 1 30 37 13 830
Claims and policyholders` (9) (34) - - (2 586)
benefits
Insurance claims 7 1 - - 841
recovered from reinsurers
Net claims and (2) (33) - - (1 745)
policyholders` benefits
Acquisition costs (169) - (25) - (1 961)
Marketing and
administration expenses
- depreciation and - (4) - - (190)
amortisation
- other expenses (114) (25) (180) (28) (4 617)
BEE expenses - - - - (6)
Recovery of expenses from - - - - 95
reinsurers
Transfer from
assets/liabilities under
insurance contracts
- change in assets 162 - - - 1 639
arising from insurance
contracts
- change in liabilities - 34 - - (4 291)
arising from insurance
contracts
- change in liabilities 13 - - - (65)
arising from
reinsurance contracts
Fair value adjustment to - - - - (175)
liabilities under
investment contracts
Profit/(loss) from (40) (27) (175) 9 2 514
operations
Finance costs - (1) - (7) (14)
Foreign exchange loss - - - - (3)
Profit/(loss) before tax (40) (28) (175) 2 2 497
Income tax expense 11 - 8 (44) (782)
Profit/(loss) for the (29) (28) (167) (42) 1 715
year
Attributable to:
- equity holders (29) (26) (167) (42) 1 717
- non-controlling - (2) - - (2)
interest
(29) (28) (167) (42) 1 715
* All other segments include the impact from business combinations
Review of Group results
Value creators
New business annualised premium income
New business annualised premium income includes flows of the schemes
Discovery administers and 100% of the business conducted together
with its joint venture partners.
New business annualised premium income decreased 2% for the year
ended 30 June 2011.
R million June June %
2011 2010 change
Discovery Health 3 904 4 502 (13)
Discovery Life 1 620 1 542 5
Discovery Invest 853 761 12
Discovery Vitality 182 177 3
PruHealth 609 409 49
PruProtect 290 227 28
New business API of Group 7 458 7 618 (2)
New business API is calculated at 12 times the monthly premium for
new recurring premium policies and 10% of the value of new single
premium policies. It also includes both automatic premium increases
and servicing increases on existing policies.
Gross inflows under management
Gross inflows under management measures the total funds managed and
received by Discovery which is an accurate measure of the continual
growth of Discovery.
Gross inflows under management increased 21% for the year ended
30 June 2011. 6% of the increase is attributable to the gross
inflows from PruHealth Insurance Limited (previously Standard Life
Healthcare) being included from 1 August 2010.
R million June June %
2011 2010 change
Discovery Health 31 873 28 101 13
Discovery Life 5 220 4 405 19
Discovery Invest 7 309 6 083 20
Discovery Vitality 1 410 1 176 20
Destiny Health - 4
PruHealth 3 880 1 278 204
PruProtect 360 188 91
Gross inflows under management 50 052 41 235 21
Less: collected on behalf of third (32 198) (28 813) (12)
parties
Discovery Health (28 362) (24 945) (14)
Discovery Invest (3 772) (3 131) (20)
Destiny Health - (3)
PruHealth (54) (639)
PruProtect (10) (95)
Gross income of Group 17 854 12 422 44
Profit from operations
The following table shows the main components of the increase in Group profit
from operations for the year ended 30 June:
R million June June %
2011 2010 change
Discovery Health 1 357 1 195 14
Discovery Life 1 558 1 341 16
Discovery Invest 101 7 >100
Discovery Vitality 18 10 80
PruHealth 61 (148) >100
PruProtect (51) (41) (24)
Profit from existing operations 3 044 2 364 29
Development and other segments (206) (217) 5
Normalised profit from operations 2 838 2 147 32
Recapture of reinsurance (313) -
Gains and losses resulting from business 609 -
combinations
DAC expense reversed due to business 137 -
combination
Amortisation of intangibles from business (97) -
combinations
Write-off of software from business (95) -
combination
Realised gains from the disposal of 87 -
intellectual property
Realised gains from the disposal of 122 -
investment property
Investment income attributable to equity 147 167
holders
Net realised gains on available-for-sale 202 200
financial assets
Finance costs and foreign exchange loss (182) (17)
Share of loss from associate (4) -
Profit before tax 3 451 2 497 38
From 1 August 2010, PruHealth and PruProtect have been accounted for
as subsidiaries in the Group results, previously accounted for as
joint ventures. This means that the comparatives disclosed include
the income, expenses, assets and liabilities of these companies at
50%, but at 100% in the current results, from 1 August 2010.
Acquisition of Standard Life Healthcare and related capital
restructure
Background
On 31 July 2010, Discovery acquired the entire share capital of
Standard Life Healthcare (SLHC), a wholly-owned subsidiary of the
Standard Life Group, for R1.56 billion (GBP137.8 million).
Discovery`s joint venture with Prudential has created a strong
foothold in both the health insurance and protection markets in the
UK. The acquisition of SLHC is likely to accelerate the attainment
of both PruHealth and PruProtect`s UK strategies. In health
insurance, where scale is important, the acquisition created a new
competitor covering approximately 700 000 lives and attracting
annual premiums of R4.1 billion (GBP370 million). In addition, the
acquisition will provide PruHealth with opportunities to sell
Vitality into SLHC`s existing client base. In the protection market,
SLHC`s large, high-quality client base provides growth opportunities
for PruProtect, and enhances Discovery`s ability to implement its
integrated model in the UK.
Discovery funded the entire purchase consideration by using R1.16
billion from its own internal funds (dividend from Discovery Life)
and through raising debt of R400 million. Discovery then contributed
SLHC to PruHealth Holdings Limited (PHHL) as a capital investment.
PHHL is the holding company of PruHealth and PruProtect, the joint
ventures between Discovery and Prudential Assurance Company of the
United Kingdom. This resulted in Discovery increasing its interest
in both PruHealth and PruProtect from 50% to 75%.
Accounting for the transactions
In terms of IFRS 3 revised: Business Combinations, the increase in
Discovery`s interest from 50% (a joint venture) to 75% (a
subsidiary) is effectively treated as two separate transactions,
that is, the disposal of the 50% interest and a subsequent
acquisition of 75% interest. The purchase price for the increased
shareholding must be used to calculate the deemed disposal
consideration for the disposal of the 50% interest. Any resulting
profit or loss (in this case profit) must be included in the
earnings of the Group but is excluded from headline earnings. Using
the GBP137.8 million that Discovery invested into PHHL to increase
its shareholding by 25%, the deemed disposal consideration for the
50% interest is GBP69 million. Discovery has reflected a profit of
R667 million in its earnings for the year ended 30 June 2011, which
has been excluded from headline earnings.
For the 75% deemed subsequent acquisition, IFRS 3 revised states
that this should be treated as if it was an independent acquisition
at that time and requires the purchase price be allocated to the
tangible assets and liabilities and to the intangible assets
acquired. The balance is allocated to goodwill. The purchase price
for the acquisition of SLHC and the deemed purchase price for the
75% of PHHL must be allocated in this manner and the appropriate
portions allocated to non-controlling interest. In addition, for
this purpose, assets must be valued on an arms-length basis to third
parties, and should not take into account Discovery`s intentions
post the acquisition.
Discovery has allocated the purchase price as follows:
Allocation of the purchase price for 75% of PHHL
GBP R
million million*
Tangible net asset value:
- Property and equipment 0.2 2
- Loans and receivables including insurance 52.0 564
receivables
- Reinsurance assets 4.2 45
- Cash and cash equivalents 195.5 2 119
- Liabilities arising from insurance contracts (12.8) (139)
- Liabilities arising from reinsurance contracts (8.6) (93)
- Borrowings at amortised cost (29.7) (322)
- Trade and other payables (85.8) (930)
Intangible assets:
- Assets arising from insurance contracts 36.8 399
- Value of in-force business 36.1 391
- Prudential brand 15.7 170
- Deferred tax liability raised in respect (14.5) (157)
of intangible assets
Goodwill 86.9 942
Non-controlling interest (69.0) (748)
Deemed consideration paid 207.0 2 243
Allocation of the purchase price for 100% of SLHC
GBP R
million million*
Tangible net asset value:
- Property and equipment 0.4 4
- Money market investments 130.7 1 416
- Loans and receivables including insurance 2.1 23
receivables
- Deferred income tax 3.6 39
- Reinsurance assets 3.6 39
- Cash and cash equivalents 15.2 165
- Liabilities arising from insurance contracts (68.2) (739)
- Deferred revenue (0.8) (9)
- Trade and other payables (22.8) (247)
Intangible assets:
- Value of in-force business 48.1 521
- Software 8.6 93
- Deferred tax liability raised in respect (15.9) (172)
of intangible assets
Goodwill 33.2 360
Consideration paid 137.8 1 493
* Translated at closing rate at 30 June 2011, which is the rate they
are included in the Statement of Financial Position
The intangible assets identified in the tables above have been
included in the Statement of Financial Position of the Group. These
intangible assets will be amortised over their remaining useful
lives and tested for impairment at each reporting date. Discovery
has recorded an amortisation charge of R97 million in profit or loss
for the period 1 August 2010 to 30 June 2011 for these intangible
assets.
The value of in-force business, being the value for the existing
customer contracts at the date of acquisition, was calculated using
a discounted cash flow model which is similar to an embedded value
model and is being amortised on the basis of unwinding of the
modelled cash flows.
At acquisition, a decision was taken that the computer software
acquired as part of the SLHC acquisition will not be used by
Discovery and accordingly the value of GBP8.6 million (R95 million)
was written-off. Discovery is however reconsidering its decision and
is in the process of determining whether the software can be
integrated into the business.
The goodwill, which represents the value of future business expected
to be written by the PHHL Group, is not amortised, but is assessed
for possible impairment at each reporting date and the impairment is
recorded in profit or loss, if necessary. At 30 June 2011, Discovery
calculated the value in use of PruHealth and PruProtect and there
was no indication that goodwill is impaired at this date.
Reconciliation of goodwill
GBP R million
million
Goodwill recognised from the purchase of PHHL 86.9 992
Goodwill recognised from the purchase of SLHC 33.2 379
Net exchange differences arising during the (69)
period
Goodwill at 30 June 2011 120.1 1 302
In terms of IFRS 3 revised, paragraph 45, the initial accounting for
an acquisition can be undertaken on a provisional basis. Adjustments
to provisional values can be made within one year of the effective
date, relating to facts or circumstances at the acquisition date. As
such, the amounts disclosed at 31 December 2010 have been adjusted
for information received after the initial calculations that related
to the net asset value of the companies at the acquisition date.
Gains and losses resulting from business combinations
The following gains and losses resulting from the business
combinations described above have been included in the Group`s
income statement at 30 June 2011:
R million Gross Tax Net
Gain recognised on disposal of joint 667 - 667
venture
Write-off of software (95) 27 (68)
Excluded from headline earnings 572 27 599
Amortisation of intangibles (97) 27 (70)
DAC balance not recognised at 137 - 137
acquisition
Once-off costs relating to acquisition (58) - (58)
Recapture of reinsurance (313) - (313)
Total adjustments to earnings to 241 54 295
arrive at normalised earnings
In the process of completing the acquisition, Discovery incurred
once-off costs such as investment banking fees, legal costs and
other consulting fees.
No value was placed on the DAC balance at acquisition. This resulted
in the accounting profit being R137 million higher than it would
have been had the DAC been valued at that date and amortised in the
current accounting period.
Recapture of reinsurance
The business combinations discussed above resulted in a need for
Discovery to restructure the capital of PHHL and PruHealth. SLHC had
surplus capital and PruHealth had reinsurance obligations, some of
which was not required for the combined businesses.
PruHealth therefore undertook the recapture of approximately
GBP28 million of reinsurance obligations which resulted in a R313
million charge to Discovery`s income statement.
Post-acquisition revenue and profit or loss of acquired entities
The table below discloses the post-acquisition revenue and profit or
loss that has been included in the Group`s income statement at
30 June 2011:
R million UK UK Life
Health
Revenue 3 772 340
Profit or loss after tax (100%) 84 (21)
Revenue and profit or loss of acquired entities from 1 July 2010
The table below discloses the revenue and profit or loss that would
have been included in the Group`s income statement at 30 June 2011,
if the acquisition date was 1 July 2010:
R million UK UK Life
Health
Revenue 4 123 360
Profit or loss after tax (100%) 60 (32)
Other investments in subsidiaries and associates
Ping An Health Insurance Company of China, Ltd (PAH)
Discovery paid R225 million for the acquisition of 20% of the share
capital of PAH. PAH has been treated as an associate in the results
of Discovery and as such, 20% of the losses incurred for the six
months to 30 June 2011 has been included in the Income Statement and
Discovery`s share of PAH`s net asset value at 30 June 2011 has been
included in the Statement of Financial Position in Investment in
associates.
The amount included in Investment in
associates is analysed as follows:
RMB`million R`million
20% of net asset value at date of purchase 135 159
Goodwill 56 66
Consideration paid 191 225
20% of movement in net asset value for six (6) (6)
months to 30 June 2011
Net exchange differences arising during the (43)
period
185 176
Humana Vitality joint venture
In February 2011, Discovery announced a joint venture between The
Vitality Group Inc. in the US (TVG Inc.) and Humana, the fourth-
largest health insurer in the United States. Through this
partnership arrangement two new entities were formed, namely The
Vitality Group LLC (TVG LLC) and Humana Vitality LLC (HV). The
effective date of this agreement was 16 May 2011.
TVG Inc. has a 75% holding in TVG LLC with the balance being held by
Humana. TVG Inc. contributed its existing business as at 1 May 2011
as its capital contribution, the net asset value at that date being
US$15 million. Humana contributed US$15 million in cash for its 25%
shareholding. At 30 June 2011, the fair value of Humana`s
contribution has been calculated as US$7.5 million, being 25% of the
total capital contributions. This fair value adjustment of US$7.5
million (R51 million) has been disclosed in the Statement of Changes
in Equity as an adjustment against non-controlling interest and
retained earnings. TVG LLC has been accounted for as a subsidiary in
the results of Discovery.
Humana has a 75% shareholding in HV, with the balance being held by
TVG Inc. Humana contributed US$50 million for its 75% shareholding.
TVG Inc. contributed a perpetual royalty-free license to the
Vitality IT systems, the Vitality name and associated marks, and a
perpetual, royalty-free license to the Vitality intellectual
property, exclusively for use in the US. This contribution has been
valued at US$12.5 million and has been disclosed as a realised gain
from the disposal of intellectual property in the Income Statement
and as an Investment in associate in the Statement of Financial
Position.
Discovery Insure Limited
Discovery Insure, a provider of short-term risk insurance products,
was launched in May 2011. Discovery has a 75% shareholding in
Discovery Insure with the balance being held by subsidiaries within
the Hollard Group (the preference shareholders). Discovery Insure
has be accounted for as a subsidiary in the results of Discovery.
Put options in subsidiaries
During the financial year, put options were granted to the non-
controlling interests of three of Discovery`s subsidiaries. The put
options entitle the non-controlling interest to sell its interest in
the subsidiary to Discovery at contracted dates.
The following put options were issued:
Prudential has the option to sell its 25% shareholding in PHHL to
Discovery, five years from 1 August 2010 or after each succeeding
one year period, at the fair market value.
Humana has the option to sell its 25% shareholding in TVG LLC to
Discovery, seven years after acquisition or after each succeeding
two year period, at the fair market value less a 15% discount.
The Discovery Insure preference shareholders have the option to sell
its 25% shareholding in Discovery Insure to Discovery, between five
and seven years after acquisition, at the fair market value.
In accordance with IAS32, Discovery has recognised the fair value of
the non-controlling interest, being the present value of the
estimated purchase price, as a financial liability in the Statement
of Financial Position (Puttable non-controlling interest). In
raising this liability, the non-controlling interest is derecognised
and the excess of the liability is debited to retained earnings in
the Statement of Changes in Equity. Discovery has consolidated 100%
of the subsidiaries results.
Interest is recorded in respect of this liability within finance
charges using the effective interest rate method. The estimated
purchase price is reconsidered at each reporting date, and any
changes in the value of the liability as a result of changes in the
assumptions used to estimate the future purchase price will be
recorded in profit or loss.
The aggregate effects on Discovery`s results at 30 June 2011 were as
follows:
R million Total
Puttable non-controlling interest recognised at date of 2 194
issue
Allocated from non-controlling interests 893
Allocated to retained earnings 1 301
Further share issues to non-controlling interests 122
Finance charges recognised in the income statement 86
Net exchange differences arising during the period (88)
Closing value of Puttable non-controlling interest 2 314
liability
Other significant transactions affecting the current results
Share-based payments
Included in marketing and administration expenses is R177 million (2010: R232
million) in respect of options granted under employee share incentive schemes
expensed 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 2011,
approximately 82.7% (2010: 50.8%) of this exposure was hedged.
Taxation
Taxation has been raised for all South African entities, with the exception of
Discovery Insure. South African income tax has been provided at 28% (2010: 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 in respect of the
calendar year ending 31 December 2010.
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"). R10 million in respect of this tax
relief has been included in income tax at 30 June 2010.
Tax relief is obtained for 100% of the PruProtect losses through Prudential.
Significant movements in the Statement of financial position
The increase in the assets arising from insurance contracts of R1 968
million is primarily as a result of profitable new business written by Discovery
Life.
In May 2011, Discovery disposed of its Investment Property and a gain of R122
million has been disclosed in the Income Statement but is excluded from headline
earnings.
Financial assets have increased due to the sale of Discovery Invest products and
the inclusion of Standard Life Healthcare money market investments of R821
million at 30 June 2011.
Borrowings at amortised cost, includes a long-term loan of R400 million raised
as part of the funding to purchase Standard Life Healthcare. Interest on the
loan is payable quarterly, for which a fixed interest rate swap has been entered
into. The loan is repayable on 11 September 2017.
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.
Shareholder information
Directorate
There have been no changes to the directorate for the year ended 30 June 2011.
A Ntsaluba (executive director) and J Durand (non-executive director) were
appointed subsequent to the year-end, on 1 July 2011 and 25 August 2011
respectively.
Repurchase of shares
As advised in SENS announcement on 10 December 2010, Discovery has acquired and
cancelled 80 790 ordinary shares from one of Discovery`s directors, Sindiswa
Zilwa, through her investment vehicle, Newshelf 801 (Proprietary) Limited as one
of Discovery`s BEE partners.
Dividend policy and capital
An interim dividend of 42 cents per share was paid on 22 March 2011.
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 R305 million (2010: R275 million) and was covered 3.6 times
(2010: 8.0 times).
Cash dividend declaration:
The board has declared a final dividend of 48 cents per share. The salient dates
are as follows:
- Last date to trade "cum" dividend Friday, 7 October 2011
- Date trading commences "ex" dividend Monday, 10 October 2011
- Record date Friday, 14 October 2011
- Date of payment Monday, 17 October 2011
Share certificates may not be dematerialised or rematerialised between Monday,
10 October 2011 and Friday, 14 October 2011, both days inclusive.
Subsequent events
At a special general meeting of shareholders held on 2 August 2011, the
shareholders approved the creation of 40 000 000 A Preference Shares,
20 000 000 B Preference Shares and 20 000 000 C Preference Shares.
On 15 August 2011, Discovery issued 8 000 000 B Preference Shares at an issue
price of R100 per share by way of private placement. The B Preference Shares
were listed on the JSE Securities Exchange South Africa under the abbreviated
short name "DSY B PREF" with alpha code "DSBP" in the "Specialist Securities" -
Preference Share sector of the market, and commenced trading on Monday, 15
August 2011.
Accounting policies
The annual financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) including IAS 34, as well as
the South African Companies Act 71 of 2008, and are consistent with the
accounting policies applied in the annual report and the corresponding prior
year except as follows:
Discovery entered into a business combination for the first time, in the current
reporting period. As such, IFRS 3 revised has been adopted.
Comparative figures
There have been no changes to comparative figures.
Audit
The financial results have been audited in accordance with section 29(1)(e) of
the Companies Act (Act 71 of 2008). The auditors, PricewaterhouseCoopers Inc.,
have issued their audit opinion on the Group financial statements for the year
ended 30 June 2011. A copy of the auditors` unqualified report is available for
inspection at the company`s registered office.
Embedded value statement
for the year ended 30 June 2011
The embedded value of Discovery at 30 June 2011 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 expected 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 required 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 the
subsidiaries in the Discovery Holdings Group. Covered business includes business
written through Discovery Life, Discovery Invest, Discovery Health, Discovery
Vitality, PruHealth and PruHealth Insurance Limited (previously Standard Life
Healthcare) in the United Kingdom. Due to the increased scale and stability of
the business, business written through PruProtect is now included as covered
business, and Discovery`s 75% share of the PruProtect value of in-force business
is included in the Discovery Group embedded value. For The Vitality Group (USA)
and Discovery Insure, no published value has been placed on the current in-force
business.
As PruHealth Insurance Limited and PruProtect are only included in the value of
in-force with effect from 30 June 2011, the profit from new business for these
entities is excluded from embedded value earnings.
During the past financial year, Discovery acquired Standard Life Healthcare and
increased its shareholding in the Prudential joint venture from 50% to 75%,
announced a venture with Humana in the United States, and launched a short term
insurer, Discovery Insure. Put options were granted to the non-controlling
interests in these subsidiaries. The put option entitles the non-controlling
interest to sell its interest in the subsidiary to companies within the
Discovery Group at specified future dates.
For accounting purposes, in accordance with IAS32, Discovery has consolidated
100% of the subsidiaries results and has recognized the fair value of the non-
controlling interest, being the present value of the estimated purchase price,
as a financial liability in the Statement of Financial Position (Puttable non-
controlling interest). For embedded value purposes at 30 June 2011, the
financial liability in excess of the non-controlling interest in the net asset
value and the non-controlling share of the losses included in retained earnings
over the reporting period were added back to the adjusted net worth. The values
for PruHealth, PruHealth Insurance Limited and PruProtect at 30 June 2011
reflect Discovery`s 75% shareholding at that date (values for PruHealth in prior
periods reflect Discovery`s 50% shareholding).
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 2011. A copy of the auditors` unqualified report is available for
inspection at the company`s registered office.
Table 1: Group embedded value
R million 30 June 30 June %
2011 2010 change
Shareholders` funds 8 969 8 382 7
Adjustment to shareholders` funds (6 381) (4 883)
from published basis(1)
Adjusted net worth 2 588 3 499 (26)
- Free Surplus 696 2 440
- Required Capital(2) 1 892 1 059
Value of in-force covered business 24 853 19 996
before cost of capital
Cost of required capital (505) (351)
Cost of STC(3) (46) (586)
Discovery Holdings embedded value 26 890 22 558 19
Number of shares (millions) 555.0 553.9
Embedded value per share R48.45 R40.72 19
Diluted number of shares (millions) 591.2 591.3
Diluted embedded value per share(4) R47.86 R40.31 19
(1) The published shareholders` funds was decreased to eliminate net
assets under insurance contracts, deferred tax and deferred
acquisition costs at June 2011 of R6 126 million (June 2010:
R4 858 million) in respect of Life, R93 million (June 2010: R25
million) in respect of PruHealth and PruHealth Insurance Limited and
R45 million in respect of PruProtect. The June 2011 shareholders`
funds was decreased by R1 510 million representing Discovery`s share
of goodwill and intangible assets (net of deferred tax) relating to
the acquisition of Standard Life Healthcare and the Prudential joint
venture. The June 2011 shareholders` funds was increased by
R1 301 million reflecting the value of the puttable non-controlling
interest liability in excess of the non-controlling interest in the
net asset value and R92 million reflecting the non-controlling share
of the losses included in retained earnings over the reporting
period.
(2) The required capital at June 2011 for Life is R610 million (June
2010: R550 million), for Health and Vitality is R437 million (June
2010: R395 million) for PruHealth and PruHealth Insurance Limited is
R730 million (June 2010: R114 million) and for PruProtect is
R115 million. 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 long-term required capital amount has increased from 18% to
19.8% of annualised premium income. Allowance has also been made for
additional capital required by PruHealth over the next 18 months.
For PruHealth Insurance Limited, the required capital amount was set
equal to 18% of annualised premium income. For PruProtect, the
required capital was set equal to the UK Pillar 1 capital
requirement.
(3) Following publication of the draft Taxation Laws Amendment Bill,
2011, it is expected that STC will be replaced by a dividend
withholding tax with effect from 1 April 2012. The cost of STC at
30 June 2011 has been calculated based on the dividends expected to
be declared prior to 1 April 2012.
(4) 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 Cost of Value
before require after
cost of d Cost of cost of
capital capital STC capital
and STC and STC
at 30 June 2011
Health and Vitality 11 610 (155) (21) 11 434
Life and Invest(1) 11 969 (182) (23) 11 764
PruHealth and PruHealth 1 077 (140) (2) 935
Insurance Limited(2)(3)
PruProtect(4) 197 (28) (0) 169
Total 24 853 (505) (46) 24 302
at 30 June 2010
Health and Vitality 9 896 (145) (289) 9 462
Life and Invest(1) 9 902 (174) (291) 9 437
PruHealth(2) 198 (32) (6) 160
Total 19 996 (351) (586) 19 059
(1) Included in the Life and Invest value of in-force covered
business is R345 million (June 2010: R226 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 value of in-force has been converted using the closing
exchange rate of R10.84/GBP (June 2010: R11.48/GBP). The values for
PruHealth at 30 June 2011 reflect Discovery`s 75% shareholding at
that date (values in prior periods reflect Discovery`s 50%
shareholding).
(3) This includes Discovery`s 75% share of the value of the
PruHealth Insurance Limited business in-force at 30 June 2011 (R708
million), less the cost of required capital (R78 million) and less
the cost of STC (R1 million).
(4) The value of in-force has been converted using the closing
exchange rate of R10.84/GBP. The values for PruProtect reflect
Discovery`s 75% shareholding in PruProtect.
Table 3: Group embedded value earnings
Year ended
R million 30 June 30 June
2011 2010
Embedded value at end of period 26 890 22 558
Less: Embedded value at beginning of period (22 (20
558) 040)
Increase in embedded value 4 332 2 518
Net increase in capital (1) 7
Dividends paid 445 375
Fair value adjustment of non-controlling interest (51) -
share of subsidiary
Shares issued to non-controlling interests - (2)
Transfer to hedging reserve 30 (12)
Embedded value earnings 4 755 2 886
Annualised return on opening embedded value 21.1% 14.4%
Table 4: Components of Group embedded value earnings
R million Net Cost of Value Embedde
Worth require of in- d
d force Value
capital covered
busines
s less
cost of
STC
Total profit from new business (1 561) (61) 3 144 1 522
(at point of sale)
Profit from existing business
- Expected return 1 710 4 521 2 235
- Change in methodology and 567 20 (14) 573
assumptions(1)
- Experience variances (128) 4 752 628
Acquisition of Standard Life (740) (97) 802 (35)
Healthcare and Prudential
joint venture
Inclusion of PruProtect value (45) (28) 197 124
of in-force
Other initiatives(2) (208) - 13 (195)
Non-recurring expenses(3) (28) - - (28)
Acquisition costs(4) (3) - 1 (2)
Finance costs (38) - - (38)
Foreign exchange rate (153) 3 (18) (168)
movements
Return on shareholders` 139 - - 139
funds(5)
Embedded value earnings (488) (155) 5 398 4 755
(1) The 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 Group initiatives including expenses relating
to the acquisition of Standard Life Healthcare, the investment in
Ping An Health, the establishment of The Vitality Group in the
United States, PruProtect, Discovery Invest and Discovery Insure.
(3) Non-recurring expenses include Group costs related to one-off
marketing events and one-off remuneration costs payable on the
relocation of senior executives.
(4) Acquisition costs relate to commission paid on Life business
that has been written over the period but that will only be
activated and on risk after the valuation date. These policies are
not included in the embedded value or the value of new business and
therefore the costs are excluded.
(5) The return on shareholders` funds is shown net of tax and
management charges.
Table 5: Methodology and assumption changes
Health and Life and PruHealth
Vitality Invest
R million Net Value Net Value Net Value Total
worth of in- worth of in- worth of in-
force force force
Modelling - - 166 (267) - (8) (109)
changes(1)
STC(2) - 297 - 253 - 9 559
Expenses - 517 1 1 - 36 555
Lapses - - (17) (36) - (148) (201)
Vitality - (129) - - - (41) (170)
Reinsurance(3) - - 645 (687) (131) 73 (100)
Mortality and - - 36 (29) - 10 17
morbidity
Benefit - - (84) 25 - - (59)
enhancements
Premium and - - (6) (44) - (88) (138)
benefit
increases
Economic - 84 (7) 179 - 11 267
assumptions
Other - - (36) 10 - (22) (48)
Total - 769 698 (595) (131) (168) 573
(1) The Life and Invest modelling changes relate mainly to a change
in the statutory reserving methodology for Invest policies and to
the modelling of waiver of premium claims.
(2) Following publication of the draft Taxation Laws Amendment
Bill, 2011, it is expected that STC will be replaced by a dividend
withholding tax with effect from 1 April 2012.
(3) The reinsurance item relates to the impact of the financing
reinsurance arrangements.
Table 6: Experience variances
R million Health and Life and PruHealth Total
Vitality Invest
Net Value Net Value Net Value
worth of worth of worth of
in-for in-fo in-fo
ce rce rce
Renewal 11 - 23 (2) (56) 2 (22)
expenses
Lapses and 35 442 60 143 - (36) 644
surrenders(1)
Mortality and - - 47 4 30 - 81
morbidity
Policy - 32 (231) 182 - - (17)
alterations(2)
Backdated
cancellations - - (27) 7 - - (20)
Premium income - - (37) 42 - - 5
Tax(3) (11) - 183 (231) (67) - (126)
Reinsurance - - (7) 4 1 - (2)
Economic (0) (25) 7 (109) - - (127)
assumptions(4)
Extended - 194 - 12 - 26 232
modelling term
Other (20) 6 (65) 56 (4) 7 (20)
Total 15 649 (47) 108 (96) (1) 628
(1) The total Health and Vitality lapse experience variance of
R477 million consists of a positive variance of R118 million due to
lower than expected lapses and a positive variance of R359 million
due to the net growth in existing employer groups (i.e. R927
million in respect of members joining existing employer groups
during the period offset by an amount of R568 million in respect of
members leaving existing employer groups).
(2) Policy alterations relate to changes to existing benefits at
the request of the policyholder.
(3) The tax variance for Life and Invest arises due to a movement
in the deferred tax asset which delays the payment of tax.
(4) For Life and Invest, the economic assumptions variance relates
primarily to lower than expected premium and benefit increases due
to lower than expected inflation over the period.
Table 7: Embedded value of new business
R million Year ended %
change
30 30
June June
2011 2010
New Business Included in Embedded Value
Earnings
Health and Vitality
Present value of future profits from new 505 541
business at point of sale
Cost of required capital (15) (18)
Cost of STC (1) (16)
Present value of future profits from new 489 507 (4)
business at point of sale after cost of
required capital and STC
New business annualised premium income(1) 1 698 2 254 (25)
Life and Invest
Present value of future profits from new 1 030 879
business at point of sale(2)
Cost of required capital (35) (33)
Cost of STC (2) (26)
Present value of future profits from new
business at point of sale after cost of
required capital and STC 993 820 21
New business annualised premium income(3) 1 724 1 621 6
Annualised profit margin(4) 7.0% 5.9%
Annualised profit margin excluding Invest 9.8% 8.4%
Business
PruHealth
Present value of future profits from new 51 16
business at point of sale
Cost of required capital (11) (6)
Cost of STC (0) (0)
Present value of future profits from new 40 10 300
business at point of sale after cost of
required capital and STC
New business annualised premium income(5) 229 147 56
Annualised profit margin(4) 3.0% 0.7%
New Business Excluded from Embedded Value
Earnings(6)
PruHealth Insurance Limited
Present value of future profits from new 17
business at point of sale
Cost of required capital (2)
Cost of STC (0)
Present value of future profits from new 15
business at point of sale after cost of
required capital and STC
New business annualised premium income 64
Annualised profit margin(4) 3.8%
PruProtect
Present value of future profits from new 129
business at point of sale
Cost of required capital (16)
Cost of STC (0)
Present value of future profits from new 113
business at point of sale after cost of
required capital and STC
New business annualised premium income 218
Annualised profit margin(4) 10.9%
(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 2011.
The total Health and Vitality new business annualised premium
income written over the period was R4 086 million (June 2010: R4
679 million).
(2) Included in the Life and Invest value of new business is
R11 million (June 2010: R22 million) in respect of investment
management services provided on off balance sheet investment
business.
Risk business written prior to the valuation date allows certain
Invest business to be written at financially advantageous terms,
the impact of which has been recognized in the value of new
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 724 million (June
2010: R1 621 million) (single premium APE: R478 million (June 2010:
R480 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 R403 million (June
2010: R392 million) and servicing increases of R347 million (June
2010: R290 million) was R2 474 million (June 2010: R2 303 million)
(single premium APE: R502 million (June 2010: R486 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 30 June
2011. There have been no changes to the definition of new business
since the previous valuation.
(6) As PruHealth Insurance Limited and PruProtect are only included
in the value of in-force with effect from 30 June 2011, the profit
from new business for these entities is excluded from embedded
value earnings.
Table 8: Embedded value economic assumptions
30 June 30 June
2011 2010
Beta coefficient 0.50 0.54
Equity risk premium
South Africa 3.50 3.50
United Kingdom 4.00 4.00
Risk discount rate (%)
South Africa 10.75 10.89
United Kingdom 6.02 6.62
Rand/GB Pound Exchange Rate
Closing 10.84 11.48
Average 11.08 11.96
Medical inflation (%)
South Africa 8.00 8.00
United Kingdom 7.00 7.00
Expense inflation and CPI (%)
South Africa 5.00 5.00
United Kingdom 3.75 3.75
Pre-tax investment return (%)
South - Cash 7.50 7.50
Africa
- Bonds 9.00 9.00
- Equity 12.50 12.50
United - Risk free 4.02 3.96
Kingdom
- PruProtect asset return assumption 5.59 -
Dividend cover ratio 4.5 4.5
times times
Income tax rate (%)
South Africa 28.00 28.00
United Kingdom 26.00% 28.00%
reducin reducin
g to g to
23.00% 24.00%
in in
April April
2014 2014
Projection term
- Health and Vitality 20 20
years years
- Group Life 10 10
years years
- PruHealth and PruHealth Insurance Limited 20 20
years years
Life and Invest mortality, morbidity and lapse and surrender assumptions were
derived from internal experience, where available, augmented by reinsurance and
industry information. An additional lapse rate is assumed over the next 6 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.
The PruHealth and PruHealth Insurance Limited assumptions were derived from
internal experience augmented by industry information. Best estimate morbidity
assumptions 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.
PruProtect assumptions were derived from internal experience, where available,
augmented by reinsurance, industry and Discovery group information.
Renewal expense assumptions were based on the results of the latest expense and
budget information.
The initial expenses included in the calculation of the value of new business
are the actual costs incurred excluding expenses of an exceptional or non-
recurring nature.
The South African 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. The PruHealth
and PruHealth Insurance Limited investment return assumption was derived from
the sterling swap curve. The PruProtect investment return assumption was set
with reference to the expected return on matching assets (or liabilities in the
case of negative reserves) held on the Prudential balance sheet.
It is assumed that, for the purposes of calculating the cost of required
capital, the Life and Invest required capital amount will be backed by surplus
assets consisting of 100% equities and the Health, Vitality, PruHealth and
PruHealth Insurance Limited required capital amounts will be fully backed by
cash. The PruProtect required capital amount is assumed to earn the same return
as the assets backing the PruProtect policyholder liabilities. Allowance has
been made for tax and investment expenses in the calculation of the cost of
capital. In calculating the capital gains tax ("CGT") liability, it is assumed
that the portfolio is realised every 5 years. The Life and Invest 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, PruHealth and
PruHealth Insurance Limited cost of capital is calculated using the difference
between the risk discount rate and the net of tax cash return. The PruProtect
cost of capital is calculated using the difference between the risk discount
rate and the net of tax asset 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 risk discount rate, calculated in accordance with the 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. 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 30 June 2011 to changes in the risk discount rate is included in the tables
below.
For each sensitivity illustrated below, 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 9: Embedded value sensitivity
Health and Life and
Vitality Invest
Adjuste
d
net
worth
R million Value Cost Value Cost
of in- of of in- of
force capita force Capita
less l less l
cost cost
of STC of
STC
Base 2 588 11 589 (155) 11 (182)
946
Impact of:
Risk discount rate + 1% 2 588 10 929 (173) 10 (159)
660
Risk discount rate - 1% 2 588 12 320 (134) 13 (205)
519
Lapses - 10% 2 588 12 000 (162) 13 (199)
080
Interest rates - 1%(1) 2 588 11 553 (148) 12 (191)
493
Equity and property market 2 524 11 589 (155) 11 (180)
value - 10% 855
Equity and property return 2 588 11 589 (155) 12 (180)
+ 1% 000
Renewal expenses - 10% 2 588 12 575 (143) 12 (177)
105
Mortality and morbidity - 2 588 11 589 (155) 12 (179)
5% 825
Health, Vitality and 2 588 11 714 (156) 11 (182)
PruHealth: Projection term 946
+ 1 year
(1) All economic assumptions were reduced by 1%.
Table 9: Embedded value sensitivity continued
PruHealth and PruProtect
PruHealth
Insurance Embedde %
Limited d Change
value
R million Value Cost Value Cost
of in- of of in- of
force Capita force Capita
less l less l
cost cost
of of
STC STC
Base 1 075 (140) 197 (28) 26 890
Impact of:
Risk discount rate + 989 (134) 184 (32) 24 852 (8)
1%
Risk discount rate - 1 172 (147) 211 (22) 29 302 9
1%
Lapses - 10% 1 366 (159) 210 (30) 28 694 7
Interest rates - 971 (136) 208 (21) 27 317 2
1%(1)
Equity and property 1 075 (140) 197 (28) 26 737 (1)
market value - 10%
Equity and property 1 075 (140) 197 (28) 26 946 0
return + 1%
Renewal expenses - 1 199 (140) 205 (27) 28 185 5
10%
Mortality and 1 876 (138) 213 (27) 28 592 6
morbidity - 5%
Health, Vitality and 1 096 (141) 197 (28) 27 034 1
PruHealth: Projection
term + 1 year
(1) All economic assumptions were reduced by 1%.
The following table shows the effect of using different assumptions on the value
of new business.
Health and Life and Invest
Vitality
R million
Value Cost Value Cost
of in- of of of
force capita in- Capita
less l force l
cost less
of cost of
STC STC
Base 504 (15) 1 028 (35)
Impact of:
Risk discount rate + 1% 462 (17) 823 (30)
Risk discount rate - 1% 551 (13) 1 281 (39)
Lapses - 10% 530 (16) 1 217 (38)
Interest rates - 1%(1) 505 (15) 1 126 (36)
Equity and property return + 1% 504 (15) 1 041 (34)
Renewal expense - 10% 578 (15) 1 062 (34)
Mortality and morbidity - 5% 504 (15) 1 163 (34)
Health, Vitality and PruHealth: 511 (15) 1 028 (35)
Projection term + 1 year
Acquisition costs - 10% 516 (15) 1 106 (35)
(1) All economic assumptions were reduced by 1%.
PruHealth and PruProtect
PruHealth
R million Insurance Value %
Limited Of new Chang
busines e
s
Value Cost Value Cost
of in- of of in- of
force Capita force Capita
less l less l
cost cost
of of STC
STC
Base 68 (13) 129 (16) 1 650
Impact of:
Risk discount rate 56 (13) 121 (18) 1 384 (16)
+ 1%
Risk discount rate 78 (14) 138 (12) 1 970 19
- 1%
Lapses - 10% 94 (15) 142 (17) 1 897 15
Interest rates - 58 (14) 140 (12) 1 752 6
1%(1)
Equity and property 66 (14) 129 (16) 1 661 1
return + 1%
Renewal expense - 10% 78 (14) 136 (15) 1 776 8
Mortality and 131 (14) 139 (15) 1 859 13
morbidity - 5%
Health, Vitality and 70 (14) 129 (16) 1 658 0
PruHealth: Projection
term + 1 year
Acquisition costs 75 (14) 136 (16) 1 753 6
- 10%
(1) All economic assumptions were reduced by 1%.
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
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*, HD Kallner*, NS
Koopowitz*, Dr TV Maphai, HP Mayers*, V Mufamadi*, AL Owen (UK), A Pollard*,
JM Robertson* (CIO), SE Sebotsa, T Slabbert,
B Swartzberg*, SV Zilwa
*Executive
Date: 01/09/2011 10:00:03 Produced by the JSE SENS Department.
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