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DISCOVERY HOLDINGS LIMITED - UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED
31 DECEMBER 2003
Discovery Holdings Limited
(Registration number 1999/007789/06)
JSE Share code: DSY
ISIN code: ZAE000022331
UNAUDITED INTERIM FINANCIAL RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2003
Highlights
Operating profit +87% to R324,8 million
Attributable profit +57% to R135,3 million
Diluted headline earnings per share +22% following 36% additional shares in
issue
Destiny Health expected to break-even in February 2004
Introduction
Discovery"s performance for the six months under review was pleasing. The
company employs a business methodology based on innovation, product leadership
and operational and financial excellence to achieve its purpose of making people
healthier and enhancing and protecting their lives. The period under review saw
the successful continuation of this approach, resulting in strong organic growth
across all of Discovery"s businesses.
Discovery increased its operating profit by 87% to R324,8 million (2002: R173,3
million) while net profit attributed to shareholders grew 57% to R135,3 million
(2002: R86,2 million). Diluted headline earnings per share increased by 22% to
26,2 cents (2002: 21,5 cents) despite a 36% increase in the number of shares in
issue.
Destiny Health
The six months under review were important for Destiny Health. The company
reduced its operating losses by 30% to $6,7 million (2002: $9,6 million), and
increased new business by 59% to $31,3 million (2002: $19,7 million).
Importantly, the company set the difficult short term target of achieving break-
even in its Illinois business by the start of 2004 and is expected to achieve
this during the month of February - one month late of its target date. To this
end, a significant focus was placed on the management of expenses, the
acquisition of new business and a focus on managing the medical loss ratio. Not
only was the company successful in achieving the set short term targets, but it
also introduced significant structural changes that bode well for longer term
success.
In addition to the breakeven goal, Destiny was focused on rolling out its joint
ventures with Guardian Life Insurance Company of America in Illinois, and Tufts
Health Plan in Massachusetts. It is expected that the impact of these ventures
will only start being felt within the next few months.
The health care environment continues to evolve rapidly toward Destiny"s
Consumer-Driven Healthcare Model. Over the period under review, the amended
Medicare legislation introduced the "Health Savings Account", which for the
first time allows Americans to invest pre-tax dollars into a medical savings
account - a structure that is central to the Destiny product design. The Health
Savings Account was specifically mentioned by the US President in his State of
the Union Address.
Discovery Health
Discovery Health"s performance was pleasing. Operating profit grew by 20% to
R214,4 million (2002: R178,6 million), and the number of lives under
administration now exceeds 1,5 million. Lapse rates reduced to an effective 3,3%
per annum, the lowest in Discovery Health"s history.
New business reduced by 20% to R934,5 million (2002: R1 163,3 million),
primarily due to an unusually high intake of members in December/January of the
previous financial year, which arose from the legislated introduction of an open
enrolment period in January of each year. As this was the first of these open
enrolment periods, the inflow of members during December and January 2003
reflected significant pent-up demand.
Discovery Health"s role is to provide access to quality care on a sustainable
basis in an environment of change and complexity. The period under review was
particularly pleasing in this regard: healthcare costs were kept under control,
while statutory reserves within the Discovery Health Medical Scheme built up in
line with that required - to over R1,6 billion. Despite the increased proportion
of member contributions allocated to reserves, contribution rates increased from
2003 to 2004 in line with previous years. With falling levels of inflation,
Discovery Health is acutely aware that the increasing gap between salary and
medical inflation means that member expectations in terms of cost are not being
met. However, given the performance of the Discovery Health Medical Scheme and
the likelihood that the reserve requirements will be met by end 2004, single
digit contribution increases are expected for 2005.
Discovery Life
Discovery Life"s performance exceeded expectation. Profit increased to R105,1
million (2002: R16,8 million), and the value of in-force business increased by
89% to R946,3 million (2002: R500,0 million). Annualised new business premium
income increased by 35% to R290,1 million (2002: R214,6 million). The number of
policyholders grew to over 100 000.
The company"s approach to life insurance has now become the industry norm and it
has established a leadership position in a market that is transforming toward
its approach. It"s products exclude any investment element and therefore it is
not only immunised against the fall-out of poor investment returns, but also
against the fluctuating financial performance resulting from them. The company
is well positioned for further innovation to capitalise on the platform it has
created.
The quality of business written has been exceptional and over the period, focus
was applied to maintaining and enhancing this. The average premium and the
ancillary benefits per policy remain significantly above the industry average,
which has helped to increase the profitability per policy. Notably, the
company"s mortality and morbidity experience was better than expected.
Increasing success is being achieved through the integration with other
Discovery products.
Prospects
Discovery is confident of continued growth, with robust performances expected
from its established businesses and increasing contributions from start-ups.
By order of the board
LL Dippenaar A Gore
Chairman Chief Executive Officer
26 February 2004
GROUP CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2003
December June
2003 2003
R million Unaudited Audited
ASSETS
Non-current assets 1 422,1 1 015,9
Fixed assets 224,8 221,2
Intangible assets 38,0 35,5
Investments 1 082,0 685,0
Loans receivable 77,3 74,2
Assets under insurance contracts 1 054,0 772,4
Current assets 1 070,7 1 552,7
Accounts receivable 255,1 209,0
Deferred tax asset 10,3 6,7
Cash and cash equivalents 805,3 1 337,0
Total assets 3 546,8 3 341,0
EQUITY AND LIABILITIES
Capital and reserves 2 110,1 1 036,9
Share capital and share premium 1 277,7 428,9
Reserves 832,4 608,0
Minority interest 127,4 127,4
Liabilities under insurance contracts 14,0 9,5
Liabilities under investment 402,9 370,2
contracts
Non-current liabilities 312,4 296,7
Deferred tax liability 14,6 25,9
Current liabilities 565,4 1 474,4
Short-term loan - 875,9
Other current liabilities 565,4 598,5
Total equity and liabilities 3 546,8 3 341,0
Net asset value per share (cents) 411,0 274,4
Number of shares in issue (000"s) 513 464 377 876
GROUP CONSOLIDATED STATEMENT OF GROSS INFLOWS UNDER MANAGEMENT FOR THE SIX
MONTHS ENDED 31 DECEMBER 2003
Six months Six months
ended ended
December December Year
ended
2003 2002 Change June
2003
R million Unaudited Unaudited % Audited
Gross inflows 6 392,6 4 808,7 33 10 943,7
under management
Less: Collected 4 372,7 2 962,7 7 190,0
on behalf of
third parties
Gross income of 2 019,9 1 846,0 3 753,7
group
GROUP CONSOLIDATED INCOME STATEMENT FOR THE SIX MONTHS ENDED 31 DECEMBER 2003
Six Six
months months
ended ended
December December Year
ended
2003 2002 Change June
2003
R million Unaudited Unaudited % Audited
Gross income of group 2 019,9 1 846,0 3 753,7
Less: Reinsurance 167,7 161,0 341,9
premiums
Net income 1 852,2 1 685,0 3 411,8
Total investment 64,0 45,9 96,2
income
Fair value (0,1) (15,5) (15,5)
adjustments
Other investment 64,1 61,4 111,7
income
INCOME 1 916,2 1 730,9 3 508,0
Claims and 658,4 725,0 1 366,0
policyholder benefits
Commissions 279,0 217,8 437,4
Operating and 787,0 674,5 1 437,0
administration
expenses
Vitality benefits 144,1 104,3 227,4
OUTGO 1 868,5 1 721,6 3 467,8
Transfers 277,1 164,0 420,2
From 277,1 201,0 420,2
assets/liabilities
under insurance
contracts
To health insurance - (37,0) -
durational and AIDS
reserves
Operating profit 324,8 173,3 460,4
Local operations 402,6 263,2 53 628,2
Foreign operations (77,8) (89,9) (167,8)
Financing costs (30,5) (11,6) (25,2)
Foreign exchange loss (36,5) - (17,1)
- unrealised
Profit before 257,8 161,7 59 418,1
abnormal items and
taxation
Abnormal items - - 120,2
Profit before 257,8 161,7 59 538,3
taxation
Taxation 123,4 75,5 182,2
- Operating profit 123,4 75,5 146,1
- Abnormal items - - 36,1
Profit after taxation 134,4 86,2 356,1
Minority share of 0,9 - 6,1
loss
Net profit 135,3 86,2 57 362,2
attributable to
ordinary shareholders
Headline earnings per
share (cents)
- undiluted 27,2 21,5 27 94,1
- diluted 26,2 21,5 22 88,2
Basic earnings per
share (cents)
- undiluted 27,4 22,8 20 95,9
- diluted 26,4 22,7 16 89,8
Headline earnings per
share before abnormal
items and foreign
exchange loss (cents)
- undiluted 34,6 21,5 61 76,3
- diluted 33,0 21,5 54 72,1
Basic earnings per
share before abnormal
items and foreign
exchange loss (cents)
- undiluted 34,9 22,8 53 78,1
- diluted 33,3 22,7 47 73,7
Weighted number of 492 979 377 876 377 876
shares in issue
(000"s)
Diluted weighted 531 725 409 458 417 594
number of shares
(000"s)
GROUP CONSOLIDATED CASH FLOW STATEMENT FOR THE SIX MONTHS ENDED 31 DECEMBER 2003
Six months Six months
ended ended
December December Year
ended
2003 2002 June 2003
R million Unaudited Unaudited Audited
Operating profit before 58,1 17,6 57,1
working capital changes
Health and Vitality 303,6 271,5 486,2
Life (164,0) (158,8) (266,1)
Destiny (81,5) (95,1) (163,0)
Working capital changes (62,4) (94,3) 158,3
Cash (4,3) (76,7) 215,4
(utilised)/generated
from operations
Taxation paid (131,6) (110,3) (180,6)
Investment income 54,0 51,4 90,1
Interest paid (16,4) (11,6) (23,9)
CASH FLOW FROM OPERATING
ACTIVITIES (98,3) (147,2) 101,0
CASH FLOW FROM INVESTING
ACTIVITIES (358,8) (138,1) (199,5)
CASH FLOW FROM FINANCING
ACTIVITIES (61,0) 145,4 1 094,7
Net (decrease)/increase (518,1) (139,9) 996,2
in cash and cash
equivalents
Cash and cash 1 337,0 354,4 354,4
equivalents at beginning
of year
Effects of exchange rate (13,6) (7,8) (13,6)
changes on cash and cash
equivalents
Cash and cash 805,3 206,7 1 337,0
equivalents at end of
year
GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED
31 DECEMBER 2003
Share Share Investment
R million capital premium reserve
31 December 2003
Balance at 1 July 2003 0,4 428,5 (4,4)
Net profit for the - - -
period
Dividends paid to
Destiny Health - - -
preference shareholders
Unrealised gains on - - 75,3
investments
Realised gains on - - (1,4)
investments transferred
to income statement
Transfer from hedging - - -
reserve
Preliminary and share - (27,9) -
issue expenses
Translation of foreign - - -
subsidiary
Issue of capital 0,9 875,8 -
Balance at 31 December 1,3 1 276,4 69,5
2003
31 December 2002
Balance at 1 July 2002 0,4 426,7 30,8
Implementation of AC133 - - -
Net profit for the - - -
period
Dividends paid to
Destiny Health - - -
preference shareholders
Unrealised losses on - - (21,4)
investments
Realised gains on - - (6,9)
investments transferred
to income statement
Translation of foreign - - -
subsidiary
Issue of capital * 1,7 -
Balance at 31 December 0,4 428,4 2,5
2002
GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED
31 DECEMBER 2003
Retained Translation Hedging
R million earnings reserve reserve Total
31 December 2003
Balance at 1 July 634,5 (7,7) (14,4) 1 036,9
2003
Net profit for the 135,3 - - 135,3
period
Dividends paid to
Destiny Health (0,6) - - (0,6)
preference
shareholders
Unrealised gains on - - - 75,3
investments
Realised gains on - - - (1,4)
investments
transferred to income
statement
Transfer from hedging - - 14,4 14,4
reserve
Preliminary and share - - - (27,9)
issue expenses
Translation of - 1,4 - 1,4
foreign subsidiary
Issue of capital - - - 876,7
Balance at 31 769,2 (6,3) - 2 110,1
December 2003
31 December 2002
Balance at 1 July 301,5 (15,1) - 744,3
2002
Implementation of (16,6) - - (16,6)
AC133
Net profit for the 86,2 - - 86,2
period
Dividends paid to
Destiny Health (2,1) - - (2,1)
preference
shareholders
Unrealised losses on - - - (21,4)
investments
Realised gains on - - - (6,9)
investments
transferred to income
statement
Translation of - (9,1) - (9,1)
foreign subsidiary
Issue of capital - - - 1,7
Balance at 31 369,0 (24,2) - 776,1
December 2002
* Amount is less than R100 000
SEGMENTAL INFORMATION FOR THE SIX MONTHS ENDED 31 DECEMBER 2003
Health
United
South States of
R million Africa America Life Vitality Total
Gross 5 596,0 226,9 384,3 185,4 6 392,6
inflows
under
management
Gross income 1 285,2 165,0 384,3 185,4 2 019,9
Reinsurance (44,1) (43,7) (79,9) - (167,7)
Fair value - - (0,1) - (0,1)
adjustments
Expenses, (1 026,7) (200,3) (476,3) (165,2) (1 868,5)
commissions
and claims
Transfer - - 234,4 - 234,4
from
balances
under
insurance
contracts
214,4 (79,0) 62,4 20,2 218,0
Return on - - 42,7 - 42,7
assets under
insurance
contracts
Operating 214,4 (79,0) 105,1 20,2 260,7
profit
before
investment
income
Investment 64,1
income
Operating 324,8
profit
FOR THE SIX MONTHS ENDED 31 DECEMBER 2002
Health
United
South States of
R million Africa America Life Vitality Total
Gross 4 314,9 158,1 196,2 139,5 4 808,7
inflows
under
management
Gross income 1 381,9 128,4 196,2 139,5 1 846,0
Reinsurance (74,6) (53,3) (33,1) - (161,0)
Fair value - - (15,5) - (15,5)
adjustments
Expenses, (1 091,7) (165,9) (331,8) (132,2) (1 721,6)
commissions
and claims
Transfer (37,0) - 175,7 - 138,7
(to)/from
balances
under
investment
and
insurance
contracts
178,6 (90,8) (8,5) 7,3 86,6
Return on - - 25,3 - 25,3
assets under
insurance
contracts
Operating 178,6 (90,8) 16,8 7,3 111,9
profit
before
investment
income
Investment 61,4
income
Operating 173,3
profit
GROUP CONSOLIDATED EMBEDDED VALUE STATEMENT FOR THE SIX MONTHS ENDED
31 DECEMBER 2003
GROUP EMBEDDED VALUE
At At At At
31 31 Change 30 June 30 June
December December
R million 2003 2002 % 2003 2003(1)
(Illustrative,
after capital
raising)
Shareholders" 2 110,1 776,1(2) 1 036,9 1 885,7
funds
Value of in- 4 401,5 3 126,1 41 4 021,1 4 021,1
force
business
before cost
of capital(3)
Cost of (289,7) (192,1) (190,2) (190,2)
capital
Discovery 6 221,9 3 710,1 68 4 867,8 5 716,6
Holdings
embedded
value
Number of 513,5 377,9 377,9 512,5
shares
millions
Embedded R12,12 R9,82 23 R12,88 R11,15
value per
share
Diluted R11,27 R9,06 24 R11,66 R10,35
embedded
value per
share
(1) In June 2003, Discovery proceeded with a claw-back offer to raise R875
million at an issue price of R6,50 per share. The shares were issued and
listed on the JSE on 28 July 2003. At 30 June 2003, the capital raised was
reflected as a short-term loan owing to FirstRand Limited, but is now
included in shareholders" funds. The embedded value at 30 June 2003 has
been restated for illustrative purposes to demonstrate the impact of
including the capital raised (net of preliminary and share issue expenses)
in shareholders" funds, and including the shares issued in the calculation
of embedded value per share.
(2) The accounting policy for health insurance and group life acquisition costs
was changed during the 2003 financial year from deferring acquisition costs
to expensing these costs as incurred. The deferred acquisition cost asset
was previously reflected as an adjustment to the value of shareholders"
funds. The shareholders" funds balance at 31 December 2002 has been
restated in line with the changes to the statement of changes in equity.
(3) The pre-paid commission expense was previously reflected as an adjustment
to shareholders" funds. It has now been fully expensed. The asset (which
amounted to R76,7 million at 31 December 2002 and R17,6 million at 30 June
2003) has been deducted from the value of in-force business at 30 June 2003
and 31 December 2002 to avoid the double counting of expense loadings.
VALUE OF IN-FORCE BUSINESS FOR THE SIX MONTHS ENDED 31 DECEMBER 2003
Value before Cost of Value after
R million cost of capital cost of
capital capital
Health and Vitality 3 045,4 -(1) 3 045,4
Life 1 203,7 (257,4) 946,3
Destiny Health (2) 152,4 (32,3) 120,1
Total 4 401,5 (289,7) 4 111,8
(1) The trustees of the Discovery Health Medical Scheme have applied for a 10%
quota share reinsurance treaty with Discovery Life to commence on 1 January
2004. As the Scheme has not yet received approval for the treaty, both
potential risk profits and the potential cost of any capital requirements
have been excluded from the embedded value.
(2) Figures for Destiny Health reflect Discovery"s 95,6% shareholding in
Destiny Health at 31 December 2003.
EMBEDDED VALUE EARNINGS
6 months 6 months
to to
31 31 12
December December months
to
R million 2003 2002(1) 30 June
2003
Embedded value at end of 6 221,9 3 710,1 4 867,8
period
Embedded value at beginning 4 867,8 3 321,0 3 321,0
of period
Increase in embedded value 1 354,1 389,1 1 546,8
Net issue of capital (848,8) (1,7) (1,8)
Dividends paid to Destiny 0,6 2,1 12,6
Health preference
shareholders
Implementation of new - 16,6 16,6
accounting standards (2)
Transfer to hedging reserve (14,4) - 14,4
(3)
Embedded value earnings 491,5 406,1 1 588,6
(1) The value of Shareholders" Funds at 31 December 2002 has been restated in
line with the adjustments to the statement of changes in equity. As a
result, the embedded value earnings for the prior period has been adjusted.
(2) Refer to the commentary to the financial statements regarding Discovery"s
adoption of AC 133.
(3) This item relates to a cash flow hedge that was taken out to reduce
exposure to currency risk on capital inflows to Destiny Health.
COMPONENTS OF EMBEDDED VALUE EARNINGS
6 months 6 months 12 months
to to to
31 31 Change 30 June
December December
R million 2003 2002 % 2003
Total profit from 357,9 275,5 30 669,6
new business(at
point of sale)
Profit from
existing business
* Expected return 272,3 241,3 500,5
* Change in (261,7) (182,8) (0,1)
methodology and
assumptions (1)
* Experience 6,9 74,1 365,8
variances
Adjustment for
minority interest
in
Destiny Health 3,7 - (2,3)
Interest on loan (25,2) - -
capital
Return on 137,6 (2,0) 55,1
shareholders"
funds (2)
Embedded value 491,5 406,1 1 588,6
earnings
(1) The change 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. These changes are described in detail
in the table below (for previous periods refer to previous embedded value
statements).
(2) Return on Shareholders" Funds is the after-tax investment return and
unwinding of the negative reserves.
METHODOLOGY AND ASSUMPTION CHANGES FOR THE SIX MONTHS ENDED 31 DECEMBER 2003
Health, Vitality
R million and Destiny Health Life Total
Modelling changes - (66,3) (66,3)
Global linkage (1) - (84,7) (84,7)
Lapses (25,0) - (25,0)
Economic 16,9 (3,3) 13,6
Expenses (5,4) (34,8) (40,2)
Mortality and (4,1) 5,5 1,4
morbidity
Tax (2) (53,6) - (53,6)
Other (2,5) (4,4) (6,9)
Total (73,7) (188,0) (261,7)
(1) The global linkage benefit basis was strengthened in the light of recent
experience and exchange rate volatility.
(2) The tax assumption change reflects a higher average VAT rate.
EXPERIENCE VARIANCES for the six months ended 31 December 2003
Health, Vitality
R million and Destiny Health Life Total
Renewal expenses (6,2) (2,3) (8,5)
Other expenses (1) (79,7) - (79,7)
Health administration
fee and
Life premium increase (20,4) 11,3 (9,1)
Extended modelling 68,1 0,8 68,9
term (2)
Lapses 28,4 (11,4) 17,0
Medical inflation (3) 14,5 - 14,5
Policy alterations (1,6) 64,7 63,1
Exchange rate (13,0) - (13,0)
movements
Mortality and (15,9) 18,6 2,7
morbidity
Quota share (4,4) (13,4) (17,8)
reinsurance treaty
(4)
Other (5) (10,5) (20,7) (31,2)
Total (40,7) 47,6 6,9
(1) The expense experience variance for Health, Vitality, and Destiny Health
includes a negative variance relating to non-recurring expenses of R38,3
million. In addition, a large proportion of Health and Destiny Health new
business was written during the period but only activated on 1 January 2004
- outside of the valuation period. A negative experience variance of R41,4
million arises in respect of the acquisition expenses incurred for these
members who are not included in the embedded value calculation.
(2) The projection term for Health, Vitality, Destiny Health, and Group Life at
31 December 2003 has not been changed from that used at 30 June 2003. Thus,
an experience variance arises because the total term of the in-force
business is effectively increased by 6 months.
(3) The positive medical inflation variance is the result of higher than
expected Health and Destiny Health contribution increases.
(4) The 10% quota share reinsurance treaty for 2004 which was previously
modelled has not been modelled in the 31 December 2003 calculation as the
Scheme has not yet received approval for the treaty. The Life product cost
of capital has increased due to the manner in which the cost of capital was
previously shared between the Life and Health products.
(5) Includes a R36,5 million unrealised foreign exchange loss arising on a
R279,2 million loan entered into by Destiny Health with RMB International
(Dublin) Limited.
EMBEDDED VALUE OF NEW BUSINESS
6 months 6 months 12
to to months
to
31 31 Change 30
December December June
R million 2003 2002 % 2003
Health and Vitality
Gross profit from new 42,9 76,5 237,9
business at point of
sale
Cost of capital - (6,3) (3,2)
Net profit from new 42,9 70,2 (39) 234,7
business at point of
sale
New business annualised 376,0 459,8 (18) 1
premium income (1) 834,2
Life
Gross profit from new 370,6 218,6 493,9
business at point of
sale
Cost of capital (63,3) (20,3) (75,6)
Net profit from new 307,3 198,3 55 418,3
business at point of
sale
New business annualised 213,6 188,8 13 354,8
premium income (2)
Annualised profit 12,1% 9,6% 13,1%
margin (3)
Destiny Health
Gross profit from new 14,8 16,0 40,5
business at point of
sale
Cost of capital (7,1) (9,0) (23,9)
Net profit from new 7,7 7,0 10 16,6
business at point of
sale
New business annualised 137,3 145,0 (5) 356,1
premium income (4)
(1) Health new business annualised premium income is the gross medical scheme
contribution. For embedded value purposes, Health new business is defined
as members of new employer groups, and includes additions to first year
business.
The new business annualised premium income shown above has been adjusted to
exclude premiums in respect of members who join an existing employer after
the first year, as well as premiums in respect of new business written
during the period but only activated after 31 December 2003 - outside of
the valuation period. These members are not included in the calculation of
the value of new business. The total Health and Vitality new business
annualised premium income written over the period was R960,9 million
(December 2002: R1 196,2 million).
The reduction in the new business margin for Health and Vitality is due to
the increase in sales of lower margin business, particularly following the
launch of the KeyCare plans on 1 January 2003.
(2) Life new business annualised premium income is net of automatic premium
increases in respect of existing business.
(3) The annualised profit margin is the value of new business expressed as a
percentage of the present value of future premiums.
(4) For embedded value purposes, Destiny Health new business is defined as
members of new employer groups, and includes additions to first year
business.
The new business annualised premium income shown above has been adjusted to
exclude premiums in respect of members who join an existing employer after
the first year, as well as premiums in respect of new business written
during the period but only activated after 31 December 2003 - outside of
the valuation period. These members are not included in the calculation of
the value of new business. The total Destiny Health new business annualised
premium income written over the period was R222,4 million (December 2002:
R186,9 million).
EMBEDDED VALUE ASSUMPTIONS
31 December 31 December 30 June
2003 2002 2003
(%) (%) (%)
Risk discount rate
- Health and 13,50 16,00 13,50
Vitality
- Life product 12,50 14,00 12,50
- Destiny Health 10,00 10,00 10,00
Medical inflation
South Africa 8,50 10,00 8,50
United States Current Decreasing Current
levels levels
reducing to linearly reducing
from to
11,50% 14,25% to 11,50%
over the 9,75% over over the
projection the projection
projection
period period period
Expense inflation
South Africa 5,50 7,00 5,50
United States 5,00 6,00 6,00
Pre-tax investment
return
South Africa - 8,00 9,50 8,00
cash
- bonds 9,50 11,00 9,50
- equity 11,50 13,00 11,50
United States - 2,00 2,00 2,00
bonds
Income tax rate
- South Africa 30,00 30,00 30,00
- United States 34,00 34,00 34,00
Federal Tax Rate
(1)
(1) Various additional State taxes also apply. Based on the projected
utilisation of Destiny Health"s assessed tax loss to date, it is assumed
that no income tax will be payable over the projection term.
Life mortality, morbidity and lapse assumptions were derived from internal
experience, where available, augmented by reinsurance and industry information.
The Health lapse assumptions were based on the results of recent experience
investigations, as were the Destiny Health morbidity assumptions. The Destiny
Health lapse assumptions were based on the results of recent experience
investigations as well as future expectations regarding scheme renewals. Renewal
expense assumptions were based on the results of the latest expense and budget
information.
The investment return assumption was determined with reference to the market
yield to maturity on long-dated government bonds. Other economic assumptions
were set relative to this yield.
It was assumed that the capital adequacy requirements in future years will be
backed by surplus assets consisting of 70% equities and 30% fixed interest
securities for the purposes of calculating the cost of capital at risk.
The embedded value of Discovery at 31 December 2003 is calculated as the sum of
the following components:
* The excess assets over liabilities at the valuation date, and
* The value of in-force business at the valuation date (less an allowance for
the cost of capital).
The value of in-force business is calculated as the value of projected future
after-tax profits of the business in force at the valuation date, discounted at
the risk discount rate.
The value of new business is determined at the point of sale as the projected
future after-tax profits of the new business written by Discovery, discounted at
the risk discount rate, less an allowance for the cost of capital.
Tillinghast, international consulting actuaries, a business of Towers Perrin,
have reviewed the methodology and assumptions used to determine the value of in-
force business and the value of new business and have confirmed that, overall,
they are reasonable.
FINANCIAL COMMENTARY
Accounting Policies
The principal accounting policies and methods of computation followed in the six
months to 31 December 2003 are consistent with those followed at 30 June 2003.
The unaudited interim financial statements comply with South African Statements
of Generally Accepted Accounting Practice.
In line with Discovery"s current policy, no dividend has been declared.
Comparative Figures
The following changes have been made to the comparative figures:
Foreign exchange losses have been shown separately on the face of the
income statement in order to provide more meaningful information. An
adjusted headline earnings per share before abnormal items and foreign
exchange losses has also been shown.
In line with industry practice, the accounting policy for health insurance and
group life acquisition costs was changed during the 2003 financial year from
deferring acquisition costs to expensing these costs as incurred. The impact of
this change in accounting policy on the results for the six months ended
31 December 2002 is as follows:
* A reduction of the retained income at 30 June 2002 of R196,3 million
* A reduction in net profit after tax for the six months ended 31 December
2002 of R6,9 million
Discovery implemented the accounting standard Financial Instruments: Recognition
and Measurement AC133 in preparation of the financial statements for the year
ended 30 June 2003. The impact of the adoption of AC133 on the results for the
six months ended 31 December 2002 is an increase in net profit after tax of R2,2
million.
New Business Annualised Premium Income
New business annualised premium income of the group decreased 8% for the six
months under review to R1 473,4 million (2002: R1 597,7 million) and is made up
as follows:
2003 2002 Change %
Health (Rm) 934,5 1 163,3 (20)
Vitality (Rm) 26,4 32,9 (20)
Life (Rm) 290,1 214,6 35
Destiny (Rm) 222,4 186,9 19
Total (Rm) 1 473,4 1 597,7 (8)
Destiny (USDm) 31,3 19,7 59
The decrease in Health and Vitality new business from R1 196,2 million for the
six months ended 31 December 2002 to R960,9 million for the six months ended
31 December 2003 is attributable to the regulatory changes (Section 29A(6) of
the Medical Schemes Act) promulgated in 2002 which allowed groups to join
medical schemes free of underwriting. This led to a higher than anticipated
influx of new business in 2002. This legislation persists but the effect is now
in line with our expectations.
Discovery Life`s new business increased 35% for the six months under review to
R290,1 million (2002: R214,6 million) building further on its leadership
position in the risk-only assurance market and proving its value proposition to
clients.
Destiny"s new business grew 59% to USD31,3 million (2002: USD19,7 million)
bearing testimony to a continued focus on marketing and distribution activities
and showing early signs of the benefits of the joint ventures. The strengthening
of the Rand against the Dollar over the six month period translated into a 19%
increase in new business in Rand terms over the six-month period.
Gross Inflows Under Management
Gross inflows under management includes flows into the Discovery Health Medical
Scheme ("DHMS") to demonstrate the scale of activity of the Discovery group and
to provide direct comparison of activity to prior periods. All lines of business
showed satisfactory growth in gross inflows under management.
R million 2003 2002 Change %
Health 5 596,0 4 314,9 30
Vitality 185,4 139,5 33
Life 384,3 196,2 96
Destiny 226,9 158,1 44
6 392,6 4 808,7 33
Operating profit - local
operations
R million 2003 2002 Change %
Health 214,4 178,6 20
Vitality 20,2 7,3 177
Life 105,1 16,8 526
Profit before investment 339,7 202,7 68
income
Investment income 62,9 60,5 4
Operating profit from 402,6 263,2 53
local operations
Discovery Health
The impact of the resolution with the Council of Medical Schemes on the results
of the health operations of Discovery, was a reduction in gross income with a
corresponding decrease in reinsurance premiums and policyholder benefits.
Although the resolution resulted in a decrease in gross income there was an
increase of 20% in operating profit before investment income. This is
attributable to:
* An increase in lives covered of 19,9% to 1 505 896 (2002: 1 255 797)
* Administration and marketing efficiencies
The operating profit of Discovery Health is weighted to the second half of the
financial year as premium increase anniversaries are on 1 January each year
while salary increases occur on 1 July each year.
The trustees of DHMS have applied for a 10% quota share reinsurance treaty with
Discovery Life to commence on 1 January 2004 for which approval has not yet been
received.
Discovery Life
Discovery Life"s increase in operating profit before investment income is
attributable to the following:
* Significant new business
* Better than anticipated mortality and morbidity experience
The number of individual policyholders insured grew to 100 218 (2002: 46 340).
Group lives covered increased to 34 968 (2002: 28 991).
Discovery Vitality
Discovery Vitality"s operating profit increased to R20,2 million (2002: R7,3
million) resulting from an enhanced product offering increasing Vitality"s
membership. With effect from 1 January 2004, Discovery Vitality has launched
further exciting benefits which are expected to lead to a reduction in the
profitability of Vitality in the second half of the financial year.
Destiny Health
Destiny Health"s operating losses before investment income, finance costs and
non-recurring expenses reduced by 48% to R47,1 million for the six month period
ended 31 December 2003 (2002: R90,8 million). This is attributable to the
strengthening of the Rand against the Dollar, improved claims experience as a
result of better risk management and the achievement of efficiencies in cost
control as well as the growth in lives covered to 24 698 (2002: 14 840).
Non-recurring costs include set-up costs of R17,5 million incurred in respect of
the joint ventures entered into with Guardian and Tufts. The R36,5 million
exchange loss arises on the R279,2 million loan entered into by Destiny with RMB
International (Dublin) Limited.
Taxation
All South African entities are in a tax paying position. Destiny operations have
significant tax losses but no deferred tax asset has been accounted for on the
foreign losses incurred.
Headline Earnings Per Share
Headline earnings per share is calculated as follows:
December December June
R million 2003 2002 2003
Net profit attributable to 135,3 86,2 362,2
ordinary shareholders
Adjusted for realised profit (1,2) (4,8) (6,7)
on available for sale
financial instruments
Headline earnings 134,1 81,4 355,5
Foreign exchange loss - 36,5 - 17,1
unrealised
Abnormal items - - (84,1)
Headline earnings before 170,6 81,4 288,5
abnormal items and foreign
exchange loss
Balance Sheet
The short-term loan of R875 million owing to FirstRand Limited as at 30 June
2003 that arose in terms of the claw-back offer was repaid by the issue of 134
615 385 new Discovery shares. These shares were listed on the JSE on 28 July
2003.
The minority interest of R127,4 million in the balance sheet comprises the
Series A preference shares of Destiny Health.
The increase in the assets under insurance contracts of R281,6 million is as a
result of the significant increase in profitable new business written by
Discovery Life.
Investments have increased due to the investment of an additional R300 million
into equity portfolios during October 2003 coupled with the strong performance
of the equity markets. Unrealised gains of R75,3 million on investments have
been taken directly to reserves.
Cash and cash equivalents at 30 June 2003 is R805,3 million. As at 31 December,
R103,5 million of cash is held by Destiny Health Insurance Company as part of
its statutory capital.
Directors:
L L Dippenaar (Chairman), A Gore (Chief Executive Officer), J M Robertson (Chief
Operating Officer), Dr BA Brink**, J P Burger, Dr N J Dlamini, R B Gouws#,
M I Hilkowitz, N S Koopowitz*,H P Mayers*, B Swartzberg*, S V Zilwa, S D Whyte*
*Executive
**Appointed 19 February 2004
#Resigned effective 5 December 2003
Transfer Secretaries:
Computershare Limited
(Registration number 1958/003546/06)
8th Floor
70 Marshall Street,
Johannesburg, 2000
PO Box 61051, Marshalltown, 2107
Secretary And Registered Office:
M J Botha
155 West Street
Sandton 2146
PO Box 786722, Sandton, 2146
Tel: (011) 529 2888
Fax: (011) 529 2958
e-mail questions to:
AskTheCFO@discovery.co.za
www.discovery.co.za/investor
Merchant Bank And Sponsor:
Rand Merchant Bank
A division of FirstRand Bank Limited
Corporate Finance
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