Wrap Text
DSY - Discovery Holdings Limited - Unaudited interim results and cash dividend
declaration for the six months ended 31 December 2010
DISCOVERY HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
ISIN: ZAE000022331
Share Code: DSY
UNAUDITED INTERIM RESULTS AND CASH DIVIDEND DECLARATION FOR THE SIX MONTHS
ENDED 31 DECEMBER 2010
Highlights
Normalised headline earnings increase to R941 million up 25%
Normalised profit from operations increase to R1 332 million up 28%
New business API R3 747 million up 15%
Interim dividend 42 cents per share up 27%
Introduction
Discovery posted strong results for the six-month period to 31 December 2010.
While the period under review was complex, impacted by both the financial
crisis and the considerable policy debates that affect the markets in which
Discovery operates, the performance across Discovery`s businesses was
pleasing. Notably, during this period, the South African economy started to
stabilise and consumer confidence increased. Discovery is strongly of the view
that South Africa has made considerable progress on a number of important
fronts and remains excited and optimistic about the country`s future.
Discovery continues to be focused on playing a positive leadership role in
South Africa.
Over the last 12 months, and particularly during the six-month period under
review, Discovery focused on achieving growth in three key strategic areas:
1. In Discovery`s South African businesses, quality, growth and innovation
were the important areas of focus. In the context of Discovery Health, this
enabled us to balance the natural tension that exists between offering access
to best quality care and affordable premiums, and ensuring sustainable growth.
For Discovery Life, this manifested in a significant reduction in lapse rates
and superior mortality and morbidity experience. Vitality experienced
significant increases in levels of engagement, thereby further entrenching
Vitality`s role as a differentiator through its integration capability and
ability to improve mortality and morbidity experience. Discovery Invest
continued to strengthen its position in the retail investment space with new
product designs and platforms.
2. In Discovery`s international businesses, a step-change in strategy was
employed to achieve scale, profitability and relevance - with a focus on
leveraging Discovery`s unique intellectual property and capabilities to
organically build businesses with minimal exposure to capital downside. In
particular, the acquisition of Standard Life Healthcare, the significant work
done within PruHealth and the continued successful roll-out of PruProtect,
have created a business of significant size and potential in the United
Kingdom. Furthermore, the important transaction concluded with Humana Inc.
(Humana) in the United States and the acquisition of 20% of Ping An Health in
China, provide considerable upside potential without significant capital risk.
3. A continued focus on building new businesses based on the unique business
model of Discovery in the South African market.
The results of these strategies were pleasing:
- Normalised operating earnings, excluding the once-off effects of the
Standard Life Healthcare acquisition, increased by 28% from
R1 044 million to R1 332 million.
- Total new business production increased by 15% from R3 246 million to R3
747 million and the embedded value increased by 15% from R21 billion to R24
billion.
- Notably, focus on all aspects of the Group`s quality was reflected in
strong, positive non-economic experience variances.
Discovery Health
Discovery Health`s performance exceeded expectation. Despite the previous
period`s high base, new business grew strongly by 10% and operating profits
increased by 12% from R555 million to R619 million. The total medical scheme
membership managed by Discovery Health increased by 12% to 2.5 million lives.
Discovery Health operates in a unique and complex environment in which
clinical, actuarial, technological and regulatory factors coalesce. It is
Discovery Health`s role to navigate these complexities and ensure access to
quality healthcare on a sustainable basis. To achieve this during the period
under review, continued focus was applied by Discovery Health to developing
benefit plans, provider networks, healthcare management capabilities, and
technological platforms that improve the journey of its medical scheme members
under management in the healthcare system. The results were positive: the
Discovery Health Medical Scheme, the largest open medical scheme in South
Africa, posted the lowest contribution rate increase among major medical
schemes and grew membership by 10%; lapses reduced to the lowest levels yet
experienced; and importantly, almost 98% of members maintained or increased
their benefit choices with only 2% buying down benefits in 2011.
A fundamental goal of Discovery Health is to improve access to private
healthcare for the low-income sector of the population and the progress made
was excellent. Membership of the Discovery Health Medical Scheme`s plan series
for this market, KeyCare, grew by 34% to 340 000. As at December 2010, the
scale of KeyCare was equivalent to the third largest medical scheme in the
country. During the period, Discovery Health also achieved considerable
success with products designed to close gaps in healthcare coverage. For
example, significant take-up was achieved by the Medical Savings Booster,
which enables members to channel discounts on HealthyFoodTrade Mark purchases
at Pick n Pay towards funding gaps in cover. In addition, a number of
important innovations were rolled out that are aimed at reducing the cost of
care and member out-of-pocket exposure and improving both the quality of care
and the member`s experience in the healthcare system. To facilitate this,
significant investment was made in Discovery Health`s technology platforms and
risk management assets, such as electronic patient records and the development
of a coordinated care model to manage complex cases. Discovery MedXpress is
also being rolled out so that medical scheme members can enjoy the benefit of
direct, same-day delivery of medicine, while enabling Discovery Health to
manage formularies and quality of compliance. The combination of these
initiatives enables Discovery Health to offer members lower price points per
unit of benefit chosen.
Discovery Health is determined to improve the quality of the South African
healthcare system for all South Africans. In this regard, Discovery Health is
committed to contribute to the successful implementation of a National Health
Insurance system for South Africa, while also ensuring the sustainability and
strength of the private healthcare sector as an integral part of the overall
national healthcare system.
Discovery Life
Discovery Life`s performance was pleasing, with operating profit growing by
14% from R675 million to R768 million, new business increasing by 6% from R782
million to R832 million and the value of in-force business increasing by 14%
from R8.4 billion to R9.6 billion. Notably, the positive non-economic
experience variances in the embedded value illustrate the quality of the
business being transacted and how it is being managed. As stated, considerable
focus was applied to the quality of the business, specifically new business,
lapse rates, mortality and morbidity experience, as well as capital
utilisation and return on capital:
1. In the context of new business, exposure to categories that have
historically generated high levels of lapses was reduced, such as the curbing
of internal replacements and the re-pricing of business assurance. The effect
of this was to increase the quality of new business but moderate its growth.
Notably, adjusting for the impact of these categories resulted in new business
growth on a like-for-like basis of 16%.
2. Discovery Life recorded a significant reduction in policy lapses to below
the embedded value assumptions set for 2011. This has been an important
strategy given the industry`s escalated levels of lapses during the economic
slow-down. The strategies employed have illustrated the importance of
Discovery`s integrated model and the benefits of policyholders` engagement in
Vitality, with significantly lower levels of lapses being observed for engaged
policyholders compared to policyholders who are not engaged.
3. The mortality and morbidity levels were better than expected, illustrating
the quality of the business model. Importantly, the benefits of Discovery`s
integrated product strategy appear to be having a positive effect on selective
lapsation - the mortality and morbidity experience has been improving with
policy duration and is an important factor in the sustainability and
profitability of the business going forward.
4. Continued focus was applied to the company`s business model to ensure
capital efficiency. As stated at the previous announcement, a unique model
utilising Discovery Life`s negative Rand reserve as an asset to back capital
bonds sold by Discovery Invest, has proved to be particularly successful. In
addition to this, other areas of capital efficiency were achieved. Going
forward, it is expected that the company`s capital requirements will be
reduced by R3 billion. The combination of these initiatives will be to
increase the return on capital of the business by 3% to 5%.
Discovery Invest
Discovery Invest`s performance exceeded expectation in all respects, with
strong new business growth and mix as well as fund performance driving
profitability. New business increased from R334 million to
R397 million and for the period under review, operating profit of
R44 million was generated compared to the operating loss of R24 million during
the comparative period. Discovery Invest`s strategy has been to focus on the
retail long-term savings market and to provide unique added value to consumers
investing in an open architecture environment that offers investors
considerable choice and investment performance. During the period under
review, this strategy was maintained through, for example, the development of
the Guaranteed Escalator Annuity and the Classic Flexible Investment Plan -
both product constructs aimed at providing unique types and levels of
protection to customers:
- The Guaranteed Escalator Annuity allows investors to access the benefits of
an equity-linked annuity such as fund choice flexibility, flexible withdrawal
rates and capital transfer on death, with the added features of a fixed
annuity, which provides guaranteed levels of income and longevity protection.
- The Classic Flexible Investment Plan offers investors access to the
traditional Linked Investment Service Provider (LISP) platform with over 170
funds, but with protection against poor fund performance, inappropriate
performance fees, mortality protection and protection against capital gains
tax liability.
These products provide enhanced exposure to the two biggest retail market
segments for Discovery Invest.
The excellent investment performance achieved by the Discovery Invest funds
was also noteworthy, with the Discovery Equity Fund and the Discovery Flexible
Property Fund ranking top of their sectors since inception, and Discovery
Invest`s Property Fund winning the Raging Bull Award. The combination of these
factors drove growth in assets under management, with 87% of fund choices
allocated to Discovery Funds, an important factor in driving profit margins.
It is anticipated that Discovery Invest will continue to grow in scale,
quality and profitability.
Vitality
Vitality`s performance was exceptional and its role in product integration,
engagement and achieving superior levels of mortality and morbidity experience
accelerated during the period under review. Engagement levels of key Vitality
benefits increased dramatically with gym membership rising by 20% from 296 116
to 356 533; HealthyFoodTrade Mark activations exceeding 228 000; and levels of
engagement across all Vitality categories increasing. Vitality has continued
its work in understanding the link between engagement with Vitality and
mortality and morbidity experience from an academic perspective, and the link
between different incentive types and the effect of complex and simple
behaviours to establish positive health behaviour. It is this significant
knowledge and capability that has been used to underpin both Discovery`s local
and international businesses.
The DiscoveryCard performed particularly well during the period under review
and reflected both the quality of Discovery`s client base and the improving
economic environment. The DiscoveryCard captured 8% of the point-of-sale
market share and the quality of the credit experience remained above
expectation. Today, Discovery members spend almost R1 billion per month on
their DiscoveryCards. An exciting advancement during the period was the
development of the Discovery Purple Card aimed at providing the higher-end
market segment with unique value.
PruHealth
A change in strategy to achieve scale, relevance and profitability for
PruHealth, delivered positive results during the period under review. Firstly,
the acquisition of Standard Life Healthcare accelerated Discovery`s strategy
in the United Kingdom, with the transaction providing immediate scale in the
Private Medical Insurance market, as well as the opportunity for Discovery to
increase its shareholding in both PruHealth and PruProtect, from 50% to 75%.
As part of the Standard Life Healthcare acquisition, Discovery secured long-
term access to Prudential plc`s brand and life fund in the United Kingdom,
which is important to the competitive position of both PruHealth and
PruProtect. Secondly, considerable work was undertaken to manage the key value
drivers of the PruHealth standalone business, with activity intensifying over
the past six months. The combination of these initiatives resulted in an
operating profit of R35 million (100% of income), versus a loss of R53 million
(50% of loss) during the comparative period. New business increased by 90%
from R165 million to R313 million, and removing the effects of the Standard
Life Healthcare new business, PruHealth`s new business increased by 35%.
Importantly, PruHealth`s combined Vitality and claims loss ratio reduced by
15%, while expense per policy reduced by 27% on a calendar year basis and
positive lapses and selection were achieved during the period.
During the period under review, delivery was taken of the Standard Life
Healthcare business and the process of integrating it into the PruHealth
business began. The quality of the asset acquired surpassed expectations, with
the loss ratio, levels of lapsation and profitability levels exceeding
expectation. The combination of the management action undertaken within
PruHealth, and the acquisition of Standard Life Healthcare, has created a
business with strong fundamental drivers of value and one that represents
significant prospects for Discovery.
Considerable research and development was also undertaken to develop a unified
product range that reflects the unique strengths of both businesses. This
product range was launched during February 2011 and incorporated the
modularity of Standard Life Healthcare`s previous product range with the
Vitality integration capability of PruHealth. PruHealth remains confident in
its ability to transact increased levels of profitable new business via the
new product range.
PruProtect
PruProtect delivered an excellent operating performance with strong growth in
both new business and earnings, and industry recognition of its differentiated
product offerings. New business grew by 44% from
R100 million to R144 million and operating losses narrowed to
R40 million (100%).
PruProtect`s strategy is to build a significant life insurance company on a
similar basis to that of the Discovery Life model to provide unique value to
customers in the United Kingdom. Given the complexity of the market and its
capital intensity, it is imperative that the business is built on the basis of
quality. In this regard, PruProtect exceeded expectations: lapses were lower
than expected, mortality and morbidity experience were better than expected,
and the product mix was acceptable. Additionally, given the business`s
increasing scale, expenses per policy decreased by 57%.
The offsetting of negative reserves created by PruProtect against positive
reserves within Prudential plc`s life fund has enabled PruProtect to achieve
scale on a relatively light capital basis. The combination of this and the
strong underlying performance has created a business that is expected to
achieve superior returns on capital.
During the period under review, PruProtect concentrated on strengthening and
increasing the breadth of the Independent Financial Advisers distribution
channel through PruProtect`s franchises. From a product perspective,
PruProtect was once again recognised as the leading protection provider in the
United Kingdom, further winning industry awards for its innovative critical
illness and income protection cover. In addition, work was done on a number of
different product offerings that will be rolled out during March 2011.
The Vitality Group
Over the last few years, Discovery has maintained a small presence in the
United States via The Vitality Group that develops and markets Vitality to
large employers and health carriers. Given the uniqueness and potential of
Vitality, the importance of wellness in a post healthcare-reform environment
in the United States, and Discovery`s considerable Vitality capabilities, a
decision was made to accelerate The Vitality Group`s development dramatically.
This included the expansion of the wellness and reward network, and refinement
of the clinical and actuarial pathways supporting the programme. Despite a
relatively insignificant distribution capability, The Vitality Group
membership grew to 140 000 members by the end of 2010. Importantly, the
structure of the business minimises Discovery`s exposure to capital and
earnings risk.
To up-scale the business and capitalise on emerging opportunities, Discovery
concluded a transaction with Humana, the fourth largest health insurer in the
United States covering 18 million members (comprising
10.2 million medical members and 7.1 million ancillary product members). Under
the terms of the transaction, Humana will capitalise a new entity,
US-based Humana-Vitality, in which Discovery will hold a 25% stake. Humana-
Vitality will provide Humana members with access to the Vitality programme,
which will be tailored to Humana`s product range and markets. Furthermore,
Humana will acquire a 25% stake in The Vitality Group.
The transaction will result in Discovery being able to leverage its unique
consumer-engaged and integrated health-and-wellness model in the United States
health insurance market with little capital and no insurance risk, while
retaining The Vitality Group`s autonomy to pursue the self-insured employer
wellness market. The greater scale and capital afforded by this structure will
allow The Vitality Group and Humana-Vitality to considerably enhance the
existing wellness networks and platforms in the United States.
During the period under review, work was also done to operationalise the
partnership with Wellness and Prevention Inc. (a Johnson & Johnson company),
in preparation for the 2011 quarter one launch.
Ping An Health
Over the past six months, significant work has taken place to operationalise
Ping An Health, the joint venture between Discovery and the Ping An Group of
China, the world`s second-largest insurance company. During the period under
review, the necessary regulatory approvals were received from the Chinese
Insurance Regulatory Commission. Operationally, the process of transferring
the necessary product and system capabilities to Ping An Health began, with
the Discovery team deployed successfully. From a product perspective,
significant work has taken place to tailor the Discovery capabilities to the
Chinese market and we remain excited by the potential of the Chinese private
health insurance market in the long-term.
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
Income statement
for the six months ended 31 December 2010
R million Group Group % Group
Six Six change Year
months months ended
ended ended June
December December 2010
2010 2009 Audited
Unaudited Unaudited
Insurance premium revenue 5 988 3 278 83 7 860
Premium revenue from - 1 865 1 865
investment contracts
transferred to insurance
contracts
Reinsurance premiums (816) (592) (1 172)
Net insurance premium 5 172 4 551 8 553
revenue
Fee income from 1 881 1 592 18 3 380
administration business
Investment income 108 106 239
Net realised gains on 192 86 123 200
available-for-sale
financial assets
Net fair value gains on 702 326 276
financial assets at fair
value through profit or
loss
Vitality income 685 525 30 1 182
Net income 8 740 7 186 13 830
Claims and policyholders` (2 594) (1 194) (2 586)
benefits
Insurance claims 573 393 841
recovered from reinsurers
Recapture of reinsurance (312) - -
Net claims and (2 333) (801) (191) (1 745)
policyholders` benefits
Acquisition costs (1 192) (1 112) (7) (1 961)
Marketing and (2 941) (2 252) (31) (4 813)
administration expenses
Amortisation of (44) - -
intangibles from business
combinations
Recovery of expenses from 79 74 95
reinsurers
Transfer from (966) (1 692) (2 717)
assets/liabilities under
insurance contracts
- change in assets 924 744 1 639
arising from insurance
contracts
- change in liabilities (1 802) (2 436) (4 291)
arising from insurance
contracts
- change in liabilities (88) - (65)
arising from reinsurance
contracts
Fair value adjustment to (99) (219) (175)
liabilities under
investment contracts
Profit from operations 1 244 1 184 2 514
Gains and losses 609 - -
resulting from business
combinations
Write-off of software (95) - -
from business combination
Finance costs (38) (5) (14)
Foreign exchange loss (22) (6) (3)
Profit before tax 1 698 1 173 45 2 497
Income tax expense (390) (346) (782)
Profit for the period 1 308 827 58 1 715
Profit attributable to:
- equity holders 1 417 829 1 717
- non-controlling (109) (2) (2)
interest
1 308 827 1 715
Earnings per share for
profit attributable to
the equity holders of the
company during the period
(cents):
- basic 255.6 149.6 71 309.9
- diluted 255.4 149.1 71 308.7
Statement of comprehensive income
for the six months ended 31 December 2010
R million Group Group % Group
Six Six change Year
months months ended
ended ended June
December December 2010
2010 2009 Audited
Unaudited Unaudited
Profit for the period 1 308 827 58 1 715
Other comprehensive
income:
Change in available-for- (79) 188 33
sale financial assets
- unrealised gains 92 305 238
- capital gains tax on (6) (43) (33)
unrealised gains
- realised gains (192) (86) (200)
transferred to income
- capital gains tax on 27 12 28
realised gains
Currency translation (346) (19) (20)
differences
- increase in currency (365) (19) (20)
translation reserve
- transfer to profit or 19 - -
loss on disposal of joint
venture
Cash flow hedges (10) (18) 12
- realised (gains)/losses (2) (30) 2
transferred to income
- tax on realised * (1) *
gains/losses
- unrealised (17) 16 22
gains/(losses)
- tax on unrealised 9 (3) (12)
gains/losses
Other comprehensive (435) 151 25
income for the period,
net of tax
Total comprehensive 873 978 (11) 1 740
income for the period
Attributable to:
- equity holders 982 980 1 742
- non-controlling (109) (2) (2)
interest
Total comprehensive 873 978 1 740
income for the period
* Amount is less than R500 000.
Headline earnings
for the six months ended 31 December 2010
R million Group Group % Group
Six Six change Year
months months ended
ended ended June
December December 2010
2010 2009 Audited
Unaudited Unaudited
Normalised headline
earnings per share
(cents):
- undiluted 169.6 136.4 24 278.8
- diluted 169.5 135.9 25 277.7
Headline earnings per
share (cents):
- undiluted 114.7 136.4 (16) 278.8
- diluted 114.6 135.9 (16) 277.7
The reconciliation
between earnings and
headline earnings is
shown below:
Net profit attributable 1 417 829 1 717
to equity shareholders
Adjusted for:
- realised gains on (165) (74) (172)
available-for-sale
financial instruments net
of CGT
- gain on disposal of (667) - -
joint venture
- write-off of software 51 - -
from business combination
net of deferred tax*
Headline earnings 636 755 (16) 1 545
- recapture of 234 - -
reinsurance*
- amortisation of 24 - -
intangibles from business
combinations*
- once-off costs relating 47 - -
to acquisitions*
Normalised headline 941 755 25 1 545
earnings
* Amounts shown at 75%
less any related tax
Weighted number of shares 554 485 553 796 554 117
in issue (000`s)
Diluted weighted number 554 793 555 733 556 257
of shares (000`s)
Segmental information
for the six months ended 31 December 2010
R million SA SA Life SA SA UK
Health Invest Vitalit Health
y
31 December 2010
Income statement
Insurance premium revenue 12 2 461 1 659 - 1 733
Reinsurance premiums (1) (481) - - (298)
Net insurance premium 11 1 980 1 659 - 1 435
revenue
Fee income from 1 668 61 105 28 6
administration business
Investment income 11 68 2 5 5
Inter-segment funding - (100) 100 - -
Net realised gains on - 193 - - (1)
available-for-sale
financial assets
Net fair value gains on - 247 455 - -
financial assets at fair
value through profit or
loss
Vitality income - - - 629 37
Net income 1 690 2 449 2 321 662 1 482
Claims and policyholders` (6) (1 (262) - (1
benefits 078) 217)
Insurance claims - 333 - - 226
recovered from reinsurers
Net claims and (6) (745) (262) - (991)
policyholders` benefits
Acquisition costs - (715) (154) (28) (128)
Marketing and
administration expenses
- depreciation and (69) (12) (5) - (2)
amortisation
- other expenses (985) (479) (100) (628) (406)
Recovery of expenses from - - - - 79
reinsurers
Transfer from
assets/liabilities under
insurance contracts
- change in assets - 727 - - (4)
arising from insurance
contracts
- change in liabilities - (96) (1 - 9
arising from insurance 716)
contracts
- change in liabilities - (71) - - -
arising from reinsurance
contracts
Fair value adjustment to - (61) (38) - -
liabilities under
investment contracts
Profit/(loss) from 630 997 46 6 39
operations
Recapture of reinsurance - - - - -
Gains and losses - - - - -
resulting from business
combinations
Amortisation of - - - - -
intangibles from business
combinations
Write-off of software - - - - -
from business combination
Finance costs - - - - (7)
Foreign exchange loss (12) (6) (3) - -
Profit/(loss) before tax 618 991 43 6 32
Income tax expense (166) (246) (12) (1) 6
Profit/(loss) for the 452 745 31 5 38
period
Attributable to:
- equity holders 452 745 31 5 13
- non-controlling - - - - 25
interest
452 745 31 5 38
31 December 2009
Income statement
Insurance premium revenue 13 2 076 833 - 321
Premium revenue from - - 1 865 - -
investment contracts
transferred to insurance
contracts
Reinsurance premiums (1) (448) - - (132)
Net insurance premium 12 1 628 2 698 - 189
revenue
Fee income from 1 469 46 50 20 1
administration business
Investment income 13 45 32 9 -
Net realised gains on - 86 - - -
available-for-sale
financial assets
Net fair value gains on - 132 194 - -
financial assets at fair
value through profit or
loss
Vitality income - - - 510 -
Net income 1 494 1 937 2 974 539 190
Claims and policyholders` (6) (886) (34) - (237)
benefits
Insurance claims - 287 - - 104
recovered from reinsurers
Net claims and (6) (599) (34) - (133)
policyholders` benefits
Acquisition costs - (660) (304) (33) (29)
Marketing and
administration expenses
-'depreciation and (62) (7) (4) - -
amortisation
-'other expenses (858) (457) (82) (480) (149)
Recovery of expenses from - - - - 69
reinsurers
Transfer from
assets/liabilities under
insurance contracts
-'change in assets - 674 (2) - -
arising from insurance
contracts
-'change in liabilities - (47) (2 - (1)
arising from insurance 406)
contracts
-'change in liabilities - (2) - - -
arising from reinsurance
contracts
Fair value adjustment to - (57) (162) - -
liabilities under
investment contracts
Profit/(loss) from 568 782 (20) 26 (53)
operations
Finance costs - - - - -
Foreign exchange loss (4) (2) - - -
Profit/(loss) before tax 564 780 (20) 26 (53)
Income tax expense (159) (198) 6 (3) 9
Profit/(loss) for the 405 582 (14) 23 (44)
period
Attributable to:
-'equity holders 405 582 (14) 23 (44)
-'non-controlling - - - - -
interest
405 582 (14) 23 (44)
Segmental information
for the six months ended 31 December 2010
R million UK Life USA New All Total
Health busines other
s seg-
Develop- ments*
ment
31 December 2010
Income statement
Insurance premium revenue 123 - - - 5 988
Reinsurance premiums (36) - - - (816)
Net insurance premium 87 - - - 5 172
revenue
Fee income from 9 - - 4 1 881
administration business
Investment income 2 - - 15 108
Inter-segment funding - - - - -
Net realised gains on - - - - 192
available-for-sale
financial assets
Net fair value gains on - - - - 702
financial assets at fair
value through profit or
loss
Vitality income - - 19 - 685
Net income 98 - 19 19 8 740
Claims and policyholders` (32) 1 - - (2
benefits 594)
Insurance claims 14 - - - 573
recovered from reinsurers
Net claims and (18) 1 - - (2
policyholders` benefits 021)
Acquisition costs (167) - - - (1
192)
Marketing and
administration expenses
-'depreciation and - - (2) - (90)
amortisation
-'other expenses (135) (12) (90) (16) (2
851)
Recovery of expenses from - - - - 79
reinsurers
Transfer from
assets/liabilities under
insurance contracts
-'change in assets 201 - - - 924
arising from insurance
contracts
-'change in liabilities - 1 - - (1
arising from insurance 802)
contracts
-'change in liabilities (17) - - - (88)
arising from reinsurance
contracts
Fair value adjustment to - - - - (99)
liabilities under
investment contracts
Profit/(loss) from (38) (10) (73) 3 1 600
operations
Recapture of reinsurance - - - (312) (312)
Gains and losses - - - 609 609
resulting from business
combinations
Amortisation of - - - (44) (44)
intangibles from business
combinations
Write-off of software - - - (95) (95)
from business combination
Finance costs (12) - - (19) (38)
Foreign exchange loss - - - (1) (22)
Profit/(loss) before tax (50) (10) (73) 141 1 698
Income tax expense 16 - - 13 (390)
Profit/(loss) for the (34) (10) (73) 154 1 308
period
Attributable to:
- equity holders (25) (10) (72) 278 1 417
- non-controlling (9) - (1) (124) (109)
interest
(34) (10) (73) 154 1 308
31 December 2009
Income statement
Insurance premium revenue 34 1 - - 3 278
Premium revenue from - - - - 1 865
investment contracts
transferred to insurance
contracts
Reinsurance premiums (11) - - - (592)
Net insurance premium 23 1 - - 4 551
revenue
Fee income from - - - 6 1 592
administration business
Investment income - - - 7 106
Net realised gains on - - - - 86
available-for-sale
financial assets
Net fair value gains on - - - - 326
financial assets at fair
value through profit or
loss
Vitality income - - 15 - 525
Net income 23 1 15 13 7 186
Claims and policyholders` (4) (27) - - (1
benefits 194)
Insurance claims 1 1 - - 393
recovered from reinsurers
Net claims and (3) (26) - - (801)
policyholders` benefits
Acquisition costs (77) - (9) - (1
112)
Marketing and
administration expenses
- depreciation and - - (2) - (75)
amortisation
- other expenses (61) (15) (66) (9) (2
177)
Recovery of expenses from
reinsurers 5 - - - 74
Transfer from
assets/liabilities under
insurance contracts
- change in assets 72 - - - 744
arising from insurance
contracts
- change in liabilities - 18 - - (2
arising from insurance 436)
contracts
- change in liabilities 2 - - - -
arising from reinsurance
contracts
Fair value adjustment to - - - - (219)
liabilities under
investment contracts
Profit/(loss) from (39) (22) (62) 4 1 184
operations
Finance costs - (1) - (4) (5)
Foreign exchange loss - - - - (6)
Profit/(loss) before tax (39) (23) (62) - 1 173
Income tax expense 16 - 4 (21) (346)
Profit/(loss) for the (23) (23) (58) (21) 827
period
Attributable to:
- equity holders (23) (23) (56) (21) 829
- non-controlling - - (2) - (2)
interest
(23) (23) (58) (21) 827
* All other segments include the impacts from business combinations.
Statement of financial position
at 31 December 2010
R million Group Group
December June
2010 2010
Unaudited Audited
ASSETS
Assets arising from insurance contracts 8 174 7 076
Property and equipment 206 220
Investment property 19 19
Intangible assets including deferred 1 492 325
acquisition costs
Goodwill 1 068 -
Financial assets
- Equity securities 2 939 2 892
- Equity linked notes 3 954 2 861
- Debt securities 1 293 714
- Inflation linked securities 80 68
- Money market 3 123 1 453
- Derivatives 74 111
- Loans and receivables including insurance 2 058 1 885
receivables
Deferred income tax 174 303
Current income tax asset 20 101
Reinsurance contracts 183 121
Cash and cash equivalents 1 896 2 845
Total assets 26 753 20 994
EQUITY
Capital and reserves
Share capital and share premium 1 558 1 541
Other reserves 140 574
Retained earnings 7 470 6 267
9 168 8 382
Non-controlling interest 785 -
Total equity 9 953 8 382
LIABILITIES
Liabilities arising from insurance contracts 8 938 6 198
Liabilities arising from reinsurance contracts 1 286 1 160
Financial liabilities
- Investment contracts at fair value through 1 893 1 544
profit or loss
- Borrowings at amortised cost 402 23
- Derivatives 14 12
Deferred income tax 2 199 1 849
Deferred revenue 47 75
Employee benefits 73 70
Trade and other payables 1 948 1 681
Total liabilities 16 800 12 612
Total equity and liabilities 26 753 20 994
Statement of changes in equity
for the six months ended 31 December 2010
Attributable to equity holders of the Company
Share Share- Revalu Trans- Hedgin Re- Total
capita based a- lation g tained
l paymen tion reserv Re- Earn-
and t re- e serve ings
share re- serve*
premiu serve
m
R million
Period ended
31 December
2010
At beginning 1 541 316 145 76 37 6 267 8 382
of period
Profit for - - - - - 1 417 1 417
the period
Other - - (79) (346) (10) - (435)
comprehensive
income
Total - - (79) (346) (10) 1 417 982
comprehensive
income for
the period
Transactions
with owners:
Non- - - - - - - -
controlling
interest
shares issues
Realised 17 - - - - - 17
gains from
treasury
shares
Employee
share option
schemes:
- Value of - 1 - - - - 1
employee
services
Dividends - - - - - (214) (214)
paid to
equity
holders
Total 17 1 - - - (214) (196)
transactions
with owners
At end of 1 558 317 66 (270) 27 7 470 9 168
period
Period ended
31 December
2009
At beginning 1 548 307 112 96 25 4 925 7 013
of period
Profit for - - - - - 829 829
the period
Other - - 188 (19) (18) - 151
comprehensive
income
Total - - 188 (19) (18) 829 980
comprehensive
income for
the period
Transactions - - - - - - -
with owners:
Non-
controlling
interest
shares issue
Realised 5 - - - - - 5
gains from
treasury
shares
Employee
share option
schemes:
- Value of - 4 - - - - 4
employee
services
Dividends - - - - - (194) (194)
paid to
equity
holders
Total 5 4 - - - (194) (185)
transactions
with owners
At end of 1 553 311 300 77 7 5 560 7 808
period
* This reserve relates to the revaluation of available-for-sale financial
assets.
Statement of changes in equity
for the six months ended 31 December 2010
R million Non- Total
con-
trollin
g
interes
t
Period ended 31 December 2010
At beginning of period - 8 382
Profit for the period (109) 1 308
Other comprehensive income - (435)
Total comprehensive income for the period (109) 873
Transactions with owners:
Non-controlling interest shares issues 894 894
Realised gains from treasury shares - 17
Employee share option schemes:
- Value of employee services - 1
Dividends paid to equity holders - (214)
Total transactions with owners 894 698
At end of period 785 9 953
Period ended 31 December 2009
At beginning of period - 7 013
Profit for the period (2) 827
Other comprehensive income - 151
Total comprehensive income for the period (2) 978
Transactions with owners: 2 2
Non-controlling interest shares issue
Realised gains from treasury shares - 5
Employee share option schemes:
- Value of employee services - 4
Dividends paid to equity holders - (194)
Total transactions with owners 2 (183)
At end of period - 7 808
Statement of cash flows
for the six months ended 31 December 2010
R million Group Group Group
Six Six Year
months months ended
ended ended June
December December 2010
2010 2009 Audited
Unaudited Unaudited
Cash flow from operating activities (824) 1 066 1 630
Cash generated by operations 1 561 2 229 4 472
Policyholder net investments (2 048) (1 240) (2 988)
Working capital changes (473) 179 330
(960) 1 168 1 814
Dividends received 33 17 31
Interest received 143 96 226
Interest paid (28) (5) (14)
Taxation paid (12) (210) (427)
Cash flow from investing activities (340) (343) (105)
Net disposals/(purchases) of 802 (183) 112
financial assets
Net purchases of equipment (17) (108) (127)
Purchase of intangible assets (53) (52) (90)
Purchase of subsidiary (1 072) - -
Cash flow from financing activities 279 (199) (396)
Proceeds from issuance of ordinary 106 2 2
shares
Dividends paid to equity holders (214) (194) (389)
Repayment of borrowings (13) (7) (9)
Increase in borrowings 400 - -
Net increase in cash and cash (885) 524 1 129
equivalents
Cash and cash equivalents at 2 845 1 737 1 737
beginning of year
Exchange losses on cash and cash (64) (21) (21)
equivalents
Cash and cash equivalents at end of 1 896 2 240 2 845
period
Review of Group results
Value creators
New business annualised premium income increased 15% for the six months ended
31 December 2010.
New business annualised premium income
R million December December % change
2010 2009
Discovery Health 1 974 1 787 10
Discovery Life 832 782 6
Discovery Invest 397 334 19
Discovery Vitality 87 78 12
PruHealth 313 165 90
PruProtect 144 100 44
New business API of Group 3 747 3 246 15
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 increased 27% for the six months ended
31 December 2010. 5% of the increase is attributable to the gross inflows from
PruHealth Insurance Limited (previously Standard Life Healthcare) being
included from 1 August 2010.
Gross inflows under management
R million December December % change
2010 2009
Discovery Health 15 115 12 758 18
Discovery Life 2 522 2 121 19
Discovery Invest 3 626 2 614 39
Discovery Vitality 676 545 24
Destiny Health - 4
PruHealth 1 829 644 184
PruProtect 142 68 109
Gross inflows under management 23 910 18 754 27
Less: collected on behalf of third (15 356) (13 359) (15)
parties
Discovery Health (13 431) (11 269) (19)
Discovery Invest (1 862) (1 732) (8)
Destiny Health - (2)
PruHealth (53) (322) 84
PruProtect (10) (34) 71
Gross income of Group 8 554 5 395 59
Gross inflows under management measures the total funds managed and received
by Discovery and is an accurate measure of the continual growth of Discovery.
Profit from operations
The following table shows the main components of the increase in Group profit
from operations for the six months ended 31 December 2010:
R million December December % change
2010 2009
Discovery Health 619 555 12
Discovery Life 768 675 14
Discovery Invest 44 (24) 283
Discovery Vitality 1 17 (94)
PruHealth 35 (53) 166
PruProtect (40) (39) (3)
Profit from existing operations 1 427 1 131 26
Development and other segments (95) (87) (9)
Normalised profit from operations 1 332 1 044 28
Recapture of reinsurance (312) -
Gains and losses resulting from 609 -
business combinations
Write-off of software from business (95) -
combination
Amortisation of intangibles from (44) -
business combinations
Investment income attributable to 76 54 41
equity holders
Net realised gains on available-for- 192 86 123
sale financial assets
Finance costs and foreign exchange (60) (11) (445)
loss
Profit before tax 1 698 1 173 45
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) must be 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 period to 31 December 2010, 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:
- Assets arising from insurance contracts 36.8 379
- Property and equipment 0.2 2
- Deferred acquisition costs 4.3 44
- Loans and receivables including insurance 52.0 535
receivables
- Reinsurance assets 4.2 43
- Cash and cash equivalents 195.5 2 013
- Liabilities arising from insurance contracts (12.8) (132)
- Liabilities arising from reinsurance contracts (8.6) (89)
- Borrowings at amortised cost (29.7) (306)
- Trade and other payables (85.8) (883)
Intangible assets:
- Value of in-force business 36.1 372
- Prudential brand 15.7 162
- Deferred tax liability raised in respect of (14.5) (149)
intangible assets
- Provisional goodwill 82.6 851
- Non-controlling interest (69.0) (711)
Deemed consideration paid 207.0 2 131
Allocation of the purchase price for 100% of SLHC
GBP R
million million*
Tangible net asset value:
- Property and equipment 0.4 4
- Deferred acquisition costs 14.4 148
- Money market investments 130.7 1 346
- Loans and receivables including insurance 2.1 22
receivables
- Deferred income tax 1.3 13
- Reinsurance assets 3.6 37
- Cash and cash equivalents 15.2 157
- Liabilities arising from insurance contracts (68.2) (702)
- Deferred revenue (0.8) (8)
- Trade and other payables (22.8) (235)
Intangible assets:
- Value of in-force business 48.1 495
- Software 8.6 89
- Deferred tax liability raised in respect of (15.9) (164)
intangible assets
- Provisional goodwill 21.1 217
Consideration paid 137.8 1 419
* Translated at closing rate at 31 December 2010, 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 R44 million
in profit or loss for the period
1 August 2010 to 31 December 2010 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.
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)
(before taking into account the impact on non-controlling interest) has been
written-off.
The provisional 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.
Reconciliation of goodwill
GBP R million
million
Provisional goodwill recognised from the 82.6 943
purchase of PHHL
Provisional goodwill recognised from the 21.1 241
purchase of SLHC
Net exchange difference arising during the (116)
period
Goodwill at 31 December 2010 103.7 1 068
In terms of IFRS 3 revised, paragraph 45, the initial accounting for an
acquisition can be undertaken on a provisional basis for this reporting
period. Adjustments to provisional values can be made within one year of the
effective date, relating to facts or circumstances 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 31
December 2010:
R million Gross Tax Net Non- Attri-
Con- butable
trolling to equity
interest holders
Gain recognised on 667 - 667 - 667
disposal of joint
venture
Write-off of (95) 27 (68) 17 (51)
software
Excluded from 572 27 599 17 616
headline earnings
Amortisation of (44) 12 (32) 8 (24)
intangibles
Once-off costs (58) - (58) 11 (47)
relating to
acquisition
Recapture of (312) - (312) 78 (234)
reinsurance
Total adjustments 158 39 197 114 311
to earnings to
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.
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 R312 million charge to Discovery`s
income statement (before taking into account the impact on non-controlling
interest).
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 31 December 2010:
R million UK UK Life
Health
Revenue 1 723 122
Profit or loss after tax (100%) 53 (28)
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 31 December 2010, if the
acquisition date was 1 July 2010:
R million UK Health UK Life
Revenue 2 072 142
Profit or loss after tax (100%) 31 (40)
Other significant transactions affecting the current interim results
Share-based payments
Included in marketing and administration expenses is R107 million (2009: R79
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 31 December 2010, approximately
67.3% (2009: 62%) of this exposure was hedged.
Taxation
All South African entities are in a tax paying position. South African income
tax has been provided at 28% (2009: 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"). R9 million in respect
of this tax relief has been included in income tax at 31 December 2009.
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 098 million is primarily as a result of profitable new business written by
Discovery Life.
Financial assets have increased due to the sale of Discovery Invest products
and the inclusion of Standard Life Healthcare money market investments of R1
322 million at 31 December 2010.
Whilst Discovery has made a payment of R225 million for the acquisition of 20%
of Ping An Health Insurance Company of China, Limited, the acquisition has not
been finally concluded. The effective date is thus post 31 December 2010. This
payment has been included in equity investments in the Statement of Financial
Position.
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 six months ended 31
December 2010.
Repurchase of shares
As advised in SENS announcement on 9 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
A final dividend of 36 cents per share was paid on 18 October 2010.
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 R303 million (2009: R258 million) and was
covered 3.9 times (2009: 8.6 times).
Cash dividend declaration:
The board has declared an interim dividend of 42 cents per share. The salient
dates are as follows:
- Last date to trade "cum" dividend Friday, 11 March 2011
- Date trading commences "ex" dividend Monday, 14 March 2011
- Record date Friday, 18 March 2011
- Date of payment Tuesday, 22 March 2011
Share certificates may not be dematerialised or rematerialised between Monday,
14 March 2011 and Friday, 18 March 2011, both days inclusive.
Accounting policies
The interim results have been prepared in accordance with International
Financial Reporting Standards including IAS 34, as well as the South African
Companies Act 61 of 1973, as amended. The accounting policies adopted are
consistent with the accounting policies applied in the last annual report and
the corresponding prior year period. 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.
Embedded value statement
for the six months ended 31 December 2010
The embedded value of Discovery at 31 December 2010 consists of the following
components:
- the free surplus attributed to the covered business at the valuation date;
- plus: the required capital to support the in-force covered business at the
valuation date;
- plus: the present value of future shareholder cash flows from the in-force
business;
- less: the cost of required capital and secondary tax on companies ("STC").
The present value of future shareholder cash flows from the in-force covered
business is calculated as the value of projected future after-tax shareholder
cash flows of the business in force at the valuation date, discounted at the
risk discount rate.
The value of new business is the present value, at the point of sale, of the
projected future after-tax shareholder cash flows of the new business written
by Discovery, discounted at the risk discount rate, less an allowance for the
reserving strain (for Life), initial expenses, cost of capital and STC. The
value of new business is calculated using the current reporting date
assumptions.
For Life, the shareholder cash flows are based on the release of margins under
the Statutory Valuation Method ("SVM") basis.
The embedded value includes the insurance and administration profits of the
subsidiaries in the Discovery Holdings Group. Covered business includes
business written through Discovery Life, Discovery Invest, Discovery Health,
Discovery Vitality, PruHealth and Standard Life Healthcare in the United
Kingdom. For The Vitality Group (USA) and PruProtect, no published value has
been placed on the current in-force business.
On 1 August 2010, Discovery acquired Standard Life Healthcare and increased
its shareholding in the Prudential joint venture from 50% to 75%. For embedded
value purposes, the value of the Standard Life Healthcare in-force business
has been calculated based on the acquisition price of GBP138 million less the
net asset value of the business at 31 December 2010. The performance of the
Standard Life Healthcare book since acquisition has exceeded expectations and
indications are that the present value of the projected future after-tax
shareholder cash flows of the business in-force at the valuation date will
exceed the current valuation. The values for PruHealth and Standard Life
Healthcare at 31 December 2010 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 six months ended 31 December 2010. A copy of the auditors` unqualified
report is available for inspection at the company`s registered office.
Table 1: Group embedded value
R million 31 31 % Change 30 June
December December 2010
2010 2009
Shareholders` funds 9 168 7 808 17 8 382
Adjustment to (6 839) (4 398) (4 883)
shareholders` funds
from published basis(1)
Adjusted net worth 2 329 3 410 (32) 3 499
- Free Surplus 1 153 2 418 2 440
- Required Capital(2) 1 176 992 1 059
Run-down costs for - (30) -
Destiny Health
Value of Standard Life 522 - -
Healthcare in-force
business acquired(3)
Value of in-force 22 231 18 371 19 996
covered business before
cost of capital
Cost of required (375) (324) (351)
capital
Cost of STC(4) (633) (540) (586)
Discovery Holdings 24 074 20 887 15 22 558
embedded value
Number of shares 555.0 554.3 553.9
(millions)
Embedded value per R43.37 R37.68 15 R40.72
share
Diluted number of 591.2 591.3 591.3
shares (millions)
Diluted embedded value R42.99 R37.37 15 R40.31
per share(5)
(1) The published Shareholders` funds has been adjusted to eliminate net
assets under insurance contracts, deferred tax and deferred acquisition costs
at December 2010 of R5 466 million (June 2010: R4 858 million; December 2009:
R4 374 million) in respect of Life and R39 million (June 2010: R25 million;
December 2009: R24 million) in respect of PruHealth. The December 2010
adjustment also includes R1 334 million of 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.
(2) The required capital at December 2010 for Life is R606 million (June 2010:
R550 million; December 2009: R516 million), for Health and Vitality is R407
million (June 2010: R395 million; December 2009: R367 million) and for
PruHealth is R163 million (June 2009: R114 million; December 2009: R109
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 over the next 24 months.
(3) Discovery`s share of the value of the Standard Life Healthcare in-force
business has been calculated based on the acquisition price of GBP138 million
less the net asset value of the business at 31 December 2010.
(4) In line with Discovery`s current dividend policy, the cost of STC is
calculated assuming a 4.5 times dividend cover on the after-tax profits as
they emerge over the projection term. An STC rate of 10% is assumed. The total
STC charge has been allocated between the different business entities based on
their contribution to the total value of in-force covered business.
(5) The diluted embedded value per share allows for Discovery`s BEE
transaction where the impact is dilutive ie 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 Cost of Value
before required STC after
cost of capital cost of
capital capital
and STC and STC
at 31 December 2010
Health and Vitality 10 840 (144) (307) 10 389
Life and Invest(1) 11 006 (168) (315) 10 523
PruHealth(2) 385 (63) (11) 311
Total 22 231 (375) (633) 21 223
at 31 December 2009
Health and Vitality 8 697 (129) (255) 8 313
Life and Invest(1) 9 409 (163) (277) 8 969
PruHealth(2) 265 (32) (8) 225
Total 18 371 (324) (540) 17 507
at 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 R278
million (June 2010: R226 million; December 2009: R153 million) in respect of
investment management services provided on off balance sheet investment
business. The net assets of the investment service provider are included in
the adjusted net worth.
(2) The PruHealth value of in-force has been converted using the closing
exchange rate of R10.30/GBP (June 2010: R11.48/GBP; December 2009:
R11.90/GBP). The values for PruHealth at 31 December 2010 reflect Discovery`s
75% shareholding at that date (values in prior periods reflect Discovery`s 50%
shareholding).
Table 3: Group embedded value earnings
Six months Six months Year
ended ended ended
R million 31 December 31 December 30 June
2010 2009 2010
Embedded value at end of period 24 074 20 887 22 558
Less: Embedded value at (22 558) (20 040) (20 040)
beginning of period
Increase in embedded value 1 516 847 2 518
Net increase in capital (17) (5) 7
Dividends paid 214 194 375
Shares issued to non- - (2) (2)
controlling interests
Transfer to hedging reserve 10 18 (12)
Embedded value earnings 1 723 1 052 2 886
Annualised return on opening 15.9% 10.8% 14.4%
embedded value
Table 4: Components of Group embedded value earnings
R million Net worth Cost of Value of Embedded
required in-force value
capital covered
business
less
cost of
STC
Total profit from new (991) (29) 1 701 681
business (at point of sale)
Profit from existing
business
- Expected return 915 (1) 129 1 043
- Change in methodology 323 13 (103) 233
and assumptions(1)
- Experience variances (17) 4 383 370
Acquisition of Standard (751) (19) 616 (154)
Life Healthcare and
Prudential joint venture(2)
Other initiative costs(3) (104) - 8 (96)
Non-recurring expenses(4) (63) - 1 (62)
Acquisition costs(5) (28) - (0) (28)
Foreign exchange rate (355) 7 (37) (385)
movements
Cost of STC (21) - 13 (8)
Return on shareholders` 129 - - 129
funds(6)
Embedded value earnings (963) (25) 2 711 1 723
(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) Whilst the acquisition of Standard Life Healthcare is embedded value
neutral, an embedded value loss arises on the increase in Discovery`s
shareholding in the Prudential joint venture as the embedded value places no
value on the right to use the Prudential brand, the right to use the
Prudential balance sheet or on Discovery`s increased share of the value of in-
force PruProtect business.
(3) This item reflects the 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 and Discovery Invest. These
costs have not been projected on a recurring basis in the embedded value due
to the fact that income from business sold under these initiatives has not
been projected or the costs are not expected to recur.
(4) Non-recurring expenses include Group costs related to one-off marketing
events and one-off remuneration costs payable on the relocation of senior
executives.
(5) Acquisition costs relate to commission paid on Life business and expenses
incurred in writing Health and Vitality business that has been written over
the period but that will only be activated and on risk after the valuation
date. These policies are not included in the embedded value or the value of
new business and therefore the costs are excluded.
(6) 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 worth of worth of
in- in- in-
force force force
Modelling - - 204 (283) - (8) (87)
changes(1)
Expenses - 487 1 10 - - 498
Lapses and - - 5 (32) - (64) (91)
surrenders
Mortality and - - (9) 7 - - (2)
morbidity
Benefit - - (41) 11 - - (30)
enhancements
Commission - - - - - (20) (20)
Vitality - (84) - - - - (84)
Economic - (11) (7) 165 - (6) 141
assumptions
Premium and - - 2 (1) - - 1
benefit
increases
Increased - - - - - (11) (11)
capital
requirement
Reinsurance(2 - - 337 (352) (169) 102 (82)
)
Total - 392 492 (475) (169) (7) 233
(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) The reinsurance item relates to the impact of the financing reinsurance
arrangements
Table 6: Experience variances
Health and Life and PruHealth
Vitality Invest
R million Net Value Net Value Net Value Total
worth of worth of worth of
in- in- in-
force force force
Renewal 21 - (1) 0 16 (7) 29
expenses
Lapses and 6 183 15 106 - - 310
surrenders(1)
Mortality and - - 41 (2) 33 (8) 64
morbidity
Policy - (11) (97) 56 - - (52)
alterations(2
)
Backdated - - (27) 7 - - (20)
cancellations
Premium - - 2 (10) - - (8)
income
Economic 0 28 (17) (13) - - (2)
assumptions(3
)
Tax(4) (12) - 94 (90) (30) 2 (36)
Reinsurance - - 28 (10) (13) - 5
Extended - 97 - 4 - 14 115
modelling
term
Other (2) (6) (35) 40 (39) 7 (35)
Total 13 291 3 88 (33) 8 370
(1) The total Health and Vitality lapse experience variance of R189 million
consists of a positive variance of R92 million due to lower than expected
lapses and a positive variance of R97 million due to the net growth in
existing employer groups (i.e. R420 million in respect of members joining
existing employer groups during the period offset by an amount of R323 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) 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.
(4) The tax variance for Life and Invest arises due to a movement in the
deferred tax asset which delays the payment of tax.
Table 7: Embedded value of new business
R million Six Six % change Year
months months ended
ended ended 30 June
31 31 2010
December December
2010 2009
Health and Vitality
Present value of future 223 164 541
profits from new business
at point of sale
Cost of required capital (7) (6) (18)
Cost of STC (6) (10) (16)
Present value of future 210 148 42 507
profits from new business
at point of sale after cost
of required capital and STC
New business annualised 713 576 24 2 254
premium income(1)
Life and Invest
Present value of future 498 478 879
profits from new business
at point of sale(2)
Cost of required capital (17) (17) (33)
Cost of STC (14) (14) (26)
Present value of future 467 447 4 820
profits from new business
at point of sale after cost
of required capital and STC
New business annualised 883 804 10 1 621
premium income(3)
Annualised profit margin(4) 6.4% 6.5% 5.9%
Annualised profit margin 9.0% 9.0% 8.4%
excluding Invest Business
PruHealth
Present value of future 9 22 16
profits from new business
at point of sale
Cost of required capital (5) (3) (6)
Cost of STC (0) (1) (0)
Present value of future 4 18 (78) 10
profits from new business
at point of sale after cost
of required capital and STC
New business annualised 109 60 82 147
premium income(5)
Annualised profit margin(4) 0.6% 3.3% 0.7%
(1) Health new business annualised premium income is the gross contribution to
the medical schemes. For embedded value purposes, Health new business is
defined as individuals and members of new employer groups, and includes
additions to first year business. There have been no changes to the definition
of new business since the previous valuation.
The new business annualised premium income shown above excludes premiums in
respect of members who join an existing employer after the first year, as well
as premiums in respect of new business written during the period but only
activated after 31 December 2010.
The total Health and Vitality new business annualised premium income written
over the period was R2 061 million (June 2010: R4 679 million; December 2009:
R1 862 million).
(2) Included in the Life and Invest value of new business is R1 million (June
2010: R22 million; December 2009: R5 million) in respect of investment
management services provided on off balance sheet investment business.
(3) Life new business is defined as Life policies or Discovery retirement
Optimiser policies which incepted during the reporting period and which are on
risk at the valuation date. Invest new business is defined as business where
at least one premium has been received and which has not been refunded after
receipt.
The new business annualised premium income of R883 million (June 2010: R1 621
million; December 2009: R804 million) (single premium APE:
R224 million (June 2010: R480 million; December 2009: R210 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 R195
million (June 2010: R392 million; December 2009:
R196 million) and servicing increases of R151 million (June 2010:
R290 million; December 2009: R116 million) was R1 229 million (June 2010: R2
303 million; December 2009: R1 116 million) (single premium APE: R224 million
(June 2010: R480 million; December 2009:
R210 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.
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 recognised in the value of new business.
Term extensions on existing contracts are not included as new business.
(4) The annualised profit margin is the value of new business expressed as a
percentage of the present value of future premiums
(5) PruHealth new business is defined as individuals and employer groups which
incepted during the reporting period. The new business annualised premium
income shown above has been adjusted to exclude premiums in respect of members
who join an existing employer group after the first month as well as premiums
in respect of new business written during the period but only activated after
31 December 2010. There have been no changes to the definition of new business
since the previous valuation.
Table 8: Embedded value economic assumptions
31 December 31 December 30 June
2010 2009 2010
Beta coefficient
South Africa 0.56 0.51 0.54
United Kingdom 0.56 0.51 0.54
Equity risk premium
South Africa 3.50 3.50 3.50
United Kingdom 4.00 4.00 4.00
Risk discount rate (%)
-'Health and Vitality 10.46 10.79 10.89
-'Life and Invest 10.46 10.79 10.89
-'PruHealth 6.73 6.99 6.62
Rand / GB Pound Exchange Rate
Closing 10.30 11.90 11.48
Average 11.04 12.43 11.96
Medical inflation (%)
South Africa 7.50 8.00 8.00
United Kingdom 7.00 Current 7.00
levels
reducing to
7.00% over
the
projection
period
Expense inflation and CPI (%)
South Africa 4.50 5.00 5.00
United Kingdom 3.75 3.75 3.75
Pre-tax investment return (%)
South Africa 7.00 7.50 7.50
- Cash
- Bonds 8.50 9.00 9.00
- Equity 12.00 12.50 12.50
United Kingdom 3.99 4.45 3.96
- Risk free
Dividend cover ratio 4.5 times 4.5 times 4.5 times
Income tax rate (%)
South Africa 28.00 28.00 28.00
United Kingdom 28.00% 28.00 28.00%
reducing reducing
to to
24.00% in 24.00%
April 2014 in
April
2014
Projection term
-'Health and Vitality 20 years 20 years 20 years
-'Group Life 10 years 10 years 10 years
-'PruHealth 20 years 20 years 20 years
Life 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 12
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 assumptions were derived from internal experience augmented by
industry information. Best estimate morbidity assumptions and forecast
Vitality costs allow for the impact of management actions. The lapse rate over
the short-term is assumed to be higher than the long-term expected lapse rate
to allow for the impact of the current economic climate on lapses.
Renewal expense assumptions were based on the results of the latest expense
and budget information.
The initial expenses included in the calculation of the value of new business
are the actual costs incurred, except for Invest business where the initial
expenses are based on medium-term expectations which are lower than the
current total costs. This reflects a realistic position for Invest.
The investment return assumption was based on a single interest rate derived
from the risk-free zero coupon government bond yield curve. Other economic
assumptions were set relative to this yield. The current and projected tax
position of the policyholder funds within the Life company has been taken into
account in determining the net investment return assumption.
It is assumed that, for the purposes of calculating the cost of required
capital, the Life required capital amount will be backed by surplus assets
consisting of 100% equities and the Health, Vitality and PruHealth required
capital amounts will be fully backed by cash. Allowance has been made for tax
and investment expenses in the calculation of the cost of capital. In
calculating the capital gains tax ("CGT") liability, it is assumed that the
portfolio is realised every five years. The Life cost of capital is calculated
using the difference between the gross of tax equity return and the equity
return net of tax and expenses. The Health and PruHealth cost of capital is
calculated using the difference between the risk discount rate and the net of
tax cash return.
Sensitivity to the embedded value assumptions
The embedded value has been calculated in accordance with the Actuarial
Society of South Africa`s Professional Guidance Note PGN 107: Embedded Value
Reporting. The updated guidance note was applied for the first time in
December 2008. The risk discount rate, calculated in accordance with the
updated guidance note, uses the CAPM approach with specific reference to the
Discovery beta coefficient. The Discovery beta coefficient reflects the
historic performance of the Discovery share price relative to the market and
infers a lower allowance for non-market related and non-financial risk.
Previously, the potential cost of these risks to shareholders was allowed for
through a higher margin in the risk discount rate. Investors may want to form
their own view on an appropriate allowance for the non-financial risks which
have not been modelled explicitly.
The sensitivity of the embedded value and the value of new business at 31
December 2010 to changes in the risk discount rate is shown below. In
determining the values at different risk discount rates, all other assumptions
have been left unchanged.
Table 9: Embedded value sensitivity to risk discount rate
R million Risk discount Published risk Risk discount
rate -1% discount rate rate +1%
Adjusted net worth plus 2 851 2 851 2 851
value of Standard Life
Healthcare
Value of in-force covered 24 436 22 231 20 369
business before cost of
capital
Cost of required capital (379) (375) (370)
Cost of STC (736) (633) (556)
Discovery Holdings 26 172 24 074 22 294
embedded value
Table 10: Value of new business sensitivity to risk discount rate
R million Risk discount Published risk Risk discount
rate -1% discount rate rate +1%
Present value of future 886 730 597
profits from new business
at point of sale
Cost of required capital (29) (29) (27)
Cost of STC (27) (20) (16)
Present value of future 830 681 554
profits from new business
at point of sale after
cost of required capital
and STC
Transfer secretaries
Computershare Investor Services (Pty) Limited'(Registration number
2004/003647/07) Ground Floor, 70 Marshall Street, Johannesburg 2001'PO Box
61051, Marshalltown 2107
Sponsors
Rand Merchant Bank (A division of FirstRand Bank Limited)
Secretary and registered office
MJ Botha, Discovery Holdings Limited (Incorporated in the Republic of South
Africa) (Registration number: 1999/007789/06) JSE share code: DSY'ISIN:
ZAE000022331 155 West Street, Sandton 2146 PO Box 786722, Sandton 2146 Tel:
(011) 529 2888'Fax: (011) 529 2958
Directors
MI Hilkowitz (Chairperson), A Gore* (Chief Executive Officer), Dr BA Brink, P
Cooper, SB Epstein (USA), R Farber*, 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: 22/02/2011 10:00:01 Supplied by www.sharenet.co.za
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