Wrap Text
Discovery Holdings Limited
(Registration number 1999/007789/06)
Share Code: DSY ISIN Code: ZAE000022331
Audited results for the year ended 30 June 2001
Group consolidated
embedded value statement
Embedded value 30 June 30 June Change
R million 2001 2000 %
Local shareholders' funds 756,3 600,3
Destiny Health,
Inc start-up cost 92,8 32,2
Total value of
shareholders' funds 849,1 632,5
Value of current business 2 406,7 1 537,8 57
Cost of capital (99,8) (54,7)
Embedded value 3 156,0 2 115,6 49
Embedded value per
share (rand) 8,15 5,50 48
Embedded value profit
Embedded value at year-end 3 156,0 2 115,6
Embedded value at
beginning of year 2 115,6 1 203,9
Increase in embedded value 1 040,4 911,7
Capital raised (10,8) (190,8)
Embedded value profit 1 029,6 720,9 43
Components of embedded
value profit
Profit from new business
(at point of
sale) from Life,
Health and Vitality 581,5 338,2 72
Profit from existing
and new business
- expected return 286,7 210,1
- experience variances 106,6 139,0
Return on shareholders' funds 54,8 33,6
Embedded value profit 1 029,6 720,9 43
Embedded value of new business
Health and Vitality
New business annualised
premium income 2 070,8 1 322,0 57
Gross profit from
new business
at point of sale 557,0 354,1 57
Cost of capital (25,7) (15,9)
Net profit from new business at
point of sale 531,3 338,2
Experience variances and
expected return 61,6 42,7
Net profit from new business
at valuation date 592,9 380,9 56
Gross profit from new business
at valuation date before
cost of capital 618,6 396,8
Life
New business annualised
premium income 93,7 n/a
Gross profit from new business
at point of sale 54,7 -
Cost of capital (4,5) -
Net profit from new business
at point of sale 50,2 -
Experience variances
and expected return 10,8 -
Net profit from new business
at valuation date 61,0 -
Gross profit from new business at
valuation date before
cost of capital 65,5
Notes to the embedded value statement
The total embedded value increased to R3 156,0 million from R2 115,6
million. This was due to a 43% increase in embedded value profit to R1 029,6
million from R720,9 million last year and R10,8 million capital raised. The
embedded value per share increased 48% to R8,15 per share from R5,50 per
share after deducting the amount attributable to the Discovery Life
preference shares (see note on diluted headline earnings per share).
The embedded value of new business at point of sale from the Health and
Vitality business increased 57% to R557,0 million from R354,1 million on the
back of a 57% increase in new business annualised premium income. The
profit margin on new business remained consistent from the prior year.
The embedded value of local shareholders' funds increased by R2,7 million at
30 June 2000 from that published in the prior year due to the
reclassification of investment reserves to shareholders' funds.
Basis change
The assumptions used in the embedded value are changed using an active basis
to realistically reflect changes in Discovery's operating conditions.
The table below illustrates the assumptions that have changed this year. The
embedded value for the year ending 30 June 2000 would have reduced by R83,9
million had these changes been applied on that date.
30 June 30 June
% 2001 2000
Risk discount rate
- Health and Vitality 16,5 19,5
- Pre-funding 15,0 19,5
- Life product 15,0 n/a
Medical inflation 10,5 11,5
Expense inflation 8,0 9,5
Tax rate 30,0 20,0
The embedded value calculations have been performed by Hymans Robertson
Consulting Actuaries.
Comparative disclosures have been enhanced to comply with the most recent
actuarial guidelines.
Group consolidated
cash flow statement
for the year ended 30 June 2001
R million 2001 2000
Cash flow from
operating activities 370,4 202,4
Cash flow from
investing activities (294,8) (333,2)
Cash flow from
financing activities 67,1 131,2
Net increase in cash and
cash equivalents 142,7 0,4
Cash and cash equivalents
at beginning of year 242,6 242,2
Cash and cash equivalents
at end of year 385,3 242,6
Group consolidated
statement of gross inflows
under management
for the year ended 30 June 2001
Change
R million 2001 2000 %
Gross inflows under
management 5 479,4 3 546,7 55
Less: Medical scheme
contributions 2 116,9 1 310,3
Less: Money market
contributions 558,9 221,3
Gross income of group 2 803,6 2 015,1
Group consolidated
income statement
for the year ended 30 June 2001
Change
R million 2001 2000 %
Gross income of group 2 803,6 2 015,1 39
Less: Reinsurance premiums 251,4 143,7
Net income 2 552,2 1 871,4
Investment income 135,9 109,3
INCOME 2 688,1 1 980,7
Claims and policyholder
benefits 1 473,9 1 208,3 22
Commissions 86,7 115,6
Operating and administration
expenses 732,5 356,7
Vitality benefits 131,6 43,6
Net deferral of acquisition
costs (45,4) (50,1)
OUTGO 2 379,3 1 674,1
Excess of income
over outgo 308,8 306,6
Transfer (to)/from policyholder
liabilities and reserves (20,9) (128,7)
To linked policyholder
liabilities (67,8) (82,5)
From individual
life policyholder
liabilities 83,0 -
To health insurance
durational and AIDS reserves (36,1) (46,2)
Transfer to investment
reserves (11,5) (0,2)
Profit before taxation 276,4 177,7 56
Local operations 336,7 209,3
- Health and Vitality 375,8 211,9 77
- Life (39,1) (2,6)
Foreign operations
- Destiny Health (60,3) (31,6)
Taxation 145,9 70,2
Attributable to current year 98,2 45,4
Attributable to transitional
tax in
respect of prior years'
profits - 24,8
Underprovision of
transitional tax
in respect of prior years 47,7 -
Profit after taxation 130,5 107,5
Minority share of loss 0,5 0,2
Net profit attributable to
ordinary shareholders 131,0 107,7 22
Earnings per share (cents) 34,0 28,8 18
Headline earnings per
share (cents) 46,3 35,4 31
Diluted headline earnings per
share (cents) 46,2 35,4 31
Weighted number of shares
in issue (000's) 385 695 373 908
Diluted weighted number of
shares (000's) 386 571 373 908
Group consolidated
balance sheet
at 30 June 2001
R million 2001 2000
ASSETS
Non-current assets 1 203,3 931,4
Fixed assets 139,6 103,0
Intangible assets 13,9 25,8
Investments 787,0 739,1
Loans receivable 262,8 63,5
Current assets 838,0 459,5
Total assets 2 041,3 1 390,9
EQUITIES AND LIABILITIES
Capital and reserves 756,3 600,3
Share capital and share
premium 497,3 486,5
Reserves 259,0 113,8
Minority interest 67,2 0,4
Policyholder liabilities
and reserves 437,2 461,7
Current liabilities 780,6 328,5
Total equities and
liabilities 2 041,3 1 390,9
Group consolidated
statement of changes in equity
for the year ended 30 June 2001
Share Invest- Re- Trans-
Share pre- ment tained lation
R million capital mium reserve earnings reserve Total
Balance at
30 June 2000 0,4 486,1 2,7 107,7 3,4 600,3
Net profit for
the year 131,0 131,0
Transfer from
income statement 11,5 11,5
Translation of
foreign subsidiary 2,7 2,7
Issue of capital
* 10,8 10,8
Balance at
30 June 2001 0,4 496,9 14,2 238,7 6,1 756,3
*Amount is share par value
Discovery's performance has exceeded expectations for the year under review.
Discovery has pursued its core purpose of making people healthy and
protecting and enhancing their lifestyles. This required internal focus on
its core businesses of Discovery Health and Discovery Vitality, and the
launch of Discovery Life. The year was also the first full year of
operations of Destiny Health in the US market.
Overall, Discovery performed exceptionally well. Gross inflows under
management grew by 55% to R5,5 billion from R3,5 billion. Annualised new
business increased by 64% to R2,2 billion from R1,3 billion. Including the
start up costs of Discovery Life and Destiny Health, profit before tax
increased by 56% to R276,4 million from R177,7 million.
Discovery Health
Discovery Health's performance was pleasing. The health care environment
continues to experience structural and legislative pressures. Despite this,
Discovery Health performed exceptionally well on all fronts, delivering to
its clients affordable access to quality healthcare.
New business production grew by 57%. Total lives covered grew by 37% to 960
494. An extreme focus on technology and infrastructure increased service
levels to their highest to date. The Discovery Health Medical Scheme, the
home of the Discovery Health plans, is now the largest open medical scheme
in South Africa. Its size and structure provides inherent strength from a
risk management perspective. Its diversity by employer - the largest
accounting for less that 0,8% of its client base - also provides added
strength and solidity. These, together with Discovery Health's ability to
coalesce actuarial, clinical, technological and operational skills enabled
the Discovery Health plans to maintain consistent contribution increases for
the year, and importantly, the lowest amongst its competitors. The Health
Plans experienced the lowest lapse rate to date, demonstrating a clear value
proposition to our clients and general service satisfaction.
An important feature of the year was the relationship with the Registrar and
Council of Medical Schemes. The year began with allegations and counter-
allegations leading to a destructive process that clouded the need for
debate around important issues. Toward the end of the year, a more
constructive process began,enabling substantial progress toward the
resolution and closure of these various issues. Importantly, Discovery
remains concerned that the current regulatory environment is inflationary,
and Discovery Health will play a constructive role in working toward an
environment of increasing access, affordability and stability.
Discovery Life
Discovery Life was launched during the year and its acceptance in the market
has been quite exceptional. The Company developed its proprietary "Invested
Risk Benefits" technology that forms a basis of this unique product range.
The Company's strategy of distributing and separating risk products from
investment products is having an important impact on the life insurance
market. New business annualised premium income in its first eight months of
operation totalled R93,7 million. In addition to this the Company developed
a focused distribution channel through Discovery Consulting Services -
franchises launched countrywide that provide a powerful conduit to a high
advice broker distribution marketplace with an owner /manager culture.
Discovery Vitality
Discovery Vitality is an important manifestation of Discovery's vision of
making people healthy and enhancing their lifestyles. It has become an
important underpin to the business of Discovery Health and Discovery Life.
An important development during the year was the liquidation of LeisureNet
and the resulting reworked structure with VirginActive. Discovery Vitality
continues to offer lifestyle enhancing benefits to its clients and
importantly better risk management, essential for Discovery Life and
Discovery Health going forward.
Destiny Health
Destiny Health experienced its first full year of operations in the US
market. The US healthcare environment continues to experience increasing
inflation, and Destiny Health's challenge is to capitalise on this. The
first six months of the year focused on infrastructure in the Chicago-land
area, and at the end of this interim stage, new business production was
slow. The last six months saw a focus on marketing and distilling issues
learnt to date, which manifested in a re-launch of the Company's products
and message in May 2001. This had an immediate effect on new business
production, which is expected to continue into the future. Discovery
Holdings will raise share capital to fund Destiny's cash flow requirements
going forward and to redeem the preference shares issued during the current
financial year.
Discovery World
The launch of Discovery World has taken the Discovery service offering to a
new and exciting level. Members, intermediaries and employers can now
interact with Discovery in an on-line interactive environment. Particularly
exciting was the receipt of the accolade of "Top Ten Web Sites" in South
Africa awarded by the Financial Mail to Discovery World. Discovery World
substantially enhances the service efficiency and reporting ability of
Discovery.
Discovery's investment in Healthbridge, a business focusing on the on-line
delivery of provider claims to medical schemes, is proving to be effective.
The volume of claims received via Healthbridge is steadily increasing,
showing the effectiveness of their business model.
Prospects
Discovery has positioned itself strongly for the future. Its core businesses
provide sophisticated products at competitive prices in a complex
environment with high demand. Concurrently, its start-up businesses of
Discovery Life and Destiny Health provide exciting opportunities for diverse
growth. This strategy, combined with the continued focus on operational
efficiency and risk management, bode well for continuing profit growth.
Discovery will continue to focus on its core purpose of improving the health
and enhancing and protecting the lifestyles of the Discovery community.
Notes to the annual financial statements
The annual financial statements have been prepared using accounting policies
consistent with those of the annual financial statements for the year ended
30 June 2000. The annual financial statements are prepared in accordance
with and comply with statements of Generally Accepted Accounting Practice.
Notes to the statement of gross inflows under management and the income
statement
Gross inflows under management increased to R5 450,5 million from R3 546,7
million in respect of Discovery's Health and Vitality businesses. This,
combined with R24,3 million gross premium from Discovery's new Life business
and R4,6 million from Destiny Health in the United States, led to an
increase in gross inflows under management of 55% to R5 479,4 million from
R3 546,7 million.
Commission and operating expenses include R142,2 million expenditure
relating to the new Life business and R65,7 million relating to Destiny
Health. The commission and operating expenditure of the Health and Vitality
businesses increased by 40% to R611,3 million from R436,2 million.
The combined reinsurance premiums and claims and policyholder benefits
increased 28% due to effective medical and claims risk management.
This led to an impressive increase in profit before taxation for the Health
and Vitality businesses of 77% to R375,8 million from R211.9 million.
The transfer from individual life policyholder liabilities of R83 million
results from the capitalisation of future acquisition expense recoupments on
individual life policies sold. The loss before taxation from the new life
operation amounted to R39,1 million.
Prior to 30 June 2000, Discovery deducted new business expenses for tax
purposes as and when incurred. These expenses were deferred actuarially in
the income statement. With the introduction of section 29A of the Income Tax
Act, 1962 (Act 58 of 1962), it is likely that these expenses will only be
deductible for tax purposes as and when they are deducted in the income
statement.
Taxation of R47,7 million has been provided on all these new business
expenses deferred in prior years on the basis that they will be added back
in the current year's income tax calculation. This treatment is considered
prudent and will be clarified with the South African Revenue Services.
Headline earnings is calculated based on the consolidated net profit
attributable to ordinary shareholders adjusted for taxation in respect of
the underprovision in transitional tax of R47,7 million on prior year
profits, mentioned above. Headline earnings per share increased by 31% to
46,3 cents per share from 35,4 cents per share.
The diluted headline earnings per share is calculated by calculating the
expected number of shares to be issued in order to redeem the preference
shares issued to the management of Discovery Life. These preference shares
ensure that the founding management of the new Life initiative participate
effectively in 15% of the value they create for shareholders.
In line with Discovery's policy no dividend has been declared.
Notes to the balance sheet
Discovery Health has advanced R179,5 million to a related party, RMBSI
Investments (Proprietary) Limited during the year to assist in their
participation in a reinsurance agreement with the Discovery Health Medical
Scheme. The loan is unsecured and bears interest at 11,3% compounded
annually.
The minority interest of R67,2 million relates to the issue by Destiny
Health of 9 000 000 A series non-voting preferred stock to outside
shareholders.
Notes to the cash flow statement
Discovery's cash and cash equivalents increased to R385,3 million at 30 June
2001 from R242,6 million at 30 June 2000 after funding operational losses
from its new life business and Destiny Health.
Comparatives
Comparative figures are regrouped where necessary in accordance with the
current year classifications.
On behalf of the board
L L Dippenaar A Gore
(Chairman) (Chief Executive Officer)
29 August 2001
Directors
L L Dippenaar (Chairman), A Gore (Chief Executive Officer),
B Swartzberg (Chief Operating Officer), S D Whyte*,
N S Koopowitz*, H P Mayers*, J M Robertson*, R B Gouws,
S R Maharaj
*Executive
Transfer Secretaries
Computer Share Services Limited
(Registration number 58/03546/06)
2nd Floor, Edura, 41 Fox Street
Johannesburg, 2000
PO Box 61051, Marshalltown, 2107
e-mail questions to: AskTheCFO@discoveryworld.co.za
Secretary and Registered Office
A Cimring
155 West Street
Sandton 2146
PO Box 786722, Sandton, 2146
Tel: (011) 529-2888
Fax: (011) 529-2958