Wrap Text
DISCOVERY - AUDITED RESULTS FOR THE YEAR ENDED 30 JUNE 2003
Discovery Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number : 1999/007789/06)
ISIN : ZAE000022331
Share Code : DSY
("Discovery")
Audited annual financial results for the year ended 30 June 2003
Highlights
Headline earnings per share +42%
New business annualised premium income +35%
Gross inflows under management +42%
Destiny Health secures two joint ventures
Introduction
The year under review was an important and successful one for Discovery. The
company operates in the health and life assurance markets, and across all its
businesses, continued to focus on its core purpose of making people healthier
and enhancing and protecting their lifestyles. Discovery"s business philosophy
is based on innovation, product leadership, and operational and financial
excellence. The year under review reflects the results of this approach with
strong organic growth achieved across all its businesses. In addition, the
company built foundations to facilitate strong future growth.
Overall, Discovery"s performance during the year under review has exceeded
expectations. Annualised new business grew by 35% to R3 148 million (2002: R2
338 million). Pre-tax profit increased to R538 million (2002: R381 million) - an
improvement of 41%. Headline earnings per share also increased significantly,
improving by 42% to 71,8c (2002: 50,7c).
Discovery Health
Discovery Health produced a pleasing performance, enjoying strong new business
growth in its existing markets. New business grew by 26% to
R2 284 million from R1 819 million, while lapse rates were reduced to 3,4% - an
important indicator demonstrating general satisfaction with the service and
value proposition offered to clients. The total lives covered grew by 23% to
just under 1,5 million lives, placing the Discovery Health Medical Scheme (DHMS)
at more than twice the size of its closest competitor in the open medical scheme
market.
In addition to strong growth, the company entered the employed but uninsured
market in January this year with the launch of the KeyCare Health Plans. Early
indications are positive and have exceeded expectation - 40 000 lives joined the
Plans within the first six months of their availability. Discovery Health is now
in a position to offer superior products across the entire market spectrum.
During the year, Discovery Health significantly restructured its service
infrastructure into a series of small cross-functional teams that wrap around
the client. Clients are now benefiting from focused, personalised service and
the force of competition between the teams. Early signs demonstrate considerable
improvement in service levels across all functions and Discovery Health expects
greater improvement going forward. Operational efficiency was improved with
staff headcount per 1 000 clients decreasing by 8%. The company continues to
spend significantly on technology to facilitate future efficiencies.
Discovery Health"s risk and healthcare management capabilities performed well
and led to a containment of healthcare costs so that members" benefits remain
comprehensive, affordable and sustainable. During the year, the company focused
on implementing the resolution with the Council of Medical Schemes. Importantly,
the Discovery Health Medical Scheme has performed well financially, generating
R664 million of surplus during the year and is on target to meet its agreed
solvency goals.
Discovery Life
Discovery Life"s performance exceeded expectation. Annualised new business
premium income grew by 60% to R423 million (2002: R264 million). Profit
increased to R114 million (2002: R11 million), while value of in-force business
increased by 174% to R756 million (2002: R276 million).
The company"s risk-only approach to life assurance has created structural change
in the life assurance market and enabled Discovery Life to take a leadership
position. All the major life assurers have now adopted this product philosophy.
Discovery Life has positioned itself for future growth: A key strategy that
continues to be rolled out is the integration of the Discovery Health and
Discovery Life Plans, allowing Discovery to offer integrated, comprehensive risk
protection, with strong synergies being achieved for the client. Now Discovery
can cater for an individual"s entire spectrum of risk needs.
During the year, the launch of the Health Plan Protector has added to Discovery
Life"s ability to offer members of Discovery Health unique protection and value.
Along with the Discovery Integrator, this new product has had an important
impact on growth in the number of policyholders.
Destiny Health
The year under review was an important one for Destiny Health in which the
company focused on delivering three key strategies: Achieving breakeven by end
2003, achieving product credibility, and rolling out Destiny Health"s
partnerships with the Guardian Life Assurance Company of America and Tufts
Health Plan of Boston, Massachusetts.
Losses were in line with expectation and the company has made progress towards
achieving a breakeven position by end 2003:
* New business grew by 65% to $42,5 million (2002: $25,7 million) and membership
has grown by 128% to 21 395 lives (2002: 9 383).
* During the year, the Bethesda, Maryland office was closed, and staff and
functionality centralised in Chicago. While once-off expenses were incurred, the
monthly savings and efficiency going forward will be considerable, in addition
to the added intensity and focus on the business. Further progress has been made
toward moving major administrative functionality back to Discovery in South
Africa giving the company access to economies of scale as well as a cheaper
operating environment.
* From a risk management perspective, considerable work was done toward building
the necessary risk management systems to achieve the desired long-term medical
loss ratios. The infrastructure being built for the partnership with Tufts
Health Plan is expected to greatly enhance this capability.
The company also made progress toward achieving both corporate and product
credibility. Various sources of independent research identified Destiny as one
of the leaders in the rapidly emerging "consumer-driven" healthcare market.
To capitalise on this, extensive focus was applied to the joint ventures with
Guardian National on a nationwide basis and with Tufts Health Plan regionally,
within the New England area. These joint ventures will be launched to
intermediaries during the latter half of 2003, with new business expected to
commence in January 2004. Significant infrastructure has been and will continue
to be built to facilitate this rollout.
Discovery Vitality
Vitality continues to offer important product differentiation to both Discovery
Health and Discovery Life and has made an important contribution during the
period under review to delivering on Discovery"s core purpose of making people
healthier. During the year, the number of Vitality members grew to over 1
million people. Statistics illustrate clearly that members are in fact changing
their behaviour - Vitality members participate in preventative health screening
measures 40% more than their non-Vitality counterparts.
A decision was taken to enhance Vitality"s benefits at the cost of some profit,
resulting in overall profitability remaining flat against the previous period.
The company is comfortable with this strategy given the centrality of Vitality
in Discovery"s integration strategy and the success of the benefits offered
toward this.
Prospects
To support the ongoing growth of Discovery Life and support the roll out of the
joint ventures to Destiny Health business, Discovery embarked on a capital
raising initiative in June 2003. R875 million was raised successfully through
the claw-back offer.
The company"s financial strength and the positioning of its businesses place it
in a favourable position for future growth.
By order of the board
L L Dippenaar A Gore
Chairman Chief Executive Officer
26 August 2003
Directors
L L Dippenaar (Chairman), A Gore (Chief Executive Officer),
J M Robertson (Chief Operating Officer), J P Burger, Dr N J Dlamini**,
R B Gouws, M I Hilkowitz, N S Koopowitz*, S R Maharaj#,
H P Mayers*, B Swartzberg*, S V Zilwa***, S D Whyte*
*Executive **Appointed 5 December 2002
***Appointed 20 February 2003 #Resigned effective 31 August 2003
Transfer secretaries
Computershare Limited
(Registration number 1958/003546/06)
70 Marshall Street
Johannesburg, 2000
PO Box 61051, Marshalltown, 2107
Secretary and registered office
M J Botha
155 West Street
Sandton 2146
PO Box 786722, Sandton, 2146
Tel: (011) 529 2888
Fax: (011) 529 2958
e-mail questions to: AskTheCFO@discoveryworld.co.za
Discovery Holdings Limited
(Registration number 1999/007789/06)
Share code: DSY ISIN code: ZAE000022331
www.discovery.co.za
Group consolidated balance sheet at 30 June 2003
R million 2003 2002
ASSETS
Non-current assets 1 015,9 1 169,4
Fixed assets 221,2 192,6
Intangible assets 35,5 32,3
Investments 685,0 859,2
Loans receivable 74,2 85,3
Assets under insurance contracts 772,4 344,8
Current assets 1 552,7 793,7
Accounts receivable 209,0 422,4
Deferred tax asset 6,7 16,9
Cash and cash equivalents 1 337,0 354,4
Total assets 3 341,0 2 307,9
EQUITY AND LIABILITIES
Capital and reserves 1 036,9 744,3
Share capital and share premium 428,9 427,1
Reserves 608,0 317,2
Minority interest 127,4 184,0
Liabilities under insurance contracts 9,5 141,2
Liabilities under investment contracts 370,2 579,0
Non-current liabilities 296,7 -
Deferred tax liability 25,9 42,6
Current liabilities 1 474,4 616,8
Short-term loan 875,9 -
Other current liabilities 598,5 616,8
Total equity and liabilities 3 341,0 2 307,9
Group consolidated statement of gross inflows under management for the year
ended 30 June 2003
Change
R million 2003 2002 %
Gross inflows under management 10 943,7 7 733,7 42
Less: Medical scheme contributions 7 190,0 3 877,0
Less: Money market contributions - 356,9
Gross income of group 3 753,7 3 499,8
Group consolidated income statement for the year ended 30 June 2003
Change
R million 2003 2002 %
Gross income of group 3 753,7 3 499,8
Less: Reinsurance premiums 341,9 210,7
Net income 3 411,8 3 289,1
Total investment income 96,2 135,3
Fair value adjustments (15,5) -
Other investment income 111,7 135,3
INCOME 3 508,0 3 424,4
Claims and policyholder benefits 1 366,0 1 721,6
Commissions 437,4 276,1
Operating and administration 1 437,0 1 095,5
expenses
Vitality benefits 227,4 167,4
OUTGO 3 467,8 3 260,6
Transfers 420,2 154,6
To liabilities under investment - (25,7)
contracts
From assets/liabilities under 420,2 260,1
insurance contracts
To health insurance durational and - (79,8)
AIDS reserves
Operating profit 460,4 318,4 45
Local operations 628,2 426,7 47
Foreign operations (167,8) (108,3)
Financing costs (42,3) (0,7)
Profit before abnormal items and 418,1 317,7 32
taxation
Abnormal items 120,2 63,5
Profit before taxation 538,3 381,2 41
TAXATION 182,2 141,8
- Profit before abnormal items 146,1 122,8
- Abnormal items 36,1 19,0
Profit after taxation 356,1 239,4
Minority share of loss 6,1 -
Net profit attributable to 362,2 239,4 51
ordinary shareholders
Basic earnings per share before
abnormal items (cents)
- undiluted 73,6 51,7 42
- diluted 69,6 48,9 42
Basic earnings per share (cents)
- undiluted 95,9 63,5 51
- diluted 89,8 59,6 51
Headline earnings per share before
abnormal items (cents)
- undiluted 71,8 50,7 42
- diluted 68,0 48,0 42
Headline earnings per share
(cents)
- undiluted 94,1 62,5 51
- diluted 88,2 58,6 51
Weighted number of shares in issue 377 876 376 838
(000"s)
Diluted weighted number of shares 417 594 402 283
(000"s)
Group consolidated cash flow statement for the year ended 30 June 2003
R million 2003 2002
CASH FLOW FROM OPERATING ACTIVITIES 101,0 32,1
Operating profit before working capital 57,1 103,1
changes
Working capital changes 158,3 68,6
Cash generated from operations 215,4 171,7
Taxation paid (180,6) (212,8)
Investment income 90,1 73,9
Interest paid (23,9) (0,7)
CASH FLOW FROM INVESTING ACTIVITIES (199,5) (185,6)
CASH FLOW FROM FINANCING ACTIVITIES 1 094,7 116,5
Net increase/(decrease) in cash and
cash equivalents
996,2 (37,0)
Cash and cash equivalents at beginning 354,4 385,3
of year
Effects of exchange rate changes on cash (13,6) 6,1
and cash equivalents
Cash and cash equivalents at end of year 1 337,0 354,4
Group consolidated statement of changes in equity for the year ended 30 June
2003
Share Share Investment
R million capital premium reserve
Balance at 1 July 2001 0,4 424,4 14,2
Change in accounting policy
Restated balance 0,4 424,4 14,2
Net profit for the period
Dividends paid to
Destiny Health
preference shareholders
Unrealised gains on 20,5
investments
Realised gains on
investments
transferred to income (3,9)
statement
Translation of foreign
subsidiary
Issue of capital * 2,3
Balance at 30 June 2002 0,4 426,7 30,8
Implementation of AC133
Net profit for the period
Dividends paid to
Destiny Health
preference shareholders
Unrealised loss on (28,5)
investments
Realised gains on
investments
transferred to income (6,7)
statement
Revaluation of forward
exchange contract
Translation of foreign
subsidiary
Issue of capital * 1,8
Balance at 30 June 2003 0,4 428,5 (4,4)
* Amount is less than R100 000
Retained Translation Hedging
R million earnings reserve reserve Total
Balance at 1 July 2001 238,7 6,1 683,8
Change in accounting policy (174,0) (174,0)
Restated balance 64,7 6,1 509,8
Net profit for the period 239,4 239,4
Dividends paid to
Destiny Health
preference shareholders (2,6) (2,6)
Unrealised gains on 20,5
investments
Realised gains on
investments
transferred to income (3,9)
statement
Translation of foreign (21,2) (21,2)
subsidiary
Issue of capital 2,3
Balance at 30 June 2002 301,5 (15,1) 744,3
Implementation of AC133 (16,6) (16,6)
Net profit for the period 362,2 362,2
Dividends paid to
Destiny Health
preference shareholders (12,6) (12,6)
Unrealised loss on (28,5)
investments
Realised gains on
investments
transferred to income (6,7)
statement
Revaluation of forward
exchange contract (14,4) (14,4)
Translation of foreign 7,4 7,4
subsidiary
Issue of capital 1,8
Balance at 30 June 2003 634,5 (7,7) (14,4) 1,036,9
Segmental information for the year ended 30 June 2003
Health
United
South States of
R million Africa America Life Vitality Total
Gross inflows 9 729,6 428,0 475,9 310,2 10 943,7
under management
Gross income 2 636,2 331,4 475,9 310,2 3 753,7
Reinsurance (133,2) (119,2) (89,5) - (341,9)
Fair value - - (15,5) - (15,5)
adjustments
Expenses, (2 132,8) (381,2) (676,7) (277,1) (3 467,8)
commissions and
claims
Transfer from
assets/liabilities
under insurance
contracts
- - 361,9 - 361,9
370,2 (169,0) 56,1 33,1 290,4
Return on assets
under insurance
contracts
58,3 58,3
Operating profit
before investment
income
370,2 (169,0) 114,4 33,1 348,7
Investment income 111,7
Operating profit 460,4
for the year ended 30 June 2002
Health
United
South States of
R million Africa America Life Vitality Total
Gross inflows 7 227,3 76,7 188,8 240,9 7 733,7
under management
Gross income 3 017,3 52,8 188,8 240,9 3 499,8
Reinsurance (206,7) 23,5 (27,5) - (210,7)
Expenses, (2 455,9) (186,2) (410,9) (207,6) (3 260,6)
commissions and
claims
Transfer (to)/from
assets/liabilities
under
investment and
insurance
contracts
(105,5) - 236,3 - 130,8
Investment income 49,5 - - - 49,5
- policyholders
298,7 (109,9) (13,3)(1) 33,3 208,8
Return on assets - - 23,8 - 23,8
under insurance
contacts
Operating profit 298,7 (109,9) 10,5 33,3 232,6
before investment
income
Investment income 85,8
Operating profit 318,4
The operating loss for the financial year ending 30 June 2002 arose due to the
strengthening of the valuation basis. Second-tier margins were added so that the
profit emerging from the business is recognised over the duration of the
policies as it is earned.
Group consolidated embedded value statement for the year ended 30 June 2003
At 30 June At 30 June Change
R million 2003 2002 %
Shareholders" funds (1) 1 036,9(2) 744,3
Value of in-force business before 4 021,1 2 741,5 47
cost of capital (3)
Cost of capital (190,2) (164,8)
Discovery Holdings embedded value 4 867,8 3 321,0 47
Number of shares (millions) (4) 377,9 376,8
Embedded value per share (Rands) 12,88 8,81 46
Diluted embedded value per share 11,66 8,26 41
(Rands)
(1) There has been a change in accounting policy relating to the deferral of
acquisition costs. The initial and renewal commissions previously borne by
Discovery Health were deferred in line with Discovery Health"s policy of
deferring the direct costs of acquiring new business, and these deferred assets
were previously reflected as adjustments to the value of shareholders" funds.
With effect from 1 January 2003, both initial and renewal commissions are paid
monthly by the medical scheme in accordance with the regulations to the Medical
Schemes Act. As these direct costs are no longer being incurred by Discovery
Health, and in line with industry practice, it was decided to change Discovery
Health"s accounting policy of deferring acquisition costs. The shareholders"
funds balance at 30 June 2002 has been restated in line with the changes to the
statement of changes in equity.
(2) In June 2003, Discovery proceeded with a claw-back offer to raise R875
million. FirstRand subscribed for the new Discovery shares on 27 June 2003. As
the new shares were only issued and listed on the JSE on 28 July 2003, the total
subscription price of the shares is reflected in the balance sheet as a short-
term loan owing to FirstRand, and shareholders" funds is unchanged.
(3) The pre-paid commission expense, previously reflected as an adjustment to
shareholders" funds, is now being deducted from the value of in-force business
to avoid the double counting of expense loadings. This amounted to R78,7 million
at 30 June 2002 and R17,6 million at 30 June 2003.
(4) The Discovery Holdings Share Incentive Trust was consolidated for the first
time in the results as at 31 December 2002. This resulted in a decrease in
shareholders" funds. Comparative figures for prior periods have also been
restated. The embedded value per share has been calculated excluding shares
issued to the Discovery Holdings Share Incentive Trust.
VALUE OF IN-FORCE BUSINESS - 30 JUNE 2003
Value before Cost of Value after
R million cost of capital capital cost of capital
Health, Vitality and Pre- 3 007,1 (16,7) 2 990,4
funding (1)
Life 901,0 (145,2) 755,8
Destiny Health (2) 113,0 (28,3) 84,7
Total 4 021,1 (190,2) 3 830,9
(1) In line with the improvement in solvency of the Discovery Health Medical
Scheme, the quota share proportion ceded to Discovery Life was reduced from 33%
to 20%. As the proportion is expected to reduce to 0% by 2005, it has been
decided to release the health durational and AIDS reserves. This has
significantly reduced the capital requirements and the cost of capital for the
Health product.
(2) Figures for Destiny Health reflect Discovery"s 91% shareholding in Destiny
Health.
VALUE OF IN-FORCE BUSINESS - 30 JUNE 2002
Value before Cost of Value after
R million cost of capital capital cost of capital
Health, Vitality and Pre- 2 367,9 (96,0) 2 271,9
funding
Life 330,6 (55,0) 275,6
Destiny Health 43,0 (13,8) 29,2
Total 2 741,5 (164,8) 2 576,7
EMBEDDED VALUE EARNINGS
12 months to 12 months to
R million 30 June 2003 30 June 2002
Embedded value at end of period (1) 4 867,8 3 321,0
Embedded value at beginning of period (1) 3 321,0 3 211,7
Increase in embedded value 1 546,8 109,3
Issue of capital (1,8) (2,3)
Dividends paid to Destiny Health preference 12,6 2,6
shareholders
Implementation of new accounting standards 16,6 -
(2)
Transfer to hedging reserve (3) 14,4 -
Embedded value earnings 1 588,6 109,6
(1) In line with the changes to the statement of changes in equity, the value
of shareholders" funds at 30 June 2001 and 30 June 2002 has been restated. As a
result, the embedded value earnings for the prior period has been adjusted.
(2) Refer to the commentary to the financial statements regarding Discovery"s
adoption of AC133.
(3) This adjustment relates to a loss on a cash flow hedge taken out to reduce
exposure to currency risk on future capital inflows to Destiny Health.
COMPONENTS OF EMBEDDED VALUE EARNINGS
12 months to 12 months to
R million 30 June 2003 30 June 2002
Total profit from new business (at point of 669,6 445,7
sale)
Profit from existing business
* Expected return 500,5 374,3
* Change in methodology and assumptions (0,1) (934,8)
* Experience variances 365,8 175,0
Adjustment for minority interest in Destiny (2,3) -
Health
Return on shareholders" funds (1) 55,1 49,4
Embedded value earnings 1 588,6 109,6
(1) Return on shareholders" funds is the after-tax investment return.
METHODOLOGY AND ASSUMPTION CHANGES for the year ended 30 June 2003
Health,
Vitality
R million and Destiny Life Total
Health
Operational changes relating to 88,7 - 88,7
the health business (1)
Other modelling and methodology (27,2) (31,2) (58,4)
changes
Reduction in Health product risk 94,6 - 94,6
discount rate (2)
Lapses (30,9) (8,9) (39,8)
Economic assumptions (33,3) 42,5 9,2
Renewal expenses 30,1 (7,6) 22,5
Mortality and morbidity (60,5) (29,5) (90,0)
Other (1,4) (25,5) (26,9)
Total 60,1 (60,2) (0,1)
(1) With effect from 1 January 2003, the proportion of risk ceded by Discovery
Health Medical Scheme to Discovery Life was reduced from 33% to 20%. This is
expected to reduce to 0% by 2005. In addition, the International Travel Benefit
reinsurance contract between Discovery Health Medical Scheme and Discovery Life
was not renewed after 1 March 2003.
In accordance with changes to the regulations to the Medical Schemes Act
with effect from 1 January 2003, all health commissions will no longer be borne
by Discovery Health, but will be paid monthly by Discovery Health Medical
Scheme.
(2) Due to the greater certainty which exists in the Health business, the risk
discount rate differential between the Health and Life products has been reduced
from 2% to 1%.
EXPERIENCE VARIANCES for the year ended 30 June 2003
Health,
Vitality
R million and Destiny Life Total
Health
Expenses (1) (17,6) (6,9) (24,5)
Inflation 52,5 0,7 53,2
Extended modelling term (2) 125,2 0,4 125,6
Lapses 86,0 9,0 95,0
Medical inflation 25,3 - 25,3
Policy alterations (37,6) 53,1 15,5
Mortality and morbidity 38,8 21,8 60,6
Finance costs (18,4) - (18,4)
Exchange rate movements (13,8) - (13,8)
Other 40,0 7,3 47,3
Total 280,4 85,4 365,8
(1) The expense experience variance for Health, Vitality and Destiny Health
includes one-off costs which are not expected to recur in the future.
(2) The projection term for Health, Vitality, Pre-funding, Destiny Health, and
Group Life at 30 June 2003 has not been changed from that used at 30 June 2002.
Thus, an experience variance arises because the total term of the in-force
business is effectively increased by one year.
Embedded value of new business
12 months to 12 months to Change
R million 30 June 2003 30 June 2002 %
Health and Vitality
Gross profit from new business at 237,9 285,7
point of sale
Cost of capital (3,2) (20,8)
Net profit from new business at 234,7 264,9 (11)
point of sale
New business annualised premium 1 834,2 1 555,9 18
income (1)
Life
Gross profit from new business at 493,9 206,5
point of sale
Cost of capital (75,6) (43,8)
Net profit from new business at 418,3 162,7 157
point of sale
New business annualised premium 354,8 255,4 39
income (2)
Destiny Health
Gross profit from new business at 40,5 18,1
point of sale
Cost of capital (3) (23,9) -
Net profit from new business at 16,6 18,1 (8)
point of sale
New business annualised premium 378,5 205,8 84
income
(1) Health new business annualised premium income is the gross medical scheme
contribution. For embedded value purposes, Health new business is defined as
members of new employer groups joining Discovery, irrespective of the size of
the employer. Health new business also includes additions to first-year
business.
The new business annualised premium income shown above has been adjusted to
exclude premiums in respect of members who join an existing employer in groups
of 20 or more, as well as premiums in respect of new business written during the
period but only activated after 30 June 2003 - outside of the valuation period.
These members are not included in the calculation of the value of new business.
The total new business annualised premium income written over the period was R2
346,3 million (June 2002: R1 868,7 million).
The reduction in the new business margin for Health and Vitality is due to the
increase in sales of lower margin business, particularly following the launch of
the KeyCare plans on 1 January 2003.
(2) Life new business annualised premium income is net of automatic premium
increases in respect of existing business. The value of Life new business,
expressed as a percentage of the present value of future premiums, is 13,1%
(June 2002: 8,9%).
(3) Destiny Health"s new business now adds to its capital requirement.
Previously, new business did not increase the minimum level of solvency capital
required in terms of US regulations.
EMBEDDED VALUE ASSUMPTIONS
30 June 2003 30 June 2002
(%) (%)
Risk discount rate
- Health and Vitality 13,50 17,25
- Pre-funding 12,50 15,25
- Life product 12,50 15,25
- Destiny Health 10,00 10,00
Medical inflation
South Africa 8,50 11,25
United States Current levels 11,50
reducing to
11,50% over
the projection
period
Expense inflation
South Africa 5,50 8,25
United States 6,00 6,00
Pre-tax investment return
South Africa - cash 8,00 10,75
- bonds 9,50 12,25
- equity 11,50 14,25
United States - bonds 2,00 2,00
Income tax rate
- South Africa 30,00 30,00
- United States (1) 0,00 0,00
(1) Based on the projected utilisation of Destiny Health"s assessed tax loss to
date, it is assumed that no income tax will be payable over the projection term.
The embedded value of Discovery at 30 June 2003 is calculated as the sum of the
following components:
* The excess assets over liabilities at the valuation date, and
* The value of in-force business at the valuation date (less an allowance for
the cost of capital).
The value of in-force business is calculated as the value of projected future
after-tax profits of the business in force at the valuation date, discounted at
the risk discount rate.
The value of one year of new business is determined at the point of sale as the
projected future after-tax profits of the new business written by Discovery,
discounted at the risk discount rate, less an allowance for the cost of capital.
Tillinghast - Towers Perrin, international consulting actuaries, have reviewed
the calculation of the value of in-force business and the value of new business
and the methodology and assumptions underlying these calculations, and have
confirmed that, overall, they are reasonable. A letter from Tillinghast - Towers
Perrin, summarising the results of their review, will be included in the annual
report.
Commentary
Audited results
PricewaterhouseCoopers Inc. has audited the group"s annual financial statements.
The unqualified audit report, together with the annual financial statements, are
available for inspection at the company"s registered office.
The annual financial statements comply with South African Statements of
Generally Accepted Accounting Practice.
In line with Discovery"s policy, no dividend has been declared.
Accounting policies
The principal accounting policies and methods of computation followed in the
current year are consistent with those of the prior year with the exception of:
* The effect of the adoption of AC133
* The changes in accounting policy relating to the deferral of acquisition costs
* The consolidation of the Discovery Holdings Share Incentive Trust
Where necessary comparative figures have been regrouped or restated to conform
with changes in presentation in the current year classifications.
Adoption of AC133
Discovery implemented the accounting standard Financial Instruments: Recognition
and Measurement AC133 in preparation of the financial statements for the year
ended 30 June 2003.
AC133 is applied prospectively. In terms of AC133 the comparative figures
included in the financial statements were not restated to take into account the
effect of AC133 and fair value adjustments are made to opening retained income
through the statement of changes in equity where applicable.
In order to comply with the requirements of AC133, Discovery segregates
investment contracts from insurance contracts and discloses the respective
assets and liabilities related to the contracts separately. Deposits received
and benefit outflows in respect of investment contracts are excluded from the
income statement.
Financial instruments held by Discovery are allocated between the investment and
insurance contracts and shareholders. The allocation and classification is as
follows:
* Investment and insurance contracts: These consist of investments and are
classified as held for trading
* Shareholders: These consist of investments, loans receivable, accounts
receivable, cash and cash equivalents, non-current liabilities, accounts payable
and derivative financial instruments and are classified as follows:
* Investments - available-for-sale
* Loans receivable, accounts receivable, cash and cash equivalents, non-current
liabilities and accounts payable - originated loans
* Derivatives - held for trading
Investments and derivatives are carried at fair value. All other financial
instruments listed above are carried at cost or amortised cost where applicable.
Fair value adjustments on shareholders" available-for-sale investments are taken
directly to equity. Fair value adjustments on held for trading investments,
originated loans and derivatives are recognised in the income statement.
Changes in accounting policy
In line with industry practice, the accounting policy for health insurance and
group life acquisition costs was changed during the year from deferring
acquisition costs to expensing these costs as incurred.
The effect of the change in accounting policy has been:
* A reduction of the retained income at 30 June 2001 of R174 million
* A reduction of net profit after tax in 2002 of R22,3 million
* A reduction of net profit after tax in 2003 of R2,9 million
Consolidation of the share incentive trust
The Discovery Holdings Share Incentive Trust has been consolidated for the first
time in 2003. The effect of the consolidation is to increase net profit in 2002
by R10,7 million, reduce share capital and share premium by the cost of shares
issued to the share trust and reduce the number of shares used in the
calculation of the undiluted earnings per share figures.
New business annualised premium income
All segments of Discovery"s business showed strong new business growth. New
business annualised premium income of the group grew 35% for the 12 months under
review to R3 148,2 million (2002: R2 338,4 million), made up as follows:
2003 2002 Change %
Health (Rm) 2 283,6 1 819,1 26
Vitality (Rm) 62,7 49,6 26
Life (Rm) 423,4 263,9 60
Destiny (USDm) 42,5 25,7 65
Gross inflows under management
Gross inflows under management includes flows into the Discovery Health Medical
Scheme ("DHMS") to demonstrate the scale of activity of the Discovery Group and
to provide direct comparison of activity to prior periods. In line with the new
business growth, all lines of business showed satisfactory growth in gross
inflows under management.
R million 2003 2002 Change %
Health 9 729,6 7 227,3 35
Vitality 310,2 240,9 29
Life 475,9 188,8 152
Destiny 428,0 76,7 458
10 943,7 7 733,7 42
Operating profit before investment income - local operations
R million 2003 2002 Change %
Health 370,2 298,7 24
Vitality 33,1 33,3 (1)
Life 114,4 10,5 990
Profit from local operations 517,7 342,5 51
Discovery Health
Impact of the resolution reached with the Council of Medical Schemes
* The administration fee earned by Discovery Health was reduced from 14% to
12,4% of DHMS"s gross contributions for the calendar year ending 31 December
2002 and 11,45% for the 2003 calendar year.
* Quota share reinsurance premiums received from DHMS, were reduced for the 2002
calendar year from 67% to 33% of risk premiums received and a further reduction
to 20% was agreed with the Council with effect from the 2003 calendar year.
In addition, the reinsurance of DHMS"s International Travel Benefit was
discontinued with effect from 1 March 2003.
The impact of the above, on the results of the health operations of Discovery,
was a reduction for the year ended 30 June 2003, as compared to the year ended
30 June 2002, in gross income with a corresponding decrease in reinsurance
premiums and policyholder benefits. Although the resolution resulted in a
decrease in gross income there was an increase of 24% in operating profit before
investment income. This is attributable to:
* An increase in Discovery lives covered of 23% to 1 446 371 (2002: 1 180 121)
* Administration efficiencies
* Lower distribution costs
The reduction in quota share reinsurance, in terms of the resolution, coupled
with the expectation that quota share reinsurance will not be allowed to
continue in future led to the decision to release the health insurance
durational and AIDS reserves. The release of the reserves totalled R120,2
million before tax and is included as an abnormal item.
Discovery Life
Discovery Life"s increase in operating profit before investment income was
attributable to the following:
* Significant new business growth, fuelled by the launch of the Integrator and
the Health Plan Protector products
* Expansion of the franchise network
* Favourable claims and lapse experience
Profits increased in the last six months of the financial year relative to the
first six months. This was mainly as a result of improved profitability of new
business and improved claims experience.
Discovery Vitality
Vitality"s operating margin has reduced as a result of an increase in benefit
offerings.
Destiny Health
In line with expectations, Destiny Health"s operating losses increased to R169,0
million (2002: R109,9 million). No deferred tax asset has been accounted for on
the US losses incurred. Lives covered grew to 21 395 (2002: 9 383).
Administration costs include set-up costs of R8 million incurred in respect of
the joint ventures entered into with Guardian National Life Assurance Company of
America and Tufts Health Plan. Included in financing costs is a R17,1 million
exchange loss arising on the loan entered into by Destiny with RMB International
(Dublin) Limited ("RMBI").
Taxation
In the current year, the taxation charge was reduced by the reversal of a prior
year over-provision of R22,9 million.
Headline earnings per share
Headline earnings per share is based on earning as follows:
R million 2003 2002
Net profit attributable to ordinary 362,2 239,4
shareholders
Adjusted for realised profit on available
for sale
financial instruments (6,7) (3,9)
Headline earnings after abnormal items 355,5 235,5
Adjusted for abnormal items after taxation (84,1) (44,5)
Headline earnings before abnormal items 271,4 191,0
Balance sheet
As announced on 12 June 2003, Discovery proceeded with a claw-back offer to
raise R875 million through the issue of 134 615 385 new Discovery shares. On 27
June 2003, FirstRand undertook to pay the subscription price for the new shares.
Discovery shareholders then had the right to acquire their pro rata portion of
the new shares. The claw-back offer closed on 25 July 2003. As the new Discovery
shares were only issued after 30 June 2003 and listed on the JSE on 28 July
2003, the total subscription price of the shares is reflected in the balance
sheet at 30 June 2003 as a short-term loan owing to FirstRand.
On 20 June 2003, Destiny Health redeemed series B to F preference shares from
the proceeds of a loan of R279,2 million obtained from RMBI and presented under
non-current liabilities in the balance sheet. The loan has been subordinated.
With the approval of the South African Reserve Bank, Discovery Holdings and
Discovery Health have provided a guarantee to RMBI for the repayment of the
loan.
The series A preference shares of Destiny Health are disclosed as the minority
interest in the balance sheet.
Assets under insurance contracts
The increase in the asset under insurance contracts is as a result of the
significant increase in profitable new business.
Cash flow statement
The increase in cash in the current year is primarily attributable to the
proceeds of the claw-back offer and proceeds of the financing of Destiny Health.
Post-balance sheet event
On 7 July 2003, Discovery Holdings invested USD22,5 million in ordinary shares
in Destiny Health Inc.
Merchant Bank and Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
CORPORATE FINANCE
Date: 26/08/2003 09:00:34 AM Supplied by www.sharenet.co.za
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