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DISCOVERY HOLDINGS LIMITED - UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED

Release Date: 26/02/2004 10:00
Code(s): DSY
Wrap Text

DISCOVERY HOLDINGS LIMITED - UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Discovery Holdings Limited (Registration number 1999/007789/06) JSE Share code: DSY ISIN code: ZAE000022331 UNAUDITED INTERIM FINANCIAL RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Highlights Operating profit +87% to R324,8 million Attributable profit +57% to R135,3 million Diluted headline earnings per share +22% following 36% additional shares in issue Destiny Health expected to break-even in February 2004 Introduction Discovery"s performance for the six months under review was pleasing. The company employs a business methodology based on innovation, product leadership and operational and financial excellence to achieve its purpose of making people healthier and enhancing and protecting their lives. The period under review saw the successful continuation of this approach, resulting in strong organic growth across all of Discovery"s businesses. Discovery increased its operating profit by 87% to R324,8 million (2002: R173,3 million) while net profit attributed to shareholders grew 57% to R135,3 million (2002: R86,2 million). Diluted headline earnings per share increased by 22% to 26,2 cents (2002: 21,5 cents) despite a 36% increase in the number of shares in issue. Destiny Health The six months under review were important for Destiny Health. The company reduced its operating losses by 30% to $6,7 million (2002: $9,6 million), and increased new business by 59% to $31,3 million (2002: $19,7 million). Importantly, the company set the difficult short term target of achieving break- even in its Illinois business by the start of 2004 and is expected to achieve this during the month of February - one month late of its target date. To this end, a significant focus was placed on the management of expenses, the acquisition of new business and a focus on managing the medical loss ratio. Not only was the company successful in achieving the set short term targets, but it also introduced significant structural changes that bode well for longer term success. In addition to the breakeven goal, Destiny was focused on rolling out its joint ventures with Guardian Life Insurance Company of America in Illinois, and Tufts Health Plan in Massachusetts. It is expected that the impact of these ventures will only start being felt within the next few months. The health care environment continues to evolve rapidly toward Destiny"s Consumer-Driven Healthcare Model. Over the period under review, the amended Medicare legislation introduced the "Health Savings Account", which for the first time allows Americans to invest pre-tax dollars into a medical savings account - a structure that is central to the Destiny product design. The Health Savings Account was specifically mentioned by the US President in his State of the Union Address. Discovery Health Discovery Health"s performance was pleasing. Operating profit grew by 20% to R214,4 million (2002: R178,6 million), and the number of lives under administration now exceeds 1,5 million. Lapse rates reduced to an effective 3,3% per annum, the lowest in Discovery Health"s history. New business reduced by 20% to R934,5 million (2002: R1 163,3 million), primarily due to an unusually high intake of members in December/January of the previous financial year, which arose from the legislated introduction of an open enrolment period in January of each year. As this was the first of these open enrolment periods, the inflow of members during December and January 2003 reflected significant pent-up demand. Discovery Health"s role is to provide access to quality care on a sustainable basis in an environment of change and complexity. The period under review was particularly pleasing in this regard: healthcare costs were kept under control, while statutory reserves within the Discovery Health Medical Scheme built up in line with that required - to over R1,6 billion. Despite the increased proportion of member contributions allocated to reserves, contribution rates increased from 2003 to 2004 in line with previous years. With falling levels of inflation, Discovery Health is acutely aware that the increasing gap between salary and medical inflation means that member expectations in terms of cost are not being met. However, given the performance of the Discovery Health Medical Scheme and the likelihood that the reserve requirements will be met by end 2004, single digit contribution increases are expected for 2005. Discovery Life Discovery Life"s performance exceeded expectation. Profit increased to R105,1 million (2002: R16,8 million), and the value of in-force business increased by 89% to R946,3 million (2002: R500,0 million). Annualised new business premium income increased by 35% to R290,1 million (2002: R214,6 million). The number of policyholders grew to over 100 000. The company"s approach to life insurance has now become the industry norm and it has established a leadership position in a market that is transforming toward its approach. It"s products exclude any investment element and therefore it is not only immunised against the fall-out of poor investment returns, but also against the fluctuating financial performance resulting from them. The company is well positioned for further innovation to capitalise on the platform it has created. The quality of business written has been exceptional and over the period, focus was applied to maintaining and enhancing this. The average premium and the ancillary benefits per policy remain significantly above the industry average, which has helped to increase the profitability per policy. Notably, the company"s mortality and morbidity experience was better than expected. Increasing success is being achieved through the integration with other Discovery products. Prospects Discovery is confident of continued growth, with robust performances expected from its established businesses and increasing contributions from start-ups. By order of the board LL Dippenaar A Gore Chairman Chief Executive Officer 26 February 2004 GROUP CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2003 December June
2003 2003 R million Unaudited Audited ASSETS Non-current assets 1 422,1 1 015,9 Fixed assets 224,8 221,2 Intangible assets 38,0 35,5 Investments 1 082,0 685,0 Loans receivable 77,3 74,2 Assets under insurance contracts 1 054,0 772,4 Current assets 1 070,7 1 552,7 Accounts receivable 255,1 209,0 Deferred tax asset 10,3 6,7 Cash and cash equivalents 805,3 1 337,0 Total assets 3 546,8 3 341,0 EQUITY AND LIABILITIES Capital and reserves 2 110,1 1 036,9 Share capital and share premium 1 277,7 428,9 Reserves 832,4 608,0 Minority interest 127,4 127,4 Liabilities under insurance contracts 14,0 9,5 Liabilities under investment 402,9 370,2 contracts Non-current liabilities 312,4 296,7 Deferred tax liability 14,6 25,9 Current liabilities 565,4 1 474,4 Short-term loan - 875,9 Other current liabilities 565,4 598,5 Total equity and liabilities 3 546,8 3 341,0 Net asset value per share (cents) 411,0 274,4 Number of shares in issue (000"s) 513 464 377 876 GROUP CONSOLIDATED STATEMENT OF GROSS INFLOWS UNDER MANAGEMENT FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Six months Six months ended ended December December Year ended
2003 2002 Change June 2003 R million Unaudited Unaudited % Audited Gross inflows 6 392,6 4 808,7 33 10 943,7 under management Less: Collected 4 372,7 2 962,7 7 190,0 on behalf of third parties Gross income of 2 019,9 1 846,0 3 753,7 group GROUP CONSOLIDATED INCOME STATEMENT FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Six Six
months months ended ended December December Year ended
2003 2002 Change June 2003 R million Unaudited Unaudited % Audited Gross income of group 2 019,9 1 846,0 3 753,7 Less: Reinsurance 167,7 161,0 341,9 premiums Net income 1 852,2 1 685,0 3 411,8 Total investment 64,0 45,9 96,2 income Fair value (0,1) (15,5) (15,5) adjustments Other investment 64,1 61,4 111,7 income INCOME 1 916,2 1 730,9 3 508,0 Claims and 658,4 725,0 1 366,0 policyholder benefits Commissions 279,0 217,8 437,4 Operating and 787,0 674,5 1 437,0 administration expenses Vitality benefits 144,1 104,3 227,4 OUTGO 1 868,5 1 721,6 3 467,8 Transfers 277,1 164,0 420,2 From 277,1 201,0 420,2 assets/liabilities under insurance contracts To health insurance - (37,0) - durational and AIDS reserves Operating profit 324,8 173,3 460,4 Local operations 402,6 263,2 53 628,2 Foreign operations (77,8) (89,9) (167,8) Financing costs (30,5) (11,6) (25,2) Foreign exchange loss (36,5) - (17,1) - unrealised Profit before 257,8 161,7 59 418,1 abnormal items and taxation Abnormal items - - 120,2 Profit before 257,8 161,7 59 538,3 taxation Taxation 123,4 75,5 182,2 - Operating profit 123,4 75,5 146,1 - Abnormal items - - 36,1 Profit after taxation 134,4 86,2 356,1 Minority share of 0,9 - 6,1 loss Net profit 135,3 86,2 57 362,2 attributable to ordinary shareholders Headline earnings per share (cents) - undiluted 27,2 21,5 27 94,1 - diluted 26,2 21,5 22 88,2 Basic earnings per share (cents) - undiluted 27,4 22,8 20 95,9 - diluted 26,4 22,7 16 89,8 Headline earnings per share before abnormal items and foreign exchange loss (cents) - undiluted 34,6 21,5 61 76,3 - diluted 33,0 21,5 54 72,1 Basic earnings per share before abnormal items and foreign exchange loss (cents) - undiluted 34,9 22,8 53 78,1 - diluted 33,3 22,7 47 73,7 Weighted number of 492 979 377 876 377 876 shares in issue (000"s) Diluted weighted 531 725 409 458 417 594 number of shares (000"s) GROUP CONSOLIDATED CASH FLOW STATEMENT FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Six months Six months ended ended
December December Year ended 2003 2002 June 2003 R million Unaudited Unaudited Audited Operating profit before 58,1 17,6 57,1 working capital changes Health and Vitality 303,6 271,5 486,2 Life (164,0) (158,8) (266,1) Destiny (81,5) (95,1) (163,0) Working capital changes (62,4) (94,3) 158,3 Cash (4,3) (76,7) 215,4 (utilised)/generated from operations Taxation paid (131,6) (110,3) (180,6) Investment income 54,0 51,4 90,1 Interest paid (16,4) (11,6) (23,9) CASH FLOW FROM OPERATING ACTIVITIES (98,3) (147,2) 101,0 CASH FLOW FROM INVESTING ACTIVITIES (358,8) (138,1) (199,5) CASH FLOW FROM FINANCING ACTIVITIES (61,0) 145,4 1 094,7 Net (decrease)/increase (518,1) (139,9) 996,2 in cash and cash equivalents Cash and cash 1 337,0 354,4 354,4 equivalents at beginning of year Effects of exchange rate (13,6) (7,8) (13,6) changes on cash and cash equivalents Cash and cash 805,3 206,7 1 337,0 equivalents at end of year GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Share Share Investment R million capital premium reserve 31 December 2003 Balance at 1 July 2003 0,4 428,5 (4,4) Net profit for the - - - period Dividends paid to Destiny Health - - - preference shareholders Unrealised gains on - - 75,3 investments Realised gains on - - (1,4) investments transferred to income statement Transfer from hedging - - - reserve Preliminary and share - (27,9) - issue expenses Translation of foreign - - - subsidiary Issue of capital 0,9 875,8 - Balance at 31 December 1,3 1 276,4 69,5 2003 31 December 2002 Balance at 1 July 2002 0,4 426,7 30,8 Implementation of AC133 - - - Net profit for the - - - period Dividends paid to Destiny Health - - - preference shareholders Unrealised losses on - - (21,4) investments Realised gains on - - (6,9) investments transferred to income statement Translation of foreign - - - subsidiary Issue of capital * 1,7 - Balance at 31 December 0,4 428,4 2,5 2002 GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Retained Translation Hedging
R million earnings reserve reserve Total 31 December 2003 Balance at 1 July 634,5 (7,7) (14,4) 1 036,9 2003 Net profit for the 135,3 - - 135,3 period Dividends paid to Destiny Health (0,6) - - (0,6) preference shareholders Unrealised gains on - - - 75,3 investments Realised gains on - - - (1,4) investments transferred to income statement Transfer from hedging - - 14,4 14,4 reserve Preliminary and share - - - (27,9) issue expenses Translation of - 1,4 - 1,4 foreign subsidiary Issue of capital - - - 876,7 Balance at 31 769,2 (6,3) - 2 110,1 December 2003 31 December 2002 Balance at 1 July 301,5 (15,1) - 744,3 2002 Implementation of (16,6) - - (16,6) AC133 Net profit for the 86,2 - - 86,2 period Dividends paid to Destiny Health (2,1) - - (2,1) preference shareholders Unrealised losses on - - - (21,4) investments Realised gains on - - - (6,9) investments transferred to income statement Translation of - (9,1) - (9,1) foreign subsidiary Issue of capital - - - 1,7 Balance at 31 369,0 (24,2) - 776,1 December 2002 * Amount is less than R100 000 SEGMENTAL INFORMATION FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Health United South States of
R million Africa America Life Vitality Total Gross 5 596,0 226,9 384,3 185,4 6 392,6 inflows under management Gross income 1 285,2 165,0 384,3 185,4 2 019,9 Reinsurance (44,1) (43,7) (79,9) - (167,7) Fair value - - (0,1) - (0,1) adjustments Expenses, (1 026,7) (200,3) (476,3) (165,2) (1 868,5) commissions and claims Transfer - - 234,4 - 234,4 from balances under insurance contracts 214,4 (79,0) 62,4 20,2 218,0 Return on - - 42,7 - 42,7 assets under insurance contracts Operating 214,4 (79,0) 105,1 20,2 260,7 profit before investment income Investment 64,1 income Operating 324,8 profit FOR THE SIX MONTHS ENDED 31 DECEMBER 2002 Health United South States of
R million Africa America Life Vitality Total Gross 4 314,9 158,1 196,2 139,5 4 808,7 inflows under management Gross income 1 381,9 128,4 196,2 139,5 1 846,0 Reinsurance (74,6) (53,3) (33,1) - (161,0) Fair value - - (15,5) - (15,5) adjustments Expenses, (1 091,7) (165,9) (331,8) (132,2) (1 721,6) commissions and claims Transfer (37,0) - 175,7 - 138,7 (to)/from balances under investment and insurance contracts 178,6 (90,8) (8,5) 7,3 86,6 Return on - - 25,3 - 25,3 assets under insurance contracts Operating 178,6 (90,8) 16,8 7,3 111,9 profit before investment income Investment 61,4 income Operating 173,3 profit GROUP CONSOLIDATED EMBEDDED VALUE STATEMENT FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 GROUP EMBEDDED VALUE At At At At 31 31 Change 30 June 30 June December December
R million 2003 2002 % 2003 2003(1) (Illustrative, after capital raising)
Shareholders" 2 110,1 776,1(2) 1 036,9 1 885,7 funds Value of in- 4 401,5 3 126,1 41 4 021,1 4 021,1 force business before cost of capital(3) Cost of (289,7) (192,1) (190,2) (190,2) capital Discovery 6 221,9 3 710,1 68 4 867,8 5 716,6 Holdings embedded value Number of 513,5 377,9 377,9 512,5 shares millions Embedded R12,12 R9,82 23 R12,88 R11,15 value per share Diluted R11,27 R9,06 24 R11,66 R10,35 embedded value per share (1) In June 2003, Discovery proceeded with a claw-back offer to raise R875 million at an issue price of R6,50 per share. The shares were issued and listed on the JSE on 28 July 2003. At 30 June 2003, the capital raised was reflected as a short-term loan owing to FirstRand Limited, but is now included in shareholders" funds. The embedded value at 30 June 2003 has been restated for illustrative purposes to demonstrate the impact of including the capital raised (net of preliminary and share issue expenses) in shareholders" funds, and including the shares issued in the calculation of embedded value per share. (2) The accounting policy for health insurance and group life acquisition costs was changed during the 2003 financial year from deferring acquisition costs to expensing these costs as incurred. The deferred acquisition cost asset was previously reflected as an adjustment to the value of shareholders" funds. The shareholders" funds balance at 31 December 2002 has been restated in line with the changes to the statement of changes in equity. (3) The pre-paid commission expense was previously reflected as an adjustment to shareholders" funds. It has now been fully expensed. The asset (which amounted to R76,7 million at 31 December 2002 and R17,6 million at 30 June 2003) has been deducted from the value of in-force business at 30 June 2003 and 31 December 2002 to avoid the double counting of expense loadings. VALUE OF IN-FORCE BUSINESS FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Value before Cost of Value after R million cost of capital cost of capital capital Health and Vitality 3 045,4 -(1) 3 045,4 Life 1 203,7 (257,4) 946,3 Destiny Health (2) 152,4 (32,3) 120,1 Total 4 401,5 (289,7) 4 111,8 (1) The trustees of the Discovery Health Medical Scheme have applied for a 10% quota share reinsurance treaty with Discovery Life to commence on 1 January 2004. As the Scheme has not yet received approval for the treaty, both potential risk profits and the potential cost of any capital requirements have been excluded from the embedded value. (2) Figures for Destiny Health reflect Discovery"s 95,6% shareholding in Destiny Health at 31 December 2003. EMBEDDED VALUE EARNINGS 6 months 6 months
to to 31 31 12 December December months to
R million 2003 2002(1) 30 June 2003 Embedded value at end of 6 221,9 3 710,1 4 867,8 period Embedded value at beginning 4 867,8 3 321,0 3 321,0 of period Increase in embedded value 1 354,1 389,1 1 546,8 Net issue of capital (848,8) (1,7) (1,8) Dividends paid to Destiny 0,6 2,1 12,6 Health preference shareholders Implementation of new - 16,6 16,6 accounting standards (2) Transfer to hedging reserve (14,4) - 14,4 (3) Embedded value earnings 491,5 406,1 1 588,6 (1) The value of Shareholders" Funds at 31 December 2002 has been restated in line with the adjustments to the statement of changes in equity. As a result, the embedded value earnings for the prior period has been adjusted. (2) Refer to the commentary to the financial statements regarding Discovery"s adoption of AC 133. (3) This item relates to a cash flow hedge that was taken out to reduce exposure to currency risk on capital inflows to Destiny Health. COMPONENTS OF EMBEDDED VALUE EARNINGS 6 months 6 months 12 months to to to 31 31 Change 30 June December December
R million 2003 2002 % 2003 Total profit from 357,9 275,5 30 669,6 new business(at point of sale) Profit from existing business * Expected return 272,3 241,3 500,5 * Change in (261,7) (182,8) (0,1) methodology and assumptions (1) * Experience 6,9 74,1 365,8 variances Adjustment for minority interest in Destiny Health 3,7 - (2,3) Interest on loan (25,2) - - capital Return on 137,6 (2,0) 55,1 shareholders" funds (2) Embedded value 491,5 406,1 1 588,6 earnings (1) The change in methodology and assumptions will vary over time to reflect adjustments to the model and assumptions as a result of changes to the operating and economic environment. These changes are described in detail in the table below (for previous periods refer to previous embedded value statements). (2) Return on Shareholders" Funds is the after-tax investment return and unwinding of the negative reserves. METHODOLOGY AND ASSUMPTION CHANGES FOR THE SIX MONTHS ENDED 31 DECEMBER 2003 Health, Vitality
R million and Destiny Health Life Total Modelling changes - (66,3) (66,3) Global linkage (1) - (84,7) (84,7) Lapses (25,0) - (25,0) Economic 16,9 (3,3) 13,6 Expenses (5,4) (34,8) (40,2) Mortality and (4,1) 5,5 1,4 morbidity Tax (2) (53,6) - (53,6) Other (2,5) (4,4) (6,9) Total (73,7) (188,0) (261,7) (1) The global linkage benefit basis was strengthened in the light of recent experience and exchange rate volatility. (2) The tax assumption change reflects a higher average VAT rate. EXPERIENCE VARIANCES for the six months ended 31 December 2003 Health, Vitality
R million and Destiny Health Life Total Renewal expenses (6,2) (2,3) (8,5) Other expenses (1) (79,7) - (79,7) Health administration fee and Life premium increase (20,4) 11,3 (9,1) Extended modelling 68,1 0,8 68,9 term (2) Lapses 28,4 (11,4) 17,0 Medical inflation (3) 14,5 - 14,5 Policy alterations (1,6) 64,7 63,1 Exchange rate (13,0) - (13,0) movements Mortality and (15,9) 18,6 2,7 morbidity Quota share (4,4) (13,4) (17,8) reinsurance treaty (4) Other (5) (10,5) (20,7) (31,2) Total (40,7) 47,6 6,9 (1) The expense experience variance for Health, Vitality, and Destiny Health includes a negative variance relating to non-recurring expenses of R38,3 million. In addition, a large proportion of Health and Destiny Health new business was written during the period but only activated on 1 January 2004 - outside of the valuation period. A negative experience variance of R41,4 million arises in respect of the acquisition expenses incurred for these members who are not included in the embedded value calculation. (2) The projection term for Health, Vitality, Destiny Health, and Group Life at 31 December 2003 has not been changed from that used at 30 June 2003. Thus, an experience variance arises because the total term of the in-force business is effectively increased by 6 months. (3) The positive medical inflation variance is the result of higher than expected Health and Destiny Health contribution increases. (4) The 10% quota share reinsurance treaty for 2004 which was previously modelled has not been modelled in the 31 December 2003 calculation as the Scheme has not yet received approval for the treaty. The Life product cost of capital has increased due to the manner in which the cost of capital was previously shared between the Life and Health products. (5) Includes a R36,5 million unrealised foreign exchange loss arising on a R279,2 million loan entered into by Destiny Health with RMB International (Dublin) Limited. EMBEDDED VALUE OF NEW BUSINESS 6 months 6 months 12 to to months
to 31 31 Change 30 December December June R million 2003 2002 % 2003 Health and Vitality Gross profit from new 42,9 76,5 237,9 business at point of sale Cost of capital - (6,3) (3,2) Net profit from new 42,9 70,2 (39) 234,7 business at point of sale New business annualised 376,0 459,8 (18) 1 premium income (1) 834,2 Life Gross profit from new 370,6 218,6 493,9 business at point of sale Cost of capital (63,3) (20,3) (75,6) Net profit from new 307,3 198,3 55 418,3 business at point of sale New business annualised 213,6 188,8 13 354,8 premium income (2) Annualised profit 12,1% 9,6% 13,1% margin (3) Destiny Health Gross profit from new 14,8 16,0 40,5 business at point of sale Cost of capital (7,1) (9,0) (23,9) Net profit from new 7,7 7,0 10 16,6 business at point of sale New business annualised 137,3 145,0 (5) 356,1 premium income (4) (1) Health new business annualised premium income is the gross medical scheme contribution. For embedded value purposes, Health new business is defined as members of new employer groups, and includes additions to first year business. The new business annualised premium income shown above has been adjusted to exclude premiums in respect of members who join an existing employer after the first year, as well as premiums in respect of new business written during the period but only activated after 31 December 2003 - outside of the valuation period. These members are not included in the calculation of the value of new business. The total Health and Vitality new business annualised premium income written over the period was R960,9 million (December 2002: R1 196,2 million). The reduction in the new business margin for Health and Vitality is due to the increase in sales of lower margin business, particularly following the launch of the KeyCare plans on 1 January 2003. (2) Life new business annualised premium income is net of automatic premium increases in respect of existing business. (3) The annualised profit margin is the value of new business expressed as a percentage of the present value of future premiums. (4) For embedded value purposes, Destiny Health new business is defined as members of new employer groups, and includes additions to first year business. The new business annualised premium income shown above has been adjusted to exclude premiums in respect of members who join an existing employer after the first year, as well as premiums in respect of new business written during the period but only activated after 31 December 2003 - outside of the valuation period. These members are not included in the calculation of the value of new business. The total Destiny Health new business annualised premium income written over the period was R222,4 million (December 2002: R186,9 million). EMBEDDED VALUE ASSUMPTIONS 31 December 31 December 30 June
2003 2002 2003 (%) (%) (%) Risk discount rate - Health and 13,50 16,00 13,50 Vitality - Life product 12,50 14,00 12,50 - Destiny Health 10,00 10,00 10,00 Medical inflation South Africa 8,50 10,00 8,50 United States Current Decreasing Current levels levels reducing to linearly reducing
from to 11,50% 14,25% to 11,50% over the 9,75% over over the projection the projection
projection period period period Expense inflation South Africa 5,50 7,00 5,50 United States 5,00 6,00 6,00 Pre-tax investment return South Africa - 8,00 9,50 8,00 cash - bonds 9,50 11,00 9,50 - equity 11,50 13,00 11,50 United States - 2,00 2,00 2,00 bonds Income tax rate - South Africa 30,00 30,00 30,00 - United States 34,00 34,00 34,00 Federal Tax Rate (1) (1) Various additional State taxes also apply. Based on the projected utilisation of Destiny Health"s assessed tax loss to date, it is assumed that no income tax will be payable over the projection term. Life mortality, morbidity and lapse assumptions were derived from internal experience, where available, augmented by reinsurance and industry information. The Health lapse assumptions were based on the results of recent experience investigations, as were the Destiny Health morbidity assumptions. The Destiny Health lapse assumptions were based on the results of recent experience investigations as well as future expectations regarding scheme renewals. Renewal expense assumptions were based on the results of the latest expense and budget information. The investment return assumption was determined with reference to the market yield to maturity on long-dated government bonds. Other economic assumptions were set relative to this yield. It was assumed that the capital adequacy requirements in future years will be backed by surplus assets consisting of 70% equities and 30% fixed interest securities for the purposes of calculating the cost of capital at risk. The embedded value of Discovery at 31 December 2003 is calculated as the sum of the following components: * The excess assets over liabilities at the valuation date, and * The value of in-force business at the valuation date (less an allowance for the cost of capital). The value of in-force business is calculated as the value of projected future after-tax profits of the business in force at the valuation date, discounted at the risk discount rate. The value of new business is determined at the point of sale as the projected future after-tax profits of the new business written by Discovery, discounted at the risk discount rate, less an allowance for the cost of capital. Tillinghast, international consulting actuaries, a business of Towers Perrin, have reviewed the methodology and assumptions used to determine the value of in- force business and the value of new business and have confirmed that, overall, they are reasonable. FINANCIAL COMMENTARY Accounting Policies The principal accounting policies and methods of computation followed in the six months to 31 December 2003 are consistent with those followed at 30 June 2003. The unaudited interim financial statements comply with South African Statements of Generally Accepted Accounting Practice. In line with Discovery"s current policy, no dividend has been declared. Comparative Figures The following changes have been made to the comparative figures: Foreign exchange losses have been shown separately on the face of the income statement in order to provide more meaningful information. An adjusted headline earnings per share before abnormal items and foreign exchange losses has also been shown. In line with industry practice, the accounting policy for health insurance and group life acquisition costs was changed during the 2003 financial year from deferring acquisition costs to expensing these costs as incurred. The impact of this change in accounting policy on the results for the six months ended 31 December 2002 is as follows: * A reduction of the retained income at 30 June 2002 of R196,3 million * A reduction in net profit after tax for the six months ended 31 December 2002 of R6,9 million Discovery implemented the accounting standard Financial Instruments: Recognition and Measurement AC133 in preparation of the financial statements for the year ended 30 June 2003. The impact of the adoption of AC133 on the results for the six months ended 31 December 2002 is an increase in net profit after tax of R2,2 million. New Business Annualised Premium Income New business annualised premium income of the group decreased 8% for the six months under review to R1 473,4 million (2002: R1 597,7 million) and is made up as follows: 2003 2002 Change % Health (Rm) 934,5 1 163,3 (20) Vitality (Rm) 26,4 32,9 (20) Life (Rm) 290,1 214,6 35 Destiny (Rm) 222,4 186,9 19 Total (Rm) 1 473,4 1 597,7 (8) Destiny (USDm) 31,3 19,7 59 The decrease in Health and Vitality new business from R1 196,2 million for the six months ended 31 December 2002 to R960,9 million for the six months ended 31 December 2003 is attributable to the regulatory changes (Section 29A(6) of the Medical Schemes Act) promulgated in 2002 which allowed groups to join medical schemes free of underwriting. This led to a higher than anticipated influx of new business in 2002. This legislation persists but the effect is now in line with our expectations. Discovery Life`s new business increased 35% for the six months under review to R290,1 million (2002: R214,6 million) building further on its leadership position in the risk-only assurance market and proving its value proposition to clients. Destiny"s new business grew 59% to USD31,3 million (2002: USD19,7 million) bearing testimony to a continued focus on marketing and distribution activities and showing early signs of the benefits of the joint ventures. The strengthening of the Rand against the Dollar over the six month period translated into a 19% increase in new business in Rand terms over the six-month period. Gross Inflows Under Management Gross inflows under management includes flows into the Discovery Health Medical Scheme ("DHMS") to demonstrate the scale of activity of the Discovery group and to provide direct comparison of activity to prior periods. All lines of business showed satisfactory growth in gross inflows under management. R million 2003 2002 Change % Health 5 596,0 4 314,9 30 Vitality 185,4 139,5 33 Life 384,3 196,2 96 Destiny 226,9 158,1 44 6 392,6 4 808,7 33 Operating profit - local operations R million 2003 2002 Change % Health 214,4 178,6 20 Vitality 20,2 7,3 177 Life 105,1 16,8 526 Profit before investment 339,7 202,7 68 income Investment income 62,9 60,5 4 Operating profit from 402,6 263,2 53 local operations Discovery Health The impact of the resolution with the Council of Medical Schemes on the results of the health operations of Discovery, was a reduction in gross income with a corresponding decrease in reinsurance premiums and policyholder benefits. Although the resolution resulted in a decrease in gross income there was an increase of 20% in operating profit before investment income. This is attributable to: * An increase in lives covered of 19,9% to 1 505 896 (2002: 1 255 797) * Administration and marketing efficiencies The operating profit of Discovery Health is weighted to the second half of the financial year as premium increase anniversaries are on 1 January each year while salary increases occur on 1 July each year. The trustees of DHMS have applied for a 10% quota share reinsurance treaty with Discovery Life to commence on 1 January 2004 for which approval has not yet been received. Discovery Life Discovery Life"s increase in operating profit before investment income is attributable to the following: * Significant new business * Better than anticipated mortality and morbidity experience The number of individual policyholders insured grew to 100 218 (2002: 46 340). Group lives covered increased to 34 968 (2002: 28 991). Discovery Vitality Discovery Vitality"s operating profit increased to R20,2 million (2002: R7,3 million) resulting from an enhanced product offering increasing Vitality"s membership. With effect from 1 January 2004, Discovery Vitality has launched further exciting benefits which are expected to lead to a reduction in the profitability of Vitality in the second half of the financial year. Destiny Health Destiny Health"s operating losses before investment income, finance costs and non-recurring expenses reduced by 48% to R47,1 million for the six month period ended 31 December 2003 (2002: R90,8 million). This is attributable to the strengthening of the Rand against the Dollar, improved claims experience as a result of better risk management and the achievement of efficiencies in cost control as well as the growth in lives covered to 24 698 (2002: 14 840). Non-recurring costs include set-up costs of R17,5 million incurred in respect of the joint ventures entered into with Guardian and Tufts. The R36,5 million exchange loss arises on the R279,2 million loan entered into by Destiny with RMB International (Dublin) Limited. Taxation All South African entities are in a tax paying position. Destiny operations have significant tax losses but no deferred tax asset has been accounted for on the foreign losses incurred. Headline Earnings Per Share Headline earnings per share is calculated as follows: December December June R million 2003 2002 2003 Net profit attributable to 135,3 86,2 362,2 ordinary shareholders Adjusted for realised profit (1,2) (4,8) (6,7) on available for sale financial instruments Headline earnings 134,1 81,4 355,5 Foreign exchange loss - 36,5 - 17,1 unrealised Abnormal items - - (84,1) Headline earnings before 170,6 81,4 288,5 abnormal items and foreign exchange loss Balance Sheet The short-term loan of R875 million owing to FirstRand Limited as at 30 June 2003 that arose in terms of the claw-back offer was repaid by the issue of 134 615 385 new Discovery shares. These shares were listed on the JSE on 28 July 2003. The minority interest of R127,4 million in the balance sheet comprises the Series A preference shares of Destiny Health. The increase in the assets under insurance contracts of R281,6 million is as a result of the significant increase in profitable new business written by Discovery Life. Investments have increased due to the investment of an additional R300 million into equity portfolios during October 2003 coupled with the strong performance of the equity markets. Unrealised gains of R75,3 million on investments have been taken directly to reserves. Cash and cash equivalents at 30 June 2003 is R805,3 million. As at 31 December, R103,5 million of cash is held by Destiny Health Insurance Company as part of its statutory capital. Directors: L L Dippenaar (Chairman), A Gore (Chief Executive Officer), J M Robertson (Chief Operating Officer), Dr BA Brink**, J P Burger, Dr N J Dlamini, R B Gouws#, M I Hilkowitz, N S Koopowitz*,H P Mayers*, B Swartzberg*, S V Zilwa, S D Whyte* *Executive **Appointed 19 February 2004 #Resigned effective 5 December 2003 Transfer Secretaries: Computershare Limited (Registration number 1958/003546/06) 8th Floor 70 Marshall Street, Johannesburg, 2000 PO Box 61051, Marshalltown, 2107 Secretary And Registered Office: M J Botha 155 West Street Sandton 2146 PO Box 786722, Sandton, 2146 Tel: (011) 529 2888 Fax: (011) 529 2958 e-mail questions to: AskTheCFO@discovery.co.za www.discovery.co.za/investor Merchant Bank And Sponsor: Rand Merchant Bank A division of FirstRand Bank Limited Corporate Finance Date: 26/02/2004 10:00:27 AM Supplied by www.sharenet.co.za Produced by the JSE SENS Department

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