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DSY - Discovery Holdings - Unaudited Interim Results And Cash Dividend

Release Date: 26/02/2008 08:01
Code(s): DSY
Wrap Text

DSY - Discovery Holdings - Unaudited Interim Results And Cash Dividend Declaration For The Six Months Ended 31 December 2007 Discovery Holdings Limited (Incorporated in the Republic of South Africa) (Registration number: 1999/007789/06) JSE share code: DSY ISIN: ZAE000022331 UNAUDITED INTERIM RESULTS AND CASH DIVIDEND DECLARATION FOR THE SIX MONTHS ENDED 31 DECEMBER 2007 - Diluted embedded value per share +19% to R27,64 - Operating profit before new ventures +35% to R726 million - Net profit after tax +34% to R541 million - Diluted HEPS +14% to 74,9 cents per share - Interim dividend of 21,5 cents per share www.discovery.co.za Commentary Discovery performed pleasingly in the period under review. The results achieved reflect a combination of: * excellent operational performance from the Group`s local businesses * increasing traction in the UK through PruHealth - its joint venture with the Prudential plc; and * a change of direction for its US business, Destiny Health. In addition, during the period under review, Discovery launched both Discovery Invest - its South African long-term savings business - and PruProtect, its UK Protection joint venture. Discovery`s core purpose of making people healthier and enhancing and protecting their lives has translated into a philosophy of consumerism in healthcare, life assurance and financial services. The manifestation of this on the ground is products that use Vitality, the incentive-based wellness programme, as a foundation, both to engage clients and to integrate products. This has enabled Discovery to create a strong and powerful competitive advantage as well as to maximise its value propositions to its clients. During the period under review, the efficacy of this approach was clearly demonstrated. For the period under review, operating profit grew 31% before the impact of the BEE transaction to R843 million (2006: R645 million), while profit after tax rose by 34% to R541 million. Diluted headline earnings per share increased 14% to 74,9 cents (2006: 65,9 cents) and new business, excluding Destiny, grew by 12% to R2,19 billion (2006: R1,96 billion). Discovery Health Discovery Health performed particularly pleasingly and exceeded expectations. Operating profits rose by 14% to R389 million (2006: R342 million) with new business improving to R1 265 million (2006: R1 233 million). The number of lives under management grew to 2 054 270 in total (2006: 1 974 675). Several substantial strategies have been embarked upon over the last two years and, during the period under review, virtually all of these came to fruition. They are: * The number of GPs in the Discovery GP Network, and the number of specialists contracted to the specialist payment arrangement exceeded target, and approached approximately 80% of all doctors in the private sector by January 2008. The effect going forward is Discovery Health Medical Scheme members will have certainty of cover and limited out-of-pocket expenses when visiting these doctors. Importantly, a foundation has been built from which to work with doctors more widely and constructively. * Utilising the scale of Discovery Health, structures and contracts have been entered into throughout the healthcare system, so that benefits can be offered at maximum quality and at contained cost. This has been achieved despite the hospital oligopoly that exists within the private healthcare system. * Significant efficiencies have been achieved in the operational, administrative and risk management structures within Discovery Health, enabling administration fees charged to the Discovery Health Medical Scheme to continue to reduce. * The significant investment in risk-management and managed care has meant that medical costs have been controlled, and the resulting medical inflation contained, despite the adverse selection and aging population of the private healthcare system. * The Discovery Health Medical Scheme generated in excess of R1 billion in surpluses for the calendar year 2007, enabling it to achieve its stated solvency target for the year. It is well on track to achieve the 25% statutory solvency requirement at December 2008. Most importantly, from a client perspective, the Discovery Health Medical Scheme has been providing - and will continue to provide - sustainable access to private healthcare. During the period under review, more than 98% of members of the Discovery Health Medical Scheme either remained on their current plan, or bought up to higher benefit levels. This is the antithesis of the sentiment that surrounds private healthcare, reflecting the reality that, with sound management and appropriate investment, access to private healthcare can be sustained and advanced. Discovery Life Discovery Life`s performance was excellent and exceeded expectations. The company increased operating profits by 46%, while gross inflows under management increased by 31% to R1 446 million (2006: R1 107 million). Annualised new business premium income rose by 31%, to R627 million (2006: R480 million). The value of business in force improved significantly, growing by 31% to R6 623 million (2006: R5 068 million). The effectiveness of Discovery Life`s approach to life assurance was clearly demonstrated during the period under review. Discovery Life estimates that it transacts more new business in the pure risk market than any other company in South Africa. The combination of innovative and relevant benefit structures, with the use of Vitality to enable dynamic pricing, allowed Discovery Life to achieve unique levels of competitiveness, and better risk selection - both in terms of new business and lapses. The result of this was substantial flows of new business, and mortality and morbidity experiences that significantly surpassed expectations. In addition, Discovery Financial Consultants, Discovery`s tied agency force continues to grow successfully with production per consultant in line with expectation, producing in excess of 9 % of the total individual life new business flow of Discovery Life. Discovery Invest During the period under review, Discovery launched its investment business, Discovery Invest. The launch, implementation, and market receptivity to this new offering, have exceeded expectations. The strategy behind Discovery Invest is to harness the significant sophistication of the investment markets - as evidenced by the breadth and skill of the asset management industry - while adding value from an insurance-structural product perspective. The manifestation of this strategy consists of three components: 1. The breadth of the product range, which encompasses all forms of long-term savings from pre-retirement to in-retirement products; 2. To utilise Vitality as a foundation and an enabler for integration with other Discovery products, so that administration and asset management fees paid by clients can be reduced significantly; and 3. To partner with the appropriate asset management capabilities in order to offer the best and most appropriate asset management component for the Discovery Invest product range. To this end, Discovery has chosen Investec Asset Management to provide local asset management capabilities and Deutsche Bank London to provide the expertise and capacity for the complex structures it requires to complement these capabilities. The result of this approach has been pleasing. The Discovery Invest product range has proved to be particularly appealing and competitive. Investment choices like RightChoiceT, which enables investors to have the benefit of hindsight, and the Escalated Products, which enable investors to have the benefit of dynamic guarantees, have proved particularly popular. The Integrated Endowment, which enables investors who are Discovery Life policyholders to invest without any asset management or administrative fees whatsoever, has also been well received. Discovery Invest was launched before the end of the period under review and only began transacting new business two months ago; however, early indications are particularly positive. Approximately 80% of inflows are to Discovery Invest funds and over 1 000 intermediaries have written business with Discovery Invest. PruHealth The performance of PruHealth was pleasing, demonstrating a concerted focus on the quality of the business. In the period under review, significant progress was made, creating an important foundation for profitability and profitable growth. PruHealth continues to achieve strong leadership in the UK private medical insurance market, evidenced by the quantum of new business transacted and by the number of important awards the company continues to receive. Once again, PruHealth was awarded the Health Insurance Company of the Year in the UK for 2007. Having said this, considerable focus was placed on the key drivers of the quality and profitability of the business: * In addition to the quantum of new business transacted, the spread by distribution channel widened considerably with the direct-to-consumer and online channels generating over 30% of the new business result. The independent financial adviser channel achieved the remainder. This balance of distribution channel bodes well for the sustainability of new business going forward. * Considerable investment was made in risk management and managed care with broad successes achieved across the spectrum of healthcare cost containment. The effect was to reduce the loss ratio from calendar year 2006 to calendar year 2007 by 12%. The structures created are expected to continue this success going forward. * Considerable focus was placed on the management of lapses with the result that the lapse rate of PruHealth was 5% lower than that of the industry. Importantly, the link to Vitality has ensured positive lapse selection - on average, sicker members leave PruHealth rather than stay. * Given the increasing critical mass of the business, focus was placed on administrative efficiency, achieving a 40% reduction in per-member-operating- cost levels over the last year. It is expected that further efficiencies will be achieved in 2008 with the renewal cost per member, per month, projected to be 12% less than in 2007. The upfront nature of PruHealth`s acquisition costs and the fact that premium loading emerges in the longer term - because premiums are linked to both age and medical inflation - means that accounting profits will invariably be dampened by the rapid growth rate of the business. In this context, embedded value is an appropriate measure for the progress made. Embedded value results have been included for the first time in these results. Embedded value results have been included for the first time in these results. The total embedded value is estimated at R1 250 million and Discovery`s portion thereof is R625 million in value, comprising R282 million of value-in-force and R343 million of net asset value. PruProtect During the period under review, PruProtect - Discovery`s UK life assurance joint venture with the Prudential plc - was launched. PruProtect`s strategy mirrors that of Discovery Life, as it is based on the Vitality structure and enables dynamic pricing to be employed in the UK life assurance market. Built into this strategy is the expectation that premium levels will be competitive and risk-selection will be improved. While the company has just recently been launched, initial market feedback from the public has been positive and encouraging. A fundamental decision in the creation of PruProtect is the belief that the business requires a dedicated high-advice distribution channel in the broker market. To this end, PruProtect has begun rolling out a franchise distribution channel, wherein owner-managed branch offices are created that market PruProtect to independent financial advisers across the UK. The approach is similar to that used by Discovery Life in South Africa. It is still early in the evolution of the strategy and, by the end of the period, 11 franchises had been launched. Discovery is optimistic of its ability to build PruProtect successfully and to link it to PruHealth, achieving in the UK what Discovery has set out to achieve in South Africa. Destiny Health At the 2007 financial year results, Discovery announced that a strategic review of Destiny Health would be undertaken and an announcement of the final strategy would be made during the period. Whilst a clear strategy was decided upon, the complexity of its execution meant that it could only be communicated at this announcement. Destiny Health will be exiting the US retail insurance market and will continue to market its Vitality product on a stand-alone basis to employer groups and health plans. It is important to put this change of strategy into context: * While Destiny Health was making progress in its attempt to build a retail health insurance business, in 2004 and 2005 the Illinois health insurance market in which it operated became particularly difficult. Destiny Health found itself in a position of structural disadvantage, wherein the price it paid for the healthcare of its members was significantly higher than the price paid by its large competitors. This relative disadvantage continued to deteriorate over time. * In an attempt to address this, Destiny Health restructured its relationship with the Guardian Life Insurance Company of America, formed a strategic partnership with AEGON, reworked its healthcare network arrangements - and attempted to move into a number of markets wherein network discounts were competitive. * Despite the considerable progress made, the operating losses incurred for the financial year to June 2007 exceeded the Discovery Board`s parameters that were set for this strategy. In order to execute on this strategy, Destiny Health will be transferring its insured block of business to a well-respected health insurance carrier. The new carrier will assume operating the Destiny Health business from 1 April 2008 and, as policies reach their renewal date, they will be transferred to an appropriate replacement health plan. Destiny Health will continue to carry the risk of these members until the transfer has taken place. The approach is a favourable one for all stakeholders, protecting members and freeing Destiny up to pursue other strategies. While the Destiny Health staff in the US will be significantly reduced as a result of the change in focus, Discovery has estimated a provisional cost of $25 - 30 million to run off this business over the next 18 months. Going forward, Discovery is clear that while its execution in the US was not satisfactory and it suffered structural strategic disadvantage, its products, most notably Vitality, were particularly well received, were considered unique, and addressed many of the fundamental trends taking place in the US healthcare system. In particular, the shift to focusing on wellness and the uniqueness of the Vitality approach have meant that Discovery will continue to offer the Vitality programme in the US, but will do so on a stand-alone basis, by wrapping it around other health plans and employer groups. In just six months, ten employers consisting of just under 50 000 total subscribers have purchased Vitality on a stand-alone basis. Importantly, the approach plays to Discovery`s strengths by utilising the chassis already built in the US, as well as the unique research and development and data capabilities Discovery has established in South Africa, the UK and the US. It is also important that, unlike retail insurance, the approach is not capital intensive - and capital invested will be done so on a success basis as the business evolves. Prospects Discovery`s businesses remain well positioned for growth going forward without requiring additional capital. MI Hilkowitz A Gore Chairperson Chief Executive Officer 25 February 2008 Income statement for the six months ended 31 December 2007 Group Group Group Six months Six months Year ended ended ended
December December June 2007 2006 % 2007 R million Unaudited Unaudited change Audited Insurance premium 1 995 1 776 3 710 revenue Reinsurance premiums (361) (292) (593) Net insurance premiums 1 634 1 484 3 117 Fee income from 1 159 1 007 2 142 administration business Investment income 99 77 175 Net realised gains on financial instruments held as available-for- 147 40 195 sale Net fair value gains on financial instruments at fair value through 17 93 151 profit or loss Vitality income 387 355 721 Net income 3 443 3 056 6 501 Insurance benefits and (1 007) (952) (1 919) claims Insurance claims 275 261 475 recovered from reinsurers Net insurance benefits (732) (691) (1 444) and claims Acquisition costs (559) (509) (1 015) Marketing and (1 783) (1 441) (3 069) administration expenses Recovery of expenses 42 - 91 from reinsurer Transfer from assets/liabilities under insurance contracts 452 325 587 - change in assets 428 349 651 arising from insurance contracts - change in liabilities arising from insurance contracts 25 (23) (60) - change in liabilities arising from reinsurance contracts (1) (1) (4) Fair value adjustment to liabilities under investment contracts (20) (95) (141) Profit before BEE 843 645 31 1 510 expenses BEE expenses (11) (17) (34) Profit from operations 832 628 1 476 Finance costs (36) (11) (21) Foreign exchange profit 4 1 3 - unrealised Share of profit from - 2 - associate Profit before taxation 800 620 29 1 458 Taxation (259) (216) (385) Profit for the year 541 404 34 1 073 Attributable to: Equity holders 538 403 1 073 Minority interests 3 1 - 541 404 1 073 Earnings per share for profit attributable to the equity holders during the year (cents): - basic 99,5 75,3 32 200,0 - diluted 98,4 72,1 36 196,4 Balance sheet at 31 December 2007 Group Group December June
2007 2007 R million Unaudited Audited ASSETS Property and equipment 282 228 Intangible assets including deferred 172 113 acquisition costs Assets arising from insurance contracts 3 542 3 114 Investment in associate 1 1 Financial assets 4 384 4 056 - Equity securities 2 124 2 155 - Debt securities 281 313 - Money market 698 577 - Equity linked notes 173 123 - Loans and receivables including insurance 1 108 888 receivables Deferred income tax 106 80 Current income tax asset - 4 Reinsurance contracts 56 51 Cash and cash equivalents 804 996 Total assets 9 347 8 643 EQUITY Capital and reserves Share capital and share premium 1 427 1 393 Other reserves 801 912 Retained earnings 3 462 3 057 Total equity 5 690 5 362 LIABILITIES Liabilities arising from insurance contracts 788 742 Liabilities arising from reinsurance 17 20 contracts Financial liabilities - Investment contracts at fair value through 792 735 profit or loss - Borrowings at amortised cost 94 73 Deferred income tax 939 806 Deferred revenue 66 122 Provisions 61 48 Trade and other payables 881 735 Current income tax liabilities 19 - Total liabilities 3 657 3 281 Total equity and liabilities 9 347 8 643 Cash flow statement for the six months ended 31 December 2007 Group Group Group
Six months Six months Year ended ended ended December December June 2007 2006 2007
R million Unaudited Unaudited Audited Cash flow from operating 128 90 575 activities Cash generated by operations 256 181 799 Working capital changes (146) 32 (42) 110 213 757 Dividends received 23 17 43 Interest received 85 59 143 Finance costs (11) (12) (23) Taxation paid (79) (187) (345) Cash flow from investing (231) (388) (625) activities Net purchases of investments (97) (332) (456) Purchase of equipment (91) (37) (108) Purchase of intangible assets (43) (19) (61) Cash flow from financing (77) (144) (283) activities Proceeds from shares issued 35 44 48 Dividends paid to equity holders (131) (160) (239) Minority share buy-back (5) (3) (5) Increase/(repayment)of 24 (25) (87) borrowings Net decrease in cash and cash (180) (442) (333) equivalents Cash and cash equivalents at 996 1 322 1 322 beginning of year Effects of exchange rate changes (12) 2 7 on cash and cash equivalents Cash and cash equivalents at end 804 882 996 of year Statement of changes in equity for the six months ended 31 December 2007 Attributable to equity holders of the Company
Share Share- capital based and pay- Invest- Trans- share ment ment lation
R million premium reserve reserve reserve 31 December 2007 Balance at 1 July 2007 1 393 257 542 115 Issue of capital 34 - - - Share-based payments - 16 - - Unrealised gains on - - 10 - investments Capital gains tax on unrealised gains on investments - - (5) - Realised gains on investments transferred to income - - (147) - statement Capital gains tax on realised gains on investments - - 19 - Currency translation - - - (7) differences Transfer to hedging - - - - reserve Net profit for the - - - - period Dividends paid to - - - - equity holders Realised loss on minority share buy-back - - - - Balance at 31 December 1 427 273 419 108 2007 31 December 2006 Balance at 1 July 2006 1 348 205 319 112 Issue of capital 39 - - - Share-based payments - 27 - - Unrealised gains on - - 257 - investments Capital gains tax on unrealised gains on investments - - (34) - Realised gains on investments transferred to income - - (40) - statement Capital gains tax on realised gains on investments - - 3 - Currency translation - - - 3 differences Transfer from hedging - - - - reserve Net profit for the - - - - period Dividends paid to - - - - equity holders Realised loss on minority share buy-back - - - - Balance at 31 December 1 387 232 505 115 2006 Statement of changes in equity for the six months ended 31 December 2007 Attributable to equity holders of the Company
Hedging Retained Minority
R million reserve earnings interest Total 31 December 2007 Balance at 1 July 2007 (2) 3 057 - 5 362 Issue of capital - - (3) 31 Share-based payments - - - 16 Unrealised gains on - - - 10 investments Capital gains tax on unrealised gains on investments - - - (5) Realised gains on investments transferred to income - - - (147) statement Capital gains tax on realised gains on investments - - - 19 Currency translation - - - (7) differences Transfer to hedging 3 - - 3 reserve Net profit for the - 538 3 541 period Dividends paid to - (131) - (131) equity holders Realised loss on minority share buy-back - (2) - (2) Balance at 31 December 1 3 462 - 5 690 2007 31 December 2006 Balance at 1 July 2006 4 2 224 - 4 212 Issue of capital - - (1) 38 Share-based payments - - - 27 Unrealised gains on - - - 257 investments Capital gains tax on unrealised gains on investments - - - (34) Realised gains on investments transferred to income - - - (40) statement Capital gains tax on realised gains on investments - - - 3 Currency translation - - - 3 difference Transfer from hedging (7) - - (7) reserve Net profit for the - 403 1 404 period Dividends paid to - (155) - (155) equity holders Realised loss on minority share buy-back - (1) - (1) Balance at 31 December (3) 2 471 - 4 707 2006 Segmental information for the six months ended 31 December 2007 Health United South States United
of R million Africa America Kingdom 31 December 2007 New business annualised premium income* 1 265 209 248 Gross inflows under 9 977 520 431 management* Income statement Insurance premium revenue 7 347 215 Reinsurance premiums (1) (33) (45) Net insurance premiums 6 314 170 Fee income from administration business 1 137 - - Investment income 24 4 10 Net realised gains on financial instruments held as available-for- - - - sale Net fair value gains on financial instruments at fair value through profit or - - - loss Vitality income - - - Net income 1 167 318 180 Insurance benefits and (7) (330) (140) claims Insurance claims recovered from reinsurers 2 25 25 Net insurance benefits (5) (305) (115) and claims Acquisition costs - (16) (23) Marketing and administration expenses (752) (108) (153) Recovery of expenses from reinsurer - - 41 Transfer from assets/liabilities under insurance contracts - change in assets arising from insurance contracts - - - - change in liabilities arising from insurance contracts 3 35 (3) - change in liabilities arising from reinsurance - - - contracts Fair value adjustment to liabilities under investment - - - contracts Profit/(loss) before BEE 413 (76) (73) expenses BEE expenses Profit from operations Finance costs Foreign exchange profit - unrealised Profit before taxation Taxation Profit for the year 31 December 2006 New business annualised premium income* 1 233 474 198 Gross inflows under management* 8 905 643 218 Income statement Insurance premium revenue 75 485 109 Reinsurance premiums (1) (35) (3) Net insurance premiums 74 450 106 Fee income from administration business 1 006 - - Investment income 24 6 3 Net realised gains on financial instruments held as available-for- - - - sale Net fair value gains on financial instruments at fair value through profit or loss - - - Vitality income - - - Net income 1 104 456 109 Insurance benefits and (59) (363) (84) claims Insurance claims recovered from reinsurers 1 40 - Net insurance benefits and claims (58) (323) (84) Acquisition costs - (22) (14) Marketing and administration expenses (681) (130) (120) Transfer from assets/liabilities under insurance contracts - change in assets arising from insurance contracts - - - - change in liabilities arising from insurance contracts 1 (8) (11) - change in liabilities arising from reinsurance - - - contracts Fair value adjustment to liabilities under investment - - - contracts Profit/(loss) before BEE 366 (27) (120) expenses BEE expenses Profit from operations Finance costs Foreign exchange profit - unrealised Share of profit from associate Profit before taxation Taxation Profit for the year Life
South United R million Africa Kingdom Vitality Holdings Total 31 December 2007 New business annualised premium income* 627 5 46 - 2 400 Gross inflows under 1 446 3 387 - 12 management* 764 Income statement Insurance premium 1 424 2 - - 1 995 revenue Reinsurance premiums (282) - - - (361) Net insurance premiums 1 142 2 - - 1 634 Fee income from administration business 22 - - - 1 159 Investment income 50 - 10 1 99 Net realised gains on financial instruments held as available-for- 147 - - - 147 sale Net fair value gains on financial instruments at fair value through profit or 17 - - - 17 loss Vitality income - - 387 - 387 Net income 1 378 2 397 1 3 443 Insurance benefits and (530) - - - (1 claims 007) Insurance claims recovered from reinsurers 223 - - - 275 Net insurance benefits (307) - - - (732) and claims Acquisition costs (490) (4) (26) - (559) Marketing and administration expenses (374) (38) (340) (18) (1 783) Recovery of expenses from reinsurer - 1 - - 42 Transfer from assets/liabilities under insurance contracts - change in assets arising from insurance contracts 428 - - - 428 - change in liabilities arising from insurance (7) (3) - - 25 contracts - change in liabilities arising from reinsurance (1) - - - (1) contracts Fair value adjustment to liabilities under investment (20) - - - (20) contracts Profit/(loss) before 607 (42) 31 (17) 843 BEE expenses BEE expenses (11) Profit from operations 832 Finance costs (36) Foreign exchange profit - unrealised 4 Profit before taxation 800 Taxation (259) Profit for the year 541 31 December 2006 New business annualised premium income* 480 - 46 - 2 431 Gross inflows under management* 1 107 - 355 - 11 228 Income statement Insurance premium 1 107 - - - 1 776 revenue Reinsurance premiums (253) - - - (292) Net insurance premiums 854 - - - 1 484 Fee income from administration business 1 - - - 1 007 Investment income 36 - 6 2 77 Net realised gains on financial instruments held as available-for- 40 - - - 40 sale Net fair value gains on financial instruments at fair value through profit or loss 93 - - - 93 Vitality income - - 355 - 355 Net income 1 024 - 361 2 3 056 Insurance benefits and (446) - - - (952) claims Insurance claims recovered from reinsurers 220 - - - 261 Net insurance benefits and claims (226) - - - (691) Acquisition costs (443) - (30) - (509) Marketing and administration expenses (211) - (299) - (1 441) Transfer from assets/liabilities under insurance contracts - change in assets arising from insurance contracts 349 - - - 349 - change in liabilities arising from insurance (5) - - - (23) contracts - change in liabilities arising from reinsurance (1) - - - (1) contracts Fair value adjustment to liabilities under investment (95) - - - (95) contracts Profit/(loss) before 392 - 32 2 645 BEE expenses BEE expenses (17) Profit from operations 628 Finance costs (11) Foreign exchange profit 1 - unrealised Share of profit from 2 associate Profit before taxation 620 Taxation (216) Profit for the year 404 *New business annualised premium income and gross inflows under management include flows of the schemes Discovery administers and 100% of the business conducted together with its joint venture partners. Embedded value statement for the six months ended 31 December 2007 The embedded value of Discovery at 31 December 2007 is calculated as the sum of the following components: * the excess assets over liabilities at the valuation date (i.e. shareholders` funds); and * the value of in-force business at the valuation date (less an allowance for the cost of capital and secondary tax on companies (STC)). Assumptions underlying the projection of in-force business were based on the results of recent experience investigations. An abridged embedded value statement is shown below. The complete embedded value statement is available on our website at www.discovery.co.za. 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 for the six months ended 31 December 2007. A copy of the auditors` unqualified report is available for inspection at the company`s registered office. Table 1: Group embedded value 31 December % 30 June
2007 R million 2007(1) 2006 Change Restated Shareholders` funds 5 690 4 707 21 5 362 Adjustment to shareholders` funds from published basis(2) (3 318) (2 394) (2 833) Adjusted net worth 2 372 2 313 2 529 Run-down costs for Destiny (300) - - Health(3) Value of in-force business before cost of capital 13 648 10 956 11 776 Cost of capital (60) (132) (32) Cost of STC (310) (293) (275) PruHealth value of in-force after cost of capital and STC at 30 - - 168 June 2007(4) Discovery Holdings embedded 15 350 12 844 20 14 166 value Number of shares (millions) 542,7 537,4 538,7 Embedded value per share R28,28 R23,90 18 R26,30 Diluted number of shares 574,7 559,4 559,7 (millions) Diluted embedded value per R27,64 R23,29 19 R25,64 share (1) The term of the Health and Vitality projection has been increased from 10 years to 20 years. The comparative figures at 31 December 2006 and 30 June 2007 have also been calculated assuming a 20 year term. (2) The published Shareholders` funds has been adjusted to eliminate assets under insurance contracts and deferred acquisition costs at December 2007 of R3 287 million (December 2006: R2 394 million; June 2007: R2 813 million) and deferred acquisition cost asset in respect of PruHealth of R31 million (June 2007: R20 million ) (3) For Destiny Health, no published value has been placed on the current in-force business. An allowance has been made for the expected costs of the run-down of the existing Destiny Health business over the next 18 months. (4) The PruHealth business has grown and is expected to make a contribution to future profits for Discovery. The profitability indicators for the business are clearer and more predictable, and Discovery`s share of the embedded value and value of new business are included in the embedded value for the group. The 30 June 2007 embedded value has been restated to include Discovery`s 50% share of the PruHealth value of in-force after cost of capital and STC. No adjustment has been made to the December 2006 embedded value due to the relatively small size of the PruHealth book of business at that date. Table 2: Value of in-force business at 31 December 2007 Value Value before after cost cost of capital Cost of Cost of of capital R million and STC capital STC and STC Health and 6 521 - (148) 6 373 Vitality Life(1) 6 817 (39) (155) 6 623 PruHealth(2) 310 (21) (7) 282 Total 13 648 (60) (310) 13 278 (1) Included in the Life value of in-force is R6 million in respect of investment management services provided on off- balance sheet investment business. The Life cost of capital is based on a statutory capital adequacy requirement at December 2007 of R183 million. (June 2007: R145 million). (2) The values shown for PruHealth reflect Discovery`s 50% shareholding in PruHealth. Table 3: Group embedded value earnings Six months ended Year ended 31 31 December 30 June December 2007
R million 2007 2006 Restated Embedded value at 15 350 12 844 14 166 end of period Less: Embedded (14 166) (10 587) (10 587) value at beginning of period Increase in 1 184 2 257 3 579 embedded value Net issue of (31) (38) (45) capital Dividends Paid 131 155 239 Minority share buy- 5 1 1 back Transfer to hedging (3) 7 6 reserve Extension of modelling term for Health and Vitality from 10 years to 20 - (1 094) (1 031) years(1) Embedded value 1 286 1 288 2 749 earnings Annualised return on opening embedded value (including run-down 19.0% 25.8% 26.0% costs for Destiny Health) Annualised return on opening embedded value (excluding run-down 23.6% 25.8% 26.0% costs for Destiny Health) (1) The embedded value earnings for June 2007 and December 2006 have been adjusted to exclude the impact of the extension of the modelling term for Health and Vitality from 10 to 20 years. Table 4: Components of Group embedded value earnings Six months ended Year ended
31 December 31 December % 30 June 2007 R million 2007 2006 change Restated Total profit from 444 371 20 742 new business (at point of sale) Profit from existing business * Expected return 674 502 1 030 * Change in 238 (52) (13) methodology and assumptions(1) * Experience 415 357 645 variances(2) Reversal of Destiny Health opening value of in-force - - (5) Inclusion of - - 168 PruHealth value of in-force Other initiative (247) (112) (353) costs(3) Acquisition (20) (49) (27) costs(4) Adjustment for minority interest in Destiny Health - (1) - Adjustment for Guardian profit share in Destiny Health - 15 - Foreign exchange (13) 2 3 rate movements Cost of STC 6 (27) 23 Return on 89 282 536 shareholders` funds Embedded value earnings excluding run-down costs for 1 586 1 288 23 2 749 Destiny Health Run-down costs for (300) - - Destiny Health Embedded value earnings including run-down costs for 1 286 1 288 (0) 2 749 Destiny Health (1) Included in the methodology and assumptions change item are amounts of R328 million in respect of Health and Vitality and negative R90 million in respect of Life. For PruHealth, there are no basis changes as the value at 30 June 2007 has been calculated using company experience between July 2007 and December 2007 and the December 2007 basis thereafter. (2) Included in the experience variance item are amounts of R324 million in respect of Health and Vitality, R101 million in respect of Life and negative R10 million in respect of PruHealth. (3) For December 2006 and June 2007, the other initiative costs reflect the expenses relating to the establishment of PruHealth. For June 2007 and December 2007, this also includes the expenses relating to the establishment and support of PruProtect, Discovery Invest and Destiny Health. 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. The split between PruHealth, PruProtect and Destiny Health is shown in the segmental income statement. (4) 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 thus the costs are excluded. Table 5: Embedded value of new business Six months ended % Year ended 31 December 31 December change 30 June 2007 R million 2007 2006 Restated Health and Vitality Net profit from 79 65 22 126 new business at point of sale New business 449 370 21 1 011 annualised premium income Life Net profit from 344 346 (1) 616 new business at point of sale New business 435 359 21 696 annualised premium income Annualised profit 9,6% 10,7% 10,1% margin PruHealth(1) Net profit from 21 - - new business at point of sale New business 94 - - annualised premium income Annualised profit 2,6% - - margin (1) The values shown for PruHealth reflect Discovery`s 50% shareholding in PruHealth. Review of Group results Gross inflows under management increased 14% for the six months ended 31 December 2007. Gross inflows under management includes flows of the schemes Discovery administers and 100% of the business conducted together with its joint venture partners. Gross inflows under management December December % R million 2007 2006 change Discovery Health 9 977 8 905 12 Discovery Life 1 446 1 107 31 Discovery Vitality 387 355 9 Destiny Health 520 643 (19) PruHealth 431 218 98 PruProtect 3 - Gross inflows under management 12 764 11 228 14 Less: collected on behalf of third (9 223) (8 090) 14 parties Discovery Health (8 833) (7 824) Destiny Health (173) (157) PruHealth (216) (109) PruProtect (1) - Gross income of Group 3 541 3 138 13 Earnings The following table shows the main components of the increase in Group profit from operations excluding investment income for the six months ended 31 December: Earnings source December December % R million 2007 2006 change Discovery Health 389 342 14 Discovery Life 479 327 46 Discovery Vitality 21 26 (19) Destiny Health (80) (33) (142) PruHealth (83) (123) 33 Operating profit before new venture 726 539 35 and unbundling costs Discovery Invest (66) (9) PruProtect (42) - - Group operating profit before investment income and unbundling costs 618 530 17 Unbundling costs (18) - - Investment income 99 77 Realised gains on shareholders` 147 40 portfolios Investment returns on assets backing 17 93 policyholder liabilities Fair value adjustment to liabilities (20) (95) under investment contracts Profit from operations before BEE 843 645 31 expenses Headline earnings The reconciliation between earnings and headline earnings is shown below: December December % R million 2007 2006 change Net profit attributable to equity 538 403 33 shareholders Adjusted for: - realised profit on available-for- (128) (37) sale investments net of CGT Headline earnings 410 366 12 BEE expenses 11 17 Headline earnings before BEE 421 383 10 transaction Headline earnings per share before BEE transaction (cents): - undiluted 77,9 71,6 9 - diluted 77,0 70,1 10 Headline earnings per share (cents): - undiluted 75,8 68,4 11 - diluted 74,9 65,9 14 Weighted number of shares in issue 540 929 535 202 (000`s) Diluted weighted number of shares 547 095 591 953 (000`s) Taxation All South African entities are in a tax paying position. South African income tax has been provided at 29% and secondary tax on companies at 10% in the financial statements and embedded value statements. The results for the full financial year will measure income tax at 28%. Destiny operations have significant tax losses but no deferred tax asset has been accounted for on the foreign losses incurred in the US. Discovery obtains tax relief on the PruHealth and PruProtect start-up losses through Prudential Assurance Company Limited ("Prudential") in the UK. R26 million has been included in finance charges relating to a settlement discount on early payment by Prudential for UK tax losses ceded to them. Investments Equity investments have decreased due to the realisation of equity investments and investment into money market investments. Balance sheet The increase in the assets arising from insurance contracts of R441 million is as a result of profitable new business written by Discovery Life. 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. Accounting policies The interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as well as the South African Companies Act 61 of 1973, as amended, and are consistent with the accounting policies applied in the annual report and the corresponding prior year period. These abridged financial statements comply with IAS 34. Share-based payments The issue of 38.7 million shares by Discovery in terms of its BEE transaction in 2005 has been accounted for in terms of IFRS2. These shares are not accounted for as issued in the consolidated accounts of Discovery but rather as a share option transaction. These shares have been considered in the calculation of diluted HEPS and diluted EPS. The BEE transaction has resulted in a charge to the income statement of R11 million in the six month period ended 31 December 2007 (2006: R17 million) in accordance with the requirements of IFRS 2. An additional R19 million (2006: R26 million) in respect of options granted under employee share incentive schemes has been expensed in the income statement for the year in accordance with the requirements of IFRS 2. Directorate Mr AL Owen was appointed as a non-executive director of the board of Discovery with effect from 6 December 2007. With effect from 1 January 2008, Mr P Cooper and Ms T Slabbert were appointed as non-executive directors of the board of Discovery Mr LL Dippenaar, Mr PK Harris and Mr JP Burger resigned as non-executive directors of the board of Discovery with effect from 31 December 2007. Restatement of comparatives An error was identified in the calculation of new business annualised premium income for PruHealth. The comparative results for previous reporting periods, reflecting 100% of the new business annualised premium income are: Six months ended GBP R million million 31 December 2004 0,4 4,5 30 June 2005 2,6 29,3 31 December 2005 6,3 72,2 30 June 2006 13,7 156,2 31 December 2006 14,3 197,9 30 June 2007 15,6 217,7 Dividend policy and Capital 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 were R184.0 million (2006: R126.4 million) and were covered 7.4 times (2006: 12.4 times). Dividend Declaration: The board has declared a cash dividend of 21,5 cents per share. The salient dates are as follows: - Last date to trade "cum" dividend Thursday, 13 March 2008 - Date trading commences "ex" dividend Friday, 14 March 2008 - Record date Thursday, 20 March 2008 - Date of payment Tuesday, 25 March 2008 Share certificates may not be dematerialised or rematerialised between Friday, 14 March 2008 and Thursday, 20 March 2008, both days inclusive. Transfer secretaries Computershare Investor Services 2004 (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 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, JP Burger****, P Cooper***, LL Dippenaar****, Dr NJ Dlamini, SB Epstein (USA), PK Harris****, NS Koopowitz*, Dr TV Maphai, HP Mayers*, AL Owen (UK)**, A Pollard*, JM Robertson* (CIO), SE Sebotsa, T Slabbert***, B Swartzberg*, SV Zilwa *Executive **Appointed 6 December 2007 ***Appointed 1 January 2008 **** Resigned 31 December 2007 Date: 26/02/2008 08:01:00 Supplied by www.sharenet.co.za Produced by the JSE SENS Department. 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