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DSY - Discovery - Unaudited Interim Results And Cash Dividend Declaration For

Release Date: 19/02/2009 10:00
Code(s): DSY
Wrap Text

DSY - Discovery - Unaudited Interim Results And Cash Dividend Declaration For The Six Months Ended 31 December 2008 Discovery Holdings Limited (Incorporated in the Republic of South Africa) (Registration number: 1999/007789/06) JSE share code: DSY ISIN: ZAE000022331 ("Discovery") UNAUDITED INTERIM RESULTS AND CASH DIVIDEND DECLARATION FOR THE SIX MONTHS ENDED 31 DECEMBER 2008 Operating profit from established businesses +31% to R1 052 million New business API excluding Destiny +28% to R2 798 million Headline earnings increase 19% to R489 million Diluted embedded value per share +20% to R36.17 Interim dividend of 25.5 cents per share Introduction The results under review are for the first half of Discovery`s 2009 financial year. During this period, Discovery performed exceptionally well. Discovery`s business model is based on organic growth driven by innovation to meet clients` needs. Today, Discovery stands for financial strength and product excellence. This placed the Group in a strong position during difficult economic conditions where consumer behaviour is often driven by caution, a flight to quality and a pursuit of value for money. Combined with an intense focus on driving excellence in all of its businesses, this has led to increased financial strength, continued innovation, and record levels of new business. Discovery also used the opportunity to focus on its capital base, increasing its capabilities and flexibility, positioning it well for further growth and additional opportunities. Operating profit of established businesses - Discovery Health, Discovery Life, Discovery Vitality and PruHealth - increased 31% to R1.1 billion. For all businesses, operating profit, including Discovery Invest, PruProtect and the wind-down of Destiny Health Inc., increased by 21% to R746 million. Record levels of new business Discovery`s strong conviction that innovation is a fundamental strategy that determines success, ensured that despite the economic conditions, the businesses continued growing. This has enabled the Group to create further product differentiation and excellence in markets that are often commoditised and highly price-sensitive. A wide range of new products and structures were rolled out across all of Discovery`s businesses. For example, Discovery Life launched the Cover Integrator that significantly reduces the cost of life cover, while Discovery Health launched the Delta Plans, thereby bringing down the cost of health cover for those members who use its hospital network. Vitality launched the HealthyFoodTrade Mark benefit in partnership with Pick n Pay that saves members up to 25% on HealthyFoodTrade Mark products. In the UK, PruHealth significantly enhanced its Vitality offering, and PruProtect restructured its life insurance offering significantly to ensure enhanced price competitiveness. The effect of this approach generated record levels of new business, and assisted in strengthening the Group`s distribution channels. New business annualised premium income increased by 28% from R2.2 billion to R2.8 billion (excluding Destiny Health). Capital strength and structure Discovery`s approach to capital management is based on prudence and a commitment to conservative gearing levels. The Group focused on enhancing its capital strength and increasing its flexibility. In particular, within Discovery Life, considerable work was done with Discovery Life`s R4.5 billion negative reserve. This asset is of considerable quality with substantial margins and returns that are consistent and more than the Group`s risk discount rate. However, it lacks flexibility and as it grows, it constitutes a concentration of resources. Two distinct structural changes were made: - The first was to convert R750 million of the negative reserve into cash through reinsurance and, in the process, transfer risk from the Discovery Life balance sheet, while retaining the upside margins of the negative reserve. - The second, the transfer of the lapse risk of up to a further R1 billion of the negative reserve through reinsurance created the opportunity for Discovery Life to raise R1 billion of cash by selling retail investment products that can be backed by the remaining guaranteed negative reserve. This enables Discovery Invest to offer uniquely competitive investment products. The combination of these initiatives was created to enable Discovery to realise up to R1.8 billion in cash and transfer risk while maintaining margins. Overall, Discovery`s financial position is excellent: the Group has no debt; Discovery Life covers its capital adequacy requirement by 6.4 times; the Discovery Health Medical Scheme`s solvency reserves amount to more than R5.2 billion thereby exceeding the 25% statutory level, and in the UK, PruHealth covers its minimum capital requirements 2.2 times. Discovery Health Discovery Health`s fundamental purpose is to provide affordable access to quality healthcare on a sustainable basis. The company`s performance over the period exceeded expectation. Given its size and social relevance, there can be no compromise in operating and building Discovery Health. The results illustrate that across every aspect of the business, its performance was excellent. In addition, the scale and sophistication of its assets and positioning will enable it to assist in building a robust healthcare system, not only for its members, but for broader society. Through Discovery Health`s network, relationships with healthcare professionals and hospitals, as well as further research and development, healthcare costs were kept under control, and benefit choices to members increased further. Notably, despite the difficult financial environment, new business increased to its highest level in the company`s history. An important barometer of success and a counter-intuitive result to the current economic climate, less than 3% of members reduced their benefit choices, while 97% of members opted to stay at or enhance their current benefit choice. An important milestone has been achieved with the Discovery Health Medical Scheme crossing the 25% statutory reserve level with more than R5.2 billion reserves. From an inter-structural perspective, Discovery Health achieved significant efficiencies while providing the most consistent service in the company`s history. This positions Discovery Health uniquely from a competitive standpoint. Operating profit grew by 22% to R475 million, while members grew by 4% to 2.1 million lives. The lapse rate remained at less than 4%. Discovery Life Discovery Life`s performance was pleasing and exceeded expectation. The company is committed to leadership in the life insurance industry by developing a business of unique quality that meets clients` needs. The company`s methodology focuses strongly on product distribution and financial excellence. The results illustrate this with new business (including Discovery Invest) growing by 58% to R993 million and operating profit growing by 29% to R618 million. Nearly all strategies followed during the period were successful: the roll- out of the Cover Integrator and LifeTime benefits assisted in the growth of new business to record levels, while in terms of distribution, Discovery Life`s agency force, Discovery Financial Consultants, continued to grow with agents` production significantly more than industry standards. The restructuring of the negative reserve created considerable capital robustness and flexibility, enabling the company to continue its growth going forward without recourse to additional shareholder funding. This also provides an open market check on the value of the negative reserve, embedded value and the assumptions underlying them. The business transacted has been of exceptional quality resulting in positive experience variances over the period, notably, the claims loss ratio continues to exceed expectation and is dramatically below industry levels. This shows the sound risk management strategies applied and the benefits of integration with Vitality. Although the lapse rate did increase over the period, reflecting the tough economic conditions, it was not significantly above expectations. Considerable work has been done on conservation and the company`s embedded value assumptions have been strengthened appropriately. Discovery is committed to building a life assurer of considerable scale and quality and, to this end, has invested in excess of R2 billion into Discovery Life since inception. The embedded value generated reflects a return on capital of 24%. Given its product, capital and distribution strength, Discovery Life is well positioned going forward. Discovery Invest Discovery Invest`s performance was in line with expectations. Clearly, given market conditions, the environment in which Discovery Invest operates is a difficult one and, in this context, expectations have to be moderated. Having said this, Discovery Invest`s approach of harnessing the market`s asset management sophistication and choice of open architecture, together with products that protect investors from volatility and downside, have resonated well. During this period Discovery Invest was focused on building its capabilities and products to ensure that it is well positioned as market conditions improve. Distribution channels continue to grow with more than 1 600 brokers transacting business for Discovery Invest. Significant resources were put toward new product technology and online capabilities to ensure competitiveness. Many of these initiatives will be rolled out in the next quarter. Vitality and DiscoveryCard Vitality`s performance exceeded expectation in terms of its strategic role. Its foundational purpose of making people healthier and providing a platform for all of Discovery`s businesses, is well entrenched. The usage of its wide range of benefits increased substantially over the period, indicating a strong engagement of Discovery`s clients in their wellness and in the Group`s products. Over the last two years, considerable work has been done on the behavioural economics and incentives required to achieve the appropriate behavioural change. During the period, Vitality Age, Vitality Interactive and Personal Pathways were rolled out in the UK and will be rolled out in South Africa during the year. Vitality provides an excellent foundation for Discovery`s future competitiveness, risk management and integration capabilities. A fundamental gap in the Vitality strategy has been the need to focus on nutrition. The new HealthyFoodTrade Mark Benefit was developed to address this and is one of the largest Vitality initiatives to date. It involves international experts in the creation of its methodology and algorithms and importantly, will be a key product differentiator for Vitality and Discovery. Vitality is particularly well placed going forward. DiscoveryCard`s performance over the period was pleasing. Clearly, given the difficult economic environment brought about by the credit crisis, and the impact of the National Credit Act, the environment in which DiscoveryCard operates was a difficult one. DiscoveryCard`s focus was therefore on the quality of its book, careful risk management, and developing further product offerings. The effect of these strategies has been positive with the credit book performing pleasingly and a continued steady growth in the number of cards being issued. DiscoveryCard`s link to the HealthyFoodTrade Mark Benefit will provide added impetus to its potential going forward. PruHealth PruHealth, Discovery`s joint venture with the Prudential plc, performed well and is on track to achieve profitability during the calendar year. From a strategic perspective, in addition to profitability, the quality and scale of PruHealth is of considerable importance to Discovery, as it forms the foundation for the Discovery business model in the UK. Vitality and the integration of PruProtect and PruHealth will provide the same product, risk management and integration advantages as in the South African market. This is particularly important, given the level of commoditisation and price- competitiveness. To this end, there is considerable focus on the quality of PruHealth and its competitive position. Despite the difficult economic environment in the UK, PruHealth made substantial progress, with considerable new business transacted, and improvements in the claims loss ratio and expense levels. Lapse rates, particularly for SMEs and corporates, remain particularly low while levels of new business remain in line with expectation. New business grew by 9% to R271 million. An important development during the period was the revision of the Vitality Gym Benefit Structure. Vitality`s benefits are traditionally tiered by Vitality status, enabling members to enjoy richer benefits the higher their status level. The PruHealth Gym Benefit was structured on a usage basis where members paid lower monthly gym subscriptions based on their usage. While this is intellectually consistent with the Vitality Behaviour Model, it created considerable opportunities for adverse selection - members purchasing PruHealth products to gain access to the gyms, simply because they were already high gym users. During the early part of 2008 it became evident that a considerable number of individual members acquired online had joined PruHealth only for this reason. The incentives created by the usage model also resulted in a dramatic increase in gym usage among existing members. The analysis indicated that while this activity supported a very low level of health claims, it created considerable Vitality subsidy costs in the short term. It was felt that while a long-term argument for keeping these members on the existing gym structure could be made, it was necessary to secure the business model from adverse selection and to ensure that products meet the right customer need. PruHealth therefore followed a prudent approach to change the gym benefit to a status-based model, despite the fact that a proportion of members were likely to lapse. The decision took place during the period under review and has been rolled out successfully. A considerable number of those members lapsed, as expected, and therefore despite high volumes of new business, the total number of members covered by PruHealth has increased at a lower rate than what would otherwise have been the case. Importantly, the short-term cost of this adverse selection amounted to GBP3 million and reversing this out of the operating loss of PruHealth illustrates more accurately the company`s progress to profitability. The quality of the business and its leadership position in the UK market, places PruHealth in a positive position going forward. PruProtect PruProtect, Discovery`s UK life assurance joint venture with the Prudential plc, had a particularly active and pleasing period. At the previous announcement, PruProtect`s performance was significantly below expectation, and in particular, the distribution channels were poorly developed. During the period under review, the company particularly focused on: i. Improving the franchise distribution channel with more efficient incentive and management structures. By January 2009, there were 12 franchises with 91 account managers actively deployed across the UK. Early signs of traction are good. The company focused on building a telephone account management system which is the more traditional approach to distribution in the UK. PruProtect has also been working actively to secure contracts with a variety of multi- tier and single-tier organisations that will be serviced by these two distribution channels. The combination of these distribution channels will provide a significant distribution capability for PruProtect. ii. The product structure was relaunched during November 2008. While Discovery`s Vitality and Life Assurance technology resonated well in the UK market, the concept of increasing premium rates during the term of the policy was difficult to market. To overcome this, Vitality was streamlined with premium rates declining with health engagement. Early indications are that this has been well received by the UK market. While many of these strategies are in their infancy, early signs are particularly positive. The application count has increased from 25 applications per day at the start of the period to 75 applications at the end. From a financial perspective, PruProtect`s operating losses are largely in line with expectation. Destiny The wind-down of Destiny Health has progressed in line with budget. The membership base has decreased from 33 282 in March 2008 to 3 000 in February 2009. Discovery stated that the wind-down would cost approximately US$30 million and the company is on target to achieve this. In addition to the financial rigour applied, Discovery is pleased that service levels to members, and engagement with our partners and regulators have been performed in such a way as to maintain our reputation. Discovery continues to support the existing Vitality business and to explore opportunities in this regard. MI Hilkowitz A Gore Chairperson Chief Executive Officer Income statement for the six months ended 31 December 2008 Group Group Group Six months Six months Year
ended ended ended December December June 2008 2007 % 2008 R million Unaudited Unaudited change Audited Insurance premium 2 535 1 995 4 293 revenue Reinsurance premiums (384) (361) (780) Net insurance premiums 2 151 1 634 3 513 Fee income from 1 356 1 159 2 532 administration business Receipt arising from 750 - - reinsurance contract Investment income 115 99 210 Net realised gains on 62 147 252 financial instruments held as available-for- sale Net fair value (93) 17 25 (losses)/gains on financial instruments at fair value through profit or loss Vitality income 443 387 791 Net income 4 784 3 443 7 323 Claims and policyholder (1 238) (1 007) (2 156) benefits Insurance claims 362 275 601 recovered from reinsurers Net claims and (876) (732) (1 555) policyholder benefits Acquisition costs (753) (559) (1 132) Marketing and (2 116) (1 783) (3 784) administration expenses Recovery of expenses 101 42 148 from reinsurers Transfer from (337) 452 749 assets/liabilities under insurance contracts - change in assets 584 428 806 arising from insurance contracts - change in liabilities (27) - - arising from insurance contracts - Premium deficiency reserve - change in liabilities (120) 25 (55) arising from insurance contracts - Other - change in liabilities (774) (1) (2) arising from reinsurance contracts Fair value adjustment 59 (20) (14) to liabilities under investment contracts Profit before 862 843 2 1 735 impairment and BEE expenses Impairment of financial (63) - - instruments held as available-for-sale BEE expenses (7) (11) (23) Profit from operations 792 832 (5) 1 712 Finance costs (9) (36) (52) Foreign exchange profit - 4 4 - unrealised Profit before taxation 783 800 (2) 1 664 Taxation (282) (259) (506) Profit for the period 501 541 (7) 1 158 Attributable to: Equity holders 490 538 1 156 Minority interests 11 3 2 501 541 1 158 Earnings per share for profit attributable to the equity holders during the period (cents): - basic 89.3 99.5 (10) 212.9 - diluted 88.7 98.4 (10) 211.1 Balance sheet at 31 December 2008 Group Group December June 2008 2008 R million Unaudited Audited ASSETS Property and equipment 231 291 Intangible assets including deferred 414 243 acquisition costs Assets arising from insurance contracts 4 504 3 920 Investment in associate 1 1 Financial assets 5 567 5 299 - Equity securities 1 839 2 055 - Equity linked notes 901 459 - Debt securities 247 173 - Inflation linked securities 64 65 - Money market 864 1 034 - Derivatives 58 35 - Loans and receivables including insurance 1 594 1 478 receivables Deferred income tax 181 128 Current income tax asset 36 - Reinsurance contracts 115 99 Cash and cash equivalents 1 507 812 Total assets 12 556 10 793 EQUITY Capital and reserves Share capital and share premium 1 579 1 468 Other reserves 524 721 Retained earnings 4 338 3 975 Total equity 6 441 6 164 LIABILITIES Liabilities arising from insurance contracts 1 358 1 061 Liabilities arising from reinsurance 785 15 contracts Financial liabilities 1 495 1 273 - Investment contracts at fair value 1 442 1 230 through profit or loss - Borrowings at amortised cost 47 37 - Derivatives 6 6 Deferred income tax 1 209 1 031 Deferred revenue 76 70 Provisions 67 54 Trade and other payables 1 125 1 116 Current income tax liabilities - 9 Total liabilities 6 115 4 629 Total equity and liabilities 12 556 10 793 Headline earnings for the six months ended 31 December 2008 Group Group Group Six months Six months Year ended ended ended December December June
2008 2007 % 2008 R million Unaudited Unaudited change Audited Headline earnings per share (cents): - undiluted 89.2 75.8 18 172.0 - diluted 88.6 74.9 18 170.6 The reconciliation between earnings and headline earnings is shown below: Net profit attributable 490 538 1 156 to equity shareholders Adjusted for: - realised profit on (55) (128) (222) available-for-sale investments net of CGT - impairment on 54 - - available-for-sale investments net of CGT Headline earnings 489 410 19 934 Weighted number of 548 060 540 929 1 543 016 shares in issue (000`s) Diluted weighted number 551 819 547 095 1 547 530 of shares (000`s) Cash flow statement for the six months ended 31 December 2008 Group Group Group
Six months Six months Year ended ended ended December December June 2008 2007 2008
R million Unaudited Unaudited Audited Cash flow from operating activities 458 61 385 Cash generated by operations 1 184 256 972 Policyholder net investments (652) (67) (638) Working capital changes (4) (146) 131 528 43 465 Dividends received 27 23 33 Interest received 107 85 194 Interest paid (9) (11) (25) Taxation paid (195) (79) (282) Cash flow from investing activities 264 (164) (269) Net sales/(purchases) of 328 (30) (76) investments Net sales/(purchases) of equipment 30 (91) (132) Purchase of intangible assets (94) (43) (66) Decrease in loans receivable - - 5 Cash flow from financing activities (17) (77) (334) Proceeds from issuance of ordinary 111 35 50 shares Dividends paid to equity holders (134) (131) (236) Minority share buy-back (4) (5) (8) Loan to share trust participants - - (109) Increase/(repayment) of borrowings 10 24 (31) Net increase/(decrease) in cash and 705 (180) (218) cash equivalents Cash and cash equivalents at 812 996 996 beginning of the year Exchange gains on cash and cash (10) (12) 34 equivalents Cash and cash equivalents at end of 1 507 804 812 the period Statement of changes in equity for the six months ended 31 December 2008 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 2008 Balance at 1 July 2008 1 468 289 299 151 Issue of capital 111 - - - Share-based payments - 9 - - Unrealised losses on - - (230) - investments Capital gains tax on - - 34 - unrealised gains on investments Realised gains on - - (62) - investments transferred to income statement Capital gains tax on - - 7 - realised gains on investments Impairment of investments transferred to income - - 63 - statement Capital gains tax on - - (9) - impairment on investments Currency translation - - - (21) differences Transfer from hedging - - - - reserve Net profit for the period - - - - Dividends paid to equity - - - - holders Realised profit on - - - - minority share buy-back Balance at 31 December 1 579 298 102 130 2008 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 - - (5) - unrealised gains on investments Realised gains on - - (147) - investments transferred to income statement Capital gains tax on - - 19 - realised gains on investments Currency translation - - - (7) 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 1 427 273 419 108 2007 Attributable to equity
holders of the Company
Hedging Retained Minority R million reserve earnings interest Total 31 December 2008 Balance at 1 July 2008 (18) 3 975 - 6 164 Issue of capital - - (11) 100 Share-based payments - - - 9 Unrealised losses on - - - (230) investments Capital gains tax on - - - 34 unrealised gains on investments Realised gains on - - - (62) investments transferred to income statement Capital gains tax on - - - 7 realised gains on investments Impairment of investments transferred to income - - - 63 statement Capital gains tax on - - - (9) impairment on investments Currency translation - - - (21) differences Transfer from hedging 12 - - 12 reserve Net profit for the period - 490 11 501 Dividends paid to equity - (134) - (134) holders Realised profit on - 7 - 7 minority share buy-back Balance at 31 December (6) 4 338 - 6 441 2008 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 - - - (5) unrealised gains on investments Realised gains on - - - (147) investments transferred to income statement Capital gains tax on - - - 19 realised gains on investments Currency translation - - - (7) differences Transfer from hedging 3 - - 3 reserve Net profit for the period - 538 3 541 Dividends paid to equity - (131) - (131) holders Realised loss on minority - (2) - (2) share buy-back Balance at 31 December 1 3 462 - 5 690 2007 Segmental information for the six months ended 31 December 2008 Health Life
United South States of United South R million Africa America Kingdom Africa 31 December 2008 Income statement Insurance premium revenue 12 211 350 1 951 Reinsurance premiums (1) (10) (55) (318) Net insurance premiums 11 201 295 1 633 Fee income from administration 1 302 - - 43 business Receipt arising from - - - 750 reinsurance contract Net fair value losses on - - - (59) financial instruments at fair value through profit or loss backing investment contracts Vitality income - 17 - - Net income 1 313 218 295 2 367 Claims and policyholder (4) (257) (236) (738) benefits Insurance claims recovered 1 29 35 295 from reinsurers Net claims and policyholder (3) (228) (201) (443) benefits Acquisition costs - (10) (25) (658) Marketing and administration (835) (113) (211) (494) expenses Recovery of expenses from - - 88 - reinsurer Transfer from - - - 584 assets/liabilities under insurance contracts - change in assets arising from insurance contracts - change in liabilities - (27) - - arising from insurance contracts - Premium deficiency reserve - change in liabilities - 14 (10) (106) arising from insurance contracts - Other - change in liabilities - - - (774) arising from reinsurance contracts Fair value adjustment to - - - 59 liabilities under investment contracts Profit/(loss) before 475 (146) (64) 535 investment income, impairment and BEE expenses Investment income Net realised gains on financial instruments held as available-for-sale Net fair value losses on financial instruments at fair value through profit or loss backing insurance contracts Impairment on financial instruments held as available- for-sale BEE expenses Profit from operations Finance costs Profit before taxation Taxation Profit for the period Life United R million Kingdom Vitality Total 31 December 2008 Income statement Insurance premium revenue 11 - 2 535 Reinsurance premiums - - (384) Net insurance premiums 11 - 2 151 Fee income from administration - 11 1 356 business Receipt arising from reinsurance - - 750 contract Net fair value losses on financial - - (59) instruments at fair value through profit or loss backing investment contracts Vitality income - 426 443 Net income 11 437 4 641 Claims and policyholder benefits (3) - (1 238) Insurance claims recovered from 2 - 362 reinsurers Net claims and policyholder benefits (1) - (876) Acquisition costs (33) (27) (753) Marketing and administration expenses (76) (387) (2 116) Recovery of expenses from reinsurer 13 - 101 Transfer from assets/liabilities under - - 584 insurance contracts - change in assets arising from insurance contracts - change in liabilities arising from - - (27) insurance contracts - Premium deficiency reserve - change in liabilities arising from (18) - (120) insurance contracts - Other - change in liabilities arising from - - (774) reinsurance contracts Fair value adjustment to liabilities - - 59 under investment contracts Profit/(loss) before investment (104) 23 719 income, impairment and BEE expenses Investment income 115 Net realised gains on financial 62 instruments held as available-for-sale Net fair value losses on financial (34) instruments at fair value through profit or loss backing insurance contracts Impairment on financial instruments (63) held as available-for-sale BEE expenses (7) Profit from operations 792 Finance costs (9) Profit before taxation 783 Taxation (282) Profit for the period 501 Health Life United South States of United South R million Africa America Kingdom Africa 31 December 2007 Income statement Insurance premium revenue 7 347 215 1 424 Reinsurance premiums (1) (33) (45) (282) Net insurance premiums 6 314 170 1 142 Fee income from administration 1 137 - - 22 business Net fair value gains on - - - 20 financial instruments at fair value through profit or loss backing investment contracts Vitality income - - - - Net income 1 143 314 170 1 184 Claims and policyholder (7) (330) (140) (530) benefits Insurance claims recovered 2 25 25 223 from reinsurers Net claims and policyholder (5) (305) (115) (307) benefits Acquisition costs - (16) (23) (490) Marketing and administration (752) (108) (153) (374) expenses Recovery of expenses from - - 41 - reinsurer Transfer from assets/liabilities under insurance contracts - change in assets arising - - - 428 from insurance contracts - change in liabilities 3 35 (3) (7) arising from insurance contracts - change in liabilities - - - (1) arising from reinsurance contracts Fair value adjustment to - - - (20) liabilities under investment contracts
Profit/(loss) before investment income and BEE expenses 389 (80) (83) 413 Investment income Net realised gains on financial instruments held as available-for-sale Net fair value losses on financial instruments at fair value through profit or loss backing insurance contracts BEE expenses Profit from operations Finance costs Foreign exchange profit - unrealised Profit before taxation Taxation Profit for the period
Life United R million Kingdom Vitality Holdings Total 31 December 2007 Income statement Insurance premium revenue 2 - - 1 995 Reinsurance premiums - - - (361) Net insurance premiums 2 - - 1 634 Fee income from administration - - - 1 159 business Net fair value gains on - - - 20 financial instruments at fair value through profit or loss backing investment contracts Vitality income - 387 - 387 Net income 2 387 - 3 200 Claims and policyholder - - - (1 007) benefits Insurance claims recovered - - - 275 from reinsurers Net claims and policyholder - - - (732) benefits Acquisition costs (4) (26) - (559) Marketing and administration (38) (340) (18) (1 783) expenses Recovery of expenses from 1 - - 42 reinsurer Transfer from assets/liabilities under insurance contracts - change in assets arising - - - 428 from insurance contracts - change in liabilities (3) - - 25 arising from insurance contracts - change in liabilities - - - (1) arising from reinsurance contracts Fair value adjustment to - - - (20) liabilities under investment contracts Profit/(loss) before (42) 21 (18) 600 investment income and BEE expenses Investment income 99 Net realised gains on 147 financial instruments held as available-for-sale Net fair value losses on (3) financial instruments at fair value through profit or loss backing insurance contracts BEE expenses (11) Profit from operations 832 Finance costs (36) Foreign exchange profit - 4 unrealised Profit before taxation 800 Taxation (259) Profit for the period 541 Embedded value statement The embedded value of Discovery at 31 December 2008 consists of the following components: the free surplus attributed to the covered business at the valuation date; plus: the required capital to support the in-force covered business at the valuation date; plus: the present value of future shareholder cash flows from the in-force business; less: the cost of required capital and secondary tax on companies (STC). The present value of future shareholder cash flows from the in-force covered business is calculated as the value of projected future after-tax shareholder cash flows of the business in force at the valuation date, discounted at the risk discount rate. The value of new business is the present value, at the point of sale, of the projected future after-tax shareholder cash flows of the new business written by Discovery, discounted at the risk discount rate, less an allowance for the reserving strain (for Life), initial expenses, cost of capital and STC. The value of new business is calculated on revised assumptions as at the current reporting date. For Life, the shareholder cash flows are based on the release of margins under the Statutory Valuation Method (SVM) basis. The embedded value includes the insurance and administration profits of all the subsidiaries in the Discovery Holdings Group. In particular, it covers business written through Discovery Life, Discovery Invest, Discovery Health, Discovery Vitality and PruHealth. For Destiny Health and PruProtect, no published value has been placed on the current in-force business. The auditors, PricewaterhouseCoopers Inc., have reviewed the consolidated value of in-force business and value of new business of Discovery Holdings Limited and its subsidiaries as included in the embedded value statement for the six months ended 31 December 2008. A copy of the auditors` unqualified report is available for inspection at the company`s registered office. Impact of changes to Professional Guidance The embedded value of Discovery has been calculated in accordance with the Actuarial Society of South Africa`s updated Professional Guidance Note PGN 107: Embedded Value Reporting (Version 4). The prior period results for Life, Invest, Health and Vitality have been restated. The PruHealth embedded value continues to be calculated using European Embedded Value Principles and Guidance as specified by the CFO Forum, accordingly no restatement of the PruHealth results are required. This has resulted in a number of changes to the calculation methodology for Life, Invest, Health and Vitality: The risk discount rate has been determined using a top-down weighted average cost of capital approach, with the required equity return calculated using Capital Asset Pricing Model (CAPM) theory. The risk discount rate has been set equal to the risk-free rate increased by a risk premium determined as a market equity risk premium multiplied by the company`s beta coefficient. To avoid short-term volatility, the Discovery beta coefficient is determined using a 3-year moving average. Specifically for PruHealth, the risk discount rate includes an additional margin to allow for additional risk and uncertainty for this more recently established subsidiary in the current economic environment. This change in methodology has resulted in a reduction in the risk margin from 3% previously to 1.54% at 31 December 2008. The risk discount rate, calculated using the CAPM approach with specific reference to the Discovery beta coefficient, reflects the historic performance of the Discovery share price relative to the market and contains a lower allowance for non-market related and non-financial risk. Previously, these risks were allowed for through a higher margin in the risk discount rate. Investors may want to consider the impact of the change in methodology and form their own view on an appropriate allowance for the non-financial risks which have not been modelled explicitly. The sensitivities of the value of in-force covered business and the value of new business to changes in the risk discount rate are shown in Tables 10 and 11 below. The cost of capital has been calculated using the greater of the level of statutory capital and the level of economic capital required to cover the risks inherent in the in-force business. For Life, the required capital was set equal to two times the statutory Capital Adequacy Requirement (CAR). For Health and Vitality, the required capital was set equal to two times the monthly renewal expense and Vitality benefit cost. For PruHealth, the required capital was set equal to the statutory requirement and was calculated as 18% of the annualised premium income. It is assumed that, for the purposes of calculating the cost of required capital, the Life required capital amount will be backed by surplus assets consisting of 100% equities and the Health, Vitality and PruHealth required capital amounts will be fully backed by cash. Allowance has been made for tax and investment expenses in the calculation of the cost of capital. In calculating the CGT liability, it is assumed that the portfolio is realised every 5 years. The Life cost of capital is calculated using the difference between the gross of tax equity return and the equity return net of tax and expenses. The Health and PruHealth cost of capital is calculated using the difference between the risk discount rate and the net of tax cash return. The impact of these changes are shown in Table 1: Table 1: Impact of PGN 107 changes on embedded value and value of new business 30 June 31 December R million 2008 2007 Published embedded 16 464 15 350 value Impact of: Change to risk 1 527 1 573 discount rate margin Change to cost of (128) (114) required capital Restated embedded 17 863 16 809 value Published value of 805 444 new business Impact of: Change to risk 284 153 discount rate margin Change to cost of (16) (7) required capital Restated value of 1 073 590 new business Table 2: Group embedded value Table 2: Group embedded value 31 December 30 June 31 December 2007 % 2008 R million 2008 Restated change Restated Shareholders` funds 6 441 5 690 13 6 164 Adjustment to (3 809) (3 318) (3 879) shareholders` funds from published basis(1) Adjusted net worth 2 632 2 372 2 285 - Free Surplus 1 734 1 651 1 543 - Required 898 721 742 Capital(2) Run-down costs for (75) (300) (190) Destiny Health(3) Value of in-force 18 536 15 348 16 560 covered business before cost of capital Cost of required (245) (173) (203) capital Cost of STC(4) (425) (438) (589) Discovery Holdings 20 423 16 809 22 17 863 embedded value Number of shares 554.4 542.7 546.0 (millions) Embedded value per R36.84 R30.97 19 R32.71 share Diluted number of 592.0 592.0 592.0 shares (millions) Diluted embedded R36.17 R30.15 20 R32.02 value per share(5) (1) The published Shareholders` funds has been adjusted to eliminate net assets under insurance contracts and deferred acquisition costs at December 2008 of R3,777 million (December 2007: R3,287 million; June 2008: R3,845 million) in respect of Life and R32 million (December 2007: R31 million; June 2008: R34 million) in respect of PruHealth. (2) The required capital at December 2008 for Life is R484 million (December 2007: R365 million; June 2008: R348 million), for Health and Vitality is R314 million (December 2007: R281 million; June 2008: R291 million) and for PruHealth is R100 million (December 2007: R75 million; June 2008: R103 million). (3) The run-down costs for Destiny Health relate to the expected future operational costs and risk profits/losses expected in the course of running down the existing block of in-force business. (4) In line with Discovery`s current dividend policy, the cost of STC is calculated assuming a 4.5 times dividend cover on the after-tax profits as they emerge over the projection term. An STC rate of 10% is assumed. The total STC charge has been allocated between the different business entities based on their contribution to the total value of in-force covered business. (5) The diluted embedded value per share is calculated by increasing the embedded value by the value of the loan to the Discovery Holdings share trust, and by increasing the number of shares by the number of shares issued to the share incentive trust which have not been delivered to participants. An allowance has been made for Discovery`s BEE transaction where the impact is dilutive i.e. where the current embedded value per share exceeds the current transaction value. Table 3: Value of in-force covered business Value before Cost of Value after cost of required Cost cost of
capital capital R million and STC capital of STC and STC at 31 December 2008 Health and 8 613 (105) (196) 8 312 Vitality Life and 9 515 (113) (220) 9 182 Invest(1) PruHealth(2) 408 (27) (9) 372 Total 18 536 (245) (425) 17 866 at 31 December 2007 (Restated) Health and 7 128 (94) (203) 6 831 Vitality Life and 7 910 (58) (226) 7 626 Invest(1) PruHealth(2) 310 (21) (9) 280 Total 15 348 (173) (438) 14 737 at 30 June 2008 (Restated) Health and 7 798 (108) (277) 7 413 Vitality Life and 8 401 (60) (299) 8 042 Invest(1) PruHealth(2) 361 (35) (13) 313 Total 16 560 (203) (589) 15 768 (1) Included in the Life and Invest value of in-force covered business is R121 million (December 2007: R7 million; June 2008: R47 million) in respect of investment management services provided on off balance sheet investment business. The net assets of the investment service provider are included in the adjusted net worth. (2) The values shown for PruHealth reflect Discovery`s 50% shareholding in PruHealth. Table 4: Group embedded value earnings Year Six months ended ended 31 December 31 December 30 June 2008 2007 2008
R million Restated Restated Embedded value at end of 20 423 16 809 17 863 period Less: Embedded value at (17 863) (15 395) (15 395) beginning of period Increase in embedded value 2 560 1 414 2 468 Net issue of capital (100) (31) (73) Dividends Paid 134 131 236 Minority share buy-back (7) 5 2 Transfer to hedging (12) (3) 16 reserve Embedded value earnings 2 575 1 516 2 649 Annualised return on 30.9% 20.7% 17.2% opening embedded value Table 5: Components of Group embedded value earnings Value of
in-force covered Cost of business required less Cost Embedded
R million Net Worth capital of STC Value Total profit from new (885) (29) 1 611 697 business (at point of sale) Profit from existing business *Expected return 121 2 857 980 *Change in methodology 774 (16) 162 920 and assumptions(1) *Experience variances (55) (3) 334 276 Other initiative (186) - - (186) costs(2) Acquisition costs(3) (35) - - (35) Foreign exchange rate (21) 4 (52) (69) movements Cost of STC(4) - - 114 114 Return on (122) - - (122) shareholders` funds(5) Embedded value (409) (42) 3 026 2 575 earnings (1) The profits from changes in methodology and assumptions will vary over time to reflect adjustments to the model and assumptions as a result of changes to the operating and economic environment. The current period`s changes are described in detail in Table 6 below (for previous periods refer to previous embedded value statements). (2) This item reflects the expenses relating to the establishment of PruProtect and Discovery Invest and the support of 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. (3) 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. (4) The positive change in the cost of STC is due to the increase in the present value of STC credits following a reduction in the risk discount rate. (5) Return on shareholders` funds is shown net of tax and management charges. Table 6: Methodology and assumption changes Health and Life and PruHealth
Vitality Invest Net Value of Net Value of Net R million worth in-force worth in-force worth Modelling changes - - 6 (52) - Economic assumptions - 577 (71) 1 766 - Benefit Enhancements(1) - (152) (82) (177) - Lapse assumption(2) - - 103 (933) - Premium Increases - - (1) (13) - Mortality and Morbidity - - 1 (1) - Expenses(3) - (106) - - - Tax - - - (20) - Reinsurance(4) - - 818 (833) - Vitality - - - - - Total - 319 774 (263) - PruHealth Value of
R million in-force Total Modelling changes - (46) Economic assumptions 139 2 411 Benefit Enhancements(1) - (411) Lapse assumption(2) (29) (859) Premium Increases - (14) Mortality and Morbidity (55) (55) Expenses(3) 32 (74) Tax - (20) Reinsurance(4) - (15) Vitality 3 3 Total 90 920 (1) The Life and Invest benefit enhancements relate to improvements in the risk benefits following the June 2008 product launch being made available to existing policyholders. The change also includes benefit enhancements relating to the launch of the 2009 Vitality benefits. (2) The Life and Invest lapse assumption has been increased following higher than expected lapse experience, and to allow for higher lapses in future as a result of the uncertain economic environment. (3) The Health and Vitality expense assumption has been increased to allow for higher costs due to the provision of Pharmaceutical Benefit Management (PBM) services to the Discovery Health Medical Scheme. (4) The reinsurance change relates to the impact of financing reinsurance arrangements which were effective from 31 December 2008. Table 7: Experience variances Health and Life and PruHealth Vitality Invest Net Value of Net Value of Net
R million worth in-force worth in-force worth Renewal Expenses 23 - (10) - (19) Other Expenses(1) (23) - (5) - - Economic (1) 118 14 123 - assumptions(2) Extended modelling - 101 - 5 - term(3) Lapses and - 27 (11) (87) - surrenders(4) Policy alterations - 3 (104) 165 - Premium income - - 3 5 - Mortality and - - 89 7 (28) morbidity Backdated - - (16) (47) - cancellations Tax (1) - 12 (10) (12) Gym start-up costs - - - - (11) Reinsurance - - - - 94 Other 14 - (32) 30 (31) Total 12 249 (60) 191 (7) Value of R million in-force Total Renewal Expenses - (6) Other Expenses(1) - (28) Economic assumptions(2) - 254 Extended modelling 13 119 term(3) Lapses and surrenders(4) (39) (110) Policy alterations - 64 Premium income - 8 Mortality and morbidity - 68 Backdated cancellations - (63) Tax - (11) Gym start-up costs - (11) Reinsurance (76) 18 Other (7) (26) Total (109) 276 (1) Other expenses include expenses which are not expected to recur. (2) For Life and Invest, the economic assumptions variance relates primarily to higher than expected premium and benefit increases due to higher than expected inflation over the period. For Health and Vitality, it relates to the inflation-linked administration and managed care fee increase in 2009 which was higher than the long-term inflation assumption in the embedded value model due to higher than expected inflation over the period. (3) The projection term for Health, Vitality, PruHealth and Group Life at 31 December 2008 has not been changed from that used in the 30 June 2008 embedded value. Thus, an experience variance arises because the total term of the in-force covered business is effectively increased by six months. (4) Included in the Health and Vitality lapse experience variance is an amount of R281 million in respect of members joining existing employer groups during the period, offset by an amount of negative R302 million in respect of members leaving existing employer groups. A positive variance of R48 million is due to lower than expected lapses. Table 8: Embedded value of new business Six months ended Year ended
31 December 31 December % 30 June 2007 2008 R million 2008 Restated change Restated Health and Vitality Present value of future 158 95 246 profits from new business at point of sale Cost of required (4) (4) (9) capital Cost of STC (2) (3) (9) Present value of future profits from new business at point of sale after 152 88 73 228 cost of required capital and STC New business annualised 499 449 11 1,079 premium income(1) Life and Invest Present value of future 540 504 855 profits from new business at point of sale(2) Cost of required (21) (9) (18) capital Cost of STC (12) (14) (29) Present value of future 507 481 5 808 profits from new business at point of sale after cost of required capital and STC New business annualised 654 435 50 964 premium income(3) Annualised profit 8.3% 11.8% 8.4% margin(4) Annualised profit 10.2% 12.1% 9.2% margin excluding Invest Business PruHealth(5) Present value of future 45 25 48 profits from new business at point of sale Cost of required (4) (3) (10) capital Cost of STC (3) (1) (1) Present value of future 38 21 81 37 profits from new business at point of sale after cost of required capital and STC New business annualised 108 94 15 219 premium income(6) Annualised profit 3.9% 3.0% 2.3% margin(4) (1) Health new business annualised premium income is the gross contribution to the medical schemes. For embedded value purposes, Health new business is defined as individuals and members of new employer groups, and includes additions to first year business. There have been no changes to the definition of new business since the previous valuation. The new business annualised premium income shown above excludes premiums in respect of members who join an existing employer after the first year, as well as premiums in respect of new business written during the period but only activated after 31 December 2008. The total Health and Vitality new business annualised premium income written over the period was R1,505 million (December 2007: R1,311 million; June 2008: R2,834 million). The increase in the value of new business is due mainly to a favourable change in the mix of business driven by strong membership growth on the non- Keycare Discovery Health Medical Scheme benefit options over the period. (2) Included in the Life and Invest value of new business is R26 million in respect of investment management services provided on off balance sheet investment business. (3) Life new business is defined as policies which incepted during the reporting period and which are on risk at the valuation date. Invest new business is defined as business where at least one premium has been received and which has not been refunded after receipt. There have been no changes to the definition of new business since the previous valuation. The new business annualised premium income of R654 million (single premium APE: R88 million) shown above excludes automatic premium increases and servicing increases in respect of existing business. The total Life new business annualised premium income written over the period, including both automatic premium increases of R201 million and servicing increases of R138 million was R993 million (single premium APE: R88 million). Single premium business is included at 10% of the value of the single premium. Policy alterations, including Discovery Retirement Optimisers added to existing Life Plans are shown in Table 7 as experience variances and not included as new business. Previously, Discovery Retirement Optimisers added to existing Life Plans were included in the value of new business. Term extensions on existing contracts are not included as new business. (4) The annualised profit margin is the value of new business expressed as a percentage of the present value of future premiums. (5) The values shown in this table for PruHealth reflect Discovery`s 50% shareholding in PruHealth. (6) PruHealth new business is defined as individuals and employer groups which incepted during the reporting period. The new business annualised premium income shown above has been adjusted to exclude premiums in respect of members who join an existing employer group after the first month as well as premiums in respect of new business written during the period but only activated after 31 December 2008. There have been no changes to the definition of new business since the previous valuation. Table 9: Embedded value economic assumptions 31 December 31 December 30 June 2008 2007 2008 Restated Restated
Beta coefficient South Africa 0.44 0.41 0.44 United Kingdom 0.44 0.70 0.74 Equity risk premium South Africa 3.50 3.50 3.50 United Kingdom 4.00 4.00 4.00 Risk discount rate (%) - Health and 9.04 10.19 12.54 Vitality - Life and Invest 9.04 10.19 12.54 - PruHealth 6.00 8.00 8.70 Rand/GB Pound exchange rate Closing 13.60 13.63 15.60 Average 14.75 14.00 14.66 Medical inflation (%) South Africa 7.50 7.75 10.00 United Kingdom Current Current Current levels levels levels reducing reducing reducing to 6.00% to 7.50% to 7.50% over the over the over the
projection projection projection period period period Expense inflation and CPI (%) South Africa 4.50 4.75 7.00 United Kingdom 3.00 4.00 4.00 Pre-tax investment return (%) South Africa - Cash 6.00 7.25 9.50 - Bonds 7.50 8.75 11.00 - Equity 11.00 12.25 14.50 United Kingdom - Cash 3.75 5.25 5.25 Dividend cover ratio 4.5 times 4.5 times 4.5 times Income tax rate (%) South Africa 28.00 29.00 28.00 United Kingdom 28.00 28.00 28.00 Projection term - Health and 20 years 20 years 20 years Vitality - Group Life 10 years 10 years 10 years - PruHealth 20 years 20 years 20 years Life mortality, morbidity and lapse assumptions were derived from internal experience, where available, augmented by reinsurance and industry information. An additional lapse rate is assumed over the next 18 months to allow for the potential impact of the current economic climate on policyholder lapses. A further increase to the future lapse rate assumptions has been made to allow for the impact of the uncertain economic environment. The Health lapse assumptions were based on the results of recent experience investigations. The lapse rate for the projection term after 10 years was set above current experience. The PruHealth assumptions were derived from internal experience augmented by industry information. Best estimate morbidity assumptions and forecast Vitality costs allow for the impact of management actions. An additional lapse rate is assumed over the next two years for group business to allow for the potential impact of the current economic climate on lapses. Renewal expense assumptions were based on the results of the latest expense and budget information. A notional allocation of corporate overhead expenses has been made to each of the subsidiary companies based on managements` view of each subsidiary`s contribution to overheads. The investment return assumption was based on a single interest rate derived from the risk free zero coupon government bond yield curve. Other economic assumptions were set relative to this yield. The current and projected tax position of the policyholder funds within the Life company has been taken into account in determining the net investment return assumption. Sensitivity to the embedded value assumptions The sensitivity of the embedded value and the value of new business at 31 December 2008 to changes in the risk discount rate is shown below. In determining the values at different risk discount rates, all other assumptions have been left unchanged. Table 10: Embedded value sensitivity to risk discount rate Risk Published Risk discount risk discount discount
R million rate -1% rate rate +1% Adjusted net worth less run- 2 557 2 557 2 557 down costs for Destiny Health Value of in-force covered 20 398 18 536 16 976 business before cost of capital Cost of required capital (233) (245) (255) Cost of STC (475) (425) (385) Discovery Holdings embedded 22 247 20 423 18 893 value Table 11: Value of new business sensitivity to risk discount rate Risk Published Risk discount risk discount discount
R million rate -1% rate rate +1% Present value of future 919 743 600 profits from new business at point of sale Cost of required capital (32) (29) (28) Cost of STC (20) (17) (13) Present value of future 867 697 559 profits from new business at point of sale after cost of required capital and STC Review of Group results New business annualised premium income and gross inflows under management include flows of the schemes Discovery administers as well as 100% of the business conducted together with its joint venture partners. New business annualised premium income (excluding Destiny Health) increased by 28% for the six-months ended 31 December 2008. New business annualised premium income December December % R million 2008 2007 change Discovery Health 1 456 1 265 15 Discovery Life 993 627 58 Discovery Vitality 49 46 7 PruHealth 271 248 9 PruProtect 29 5 >100 New business API excluding Destiny 2 798 2 191 28 Health Destiny Health* 80 209 -62 New business API of Group 2 878 2 400 20 * New business in Destiny Health relates to new members joining existing business in the current year Gross inflows under management increased by 18% for the six-months ended 31 December 2008. Gross inflows under management December December % R million 2008 2007 change Discovery Health 11 211 9 977 12 Discovery Life 2 380 1 446 65 Discovery Vitality 437 387 13 Destiny Health 283 520 -46 PruHealth 701 431 63 PruProtect 22 3 >100 Gross inflows under management 15 034 12 764 18 Less: collected on behalf of third (10 700) (9 223) 16 parties Discovery Health (9 897) (8 833) Discovery Life (386) - Destiny Health (55) (173) PruHealth (351) (216) PruProtect (11) (1) Gross income of Group 4 334 3 541 22 Earnings The following table shows the main components of the increase in Group profit from operations for the six-months ended 31 December 2008: Earnings source December December % R million 2008 2007 change Discovery Health 475 389 22 Discovery Life 618 479 29 Discovery Vitality 23 21 10 PruHealth (64) (83) 23 Operating profit from established 1 052 806 31 businesses Discovery Invest (83) (66) -26 PruProtect (104) (42) >100 Destiny Health (119) (80) -49 Group operating profit before 746 618 21 premium deficiency reserve and unbundling costs Transfer to premium deficiency (27) - reserve Unbundling costs - (18) Profit from operations before 719 600 20 investment income, impairment and BEE expenses Taxation All South African entities are in a tax paying position. South African income tax has been provided at 28% (2007: 29%) and secondary tax on companies at 10% in the financial statements and embedded value statements. Destiny operations have significant tax losses but no deferred tax asset has been accounted for on the foreign losses incurred in the US. Discovery obtained no tax relief for the PruHealth losses for the six-month period to 31 December 2008. For the six-month period ending 31 December 2007, Discovery obtained tax relief for 100% of the PruHealth losses as this tax asset was ceded to Prudential Assurance Company in the UK ("Prudential"). R26 million was included in finance charges relating to a settlement discount on early payment by Prudential for these tax losses in that period. Tax relief is obtained for 100% of the PruProtect losses through Prudential. Reinsurance contracts Included in cash and cash equivalents at December 2008 is R750 million received in terms of a quota share treaty entered into by Discovery Life. This treaty effectively reinsures approximately 15% of the negative reserve as at 31 December 2008. The liability in respect of this treaty has been included in liabilities arising from reinsurance contracts. This amount has been shown as a receipt arising from reinsurance contract on the face of the income statement and the full amount has been transferred out through the change in liabilities under reinsurance contracts. Discovery Life also entered into a reinsurance contract to reinsure lapse risk (for the next five years) of up to 22% of the negative reserve in force as at 31 December 2008. Investments Investments have increased due to the sale of Discovery Invest products. Discovery has classified its shareholder investments as available-for-sale financial instruments. As such, gains and losses are ordinarily taken directly to reserves, until realised. When realised, the resulting gain or loss is taken to profit and loss but excluded from the calculation of headline earnings. Due to the significant decrease in the equity markets during the last six months of 2008, Discovery had to assess at 31 December 2008 whether objective evidence existed that the equity instruments classified as available-for-sale financial assets were impaired at that date. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is objective evidence of impairment. Discovery has taken the view that a 30% decline in the fair value of an investment in an equity instrument below cost would be classified as significant and a period of nine months or more would be a prolonged decline. Based on this view, Discovery has impaired equity instruments classified as available-for-sale financial assets that had a decline of 30% or more in the fair value of the asset below cost. This amounted to R63 million and has been taken through profit and loss. Had a decline of 20% or more been used, an impairment of R89 million would have been taken through profit and loss. The `prolonged decline` criteria was not met at this date. Balance sheet The increase in the assets arising from insurance contracts of R584 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. At 31 December 2008, Destiny Health raised a Premium Deficiency Reserve of US$2.8 million (R27 million). This relates to future losses that will be incurred on a block of business due to an onerous contract. This reserve has been included in liabilities arising from insurance contracts. Accounting policies The interim results have been prepared in accordance with International Financial Reporting Standards (IFRS) including IAS 34, as well as the South African Companies Act 61 of 1973, as amended, and are consistent with the accounting policies applied in the last annual report as well as the corresponding prior year period. 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 R7 million in the six-month period ended 31 December 2008 (2007: R11 million) in accordance with the requirements of IFRS 2. An additional R37 million (2007: R19 million) in respect of options granted under employee share incentive schemes has been expensed in the income statement for the period in accordance with the requirements of IFRS 2. Discovery has acquired cash-settled share options to hedge approximately 66.6% of its obligations in respect of options granted under the employee share incentive scheme. Directorate Dr Judy Dlamini has resigned as non-executive director from the board of Discovery Holdings Limited, with effect from 30 November 2008, to pursue her philanthropic and business interests. Judy has added tremendous value to the Discovery board during her tenure and her contribution will be missed. Dividend policy and capital A final dividend of 23 cents per share was paid on 20 October 2008. The directors are of the view that the Discovery Group is adequately capitalised at this time. On the statutory basis the capital adequacy requirement of Discovery Life was R242 million (2007: R183 million) and was covered 6.4 times (2007: 7.4 times). Cash dividend declaration: The board has declared an interim cash dividend of 25.5 cents per share. The salient dates are as follows: - Last date to trade "cum" dividend Friday, 13 March 2009 - Date trading commences "ex" dividend Monday, 16 March 2009 - Record date Friday, 20 March 2009 - Date of payment Monday, 23 March 2009 Share certificates may not be dematerialised or rematerialised between Monday, 16 March 2009 and Friday, 20 March 2009, both days inclusive. Transfer secretaries Computershare Investor Services (Pty) Limited (Registration number 2004/003647/07) Ground Floor, 70 Marshall Street, Johannesburg 2001, PO Box 61051, Marshalltown 2107 Sponsors Rand Merchant Bank (A division of FirstRand Bank Limited) Secretary and registered office MJ Botha 155 West Street, Sandton 2146, PO Box 786722, Sandton 2146 Tel: (011) 529 2888, Fax: (011) 529 2958 Directors MI Hilkowitz (Chairperson), A Gore* (Chief Executive Officer), Dr BA Brink, P Cooper, Dr NJ Dlamini**, SB Epstein (USA), NS Koopowitz*, Dr TV Maphai, HP Mayers*, AL Owen (UK), A Pollard*, JM Robertson* (CIO), SE Sebotsa, T Slabbert, B Swartzberg*, SV Zilwa *Executive **Resigned 30 November 2008 Date: 19/02/2009 10:00:02 Supplied by www.sharenet.co.za Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.

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