Wrap Text
DSY/DSBP - Discovery Holdings Limited - Unaudited interim results and cash
dividend declarations for the six months ended 31 December 2011
DISCOVERY HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
Ordinary share code: DSY ISIN: ZAE000022331
Preference share code: DSBP ISIN: ZAE000158564
("Discovery")
UNAUDITED INTERIM RESULTS AND CASH DIVIDEND DECLARATIONS
FOR THE SIX MONTHS ENDED 31 DECEMBER 2011
Normalised headline earnings increase to R1125 million up 20%
Embedded value per share increase to R51.20 up 18%
Normalised profit from operations increase to R1 629 million up 22%
Interim dividend 50 cents per share
Overview
Discovery posted an excellent performance over the first six months of the
financial year to 31 December 2011. The results for the period reflect a
continuation of the Group`s strategy to make a profound impact on the lives
of those it serves and to bring about positive societal change. A commitment
to making people healthier and enhancing and protecting their lives is the
underpin of this strategy. Following from this core purpose is the Discovery
integrated business model of health insurance, life insurance, financial
services and Vitality: this allows superior products and solutions to be
offered to Discovery`s members in a way that is affordable, sustainable, and
provides unique value for money. Leading from this, Discovery has developed
a powerful ambition to become a multinational organisation, based on a
number of important principles: a disruptive, positive force in the markets
in which it operates; the ability to command substantial market share;
products that are superior and that people want to buy; and an overall
presence that is inspiring and transformative for society.
The cumulative effect of this model and approach has created two virtuous
cycles: the first, a strong and unique set of technology, product and
intellectual property capabilities that are appealing to other markets and
attract best-of-breed local partners; the second, a capital-light model
wherein Discovery`s significant international expansion can leverage the
capital strength, brand and presence of these partners. In addition, the
high dividend cover enables further reinvestment into building out existing
Discovery businesses, coupled with the commitment to allocate between 5% and
7% of the organisation`s operating profit towards the development of new
businesses, such as Discovery Insure. During the period under review, the
Group continued to drive this strategy, with the approach validated by the
ability to build businesses in different markets and geographies, with
minimal capital strain and with phased implementation.
Discovery`s businesses can therefore be characterised into three distinct
groupings: first, established businesses that typically exceed five years;
second, developing businesses with a maturity of between three to five
years; and third, new businesses with less than three years since inception.
It is within this context that the results should be considered: new
business increased by 21% from R3 747 million to R4 535 million, and
notably, established businesses increased by 6% from R2 876 million to R3
055 million; developing businesses by 14% from R854 million to R977 million;
and new businesses increased substantially from R17 million to R503
million. Similarly, operating profit increased by 22% from R1 332 million to
R1 629 million, with established businesses increasing by 11% from R1 388
million to R1 544 million; developing businesses by 523% from R39 million to
R243 million; and the amount spent on new businesses increasing from R95
million to R158 million.
It is also important to note that the Group generated R1.8 billion in cash
and reinvested R1.1 billion into new business and distribution capabilities
for Discovery Life and Discovery Invest. The organisation as a whole has
generated a return on capital of 60% per annum since inception, using the
market capitalisation as a measure of value, and serves a sizeable global
client base of over 5.5 million unique members across its businesses.
Established businesses
* New business:
R3.1 billion
* Operating profit:
R1.5 billion
* Unique members:
3.0 million
1. Discovery Health (South Africa)
Discovery Health`s performance over the period was excellent and exceeded
expectation. In combination, the significant growth of the Discovery Health
Medical Scheme and the other medical schemes that Discovery Health
administers, together with the efficiencies achieved within Discovery
Health, enabled the company to explicitly reduce the administration fees
charged to the Discovery Health Medical Scheme by R100 million (including
VAT) for the 2011 calendar year, whilst maintaining an increase in profits
of 10%. This strategy will facilitate continued growth of reserves in the
Discovery Health Medical Scheme and will support growth. The company
believes that this is a well-balanced result and is a continuation of a
process of achieving efficiencies of scale, and passing these on to members
of the Discovery Health Medical Scheme. In fact, when considering the
drivers of medical inflation over the past five years, administration
expenditure is the only component of the medical scheme`s expenditure which
has been reducing consistently in real terms; in this regard, while medical
inflation has averaged 10,5%, administration fees have had a deflationary
effect of 4% for the past five years.
In addition to the strong growth in membership, the period is also
noteworthy for the continued efforts made by the Discovery Health Medical
Scheme to rebalance benefit structures in order to eliminate waste as well
as to increase benefits in areas of critical care such as oncology. While
this process led to public debate around the restructuring of the Allied
Health and Therapeutic Benefit, it is seen as necessary to redirect spend
towards more appropriate coverage. This strategy results in benefits that
are comparable to the best private health systems in the world, yet at the
same time provides access to superior healthcare when members are sick.
Discovery Health will continue with this process of rebalancing benefits as
required from time to time in order to ensure ongoing stability and cover
for the most critical healthcare needs.
The third prevalent theme during the period is that of building and
strengthening a sustainable healthcare system. In this regard, Discovery
Health used this period to invest significantly in a range of technological
and service innovations aimed at improving the quality and efficiency of the
healthcare system for the benefit of its members. Key innovations include
the development of a South African first iPad application which provides
doctors treating Discovery Health members with access to members` full
health records; MedXpress, a national medicine delivery service providing
Discovery Health members with home delivery of acute and chronic medicines
at no charge; and HospitalXpress, a range of services designed to facilitate
rapid and efficient authorisation and admission of Discovery Health members
to hospitals.
In terms of the above-stated strategy, the robustness of the private
healthcare system and Discovery Health`s success within it, are strongly
illustrated by the movements of members. During the period, in addition to
the strong growth achieved, the number of members leaving the scheme (the
lapse rate) reduced to 3.9% on a calendar year basis (including an allowance
for IBNR), amongst the lowest in the Scheme`s history. Furthermore, despite
the expense of private healthcare, the number of members staying with their
current benefit options or buying up to higher benefit options measured 98%.
The combination of these metrics reflects a remarkably sustainable system
and bodes well for the continued success of Discovery Health and Discovery
Health Medical Scheme.
Finally, it is important to state Discovery Health`s belief that our private
healthcare system, while having room for further improvement, is excellent,
sustainable and an important national asset. This may seem in stark contrast
to common views of waste and inevitable decline in the private healthcare
system. A rigorous analysis of the facts suggests the opposite. Access to
care for those covered by medical schemes is comparable to the best
healthcare systems found in developed markets: the quality and outcomes are
of the same order of magnitude, while the cost, adjusting for purchasing
power parity, is lower. Importantly, despite the understandable concerns
about gaps in medical scheme coverage, coverage levels in reality are
significantly comprehensive. Members of the Discovery Health Medical Scheme,
for example, had 97% of all hospital claims paid out in the 2011 year
translating into R14.1 billion from January 2011 to December 2011. It is in
light of this that Discovery Health is a strong advocate of a coordinated
effort to improve the entire South African healthcare system. The company
remains committed to a National Health Insurance system that is a conduit of
this change. In this context, a strong private sector should be seen as an
asset.
Discovery Health remains confident of its ability to grow its profitability
on a sustainable basis into the foreseeable future, through a combination of
ongoing growth in members under management and further gains in operational
efficiency.
2. Discovery Life (South Africa)
Discovery Life`s performance was excellent with new business increasing by
7%, operating profit increasing by 12% from R768 million to R862
million, and the value of in-force business increasing by 20%.
During the period under review, Discovery Life continued along a set
strategy of focusing on market leadership through product innovation, and on
quality of new business to ensure superior performance in terms of policy
lapsation and mortality and morbidity experience. The results illustrated
the success of this strategy, with lapses reducing by 1% per annum and
falling below the long-term assumptions within the embedded value basis, and
mortality and morbidity experience 15% below the embedded value basis. The
growth in new business also reflected the market`s acceptance of the
continued process of innovation. During the period, the Access Cover product
and other innovations were successfully rolled out to the market.
A central aspect within Discovery Life is the dynamic pricing of
policyholder premiums based on their engagement with Vitality. Policyholders
who engage with Vitality experience lower premium adjustments and higher
periodic payback benefits. Over the period, Discovery Life saw a continued
and significant increase in engagement, leading to lower levels of premium
increases, and substantially higher levels of payback benefits. The effect
on the actuarial dynamics of Discovery Life is substantial in that it prices
risk more accurately and reduces lapsation.
It is also important to state that Discovery Life is still in a strong
growth phase and is funding the growth of Discovery Invest. Although
Discovery Life generates in excess of R1.6 billion of cash per year, the
cash emerging is currently reinvested into new business and the building out
of distribution channels. Discovery has made an explicit decision that this
is an appropriate strategy, and will continue to support it into the
foreseeable future. Discovery Life provides a unique opportunity to invest
considerable amounts of capital at superior rates of return - in fact, the
return on capital invested since Discovery Life`s inception is in excess of
27%. Taking current claims experience into account, the return on capital
since inception exceeds 30%. The return per rand of capital invested into
new business comfortably exceeds target levels and is further bolstered by
financing structures.
Important also is the nature of the asset being built in Discovery Life, and
its value - this is primarily a function of future policyholder lapsation
and levels of mortality. Discovery Life is confident of its ability to
control the former and in the case of the latter, worldwide mortality levels
together with the selective effect of Vitality are likely to see mortality
experience improving. The combination of these will be to boost the returns
on capital invested in Discovery Life. In addition, the effect of motor
vehicle accidents on mortality, and Discovery`s increasing understanding of
how its members drive through VitalityDriveTrade Mark, will provide
opportunities to incentivise members toward better behaviour and further
increase Discovery Life`s ability to price risk accurately and provide value
for money.
3. Vitality
Vitality`s performance over the period was exceptional and it continues to
serve as a critical foundation across Discovery`s businesses. Most
importantly, it has a profound impact on the mortality and morbidity levels
of all Discovery`s members and provides a critical pricing and behavioural
basis for the sustainability of Discovery`s product offerings. The Vitality
model is powerful: it creates a virtuous actuarial cycle wherein rewards are
used to incentivise the appropriate behavioural change; behaviour change
leads to a reduction of mortality and morbidity, thereby reducing claims
costs; and the reduction in claims costs ensures that the system remains in
balance, and so on. The benefits of this cycle are experienced by all
stakeholders: clients, Discovery and society. It is this cycle that
Discovery aims to replicate in a number of markets.
A fundamental measure of the success of Vitality are the levels of
engagement and the underlying behavioural dynamics of the base. During the
period, engagement levels grew off an already positive base, with gym visits
increasing to more than 20 million visits for the calendar year; Kulula
flights increasing from just over 500 000 flights in 2010, to over 750 000
flights for the 2011 calendar year; and South African participation in
wellness activities increasing dramatically, with over 50% of the eligible
population completing their Health Risk Assessments, over 50% having their
glucose tested, and over 50% having their cholesterol assessed.
Furthermore, the DiscoveryCard, which on implementation was essentially a
Vitality reward structure, has continued to evolve into a substantial
business in its own right. During the period, the experience of the
DiscoveryCard was exceptional and exceeded expectation, with the number of
accounts exceeding 290 000; the level of active accounts exceeding 85%; the
bad debt levels reducing further to 0.07% of advances, and point of sale
market share averaging just under 9%. In this regard, the DiscoveryCard
provides a powerful foundation to further development of the Discovery
Group. In addition, the data emerging from the DiscoveryCard provides a
powerful understanding of the correlation between consumption behaviour and
other risk behaviours important to Discovery.
During the period, the rollout of VitalityDriveTrade Mark - the behavioural
underpin for the Discovery Insure business - also continued. Although early
in its implementation, the results are pleasing, with 98% of all Discovery
Insure members opting to purchase VitalityDriveTrade Mark.
Finally, virtually all aspects of the Vitality capability in terms of
intellectual property, technology, online capability and actuarial models,
have been structured to be easily deployed in markets outside of South
Africa. Sophisticated and tailored Vitality models are being actively rolled
out in the US with Humana; the UK with the PruHealth and PruProtect
businesses; and will be deployed shortly in the Ping An Health joint venture
in China.
Developing businesses
* New business:
R1 billion
* Profit: all profitable;
R243 million
* Unique members:
0.7 million
4. Discovery Invest (South Africa)
During the period under review, Discovery Invest achieved an excellent
performance with assets under management growing by 50% from R13.9 billion
to R20.9 billion, and operating profit by 84% from R44 million to R81
million.
The success of Discovery Invest reflects a combination of the market`s
receptivity to Discovery Invest`s strategy to offer value-add products,
together with the exceptional performance of Discovery Invest`s portfolio of
funds. Notably, the Discovery Equity Fund continues to perform at the top of
its peer group and based on this, attracted more than double the inflows of
its nearest competitor. The value-add approach of Discovery Invest has
created an ability to generate superior profit margins in the products
provided, while an important driver of the emerging profitability is its
achievement of scale, leading to a reduction in unit costs. It is
anticipated that this trend will continue given Discovery Invest`s
considerable growth potential.
5. PruProtect (United Kingdom)
The period under review was a particularly successful one for Discovery`s UK
businesses, with their combined profitability turning from a loss of R5
million to a profit of R162 million. Both businesses made strong progress in
their respective markets and Discovery`s vision of building a Discovery-like
capability in the UK now appears realistic, with great potential for scale
and profitability. In particular, PruProtect`s performance was remarkable
and in a short space of time since its launch, it has become a major player
in the UK protection market. Importantly, while each business focused on the
unique dynamics of the markets in which they operate, over the period a
considerably more powerful Vitality capability was rolled out, taking into
account many of the South African learnings. This bodes well for both
businesses to differentiate themselves in their respective markets.
PruProtect`s performance was exceptional and significantly ahead of
expectation. Virtually every aspect of the business made outstanding
progress and manifested in profit growing from -R40 million to R115
million. In addition, PruProtect comfortably exceeded return on capital
hurdles for new business written during the six months ending 31 December
2011.
The PruProtect strategy revolved around repeating the Discovery Life model
in the UK. This has been followed closely in all aspects of the business
model, from product innovations and processes, to distribution initiatives.
Most importantly, PruProtect`s profitability is a manifestation of the
quality achieved across key dimensions of the business: levels of mortality
were lower than expected; the average premium was higher than expected; and
inflation-linking exceeded expectation.
One of the most important successes was that of the franchise distribution
model: while new business grew 51% from R144 million to R218 million, the
franchise channel itself grew by almost 100%. The implication of this was
that the make-up of new business was of a far higher quality than the
previous period under review. In addition, the combination of the product
and distribution capability has enabled PruProtect to be included on the
panels of many of the most powerful distributors, and PruProtect expects
sizeable growth from these initiatives going forward.
In just four years since its launch, the company is now capturing in excess
of 8.5% of the broker-distributed life insurance market, and generating new
business margins of around 16.5%. Discovery is optimistic about the
prospects of PruProtect going forward.
6. PruHealth (United Kingdom)
PruHealth`s performance during the period was pleasing and in line with
expectation. The period was dominated by two distinct forces: the difficult
economic environment, leading to a weakened private medical insurance market
in which there was adverse lapsation; and second, the integration of
Standard Life Healthcare and PruHealth.
Against this, PruHealth made significant progress, with its explicit
decision to focus on quality and to ensure that loss ratios were stable and
robust. This was achieved by applying careful risk and actuarial processes
to the management of the business. The results of this approach were
satisfying, with the loss ratio in the PruHealth book and the acquired
Standard Life Healthcare book drifting downward to levels better than
expectation. The concomitant effect of this was that lapse rates of
previously higher loss ratio groups escalated, as these were priced up; and
new business reduced following the decision to price at sustainable levels.
By the end of the period, all actuarial dynamics of the business were in
line with expectation and the company focused on rolling out the new product
range with a significantly-enhanced Vitality capability. It is anticipated
that levels of new business during the next period will show improvement.
With the positive foundation created, the business should generate strong
profitability going forward.
In respect of integration infrastructures, considerable progress was made in
terms of how the two businesses will be brought together from both a
technology and product perspective. Despite the profit achieved during the
period, it is anticipated that once this integration has occurred, an
additional saving of approximately R80 million to R100 million will be
achieved, with the full saving likely to emerge in the 2014 financial year.
New businesses
* New business:
R0.5 billion
* Investment:
8.8% of profit
* Unique members:
1.8 million
7. Discovery Insure (South Africa)
Discovery Insure was launched just prior to the reporting period under
consideration and its receptivity and progress have exceeded expectation.
New business since inception has exceeded R140 million API, with total in-
force policies at 31 December 2011 of 7 986. The premise on which Discovery
Insure is based is the extension of Discovery`s behavioural expertise into
affecting the way people drive, so that they pose lower insurance risk, and
more importantly - lower mortality and morbidity risk. In this way,
Discovery Insure`s purpose is completely aligned with the overall Discovery
purpose and the business has been created to disrupt the traditional short-
term insurance models that use claims experience as a proxy for risk and
reward lower risks with lower premiums. In contrast, Discovery Insure
accurately measures driving behaviour to assess risk and rewards lower risks
on a real-time basis with more tangible and immediate benefits that impact
behaviour.
Three of the key strategic barriers that required attention was ensuring
that the telematics technology could be made mainstream with relevant and
accurate data available instantaneously; overcoming policyholders`
reservations that being tracked would feel intrusive in any way; and
building a network chassis to fulfil the fuel reward benefit. All of these
barriers have been dealt with and the business is rolling out ahead of
expectation. There appears to be a real opportunity to not only build a
business of scale and quality, but also to impact society in a real and
significant way: creating better drivers and consequently, safer roads. The
early results around VitalityDriveTrade Mark have exceeded expectation, with
98% of Discovery Insure clients having VitalityDriveTrade Mark, and within
this, levels of engagement have been strong and meaningful correlations
found between how policyholders drive and their levels of risk.
In addition, early indications demonstrate that the kind of client attracted
to Discovery Insure is typically attracted to Discovery`s other products,
with over 60% of clients having three or more Discovery products, excluding
Discovery Insure. The implication of this is two-fold: the persistency and
behavioural quality of the Discovery Insure client base is superior, and the
ability to predict behavioural change from other interactions with Discovery
becomes more accurate. This is profound given Discovery`s goal of building a
business of scale with significant value based on its ability to price risk
accurately and attract quality members.
8. Ping An Health (China)
Ping An Health made significant progress during the period. During the
previous year work was done on obtaining the necessary regulatory approvals
and establishing the team in China. During the period under review, Ping An
Health invested considerably in technology and other infrastructural
aspects. In addition to this, the company focused on a number of important
product development initiatives and innovations, including a Vitality
construct, with these expected to be rolled out in the first and second
quarters of 2012.
Despite the infancy of many of the developments, progress made in the market
was strong, with new business for the six months of R211 million, the
quality of business exceeding expectation, and over 430 000 lives being
covered by the end of the period. Ping An Health is now well positioned to
capture considerable Group high-end and Individual insurance mid-market
business.
Discovery remains excited about the potential of Ping An Health and the
ability to build a leading health insurance company in China.
9. The Vitality Group (The United States)
During the period, The Vitality Group made significant progress. Discovery`s
intent is to create a scaled-up stand-alone Vitality capability in the US,
given the opportunity created by the inherent centrality of wellness to the
US healthcare system.
Discovery`s strategy in the US is to explore a number of distribution
channels and partnership opportunities. A seminal development in this regard
was the partnership with Humana, which presents Discovery with the
opportunity to apply its learnings into a large US Health insurer. During
the period, the partnership was successfully rolled out and yielded
considerable results in a short space of time: the combination of The
Vitality Group`s own distribution channels, in addition to Humana`s
distribution, generated in excess of R174 million new business by 31
December 2011, with 1.4 million lives covered by February 2012. In addition,
the network is reaching significant scale with over 14 000 partner health
clubs and over 2 500 retail locations for members to undergo Vitality
Wellness Checks.
Discovery remains optimistic about the prospects of leveraging its
intellectual property and assets towards building up a business of scale in
the US.
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
INCOME STATEMENT
for the six months ended 31 December 2011
R million Group Group % Group
Six months Six months change Year
ended ended ended
December December June
2011 2010 2011
Unaudited Unaudited Audited
Insurance premium revenue 7 203 5 988 12 486
Reinsurance premiums (829) (816) (1 700)
Net insurance premium 6 374 5 172 10 786
revenue
Fee income from 1 999 1 881 3 888
administration business
Investment income 118 108 205
Net realised gains on 80 192 202
available-for-sale
financial assets
Net fair value gains on 252 702 661
financial assets at fair
value through profit or
loss
Vitality income 808 685 1 480
Net income 9 631 8 740 17 222
Claims and policyholders` (3 391) (2 594) (5 573)
benefits
Insurance claims 649 573 1 246
recovered from reinsurers
Recapture of reinsurance - (312) (313)
Net claims and (2 742) (2 333) (4 640)
policyholders` benefits
Acquisition costs (1 381) (1 192) (2 116)
Marketing and (3 424) (2 941) (6 012)
administration expenses
Amortisation of (70) (44) (97)
intangibles from business
combinations
Recovery of expenses from 61 79 139
reinsurers
Transfer from (356) (966) (1 530)
assets/liabilities under
insurance contracts
-change in assets arising 1 348 924 1 760
from insurance contracts
-change in liabilities (1 640) (1 802) (3 184)
arising from insurance
contracts
-change in liabilities (64) (88) (106)
arising from reinsurance
contracts
Fair value adjustment to - (99) (52)
liabilities under
investment contracts
Profit from operations 1 719 1 244 2 914
Finance costs (127) (38) (168)
Foreign exchange 74 (22) (14)
gains/(losses)
Share of profit/(losses) (5) - (4)
from associates
Gains and losses - 609 609
resulting from business
combinations
Write-off of software - (95) (95)
from business combination
Realised gains on - - 87
disposal of intellectual
property
Realised gains on - - 122
disposal of investment
property
Profit before tax 1 661 1 698 (2) 3 451
Income tax expense (563) (390) (44) (872)
Profit for the period 1 098 1 308 (16) 2 579
Profit attributable to:
-equity holders 1 098 1 417 (23) 2 577
-non-controlling interest - (109) 2
1 098 1 308 (16) 2 579
Earnings per share for
profit attributable to
the equity holders of the
company during the period
(cents):
-basic 197.9 255.6 (23) 464.4
-diluted 197.8 255.4 (23) 464.2
STATEMENT OF COMPREHENSIVE INCOME
for the six months ended 31 December 2011
R million Group Group % Group
Six months Six months change Year
ended ended ended
December December June
2011 2010 2011
Unaudited Unaudited Audited
Profit for the period 1 098 1 308 2 579
Other comprehensive
income:
Change in available-for- (5) (79) (122)
sale financial assets
-unrealised gains 74 92 61
-capital gains tax on (10) (6) (9)
unrealised gains
-realised gains (80) (192) (202)
transferred to profit or
loss
-capital gains tax on 11 27 28
realised gains
Currency translation 271 (346) (146)
differences
-increase/(decrease) in 271 (365) (127)
currency translation
reserve
-transfer to profit or - 19 (19)
loss on disposal of joint
venture
Cash flow hedges 14 (10) (30)
-unrealised 14 (17) (31)
gains/(losses)
-tax on unrealised (1) 9 8
gains/losses
-realised losses/(gains) 2 (2) (10)
transferred to profit or
loss
-tax on realised (1) * 3
gains/losses
Other comprehensive 280 (435) (298)
income for the period,
net of tax
Total comprehensive 1 378 873 58 2 281
income for the period
Attributable to:
-equity holders 1 378 982 40 2 279
-non-controlling interest - (109) 2
Total comprehensive 1 378 873 58 2 281
income for the period
* Amount is less than R500 000.
STATEMENT OF FINANCIAL POSITION
at 31 December 2011
R million Group Group
December June
2011 2011
Unaudited Audited
ASSETS
Assets arising from insurance contracts 10 552 9 044
Property and equipment 240 200
Intangible assets including deferred 1 557 1 440
acquisition costs
Goodwill 1 503 1 302
Investment in associate 324 260
Financial assets
-Equity securities 3 857 3 467
-Equity linked notes 5 627 4 742
-Debt securities 2 379 1 535
-Inflation linked securities 121 159
-Money market 4 755 2 680
-Derivatives 60 46
-Loans and receivables including insurance 2 195 2 269
receivables
Current income tax asset 27 -
Deferred income tax 312 296
Reinsurance contracts 170 180
Cash and cash equivalents 2 578 3 285
Total assets 36 257 30 905
EQUITY
Capital and reserves
Share capital and share premium 1 537 1 542
Preference shares 779 -
Other reserves 562 278
Retained earnings 7 966 7 149
10 844 8 969
Non-controlling interest 1 4
Total equity 10 845 8 973
LIABILITIES
Liabilities arising from insurance 12 475 10 621
contracts
Liabilities arising from reinsurance 1 386 1 308
contracts
Financial liabilities
-Investment contracts at fair value through 2 411 2 063
profit or loss
-Borrowings at amortised cost 402 402
-Derivatives 22 22
-Puttable non-controlling interests 2 742 2 314
Deferred income tax 2 875 2 584
Deferred revenue 116 130
Employee benefits 103 97
Trade and other payables 2 880 2 391
Total liabilities 25 412 21 932
Total equity and liabilities 36 257 30 905
HEADLINE EARNINGS
for the six months ended 31 December 2011
R million Group Group % Group
Six months Six months change Year
ended ended ended
December December June
2011 2010 2011
Unaudited Unaudited Audited
Normalised headline
earnings per share
(cents):
-undiluted 202.8 169.6 20 365.8
-diluted 202.7 169.5 20 365.5
Headline earnings per
share (cents):
-undiluted 185.5 114.7 62 295.3
-diluted 185.4 114.6 62 295.2
The reconciliation
between earnings and
headline earnings is
shown below:
Net profit 1 098 1 417 2 577
attributable to
equity shareholders
Adjusted for:
-realised gains on (69) (165) (174)
available-for-sale
financial assets net
of CGT
-gain on disposal of - (667) (667)
joint venture
-write-off of - 51 68
software from
business combination
net of deferred tax*
-realised gains on - - (57)
disposal of
intellectual property
net of deferred tax
-realised gains on - - (109)
disposal of
investment property
net of CGT
Headline earnings 1 029 636 62 1 638
-amortisation of 50 24 70
intangibles from
business combinations
net of deferred tax*
-finance costs raised 75 - 86
on puttable non-
controlling interest
financial liability
-non-controlling (6) - -
interest adjustment
if no put options
-preference share (23) - -
dividends
-once-off costs
relating to
acquisitions* - 47 58
-recapture of - 234 313
reinsurance*
-'DAC expense - - (137)
reversed due to
business combination
Normalised headline 1 125 941 20 2 028
earnings
* December 2010
amounts shown at 75%.
Weighted number of 555 003 554 485 554 847
shares in issue
(000`s)
Diluted weighted 555 247 554 793 555 056
number of shares
(000`s)
STATEMENT OF CASH FLOWS
for the six months ended 31 December 2011
R million Group Group Group
Six months Six months Year
ended ended ended
December December June
2011 2010 2011
Unaudited Unaudited Audited
Cash flow from operating 707 (824) (6)
activities
Cash generated by operations 2 137 1 561 4 060
Policyholder net investments (1 665) (2 048) (3 930)
Working capital changes 483 (473) 156
955 (960) 286
Dividends received 53 33 83
Interest received 19 143 122
Interest paid (37) (28) (62)
Taxation paid (283) (12) (435)
Cash flow from investing (2 108) (340) 313
activities
Net (purchases)/disposals of (1 976) 802 1 369
financial assets
Net purchases of equipment (70) (17) (40)
Purchase of intangible assets (62) (53) (84)
Purchase of subsidiary - (1 072) (1 072)
Disposal of investment - - 140
property
Cash flow from financing 511 279 198
activities
Proceeds from issuance of 18 106 282
ordinary shares
Proceeds from preference 800 - -
shares issued
Share issue costs (21) - -
Dividends paid to equity (274) (214) (461)
holders
Minority share buy-backs (12) - -
Repayment of borrowings - (13) (23)
Increase in borrowings - 400 400
Net (decrease)/increase in (890) (885) 505
cash and cash equivalents
Cash and cash equivalents at 3 285 2 845 2 845
beginning of year
Exchange gains/(losses) on 183 (64) (65)
cash and cash equivalents
Cash and cash equivalents at 2 578 1 896 3 285
end of period
SEGMENTAL INFORMATION
for the six months ended 31 December 2011
R million SA Health SA Life SA Invest
31 December 2011
Income statement
Insurance premium revenue 8 2 905 1 855
Reinsurance premiums (1) (519) -
Net insurance premium revenue 7 2 386 1 855
Fee income from administration 1 755 47 177
business
Investment income 10 63 7
Inter-segment funding - (126) 126
Net realised gains on available- - 75 5
for-sale financial assets
Net fair value gains on financial - 95 157
assets at fair value through
profit or loss
Vitality income - - -
Net income 1 772 2 540 2 327
Claims and policyholders` benefits (2) (1 328) (433)
Insurance claims recovered from - 380 -
reinsurers
Net claims and policyholders` (2) (948) (433)
benefits
Acquisition costs - (694) (176)
Marketing and administration
expenses
-depreciation and amortisation (66) (13) (3)
-other expenses (1 012) (582) (112)
Recovery of expenses from - - -
reinsurers
Transfer from assets/liabilities
under insurance contracts
-change in assets arising from - 928 -
insurance contracts
-change in liabilities arising - (162) (1 519)
from insurance contracts
-change in liabilities arising - (98) -
from reinsurance contracts
Fair value adjustment to - (9) 9
liabilities under investment
contracts
Profit/(loss) from operations 692 962 93
Amortisation of intangibles from - - -
business combinations
Finance costs (1) - (1)
Foreign exchange gains 23 16 2
Share of profit/(loss) from - - -
associates
Profit/(loss) before tax 714 978 94
Income tax expense (201) (254) (26)
Profit/(loss) for the period 513 724 68
Attributable to:
-equity holders 513 724 68
-non-controlling interest - - -
513 724 68
31 December 2010
Income statement
Insurance premium revenue 12 2 461 1 659
Reinsurance premiums (1) (481) -
Net insurance premium revenue 11 1 980 1 659
Fee income from administration 1 668 61 105
business
Investment income 11 68 2
Inter-segment funding - (100) 100
Net realised gains on available- - 193 -
for-sale financial assets
Net fair value gains on financial - 247 455
assets at fair value through
profit or loss
Vitality income - - -
Net income 1 690 2 449 2 321
Claims and policyholders` benefits (6) (1 078) (262)
Insurance claims recovered from - 333 -
reinsurers
Net claims and policyholders` (6) (745) (262)
benefits
Acquisition costs - (715) (154)
Marketing and administration
expenses
-depreciation and amortisation (69) (12) (5)
-other expenses (985) (479) (100)
Recovery of expenses from - - -
reinsurers
Transfer from assets/liabilities
under insurance contracts
-change in assets arising from - 727 -
insurance contracts
-change in liabilities arising - (96) (1 716)
from insurance contracts
-change in liabilities arising - (71) -
from reinsurance contracts
Fair value adjustment to
liabilities under investment
contracts - (61) (38)
Profit/(loss) from operations 630 997 46
Recapture of reinsurance - - -
Gains and losses resulting from - - -
business combinations
Write-off of software from - - -
business combination
Amortisation of intangibles from - - -
business combinations
Finance costs - - -
Foreign exchange losses (12) (6) (3)
Profit/(loss) before tax 618 991 43
Income tax expense (166) (246) (12)
Profit/(loss) for the period 452 745 31
Attributable to:
-equity holders 452 745 31
-non-controlling interest - - -
452 745 31
SEGMENTAL INFORMATION
for the six months ended 31 December 2011
R million SA UK Health UK Life
Vitality
31 December 2011
Income statement
Insurance premium revenue - 2 147 263
Reinsurance premiums - (251) (56)
Net insurance premium revenue - 1 896 207
Fee income from administration - 9 11
business
Investment income 2 9 3
Inter-segment funding - - -
Net realised gains on available- - - -
for-sale financial assets
Net fair value gains on financial - - -
assets at fair value through
profit or loss
Vitality income 742 30 -
Net income 744 1 944 221
Claims and policyholders` benefits - (1 529) (81)
Insurance claims recovered from - 216 52
reinsurers
Net claims and policyholders` - (1 313) (29)
benefits
Acquisition costs (33) (137) (337)
Marketing and administration
expenses
-depreciation and amortisation - (5) -
-other expenses (709) (502) ( 225)
Recovery of expenses from - 61 -
reinsurers
Transfer from assets/liabilities
under insurance contracts
-change in assets arising from - (34) 454
insurance contracts
-change in liabilities arising - 42 -
from insurance contracts
-change in liabilities arising - - 34
from reinsurance contracts
Fair value adjustment to - - -
liabilities under investment
contracts
Profit/(loss) from operations 2 56 118
Amortisation of intangibles from - - -
business combinations
Finance costs - (10) (28)
Foreign exchange gains - - -
Share of profit/(loss) from - - -
associates
Profit/(loss) before tax 2 46 90
Income tax expense 1 - (41)
Profit/(loss) for the period 3 46 49
Attributable to:
-equity holders 3 46 49
-non-controlling interest - - -
3 46 49
31 December 2010
Income statement
Insurance premium revenue - 1 733 123
Reinsurance premiums - (298) (36)
Net insurance premium revenue - 1 435 87
Fee income from administration 28 6 9
business
Investment income 5 5 2
Inter-segment funding - - -
Net realised gains on available- - (1) -
for-sale financial assets
Net fair value gains on financial - - -
assets at fair value through
profit or loss
Vitality income 629 37 -
Net income 662 1 482 98
Claims and policyholders` benefits - (1 217) (32)
Insurance claims recovered from - 226 14
reinsurers
Net claims and policyholders` - (991) (18)
benefits
Acquisition costs (28) (128) (167)
Marketing and administration
expenses
-depreciation and amortisation - (2) -
-other expenses (628) (406) (135)
Recovery of expenses from - 79 -
reinsurers
Transfer from assets/liabilities
under insurance contracts
-change in assets arising from - (4) 201
insurance contracts
-change in liabilities arising - 9 -
from insurance contracts
-change in liabilities arising - - (17)
from reinsurance contracts
Fair value adjustment to - - -
liabilities under investment
contracts
Profit/(loss) from operations 6 39 (38)
Recapture of reinsurance - - -
Gains and losses resulting from - - -
business combinations
Write-off of software from - - -
business combination
Amortisation of intangibles from - - -
business combinations
Finance costs - (7) (12)
Foreign exchange losses - - -
Profit/(loss) before tax 6 32 (50)
Income tax expense (1) 6 16
Profit/(loss) for the period 5 38 (34)
Attributable to:
-equity holders 5 13 (25)
-non-controlling interest - 25 (9)
5 38 (34)
SEGMENTAL INFORMATION
for the six months ended 31 December 2011
R million New All other Total
business segments*
development
31 December 2011
Income statement
Insurance premium revenue 25 - 7 203
Reinsurance premiums (2) - (829)
Net insurance premium revenue 23 - 6 374
Fee income from administration - - 1 999
business
Investment income 3 21 118
Inter-segment funding - - -
Net realised gains on available- - - 80
for-sale financial assets
Net fair value gains on financial - - 252
assets at fair value through
profit or loss
Vitality income 36 - 808
Net income 62 21 9 631
Claims and policyholders` benefits (18) - (3 391)
Insurance claims recovered from 1 - 649
reinsurers
Net claims and policyholders` (17) - (2 742)
benefits
Acquisition costs (4) - (1 381)
Marketing and administration
expenses
-depreciation and amortisation (3) - (90)
-other expenses (171) (21) (3 334)
Recovery of expenses from - - 61
reinsurers
Transfer from assets/liabilities
under insurance contracts
-change in assets arising from - - 1 348
insurance contracts
-change in liabilities arising (1) - (1 640)
from insurance contracts
-change in liabilities arising - - (64)
from reinsurance contracts
Fair value adjustment to - - -
liabilities under investment
contracts
Profit/(loss) from operations (134) - 1 789
Amortisation of intangibles from - (70) (70)
business combinations
Finance costs - (87) (127)
Foreign exchange gains 2 31 74
Share of profit/(loss) from 2 (7) (5)
associates
Profit/(loss) before tax (130) (133) 1 661
Income tax expense - (42) (563)
Profit/(loss) for the period (130) (175) 1 098
Attributable to:
-equity holders (130) (175) 1 098
-non-controlling interest - - -
(130) (175) 1 098
31 December 2010
Income statement
Insurance premium revenue - - 5 988
Reinsurance premiums - - (816)
Net insurance premium revenue - - 5 172
Fee income from administration - 4 1 881
business
Investment income - 15 108
Inter-segment funding - - -
Net realised gains on available- - - 192
for-sale financial assets
Net fair value gains on financial - - 702
assets at fair value through
profit or loss
Vitality income 19 - 685
Net income 19 19 8 740
Claims and policyholders` benefits - 1 (2 594)
Insurance claims recovered from - - 573
reinsurers
Net claims and policyholders` - 1 (2 021)
benefits
Acquisition costs - - (1 192)
Marketing and administration
expenses
-depreciation and amortisation (2) - (90)
-other expenses (90) (28) (2 851)
Recovery of expenses from - - 79
reinsurers
Transfer from assets/liabilities
under insurance contracts
-change in assets arising from - - 924
insurance contracts
-change in liabilities arising - 1 (1 802)
from insurance contracts
-change in liabilities arising - - (88)
from reinsurance contracts
Fair value adjustment to - - (99)
liabilities under investment
contracts
Profit/(loss) from operations (73) (7) 1 600
Recapture of reinsurance - (312) (312)
Gains and losses resulting from - 609 609
business combinations
Write-off of software from - (95) (95)
business combination
Amortisation of intangibles from - (44) (44)
business combinations
Finance costs - (19) (38)
Foreign exchange losses - (1) (22)
Profit/(loss) before tax (73) 131 1 698
Income tax expense - 13 (390)
Profit/(loss) for the period (73) 144 1 308
Attributable to:
-equity holders (72) 268 1 417
-non-controlling interest (1) (124) (109)
(73) 144 1 308
* All other segments include the impact from business combinations.
STATEMENT OF CHANGES IN EQUITY
for the six months ended 31 December 2011
Attributable to equity holders of
the Company
R million Share Preference Share-
capital shares based
and share payment
premium reserve
Period ended 31 December 2011
At beginning of period 1 542 - 318
Profit for the period - - -
Other comprehensive income - - -
Total comprehensive income for - - -
the period
Transactions with owners:
Issue of share capital - 800 -
Non-controlling interest shares - - -
issues
Non-controlling interest share - - -
buy-backs
Realised losses from non- - - -
controlling interest share buy-
backs
Realised gains from treasury 5 - -
shares
Increase in treasury shares (10) - -
Employee share option schemes:
-'Value of employee services - - 1
Share issue costs written-off - (21) -
Transfer to contingency reserve - - -
Dividends paid to equity holders - - -
Total transactions with owners (5) 779 1
At end of period 1 537 779 319
Period ended 31 December 2010
At beginning of period 1 541 - 316
Profit for the period - - -
Other comprehensive income - - -
Total comprehensive income for - - -
the period
Transactions with owners: - - -
Non-controlling interest shares
issues
Realised gains from treasury 17 - -
shares
Employee share option schemes:
-Value of employee services - - 1
Dividends paid to equity holders - - -
Total transactions with owners 17 - 1
At end of period 1 558 - 317
STATEMENT OF CHANGES IN EQUITY
for the six months ended 31 December 2011
Attributable to equity holders of the
Company
R million Revaluation Translation Contingency
reserve1 reserve reserve2
Period ended 31 December 2011
At beginning of period 23 (70) -
Profit for the period - - -
Other comprehensive income (5) 271 -
Total comprehensive income (5) 271 -
for the period
Transactions with owners:
Issue of share capital - - -
Non-controlling interest - - -
shares issues
Non-controlling interest - - -
share buy-backs
Realised losses from non- - - -
controlling interest share
buy-backs
Realised gains from treasury - - -
shares
Increase in treasury shares - - -
Employee share option
schemes:
-Value of employee services - - -
Share issue costs written-off - - -
Transfer to contingency - - 3
reserve
Dividends paid to equity - - -
holders
Total transactions with - - 3
owners
At end of period 18 201 3
Period ended 31 December 2010
At beginning of period 145 76 -
Profit for the period - - -
Other comprehensive income (79) (346) -
Total comprehensive income (79) (346) -
for the period
Transactions with owners: - - -
Non-controlling interest
shares issues
Realised gains from treasury - - -
shares
Employee share option
schemes:
-Value of employee services - - -
Dividends paid to equity - - -
holders
Total transactions with - - -
owners
At end of period 66 (270) -
STATEMENT OF CHANGES IN EQUITY
for the six months ended 31 December 2011
Attributable to equity holders of the
Company
R million Hedging Retained Total
reserve earnings
Period ended 31 December 2011
At beginning of period 7 7 149 8 969
Profit for the period - 1 098 1 098
Other comprehensive income 14 - 280
Total comprehensive income 14 1 098 1 378
for the period
Transactions with owners:
Issue of share capital - - 800
Non-controlling interest - - -
shares issues
Non-controlling interest - - -
share buy-backs
Realised losses from non- - (4) (4)
controlling interest share
buy-backs
Realised gains from treasury - - 5
shares
Increase in treasury shares - - (10)
Employee share option
schemes:
-Value of employee services - - 1
Share issue costs written-off - - (21)
Transfer to contingency
reserve - (3) -
Dividends paid to equity - (274) (274)
holders
Total transactions with - (281) 497
owners
At end of period 21 7 966 10 844
Period ended 31 December 2010
At beginning of period 37 6 267 8 382
Profit for the period - 1 417 1 417
Other comprehensive income (10) - ( 435)
Total comprehensive income (10) 1 417 982
for the period
Transactions with owners: - - -
Non-controlling interest
shares issues
Realised gains from treasury - - 17
shares
Employee share option
schemes:
-'Value of employee services - - 1
Dividends paid to equity - (214) (214)
holders
Total transactions with - (214) (196)
owners
At end of period 27 7 470 9 168
STATEMENT OF CHANGES IN EQUITY
for the six months ended 31 December 2011
R million Non- Total
controlling
interest
Period ended 31 December 2011
At beginning of period 4 8 973
Profit for the period - 1 098
Other comprehensive income - 280
Total comprehensive income for the period - 1 378
Transactions with owners:
Issue of share capital - 800
Non-controlling interest shares issues 5 5
Non-controlling interest share buy-backs (8) (8)
Realised losses from non-controlling - (4)
interest share buy-backs
Realised gains from treasury shares - 5
Increase in treasury shares - (10)
Employee share option schemes:
-Value of employee services - 1
Share issue costs written-off - (21)
Transfer to contingency reserve - -
Dividends paid to equity holders - (274)
Total transactions with owners (3) 494
At end of period 1 10 845
Period ended 31 December 2010
At beginning of period - 8 382
Profit for the period (109) 1 308
Other comprehensive income - (435)
Total comprehensive income for the period (109) 873
Transactions with owners: 894 894
Non-controlling interest shares issues
Realised gains from treasury shares - 17
Employee share option schemes:
-Value of employee services - 1
Dividends paid to equity holders - (214)
Total transactions with owners 894 698
At end of period 785 9 953
1 This reserve relates to the revaluation of available-for-sale
financial assets.
2 The statutory contingency reserve is calculated at 10% of net
written premiums in terms of the South African Short-term Insurance
Act 1998. Transfers to and from this reserve are taken directly to
and from distributable reserves.
REVIEW OF GROUP RESULTS
VALUE CREATORS
New business annualised premium income increased 21% for the six months
ended 31 December 2011.
R million December December %
2011 2010 change
Discovery Health 2 089 1 974 6
Discovery Life 892 832 7
Discovery Invest 487 397 23
Discovery Vitality 74 70 6
Discovery Insure 118 -
PruHealth 272 313 (13)
PruProtect 218 144 51
Vitality USA 174 17 924
Ping An Health 211 -
New business API of Group 4 535 3 747 21
New business API is calculated at 12 times the monthly premium for new
recurring premium policies and 10% of the value of new single premium
policies. It also includes both automatic premium increases and servicing
increases on existing policies. For Vitality USA and Ping An Health, new
business API is calculated based on the date of policy inception.
Gross inflows under management increased 16% for the six months ended 31
December 2011.
GROSS INFLOWS UNDER MANAGEMENT
R million December December %
2011 2010 change
Discovery Health 17 016 15 115 13
Discovery Life 2 952 2 522 17
Discovery Invest 4 612 3 626 27
Discovery Insure 25 -
Discovery Vitality 778 676 15
PruHealth 2 186 1 829 20
PruProtect 274 142 93
Gross inflows under management 27 843 23 910 16
Less: collected on behalf of third (17 833) (15 356) (16)
parties
Discovery Health (15 253) (13 431) (14)
Discovery Invest (2 580) (1 862) (39)
PruHealth - (53)
PruProtect - (10)
Gross income of Group 10 010 8 554 17
Gross inflows under management measures the total funds collected by
Discovery and is an accurate measure of the growth of Discovery.
PROFIT FROM OPERATIONS
The following table shows the main components of the Group profit
from operations for the six months ended 31 December 2011:
R million December December %
2011 2010 change
Discovery Health 682 619 10
Discovery Life 862 768 12
Discovery Invest 81 44 84
Discovery Vitality - 1
PruHealth 47 35 34
PruProtect 115 (40) 388
Profit from existing operations 1 787 1 427 25
Development and other segments (158) (95) (66)
Normalised profit from operations 1 629 1 332 22
Amortisation of intangibles from (70) (44) (59)
business combinations
Investment income attributable to 80 76 5
equity holders
Net realised gains on available-for- 80 192 (58)
sale financial assets
Share of profit/(loss) from (5) -
associates
Finance costs and foreign exchange (53) (60) 12
gains/(losses)
Recapture of reinsurance - (312)
Gains and losses resulting from - 609
business combinations
Write-off of software from business - (95)
combination
Profit before tax 1 661 1 698 (2)
From 1 August 2010, PruHealth and PruProtect have been accounted for as
subsidiaries in the Group results, previously accounted for as joint
ventures. This means that the comparatives disclosed include the income,
expenses, assets and liabilities of these companies at 50% for July 2010,
but at 100% from 1 August 2010.
SIGNIFICANT MOVEMENTS IN THE INCOME STATEMENT
ACQUISITION OF STANDARD LIFE HEALTHCARE (SLHC)
For a detailed discussion regarding the accounting treatment of the
acquisition of SLHC, please refer to the 30 June 2011 Annual Financial
Statements.
In terms of IFRS 3 revised, paragraph 45, the initial accounting for an
acquisition can be undertaken on a provisional basis. Adjustments to
provisional values can be made within one year of the effective date,
relating to facts or circumstances at the acquisition date. As such, the
acquisition accounting entries were finalised at 30 June 2011 and no further
adjustments will be made.
Intangibles identified in the acquisition of SLHC are amortised over their
remaining useful lives and tested for impairment at each reporting date.
There was no indication of impairment for the current reporting period.
Discovery has recorded an amortisation charge of R70 million in profit or
loss at 31 December 2011 (2010: R44 million).
SHARE-BASED PAYMENTS
Included in marketing and administration expenses is R106 million (2010:
R107 million) in respect of options granted under employee share incentive
schemes expensed in accordance with the requirements of IFRS 2.
Discovery entered into transactions to hedge its exposure in the phantom
share scheme related to changes in the Discovery share price. As at 31
December 2011, approximately 85% (2010: 67.3%) of this exposure was hedged.
PUT OPTIONS IN SUBSIDIARIES
During the prior financial year, put options were granted to the non-
controlling interests of three of Discovery`s subsidiaries, entitling the
non-controlling interest to sell its interest in the subsidiary to Discovery
at contracted dates. In accordance with IAS 32, Discovery has recognised the
fair value of the non-controlling interest, being the present value of the
estimated purchase price, as a financial liability in the Statement of
Financial Position (Puttable non-controlling interests). Interest in respect
of this liability of R75 million has been recorded in finance charges for
the six months ended 31 December 2011, using the effective interest rate
method. The estimated purchase prices have been reconsidered and no
adjustments to the assumptions were made.
Aggregate effects on Discovery`s results at 31 December 2011:
R million Total
Value of puttable non-controlling interests as at 1 July 2 314
2011
Further share issues to non-controlling interests 23
Finance charges recognised in the income statement 75
Net exchange differences arising during the period 330
Value of puttable non-controlling interests as at 31 2 742
December 2011
TAXATION
All South African entities, excluding Discovery Insure, are in a tax paying
position. South African income tax has been provided at 28% (2010: 28%) and
secondary tax on companies at 10% in the financial statements. No deferred
tax has been accounted for in respect of the Discovery Insure losses.
Discovery obtained no tax relief for the PruHealth losses in respect of the
calendar year ending 31 December 2010 and utilised prior losses against
current income in PruHealth. Discovery has not accounted for any deferred
tax asset in respect of the balance of assessed losses in PruHealth.
Tax relief is obtained for 100% of the PruProtect losses through The
Prudential Plc.
Included in the profit before tax for the six months ended 31 December 2010,
are non-taxable gains and losses resulting from business combinations.
MATERIAL TRANSACTIONS WITH RELATED PARTIES
Discovery Health administers Discovery Health Medical Scheme (DHMS) and
provides managed care services for which it charges an administration fee
and a managed healthcare fee respectively. These fees are determined on an
arm`s length basis and totalled R1 613 million for the six months ended 31
December 2011 (2010: R1 541 million). Discovery offers the members of DHMS
access to the Vitality programme.
SIGNIFICANT MOVEMENTS IN THE STATEMENT OF FINANCIAL POSITION
FINANCIAL ASSETS
Financial assets have increased due to the sale of Discovery Invest products
as well as the transfer of approximately R750 million from cash and
cash equivalents to a money market investment portfolio.
ISSUE OF PREFERENCE SHARES
On 15 August 2011, Discovery issued 8 million B preference shares at an
issue price of R100 each by way of private placement. These preference
shares were issued at a coupon rate of 85% of prime rate. These preference
shares are non-cumulative, non-participating, non-convertible, voluntarily
redeemable no par value preference shares and have therefore been classified
as equity. The value of the preference shares in the Statement of Financial
Position has been reduced by share issue costs of R21 million.
The first preference share dividend has been declared on 22 February
2012. As these preference shares are non-cumulative, no dividend has been
accrued for in the current reporting period. Normalised headline earnings
have been adjusted by R23 million, as if the preference share dividends have
been accrued for on a day-to-day basis.
BORROWINGS AT AMORTISED COST
Borrowings at amortised cost, includes a long-term loan of R400 million
raised as part of the funding to purchase SLHC. Interest on the loan is
payable quarterly, at a fixed interest rate. R20 million has been recorded
in finance charges for the six months ended 31 December 2011 (2010: R12.6
million). The loan is repayable on 11 September 2017.
DEFERRED TAX LIABILITY
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.
SHAREHOLDER INFORMATION
DIRECTORATE
Dr Ayanda Ntsaluba was appointed as an executive director with effect from 1
July 2011. Mr Jannie Durand was appointed as a non-executive director with
effect from 25 August 2011.
DIVIDEND POLICY AND CAPITAL
A final dividend of 48 cents per share was paid on 17 October 2011.
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 was R342 million (2010: R303 million) and was
covered 4.4 times (2010: 3.9 times).
PREFERENCE SHARE CASH DIVIDEND DECLARATION:
The board has declared a dividend of 289.23 cents per share, payable to
preference shareholders for the period 15 August 2011 to 31 December 2011.
The salient dates are as follows:
-Last date to trade "cum" dividend Friday, 9 March 2012
-Date trading commences "ex" dividend Monday, 12 March 2012
-Record date Friday, 16 March 2012
-Date of payment Monday, 19 March 2012
Share certificates may not be dematerialised or rematerialised between
Monday, 12 March 2012 and Friday, 16 March 2012, both days inclusive.
ORDINARY SHARE CASH DIVIDEND DECLARATION:
The board has declared an interim dividend of 50 cents per share.
The salient dates are as follows:
-Last date to trade "cum" dividend Thursday, 15 March 2012
-Date trading commences "ex" dividend Friday, 16 March 2012
-Record date Friday, 23 March 2012
-Date of payment Monday, 26 March 2012
Share certificates may not be dematerialised or rematerialised between
Friday, 16 March 2012 and Friday, 23 March 2012, both days inclusive.
ACCOUNTING POLICIES
The interim results have been prepared in accordance with International
Financial Reporting Standards including IAS 34, as well as the South African
Companies Act 71 of 2008. The accounting policies adopted are consistent
with the accounting policies applied in the last annual report and the
corresponding prior year period.
COMPARATIVE FIGURES
There have been no changes to comparative figures, except for a change in
the composition of Discovery`s reportable segments.
In terms of IFRS 8, if a segment no longer meets any of the ten per cent
thresholds in the current or prior period, this segment will not be required
to be reported on separately in either period. The USA Health segment meets
this criteria and has now been aggregated in the `All other segments` column
in the Segmental Information in both the current and prior periods.
We are a proudly South African company that aims to be a leader in our
respective industries as well as in the South African economy and society.
EMBEDDED VALUE STATEMENT
for the six months ended 31 December 2011
The embedded value of Discovery at 31 December 2011 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 expected 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
required capital and STC. The value of new business is calculated using the
current reporting date assumptions.
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 the
subsidiaries in the Discovery Holdings Group. Covered business includes
business written in South Africa through Discovery Life, Discovery Invest,
Discovery Health and Discovery Vitality, and in the United Kingdom through
PruProtect, PruHealth and PruHealth Insurance Limited (previously Standard
Life Healthcare). PruProtect and PruHealth Insurance Limited are included in
the Group value of new business and value of in-force business with effect
from 30 June 2011. For The Vitality Group (USA) and Discovery Insure, no
published value has been placed on the current in-force business.
In August 2010, Discovery acquired Standard Life Healthcare and increased
its shareholding in the Prudential joint venture from 50% to 75%. During
2011, Discovery announced a venture with Humana in the United States and
launched a short term insurer, Discovery Insure. Put options were granted to
the non-controlling parties in these subsidiaries. The put option entitles
the non-controlling party to sell its interest in the subsidiary to
companies within the Discovery Group at specified future dates.
For accounting purposes, in accordance with IAS32, Discovery has
consolidated 100% of the subsidiaries results and has recognized the fair
value of the non-controlling interest, being the present value of the
estimated purchase price, as a financial liability in the Statement of
Financial Position (Puttable non-controlling interest). For embedded value
purposes, the financial liability in excess of the non-controlling interest
in the net asset value and the non-controlling share of the profits/losses
included in retained earnings were added back to the adjusted net worth.
In August 2011, Discovery raised R800 million through the issue of non-
cumulative, non-participating, non-convertible preference shares. For
embedded value purposes, the capital raised, net of share issue expenses,
has been excluded from the adjusted net worth.
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 2011. A copy of the auditors` unqualified
review report is available for inspection at the company`s registered
office.
TABLE 1: GROUP EMBEDDED VALUE
R million 31 December 31 December % 30 June
2011 2010 change 2011
Shareholders` 10 844 9 168 18 8 969
funds
Adjustment to (7 756) (6 839) (6 381)
shareholders`
funds from
published basis(1)
Adjusted net worth 3 088 2 329 33 2 588
-Free surplus 1 078 1 153 696
-Required 2 010 1 176 1 892
capital(2)
Value of Standard 522
Life Healthcare in-
force business
acquired(3)
Value of in-force 25 860 22 231 24 853
covered business
before cost of
capital
Cost of required (502) (375) (505)
capital
Cost of STC(4) (30) (633) (46)
Discovery Holdings 28 416 24 074 18 26 890
embedded value
Number of shares 555.0 555.0 555.0
(millions)
Embedded value per R51.20 R43.37 18 R48.45
share
Diluted number of 591.2 591.2 591.2
shares (millions)
Diluted embedded R50.56 R42.99 18 R47.86
value per share(5)
(1) The published shareholders` funds was reduced to eliminate net assets
under insurance contracts, deferred tax and deferred acquisition costs at
December 2011 of R6 926 million (June 2011: R6 126 million; December 2010:
R5 466 million) in respect of Life, R98 million (June 2011: R93 million;
December 2010: R39 million) in respect of PruHealth and R53 million (June
2011: R45 million) in respect of PruProtect. The December 2011 shareholders`
funds was reduced by R1 704 million (June 2011: R1 510 million) representing
Discovery`s share of goodwill and intangible assets (net of deferred tax)
relating to the acquisition of Standard Life Healthcare and the Prudential
joint venture.
The December 2011 shareholders` funds was increased by R1 706 million (June
2011: R1 301 million) reflecting the value of the puttable non-controlling
interest liability in excess of the non-controlling interest in the net
asset value and R98 million (June 2011: R92 million) reflecting the non-
controlling share of the losses included in retained earnings.
The December 2011 shareholders` funds was reduced by an amount of R779
million being the net preference share capital raised during August 2011.
(2) The required capital at December 2011 for Life is R685 million (June
2011: R610 million; December 2010: R606 million), for Health and Vitality is
R462 million (June 2011: R437 million; December 2010: R407 million), for
PruHealth is R699 million (June 2011: R730 million; December 2010: R163
million) and for PruProtect is R164 million (June 2011: R115 million). 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 amount was set equal to the
capital prescribed by the FSA under the Individual Capital Adequacy
Standards ("ICAS") framework. Allowance has also been made for additional
capital required by PruHealth over the next 12 months. For PruProtect, the
required capital was set equal to the UK Pillar 1 capital requirement.
(3) The value of the Standard Life Healthcare (now PruHealth Insurance
Limited) business in-force at 31 December 2010 was calculated based on the
acquisition price less the net asset value of the business. With effect from
30 June 2011 the value of in-force business, calculated as the present value
of expected future after-tax shareholder cash flows, has been included with
the PruHealth value of in-force covered business.
(4) STC will be replaced by a dividend withholding tax with effect from 1
April 2012. The cost of STC at 31 December 2011 has been calculated based on
the dividends expected to be declared prior to 1 April 2012.
(5) The diluted embedded value per share allows 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 2: VALUE OF IN-FORCE COVERED BUSINESS
R million Value Cost of Cost of Value after
before required STC cost of
cost of capital capital
capital and STC
and STC
at 31 December 2011
Health and Vitality 11 397 (164) (14) 11 219
Life and Invest(1) 12 891 (201) (15) 12 675
PruHealth(2) 1 241 (119) (1) 1 121
PruProtect(2) 331 (18) (0) 313
Total 25 860 (502) (30) 25 328
at 31 December 2010
Health and Vitality 10 840 (144) (307) 10 389
Life and Invest(1) 11 006 (168) (315) 10 523
PruHealth(2) 385 (63) (11) 311
Total 22 231 (375) (633) 21 223
at 30 June 2011
Health and Vitality 11 610 (155) (21) 11 434
Life and Invest(1) 11 969 (182) (23) 11 764
PruHealth(2) 1 077 (140) (2) 935
PruProtect(2) 197 (28) (0) 169
Total 24 853 (505) (46) 24 302
(1) Included in the Life and Invest value of in-force covered
business is R406 million (June 2011: R345 million; December 2010:
R278 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 value of in-force has been converted using the closing
exchange rate of R12.51/GBP (June 2011: R10.84/GBP; December 2010:
R10.30/GBP). The values for PruHealth and PruProtect reflect
Discovery`s 75% shareholding in the joint venture.
TABLE 3: GROUP EMBEDDED VALUE EARNINGS
R million Six months Six months Year
ended ended ended
31 December 31 30 June
2011 December 2011
2010
Embedded value at end of 28 416 24 074 26 890
period
Less: Embedded value at (26 890) (22 558) (22 558)
beginning of period
Increase in embedded value 1 526 1 516 4 332
Net change in capital 5 (17) (1)
Dividends paid 274 214 445
Fair value adjustment of non- - - (51)
controlling interest share of
subsidiary
Non-controlling share buy- 4 - -
back
Transfer to hedging reserve (14) 10 30
Embedded value earnings 1 795 1 723 4 755
Annualised return on opening 13.8% 15.9% 21.1%
embedded value
TABLE 4: COMPONENTS OF GROUP EMBEDDED VALUE EARNINGS
R million Net Cost of Value of Embedded
worth required in-force value
capital covered
business
less cost
of STC
Total profit from new (865) (37) 1 788 886
business (at point of
sale)
Profit from existing
business
Expected return 1 081 13 218 1 312
Change in methodology and 443 48 (769) (278)
assumptions(1)
Experience variances (78) 3 (420) (495)
Other initiative costs(2) (207) - 9 (198)
Non-recurring expenses (33) - - (33)
Acquisition costs(3) (26) - (2) (28)
Finance costs (12) - - (12)
Foreign exchange rate 365 (24) 199 540
movements
Return on shareholders` 101 - - 101
funds(4)
Embedded value earnings 769 3 1 023 1 795
(1) The 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 5 below (for previous periods refer to previous
embedded value statements).
(2) This item reflects Group initiatives including expenses relating to the
investment in Ping An Health, the establishment of The Vitality Group in the
United States, PruProtect and Discovery Insure.
(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 therefore the costs are excluded.
(4) The return on shareholders` funds is shown net of tax and management
charges.
TABLE 5: METHODOLOGY AND ASSUMPTION CHANGES
Health and Vitality Life and Invest
R million Net Value of Net Value of
worth in-force worth in-force
Modelling changes(1) - (40) 48 (113)
Expenses - 22 (2) (2)
Lapses(2) - - (7) (89)
Vitality - (9) - -
Reinsurance(3) - - 379 (406)
Mortality and - - 18 (15)
morbidity(4)
Benefit enhancements - - (41) 40
Premium and benefit - - 1 (56)
increases
Economic assumptions - (69) 7 (157)
Other - 7 3 (1)
Total - (89) 406 (799)
TABLE 5: METHODOLOGY AND ASSUMPTION CHANGES
PruHealth PruProtect
R million Net Value Net Value of Total
worth of worth in-force
in-
force
Modelling changes(1) - 265 (9) (1) 150
Expenses - (172) 3 1 (150)
Lapses(2) - (472) 2 (2) (568)
Vitality - (18) - - (27)
Reinsurance(3) 46 (17) - - 2
Mortality and - 435 (14) 30 454
morbidity(4)
Benefit enhancements - - - - (1)
Premium and benefit - - - - (55)
increases
Economic assumptions - 100 9 14 (96)
Other - 1 (0) 3 13
Total 46 122 (9) 45 (278)
(1) The Life and Invest modelling changes relate mainly to changes following
a conversion process on the administration system. The PruHealth modelling
changes relate to the modelling of commission on the PruHealth Insurance
Limited book.
(2) For Life and Invest and PruHealth, long-term lapse assumptions have been
strengthened at certain points.
(3) The reinsurance item relates to the impact of the financing reinsurance
arrangements.
(4) The PruHealth morbidity assumption has been adjusted as confidence in
its experience has improved.
TABLE 6: EXPERIENCE VARIANCES
Health and Vitality Life and Invest
R million Net Value of Net Value
worth in-force worth of
in-
force
Renewal expenses 3 - (6) 5
Administration fee (30) (532) - -
adjustment(1)
Lapses and surrenders(2) 3 82 (11) 28
Mortality and morbidity - - 78 (15)
Policy alterations(3) - (10) (135) 186
Backdated cancellations - - (15) 5
Premium income - - (20) (14)
Tax(4) (7) - 86 (70)
Reinsurance - - (1) 0
Economic assumptions(5) - - (15) (46)
Commission - - - -
Extended modelling term - 114 - 10
Other (26) 2 14 (13)
Total (57) (344) (25) 76
TABLE 6: EXPERIENCE VARIANCES
PruHealth PruProtect
R million Net Value of Net Value of Total
worth in-force worth in-force
Renewal expenses (109) - 9 - (98)
Administration fee - - - - (562)
adjustment(1)
Lapses and - (171) 2 1 (66)
surrenders(2)
Mortality and morbidity 94 - 2 - 159
Policy alterations(3) - - 6 (0) 47
Backdated cancellations - - (2) (1) (13)
Premium income - - (9) - (43)
Tax(4) 10 - (13) - 6
Reinsurance (22) - (5) - (28)
Economic assumptions(5) - - - - (61)
Commission 48 - - - 48
Extended modelling term - 13 - - 137
Other (5) 12 (2) (3) (21)
Total 16 (146) (12) (3) (495)
(1) This variance relates to the reduction in the administration fee payable
by the Discovery Health Medical Scheme during 2011.
(2) The total Health and Vitality lapse experience variance of R85 million
consists of a positive variance of R102 million due to lower than expected
lapses and a negative variance of R17 million due to the net growth in
existing employer groups (i.e. R379 million in respect of members joining
existing employer groups during the period offset by an amount of R396
million in respect of members leaving existing employer groups).
(3) Policy alterations relate to changes to existing benefits at the request
of the policyholder.
(4) The tax variance for Life and Invest arises due to a movement in the
deferred tax asset which delays the payment of tax.
(5) For Life and Invest, the economic assumptions variance relates primarily
to lower than expected premium and benefit increases due to lower than
expected inflation over the period.
TABLE 7: EMBEDDED VALUE OF NEW BUSINESS
R million Six months Six months % Year
ended ended change ended
31 December 31 December 30 June
2011 2010 2011
Health and Vitality
Present value of 205 223 505
future profits from
new business at
point of sale
Cost of required (7) (7) (15)
capital
Cost of STC (0) (6) (1)
Present value of 198 210 (6) 489
future profits from
new business at
point of sale after
cost of required
capital and STC
New business 682 713 (4) 1 698
annualised premium
income(1)
Life and Invest
Present value of 542 498 1 030
future profits from
new business at
point of sale(2)
Cost of required (20) (17) (35)
capital
Cost of STC (1) (14) (2)
Present value of 521 467 12 993
future profits from
new business at
point of sale after
cost of required
capital and STC
New business 926 883 5 1 724
annualised premium
income(3)
Annualised profit 6.9% 6.4% 7.0%
margin(4)
Annualised profit 10.2% 9.0% 9.8%
margin excluding
Invest Business
PruHealth(5)
Present value of 11 9 68
future profits from
new business at
point of sale
Cost of required (5) (5) (13)
capital
Cost of STC (0) (0) (0)
Present value of 6 4 50 55
future profits from
new business at
point of sale after
cost of required
capital and STC
New business 112 109 3 229
annualised premium
income(6)
Annualised profit 1.0% 0.6% 3.2%
margin(4)
PruProtect
Present value of 166 129
future profits from
new business at
point of sale
Cost of required (5) (16)
capital
Cost of STC (0) (0)
Present value of 161 113
future profits from
new business at
point of sale after
cost of required
capital and STC
New business 163 218
annualised premium
income(7)
Annualised profit 16.3% 10.9%
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 2011.
The total Health and Vitality new business annualised premium income written
over the period was R2 183 million (June 2011: R4 086 million; December
2010: R2 061 million).
(2) Included in the Life and Invest value of new business is R1 million
(June 2011: R11 million; December 2010: R1 million) in respect of investment
management services provided on off balance sheet investment business.
Risk business written prior to the valuation date allows certain Invest
business to be written at financially advantageous terms, the impact of
which has been recognized in the value of new business.
(3) Life new business is defined as Life policies or Discovery Retirement
Optimiser 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.
The new business annualised premium income of R926 million (June 2011: R1
724 million; December 2010: R883 million) (single premium APE: R255 million
(June 2011: R478 million; December 2010: R224 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 R265
million (June 2011: R403 million; December 2010: R195 million) and servicing
increases of R188 million (June 2011: R347 million; December 2010: R151
million) was R1 379 million (June 2011: R2 474 million; December 2010:
R1 229 million) (single premium APE: R266 million (June 2011: R502 million;
December 2010: R210 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 6 as experience variances and not
included as 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 new business for PruHealth is seasonal, with more business written
in the first half of the calendar year than the second half. The PruHealth
value of new business at 30 June 2011 includes new business written through
PruHealth Insurance Limited between August 2010 and March 2011. No new
business has been written through PruHealth Insurance Limited since March
2011. No value was placed on the PruHealth Insurance Limited new business at
31 December 2010.
(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 2011. There have been no changes to the
definition of new business since the previous valuation.
(7) The PruProtect new business is defined as policies which incepted during
the reporting period and which are on risk at the valuation date.
TABLE 8: EMBEDDED VALUE ECONOMIC ASSUMPTIONS
31 31 December 30 June
December 2010 2011
2011
Beta coefficient
South Africa 0.53 0.56 0.50
United Kingdom 0.53 0.56 0.50
Equity risk premium (%)
South Africa 3.50 3.50 3.50
United Kingdom 4.00 4.00 4.00
Risk discount rate (%)
Health and Vitality 10.855 10.46 10.75
Life and Invest 10.855 10.46 10.75
PruHealth 4.60 6.73 6.02
PruProtect 4.60 - 6.02
Rand/GB Pound Exchange Rate
Closing 12.51 10.30 10.84
Average 12.18 11.04 11.08
Medical inflation (%)
South Africa 8.00 7.50 8.00
United Kingdom 7.00 7.00 7.00
Expense inflation and CPI (%)
South Africa 5.00 4.50 5.00
United Kingdom
-PruHealth 3.75 3.75 3.75
-PruProtect 3.00 - 3.70
Pre-tax investment return (%)
South Africa
-Cash 7.50 7.00 7.50
-Bonds 9.00 8.50 9.00
-Equity 12.50 12.00 12.50
United Kingdom
-Risk free 2.48 3.99 4.02
-PruProtect asset return 4.04 - 5.59
assumption
Dividend cover ratio 4.5 times 4.5 times 4.5 times
Income tax rate (%)
South Africa 28.00 28.00 28.00
United Kingdom 26.00% 28.00% 26.00%
reducing reducing reducing
to to to
23.00% in 24.00% in 23.0% in
April April 2014 April
2014 2014
Projection term
-Health and Vitality 20 years 20 years 20 years
-Group Life 10 years 10 years 10 years
-PruHealth 20 years 20 years 20 years
Life and Invest mortality, morbidity and lapse and surrender assumptions
were derived from internal experience, where available, augmented by
reinsurance and industry information.
The Health lapse assumptions were based on the results of recent experience
investigations. The lapse rate for the projection term after 10 years was
set above current experience.
The PruHealth assumptions were derived from internal experience. Best
estimate morbidity assumptions allow for the impact of management actions.
The lapse rate over the short-term is assumed to be higher than the long-
term expected lapse rate to allow for the impact of the current economic
climate on lapses.
PruProtect assumptions were derived from internal experience, where
available, augmented by reinsurance, industry and Discovery group
information.
Renewal expense assumptions were based on the results of the latest expense
and budget information.
The initial expenses included in the calculation of the value of new
business are the actual costs incurred excluding expenses of an exceptional
or non-recurring nature.
The South African 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. The PruHealth investment return assumption was derived from the
sterling swap curve. The PruProtect investment return assumption was set
with reference to the expected return on matching assets (or liabilities in
the case of negative reserves) held on the Prudential balance sheet.
It is assumed that, for the purposes of calculating the cost of required
capital, the Life and Invest 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. The
PruProtect required capital amount is assumed to earn the same return as the
assets backing the PruProtect policyholder liabilities. Allowance has been
made for tax and investment expenses in the calculation of the cost of
capital. In calculating the capital gains tax ("CGT") liability, it is
assumed that the portfolio is realised every 5 years. The Life and Invest
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
Vitality and PruHealth cost of capital is calculated using the difference
between the risk discount rate and the net of tax cash return. The
PruProtect cost of capital is calculated using the difference between the
risk discount rate and the net of tax asset return assumption.
SENSITIVITY TO THE EMBEDDED VALUE ASSUMPTIONS
The embedded value has been calculated in accordance with the Actuarial
Society of South Africa`s Professional Guidance Note PGN 107: Embedded Value
Reporting. The risk discount rate, calculated in accordance with the
guidance note, uses the CAPM approach with specific reference to the
Discovery beta coefficient. The Discovery beta coefficient reflects the
historic performance of the Discovery share price relative to the market and
infers a lower allowance for non-market related and non-financial risk.
Investors may want to form their own view on an appropriate allowance for
the non-financial risks which have not been modelled explicitly.
The sensitivity of the embedded value and the value of new business at 31
December 2011 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 9: EMBEDDED VALUE SENSITIVITY TO RISK DISCOUNT RATE
R million Risk Published Risk
discount risk discount
rate -1% discount rate +1%
rate
Adjusted net worth 3 088 3 088 3 088
Value of in-force covered 28 314 25 860 23 776
business before cost of
capital
Cost of required capital (503) (502) (503)
Cost of STC (30) (30) (30)
Discovery Holdings embedded 30 869 28 416 26 331
value
TABLE 10: VALUE OF NEW BUSINESS SENSITIVITY TO RISK DISCOUNT RATE
R million Risk Published Risk
discount risk discount
rate -1% discount rate +1%
rate
Present value of future 1 084 924 784
profits from new business at
point of sale
Cost of required capital (35) (37) (37)
Cost of STC (1) (1) (1)
Present value of future 1 048 886 746
profits from new business at
point of sale after cost of
required capital and STC
www.discovery.co.za
Sandton
23 February 2012
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 23/02/2012 10:00:01 Supplied by www.sharenet.co.za
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