Wrap Text
Unaudited interim results announcement and cash dividend declarations for the six months ended 31 December 2012
Discovery Limited
Unaudited interim results announcement and cash dividend declarations
For the six months ended 31 December 2012
Financial highlights
Normalised profit from operations up 21%: R1 973 million
Normalised headline earnings up 20%: R1 349 million
Embedded value up 18%: R33.4 billion
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, Discovery Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
Company tax reference number: 9652/003/71/7
JSE share code: DSY
ISIN: ZAE000022331
JSE share code: DSBP
ISIN: ZAE000158564
155 West Street, Sandton 2146
PO Box 786722, Sandton 2146
Tel: (011) 529 2888
Fax: (011) 539 8003
Directors
MI Hilkowitz (Chairperson), A Gore* (Chief Executive Officer), Dr BA Brink, P Cooper, JJ Durand, SB Epstein (USA), R Farber* (Financial Director), HD Kallner*, NS Koopowitz*,
Dr TV Maphai, HP Mayers*, V Mufamadi#, Dr A Ntsaluba*, AL Owen (UK), A Pollard*, JM Robertson*, SE Sebotsa, T Slabbert, B Swartzberg*, SV Zilwa
*Executive
#Resigned 4 December 2012
Preparation of Interim results
The interim results for the six months ended 31 December 2012 were prepared by B Mill FFA, FASSA, L Capon CA(SA) and L van Jaarsveldt CA(SA) and supervised by R Farber CA(SA),
FCMA
Introduction
Discoverys core purpose of making people healthier and enhancing and protecting their lives has led to its stated ambition of building a best-in-class global insurance organisation, based
on financial strength and innovation. At the core of Discoverys business model is the use of behavioural structures to underpin insurance systems, enabling it to develop sophisticated,
integrated products that make people healthier and improve the actuarial dynamics of its base, and positively impact society. Emerging trends are increasingly making it clear how
applicable this model is to local and international markets. Three notable macro trends validating the Discovery business model are:
- Chronic diseases of lifestyle can, and will, be modified: Given the overwhelming evidence that diseases of lifestyle are fundamental to mortality and sickness, and can be controlled,
there is a growing policy movement towards wellness in South Africa and globally. Insurance organisations that are able to influence behaviour and improve peoples health, reducing
mortality risk and lowering healthcare costs, will therefore have a powerful competitive advantage.
- The insurance industry is growing and is receptive to innovation: With the increasing global volatility and risk aversion, the insurance industry is more relevant and receptive to
innovation. Ironically, innovation has taken place in the investment industry, while protection products globally continue to be static and commoditised. This creates an opportunity to
utilise mortality and morbidity improvements linked to behaviour change to develop differentiated and compelling protection products that offer consumers greater value for money.
- The increased cost of healthcare will remain a challenge: The increased cost of healthcare is a global challenge, and is not set to slow down. Organisations that can address this
complicated issue and arrest healthcare inflation, will add significant value to their members and broader society.
Discoverys business model is therefore robust and is proving to be repeatable and scalable. This, together with Discoverys expansion model (capital light, innovation-led, concurrent
development of multiple businesses), has yielded an excellent set of results over the six months to December 2012.
Group results for the six months ended 31 December 2012
The period saw growth in new business annualised premium income up 12% to R5 106 million; normalised profit from operations up 21% to R1 973 million; and normalised headline
earnings up 20% to R1 349 million. The period was noteworthy for its greater diversification of new business and earnings, underpinned by the outstanding performance in the UK. The
UK businesses contributed R283 million or 14% of the normalised profit from operations, and their strong new business growth contributed to the embedded value growing by 18% to
R33.4 billion. The embedded value growth was further driven by the positive experience variances across all the businesses. With Discovery Life cash flow positive, the group was able to
achieve this growth with little recourse to capital.
Notable business-specific insights:
Vitality
Vitality performed remarkably well, with the period characterised by significant growth. Locally, membership grew to 1 667 362 million lives, with new business increasing by 42%.
Internationally, The Vitality Group and HumanaVitality generated new business of R113 million, with membership in excess of two million lives at December, and an additional 700 000
Medicare lives added in January 2013; as well as the UK achieving strong take up of Vitality+. Furthermore, Vitality is forming the basis of a global, scalable business. During the period,
progress was made in globalising the Vitality capabilities in terms of shared technologies, such as the HealthyFood benefit structure, which was extended to Woolworths in South Africa
and rolled out to Wal-Mart in the US. In addition, Discoverys partners - Humana, Ping An and Prudential - invested significantly in marketing Vitality as part of their new business
approach. Global membership currently stands in excess of five million lives.
The UK
The Discovery JV with Prudential performed remarkably well, as Discovery furthered its ambition to build the best protection business in the UK, based on the Discovery business model.
Notwithstanding the difficult economic climate, the combined performance of the UK businesses (PruHealth and PruProtect) was excellent: profits grew by 99% to R283 million; new
business grew by 46% to R727 million; and the customer base stood at just under 700 000 lives at December 2012. A strong focus on managing for quality across both businesses, and
building quality across every aspect within the businesses, led to excellent individual business performance. PruProtect experienced a 107% increase in operating profit to R180 million;
strong new business growth, up 58%; higher-profitability new business mix; and better-than-expected claims and lapse experience. PruHealths operating profit measured R103 million, a
87% increase; with strong growth in new business (+36%) and excellent performance on the key drivers of loss ratio and lapse rate.
Ping An Health
The period was successful for Ping An Health: lives under management grew to 636 123. Importantly, the company progressed on all fronts, with systems in place; actuarial and clinical
risk management tools established; products set up for group and individual markets; and Vitality launched and actively marketed. With the capabilities that have been built, the business
is well positioned to shape and build the health insurance market in China, as evidenced by its number two position in the group high-end market. Given Ping An Healths success,
Discovery will increase its shareholding from 20% to 25%, subject to regulatory approval in China and South Africa.
Discovery Insure
Discovery Insures performance was excellent, with new business of R184 million and the further development of a high-quality client base. The efficacy of the model was evidenced by
the improved driver behaviour of the base, lower relative accident frequency, and positive selective lapsation. In addition, as the business begins to build scale, clear paths have emerged
for strategic advantages in pricing and distribution; and using Telematics to track driver behaviour and innovate in accident identification, pre-emptive safety alerts, and driver profiling.
The investment in the business is progressing according to plan, despite the adverse weather conditions that affected the entire industry.
Discovery Health
Performance over the period under review was excellent. Discovery Health continued to reduce administration fees (R70 million over the period), and in spite of this, achieved an overall
increase in operating profit (post the admin fee reduction) of 12%, to R762 million. Furthermore, considerable work took place on every aspect of the business to control healthcare
costs, enhance benefits, improve the member journey, and ensure that doctors are adequately remunerated for their skills, resulting in exceptional performance of the Discovery Health
Medical Scheme. The Discovery Health Medical Scheme grew significantly by 6% off a high base, driven by quality new business and record-low lapses; as well as positive net plan
movements. The result is an excellent financial performance of the Scheme, with a strong surplus recorded in 2012 and R8.2 billion in reserves. Discovery Health remains committed to
building a better healthcare system for all South Africans: during the period it continued its support of the emerging National Health Insurance system and was intimately involved in the
establishment of the Social Compact with the Minister of Health and other private sector players.
Discovery Life
The period under review demonstrated the quality and efficacy of the model in terms of selection, mortality and morbidity experience, and selective lapsation. Operating profit increased
by 17% and new business increased by 7%, with an improving run rate from Q4 2012. While the in-force business was highly cash generative, reinvestment took place in profitable new
business. The experience variances were the highest in the companys history on a six-monthly basis.
Discovery Invest
Performance was excellent with operating profit of R99 million, and assets under management increasing to R26.6 billion, up 42% on a like-for-like basis. Performance was supported by
continued product resonance and strong performance of the equity market.
Prospects
The work over the past six months positions Discovery strongly for continued growth and profitability into the future.
MI Hilkowitz
Chairperson
A Gore
Chief Executive Officer
Sandton
21 February 2013
Income statement
for the six months ended 31 December 2012
Group Group Group
Six months Six months Year
ended ended ended
December December June
2012 2011 % 2012
R million Unaudited Unaudited change Audited
Insurance premium revenue 8 406 7 203 14 691
Reinsurance premiums (984) (829) (1 755)
Net insurance premium revenue 7 422 6 374 12 936
Fee income from administration business 2 283 1 999 4 251
Investment income 158 118 261
Net realised gains on available-for-sale financial assets 5 80 81
Net fair value gains on financial assets at fair value through profit or loss 1 657 252 737
Vitality income 903 808 1 603
Net income 12 428 9 631 19 869
Claims and policyholders benefits (4 062) (3 391) (6 702)
Insurance claims recovered from reinsurers 777 649 1 200
Net claims and policyholders benefits (3 285) (2 742) (5 502)
Acquisition costs (1 661) (1 381) (2 775)
Marketing and administration expenses (3 847) (3 424) (6 910)
Amortisation of intangibles from business combinations (90) (70) (152)
Recovery of expenses from reinsurers 54 61 148
Transfer from assets/liabilities under insurance contracts (1 045) (356) (1 075)
- change in assets arising from insurance contracts 1 194 1 348 2 454
- change in liabilities arising from insurance contracts (2 147) (1 640) (3 396)
- change in liabilities arising from reinsurance contracts (92) (64) (133)
Fair value adjustment to liabilities under investment contracts (546) - (50)
Profit from operations 2 008 1 719 17 3 553
Puttable non-controlling interest fair value adjustment - - (13)
Finance costs (160) (127) (265)
Foreign exchange gains 15 74 78
Share of losses from associates (10) (5) 1
Profit before tax 1 853 1 661 12 3 354
Income tax expense (579) (563) (3) (1 132)
Profit for the period 1 274 1 098 16 2 222
Profit attributable to:
- ordinary shareholders 1 241 1 098 13 2 199
- preference shareholders 33 - 23
- non-controlling interest - - -
1 274 1 098 16 2 222
Earnings per share for profit attributable to ordinary shareholders of the company during the period
(cents):
- basic 223.8 197.9 13 396.1
- diluted 221.9 197.8 12 395.7
Statement of comprehensive income
for the six months ended 31 December 2012
Group Group Group
Six months Six months Year
ended ended ended
December December June
2012 2011 % 2012
R million Unaudited Unaudited change Audited
Profit for the period 1 274 1 098 2 222
Other comprehensive income:
Change in available-for-sale financial assets 97 (5) 35
- unrealised gains 118 74 145
- capital gains tax on unrealised gains (17) (10) (40)
- realised gains transferred to profit or loss (5) (80) (81)
- capital gains tax on realised gains 1 11 11
Currency translation differences 120 271 324
- unrealised gains 152 271 324
- deferred tax on unrealised gains (32) - -
Cash flow hedges 11 14 32
- unrealised gains 27 14 39
- tax on unrealised gains (3) (1) (3)
- gains/losses recycled to profit or loss (15) 2 (4)
- tax on recycled gains/losses 2 (1) *
Other comprehensive income for the period, net of tax 228 280 391
Total comprehensive income for the period 1 502 1 378 9 2 613
Attributable to:
- ordinary shareholders 1 469 1 378 7 2 590
- preference shareholders 33 - 23
- non-controlling interest - - -
Total comprehensive income for the period 1 502 1 378 9 2 613
* Amount is less than R500 000
Headline earnings
for the six months ended 31 December 2012
Group Group Group
Six months Six months Year
ended ended ended
December December June
2012 2011 % 2012
R million Unaudited Unaudited change Audited
Normalised headline earnings per share (cents):
- undiluted 243.1 202.8 20 417.3
- diluted 241.1 202.7 19 416.9
Headline earnings per share (cents):
- undiluted 223.1 185.5 20 383.7
- diluted 221.2 185.4 19 383.2
The reconciliation between earnings and headline earnings is shown below:
Net profit for the period 1 274 1 098 2 222
Adjusted for:
- dividend declared to preference shareholders (33) - (23)
- realised gains on available-for-sale financial instruments net of CGT (4) (69) (70)
Headline earnings 1 237 1 029 20 2 129
- amortisation of intangibles from business combinations net of deferred tax 65 50 69
- finance costs raised on puttable non-controlling interest financial liability 81 75 152
- fair value adjustment to puttable non-controlling interest financial liability - - 13
- non-controlling interest adjustment if no put options (33) (6) (14)
- accrual of dividends payable to preference shareholders (1) (23) (33)
Normalised headline earnings 1 349 1 125 20 2 316
Weighted number of shares in issue (000s) 554 274 555 003 554 930
Diluted weighted number of shares (000s) 559 096 555 247 555 538
Statement of financial position
at 31 December 2012
Group Group
December June
2012 2012
R million Unaudited Audited
ASSETS
Assets arising from insurance contracts 13 011 11 681
Property and equipment 405 251
Intangible assets including deferred acquisition costs 1 708 1 608
Goodwill 1 652 1 542
Investment in associates 350 341
Financial assets
- Equity securities 13 562 5 096
- Equity linked notes 1 333 6 480
- Debt securities 4 640 2 835
- Inflation linked securities 87 257
- Money market 6 906 5 729
- Derivatives 72 149
- Loans and receivables including insurance receivables 2 060 2 197
Deferred income tax 327 348
Current income tax asset 50 18
Reinsurance contracts 223 201
Cash and cash equivalents 1 723 1 929
Total assets 48 109 40 662
EQUITY
Capital and reserves
Share capital and share premium 1 493 1 503
Perpetual preference share capital 779 779
Other reserves 898 670
Retained earnings 9 712 8 778
12 882 11 730
Non-controlling interest 2 1
Total equity 12 884 11 731
LIABILITIES
Liabilities arising from insurance contracts 16 704 14 319
Liabilities arising from reinsurance contracts 1 556 1 457
Financial liabilities
- Investment contracts at fair value through profit or loss 5 762 2 915
- Borrowings at amortised cost 437 402
- Derivatives 44 35
- Puttable non-controlling interests 3 201 2 893
Deferred income tax 3 434 3 075
Deferred revenue 113 116
Employee benefits 123 116
Trade and other payables 3 817 3 532
Current income tax liability 34 71
Total liabilities 35 225 28 931
Total equity and liabilities 48 109 40 662
Segmental information
for the six months ended 31 December 2012
SA SA SA SA UK UK New business All other
R million Health Life Invest Vitality Health Life development segments Total
31 December 2012
Income statement
Insurance premium revenue 8 3 441 2 068 - 2 274 495 120 - 8 406
Reinsurance premiums (1) (610) - - (287) (82) (4) - (984)
Net insurance premium revenue 7 2 831 2 068 - 1 987 413 116 - 7 422
Fee income from administration business 1 947 60 259 - 9 - - - 2 275
Guarantee received from HumanaVitality - - - - - - 8 - 8
Investment income on assets backing policyholder liabilities - 65 - - 27 - - - 92
Finance charge on negative reserve funding - - - - - (54) - - (54)
Inter-segment funding - (169) 169 - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 346 1 311 - - - - - 1 657
Vitality income - - - 782 40 - 81 - 903
Net income 1 954 3 133 3 807 782 2 063 359 205 - 12 303
Claims and policyholders benefits (1) (1 582) (718) - (1 558) (108) (95) - (4 062)
Insurance claims recovered from reinsurers 1 436 - - 266 64 10 - 777
Net claims and policyholders benefits - (1 146) (718) - (1 292) (44) (85) - (3 285)
Acquisition costs - (750) (192) (34) (185) (487) (13) - (1 661)
Marketing and administration expenses
- depreciation and amortisation (76) (14) (1) - (8) - (5) - (104)
- other expenses (1 116) (616) (155) (743) (515) (298) (277) (23) (3 743)
Recovery of expenses from reinsurers - - - - 54 - - - 54
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 476 - - 9 709 - - 1 194
- change in liabilities arising from insurance contracts - (17) (2 097) - (23) - (10) - (2 147)
- change in liabilities arising from reinsurance contracts - (33) - - - (59) - - (92)
Fair value adjustment to liabilities under investment contracts - (1) (545) - - - - - (546)
Normalised profit/(loss) from operations 762 1 032 99 5 103 180 (185) (23) 1 973
31 December 2011
Income statement
Insurance premium revenue 8 2 905 1 855 - 2 147 263 25 - 7 203
Reinsurance premiums (1) (519) - - (251) (56) (2) - (829)
Net insurance premium revenue 7 2 386 1 855 - 1 896 207 23 - 6 374
Fee income from administration business 1 755 47 177 - 9 11 - - 1 999
Guarantee received from HumanaVitality - - - - - - 6 - 6
Investment income on assets backing policyholder liabilities - 57 - - 8 - - - 65
Finance charge on negative reserve funding - - - - - (28) - - (28)
Inter-segment funding - (126) 126 - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 95 157 - - - - - 252
Vitality income - - - 742 30 - 36 - 808
Net income 1 762 2 459 2 315 742 1 943 190 65 - 9 476
Claims and policyholders benefits (2) (1 328) (433) - (1 529) (81) (18) - (3 391)
Insurance claims recovered from reinsurers - 380 - - 216 52 1 - 649
Net claims and policyholders benefits (2) (948) (433) - (1 313) (29) (17) - (2 742)
Acquisition costs - (694) (176) (33) (137) (337) (4) - (1 381)
Marketing and administration expenses
- depreciation and amortisation (66) (13) (3) - (5) - (3) - (90)
- other expenses (1 012) (582) (112) (709) (502) (225) (171) (21) (3 334)
Recovery of expenses from reinsurers - - - - 61 - - - 61
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 928 - - (34) 454 - - 1 348
- change in liabilities arising from insurance contracts - (162) (1 519) - 42 - (1) - (1 640)
- change in liabilities arising from reinsurance contracts - (98) - - - 34 - - (64)
Fair value adjustment to liabilities under investment contracts - (9) 9 - - - - - -
Normalised profit/(loss) from operations 682 881 81 - 55 87 (131) (21) 1 634
Reconciliation of profit for the period to normalised profit from operations
for the six months ended 31 December 2012
December 2012 December 2011
Unaudited Unaudited
Amounts Amounts
per per
income Profit income Profit
R million statement reconciliation statement reconciliation
Profit for the period per income statement 1 274 1 098
Add back:
- income tax expense 579 563
- share of loss from associates 10 5
- foreign exchange gains (15) (74)
- finance costs 160 127
Profit from operations per income statement 2 008 1 719
Items not included in normalised profit:
Investment income 158 118
- investment income earned on shareholder investments and cash 66 (66) 53 (53)
- investment income on assets backing policyholder liabilities 92 65
Net realised gains on available-for-sale financial assets (5) (80)
Amortisation of intangibles from business combinations 90 70
Items included in normalised profit:
Finance costs 160 127
- finance charge on negative reserve funding 54 (54) 28 (28)
- finance costs raised on puttable non-controlling interest financial liability 81 75
- other finance costs 25 24
Guarantee received from HumanaVitality - 6
Normalised profit from operations per segmental information 1 973 1 634
Statement of cash flows
for the six months ended 31 December 2012
Group Group Group
Six months Six months Year
ended ended ended
December December June
2012 2011 2012
R million Unaudited Unaudited Audited
Cash flow from operating activities 675 707 1 457
Cash generated by operations 2 789 2 137 4 679
Net purchases of investments held to back policyholder liabilities (2 298) (1 665) (3 849)
Working capital changes 91 483 722
582 955 1 552
Dividends received 81 53 115
Interest received 206 19 395
Interest paid (76) (37) (113)
Taxation paid (118) (283) (492)
Cash flow from investing activities (607) (2 108) (3 222)
Net purchases of financial assets (331) (1 976) (2 968)
Net purchases of equipment (157) (70) (116)
Purchase of intangible assets (119) (62) (138)
Cash flow from financing activities (295) 511 202
Proceeds from issuance of ordinary shares 59 18 28
Proceeds from issuance of preference shares - 800 806
Share issue costs - (21) (21)
Dividends paid to ordinary shareholders (316) (274) (580)
Dividends paid to preference shareholders (33) - (23)
Non-controlling interest share buy-backs - (12) (8)
Repayment of borrowings (5) - -
Net decrease in cash and cash equivalents (227) (890) (1 563)
Cash and cash equivalents at beginning of year 1 929 3 285 3 285
Exchange gains on cash and cash equivalents 21 183 207
Cash and cash equivalents at end of period 1 723 2 578 1 929
Statement of changes in equity
for the six months ended 31 December 2012
Attributable to equity holders Attributable to equity holders
of the Company of the Company
Share capital Preference Share-based Non-
and share share payment Revaluation Translation Contingency Hedging Retained controlling
R million premium capital reserve reserve* reserve reserve reserve earnings Total interest Total
Period ended 31 December 2012
At beginning of period 1 503 779 319 58 254 - 39 8 778 11 730 1 11 731
Profit for the period - 33 - - - - - 1 241 1 274 - 1 274
Other comprehensive income - - - 97 120 - 11 - 228 - 228
Total comprehensive income for the period - 33 - 97 120 - 11 1 241 1 502 - 1 502
Transactions with owners:
Non-controlling interest shares issues - - - - - - - - - 1 1
Realised gains from treasury shares 5 - - - - - - - 5 - 5
Increase in treasury shares (15) - - - - - - - (15) - (15)
Dividends paid to preference shareholders - (33) - - - - - - (33) - (33)
Dividends paid to ordinary shareholders - - - - - - - (307) (307) - (307)
Total transactions with owners (10) (33) - - - - - (307) (350) 1 (349)
At end of period 1 493 779 319 155 374 - 50 9 712 12 882 2 12 884
Period ended 31 December 2011
At beginning of period 1 542 - 318 23 (70) - 7 7 149 8 969 4 8 973
Profit for the period - - - - - - - 1 098 1 098 - 1 098
Other comprehensive income - - - (5) 271 - 14 - 280 - 280
Total comprehensive income for the period - - - (5) 271 - 14 1 098 1 378 - 1 378
Transactions with owners:
Increase in treasury shares (10) - - - - - - - (10) - (10)
Proceeds from disposal of treasury shares 5 - - - - - - - 5 - 5
Issue of preference shares - 800 - - - - - - 800 - 800
Share issue costs - (21) - - - - - - (21) - (21)
Non-controlling interest shares issues - - - - - - - - - 5 5
Non-controlling interest share buy-backs - - - - - - - - - (8) (8)
Realised losses from non-controlling interest share buy-backs - - - - - - - (4) (4) - (4)
Employee share option schemes:
- value of employee services - - 1 - - - - - 1 - 1
Transfer to contingency reserve - - - - - 3 - (3) - - -
Dividends paid to ordinary shareholders - - - - - - - (274) (274) - (274)
Total transactions with owners (5) 779 1 - - 3 - (281) 497 (3) 494
At end of period 1 537 779 319 18 201 3 21 7 966 10 844 1 10 845
* This reserve relates to the revaluation of available-for-sale financial assets.
Financial assets - investments
at 31 December 2012
Group Group
December June
2012 2012
R million Unaudited Audited
Available-for-sale financial assets: 6 142 5 362
- Equity securities 868 736
- Equity linked notes 48 44
- Debt securities 424 330
- Inflation linked securities 1 60
- Money market 4 802 4 192
Financial assets at fair value through profit or loss 20 385 15 035
- Equity securities 12 694 4 360
- Equity linked notes 1 285 6 436
- Debt securities 4 216 2 505
- Inflation linked securities 86 197
- Money market 2 104 1 537
26 528 20 397
Available-for-sale financial assets are shareholder investments. Unrealised gains and losses arising from changes in the fair value of these assets are recognised in the statement of other
comprehensive income. When the assets are sold the accumulated fair value adjustments are included in profit or loss as net realised gains/losses on available-for-sale financial assets.
Interest income and dividends received from these assets are recognised as investment income in profit or loss.
Financial assets designated as financial assets at fair value through profit or loss are those that are held in internal funds to match insurance and investment contract liabilities that are
linked to the changes in the fair value of these assets. Discovery recognises interest income, dividends received, realised and unrealised gains and losses from these assets in profit or loss
in Net fair value gains on financial assets at fair value through profit or loss.
Review of Group results
For the six months ended 31 December 2012
Value creators
New business annualised premium income increased 12% for the six months ended 31 December 2012.
New business annualised premium income
December December %
R million 2012 2011 change
Discovery Health 2 286 2 089 9
Discovery Life 950 892 7
Discovery Invest 518 487 6
Discovery Vitality 105 74 42
Discovery Insure 184 118 56
PruHealth* 383 281 36
PruProtect 344 218 58
Vitality USA 113 174 (35)
Ping An Health 223 211 6
New business API of Group 5 106 4 544 12
* The comparative for PruHealth has been increased to be consistent with the basis used at 31 December 2012.
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 11% for the six months ended 31 December 2012.
Gross inflows under management
December December %
R million 2012 2011 change
Discovery Health 19 250 17 016 13
Discovery Life 3 501 2 952 19
Discovery Invest 4 420 4 612 (4)
Discovery Insure 120 25 380
Discovery Vitality 782 742 5
PruHealth 2 323 2 186 6
PruProtect 495 274 81
Vitality USA 89 36 147
Gross inflows under management 30 980 27 843 11
Less: collected on behalf of third parties (19 389) (17 833) (9)
Discovery Health (17 295) (15 253)
Discovery Invest (2 094) (2 580)
Gross income of Group 11 591 10 010 16
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 2012:
December December %
R million 2012 2011 change
Discovery Health 762 682 12
Discovery Life 1 032 881 17
Discovery Invest 99 81 22
Discovery Vitality 5 -
PruHealth 103 55 87
PruProtect 180 87 107
Profit from existing operations 2 181 1 786 22
Development and other segments (208) (152) (37)
Normalised profit from operations 1 973 1 634 21
The comparative numbers in the table above have been adjusted to align with the disclosure in the current period. Discovery Life and PruHealth have been increased to include
investment income received on assets held to back the statutory reserves, which was previously included in investment income attributable to shareholders. PruProtect now includes
finance charges on negative reserve funding, which was previously included in finance costs. Development and other segments, now includes guaranteed income received from the
HumanaVitality joint venture. This was previously disclosed in income from associates. These adjustments have also been made to the segmental information.
Significant movements in the Income Statement
Share-based payments
Included in marketing and administration expenses is R158 million (2011: R106 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 2012, approximately 84%
(2011: 85%) of this exposure was hedged. Fair value gains of R71 million (2011: R26 million) relating to the hedge were recognised in profit or loss resulting in a net expense of R87
million (2011: R80 million).
Taxation
For South African entities that are in a tax paying position, tax has been provided at 28% (2011: 28%) in the financial statements. No deferred tax asset has been accounted for in respect
of the Discovery Insure losses.
Tax relief is obtained for 100% of the PruProtect losses through the Prudential Plc. No deferred tax asset has been raised on the PruHealth assessed losses.
Material transactions with related parties
Discovery Health administers the 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 annual basis and approved by the trustees of DHMS. The fees totalled R1 781 million for the six months ended 31 December 2012 (2011:
R1 613 million). Discovery offers the members of DHMS access to the Vitality programme.
Significant movements in the Statement of Financial Position
Financial assets
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss have increased by R5.4 billion due to the sale of Discovery Invest products as well as the significant returns on these investments. These
returns are reflected in the income statement in Net fair value gains on financial assets at fair value through profit or loss.
At 30 June 2012, R6.4 billion was invested in Equity Linked Notes issued by two providers. To reduce the exposure to these note providers, Discovery has sold approximately R5.7 billion
worth of Equity Linked Notes and re-invested the proceeds with various investment managers.
Available-for-sale financial assets
Available-for-sale financial assets have primarily increased due to the transfer of funds from cash and cash equivalents to money market investments.
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
Mr Vhonani Mufamadi has resigned as non-executive director from the board of Discovery Limited, with effect from 4 December 2012.
Dividend policy and capital
The following final dividends were paid during the past six months:
- preference share dividend of 414,73973 cents per share, paid on 25 September 2012;
- ordinary share dividend of 53,5 cents per share, paid on 15 October 2012.
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 R414 million
(2011: R342 million) and was covered 3.9 times (2011: 4.4 times).
B preference share cash dividend declaration:
Notice is hereby given that the directors have declared an interim gross cash dividend of 431,23288 cents (366,54795 cents net of dividend withholding tax) per B preference share for
period 1 July 2012 to 31 December 2012. The dividend has been declared from income reserves and no secondary tax on companies credits has been used. A dividend withholding tax of
15% will be applicable to all shareholders who are not exempt.
The issued preference share capital at the declaration date is 8 million B preference shares.
The salient dates for the dividend will be as follows:
Last day of trade receive a dividend
Friday, 8 March 2013
Shares commence trading ex dividend
Monday, 11 March 2013
Record date
Friday, 15 March 2013
Payment date
Monday, 18 March 2013
B preference share certificates may not be dematerialised or rematerialised between Monday, 11 March 2013 and Friday, 15 March 2013, both days inclusive.
Ordinary share cash dividend declaration:
Notice is hereby given that the directors have declared an interim gross cash dividend of 60 cents (51 cents net of dividend withholding tax) per ordinary share for the six month period
ended 31 December 2012. The dividend has been declared from income reserves and no secondary tax on companies credits has been used. A dividend withholding tax of 15% will be
applicable to all shareholders who are not exempt.
The issued ordinary share capital at the declaration date is 591 872 390 ordinary shares.
The salient dates for the dividend will be as follows:
Last day of trade receive a dividend
Thursday, 14 March 2013
Shares commence trading ex dividend
Friday, 15 March 2013
Record date
Friday, 22 March 2013
Payment date
Monday, 25 March 2013
Share certificates may not be dematerialised or rematerialised between Friday, 15 March 2013 and Friday, 22 March 2013, both days inclusive.
Subsequent events
Ping An Health
Subject to exchange control and regulatory approval, Discovery will purchase a further 5% in Ping An Health for RMB82.2 million.
Recapture of reinsurance
In January 2013, PruHealth agreed to recapture a portion of its outstanding reinsurance obligations for £24 million.
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.
Embedded value statement for the six months ended 31 December 2012
The embedded value of Discovery at 31 December 2012 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.
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 and cost of required capital. 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 Limited 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). 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 are 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 Limited and its subsidiaries as included in
the embedded value statement for the six months ended 31 December 2012. A copy of the auditors unqualified review report is available for inspection at the companys registered
office.
Table 1: Group embedded value
31 December 31 December % 30 June
R million 2012 2011 change 2012
Shareholders funds 12 882 10 844 19 11 730
Adjustment to shareholders funds from published basis(1) (9 254) (7 756) (8 401)
Adjusted net worth 3 628 3 088 17 3 329
- Free Surplus 1 355 1 078 1 208
- Required Capital(2) 2 273 2 010 2 121
Value of in-force covered business before cost of capital 30 407 25 860 27 493
Cost of required capital (622) (502) (576)
Cost of STC(3) - (30) -
Discovery Limited embedded value 33 413 28 416 18 30 246
Number of shares (millions) 554.3 555.0 554.4
Embedded value per share R60.28 R51.20 18 R54.56
Diluted number of shares (millions) 591.2 591.2 591.2
Diluted embedded value per share(4) R59.26 R50.56 17 R53.78
(1) The published shareholders funds was decreased to eliminate net assets under insurance contracts, deferred tax and deferred acquisition costs at December 2012 of R8 661 million
(June 2012: R7 660 million; December 2011: R6 926 million) in respect of Life, R143 million (June 2012: R130 million; December 2011: R98 million) in respect of PruHealth and PruHealth
Insurance Limited and R34 million (June 2012: R38 million; December 2011: R98 million) in respect of PruProtect. The shareholders funds was decreased by R1 813 million (June 2012:
R1 738 million; December 2011: R1 704 million) representing Discoverys share of goodwill and intangible assets (net of deferred tax) relating to the acquisition of Standard Life
Healthcare and the Prudential joint venture. The shareholders funds was increased by R2 100 million (June 2012: R1 851 million; December 2011: R1 706 million) reflecting the value of
the puttable non-controlling interest liability in excess of the non-controlling interest in the net asset value and R76 million (June 2012: R93 million; December 2011: R98 million)
reflecting the non-controlling share of the losses included in retained earnings. The 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 2012 for Life is R829 million (June 2012: R728 million; December 2011: R685 million), for Health and Vitality is R520 million (June 2012: R487 million;
December 2011: R462 million), for PruHealth and PruHealth Insurance Limited is R670 million (June 2012: R708 million; December 2011: R699 million) and for PruProtect is R254 million
(June 2012: R198 million; December 2011: R164 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. For PruProtect, the required capital was set equal to the UK Pillar 1 capital requirement.
(3) STC was replaced by a dividend withholding tax with effect from 1 April 2012.
(4) The diluted embedded value per share allows for Discoverys 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
Value before Cost of Value after
cost of capital required Cost of cost of capital
R million and STC capital STC and STC
at 31 December 2012
Health and Vitality 11 833 (176) - 11 657
Life and Invest(1) 16 487 (299) - 16 188
PruHealth(2) 1 489 (102) - 1 387
PruProtect(2) 598 (45) - 553
Total 30 407 (622) - 29 785
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 30 June 2012
Health and Vitality 11 435 (171) - 11 264
Life and Invest(1) 14 346 (274) - 14 072
PruHealth(2) 1 316 (97) - 1 219
PruProtect(2) 396 (34) - 362
Total 27 493 (576) - 26 917
(1) Included in the Life and Invest value of in-force covered business is R524 million (June 2012: R425 million; December 2011: R406 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 R13.75/GBP (June 2012: R12.83/GBP; December 2011: R12.51/GBP). The values for PruHealth and
PruProtect reflect Discoverys 75% shareholding in the joint venture.
Table 3: Group embedded value earnings
Six months ended Year ended
31 December 31 December 30 June
R million 2012 2011 2012
Embedded value at end of period 33 413 28 416 30 246
Less: Embedded value at beginning of period (30 246) (26 890) (26 890)
Increase in embedded value 3 167 1 526 3 356
Net change in capital 10 5 39
Dividends paid 340 274 593
Non-controlling share buy-back - 4 -
Transfer to hedging reserve (11) (14) (32)
Embedded value earnings 3 506 1 795 3 956
Annualised return on opening embedded value 24.5% 13.8% 14.7%
Table 4: Components of Group embedded value earnings
Six months
ended Year
Six months ended 31 December ended 30
31 December 2012 2011 June 2012
Value of
Cost of in-force
Net required covered Embedded Embedded Embedded
R million worth capital business value value value
Total profit from new business
(at point of sale) (912) (49) 1 915 954 886 1 640
Profit from existing business
- Expected return 1 251 35 69 1 355 1 312 2 670
- Change in methodology and assumptions(1) 308 (16) 87 379 (278) (680)
- Experience variances (71) (6) 704 627 (495) (107)
Other initiative costs(2) (215) - 13 (202) (198) (386)
Non-recurring expenses (14) - - (14) (33) (26)
Acquisition costs(3) (29) - (0) (29) (28) 5
Finance costs (18) - - (18) (12) (28)
Foreign exchange rate movements 152 (10) 126 268 540 638
Return on shareholders funds(4) 186 - - 186 101 230
Embedded value earnings 638 (46) 2 914 3 506 1 795 3 956
(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 periods changes are described in detail in Table 6 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 Vitality Group, Discovery Insure and the expansion of the Life and Invest
distribution channel.
(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: Experience variances
Health and Vitality Life and Invest PruHealth PruProtect
Net Value of Net Value of Net Value of Net Value of
R million worth in-force worth in-force worth in-force worth in-force Total
Renewal expenses (26) - 22 (1) (24) 7 6 - (16)
Lapses and surrenders(1) 1 166 (25) 145 - 62 36 (3) 382
Mortality and morbidity - - 35 (10) 46 - 5 - 76
Policy alterations(2) - (9) (179) 182 - - 8 6 8
Backdated cancellations - - (45) 13 - - (7) (3) (42)
Premium income - - (33) (35) - - (16) - (84)
Economic assumptions - - 31 99 - - - - 130
Commission - - - - (10) (20) - - (30)
Tax(3) (7) - 134 (111) (18) 0 (12) - (14)
Reinsurance - - (1) 0 - - (2) - (3)
Extended modelling term - 117 - 34 - 8 - - 159
Vitality 24 - - - 3 (2) - - 25
Other 21 4 (40) 58 (1) (3) 3 (6) 36
Total 13 278 (101) 374 (4) 52 21 (6) 627
(1) The total Health and Vitality lapse experience variance of R167 million consists of a positive variance of R109 million due to lower than expected lapses and a positive variance of R58
million due to the net growth in existing employer groups (i.e. R400 million in respect of members joining existing employer groups during the period offset by an amount of R342 million
in respect of members leaving existing employer groups).
(2) Policy alterations relate to changes to existing benefits at the request of the policyholder.
(3) The tax variance for Life and Invest arises due to a movement in the deferred tax asset which delays the payment of tax.
Table 6: Methodology and assumption changes
Health and Vitality Life and Invest PruHealth PruProtect
Net Value of Net Value of Net Value of Net Value of
R million worth in-force worth in-force worth in-force worth in-force Total
Modelling changes - - (49) 82 - - 68 (8) 93
Expenses - (160) (1) 8 - - 5 (2) (150)
Lapses(1) - - - - - - (174) (1) (175)
Mortality and morbidity - - - - - - 44 10 54
Tax - - - - - 30 - 6 36
Economic assumptions - 110 (10) 201 - (8) 9 30 332
Reinsurance(2) - - 310 (327) 79 (76) - - (14)
Other(3) - - 26 176 - - 1 (0) 203
Total - (50) 276 140 79 (54) (47) 35 379
(1) The PruProtect lapse assumption was strengthened to reflect uncertainty about long duration experience.
(2) The reinsurance item relates to the impact of the financing reinsurance arrangements.
(3) Other items for Life include the expected impact of changes to the integrator benefit structure.
Table 7: Embedded value of new business
Six months Six months Year
ended ended ended
31 December 31 December % 30 June
R million 2012 2011 change 2012
Health and Vitality
Present value of future profits from new business at point of sale 173 205 399
Cost of required capital (8) (7) (15)
Cost of STC - (0) -
Present value of future profits from new business at point of sale after cost of required capital and
STC 165 198 (17) 383
New business annualised premium income(1) 752 682 10 1 798
Life and Invest
Present value of future profits from new business at point of sale(2) 513 542 974
Cost of required capital (22) (20) (40)
Cost of STC - (1) -
Present value of future profits from new business at point of sale after cost of required capital and
STC 491 521 (6) 934
New business annualised premium income(3) 953 926 3 1 804
Annualised profit margin(4) 6.6% 6.9% 6.6%
Annualised profit margin excluding Invest Business 10.6% 10.2% 10.0%
PruHealth
Present value of future profits from new business at point of sale 12 11 21
Cost of required capital (5) (5) (9)
Cost of STC - (0) -
Present value of future profits from new business at point of sale after cost of required capital and
STC 7 6 17 12
New business annualised premium income(5) 173 112 54 273
Annualised profit margin(4) 0.7% 1.0% 0.7%
PruProtect(6)
Present value of future profits from new business at point of sale 305 166 326
Cost of required capital (14) (5) (15)
Cost of STC - (0) -
Present value of future profits from new business at point of sale after cost of required capital and
STC 291 161 81 311
New business annualised premium income 258 163 58 345
Annualised profit margin(4) 14.5% 16.3% 15.1%
(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 2012. The total Health and Vitality new business annualised premium income written over the period was R2 391
million (June 2012: R4 453 million; December 2011: R2 163 million).
(2) Included in the Life and Invest value of new business is negative R6 million (June 2012: -R1 million; December 2011: 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
R953 million (June 2012: R1 804 million; December 2011: R926 million) (single premium APE: R274 million (June 2012: R511 million; December 2011: R255 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 R325 million (June 2012: R552 million; December 2011: R265 million) and servicing increases of R190 million (June 2012: R354 million; December
2011: R188 million) was R1 468 million (June 2012: R2 710 million; December 2011: R1 379 million) (single premium APE: R291 million (June 2012: R537 million; December 2011: R266
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 5 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) 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 2012. There have been no changes to the definition of new business since the previous valuation.
(6) PruProtect new business is defined as policies which incepted during the reporting period and which are on risk at the valuation date. There have been no changes to the definition of
new business since the previous valuation.
Table 8: Embedded value economic assumptions
31 December 31 December 30 June
2012 2011 2012
Beta coefficient
South Africa 0.53 0.53 0.53
United Kingdom 0.53 0.53 0.53
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 9.855 10.855 10.355
Life and Invest 9.855 10.855 10.355
PruHealth 4.44 4.60 4.40
PruProtect 4.44 4.60 4.40
Rand/GB Pound Exchange Rate
Closing 13.75 12.51 12.83
Average 13.58 12.18 12.35
Medical inflation (%)
South Africa 7.00 8.00 7.50
United Kingdom 7.00 7.00 7.00
Expense inflation and CPI (%)
South Africa 4.00 5.00 4.50
United Kingdom - PruHealth 3.75 3.75 3.75
- PruProtect 2.90 3.00 1.60
Pre-tax investment return (%)
South Africa - Cash 6.50 7.50 7.00
- Bonds 8.00 9.00 8.50
- Equity 11.50 12.50 12.00
United Kingdom - Risk free 2.32 2.48 2.26
- PruProtect asset return assumption 3.36 4.04 2.66
Dividend cover ratio 4.5 times 4.5 times 4.5 times
Income tax rate (%)
South Africa 28.00 28.00 28.00
25.00% 26.00% 25.00%
reducing to reducing to reducing to
21.00% 23.00% 23.00%
in April in April in April
United Kingdom 2014 2014 2014
Projection term
- Health and Vitality 20 years 20 years 20 years
- Life value of in-force 40 years Not Limited 40 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. 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. The PruProtect expense inflation assumption was set with
reference to the investment return assumption.
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 Africas 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 may not allow fully 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
2012 to changes in the risk discount rate is included in the tables below.
For each sensitivity illustrated below, all other assumptions have been left unchanged. No allowance has been made for management action such as risk premium increases where future
experience is worse than the base assumptions.
Table 9: Embedded value sensitivity
Health and Vitality Life and Invest PruHealth PruProtect(2)
Adjusted Value of Cost of Value of Cost of Value of Cost of Value of Cost of Embedded %
R million net worth in-force capital in-force capital in-force capital in-force capital value change
Base 3 628 11 833 (176) 16 487 (299) 1 489 (102) 598 (45) 33 413
Impact of:
Risk discount rate +1% 3 628 11 159 (198) 14 876 (265) 1 386 (135) 536 (61) 30 926 (7)
Risk discount rate -1% 3 628 12 580 (151) 18 416 (341) 1 604 (66) 675 (23) 36 322 9
Lapses -10% 3 628 12 251 (185) 18 170 (331) 1 754 (110) 631 (50) 35 758 7
Interest rates -1%(1) 3 628 11 728 (165) 17 170 (312) 1 476 (141) 763 (46) 34 101 2
Equity and property market value -10% 3 550 11 833 (176) 16 380 (299) 1 489 (102) 598 (45) 33 228 (1)
Equity and property return +1% 3 628 11 833 (176) 16 614 (300) 1 489 (102) 598 (45) 33 539 0
Renewal expenses -10% 3 628 12 982 (163) 16 684 (298) 1 642 (102) 590 (44) 34 919 5
Mortality and morbidity -5% 3 628 11 833 (176) 17 496 (298) 2 070 (102) 581 (44) 34 988 5
Projection term +1 year 3 628 11 958 (178) 16 557 (299) 1 504 (102) 598 (45) 33 621 1
(1) All economic assumptions were reduced by 1%.
(2) The sensitivity impact on the PruProtect value of in-force includes the net of tax change in negative reserves.
Table 10: Value of new business sensitivity
Health and Vitality Life and Invest PruHealth PruProtect(2)
Value of Cost Value of Cost Value of Cost Value of Cost Value of
new of new of new of new of new %
R million business capital business capital business capital business capital business change
Base 173 (8) 513 (22) 12 (5) 305 (14) 954
Impact of:
Risk discount rate +1% 157 (9) 408 (19) 7 (7) 281 (18) 800 (16)
Risk discount rate -1% 192 (7) 637 (25) 18 (3) 334 (7) 1 139 19
Lapses -10% 184 (8) 636 (24) 25 (6) 292 (15) 1 084 14
Interest rates -1%(1) 159 (9) 553 (23) 12 (7) 255 (15) 925 (3)
Equity and property return +1% 173 (8) 528 (22) 12 (5) 305 (14) 969 2
Renewal expense -10% 226 (6) 528 (22) 20 (5) 313 (14) 1 040 9
Mortality and morbidity -5% 173 (8) 571 (22) 39 (5) 342 (13) 1 077 13
Projection term +1 year 176 (8) 518 (22) 13 (5) 305 (14) 963 1
Acquisition costs -10% 180 (8) 561 (22) 17 (5) 321 (14) 1 030 8
(1) All economic assumptions were reduced by 1%.
(2) The sensitivity impact on the PruProtect value of new business includes the net of tax change in negative reserves.
Physical address:
155 West Street
Sandton
Postal address:
PO Box 786722
Sandton
2146
Contact centre number:
0860 99 8877
Fax number:
011 539 8003
www.discovery.co.za
Date: 21/02/2013 09:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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