Wrap Text
Summary of audited results and cash dividend declaration for the year ended 30 June 2013
Discovery Limited
(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
Summary of audited results and cash dividend declaration
for the year ended 30 June 2013
FINANCIAL HIGHLIGHTS
NORMALISED HEADLINE EARNINGS
R2 787 million up 20%
EMBEDDED VALUE
R35,7 billion up 18%
TOTAL DIVIDENDS FOR THE yEAR
124.5 cents per share up 20%
OVERVIEW
Introduction
The full financial year through to end June 2013 was an important one for Discovery. Its business model - the use of behavioural structures to underpin insurance systems - is proving
increasingly resilient and responsive to a world in which the burden of preventable diseases of lifestyle is growing; healthcare costs are persistently increasing; and risk-averse
consumers are seeking greater certainty and protection. In this context, Discovery's core purpose of making people healthier and enhancing their lives manifested in value for money
to members; sustainable and innovative products; and improved actuarial dynamics of its base - the outcome of which is the strong positioning of all the businesses in their
respective markets.
Notable Group-specific insights
Results exceeded expectation, with strong actuarial dynamics across the group: A focus on financial strength, performance and prudence delivered a strong set of results over the
period, which saw new business grow by 15% to R10 799 million; normalised headline earnings by 20% to R2 787 million; embedded value by 18% to R35,7 billion; while return on
capital exceeded 20%. Pleasingly, the focus on building insurance systems that integrate wellness, behaviour change and protection, led to strong actuarial dynamics across the group,
with positive trends in both lapse rates and loss ratios. In particular, the excellent performance of PruHealth and PruProtect resulted in an upward revaluation of Prudential's 25%
shareholding in the joint venture and allowed for a restructuring of PruHealth's capital portfolio in search of greater yield. This led to a further recapture of a portion of the outstanding
reinsurance balance in PruHealth, as well as a mark-to-market adjustment of the Prudential put option in the income statement. In addition, cash generation across the group
continued to strengthen, with the Group being well capitalised given the requirements of all businesses, with no recourse to additional capital.
The performance of Discovery's core businesses exceeded expectation: Discovery's established and emerging businesses, which represent the most sophisticated manifestations of
the integrated model, had an excellent period: new business grew 16% to R9 575 million, while normalised profit grew by 20% to R4 522 million. These businesses - and the
benefits afforded by integration with Vitality and with each other - provide the platform for Discovery's expansion strategy.
The period was notable for its significant investment in growth: Discovery invested 12% of earnings in new growth initiatives over the period: while this exceeded prior years, the
investment was based on the strong evidence of the business model's repeatability and scalability. A substantial portion of this investment was in Discovery Insure, which performed
pleasingly over the period with new business growth of 53% to R366 million; and in the strategic joint venture with AIA, one of the largest and most highly-respected insurance
groups in the world. The pan-Asian joint venture launched in Singapore - AIA Vitality - will combine AIA's brand and distribution assets with Discovery's world-leading integrated
approach to wellness and life assurance, and offers a significant opportunity to expand Discovery's footprint in this high-growth market. Finally, the period saw substantial
investments in technology - R1 billion - to build the foundation and infrastructure for continued growth and expansion going forward.
Notable business-specific insights
Vitality
Vitality forms the fundamental underpinning of the Discovery business model and this was strengthened over the period, with membership growing to 5.5 million lives in five markets.
Given the structure's ability to change member behaviour - and the evidence from Discovery's base of engagement leading to significantly lower hospital admission rates, healthcare
costs, and levels of dread disease and mortality - investment was made in the science, scale and infrastructure of Vitality. This enabled the success of the existing businesses and supports
continued expansion, such as with the AIA joint venture - as the ability to incentivise healthier behaviour and dynamically price risk in life insurance becomes even more powerful. In
addition, progress was made in globalising the Vitality capabilities, such as the HealthyFood benefit structure, which was extended to Woolworths in South Africa, and rolled out to
Wal-Mart in the US and Cold Storage in Singapore. The period was also significant for the launch of the Vitality Institute in the US and the Vitality Advisory Board in the UK - with a
mandate to strengthen the science of prevention and health promotion and further secure Vitality as the thought leader in the rapidly-growing wellness industry.
Discovery Health
Discovery Health's performance exceeded expectation: new business increased by 13% to R4 820 million; lives under management grew to 2.76 million; and operating profit
increased by 13% to R1 688 million, after the continued efficiencies passed on to the Scheme in the form of an administration fee reduction. Notably, the performance of Discovery
Health Medical Scheme was exceptional: lives grew by 6% off a high base, driven by a combination of strong new business - in particular, 18% growth of new groups and individuals
to the Scheme - and industry-low lapses. The Scheme also showed excellent financial strength, ending the calendar year 2012 with a strong surplus of R789 million and total reserves
of R8,2 billion.
Discovery Health's vision is to ensure that the medical schemes under its management offer the broadest and best benefit choices, at the lowest cost per unit of benefit, inside a
healthcare system that is seamless, accessible and excellently serviced. During the period, Discovery Health continued to deliver on this vision, with work continuing on every aspect
of the business to control healthcare costs, enhance scheme benefits, digitise the Discovery Health ecosystem and strengthen the long-term sustainability of the schemes under
management. In addition, the business must also exist within a broader sustainable healthcare system for all South Africans. During the period, the Discovery Foundation's ongoing
work to address the shortage of medical graduate and specialist skills (R83 million invested thus far and over 195 recipients to date) was augmented by the launch of the prestigious
Massachusetts General Hospital Super Specialist award and by the recently-launched set of awards recognising excellence and innovation amongst private-sector doctors.
Finally, Discovery Health was recognised as the leading medical aid brand in South Africa in the Sunday Times Brand Survey 2013, while an independent review strongly endorsed the
value provided by Discovery Health to Discovery Health Medical Scheme, as well as the Scheme's governance structures and the integrated outsourcing relationship between the
Scheme and Discovery Health.
Discovery Life
Discovery Life demonstrated strong performance over the period: new business increased by 8% to R1 896 million, with Discovery Life being the number one writer of
intermediated new business and demonstrating continued market share gains. Operating profit increased by 16% to R2 106 million, while a continually-strengthening cash position
allowed for further reinvestment into the business. Mortality and morbidity experience also exceeded expectation.
The period saw further evolution of the product strategy around improving pricing and selection as well as reducing lapsation. This took place in two important areas: firstly, the
enhancement of the dynamic pricing model to include driving behaviour; and secondly, the separation of short-term and long-term behavioural elements through Payback Benefits
and Cash Conversion Benefits, which provide an unmatched value proposition. This has contributed to high and significantly-improved engagement levels, as well as an enhanced
lapse rate and mortality/morbidity experience.
Discovery Invest
Performance of Discovery Invest was ahead of expectation, with an operating profit of R221 million up 46%; and assets under management increasing to R30 billion, up 20% from
the prior period. Performance was supported by continued product resonance and strong performance of the market.
The period witnessed further enhancement of the integration model, enabling Discovery Invest to offer uniquely-efficient long-term savings products, combined with the flexibility and
attractiveness of the open architecture environment. In particular, the Discovery Retirement Optimiser range and the upfront investment boosters were enhanced over the period and gained
considerable traction.
PruHealth and PruProtect
The performance of Discovery's UK joint venture was exceptional: profits grew by 57% to R472 million; new business grew by 48% to R1 573 million; and the customer base measured around
710 000 lives at the end of the period. PruProtect experienced a 56% increase in operating profit to R326 million; strong new business growth, up 40% to
R644 million; better-than-expected claims and lapse experience; and a 40% increase in in-force policies. PruHealth's operating profit measured R146 million, a 60% increase; with strong growth in
new business, up 54% to R929 million; and excellent performance on the key drivers of loss ratio and lapse rate.
Ping An Health
Ping An Health made good progress over the period, with a deliberate refocus of its strategy away from the Fund and Service base, and towards mid-end and high-end insurance products.
These markets, while embryonic, are growing rapidly and total approximately RMB1 billion of premium income - of which Ping An Health has captured in the region of 30%. Insurance business
was characterised by strong new business growth levels over the period (up 58%, excluding Ping An employees) and a low loss ratio in line with expectation. Ping An Health sustained its
position as the number one writer of new business in the Group high-end market. Importantly, the Individual market remains a key growth opportunity for the business. The integrated health
insurance and Vitality offering will powerfully position Ping An Health to capture this potential.
Discovery Insure
The period under review affirmed the disruptive potential of Discovery Insure. The business demonstrated progress across all dimensions: new business increased by 53% to R366 million, more
than doubling the in-force base over the period. This can be attributed to a focused effort to increase awareness of the product and a bolstering of the direct distribution capability. In addition, the
growth was accompanied by a simultaneous improvement in quality: loss ratios have trended downwards, supported by improved claims management; lower relative accident frequency and
severity due to improved driver behaviour; and excellent lapse dynamics (positive selective lapsation and durational effects). Discovery is optimistic about the potential of the business, based on
growing evidence of the behavioural insurance model and the potential to find product linkages with other Discovery businesses. In this light, Discovery has decided, subject to the necessary
regulatory approval, to acquire the 25% Hollard stake in the business for R352 million.
Prospects
The progress made over the past financial year positions Discovery strongly for continued growth and profitability in the future.
Any forecast information has not been reviewed and reported on by the Group's external auditors.
MI HILKOWITZ
Chairperson
A GORE
Chief Executive Officer
Sandton
2 September 2013
INCOME STATEMENT
for the year ended 30 June 2013
Group Group %
R million 2013 2012 change
Insurance premium revenue 17 893 14 691
Reinsurance premiums (2 233) (1 755)
Net insurance premium revenue 15 660 12 936
Fee income from administration business 4 819 4 251
Vitality income 1 958 1 603
Investment income 324 261
Net realised gains on available-for-sale financial assets 1 81
Net fair value gains on financial assets at fair value through profit or loss 2 099 737
Net income 24 861 19 869
Claims and policyholders' benefits (8 884) (6 702)
Insurance claims recovered from reinsurers 1 804 1 200
Net claims and policyholders' benefits (7 080) (5 502)
Acquisition costs (3 407) (2 775)
Marketing and administration expenses (7 869) (6 910)
Amortisation of intangibles from business combinations (186) (152)
Recapture of reinsurance (336) -
Recovery of expenses from reinsurers 139 148
Transfer from assets/liabilities under insurance contracts (1 735) (1 075)
- change in assets arising from insurance contracts 2 262 2 454
- change in liabilities arising from insurance contracts (3 953) (3 396)
- change in liabilities arising from reinsurance contracts (44) (133)
Fair value adjustment to liabilities under investment contracts (600) (50)
Profit from operations 3 787 3 553
Puttable non-controlling interest fair value adjustment (133) (13)
Finance costs (347) (265)
Foreign exchange gains 40 78
Share of profit/(loss) from associate (22) 1
Profit before tax 3 325 3 354 (1)
Income tax expense (1 194) (1 132) (5)
Profit for the year 2 131 2 222 (4)
Profit attributable to:
- ordinary shareholders 2 063 2 199 (6)
- preference shareholders 68 23
- non-controlling interest - -
2 131 2 222 (4)
Earnings per share for profit attributable to ordinary shareholders of the company during the year
(cents):
- basic 372.2 396.1 (6)
- diluted 367.1 395.7 (7)
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 June 2013
Group Group %
R million 2013 2012 change
Profit for the year 2 131 2 222
Items that are or may be reclassified subsequently to profit or loss:
Change in available-for-sale financial assets 195 35
- unrealised gains 223 145
- capital gains tax on unrealised gains (27) (40)
- realised gains transferred to profit or loss (1) (81)
- capital gains tax on realised gains * 11
Currency translation differences 292 324
- unrealised gains 341 324
- deferred tax on unrealised gains (49) -
Cash flow hedges 96 32
- unrealised gains 172 39
- tax on unrealised gains (33) (3)
- current tax on unrealised gains (4) -
- gains recycled to profit or loss (54) (4)
- tax on recycled gains 15 *
Other comprehensive income for the year, net of tax 583 391
Total comprehensive income for the year 2 714 2 613 4
Attributable to:
- ordinary shareholders 2 646 2 590 2
- preference shareholders 68 23
- non-controlling interest - -
Total comprehensive income for the year 2 714 2 613 4
* Amount is less than R500 000.
HEADLINE EARNINGS
for the year ended 30 June 2013
Group Group %
R million 2013 2012 change
Normalised headline earnings per share (cents):
- undiluted 502.9 417.3 21
- diluted 496.0 416.9 19
Headline earnings per share (cents):
- undiluted 372.0 383.7 (3)
- diluted 367.0 383.2 (4)
The reconciliation between earnings and headline earnings is shown below:
Net profit attributable to ordinary shareholders 2 063 2 199
Adjusted for:
- realised gains on available-for-sale financial assets net of CGT (1) (70)
Headline earnings 2 062 2 129 (3)
- amortisation of intangibles from business combinations net of deferred tax 131 69
- finance costs raised on puttable non-controlling interest financial liability 165 152
- fair value adjustment to puttable non-controlling interest financial liability 133 13
- non-controlling interest allocation if no put options (40) (14)
- accrual of dividends payable to preference shareholders * (33)
- recapture of reinsurance 336 -
Normalised headline earnings 2 787 2 316 20
* Amount is less than R500 000.
Weighted number of shares in issue (000's) 554 165 554 930
Diluted weighted number of shares (000's) 561 843 555 538
STATEMENT OF FINANCIAL POSITION
at 30 June 2013
Group Group
R million 2013 2012
Assets
Assets arising from insurance contracts 14 407 11 681
Property and equipment 533 251
Intangible assets including deferred acquisition costs 1 828 1 608
Goodwill 1 859 1 542
Investment in associates 402 341
Financial assets
- Equity securities 14 710 5 096
- Equity linked notes 1 281 6 480
- Debt securities 5 324 2 835
- Inflation linked securities 172 257
- Money market 8 114 5 729
- Derivatives 541 149
- Loans and receivables including insurance receivables 3 061 2 197
Deferred income tax 370 348
Current income tax asset 32 18
Reinsurance contracts 237 201
Cash and cash equivalents 2 062 1 929
Total assets 54 933 40 662
Equity
Capital and reserves
Ordinary share capital and share premium 1 470 1 503
Perpetual preference share capital 779 779
Other reserves 1 253 670
Retained earnings 10 204 8 778
13 706 11 730
Non-controlling interest 2 1
Total equity 13 708 11 731
Liabilities
Liabilities arising from insurance contracts 19 086 14 319
Liabilities arising from reinsurance contracts 1 508 1 457
Financial liabilities
- Puttable non-controlling interests 3 782 2 893
- Negative reserve funding 2 813 1 264
- Borrowings at amortised cost 660 402
- Investment contracts at fair value through profit or loss 6 049 2 915
- Derivatives 28 35
- Trade and other payables 3 179 2 268
Deferred income tax 3 784 3 075
Deferred revenue 151 116
Employee benefits 138 116
Current income tax liability 47 71
Total liabilities 41 225 28 931
Total equity and liabilities 54 933 40 662
SEGMENTAL INFORMATION
for the year ended 30 June 2013
SA SA SA SA UK UK New business All other
R million Health Life Invest Vitality Health Life development segments Total
30 June 2013
Income statement
Insurance premium revenue 16 7 189 4 520 - 4 744 1 128 296 - 17 893
Reinsurance premiums (2) (1 299) - - (733) (190) (9) - (2 233)
Net insurance premium revenue 14 5 890 4 520 - 4 011 938 287 - 15 660
Fee income from administration business 4 061 140 555 - 34 - 11 - 4 801
Vitality income - - - 1 660 100 - 198 - 1 958
Guarantee received from HumanaVitality - - - - - - 18 - 18
Investment income on assets backing policyholder liabilities - 141 - - 51 - - - 192
Finance charge on negative reserve funding - - - - - (124) - - (124)
Inter-segment funding - (360) 360 - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 501 1 598 - - - - - 2 099
Net income 4 075 6 312 7 033 1 660 4 196 814 514 - 24 604
Claims and policyholders' benefits (2) (3 648) (1 538) - (3 281) (192) (223) - (8 884)
Insurance claims recovered from reinsurers 3 1 004 - - 668 111 18 - 1 804
Net claims and policyholders' benefits 1 (2 644) (1 538) - (2 613) (81) (205) - (7 080)
Acquisition costs - (1 497) (401) (73) (379) (1 011) (46) - (3 407)
Marketing and administration expenses
- depreciation and amortisation (164) (29) (1) - (20) - (15) (1) (230)
- other expenses (2 224) (1 198) (256) (1 552) (1 166) (549) (640) (54) (7 639)
Recovery of expenses from reinsurers - - - - 139 - - - 139
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 1 189 - - - 1 073 - - 2 262
- change in liabilities arising from insurance contracts - 117 (4 026) - (11) (10) (23) - (3 953)
- change in liabilities arising from reinsurance contracts - (134) - - - 90 - - (44)
Fair value adjustment to liabilities under investment contracts - (10) (590) - - - - - (600)
Normalised profit/(loss) from operations 1 688 2 106 221 35 146 326 (415) (55) 4 052
SEGMENTAL INFORMATION
for the year ended 30 June 2012
SA SA SA SA UK UK New business All other
R million Health Life Invest Vitality Health Life development segments Total
30 June 2012
Income statement
Insurance premium revenue 16 6 085 3 683 - 4 193 623 91 - 14 691
Reinsurance premiums (1) (1 082) - - (566) (102) (4) - (1 755)
Net insurance premium revenue 15 5 003 3 683 - 3 627 521 87 - 12 936
Fee income from administration business 3 705 99 421 - 20 5 1 - 4 251
Vitality income - - - 1 454 58 - 91 - 1 603
Guarantee received from HumanaVitality - - - - - - 14 - 14
Investment income on assets backing policyholder liabilities - 113 - - 19 - - - 132
Finance charge on negative reserve funding - - - - - (66) - - (66)
Inter-segment funding - (271) 271 - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 252 485 - - - - - 737
Net income 3 720 5 196 4 860 1 454 3 724 460 193 - 19 607
Claims and policyholders' benefits (3) (2 639) (904) - (2 992) (102) (62) - (6 702)
Insurance claims recovered from reinsurers - 739 - - 412 49 - - 1 200
Net claims and policyholders' benefits (3) (1 900) (904) - (2 580) (53) (62) - (5 502)
Acquisition costs - (1 373) (351) (65) (282) (685) (19) - (2 775)
Marketing and administration expenses
- depreciation and amortisation (135) (26) (5) - (11) - (8) - (185)
- other expenses (2 083) (1 122) (270) (1 384) (946) (491) (359) (70) (6 725)
Recovery of expenses from reinsurers - - - - 148 - - - 148
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 1 503 - - 1 950 - - 2 454
- change in liabilities arising from insurance contracts - (281) (3 146) - 37 - (6) - (3 396)
- change in liabilities arising from reinsurance contracts - (161) - - - 28 - - (133)
Fair value adjustment to liabilities under investment contracts - (17) (33) - - - - - (50)
Normalised profit/(loss) from operations 1 499 1 819 151 5 91 209 (261) (70) 3 443
RECONCILIATION OF PROFIT FOR THE YEAR
TO NORMALISED PROFIT FROM OPERATIONS
for the year ended 30 June 2013
June 2013 June 2012
Audited Audited
Amounts Amounts
per per
income Profit income Profit
R million statement reconciliation statement reconciliation
Profit for the year per income statement 2 131 2 222
Add back:
- income tax expense 1 194 1 132
- puttable non-controlling interest fair value adjustment 133 13
- finance costs 347 265
- foreign exchange gains (40) (78)
- share of loss/(profit) from associates 22 (1)
Profit from operations per income statement 3 787 3 553
Items not included in normalised profit:
Investment income 324 261
- investment income earned on shareholder investments and cash 132 (132) 129 (129)
- investment income on assets backing policyholder liabilities 192 132
Net realised gains on available-for-sale financial assets (1) (81)
Recapture of reinsurance 336 -
Amortisation of intangibles from business combinations 186 152
Items included in normalised profit:
Finance costs (347) (265)
- finance charge on negative reserve funding (124) (124) (66) (66)
- finance costs raised on puttable non-controlling interest financial liability (165) (152)
- other finance costs (58) (47)
Guarantee received from HumanaVitality - 14
Normalised profits from operations per segmental information 4 052 3 443
STATEMENT OF CASH FLOWS
for the year ended 30 June 2013
Group Group
R million 2013 2012
Cash flow from operating activities 1 781 1 457
Cash generated by operations 5 250 4 679
Net purchase of investments held to back policyholder liabilities (4 751) (3 849)
Working capital changes 980 722
1 479 1 552
Dividends received 238 115
Interest received 617 395
Interest paid (182) (113)
Taxation paid (371) (492)
Cash flow from investing activities (1 257) (3 222)
Net purchase of financial assets (737) (2 968)
Purchase of equipment (302) (116)
Purchase of intangible assets (181) (138)
Purchase of businesses (37) -
Cash flow from financing activities (671) 202
Proceeds from issuance of ordinary shares 1 28
Proceeds from issuance of preference shares 77 806
Share issue costs - (21)
Dividends paid to ordinary shareholders (670) (580)
Dividends paid to preference shareholders (68) (23)
Non-controlling interest share buy-backs - (8)
Repayment of borrowings (11) -
Net decrease in cash and cash equivalents (147) (1 563)
Cash and cash equivalents at beginning of year 1 929 3 285
Exchange gains on cash and cash equivalents 64 207
Cash and cash equivalents at end of year 1 846 1 929
Reconciliation to statement of financial position:
Cash and cash equivalents 2 062 1 929
Bank overdraft included in borrowings at amortised cost (216) -
Cash and cash equivalents at end of year 1 846 1 929
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 June 2013
Attributable to equity holders of the Company Attributable to equity holders of the Company
Share capital Preference Share-based Non-
and share share payment Revaluation Translation Hedging Retained controlling
R million premium capital reserve reserve* reserve reserve earnings Total interest Total
year ended 30 June 2012
At beginning of year 1 542 - 318 23 (70) 7 7 149 8 969 4 8 973
Profit for the year - 23 - - - - 2 199 2 222 - 2 222
Other comprehensive income - - - 35 324 32 - 391 - 391
Total comprehensive income for the year - 23 - 35 324 32 2 199 2 613 - 2 613
Transactions with owners:
Increase in treasury shares (47) - - - - - - (47) - (47)
Realised gains from treasury shares 8 - - - - - - 8 - 8
Issue of preference shares - 800 - - - - - 800 - 800
Share issue costs - (21) - - - - - (21) - (21)
Non-controlling interest share issues - - - - - - - - 34 34
Transfer to puttable non-controlling interests liability - - - - - - - - (29) (29)
Non-controlling interest share buy-backs - - - - - - - - (8) (8)
Employee share option schemes:
- value of employee services - - 1 - - - - 1 - 1
Dividends paid to preference shareholders - (23) - - - - - (23) - (23)
Dividends paid to ordinary shareholders - - - - - - (570) (570) - (570)
Total transactions with owners (39) 756 1 - - - (570) 148 (3) 145
At end of year 1 503 779 319 58 254 39 8 778 11 730 1 11 731
year ended 30 June 2013
At beginning of year 1 503 779 319 58 254 39 8 778 11 730 1 11 731
Profit for the year - 68 - - - - 2 063 2 131 - 2 131
Other comprehensive income - - - 195 292 96 - 583 - 583
Total comprehensive income for the year - 68 - 195 292 96 2 063 2 714 - 2 714
Transactions with owners:
Increase in treasury shares (39) - - - - - - (39) - (39)
Proceeds from treasury shares 6 - - - - - - 6 - 6
Non-controlling interest share issues - - - - - - - - 1 1
Dividends paid to preference shareholders - (68) - - - - - (68) - (68)
Dividends paid to ordinary shareholders - - - - - - (637) (637) - (637)
Total transactions with owners (33) (68) - - - - (637) (738) 1 (737)
At end of year 1 470 779 319 253 546 135 10 204 13 706 2 13 708
* This reserve relates to the revaluation of available-for-sale financial assets.
REVIEW OF GROUP RESULTS
for the year ended 30 June 2013
Value creators
New business annualised premium income
New business annualised premium income increased 15% for the year ended 30 June 2013.
June June %
R million 2013 2012 change
Discovery Health 4 820 4 282 13
Discovery Life 1 896 1 749 8
Discovery Invest 1 070 961 11
Discovery Vitality 216 171 26
Discovery Insure 366 239 53
PruHealth* 929 605 54
PruProtect 644 460 40
The Vitality Group USA* 514 564 (9)
Ping An Health 344 359 (4)
New business API of Group 10 799 9 390 15
* The comparatives for PruHealth and Vitality USA have been increased to be consistent with the basis used at 30 June 2013.
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 The Vitality Group USA and Ping An Health, new business API is calculated based on the date of policy
inception.
Gross inflows under management
Gross inflows under management increased 15% for the year ended 30 June 2013.
June June %
R million 2013 2012 change
Discovery Health 41 050 35 963 14
Discovery Life 7 329 6 184 19
Discovery Invest 9 089 8 231 10
Discovery Insure 298 92 224
Discovery Vitality 1 660 1 454 14
PruHealth 4 878 4 271 14
PruProtect 1 128 628 80
The Vitality Group USA 216 91 137
AIA Vitality 9 -
Gross inflows under management 65 657 56 914 15
Less: collected on behalf of third parties (40 813) (36 369) (12)
Discovery Health (36 973) (32 242)
Discovery Invest (3 840) (4 127)
Gross income of Group 24 844 20 545 21
Gross inflows under management measures the total funds collected by Discovery and is an accurate measure of the growth of Discovery.
Normalised profit from operations
The following table shows the main components of the normalised profit from operations for the year ended 30 June 2013:
June June %
R million 2013 2012 change
Discovery Health 1 688 1 499 13
Discovery Life 2 106 1 819 16
Discovery Invest 221 151 46
Discovery Vitality 35 5 600
PruHealth 146 91 60
PruProtect 326 209 56
Normalised profit from existing operations 4 522 3 774 20
Development and other segments (470) (331) (42)
Normalised profit from operations 4 052 3 443 18
Significant movements in the Income Statement
Share-based payments
Included in marketing and administration expenses, in employee costs, is R450 million (2012: R266 million) in respect of phantom options granted under the employee share incentive
schemes, which is expensed in accordance with the requirements of IFRS 2. Discovery has entered into transactions to hedge its exposure to changes in the Discovery share price arising from
these schemes. As at 30 June 2013, approximately 87.7% (2012: 79.1%) of this exposure was hedged. Fair value gains of R250 million (2012: R85 million) relating to the hedge were recognised
in profit or loss resulting in a net expense to Discovery of R200 million (2012: R181 million).
Put options in subsidiaries
During the 2011 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 R165 million has been recorded in finance costs for the year
ended 30 June 2013 (2012: R152 million), using the effective interest rate method. The estimated purchase prices have been reconsidered at 30 June 2013 and a fair value adjustment of R133 million
has been captured to profit or loss (2012: R13 million).
Aggregate effects on Discovery's results at 30 June 2013:
R million Total
Value of puttable non-controlling interests at 1 July 2012 2 893
Further share issues to non-controlling interests 77
Finance costs recognised in profit or loss 165
Fair value adjustments recognised in profit or loss: 133
- resulting from a change in interest rates (55)
- resulting from a change in assumptions 188
Net exchange differences arising during the year allocated to the translation reserve 514
Value of puttable non-controlling interests at 30 June 2013 3 782
Taxation
For South African entities that are in a tax paying position, tax has been provided at 28% (2012: 28%) and secondary tax on companies at 10% (up to 31 March 2012) in the financial
statements. No deferred tax has been accounted for in respect of the Discovery Insure losses.
No deferred tax has been raised on the assessed losses in PruHealth and The Vitality Group.
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 R3 714 million for the year ended 30 June 2013 (2012: R3 408 million).
Discovery offers the members of DHMS access to the Vitality programme.
Significant movements in the Statement of Financial Position
Acquisition of a business combination
On 25 March 2013, Prudential Health Holdings Limited (PHHL), established a wholly-owned subsidiary, Insure your Health Limited (IYH). IYH acquired the assets of three businesses namely,
Insured Health Limited, Insured Limited and Employed Health Limited for GBP2.6 million. GBP2 million of this has been allocated to goodwill.
Financial assets
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss have increased by R7,9 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.
Negative reserve funding
The negative reserve funding liability on Discovery's Statement of Financial Position represents the acquisition costs that are funded by the Prudential Assurance Company on behalf of
PruProtect. The liability unwinds and is repaid on a matched basis as the cash flows emerge from the assets arising from insurance contracts. In the event that the cash flows do not emerge as
anticipated, PruProtect would be required to repay these liabilities from other resources.
The increase in the negative reserve funding liability relates to the increase in new business written by PruProtect in the current financial year.
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 resigned as a non-executive director from the board of Discovery Limited, with effect from 4 December 2012.
Dividend policy and capital
The following interim dividends were paid during the current financial year:
- preference share dividend of 431.23288 cents per share, paid on 18 March 2013
- ordinary share dividend of 60 cents per share, paid on 25 March 2013
The Directors are of the view that the Discovery Group is adequately capitalised at this time. On the statutory basis the capital adequacy requirements of Discovery Life were R455 million
(2012: R364 million) and was covered 4.0 times (2012: 4.4 times).
B preference share cash dividend declaration:
On 29 August 2013, the Directors declared a final gross cash dividend of 421.50685 cents (358.28082 cents net of dividend withholding tax) per B preference share for the period 1 January
2013 to 30 June 2013. 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 to receive a dividend Friday, 13 September 2013
Shares commence trading "ex" dividend Monday, 16 September 2013
Record date Friday, 20 September 2013
Payment date Monday, 23 September 2013
B preference share certificates may not be dematerialised or rematerialised between Monday, 16 September 2013 and Friday, 20 September 2013, both days inclusive.
Ordinary share cash dividend declaration:
Notice is hereby given that the Directors have declared a final gross cash dividend of 64.5 cents (54.825 cents net of dividend withholding tax) per ordinary share for the year ended
30 June 2013. 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 to receive a dividend Friday, 4 October 2013
Shares commence trading "ex" dividend Monday, 7 October 2013
Record date Friday, 11 October 2013
Payment date Monday, 14 October 2013
Share certificates may not be dematerialised or rematerialised between Monday, 7 October 2013 and Friday, 11 October 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.
Discovery Insure
In August 2013, Discovery Insure's preference shareholders agreed to sell its 25% shareholding in Discovery Insure Limited to Discovery Limited for R352 million, relative to the
R182 million invested by these shareholders to date. The transaction is subject to regulatory approval and is expected to be settled towards the end of 2013.
Accounting policies
The annual financial statements 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, except for the accounting policy relating to Joint Ventures.
Previously, Discovery accounted for interests in jointly controlled entities by proportionate consolidation. In terms of this method, Discovery would include its share of a joint venture's
individual income, expenses, assets, liabilities and cash flows in the relevant components of its financial statements.
Discovery has changed this accounting policy and will now recognise its interest in a joint venture using the equity method. Under the equity method, on initial recognition the
investment is recognised at cost and the carrying amount is increased or decreased to recognise Discovery's share of the profit or loss of the investee after the date of acquisition.
Discovery's share of the investee's profit or loss is recognised in profit or loss.
As this change has no effect on the comparative numbers, Discovery changed its accounting policy to align with the requirements of IFRS 11: Joint arrangements, which is effective for
Discovery's 2014 reporting period.
Comparative figures
There have been no changes to comparative figures.
Audit
The consolidated financial statements are considered preliminary based on the JSE Listings Requirements and are summarised from a complete set of the Group financial statements on which the
Independent Auditors, PricewaterhouseCoopers Inc, has expressed an unqualified audit opinion, which is available for inspection at the Company's registered office.
This report is extracted from audited information, but is not itself audited. The Auditor's Report does not necessarily report on all of the information contained in this announcement.
Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor's engagement they should obtain a copy of the Auditor's Report together
with the accompanying financial information from the Company's registered office.
The Directors of Discovery take full responsibility for the preparation of this report and that the financial information has been correctly extracted from the underlying Annual Financial
Statements.
A copy of the Annual Financial Statements that have been summarised in this report can be obtained from the Company's registered office.
EMBEDDED VALUE STATEMENT
for the year ended 30 June 2013
The embedded value of Discovery at 30 June 2013 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 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 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 year ended 30 June 2013. A copy of the auditors' unqualified review report is available for inspection at the company's registered office.
Table 1: Group embedded value
30 June 30 June %
R million 2013 2012 change
Shareholders' funds 13 706 11 730 17
Adjustment to shareholders' funds from published basis (1) (9 611) (8 401)
Adjusted net worth 4 095 3 329
- Free Surplus 1 338 1 208
- Required Capital (2) 2 757 2 121
Value of in-force covered business before cost of capital 32 383 27 493
Cost of required capital (757) (576)
Discovery Limited embedded value 35 721 30 246 18
Number of shares (millions) 554.0 554.4
Embedded value per share R64.48 R54.56 18
Diluted number of shares (millions) 591.2 591.2
Diluted embedded value per share (3) R63.30 R53.78 18
(1) The published shareholders' funds was decreased to eliminate net assets under insurance contracts, deferred tax and deferred acquisition
costs at June 2013 of R9 458 million (June 2012: R7 660 million) in respect of Life, R190 million (June 2012: R130 million) in respect of PruHealth
and PruHealth Insurance Limited and R32 million (June 2012: R38 million) in respect of PruProtect. The shareholders' funds was decreased by
R1 983 million (June 2012: R1 738 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 shareholders' funds was increased by R2 663 million (June 2012: R1 851 million) reflecting the value of the puttable non-controlling interest
liability in excess of the non-controlling interest in the net asset value and R168 million (June 2012: R93 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 June 2013 for Life is R909 million (June 2012: R728 million), for Health and Vitality is R553 million (June 2012:
R487 million), for PruHealth and PruHealth Insurance Limited is R987 million (June 2012: R708 million) and for PruProtect is R308 million (June
2012: R198 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 1.25 times 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) 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
Value Cost of Value
before cost required after cost
R million of capital capital of capital
at 30 June 2013
Health and Vitality 12 405 (190) 12 215
Life and Invest (1) 17 213 (340) 16 873
PruHealth (2) 2 003 (167) 1 836
PruProtect (2) 762 (60) 702
Total 32 383 (757) 31 626
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 R576 million (June 2012: R425 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 R15.22/GBP (June 2012: R12.83/GBP). The values for PruHealth
and PruProtect reflect Discovery's 75% shareholding in the joint venture.
Table 3: Group embedded value earnings
30 June 30 June
R million 2013 2012
Embedded value at end of period 35 721 30 246
Less: Embedded value at beginning of period (30 246) (26 890)
Increase in embedded value 5 475 3 356
Net change in capital 21 39
Dividends paid 717 593
Transfer to hedging reserve (85) (32)
Embedded value earnings 6 128 3 956
Annualised return on opening embedded value 20.3% 14.7%
Table 4: Components of Group embedded value earnings
30 June 2013 30 June
2012
Value of
Cost of in-force
Net required covered Embedded Embedded
R million worth capital business value value
Total profit from new business (at point of sale) (1 752) (103) 3 715 1 860 1 640
Profit from existing business
- Expected return 2 505 26 295 2 826 2 670
- Change in methodology and assumptions (1) 699 (58) (841) (200) (680)
- Experience variances (320) (14) 1 326 992 (107)
Increase in goodwill and intangibles (22) - - (22) -
Other initiative costs (2) (450) - 25 (425) (386)
Non-recurring expenses (19) - - (19) (26)
Acquisition costs (3) (6) - 2 (4) 5
Finance costs (35) - - (35) (28)
Foreign exchange rate movements 451 (32) 379 798 638
Return on shareholders' funds (4) 357 - - 357 230
Embedded value earnings 1 408 (181) 4 901 6 128 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 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 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 (39) - 21 (3) (15) - 7 - (29)
Other expenses - - - - (81) - - - (81)
Lapses and surrenders (1) 14 428 (4) 309 - 138 8 (4) 889
Mortality and morbidity - - (14) 30 109 61 11 - 197
Policy alterations (2) - 26 (373) 339 - - 1 9 2
Backdated cancellations - - (78) 22 - - (6) (4) (66)
Premium income - - (74) (82) - (133) - - (289)
Economic assumptions - - (31) 118 - - - - 87
Commission - - - - (11) (16) - - (27)
Tax (3) (12) - 216 (244) (11) - (15) - (66)
Reinsurance - - (12) 10 - - 34 (13) 19
Maintain modelling term (4) - 234 - 70 - 14 - - 318
Vitality benefits 67 - - - (4) 1 - - 64
Other 56 (52) (85) 79 0 (26) 1 1 (26)
Total 86 636 (434) 648 (13) 39 41 (11) 992
(1) The total Health and Vitality lapse experience variance of R442 million consists of a positive variance of R134 million due to lower than expected lapses and a positive variance of R308
million due to the net growth in existing employer groups (i.e. R966 million in respect of members joining existing employer groups during the period offset by an amount of R658 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.
(4) The projection term for Health and Vitality, Life, Group Life and PruHealth at 30 June 2013 has not been changed from that used in the 30 June 2012 embedded value calculation.
Therefore, an experience variance arises because the total term of the in-force covered business is effectively increased by one year.
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 - - (30) (14) - - 2 15 (27)
Expenses (1) - (332) 1 (18) - (84) 5 (2) (430)
Lapses (2) - - (0) (149) - 186 (239) 26 (176)
Mortality and morbidity (3) - - - - - 150 31 (8) 173
Benefit enhancements - - 9 (56) - - - - (47)
Vitality benefits (4) - 160 - - - (222) - - (62)
Tax - - - - - 58 - 6 64
Economic assumptions - 92 42 155 - (38) 117 (12) 356
Reinsurance (5) - - 811 (826) (87) 47 - - (55)
Other - - 23 (12) - (19) 14 (2) 4
Total - (80) 856 (920) (87) 78 (70) 23 (200)
(1) The Health renewal expense assumption has been adjusted to reflect increased investment in IT, systems and other strategic initiatives which are expected to create a sustainable long-term
competitive advantage for the business.
The PruHealth expense assumption allows for higher than expected expenses related to the transitional services arrangement with Standard Life.
(2) The Invest and PruProtect lapse assumptions were strengthened to reflect uncertainty about long duration experience.
The PruHealth lapse assumption has been reduced in line with recent experience and expected future experience.
(3) The PruHealth morbidity assumption has been reduced in line with recent experience and expected future experience.
(4) The South African Vitality benefit assumption was adjusted in line with better than expected recent experience.
The United Kingdom Vitality benefit assumption has been strengthened following recent benefit enhancements and increased engagement.
(5) The reinsurance item relates to the impact of the financing reinsurance arrangements.
Table 7: Embedded value of new business
30 June 30 June %
R million 2013 2012 change
Health and Vitality
Present value of future profits from new business at point of sale 396 399
Cost of required capital (16) (16)
Present value of future profits from new business at point of sale after cost of required capital 380 383 (1)
New business annualised premium income (1) 1 783 1 798 (1)
Life and Invest
Present value of future profits from new business at point of sale (2) 1 033 974
Cost of required capital (44) (40)
Present value of future profits from new business at point of sale after cost of required capital 989 934 6
New business annualised premium income (3) 1 923 1 804 7
Annualised profit margin (4) 6.4% 6.6%
Annualised profit margin excluding Invest Business 10.0% 10.0%
PruHealth (5)
Present value of future profits from new business at point of sale 54 21
Cost of required capital (20) (9)
Present value of future profits from new business at point of sale after cost of required capital 34 12 183
New business annualised premium income 525 273 92
Annualised profit margin 1.2% 0.7%
PruProtect (6)
Present value of future profits from new business at point of sale 480 326
Cost of required capital (23) (15)
Present value of future profits from new business at point of sale after cost of required capital 457 311 47
New business annualised premium income 483 345 40
Annualised profit margin (4) 12.8% 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 from 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 30 June 2013.
The total Health and Vitality new business annualised premium income written over the period was R5 036 million (June 2012: R4 453 million).
(2) Included in the Life and Invest value of new business is R14 million (June 2012: -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 recognised 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 R1 923 million (June 2012: R1 804 million) (single premium APE: R614 million (June 2012:
R511 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 R651 million (June 2012: R552
million) and servicing increases of R392 million (June 2012: R354 million), was R2 966 million (June 2012: R2 710 million) (single premium APE:
R644 million (June 2012: R537 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 30 June 2013. There have
been no changes to the definition of new business from 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 from the previous valuation.
Table 8: Embedded value economic assumptions
30 June 30 June
2013 2012
Beta coefficient
South Africa 0.49 0.53
United Kingdom 0.49 0.53
Equity risk premium (%)
South Africa 3.50 3.50
United Kingdom 4.00 4.00
Risk discount rate (%)
Health and Vitality 10.215 10.355
Life and Invest 10.215 10.355
PruHealth 4.97 4.40
PruProtect 4.97 4.40
Rand/GB Pound Exchange Rate
Closing 15.22 12.83
Average 13.98 12.35
Medical inflation (%)
South Africa 7.50 7.50
United Kingdom 7.00 7.00
Expense inflation and CPI (%)
South Africa 4.50 4.50
United Kingdom - PruHealth 3.30 3.75
- PruProtect 3.30 1.60
Pre-tax investment return (%)
South Africa - Cash 7.00 7.00
- Bonds 8.50 8.50
- Equity 12.00 12.00
United Kingdom - Risk Free 3.01 2.26
- PruProtect asset return assumption 3.85 2.66
Income tax rate (%)
South Africa 28.00 28.00
24.00% 25.00%
reducing to reducing to
20.00% in 23.00% in
United Kingdom April 2015 April 2014
Projection term
- Health and Vitality 20 years 20 years
- Life value of in-force 40 years 40 years
- Group Life 10 years 10 years
- PruHealth 20 years 20 years
Life and Invest mortality, morbidity, lapse and surrender assumptions were derived from internal experience, where available and 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 and augmented by industry information.
PruProtect assumptions were derived from internal experience, where available and 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 five 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 Advisory Practice Note APN 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 30 June 2013 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 4 095 12 405 (190) 17 213 (340) 2 003 (167) 762 (60) 35 721
Impact of:
Risk discount rate +1% 4 095 11 699 (214) 15 528 (302) 1 866 (218) 678 (80) 33 052 (7)
Risk discount rate -1% 4 095 13 188 (163) 19 224 (387) 2 154 (109) 865 (34) 38 833 9
Lapses -10% 4 095 12 860 (200) 18 953 (376) 2 304 (178) 799 (66) 38 191 7
Interest rates -1% (1) 4 095 12 365 (181) 17 870 (352) 1 989 (218) 999 (65) 36 502 2
Equity and property market value -10% 3 997 12 405 (190) 17 125 (340) 2 003 (167) 762 (60) 35 535 (1)
Equity and property return +1% 4 095 12 405 (190) 17 345 (341) 2 003 (167) 762 (60) 35 852 0
Renewal expenses -10% 4 095 13 650 (176) 17 410 (339) 2 183 (167) 752 (59) 37 349 5
Mortality and morbidity -5% 4 095 12 405 (190) 18 316 (332) 2 745 (167) 743 (59) 37 556 5
Projection term +1 year 4 095 12 538 (192) 17 290 (342) 2 026 (167) 762 (60) 35 950 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.
The following table shows the effect of using different assumptions on the value of new business.
Table 10: Value of new business sensitivity
Health and Vitality Life and Invest PruHealth PruProtect (2)
Value
Value of Cost of Value of Value of Cost of Value of Cost of of new %
R million new business capital new business Cost of capital new business capital new business capital business change
Base 396 (16) 1 033 (44) 54 (20) 480 (23) 1 860
Impact of:
Risk discount rate +1% 358 (19) 825 (39) 39 (25) 443 (30) 1 552 (17)
Risk discount rate -1% 439 (14) 1 279 (50) 71 (13) 525 (13) 2 224 20
Lapses -10% 423 (17) 1 268 (49) 85 (21) 487 (25) 2 151 16
Interest rates -1% (1) 397 (16) 1 109 (46) 53 (25) 388 (26) 1 834 (1)
Equity and property return +1% 396 (16) 1 059 (44) 54 (20) 480 (23) 1 886 1
Renewal expense -10% 469 (16) 1 060 (44) 78 (20) 494 (23) 1 998 7
Mortality and morbidity -5% 396 (16) 1 151 (43) 170 (20) 533 (22) 2 149 16
Projection term + 1 year 403 (17) 1 043 (44) 56 (20) 480 (23) 1 878 1
Acquisition costs -10% 413 (16) 1 125 (44) 66 (20) 507 (23) 2 008 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.
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)
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 final results The final results for the year ended 30 June 2013 were prepared by B Mill FFA, FASSA, L Capon CA(SA) and L van Jaarsveldt CA(SA) and were supervised by
R Farber CA(SA), FCMA.
www.discovery.co.za
Sandton
3 September 2013
Date: 03/09/2013 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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