Wrap Text
Summary of unaudited interim results and cash dividend declarations for the six months ended 31 December 2013
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
Summary of unaudited interim results and cash dividend declarations for the six months ended 31 December 2013
Normalised profit from operations
R2 383 million up 21%
Normalised headline earnings
R1 650 million up 22%
Embedded value
R39,8 billion up 19%
Overview
Introduction
The six months to 31 December 2013 has been a successful and important period in the context of Discovery's evolution. The period saw normalised profit from operations up 21%
to R2 383 million; normalised headline earnings up 22% to R1 650 million; growth in new business annualised premium income up 19% to R5 883 million; excellent performance in
the key drivers of new business, loss ratios and lapses across all of Discovery's businesses; growth in embedded value of 19%; and cash generated from operations over the period
of R1.3 billion.
Importantly, the growth and quality of earnings reflect the efficacy of Discovery's model, centered around making people healthier, and as a result, building superior insurance
systems through:
- The use of behavioural science to incentivise members to achieve lower mortality, morbidity and better financial outcomes, leading to next generation insurance products
- The derivation of value from the above for Discovery and its customers through better risk management, dynamic pricing, increased persistency and product integration.
Given the global trends of diseases of lifestyle, the challenge of rising healthcare costs, and consumers turning to protection to mitigate uncertainty, this differentiated model is
becoming increasingly more resonant among insurers, consumers and societies. To capitalise on these persistent trends and build on Discovery's leadership in this space, the
six-month period under review saw a deliberate strategy of investing in the repeatability of the model across local businesses, international markets, and adjacent industries. This
was achieved by building on its underlying capabilities, namely, clinical and behavioural research; health and wellness tools; digital platforms; and data analytics.
Discovery Health
Performance over the period exceeded expectation. Discovery Health achieved an overall increase in new business of 15% to R2 623 million and an increase in operating profit of
13% to R860 million. During the period, Discovery Health continued to deliver on its vision of building a superior healthcare system for members of the schemes under its
management. In this light, every aspect of the member journey has been enhanced through Discovery Health's proprietary assets, translating into lowest-in-industry healthcare
costs; access to the largest and broadest system of healthcare professionals and networks; healthcare quality outcomes in line with global benchmarks; and best-in-industry service
levels.
The benefits of these assets and capabilities are evidenced in the performance of Discovery Health Medical Scheme: membership grew by 4% off a high base, loss ratios continued
to decline, and lapses and buy-downs remained exceptionally low. This resulted in the robust financial performance of Discovery Health Medical Scheme (unaudited), including a
surplus of R1.4 billion generated over the 12 months to December 2013, solvency at 24.07% and solvency reserves of R9.7 billion at the end of the period.
The period was also noteworthy for the strong growth in restricted scheme business, with the take-on of the Anglo Medical Scheme and the BMW Medical Aid Society with effect
from 1 January 2014.
Discovery Life
Discovery Life experienced strong earnings growth of 21%, driven by above-expectation new business (11% growth), continued positive lapse and claims experience, and disciplined
expense control. Furthermore, the durational trend of both lapses and claims is positive, which adds further credibility to the impact Vitality has on the Discovery Life insurance
book and the repeatability of the model. In addition, the business generated R194 million in cash over the period.
From a distribution perspective, Discovery Life has continued to invest in its tied distribution channels. This has translated into an increase in the proportion of tied business
generated, growing from 35% in the prior period, to 55% in the current period.
In addition, significant work has taken place to understand and systemise the Discovery Life integrated model for repeatability in other markets, including specific quantification of
the mortality impact of Vitality engagement.
Discovery Invest
The performance of Discovery Invest over the period exceeded expectation. Assets under management increased to R36 billion, up 35% on a like-for-like basis; and new business
increased by 26% from R518 million to R652 million. Earnings increased by 49% to R148 million, driven by excellent expense efficiencies and strong growth in fee income (a
function of both product receptivity and positive market returns).
Discovery Insure
Discovery Insure's performance exceeded expectation across all dimensions. New business grew by 40% to R257 million, with Discovery Insure now accounting for approximately
12% new business market share; lapse rates declined significantly; and the loss ratio, notwithstanding the adverse weather conditions experienced during the period, is now
trending toward the long-term optimal level. The period was also significant for breakthrough innovation in product, distribution, service and the Vitalitydrive model, enabling
Discovery Insure to remain the fastest-growing short-term insurer in the country.
Discovery remains excited about the potential of the Discovery Insure business, given the performance above, and as such, invested in the business from an infrastructure and
brand-building perspective. In addition, a risk-sharing quota share reinsurance structure was concluded during the period to provide upfront financing, allowing the business to
accelerate the level of new business that can be achieved over the next three years.
PruHealth and PruProtect
Performance over the six-month period exceeded expectation: combined profits of the UK businesses grew by 27% to R359 million; new business grew by 35% to R982 million; and
the customer base stood at just over 774 000 lives at December 2013. Notably, the period under review was an important one for the UK businesses, with significant progress
made towards the implementation of Discovery-style product integration across both PruHealth and PruProtect. The significant investment that has taken place in the Vitality
construct and brand has manifested in higher and excellent quality new business levels, strong performance of loss ratio and lapse rate assumptions, and product innovation
opportunities that create further distinction and competitive advantage in the UK.
PruHealth's focus on developing its unique Lifestyle Health Insurance proposition has manifested in both strong new business flows (up 47%), particularly in the individual and SME
markets, and improved Vitality engagement. Importantly, the higher levels of Vitality engagement continue to positively impact loss ratios and lapse rates, with these metrics
remaining among the lowest in the industry, and showing further improvement during the period under review.
In the case of PruProtect, the six-month period saw the launch of the new Vitality Optimiser product, which leverages the Discovery Life integrator methodology. The product
resonance and initial traction has been exceptional, with 30% of sales in Q4 2013 being the Vitality Optimiser product. While still in its infancy, from a profitability perspective,
Optimiser sales have been associated with higher sums assured, more ancillary benefits, higher indexation take-up, and higher Severe Illness Cover take-up, resulting in a value of
new business margin that is almost double that of the non-Optimiser range.
Ping An Health
The period under review saw advances in Ping An Health in the nascent health insurance industry in China. New business more than doubled over the period to R138 million,
predominantly driven by Group Insurance sales, where Ping An Health is the number one player. The October 2013 launch of the Comprehensive Health Protector 2.0, and a
revamped Vitality offering, saw a marked increase in Individual sales, and shows promise to help unlock the latent potential within this market. The quality of the business is
excellent, with loss ratio and lapse rates within assumptions; and Vitality engagement for Individual business is pleasing and climbing.
The Vitality Group and AIA Vitality
Over the period, significant effort was invested in globalising the Vitality chassis in the US and Asia through The Vitality Group and AIA Vitality.
The US continues to be the epicenter in wellness research and adoption and The Vitality Group leads the intellectual property development for Discovery in this arena. In particular,
The Vitality Group steers the development of wellness solutions for large employer groups, including multinationals, and is recognised by preeminent broking houses as the
preferred provider for Corporates.
In Asia, AIA Vitality draws directly on the product construct of the integrated model, developed in Discovery Life and successfully exported to PruProtect. Pilot rollouts have
commenced in two territories, Singapore and Australia, where considerable work has gone into tailoring the product proposition and infrastructure to facilitate a broad rollout.
Early data from both countries confirms the relevance of the Discovery Vitality business model to the AIA territories.
Prospects
The progress made over the past six months positions Discovery strongly for continued growth and profitability into the future.
The financial information on which the above forecast is based has not been reviewed and reported on by the company's external auditors.
On behalf of the Board
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
Sandton
19 February 2014
Statement of financial position
at 31 December 2013
Group Group
December June
2013 2013
Audited
R million Unaudited and restated
Assets
Assets arising from insurance contracts (negative rand reserve) 15 901 14 398
Property and equipment 623 533
Intangible assets including deferred acquisition costs 2 121 1 828
Goodwill 2 122 1 859
Investment in associates 549 402
Financial assets
- Equity securities 16 740 14 951
- Equity linked notes 1 533 1 281
- Debt securities 7 388 5 353
- Inflation linked securities 139 208
- Money market 9 650 8 130
- Derivatives 438 541
- Loans and receivables including insurance receivables 2 436 2 843
Deferred income tax 400 370
Current income tax asset 24 32
Reinsurance contracts 212 226
Cash and cash equivalents 2 624 2 103
Total assets 62 900 55 058
Equity
Capital and reserves
Ordinary share capital and share premium 2 491 1 470
Perpetual preference share capital 779 779
Other reserves 1 524 1 253
Retained earnings 11 538 10 204
16 332 13 706
Non-controlling interest - 2
Total equity 16 332 13 708
Liabilities
Liabilities arising from insurance contracts 22 788 19 075
Liabilities arising from reinsurance contracts 1 530 1 499
Financial liabilities
- Puttable non-controlling interests 3 909 3 782
- Negative reserve funding 3 857 2 813
- Borrowings at amortised cost 439 660
- Investment contracts at fair value through profit or loss 7 354 6 410
- Derivatives 24 28
- Trade and other payables 2 110 2 963
Deferred income tax 4 256 3 784
Deferred revenue 142 151
Employee benefits 146 138
Current income tax liability 13 47
Total liabilities 46 568 41 350
Total equity and liabilities 62 900 55 058
Income statement
for the six months ended 31 December 2013
Group Group Group
Six months Six months Year
ended ended ended
December December June
2013 2012 2013
Unaudited % Audited
R million Unaudited and restated change and restated
Insurance premium revenue 11 001 8 324 17 703
Reinsurance premiums (1 017) (902) (2 043)
Net insurance premium revenue 9 984 7 422 15 660
Fee income from administration business 2 647 2 283 4 819
Vitality income 1 167 903 1 958
Investment income 192 158 324
- investment income earned on shareholder investments and cash 86 66 132
- investment income on assets backing policyholder liabilities 106 92 192
Net realised gains on available-for-sale financial assets 43 5 1
Net fair value gains on financial assets at fair value through profit or loss 2 359 1 686 2 129
Net income 16 392 12 457 24 891
Claims and policyholders' benefits (5 350) (3 998) (8 773)
Insurance claims recovered from reinsurers 857 713 1 693
Net claims and policyholders' benefits (4 493) (3 285) (7 080)
Acquisition costs (2 007) (1 715) (3 531)
Marketing and administration expenses (4 769) (3 893) (7 974)
Amortisation of intangibles from business combinations (91) (90) (186)
Recapture of reinsurance - - (336)
Recovery of expenses from reinsurers 153 54 139
Transfer from assets/liabilities under insurance contracts (2 320) (1 045) (1 735)
- change in assets arising from insurance contracts 959 1 135 2 352
- change in liabilities arising from insurance contracts (3 249) (2 147) (3 953)
- change in liabilities arising from reinsurance contracts (30) (33) (134)
Fair value adjustment to liabilities under investment contracts (486) (575) (630)
Profit from operations 2 379 1 908 25 3 558
Puttable non-controlling interest fair value adjustment 105 - (133)
Finance costs (108) (104) (220)
- finance costs raised on puttable non-controlling interest financial liability (75) (81) (165)
- other finance costs (33) (23) (55)
Foreign exchange gains 1 15 40
Share of losses from associates (16) (10) (22)
Profit before tax 2 361 1 809 31 3 223
Income tax expense (614) (535) 15 (1 092)
Profit for the period 1 747 1 274 37 2 131
Profit attributable to:
- ordinary shareholders 1 713 1 241 38 2 063
- preference shareholders 34 33 68
- non-controlling interest - - -
1 747 1 274 37 2 131
Earnings per share for profit attributable to ordinary shareholders of the company during the period
(cents):
- basic 307.7 223.8 37 372.2
- diluted 301.1 221.9 36 367.1
Statement of comprehensive income
for the six months ended 31 December 2013
Group Group Group
Six months Six months Year
ended ended ended
December December June
2013 2012 % 2013
R million Unaudited Unaudited change Audited
Profit for the period 1 747 1 274 2 131
Items that are or may be reclassified subsequently to profit or loss:
Change in available-for-sale financial assets 90 97 195
- unrealised gains 154 118 223
- capital gains tax on unrealised gains (29) (17) (27)
- realised gains transferred to profit or loss (43) (5) (1)
- capital gains tax on realised gains 8 1 *
Currency translation differences 259 120 292
- unrealised gains 285 152 341
- deferred tax on unrealised gains (26) (32) (49)
Cash flow hedges (78) 11 96
- unrealised gains (14) 27 172
- tax on unrealised gains 2 (3) (33)
- current tax on unrealised gains - - (4)
- gains recycled to profit or loss (78) (15) (54)
- tax on recycled gains 12 2 15
Other comprehensive income for the period, net of tax 271 228 583
Total comprehensive income for the period 2 018 1 502 34 2 714
Attributable to:
- ordinary shareholders 1 984 1 469 35 2 646
- preference shareholders 34 33 68
- non-controlling interest - - -
Total comprehensive income for the period 2 018 1 502 34 2 714
* Amount is less than R500 000.
Headline earnings
for the six months ended 31 December 2013
Group Group Group
Six months Six months Year
ended ended ended
December December June
2013 2012 % 2013
R million Unaudited Unaudited change Audited
Normalised headline earnings per share (cents):
- undiluted 296.2 243.1 22 502.9
- diluted 289.9 241.1 20 496.0
Headline earnings per share (cents):
- undiluted 301.4 223.1 35 372.0
- diluted 294.9 221.2 33 367.0
The reconciliation between earnings and headline earnings is shown below:
Net profit attributable to ordinary shareholders 1 713 1 241 2 063
Adjusted for:
- realised gains on available-for-sale financial assets net of CGT (35) (4) (1)
Headline earnings 1 678 1 237 36 2 062
- amortisation of intangibles from business combinations net of deferred tax 42 65 131
- finance costs raised on puttable non-controlling interest financial liability 75 81 165
- fair value adjustment to puttable non-controlling interest financial liability (105) - 133
- non-controlling interest allocation if no put options (40) (33) (40)
- accrual of dividends payable to preference shareholders * (1) *
- recapture of reinsurance - - 336
Normalised headline earnings 1 650 1 349 22 2 787
Weighted number of shares in issue (000's) 556 944 554 274 554 165
Diluted weighted number of shares (000's) 569 101 559 096 561 843
* Amount is less than R500 000.
Statement of changes in equity
for the six months ended 31 December 2013
Attributable to equity holders of the Company
Share capital Preference Share-based Non-
and share share payment Revaluation Translation Hedging Retained controlling
R million (unaudited) premium capital reserve reserve(1) reserve reserve earnings Total interest Total
Period ended 31 December 2013
At beginning of period 1 470 779 319 253 546 135 10 204 13 706 2 13 708
Profit for the period - 34 - - - - 1 713 1 747 - 1 747
Other comprehensive income - - - 90 259 (78) - 271 - 271
Total comprehensive income for the period - 34 - 90 259 (78) 1 713 2 018 - 2 018
Transactions with owners:
Non-controlling interest share issues - - - - - - - - 1 1
Non-controlling interest share buy-backs - - - - - - - - (3) (3)
Proceeds from treasury shares 1 - - - - - - 1 - 1
Increase in treasury shares (9) - - - - - - (9) - (9)
Share issue 1 030 - - - - - - 1 030 - 1 030
Share buy-back * - - - - - - * - *
Share issue costs (1) - - - - - - (1) - (1)
Dividends paid to preference shareholders - (34) - - - - - (34) - (34)
Dividends paid to ordinary shareholders - - - - - - (379) (379) - (379)
Total transactions with owners 1 021 (34) - - - - (379) 608 (2) 606
At end of period 2 491 779 319 343 805 57 11 538 16 332 - 16 332
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 share issues - - - - - - - - 1 1
Proceeds 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
(1) This reserve relates to the revaluation of available-for-sale financial assets.
* Amount is R12 440.91
Statement of cash flows
for the six months ended 31 December 2013
Group Group Group
Six months Six months Year
ended ended ended
December December June
2013 2012 2013
Unaudited Audited
R million Unaudited and restated and restated
Cash flow from operating activities 1 251 (177) 871
Cash generated by operations 3 352 2 737 5 077
Net purchases of investments held to back policyholder liabilities (2 742) (3 019) (5 546)
Working capital changes 389 162 1 123
999 (120) 654
Dividends received 133 81 238
Interest received 446 206 617
Interest paid (34) (20) (55)
Taxation paid (293) (324) (583)
Cash flow from investing activities (859) (603) (1 261)
Net purchases of financial assets (366) (327) (741)
Net purchases of equipment (104) (157) (302)
Purchase of intangible assets (257) (119) (181)
Increase in investment in associate (132) - -
Purchase of businesses - - (37)
Cash flow from financing activities 297 (295) (671)
Proceeds from issuance of ordinary shares 1 030 59 1
Proceeds from issuance of preference shares 45 - 77
Share buy-back * - -
Share issue costs (1) - -
Dividends paid to ordinary shareholders (380) (316) (670)
Dividends paid to preference shareholders (34) (33) (68)
Non-controlling interest share buy-backs (3) - -
Settlement of puttable non-controlling interest liability (352) - -
Repayment of borrowings (8) (5) (11)
Net increase/(decrease) in cash and cash equivalents 689 (1 075) (1 061)
Cash and cash equivalents at beginning of period 1 887 2 884 2 884
Exchange gains on cash and cash equivalents 48 21 64
Cash and cash equivalents at end of period 2 624 1 830 1 887
Reconciliation to statement of financial position
Cash and cash equivalents 2 624 1 830 2 103
Bank overdraft included in borrowings at amortised cost - - (216)
Cash and cash equivalents at end of period 2 624 1 830 1 887
* Amount is R12 440.91
Additional information
at 31 December 2013
Financial assets - investments
Group
Group June
December 2013
2013 Audited
R million Unaudited and restated
Available-for-sale financial assets: 7 518 6 706
- Equity securities 1 141 952
- Equity linked notes 20 14
- Debt securities 719 544
- Inflation linked securities 4 12
- Money market 5 634 5 184
Financial assets at fair value through profit or loss: 27 932 23 217
- Equity securities 15 599 13 999
- Equity linked notes 1 513 1 267
- Debt securities 6 669 4 809
- Inflation linked securities 135 196
- Money market 4 016 2 946
35 450 29 923
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'.
Exchange rates used in the preparation of these results
USD GBP
31 December 2013
- Average 10.16 16.20
- Closing 10.50 17.37
30 June 2013
- Average 8.94 13.98
- Closing 10.01 15.22
31 December 2012
- Average 8.49 13.58
- Closing 8.51 13.75
Fair value hierarchy of financial instruments
The Group's financial instruments measured at fair value have been disclosed using a fair value hierarchy. The hierarchy has three levels that reflect the
significance of the inputs used in measuring fair value. These are as follows:
Level 1 includes financial instruments that are measured using unadjusted, quoted prices in an active market for identical financial instruments. Quoted prices
are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and
regularly occurring market transactions on an arm's length basis.
Level 2 includes financial instruments that are valued using techniques based significantly on observable market data. Instruments in this category are valued
using:
(a) quoted prices for similar instruments or identical instruments in markets which are not considered to be active or
(b) valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable market data.
Level 3 includes financial instruments that are valued using valuation techniques that incorporate information other than observable market data and where at
least one input (which could have a significant effect on instruments' valuation) cannot be based on observable market data.
31 December 2013
R million (unaudited) Level 1 Level 2 Level 3 Total
Financial assets
Financial instruments at fair value through profit or loss:
- Equity securities 10 657 4 942 - 15 599
- Equity linked notes - 1 513 - 1 513
- Debt securities 5 000 1 669 - 6 669
- Inflation linked securities 135 - - 135
- Money market securities 842 3 174 - 4 016
Available-for-sale financial instruments:
- Equity securities 1 131 10 - 1 141
- Equity linked notes - 20 - 20
- Debt securities 54 665 - 719
- Inflation linked securities - 4 - 4
- Money market securities 3 021 2 613 - 5 634
Derivative financial instruments at fair value:
- Hedges - 434 - 434
- Non-hedges - 4 - 4
20 840 15 048 - 35 888
Financial liabilities
Puttable non-controlling interests - - 3 909 3 909
Negative reserve funding - 3 857 - 3 857
Borrowings at amortised cost - 439 - 439
Derivative financial instruments at fair value:
- Hedges - 16 - 16
- Non-hedges - 8 - 8
- 4 320 3909 8229
There were no transfers between level 1, 2 or 3 during the period.
30 June 2013
R million (audited and restated) Level 1 Level 2 Level 3 Total
Financial assets
Financial instruments at fair value through profit or loss:
- Equity securities 8 909 5 090 - 13 999
- Equity linked notes - 1 267 - 1 267
- Debt securities 3 658 1 151 - 4 809
- Inflation linked securities 196 - - 196
- Money market securities 163 2 783 - 2 946
Available-for-sale financial instruments:
- Equity securities 721 231 - 952
- Equity linked notes - 14 - 14
- Debt securities 37 507 - 544
- Inflation linked securities 8 4 - 12
- Money market securities 2 630 2 554 - 5 184
Derivative financial instruments at fair value:
- Hedges - 536 - 536
- Non-hedges - 5 - 5
16 322 14 142 - 30 464
Financial liabilities
Puttable non-controlling interests - - 3 782 3 782
Negative reserve funding - 2 813 - 2 813
Borrowings at amortised cost - 660 - 660
Derivative financial instruments at fair value:
- Hedges - 10 - 10
- Non-hedges - 18 - 18
- 3 501 3 782 7 283
Included in level 3 is the Puttable non-controlling interest liability. For detailed a description of the valuation of this liability, please refer to note 4.3 in the 30 June 2013 Annual Financial
Statements.
Segmental information
for the six months ended 31 December 2013
IFRS reporting adjustments
New Normalised
business All other profit
R million (unaudited) SA Health SA Life SA Invest SA Vitality UK Health UK Life development segments Total UK Life(1) DUT(2) adjustments(3) IFRS total
31 December 2013
Income statement
Insurance premium revenue 8 4 118 2 969 - 2 929 848 251 - 11 123 (122) - - 11 001
Reinsurance premiums (1) (613) - - (372) (122) (31) - (1 139) 122 - - (1 017)
Net insurance premium revenue 7 3 505 2 969 - 2 557 726 220 - 9 984 - - - 9 984
Fee income from administration business 2 136 86 363 - 43 - 9 - 2 637 - - 10 2 647
Vitality income - - - 910 91 - 166 - 1 167 - - - 1 167
Guarantee received from HumanaVitality - - - - - - 10 - 10 - - (10) -
Investment income on assets backing policyholder liabilities - 84 - - 22 - - - 106 - - (106) -
Finance charge on negative reserve funding - - - - - (74) - - (74) 74 - - -
Inter-segment funding - (215) 215 - - - - - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 547 1 515 - - - - - 2 062 - 297 - 2 359
Net income 2 143 4 007 5 062 910 2 713 652 405 - 15 892 74 297 (106) 16 157
Claims and policyholders' benefits (1) (1 949) (1 108) - (2 029) (226) (183) - (5 496) 146 - - (5 350)
Insurance claims recovered from reinsurers (1) 450 - - 374 146 34 - 1 003 (146) - - 857
Net claims and policyholders' benefits (2) (1 499) (1 108) - (1 655) (80) (149) - (4 493) - - - (4 493)
Acquisition costs - (774) (249) (34) (241) (595) (40) - (1 933) (74) - - (2 007)
Marketing and administration expenses
- depreciation and amortisation (87) (15) - - - - (18) (1) (121) - - - (121)
- other expenses (1 194) (667) (160) (871) (846) (423) (428) (17) (4 606) (42) - - (4 648)
Recovery of expenses from reinsurers - - - - 127 - 26 - 153 - - - 153
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 284 - - - 644 - - 928 31 - - 959
- change in liabilities arising from insurance contracts - (57) (3 211) - 33 (1) (13) - (3 249) - - - (3 249)
- change in liabilities arising from reinsurance contracts - (30) - - - 31 - - 1 (31) - - (30)
Fair value adjustment to liabilities under investment contracts - (3) (186) - - - - - (189) - (297) - (486)
Normalised profit/(loss) from operations 860 1 246 148 5 131 228 (217) (18) 2 383
Investment income earned on shareholder investments and cash 18 29 8 4 2 - 10 15 86 - - 106 192
Net realised gains on available-for-sale financial assets - 41 2 - - - - - 43 - - - 43
Amortisation of intangibles from business combinations - - - - - - - (91) (91) - - - (91)
Puttable non-controlling interest fair value adjustment - - - - - - - 105 105 - - - 105
Finance costs (12) - - - (1) (1) - (95) (109) 1 - - (108)
Foreign exchange gains/(losses) - - 4 - (35) - 1 31 1 - - - 1
Share of losses from associates - - - - - - (16) - (16) - - - (16)
Profit before tax 866 1 316 162 9 97 227 (222) (53) 2 402 (41) - - 2 361
Income tax expense (245) (350) (45) (2) (18) (41) 11 35 (655) 41 - - (614)
Profit for the period 621 966 117 7 79 186 (211) (18) 1 747 - - - 1 747
The information in the segment report is presented on the same basis as reported to management. Reporting adjustments are those accounting reclassifications and entries required to produce IFRS compliant results. These adjustments include the following:
(1) The PruProtect results are reclassified to account for the contractual arrangement under IFRS 4 - Insurance contracts.
(2) Discovery Unit Trusts (DUT) are consolidated into Discovery's results for IFRS purposes. This column includes the effects of consolidating the unit trusts into Discovery's results, being effectively the income and expenses relating to units held by third parties. This was
previously included as part of the Discovery Invest segment.
(3) Investment income on assets backing policyholder liabilities is included as part of the normalised profit from operations but is included together with shareholder investment income for IFRS purposes.
Segmental information
for the six months ended 31 December 2012
IFRS reporting adjustments
New Normalised
business All other profit
R million (unaudited and restated) SA Health SA Life SA Invest(2) SA Vitality UK Health UK Life development segments Total UK Life(1) DUT(2) adjustments(3) IFRS total
31 December 2012
Income statement
Insurance premium revenue 8 3 441 2 068 - 2 274 495 120 - 8 406 (82) - - 8 324
Reinsurance premiums (1) (610) - - (287) (82) (4) - (984) 82 - - (902)
Net insurance premium revenue 7 2 831 2 068 - 1 987 413 116 - 7 422 - - - 7 422
Fee income from administration business 1 947 60 259 - 9 - - - 2 275 - - 8 2 283
Vitality income - - - 782 40 - 81 - 903 - - - 903
Guarantee received from HumanaVitality - - - - - - 8 - 8 - - (8) -
Investment income on assets backing policyholder liabilities - 65 - - 27 - - - 92 - - (92) -
Finance charge on negative reserve funding - - - - - (54) - - (54) 54 - - -
Inter-segment funding - (169) 169 - - - - - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 346 804 - - - - - 1 150 - 536 - 1 686
Net income 1 954 3 133 3 300 782 2 063 359 205 - 11 796 54 536 (92) 12 294
Claims and policyholders' benefits (1) (1 582) (718) - (1 558) (108) (95) - (4 062) 64 - - (3 998)
Insurance claims recovered from reinsurers 1 436 - - 266 64 10 - 777 (64) - - 713
Net claims and policyholders' benefits - (1 146) (718) - (1 292) (44) (85) - (3 285) - - - (3 285)
Acquisition costs - (750) (192) (34) (185) (487) (13) - (1 661) (54) - - (1 715)
Marketing and administration expenses
- depreciation and amortisation (76) (14) (1) - (8) - (5) - (104) - - - (104)
- other expenses (1 116) (616) (155) (743) (515) (298) (277) (23) (3 743) (46) - - (3 789)
Recovery of expenses from reinsurers - - - - 54 - - - 54 - - - 54
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 476 - - 9 709 - - 1 194 (59) - - 1 135
- change in liabilities arising from insurance contracts - (17) (2 097) - (23) - (10) - (2 147) - - - (2 147)
- change in liabilities arising from reinsurance contracts - (33) - - - (59) - - (92) 59 - - (33)
Fair value adjustment to liabilities under investment contracts - (1) (38) - - - - - (39) - (536) - (575)
Normalised profit/(loss) from operations 762 1 032 99 5 103 180 (185) (23) 1 973
Investment income earned on shareholder investments and cash 13 20 6 2 4 - 8 13 66 - - 92 158
Net realised gains on available-for-sale financial assets - 5 - - - - - - 5 - - - 5
Amortisation of intangibles from business combinations - - - - - - - (90) (90) - - - (90)
Finance costs (3) - - - - (2) - (101) (106) 2 - - (104)
Foreign exchange gains/(losses) - - 2 - - - - 13 15 - - - 15
Share of losses from associates - - - - - - (10) - (10) - - - (10)
Profit before tax 772 1 057 107 7 107 178 (187) (188) 1 853 (44) - - 1 809
Income tax expense (222) (288) (32) (2) (12) (44) 7 14 (579) 44 - - (535)
Profit for the period 550 769 75 5 95 134 (180) (174) 1 274 - - - 1 274
The information in the segment report is presented on the same basis as reported to management. Reporting adjustments are those accounting reclassifications and entries required to produce IFRS compliant results. These adjustments include the following:
(1) The PruProtect results are reclassified to account for the contractual arrangement under IFRS 4 - Insurance contracts.
(2) Discovery Unit Trusts (DUT) are consolidated into Discovery's results for IFRS purposes. This column includes the effects of consolidating the unit trusts into Discovery's results, being effectively the income and expenses relating to units held by third parties. This was
previously included as part of the Discovery Invest segment.
(3) Investment income on assets backing policyholder liabilities is included as part of the normalised profit from operations but is included together with shareholder investment income for IFRS purposes.
Review of group results
for the six months ended 31 December 2013
Value creators
New business annualised premium income
New business annualised premium income increased 19% for the six months ended 31 December 2013 when compared to the same period in the prior year.
December December %
R million 2013 2012 change
Discovery Health 2 623 2 286 15
Discovery Life 1 056 950 11
Discovery Invest 652 518 26
Discovery Vitality 90 105 (14)
Discovery Insure 257 184 40
PruHealth 562 383 47
PruProtect 420 344 22
The Vitality Group 50 45 11
HumanaVitality 35 68 (49)
Ping An Health* 138 61 126
New business API of Group 5 883 4 944 19
* The comparative for Ping An Health has been reduced by R162 million to exclude the Fund Product which has been discontinued during the current financial year.
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, HumanaVitality 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 18% for the six months ended 31 December 2013 when compared to the same period in the prior year.
December December %
R million 2013 2012 change
Discovery Health 22 011 19 250 14
Discovery Life 4 204 3 501 20
Discovery Invest 4 953 4 420 12
Discovery Insure 253 120 111
Discovery Vitality 910 782 16
PruHealth 3 063 2 323 32
PruProtect 848 495 71
The Vitality Group 176 89 98
AIA Vitality 7 -
Gross inflows under management 36 425 30 980 18
Less: collected on behalf of third parties (21 488) (19 389) 11
Discovery Health (19 867) (17 295) 15
Discovery Invest (1 621) (2 094) (23)
Gross income of Group 14 937 11 591 29
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 six months ended 31 December 2013:
December December %
R million 2013 2012 change
Discovery Health 860 762 13
Discovery Life 1 246 1 032 21
Discovery Invest 148 99 49
Discovery Vitality 5 5 -
PruHealth 131 103 27
PruProtect 228 180 27
Normalised profit from existing operations 2 618 2 181 20
Development and other segments (235) (208) (13)
Normalised profit from operations 2 383 1 973 21
Significant movements in the Income Statement
Share-based payments
Included in marketing and administration expenses, in employee costs, is R137 million (2012: R158 million) in respect of phantom shares and 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 31 December 2013, approximately 90% (2012: 84%) of this exposure was hedged. Fair value gains of R49 million
(2012: R71 million) relating to the hedge were recognised in profit or loss resulting in a net expense to Discovery of R88 million (2012: R87 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 R75
million has been recorded in finance costs for the six months ended 31 December 2013 (2012: R81 million), using the effective interest rate method.
For the interim results, the value of this liability is only recalculated if there are any significant movements to the assumptions applied at 30 June 2013. At 31 December 2013,
no changes have been made to the valuation methodology or long-term valuation assumptions. The present value of the purchase price has however been adjusted for a
movement in the government bond yield curve used to discount the redemption value as well as a movement along the yield curve to allow for the month reduction in the
period to the expected option exercise date. This has resulted in a fair value adjustment of R105 million being captured to profit or loss (2012: nil).
In August 2013, subject to regulatory approval, Discovery Insure's preference shareholders agreed to sell its 25% shareholding in Discovery Insure Limited to Discovery Limited
for R352 million. This approval was received in December 2013 and the transaction was settled. Normalised headline earnings includes an allocation for the non-controlling
interest share of losses to the end of November 2013, being R26 million.
Aggregate effects on Discovery's results at 31 December 2013:
R million Total
Value of puttable non-controlling interests at 1 July 2013 3 782
Further share issues to non-controlling interests 45
Finance costs recognised in profit or loss 75
Fair value adjustments resulting from a change in interest rates recognised in profit or loss (105)
Put option exercised (352)
Net exchange differences arising during the period allocated to the translation reserve 464
Value of puttable non-controlling interests at 31 December 2013 3 909
Taxation
For South African entities that are in a tax paying position, tax has been provided at 28% (2012: 28%) 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 R1 942 million for the six months ended 31
December 2013 (2012: R1 781 million). Discovery offers the members of DHMS access to the Vitality programme.
Significant movements in the Statement of Financial Position
Investments in associates and subsidiaries
Ping An Health
In October 2013, following regulatory approval, Discovery Limited purchased a further 5% in Ping An Health for RMB 82.2 million, resulting in a 25% holding.
Discovery Insure
In December 2013, following regulatory approval, Discovery Limited purchased Discovery Insure's preference shareholders' 25% shareholding in Discovery Insure for R352
million. Discovery Limited now holds 100% of the issued capital of Discovery Insure.
Refinancing of BEE transaction by a BEE partner
In September 2005, Discovery concluded a BEE transaction pursuant to which 38 725 909 shares were issued to a consortium of BEE parties. 17 703 273 of these shares were
issued to WDB Discovery Investment Proprietary Limited (WDB) at R0.113 each, being one of the BEE consortium members. The difference between the market value of the
ordinary shares issued to the BEE parties and the subscription consideration represents an outstanding funded amount provided by Discovery shareholders (funded amount).
In December 2013, WDB decided to refinance the funded amount provided by Discovery with a third-party financial institution, which resulted in the following transactions:
- The repurchase by Discovery of 12 440 910 Discovery shares held by WDB at a price of R0.001 per Discovery share.
- The issue to WDB by Discovery of 12 440 910 new Discovery shares at a price of R82.75 per Discovery share (representing the 30 day VWAP to 4 December 2013).
This resulted in an increase in Share Premium of R1 030 million and a decrease in treasury shares of 17 703 273 shares.
Financial assets
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss have increased by R4.7 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'.
Available-for-sale financial assets
Available-for-sale financial assets have primarily increased due to the investment of the cash received from WDB on the refinancing of their BEE shareholding.
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 period as well as an increase in the foreign
exchange rate.
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 Tito Mboweni has been appointed as a non-executive director to the board of Discovery Limited, with effect from 1 January 2014.
Dividend policy and capital
The following final dividends were paid during the past six months:
- preference share dividend of 421,50685 cents per share, paid on 23 September 2013
- ordinary share dividend of 64,5 cents per share, paid on 14 October 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 was
R517 million (2012: R414 million) and was covered 3.9 times (2012: 3.9 times).
B preference share cash dividend declaration:
Notice is hereby given that the Directors have declared an interim gross cash dividend of 428.49315 cents (364.21918 cents net of dividend withholding tax) per B preference
share for period 1 July 2013 to 31 December 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, 7 March 2014
Shares commence trading "ex" dividend Monday, 10 March 2014
Record date Friday, 14 March 2014
Payment date Monday, 17 March 2014
B preference share certificates may not be dematerialised or rematerialised between Monday, 10 March 2014 and Friday, 14 March 2014, both days inclusive.
Ordinary share cash dividend declaration:
Notice is hereby given that the Directors have declared an interim gross cash dividend of 73 cents (62.05 cents net of dividend withholding tax) per ordinary share for the six
month period ended 31 December 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 Thursday, 13 March 2014
Shares commence trading "ex" dividend Friday, 14 March 2014
Record date Thursday, 20 March 2014
Payment date Monday, 24 March 2014
Share certificates may not be dematerialised or rematerialised between Friday, 14 March 2014 and Thursday, 20 March 2014, both days inclusive.
Subsequent events
The Vitality Group
Discovery invested a further USD 5 million into The Vitality Group at the beginning of the 2014 calendar year.
Discovery's new head office
In February 2014, Discovery concluded an agreement to develop Discovery's new head office and is expecting to take occupation on 1 January 2018. The rentals will be
approximately R226 million per annum and will escalate at a rate of 7% per annum compounded annually. The initial lease period, commencing 1 November 2017, is for 15
years with the option to renew.
Accounting policies
The interim results have been prepared in accordance with International Financial Reporting Standards (IFRS) including IAS 34, as well as the South African Companies Act 71 of
2008. The accounting policies adopted are consistent with the accounting policies applied in the last annual report, except for changes required by the mandatory adoption of
new and revised IFRS. The impact on Discovery has been in the following areas:
IFRS 10: Consolidated financial statements
Under IFRS 10, subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when it has power over the entity, is
exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity. Discovery has
applied IFRS 10 retrospectively in accordance with the transition provisions of IFRS 10. Discovery consequently re-examined the impact of this standard on all its investments
and this resulted in certain reclassifications of investments in the Discovery Unit Trusts and PruProtect.
Discovery Unit Trusts
Previously, investments in the Discovery Unit Trusts in which Discovery had an economic interest of less than 50% of the total fund value were designated as financial assets.
The adoption of IFRS 10 has resulted in the consolidation of all Discovery Unit Trusts even if the economic interest is less than 50% as Discovery has significant power to direct
the relevant activities of the fund and has sufficient exposure to the variable returns of the funds.
PruProtect
PruProtect is a contractual arrangement established by Prudential and Discovery, giving Discovery the ability to sell life insurance in the UK market using Prudential's long-term
license. In the past Discovery has consolidated this book of business as a cut-out of the Prudential book. Under the new IFRS 10, PruProtect does not meet the definition of an
entity for consolidation purposes and therefore is not consolidated. The PruProtect contractual arrangement was reconsidered and it was considered most appropriate to
account for the contract under IFRS 4 - Insurance contracts. PruProtect sells the insurance policy using Prudential's license and passes the risks and rewards onto the Discovery
Group using the contractual arrangement. The net result will be the same as if PruProtect was consolidated as a subsidiary, but certain lines within the income statement and
statement of financial position will be disclosed differently. The segmental disclosure for PruProtect is unchanged from prior years but an additional column has been added to
show the adjustments to account for the PruProtect business as an insurance contract in the IFRS income statement.
The tables below show the effects on the statement of financial position, the income statement and the statement of cash flows. There was no effect on the statement of other
comprehensive income and earnings per share.
Impact on statement of financial position
30 June 2013 1 July 2012
Total Total
R million DUT PruProtect adjustments DUT PruProtect adjustments
Assets
Assets arising from insurance contracts - (9) (9) - (90) (90)
Financial assets
- Equity securities 241 - 241 4 274 - 4 274
- Debt securities 29 - 29 265 - 265
- Inflation linked securities 36 - 36 64 - 64
- Money market 16 - 16 - - -
- Loans and receivables including insurance receivables 1 (219) (218) 53 (368) (315)
Reinsurance contracts - (11) (11) - - -
Cash and cash equivalents 41 - 41 955 - 955
Total increase/(decrease) 364 (239) 125 5 611 (458) 5 153
Liabilities
Liabilities arising from insurance contracts - (11) (11) - - -
Liabilities arising from reinsurance contracts - (9) (9) - (90) (90)
Financial liabilities
- Investment contracts at fair value through profit or loss 361 - 361 5 397 - 5 397
- Trade and other payables 3 (219) (216) 214 (368) (154)
Total increase/(decrease) 364 (239) 125 5 611 (458) 5 153
Equity
Retained earnings - - - - - -
Impact on the income statement
Year ended June 2013 Six months ended December 2012
Total Total
R million DUT PruProtect adjustments DUT PruProtect adjustments
Insurance premium revenue - (190) (190) - (82) (82)
Reinsurance premiums - 190 190 - 82 82
Net fair value gains on financial assets at fair value through profit or loss 30 - 30 29 - 29
Claims and policyholders' benefits - 111 111 - 64 64
Insurance claims recovered from reinsurers - (111) (111) - (64) (64)
Acquisition costs - (124) (124) - (54) (54)
Marketing and administration expenses - (105) (105) - (46) (46)
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 90 90 - (59) (59)
- change in liabilities arising from reinsurance contracts - (90) (90) - 59 59
Fair value adjustment to liabilities under investment contracts (30) - (30) (29) - (29)
Finance costs - 127 127 - 56 56
Profit before tax - (102) (102) - (44) (44)
Income tax expense - 102 102 - 44 44
Net increase/(decrease) on profit for the period - - - - - -
Impact on statement of cash flows
Year ended June 2013 Six months ended December 2012
Total Total
R million DUT PruProtect adjustments DUT PruProtect adjustments
Cash flow from operating activities (910) - (910) (852) - (852)
Cash generated by operations 44 (217) (173) 36 (88) (52)
Net purchases of investments held to back policyholder liabilities (795) - (795) (721) - (721)
Working capital changes (159) 302 143 (167) 238 71
Interest paid - 127 127 - 56 56
Taxation paid - (212) (212) - (206) (206)
Cash flow from investing activities (4) - (4) 4 - 4
Net purchases of financial assets (4) - (4) 4 - 4
Net decrease in cash and cash equivalents (914) - (914) (848) - (848)
Net increase in cash and cash equivalents at the beginning of the period 955 - 955 955 - 955
Net increase in cash and cash equivalents at the end of the period 41 - 41 107 - 107
Embedded value statement
for the six months ended 31 December 2013
The embedded value of Discovery at 31 December 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), AIA Vitality, Ping An Health 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 December 2013, following regulatory approval, Discovery Limited purchased Discovery Insure's preference shareholders' 25% shareholding in Discovery Insure for R352 million.
Discovery Limited now holds 100% of the issued capital of Discovery Insure.
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 2013. A copy of the auditors' unqualified review report is available for inspection at the company's registered
office.
Table 1: Group embedded value
31 December 31 December % 30 June
R million 2013 2012 Change 2013
Shareholders' funds 16 332 12 882 27 13 706
Adjustment to shareholders' funds from published basis(1) (10 894) (9 254) (9 611)
Adjusted net worth 5 438 3 628 4 095
- Free Surplus 2 248 1 355 1 338
- Required Capital(2) 3 190 2 273 2 757
Value of in-force covered business before cost of capital 35 189 30 407 32 383
Cost of required capital (845) (622) (757)
Discovery Limited embedded value 39 782 33 413 19 35 721
Number of shares (millions) 574.1 554.3 554.0
Embedded value per share R69.29 R60.28 15 R64.48
Diluted number of shares (millions) 591.2 591.2 591.2
Diluted embedded value per share(3) R68.55 R59.26 16 R63.30
(1) The published shareholders' funds were adjusted to eliminate net assets under insurance contracts, deferred tax and deferred acquisition costs at December
2013 of R10 451 million (June 2013: R9 458 million; December 2012: R8 661 million) in respect of Life, R214 million (June 2013: R190 million; December 2012:
R143 million) in respect of PruHealth and PruHealth Insurance Limited and R32 million (June 2013: R32 million; December 2012: R34 million) in respect of
PruProtect. The shareholders' funds were decreased by R2 356 million (June 2013: R1 983 million; December 2012: R1 813 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 were increased by R2 927 million (June 2013: R2 663 million; December 2012: R2 100 million) reflecting the value of the puttable non-
controlling interest liability in excess of the non-controlling interest in the net asset value and R11 million (June 2013: R168 million; December 2012: R76 million)
reflecting the non-controlling share of the losses included in retained earnings.
The shareholders' funds were 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 R1 033 million (June 2013: R909 million; December 2012: R829 million), for Health and Vitality is R589 million
(June 2013: R553 million; December 2012: R520 million), for PruHealth and PruHealth Insurance Limited is R1 171 million (June 2013: R987 million; December
2012: R670 million) and for PruProtect is R397 million (June 2013: R308 million; December 2012: R254 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 31 December 2013
Health and Vitality 12 942 (199) 12 743
Life and Invest(1) 18 835 (392) 18 443
PruHealth(2) 2 411 (150) 2 261
PruProtect(2) 1 001 (104) 897
Total 35 189 (845) 34 344
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 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
(1) Included in the Life and Invest value of in-force covered business is R673 million (June 2013: R576 million; December 2012: R524 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 R17.37/GBP (June 2013: R15.22/GBP; December 2012: R13.75/
GBP). The values for PruHealth and PruProtect reflect Discovery's 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 2013 2012 2013
Embedded value at end of period 39 782 33 413 35 721
Less: Embedded value at beginning of period (35 721) (30 246) (30 246)
Increase in embedded value 4 061 3 167 5 475
Net change in capital (1 021) 10 21
Dividends paid 413 340 717
Transfer to hedging reserve 70 (11) (85)
Embedded value earnings 3 523 3 506 6 128
Annualised return on opening embedded value 20.7% 24.5% 20.3%
Table 4: Components of Group embedded value earnings
Six months Year
ended ended
31 December 30 June
Six months ended 31 December 2013 2012 2013
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) (951) (58) 2 095 1 086 954 1 860
Profit from existing business
- Expected return 1 430 19 132 1 581 1 355 2 826
- Change in methodology and assumptions(1) 534 (13) (629) (108) 379 (200)
- Experience variances (161) (4) 790 625 627 992
Acquisition of Discovery Insure joint venture (297) - - (297) - -
Increase in goodwill and intangibles (125) - - (125) - (22)
Other initiative costs(2) (187) - 2 (185) (202) (425)
Non-recurring expenses (9) - - (9) (14) (19)
Acquisition costs(3) (36) - (0) (36) (29) (4)
Finance costs (11) - - (11) (18) (35)
Foreign exchange rate movements 389 (32) 408 765 268 798
Return on shareholders' funds(4) 237 - - 237 186 357
Embedded value earnings 813 (88) 2 798 3 523 3 506 6 128
(1) The changes in methodology and assumptions will vary over time to reflect adjustments to the model and assumptions as a result of changes to the operating and economic
environment. The current period's changes are described in detail in Table 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, AIA Vitality and Discovery Insure.
(3) Acquisition costs relate to commission paid on Life business and expenses incurred in writing Health and Vitality business that has been written over the period but that will only
be activated and on risk after the valuation date. These policies are not included in the embedded value or the value of new business and therefore the costs are excluded.
(4) The return on shareholders' funds is shown net of tax and management charges.
Table 5: 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 (7) - 4 2 (29) - 5 - (25)
Other expenses 14 - - - - - - - 14
Lapses and surrenders 0 129 (50) 193 - (12) (2) (2) 256
Mortality and morbidity - - 121 (18) 13 - (4) - 112
Policy alterations(1) - (10) (228) 233 - - 1 1 (3)
Premium and fee income 5 70 (18) (19) - - - - 38
Economic assumptions - - (48) 118 - - - - 70
Commission - - - - 18 - - - 18
Tax(2) (8) - 97 (124) (20) - 17 - (38)
Reinsurance - - (0) 0 2 - (2) - 0
Maintain modelling term(3) - 91 - 44 - 25 - - 160
Vitality benefits (4) - - - 16 - - - 12
Other 24 (3) (71) 57 0 6 (7) 5 11
Total 24 277 (193) 486 (0) 19 8 4 625
(1) Policy alterations relate to changes to existing benefits at the request of the policyholder.
(2) The tax variance for Life and Invest arises due to a movement in the deferred tax asset which delays the payment of tax.
(3) The projection term for Health and Vitality, Life, Group Life and PruHealth at 31 December 2013 has not been changed from that used in the 30 June 2013 embedded value
calculation. Therefore, an experience variance arises because the total term of the in-force covered business is effectively increased by six months.
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(1) - (8) 7 (29) - - (25) 5 (50)
Expenses - (11) 1 (11) - - 40 (11) 8
Lapses(2) - - 0 (163) - 7 - - (156)
Mortality and morbidity - - - - - (23) - - (23)
Benefit enhancements - - (3) (14) - - - - (17)
Vitality benefits - (40) - - - 19 - - (21)
Tax - - - - - - - 33 33
Economic assumptions - 92 27 (44) - 59 (4) (37) 93
Premium and fee income - - 8 57 - - - - 65
Reinsurance(3) - - 428 (431) 96 (86) (15) (30) (38)
Other - - (26) 24 - (0) - - (2)
Total - 33 442 (611) 96 (24) (4) (40) (108)
(1) For Health, the embedded value calculation previously allowed for an increase in the lapse assumption after year 10 of the projection term. The model has now been adjusted to
allow for a level lapse rate over the projection term.
(2) The Invest lapse assumptions were strengthened to reflect uncertainty about long duration experience.
(3) The reinsurance item relates to the impact of the financing reinsurance arrangements.
Table 7: Embedded value of new business
Six Months Ended Year Ended
31 December 31 December % 30 June
R million 2013 2012 change 2013
Health and Vitality
Present value of future profits from new business at point of sale 244 173 396
Cost of required capital (8) (8) (16)
Present value of future profits from new business at point of sale after cost of required capital 236 165 43 380
New business annualised premium income(1) 944 752 26 1 783
Life and Invest
Present value of future profits from new business at point of sale(2) 556 513 1 033
Cost of required capital (26) (22) (44)
Present value of future profits from new business at point of sale after cost of required capital 530 491 8 989
New business annualised premium income(3) 1 065 953 12 1 923
Annualised profit margin(4) 6.3% 6.6% 6.4%
Annualised profit margin excluding Invest Business 10.1% 10.6% 10.0%
PruHealth(5)
Present value of future profits from new business at point of sale 70 12 54
Cost of required capital (10) (5) (20)
Present value of future profits from new business at point of sale after cost of required capital 60 7 757 34
New business annualised premium income(6) 348 173 101 525
Annualised profit margin(4) 3.1% 0.7% 1.2%
PruProtect(7)
Present value of future profits from new business at point of sale 274 305 480
Cost of required capital (14) (14) (23)
Present value of future profits from new business at point of sale after cost of required capital 260 291 (11) 457
New business annualised premium income 315 258 22 483
Annualised profit margin(4) 11.4% 14.5% 12.8%
(1) Health new business annualised premium income is the gross contribution to the medical schemes. For embedded value purposes, Health new business was previously
defined as new individuals and members of new employer groups, and included additions to first year business. The definition of new business has been adjusted and
now also includes new members who have been added to existing employer groups where the member has a choice of medical scheme. These members were previously
included in the embedded value as a positive lapse experience variance. The impact of the change in definition has resulted in a R55 million increase in the Health value
of new business.
The new business annualised premium income shown above excludes premiums in respect of members who join an existing employer after the first year where the
member has no choice of medical scheme, as well as premiums in respect of new business written during the period but only activated after 31 December 2013.
The total Health and Vitality new business annualised premium income written over the period was R2 713 million (June 2013: R5 036 million; December 2012: R2 391
million).
(2) Included in the Life and Invest value of new business is R18 million (June 2013: R14 million; December 2012: -R6 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 R1 065 million (June 2013: R1 923 million; December 2012: R953 million) (single premium APE: R385 million (June 2013:
R614 million; December 2012: R274 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 R387 million (June 2013: R651 million; December 2012:
R325 million) and servicing increases of R255 million (June 2013: R392 million; December 2012: R190 million) was R1 707 million (June 2013: R2 966 million; December
2012: R1 468 million) (single premium APE: R409 million (June 2013: R644 million; December 2012: R291 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) In line with actual experience, the PruHealth lapse and loss ratio assumptions have been adjusted to allow for the impact of duration. While this change has resulted
in an increase in the annualised new business profit margin, the overall levels of these assumptions are unchanged and the change had no impact on the value of in-force.
(6) PruHealth new business is defined as individuals and employer groups which incepted during the reporting period. The new business annualised premium income
shown above has been adjusted to exclude premiums in respect of members who join an existing employer group after the first month as well as premiums in respect of
new business written during the period but only activated after 31 December 2013.
(7) PruProtect new business is defined as policies which incepted during the reporting period and which are on risk at the valuation date.
Table 8: Embedded value economic assumptions
31 December 31 December 30 June
2013 2012 2013
Beta coefficient
South Africa 0.43 0.53 0.49
United Kingdom 0.43 0.53 0.49
Equity risk premium (%)
South Africa 3.50 3.50 3.50
United Kingdom 4.00 4.00 4.00
Risk discount rate (%)
Health and Vitality 10.50 9.855 10.215
Life and Invest 10.50 9.855 10.215
PruHealth 4.70 4.44 4.97
PruProtect 5.76 4.44 4.97
Rand/GB Pound Exchange Rate
Closing 17.37 13.75 15.22
Average 16.20 13.58 13.98
Medical inflation (%)
South Africa 8.00 7.00 7.50
United Kingdom 6.50 7.00 6.50
Expense inflation and CPI (%)
South Africa 5.00 4.00 4.50
United Kingdom - PruHealth 3.40 3.75 3.30
- PruProtect 3.40 2.90 3.30
Pre-tax investment return (%)
South Africa - Cash 7.50 6.50 7.00
- Bonds 9.00 8.00 8.50
- Equity 12.50 11.50 12.00
United Kingdom - PruHealth investment return 2.94 1.99 2.37
- PruProtect investment return 4.00 3.36 3.85
Income tax rate (%)
South Africa 28.00 28.00 28.00
United Kingdom - Long Term 20.00 21.00 20.00
Projection term
- Health and Vitality 20 years 20 years 20 years
- Life value of in-force 40 years 40 years 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 and Vitality lapse assumptions were derived from the results of recent experience investigations.
The PruHealth assumptions were derived from internal experience, augmented by industry information.
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 best estimate investment return assumption for PruHealth and PruProtect was based on the single interest rate derived from the risk-free zero coupon sterling yield curve. In the
past, the PruProtect 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 United Kingdom expense inflation assumption was set in line with long-term United Kingdom inflation expectations.
It is assumed that, for the purposes of calculating the cost of required capital, the Life and Invest required capital amount will be backed by surplus assets consisting of 100% equities
and the Health, Vitality and PruHealth required capital amounts will be fully backed by cash. The PruProtect required capital amount is assumed to earn the same return as the assets
backing the PruProtect policyholder liabilities. Allowance has been made for tax and investment expenses in the calculation of the cost of capital. In calculating the capital gains tax
("CGT") liability, it is assumed that the portfolio is realised every 5 years. The Life and Invest cost of capital is calculated using the difference between the gross of tax equity return
and the equity return net of tax and expenses. The Health and Vitality and PruHealth cost of capital is calculated using the difference between the risk discount rate and the net of tax
cash return. The PruProtect cost of capital is calculated using the difference between the risk discount rate and the net of tax asset return assumption.
Sensitivity to the embedded value assumptions
The embedded value has been calculated in accordance with the Actuarial Society of South Africa's 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 31
December 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 5 438 12 942 (199) 18 835 (392) 2 411 (150) 1 001 (104) 39 782
Impact of:
Risk discount rate +1% 5 438 12 180 (224) 17 024 (349) 2 245 (214) 884 (126) 36 858 (7)
Risk discount rate -1% 5 438 13 791 (171) 20 995 (445) 2 602 (78) 1 143 (75) 43 200 9
Lapses -10% 5 438 13 434 (209) 20 693 (434) 2 775 (158) 1 051 (113) 42 477 7
Interest rates -1%(1) 5 438 13 020 (189) 19 525 (405) 2 396 (214) 1 333 (117) 40 787 3
Equity and property market value -10% 5 304 12 943 (199) 18 719 (392) 2 411 (150) 1 001 (104) 39 533 (1)
Equity and property return +1% 5 438 12 943 (199) 18 986 (394) 2 411 (150) 1 001 (104) 39 932 0
Renewal expenses -10% 5 438 14 248 (185) 19 053 (391) 2 633 (150) 987 (103) 41 530 4
Mortality and morbidity -5% 5 438 12 943 (199) 20 021 (384) 3 302 (150) 967 (101) 41 837 5
Projection term +1 year 5 438 13 133 (202) 18 922 (394) 2 443 (150) 1 001 (104) 40 087 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 Cost of Value of Cost of Value of Cost of of new %
R million new business capital new business capital new business capital new business capital business change
Base 244 (8) 556 (26) 70 (10) 274 (14) 1 086
Impact of:
Risk discount rate +1% 223 (9) 454 (23) 56 (13) 252 (18) 922 (15)
Risk discount rate -1% 267 (7) 677 (30) 84 (5) 302 (10) 1 278 18
Lapses -10% 259 (9) 674 (29) 92 (10) 298 (15) 1 260 16
Interest rates -1%(1) 247 (8) 597 (27) 68 (13) 255 (16) 1 103 2
Equity and property return +1% 244 (8) 571 (26) 69 (10) 274 (14) 1 100 1
Renewal expense -10% 282 (8) 570 (26) 86 (10) 282 (14) 1 162 7
Mortality and morbidity -5% 244 (8) 612 (26) 120 (10) 305 (14) 1 223 13
Projection term +1 year 249 (8) 561 (26) 72 (10) 274 (14) 1 098 1
Acquisition costs -10% 250 (8) 604 (26) 76 (9) 291 (14) 1 164 7
(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)
(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*, TT Mboweni#, Dr A Ntsaluba*, AL Owen (UK), A Pollard*, JM Robertson*, SE Sebotsa, T Slabbert, B Swartzberg*, SV Zilwa
*Executive #Appointed 1 January 2014
Preparation of interim results The interim results for the six months ended 31 December 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.
20 February 2014
Date: 20/02/2014 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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