DISCOVERY LIMITED - Voluntary announcement regarding agreement to acquire remaining 25% stake in Prudential Health Holdings Limited

Voluntary announcement regarding  agreement to acquire remaining 25% stake in Prudential Health Holdings Limited

 
Discovery Limited  
(Registration number 1999/007789/06)  
(Incorporated in the Republic of South Africa)  
Ordinary share code: DSY  
ISIN: ZAE000022331  
(“Discovery” or “the Company”)  
 
 
Voluntary announcement regarding Discovery’s agreement to acquire the remaining 25% stake in 
Prudential Health Holdings Limited  
 
1. Introduction  
Shareholders are advised that Discovery has entered into a binding agreement to acquire the remaining 
25% issued share capital of Prudential Health Holdings Limited, the holding company of PruHealth and 
PruProtect (“joint venture”), the UK joint venture with Prudential Assurance Company (“Prudential”), for 
GBP155 million (“the acquisition”). The agreement will see Discovery taking ownership of Prudential’s 
25% stake in the joint venture. 
  
The acquisition is strategically consistent with Discovery's ambition to have full ownership of the 
underlying insurance entities in the UK. The current agreement is the culmination of a process that 
began with Discovery’s acquisition, and subsequent contribution to PruHealth as a capital investment, of 
Standard Life Healthcare in 2010, which saw it increase its shareholding in the joint venture to 75% at 
that time. As part of that transaction, Discovery and Prudential further entered into reciprocal options 
over Prudential’s remaining 25% shareholding, with the options becoming exercisable during 2015.  
 
Under this agreement Discovery will acquire full ownership of the former joint venture, resulting in the 
original options falling away. The current agreement provides Discovery with a favourable basis for the 
acquisition of the business, including a collaborative framework with Prudential for the smooth 
transition of members, and continued support for a period of time.  
 
2. Background to the PruHealth and PruProtect joint venture  
The joint venture was initially established as an equally-owned venture between Discovery and 
Prudential in the private medical insurance market, and subsequently expanded to offer long-term 
protection products. The joint venture underwent a shareholding change in 2010, at which time 
Discovery increased its shareholding in the joint venture to 75%. Today, the joint venture covers over 
800,000 people, occupying a number four position in the private health insurance market, and a number 
three position in the intermediated life insurance market. In aggregate, the joint venture attracts annual 
premiums of approximately GBP480m, with annualised new business in excess of GBP110m.  
 
3. Overview of Discovery and its shared-value insurance model  
Discovery is a global insurance company listed on the exchange operated by the JSE Limited in South 
Africa, operating in the health, life and general insurance markets, as well as in investments and credit. 
Discovery has over 4 million members, with 3 million engaged in Vitality. Financially, the business 
generates GBP4.5 billion of annual revenue, with earnings per share growth of 26% per annum 
compounded since 2000. The business has a FTSE 100 market capitalisation equivalent, and employs 
over 10,000 people worldwide. 
 
The health and long-term protection industries address society’s most pressing needs, but face 
disruptive forces that threaten their traditional business models. Principally, the nature of mortality and 
morbidity risk is changing, with lifestyle choices driving in excess of 80% of the disease burden and 60% 
of mortality. The implications for life and health insurance markets are substantial, with static 
underwriting practices that evaluate and price risk at policy inception failing to take account of the 
changing nature and causality of risk over the policy term. Discovery’s model specifically takes this into 
account by incentivising engagement in wellness, actuarially and clinically determining the effect of 
engagement on mortality, morbidity and health risk, and pricing these effects dynamically into the 
insurance premium over time. The effect of the model is to create lower price points, attract better 
lives, induce behaviour change, and mitigate selective lapses over time.  
 
Further, the ability to generate excess insurance profits by making members healthier creates a 
framework within which to share value within the insurance system. This shared-value model delivers 
better health and value for members, more productive and engaged employees, and a healthier society 
at large. Importantly, the model is repeatable and scalable, and today Discovery is active in the United 
States through The Vitality Group, in China through its shareholding in Ping An Health, a subsidiary of 
Ping An Group, and in Asia in a joint venture with AIA, to deliver the shared-value model in their local 
markets. 
  
4. The resonance of Discovery’s model, and further opportunity in the UK  
Strategically, the UK health and life insurance markets present opportunity; the UK protection market is 
the third?largest globally; underwriting approaches tend to be static and based on pre-existing 
conditions at policy inception; the ubiquity of the NHS creates an environment in which resources are 
mainly applied towards treatment, rather than prevention, of disease; renewed economic growth 
creates demand for insurance, both in health and life insurance; and increasingly, companies are 
recognising their social obligations toward employee wellbeing. In the UK, the combination of high levels 
of underinsurance and low retention rates reflect the inability of current products to adequately address 
the structural issues at play.  
 
Discovery’s vision in the UK is to fully replicate the shared-value model to create a unique protection 
business that is responsive to global trends, engaging of members, and creates unique value add to 
members and society. In essence, using this model, we will move insurance from a low interest category 
to a brand with which consumers can resonate. The repeatability of Discovery’s model in the UK is well 
established; over 8,000 intermediaries write health and protection business for the company, and are 
serviced by a unique Franchise distribution model that employs over 200 Account Managers; the 
combination of clinical and actuarial capabilities within PruHealth support industry-low loss ratios, a 
unique Full Refund consultant proposition, and an extension of benefits into non-traditional areas; 
Vitality engagement is high and increasing, with strong evidence of behaviour change and meaningful 
correlations between Vitality engagement and lapse and claims outcomes; and the escalation of the 
Vitality brand through a differentiated advertising and sponsorship approach, including the appointment 
of Vitality Ambassadors and various sponsorship properties, have resulted in growing consumer 
awareness. The financial manifestation has been strongly-growing new business and operating profit, 
with over 20% growth in each metric for the past two years.  
 
Financially, the UK operations is targeting GBP1 billion of earned premiums and GBP200 million of new 
business over the next 5 years.  
 
Any forecast financial information contained herein has not been reviewed and reported on by the 
Company’s external auditors.  
 
5. Rebrand strategy  
In line with the escalation of the Vitality brand, the former businesses of PruHealth and PruProtect will 
be rebranded and consolidated under a single insurance brand, “Vitality”, with the business offering two 
insurance lines, “VitalityHealth” in the private medical insurance market, and “VitalityLife” in the long-
term protection market. The rebrand reflects the brand equity that has been built in the Vitality brand 
over the past two years, but importantly, also the significance of Vitality as a mechanism to deliver 
Discovery’s shared-value insurance model.  
 
6. Transitional arrangements  
The change in ownership is expected to have no operational impact on the business or members, with 
predominantly all operational functions housed and conducted within the joint venture itself.  
 
7. Funding  
Discovery anticipates funding the acquisition through a combination of internal resources and debt.  
 
8. Conditions precedent  
There are no outstanding conditions precedent to the finalisation of the acquisition.  
 
9. Categorisation of the Transaction 
The acquisition consideration represents less than 5% of Discovery’s market capitalisation and the 
acquisition is not a categorised transaction in terms of the Listings Requirements of the JSE Limited. This 
announcement is therefore voluntary.  
 
 
 
Sandton  
10 November 2014  
 
 
Sponsor  
RAND MERCHANT BANK (A division of FirstRand Bank Limited)  
 
 
Transaction Advisor  
Barclays Bank plc acted as financial advisor to Discovery on this transaction 

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