Wrap Text
Unaudited interim results, cash dividend declaration and trading statement for the six months ended 31 December 2015
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
Unaudited interim results, cash dividend declaration and trading statement
for the six months ended 31 December 2015
Normalised profit from operations
R3 015 million
up 7%
New business annualised premium income
R8 435 million
up 27%
Embedded value
R56.5 billion
up 24%
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
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), HL Bosman, Dr BA Brink, SE de Bruyn Sebotsa, JJ Durand(1), SB Epstein (USA),
R Farber* (Financial Director), HD Kallner*, F Khanyile(2), NS Koopowitz*, Dr TV Maphai, HP Mayers*, TT Mboweni, Dr A Ntsaluba*, AL Owen (UK),
A Pollard*, JM Robertson*, T Slabbert(3), B Swartzberg*, SV Zilwa
*Executive 1 Resigned 13 January 2016 2 Appointed 22 October 2015 3 Resigned 22 October 2015
Interim financial results
- prepared by L Capon CA(SA) and L van Jaarsveldt CA(SA)
- supervised by R Farber CA(SA), FCMA
Embedded value statement
- prepared by M Curtis FASSA, FIA
- supervised by A Rayner FASSA, FIA
Commentary
01 | Group Financial Performance
The six-month period ended 31 December 2015 saw a robust financial performance, accompanied by significant investment in new initiatives.
At a Group level, new business displayed excellent growth of 27% to R8 435 million, above the 10-year compound annual growth rate of 15%.
From an earnings perspective, headline earnings in the prior year were positively impacted by the once-off accounting treatment resulting from the
lapsing of the put options Prudential held in respect of its interest in the UK joint venture - this was due to Discovery's purchase of Prudential's remaining
25% of the joint venture in November 2014. As a result, earnings per share decreased by 53% to 281.0 cents per share.
Normalised profit from operations increased 7% to R3 015 million; and normalised headline earnings were up 7% to R2 124 million, a growth rate lower
than Discovery's historic rate due to:
1. An accelerated and substantial investment in new initiatives in excess of 60% over the prior period, including the banking initiative; Ping An Health;
Discovery Partner Markets and further development of the Vitality Network; the take-on of the Bankmed Medical Scheme; and refining the underlying
Vitality Chassis, manifesting in the SA launch of the global product, Vitality Active Rewards with Apple Watch.
2. Higher-than-expected costs associated with moving VitalityHealth in the UK onto its own system infrastructure.
Finally, embedded value grew 24% to R56.5 billion, despite a rising interest rate and currency depreciation; and return on average equity was 13%.
This performance takes place amidst an environment of considerable volatility, with increasing interest rates, a depreciating currency and weak equity
market sentiment. Given the prudent way the Discovery Group has been structured, for example, through geographic and industry diversification and
product design that links to economic factors and accurately matches price to risk, the Group remains resilient in the face of economic and non-economic
stresses in terms of its earnings, embedded value and solvency position.
Consistent with its dividend policy, Discovery declared an increase in total dividends payable of 10%. Given the change in the number of shares, this
results in a gross dividend per share of 85.5 cents, flat on the prior year, though in line with the growth in normalised headline earnings per share. This
will allow Discovery the flexibility to continue to invest for future growth.
02 | Strategic Overview
Considerable work was done over the period to refine the business model, resulting in a disciplined and scalable shared-value model aligned to
Discovery's core purpose and consistent with emerging trends, including the increasingly behavioural nature of insurance risk; the rise of technology as an
enabler of accurate risk segmentation; and the growing social responsibility of insurers to make people healthier. The output is twofold:
1) better value for money, social outcomes, and actuarial performance; and
2) the imperative for organic growth.
Discovery has thus developed a growth engine where significant investment is made in new businesses - between 8% and 10% of earnings historically, and
in excess of this over the period - to develop them into emerging businesses that exhibit strong new business and operating profit growth, and over time,
become incumbents that track well above economic growth. This philosophy of sustainable, organic growth was evident over the period in, for example,
Discovery Insure, which is now at the inflection point of becoming an emerging business; and Discovery Partner Markets, which is still fairly young in
maturity but promises significant potential earnings with low levels of capital deployed.
Furthermore, underpinning the business model is continual investment in the science of the model and the Vitality chassis. Building on the success of the
UK launch of Vitality Active Rewards, the South African launch of Vitality Active Rewards with Apple Watch saw unprecedented success. To date, the
take-up and engagement levels in SA have been exceptional - over 160 000 members have joined the programme, with significant behaviour change
illustrated by an increase of 21% in physical activity events per week. This makes it the most successful Vitality benefit launched to date. The nature of the
UK (Active Rewards) and South African (Active Rewards with Apple Watch) experience is encouraging for the global business, given the planned roll-outs of
Vitality Active Rewards with Apple Watch in Discovery's other territories over the course of 2016.
The focus on the Group's capital structure, to support both new initiatives and growth within established businesses, continued during the six months
under review. The period included both the impact of additional financial reinsurance taken out in November 2014 by Discovery Life to support Group
expansion, and the Rights Issue in March 2015 of R5 billion. The capital raised through the Rights Issue was allocated to the purchase of another 54.99%
share in the DiscoveryCard, as well as to capitalise the UK business and provide the capital foundation for Discovery's banking aspirations.
03 | Business-specific Performance
3.1 South Africa
Discovery Health
Discovery Health performed better than expectation. During the period, normalised operating profit increased by 11% to R1 061 million. In addition, new
business API (excluding Bankmed, which reflected in new business in the prior period) increased off a significant base by 36% to R3 826 million.
The period under review also saw the impact of Discovery Health's innovation and expertise on the sustained excellent performance of the Discovery
Health Medical Scheme: lives administered grew by 2.2% to 2.7 million; and the solvency ratio remained above the statutory 25% - with reserves higher
than the next 10 open schemes combined.
Discovery Health continued to build strategic assets across the healthcare system to generate savings for its medical scheme clients, and efficiencies
within administration. An example is its direct delivery service for medicines (SouthernRx), and Discovery HomeCare, both of which are saving significant
amounts for Discovery Health's scheme clients, while improving the quality of care received by members.
Discovery Health continued its strategic move towards digital healthcare. Over the period, the Discovery Health Medical Scheme launched the country's
first fully-digital healthcare plan - the Smart Plan. The Smart Plan has proven successful in attracting a younger demographic, and demonstrates the lowest
premium per unit of benefit in the market - a result of its advanced analytical backbone that optimises healthcare network utilisation by matching member
supply and demand in real-time.
Furthermore, the focused investment in the administration platform, in preparation for Bankmed (representing over 200 000 new members from
1 January 2016), laid the foundation for the attraction of two significant new restricted scheme clients, which are scheduled to join on 1 July 2016,
continuing Discovery Health's significant success in the restricted scheme market.
Discovery Health strongly supports the objectives of universal health coverage that underpin the NHI White Paper and will work closely with the
Department of Health and all other stakeholders on the details of the proposal, and assist with implementation where possible. Discovery Health is also
actively participating in the Health Market Inquiry of the Competition Commission.
Discovery Life
Discovery Life's performance was robust with excellent market share growth overall (28% of new business share this year versus 26% last year). Earnings
were 13% higher (pre-FinRe) than the prior period, with normalised operating profit growing 13% to R1 658 million, reversing out the impact of additional
cash FinRe from November 2014. Lapse rates demonstrated an improving trend and the claims experience was in line with long-term expectation.
Experience variances were positive excluding economic variances. The business generated R187 million in cash over the period (pre-FinRe and
repayments), with the cash position remaining strong with CAR cover unchanged at 3.9 times.
The period was notable for Discovery Life's continued investment in building a strong and sophisticated adviser force. The large tied adviser force
exhibited productivity levels 200% above that of the market. This also led to the development of the Discovery Financial Adviser Academy, aimed at
training and accelerating the entrance of new tied advisers into the insurance market.
At the same time, the impact of the Discovery business model is evident. An analysis of the dynamic pricing structure shows that when comparing the
transition of integrated versus non-integrated cohorts over time - the integrated cohort is superior from a retention and health profile perspective.
Discovery Invest
The performance of Discovery Invest was excellent with new business year-on-year growth of 17%, assets under management exceeding R56 billion and
operating profit growth of 25% to R238 million. Invest new business margins improved through product innovation.
During the period under review, the business continued to drive innovation by launching pre-retirement accumulation products and linked annuities in
retirement, that pivot off the shared-value model. Given the scientific evidence of Vitality improving mortality and morbidity, there is a genuine need for
additional retirement savings to cater for extended lifespans. Using the shared-value model, and underpinned by Vitality, these products create higher
retirement benefits, larger income in retirement and longer-lasting retirement assets through increased longevity.
Discovery Insure
Over the period, Discovery Insure continued its progression towards meeting the criteria of a Discovery business, namely: insurgency and market
leadership in new business, driven by superior products that drive engagement and improve actuarial dynamics, and existing within an exceptional service
ecosystem. New business was maintained at the high base set in the prior period, with an increased focus on quality; and growth was witnessed in gross
written premiums and cumulative inforce policies. In addition, the profit signature continued its trend towards breakeven.
More importantly, the period saw the business deliver on the key drivers of value - selection and behaviour change; and durational impact. The
Vitalitydrive model continued to deliver superior actuarial dynamics: risk profile varied by Vitalitydrive status, and initial indications of sustained behaviour
change were witnessed by a 14% improvement in driving scores after seven months using the smartphone app and sensor technology. Furthermore,
analysis done on Discovery Insure clients compared to the industry, revealed that Insure clients have a better risk profile by claims experience - by a
minimum of 19% as derived by comparing the cause of an accident between Insure drivers and other third party drivers. In addition, continued evidence
exists for the loss ratio improving by duration.
Finally, Discovery Insure remains focused on its pioneering technology in terms of claims and telematics. During the period, recognition included winning
the "Most Innovative New Digital Product" at the Gartner Annual symposium in Barcelona in November 2015.
3.2 The United Kingdom
The UK business is a fundamental beachhead for Discovery's strategy of internationalising its composite Health and Life insurance model, given the UK's
lifestyle disease burden, aging population, sizeable protection market and commoditised offerings. Against this backdrop, the business is now established
- VitalityLife was granted its own life insurance licence in December 2015; VitalityHealth has transitioned to its own systems chassis, off that of Standard
Life Healthcare; the branding strategy for the combined business is now paying dividends in terms of brand recall and social presence; the business is now
capitalised; and an integrated Health and Life Vitality platform has been successfully developed, evidenced by the success of Active Rewards.
VitalityLife
From a financial perspective, VitalityLife produced an excellent six-month performance, with new business sales up 28% in Rand terms (R643 million vs
R502 million). This resulted in a 28% increase in normalised profit (R343 million vs R269 million) over the period. VitalityLife is currently in third position in
the IFA sector with a market share of 11.3%. VitalityLife's distribution footprint continued to grow significantly with the 18 active Franchises accounting for
72% of all new business sales over the period, and the single ties channel growing to 23 as at December 2015.
During the period under review, VitalityLife achieved strong success in positioning its new-generation risk offering to the market, this being evident
through strong continued adoption of the Vitality-integrated model with the Vitality Optimiser product comprising 63% of all new business sales in the six
months to 31 December 2015. The period also showed lower mortality for Vitality Optimiser cases versus non-Vitality Optimiser cases. 2016 will also see
the introduction of a new form of life insurance integration and dynamic pricing using both the wellness of the client through Vitality and the underlying
interest rates to create a better match of premium to client overall cost of risk. This product innovation presents a sophisticated client expense and risk
management product, and economically robust new business values for VitalityLife.
Finally, new business commenced being written on the VitalityLife insurance licence on 1 January 2016.
VitalityHealth
From a financial perspective, the period was dominated by the extensive work undertaken following the exit of the Transitional Services Agreement (TSA)
with Standard Life Healthcare. This work resulted in significant unplanned and exceptional costs for the period, predominately in the areas of IT
development, administration and claims, in the order of £5 million. VitalityHealth returned to new business API growth (+24%) despite a complex
environment characterised by aggressive new business pricing and increases in the Insurance Premium Tax, which impacts on the end price paid by
consumers. Strong growth was generated in the more profitable Individual (+24%) and Direct channels (+21%), VitalityHealth's areas of focus, while less
profitable Corporate new business declined over the period. VitalityHealth's lapse rates remained strong over the period.
During the period under review, VitalityHealth made excellent progress in further embedding its wellness-integrated insurance model. From a product
perspective, VitalityHealth's new virtual primary care service, Vitality GP, resonated strongly with members and is delivering on its mandate to provide
integrated wellness and sickness pathways. Nearly half of those who have used the service have received wellness coaching from the Vitality GP. Active
Rewards, which was initiated in the UK, saw significant behaviour change in the complex area of physical activity engagement, with 34% of members who
had not previously engaged in physical activity now doing so for the first time. In addition, overall Vitality engagement is at an all-time high and continues
to increase across all dimensions of the programme.
During October, VitalityHealth concluded a joint purchasing agreement with Aviva Health for the procurement of hospital services. The Healthcare
Purchasing Alliance, with approximately 25% share of the market, creates a new, significant player of scale that will negotiate hospital tariffs on
VitalityHealth's behalf, which should positively support the loss ratio going forward.
3.3 Discovery Partner Markets (DPM)
Discovery Partner Markets now comprises significant global operations, with limited capital deployment. Over the period, the business experienced a
period of continued growth across established markets, and expansion within the Asia-Pacific region and new markets. In addition, the overwhelming
response to Vitality Active Rewards in both the UK and SA confirmed the veracity of the Vitality model and its ability to effectively promote healthy
behaviour. This led to the investment and development of a global Vitality Active Rewards platform.
The devaluation of the Rand against the US Dollar between the end of the last interim reporting period and the current period had the effect of
augmenting Dollar-based losses in both The Vitality Group (TVG) and Ping An Health.
TVG
The period was a noteworthy one for TVG for multiple reasons. First, the combination of the shared-value pricing structure and investments in the
distribution support channel saw a positive response from the large Employee Benefits broking houses. In addition, TVG significantly strengthened its
member engagement toolkit with a new member portal, enhanced features on mobile, and new challenges engine. The business also realised positive
member engagement with a direct correlation to improved health outcomes. Finally, the period was noteworthy for its endorsement of Vitality's business
model. TVG's client McKesson won the C. Everett Koop National health Award - in recognition of the effectiveness of the Vitality programme in improving
the health of its employees.
From the perspective of John Hancock, early traction in the market reflected pleasing support of shared-value products by John Hancock's distribution
channels.
Manulife Vitality
A significant development over the period involved Discovery entering into an agreement with John Hancock's parent company, Manulife, for Canada. This
will see the roll-out of shared-value products in Canada in the latter half of the 2016 calendar year, where Manulife is the largest life insurance company
with over 13.5 million clients across all product types.
AIA
The last six months saw AIA Vitality continue to expand its footprint across the Asia-Pacific region. In addition to Australia and Singapore, where AIA Vitality
is already established, AIA Vitality has now launched in Hong Kong and the Philippines.
Generali
A framework agreement has now been reached, and the business has shifted its focus towards roll-out in Germany, followed by France. The launch of
Generali Vitality to staff in Germany is imminent, with the public launch due before the end of the financial year.
Ping An Health
Healthcare reform is one of the core subjects in the Government's new five-year plan that relies heavily on private business involvement.
This trend is expected to build on the business' already-impressive performance, where Ping An Health realised total new business sales of R752 million,
comprising R173 million and R579 million in the Group and Individual segments respectively during the period. This represents an overall increase of 77%
on the corresponding period in 2014. Despite new business strain realised in full in the year business is written, the strategic decision is to focus on
growth and expand along new lines such as with the launch of the Group mid-market product.
Business fundamentals also remained strong within Ping An Health. Loss ratios for both the Individual and Group products were well managed and below
expectation, while lapse rates in all areas of the business remained as expected throughout the period.
04 | Prospects for Future Growth and Trading Statement
The progress made over the past six months - specifically the substantial investment in new initiatives and the capital restructuring to support this and to
ensure robustness - positions Discovery positively for long-term growth.
Due to the once-off accounting treatment resulting from the lapsing of the put options Prudential held in respect of its interest in the UK joint venture,
Discovery's undiluted headline earnings per share and basic earnings per share for the year ending 30 June 2016 ("next period") is expected to be at least
20% lower (176.5 cents and 183.0 cents respectively) than that of the year ended 30 June 2015 (882.4 cents and 914.8 cents respectively). Normalised
headline earnings per share, which the Company views as the most appropriate measure of its performance, will not be impacted by this accounting
treatment.
Any forecast information contained in this announcement has not been reviewed and reported by the Group's external auditors and a further trading
statement will be released when the Company has the reasonable certainty required to be able to provide specific guidance.
On behalf of the Board
MI HILKOWITZ A GORE
Chairperson Group Chief Executive
Sandton
24 February 2016
Statement of financial position
at 31 December 2015
Group Group
December June
2015 2015
R million Unaudited Audited
Assets
Assets arising from insurance contracts 25 210 21 726
Property and equipment 1 036 727
Intangible assets including deferred acquisition costs 3 174 2 526
Goodwill 2 868 2 375
Investment in equity accounted investments 538 505
Financial assets
- Available-for-sale investments 11 651 9 454
- Investments at fair value through profit or loss 43 515 40 132
- Derivatives 720 825
- Loans and receivables including insurance receivables 5 198 3 884
Deferred income tax 880 690
Current income tax asset 15 5
Reinsurance contracts 429 362
Cash and cash equivalents 7 378 6 251
Total assets 102 612 89 462
Equity
Capital and reserves
Ordinary share capital and share premium 8 301 7 488
Perpetual preference share capital 779 779
Other reserves 3 968 2 024
Retained earnings 18 263 17 065
31 311 27 356
Non-controlling interest - -
Total equity 31 311 27 356
Liabilities
Liabilities arising from insurance contracts 33 512 30 818
Liabilities arising from reinsurance contracts 4 002 3 827
Financial liabilities
- Negative reserve funding 4 179 5 437
- Borrowings at amortised cost 5 481 954
- Investment contracts at fair value through profit or loss 11 585 10 059
- Derivatives 14 7
- Trade and other payables 6 470 5 506
Deferred income tax 5 606 5 077
Deferred revenue 197 192
Employee benefits 150 152
Current income tax liability 105 77
Total liabilities 71 301 62 106
Total equity and liabilities 102 612 89 462
Income statement
for the six months ended 31 December 2015
Group Group Group
Six months Six months Year
ended ended ended
December December June
2015 2014 % 2015
R million Unaudited Unaudited change Audited
Insurance premium revenue 16 047 13 529 27 694
Reinsurance premiums (2 093) (1 368) (3 113)
Net insurance premium revenue 13 954 12 161 24 581
Fee income from administration business 3 638 3 082 6 630
Vitality income 1 838 1 459 3 029
Receipt arising from reinsurance contracts - 1 250 1 250
Investment income 354 212 507
- investment income earned on shareholder investments and cash 163 74 188
- investment income earned on assets backing policyholder liabilities 191 138 319
Net realised gains/(losses) on available-for-sale financial assets 3 (8) 188
Net fair value gains on financial assets at fair value through profit or loss 1 318 1 023 3 124
Net income 21 105 19 179 39 309
Claims and policyholders' benefits (9 192) (7 415) (15 805)
Insurance claims recovered from reinsurers 1 662 1 132 2 503
Net claims and policyholders' benefits (7 530) (6 283) (13 302)
Acquisition costs (2 965) (2 472) (5 294)
Marketing and administration expenses (7 080) (5 883) (12 251)
Amortisation of intangibles from business combinations (122) (113) (227)
Recovery of expenses from reinsurers 297 214 447
Transfer from assets/liabilities under insurance contracts (445) (1 770) (2 541)
- change in assets arising from insurance contracts 1 703 1 772 3 278
- change in assets arising from reinsurance contracts 12 23 81
- change in liabilities arising from insurance contracts (1 985) (2 153) (4 320)
- change in liabilities arising from reinsurance contracts (175) (1 412) (1 580)
Fair value adjustment to liabilities under investment contracts (517) (276) (912)
Profit from operations 2 743 2 596 6 5 229
Puttable non-controlling interest fair value adjustment - 1 661 1 661
Finance costs (97) (106) (197)
- finance costs raised on puttable non-controlling interest financial liability - (64) (64)
- other finance costs (97) (42) (133)
Foreign exchange gains 25 18 40
Realised gains from the sale of associate - 7 7
Share of net (losses)/profits from equity accounted investments (54) 48 26
Profit before tax 2 617 4 224 (38) 6 766
Income tax expense (807) (694) (16) (1 214)
Profit for the period 1 810 3 530 (49) 5 552
Profit attributable to:
- ordinary shareholders 1 773 3 495 (49) 5 480
- preference shareholders 37 35 72
- non-controlling interest - - -
1 810 3 530 (49) 5 552
Earnings per share for profit attributable to ordinary shareholders of the
company during the period (cents):
- basic* 281.0 592.6 (53) 914.8
- diluted* 277.1 584.7 (53) 902.2
* December 2014 earnings per share has been restated
Statement of comprehensive income
for the six months ended 31 December 2015
Group Group Group
Six months Six months Year
ended ended ended
December December June
2015 2014 % 2015
R million Unaudited Unaudited change Audited
Profit for the period 1 810 3 530 5 552
Items that are or may be reclassified subsequently to profit or loss:
Change in available-for-sale financial assets 9 13 (92)
- unrealised gains 9 4 72
- capital gains tax on unrealised gains 2 2 (11)
- realised (gains)/losses transferred to profit or loss (3) 8 (188)
- capital gains tax on realised gains/losses 1 (1) 35
Currency translation differences 1 891 57 492
- unrealised gains 1 926 58 504
- deferred tax on unrealised gains (35) (1) (12)
Cash flow hedges (43) 47 58
- unrealised gains 9 79 143
- tax on unrealised gains (1) (12) (23)
- gains recycled to profit or loss (61) (24) (75)
- tax on recycled gains 10 4 13
Share of other comprehensive income from equity accounted investments 87 35 65
- change in available-for-sale financial assets 9 4 13
- currency translation differences 78 31 52
Other comprehensive income for the period, net of tax 1 944 152 523
Total comprehensive income for the period 3 754 3 682 2 6 075
Attributable to:
- ordinary shareholders 3 717 3 647 2 6 003
- preference shareholders 37 35 72
- non-controlling interest - - -
Total comprehensive income for the period 3 754 3 682 2 6 075
Headline earnings
for the six months ended 31 December 2015
Group
Group Six months Group
Six months ended Year
ended December ended
December 2014 June
2015 Unaudited % 2015
R million Unaudited and restated change Audited
Normalised headline earnings per share (cents):
- undiluted 336.6 335.9 * 672.2
- diluted 331.9 331.4 * 663.0
Headline earnings per share (cents):
- undiluted 280.6 586.6 (52) 882.4
- diluted 276.7 578.9 (52) 870.2
The reconciliation between earnings and headline earnings is shown below:
Net profit attributable to ordinary shareholders 1 773 3 495 5 480
Adjusted for:
- realised (gains)/losses on available-for-sale financial assets net of CGT (2) 7 (153)
- realised gain from sale of associate including deferred tax reversal - (42) (42)
Headline earnings 1 771 3 460 (49) 5 285
- accrual of dividends payable to preference shareholders (1) (2) (1)
- amortisation of intangibles from business combinations net of deferred tax 97 89 170
- costs relating to the AIA restructure - - 87
- deferred tax asset recognised on VitalityHealth assessed losses - - (295)
- fair value adjustment to puttable non-controlling interest financial liability - (1 661) (1 661)
- finance costs raised on puttable non-controlling interest financial liability - 64 64
- non-controlling interest allocation if no put options - (42) (42)
- rebranding and business acquisitions expenses 199 73 420
- additional 54.99% share of DiscoveryCard profits 58 - -
Normalised headline earnings 2 124 1 981 7 4 027
Weighted number of shares in issue (000's) 631 079 589 808 7 598 946
Diluted weighted number of shares (000's) 639 919 597 712 7 607 290
* Less than 1%
Statement of changes in equity
for the six months ended 31 December 2015
Attributable to equity holders of the Company Attributable to equity holders of the Company
Share capital Preference Share-based Available- Non-
and share share payment for-sale Translation Hedging Retained controlling
R million premium capital reserve investments(1) reserve reserve earnings Total interest Total
Period ended 31 December 2015
At beginning of the period 7 488 779 319 171 1 373 161 17 065 27 356 - 27 356
Total comprehensive income for the period - 37 - 18 1 969 (43) 1 773 3 754 - 3 754
Profit for the period - 37 - - - - 1 773 1 810 - 1 810
Other comprehensive income - - - 18 1 969 (43) - 1 944 - 1 944
Transactions with owners 813 (37) - - - - (575) 201 - 201
Increase in treasury shares (4) - - - - - - (4) - (4)
Proceeds from treasury shares * - - - - - - * - *
Share issue 817 - - - - - - 817 - 817
Share buy-back ** - - - - - - ** - **
Dividends paid to preference shareholders - (37) - - - - - (37) - (37)
Dividends paid to ordinary shareholders - - - - - - (575) (575) - (575)
At end of the period 8 301 779 319 189 3 342 118 18 263 31 311 - 31 311
Period ended 31 December 2014
At beginning of the period 2 582 779 319 250 829 103 12 549 17 411 - 17 411
Total comprehensive income for the period - 35 - 17 88 47 3 495 3 682 - 3 682
Profit for the period - 35 - - - - 3 495 3 530 - 3 530
Other comprehensive income - - - 17 88 47 - 152 - 152
Transactions with owners 1 (35) - - - - (460) (494) - (494)
Increase in treasury shares 1 - - - - - - 1 - 1
Dividends paid to preference shareholders - (35) - - - - - (35) - (35)
Dividends paid to ordinary shareholders - - - - - - (460) (460) - (460)
At end of the period 2 583 779 319 267 917 150 15 584 20 599 - 20 599
1 This relates to the fair value adjustments of available-for-sale financial assets
* Amount is less than R500 000
** Amount is R5 666
Statement of cash flows
for the six months ended 31 December 2015
Group Group Group
Six months Six months Year
ended ended ended
December December June
2015 2014 2015
R million Unaudited Unaudited Audited
Cash flow from operating activities 527 3 057 3 415
Cash generated by operations 4 325 3 296 5 340
Receipt arising from reinsurance contracts - 1 250 1 250
Net purchase of investments held to back policyholder liabilities (2 493) (2 581) (5 232)
Working capital changes (1 527) 877 1 711
305 2 842 3 069
Dividends received 265 112 499
Interest received 483 411 923
Interest paid (73) (41) (131)
Taxation paid (453) (267) (945)
Cash flow from investing activities (3 994) (71) (2 229)
Net purchase of financial assets (1 892) 121 (1 656)
Purchase of equipment (222) (126) (172)
Proceeds from the sale of property and equipment - - 7
Purchase of intangible assets (1 880) (208) (559)
Proceeds from the sale of intangible assets - - 9
Increase in investment in associate - (58) (59)
Disposal of investment in associate - 200 201
Cash flow from financing activities 4 349 (1 853) 1 485
Proceeds from rights-issue - - 5 000
Rights-issue costs - - (94)
Proceeds from issuance of ordinary shares 817 - -
Share buy-back * - -
Dividends paid to ordinary shareholders (574) (460) (964)
Dividends paid to preference shareholders (37) (35) (72)
Increase in borrowings 4 162 1 500 1 992
Repayment of borrowings (19) (14) (1 533)
Settlement of puttable non-controlling interest liability - (2 844) (2 844)
Net increase in cash and cash equivalents 882 1 133 2 671
Cash and cash equivalents at beginning of period 6 251 3 520 3 520
Exchange gains on cash and cash equivalents 245 5 60
Cash and cash equivalents at end of period 7 378 4 658 6 251
* Amount is R5 666
Additional information
at 31 December 2015
Financial assets - investments
Group Group
December June
2015 2015
R million Unaudited Audited
Available-for-sale financial assets: 11 651 9 454
- Equity securities 52 65
- Equity linked notes 19 19
- Debt securities 466 532
- Money market securities 2 076 992
- Mutual funds 9 038 7 846
Financial assets at fair value through profit or loss: 43 515 40 132
- Equity securities 10 073 10 584
- Equity linked notes 2 483 2 576
- Debt securities 8 421 7 552
- Inflation linked securities 246 218
- Money market securities 1 279 1 170
- Mutual funds 21 013 18 032
55 166 49 586
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 2015
- Average 13.97 21.25
- Closing 15.63 23.18
30 June 2015
- Average 11.49 18.04
- Closing 12.18 19.19
31 December 2014
- Average 11.04 17.82
- Closing 11.57 18.03
30 June 2014
- Average 10.43 17.06
- Closing 10.63 18.17
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 2015
R million (unaudited) Level 1 Level 2 Level 3 Total
Financial assets
Financial instruments at fair value through profit or loss:
- Equity securities 10 073 - - 10 073
- Equity linked notes - 2 483 - 2 483
- Debt securities 7 718 703 - 8 421
- Inflation linked securities 246 - - 246
- Money market securities 39 1 240 - 1 279
- Mutual funds 21 013 - - 21 013
Available-for-sale financial instruments:
- Equity securities 52 - - 52
- Equity linked notes - 19 - 19
- Debt securities 73 393 - 466
- Money market securities 280 1 796 - 2 076
- Mutual funds 9 038 - - 9 038
Derivative financial instruments at fair value:
- Hedges - 719 - 719
- Non-hedges - 1 - 1
48 532 7 354 - 55 886
Financial liabilities
Derivative financial instruments at fair value:
- Hedges - 11 - 11
- Non-hedges - 3 - 3
- 14 - 14
There were no transfers between level 1 and 2 during the current financial period.
Specific valuation techniques used to value financial instruments in level 2
- Discovery has invested in equity linked notes offered by international banks in order to back certain unit-linked contract liabilities. The calculation of
the daily value of the equity linked investments is made by the provider of the note. Discovery has procedures in place to ensure that these prices are
correct. Aside from the daily reasonableness checks versus similar funds and movement since the prior day's price, the fund values are calculated with
reference to a specific formula or index, disclosed to the policyholders, which is recalculated by Discovery in order to check if the price provided by the
provider is correct.
- If a quoted market price is not available on a recognised stock exchange or from a broker for non-exchange traded financial instruments, the fair value
of the instrument is estimated by the asset managers, using valuation techniques including the use of recent arm's length market transactions,
reference to the current fair value of another instrument that is substantially the same, discounted cash flow techniques, option pricing models or
other valuation techniques that provide a reliable estimate of prices obtained in actual market transactions.
- The fair value of the hedged derivatives is calculated by the issuers of those instruments, as follows:
(a) The fair value of call options is calculated on a Black-Scholes model.
(b) The fair value of the return swaps is calculated by discounting the future cash flows of the instruments.
(c) The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves.
30 June 2015
R million (audited) Level 1 Level 2 Level 3 Total
Financial assets
Financial instruments at fair value through profit or loss:
- Equity securities 10 584 - - 10 584
- Equity linked notes - 2 576 - 2 576
- Debt securities 6 947 605 - 7 552
- Inflation linked securities 218 - - 218
- Money market securities 157 1 013 - 1 170
- Mutual funds 18 032 - - 18 032
Available-for-sale financial instruments:
- Equity securities 65 - - 65
- Equity linked notes - 19 - 19
- Debt securities 66 466 - 532
- Money market securities 152 840 - 992
- Mutual funds 7 846 - - 7 846
Derivative financial instruments at fair value:
- Hedges - 824 - 824
- Non-hedges - 1 - 1
44 067 6 344 - 50 411
Financial liabilities
Derivative financial instruments at fair value:
- Hedges - 4 - 4
- Non-hedges - 3 - 3
- 7 - 7
Segmental information
for the six months ended 31 December 2015
IFRS reporting adjustments
New Normalised
SA SA SA SA UK UK business All other Segment UK profit IFRS
R million Health Life Invest Vitality Health Life development segments total Life(2) DUT(3) adjustments(4) total
Income statement
Insurance premium revenue 8 5 394 4 270 - 4 227 1 828 724 - 16 451 (404) - - 16 047
Reinsurance premiums (1) (988) - - (1 013) (404) (91) - (2 497) 404 - - (2 093)
Net insurance premium revenue 7 4 406 4 270 - 3 214 1 424 633 - 13 954 - - - 13 954
Fee income from administration business 2 622 140 592 - 24 - 260 - 3 638 - - - 3 638
Vitality income - - - 1 085 259 30 464 - 1 838 - - - 1 838
Investment income on assets backing policyholder liabilities - 138 - - 24 - 29 - 191 - - (191) -
Finance charge on negative reserve funding - - - - - (172) - - (172) 172 - - -
Inter-segment funding(1) - (215) 215 - - - - - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 113 832 - - - - - 945 - 373 - 1 318
Net income 2 629 4 582 5 909 1 085 3 521 1 282 1 386 - 20 394 172 373 (191) 20 748
Claims and policyholders' benefits (1) (2 873) (2 351) - (3 342) (348) (470) - (9 385) 193 - - (9 192)
Insurance claims recovered from reinsurers * 767 - - 832 193 63 - 1 855 (193) - - 1 662
Net claims and policyholders' benefits (1) (2 106) (2 351) - (2 510) (155) (407) - (7 530) - - - (7 530)
Acquisition costs (3) (896) (355) (33) (294) (1 130) (82) - (2 793) (172) - - (2 965)
Marketing and administration expenses
- depreciation and amortisation (120) (12) - - (76) - (49) - (257) - - - (257)
- other expenses (1 444) (736) (222) (1 021) (1 310) (596) (1 151) (31) (6 511) (113) - (199) (6 823)
Recovery of expenses from reinsurers - - - - 297 - - - 297 - - - 297
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 755 - - - 1 528 - - 2 283 (580) - - 1 703
- change in assets arising from reinsurance contracts - 11 - - 1 6 - - 18 (6) - - 12
- change in liabilities arising from insurance contracts - 171 (2 600) - 463 (12) (13) - (1 991) 6 - - (1 985)
- change in liabilities arising from reinsurance contracts - (175) - - - (580) - - (755) 580 - - (175)
Fair value adjustment to liabilities under investment contracts - (1) (143) - - - - - (144) - (373) - (517)
Share of profits/(losses) from equity accounted investments - - - - 1 - (55) - (54) - - - (54)
Normalised profit/(loss) from operations 1 061 1 593 238 31 93 343 (371) (31) 2 957 (113) - (390) 2 454
Investment income earned on shareholder investments and cash 60 47 13 7 3 - 2 31 163 - - 191 354
Net realised gains on available-for-sale financial assets - 1 2 - - - - - 3 - - - 3
Rebranding and business acquisitions expenses - - - - (199) - - - (199) - - 199 -
Amortisation of intangibles from business combinations - - - - - - - (122) (122) - - - (122)
Finance costs (21) (9) - - (3) - (1) (63) (97) - - - (97)
Foreign exchange gains/(losses) 1 - 6 - (96) - 8 106 25 - - - 25
Profit before tax 1 101 1 632 259 38 (202) 343 (362) (79) 2 730 (113) - - 2 617
Income tax expense (312) (452) (70) (11) 38 (113) 21 (21) (920) 113 - - (807)
Profit for the period 789 1 180 189 27 (164) 230 (341) (100) 1 810 - - - 1 810
* Amount is less than R500 000
1 The inter-segment funding of R215 million reflects a notional allocation of interest earned on the negative reserve backing policyholders' funds of guaranteed investment products and hence is transferred to Discovery Invest.
The segment information is presented on the same basis as reported to the Chief Executive Officers of the reportable segments. The segment total is then adjusted for accounting reclassifications and entries required to produce IFRS compliant results. These adjustments include the
following:
2 The VitalityLife results are reclassified to account for the contractual arrangement as a reinsurance contract under IFRS 4.
3 The Discovery Unit Trusts (DUT) are consolidated into Discovery's results for IFRS purposes. In the Segment information the DUT column includes the effects of consolidating the unit trusts into Discovery's results, effectively being the income and expenses relating to units held by third
parties.
4 Investment income on assets backing policyholder liabilities is included as part of the normalised profit from operations in the segmental disclosure, but is included together with shareholder investment income for IFRS purposes.
Segmental information continued
for the six months ended 31 December 2014
IFRS reporting adjustments
New Normalised
SA SA SA SA UK UK business All other Segment UK profit IFRS
R million Health Life Invest Vitality Health Life development segments total Life(2) DUT(3) adjustments(4) total
Income statement
Insurance premium revenue 8 4 700 3 932 - 3 434 1 213 498 - 13 785 (256) - - 13 529
Reinsurance premiums (1) (665) - - (607) (256) (95) - (1 624) 256 - - (1 368)
Net insurance premium revenue 7 4 035 3 932 - 2 827 957 403 - 12 161 - - - 12 161
Fee income from administration business 2 321 109 461 - 44 - 147 - 3 082 - - - 3 082
Vitality income - - - 1 003 156 - 300 - 1 459 - - - 1 459
Receipt arising from reinsurance contracts - 1 250 - - - - - - 1 250 - - - 1 250
Investment income on assets backing policyholder liabilities - 102 - - 26 - 10 - 138 - - (138) -
Finance charge on negative reserve funding - - - - - (153) - - (153) 153 - - -
Inter-segment funding(1) - (234) 234 - - - - - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 287 490 - - - - - 777 - 246 - 1 023
Net income 2 328 5 549 5 117 1 003 3 053 804 860 - 18 714 153 246 (138) 18 975
Claims and policyholders' benefits * (2 552) (2 298) - (2 146) (192) (325) - (7 513) 98 - - (7 415)
Insurance claims recovered from reinsurers * 540 - - 532 98 60 - 1 230 (98) - - 1 132
Net claims and policyholders' benefits - (2 012) (2 298) - (1 614) (94) (265) - (6 283) - - - (6 283)
Acquisition costs (1) (855) (332) (30) (275) (758) (68) - (2 319) (153) - - (2 472)
Marketing and administration expenses
- depreciation and amortisation (100) (14) - - (39) - (25) (1) (179) - - - (179)
- other expenses (1 273) (721) (190) (945) (1 069) (529) (783) (61) (5 571) (60) - (73) (5 704)
Recovery of expenses from reinsurers - - - - 151 - 63 - 214 - - - 214
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 923 - - - (98) - - 825 947 - - 1 772
- change in assets arising from reinsurance contracts - (18) - - 39 2 - - 23 - - - 23
- change in liabilities arising from insurance contracts - 26 (2 078) - (83) (5) (13) - (2 153) - - - (2 153)
- change in liabilities arising from reinsurance contracts - (1 412) - - - 947 - - (465) (947) - - (1 412)
Fair value adjustment to liabilities under investment contracts - (2) (28) - - - - - (30) - (246) - (276)
Share of net profits from equity accounted investments - - - - - - 48 - 48 - - - 48
Normalised profit/(loss) from operations 954 1 464 191 28 163 269 (183) (62) 2 824 (60) - (211) 2 553
Investment income earned on shareholder investments and cash 21 20 10 3 3 - 7 10 74 - - 138 212
Net realised gains on available-for-sale financial assets * (8) - - - - - - (8) - - - (8)
Rebranding and business acquisitions expenses - - - - (46) - - (27) (73) - - 73 -
Amortisation of intangibles from business combinations - - - - - - - (113) (113) - - - (113)
Puttable non-controlling interest fair value adjustment - - - - - - - 1 661 1 661 - - - 1 661
Finance costs (15) - - - (1) - - (90) (106) - - - (106)
Foreign exchange gains - - 2 - 2 - 14 - 18 - - - 18
Realised gain from sale of associate - - - - - - - 7 7 - - - 7
Profit before tax 960 1 476 203 31 121 269 (162) 1 386 4 284 (60) - - 4 224
Income tax expense (272) (416) (56) (5) (14) (60) 13 56 (754) 60 - - (694)
Profit for the period 688 1 060 147 26 107 209 (149) 1 442 3 530 - - - 3 530
* Amount is less than R500 000.
1 The inter-segment funding of R234 million reflects a notional allocation of interest earned on the negative reserve backing policyholders' funds of guaranteed investment products and hence is transferred to Discovery Invest.
The segment information is presented on the same basis as reported to the Chief Executive Officers of the reportable segments. The segment total is then adjusted for accounting reclassifications and entries required to produce IFRS compliant results. These adjustments include the
following:
2 The VitalityLife results are reclassified to account for the contractual arrangement as a reinsurance contract under IFRS 4.
3 The Discovery Unit Trusts (DUT) are consolidated into Discovery's results for IFRS purposes. In the Segment information the DUT column includes the effects of consolidating the unit trusts into Discovery's results, effectively being the income and expenses relating to units held by third
parties.
4 Investment income on assets backing policyholder liabilities is included as part of the normalised profit from operations in the segmental disclosure, but is included together with shareholder investment income for IFRS purposes.
Review of Group results
for the six months ended 31 December 2015
New business annualised premium income
New business annualised premium income increased 27% for the six months ended 31 December 2015 when compared to the same period in the prior
year.
December December %
R million 2015 2014 change
Discovery Health(1) 3 826 2 806 36
Discovery Life 1 206 1 151 5
Discovery Invest 932 797 17
Discovery Insure 402 403 -
Discovery Vitality 101 104 (3)
VitalityHealth 513 413 24
VitalityLife 643 502 28
The Vitality Group 60 61 (2)
Ping An Health 752 426 77
New business API of Group 8 435 6 663 27
1 New business API for Discovery Health at December 2015 includes the take-on of two new in-house schemes.
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 and Ping An Health, new business
API is calculated based on the date of policy inception.
Gross inflows under management
Gross inflows under management measures the total funds collected by Discovery. Gross inflows under management increased 15% for the six months
ended 31 December 2015 when compared to the same period in the prior year.
December December %
R million 2015 2014 change
Discovery Health 27 434 24 589 12
Discovery Life 5 534 4 809 15
Discovery Invest 7 466 6 770 10
Discovery Insure 734 506 45
Discovery Vitality 1 085 1 003 8
VitalityHealth 4 510 3 634 24
VitalityLife 1 858 1 213 53
The Vitality Group 474 300 58
Other partner markets 240 139 73
Gross inflows under management 49 335 42 963 15
Less: collected on behalf of third parties (27 408) (24 637) 11
Discovery Health (24 804) (22 260) 11
Discovery Invest (2 604) (2 377) 10
Gross income of Group per the segmental information 21 927 18 326 20
Gross income is made up as follows:
- Insurance premium revenue 16 451 13 785 19
- Fee income from administration business 3 638 3 082 18
- Vitality income 1 838 1 459 26
Gross income of Group per the segmental information 21 927 18 326 20
Normalised profit from operations
The following table shows the main components of the normalised profit from operations for the six months ended 31 December 2015:
December December %
R million 2015 2014 change
Discovery Health 1 061 954 11
Discovery Life 1 593 1 464 9
Discovery Invest 238 191 25
Discovery Vitality 31 28 11
VitalityHealth 93 163 (43)
VitalityLife 343 269 28
Normalised profit from established businesses 3 359 3 069 9
Development and other segments (402) (245) 64
Additional 54.99% share of DiscoveryCard profits 58 -
Normalised profit from operations(1) 3 015 2 824 7
1 This does not agree to the normalised profit from operations per the segmental information due to the inclusion of the additional 54.99% share of
DiscoveryCard profits discussed below.
Significant transactions affecting the current results
Increase in the DiscoveryCard profit share arrangement
Discovery and FirstRand Bank Limited (FRB) currently have a joint arrangement in place that makes a "Discovery" branded FNB credit card (DiscoveryCard)
available to the clients within the Discovery Group. In terms of this arrangement, FRB pays Discovery an amount equal to 20% of the profits generated by
the DiscoveryCard.
In the period under review, both parties have agreed that Discovery will increase its economic interest in the DiscoveryCard by subscribing for redeemable
preference shares in the share capital of FRB. This will entitle Discovery to receive an additional 54.99% of the profits generated by the DiscoveryCard. In
December 2015, Discovery paid R1.4 billion to FRB in this regard. The contractual rights under the preference shares were finalised subsequent to
31 December 2015 and the payment has therefore been accounted for as a prepayment in 'Loans and receivables' in the statement of financial position.
Once the preference shares have been issued, Discovery will be entitled to the additional 54.99% profits from the DiscoveryCard effective from 1 July 2015.
At 31 December 2015, the after tax profit share in respect of the additional 54.99% has been calculated as R58 million and has been added to Normalised
Headline Earnings.
Increase in borrowings
During the prior financial year, Discovery entered into a GBP 100 million term facility with HSBC Bank Plc which would be used to fund the operations of
VitalityLife. At 30 June 2015, GBP 26.4 million of the facility was utilised. During the current financial period, Discovery has drawn on the remaining balance
of GBP 73.6 million, increasing borrowings by R1.6 billion. Finance charges of R40 million in respect of these borrowings has been recognised in profit or
loss.
During the period under review, Discovery has also entered into a short-term bridge loan of R2.6 billion with RMB Limited to fund the subscription of the
FRB preference shares discussed above and to further fund its international operations.
Refinancing of BEE transaction by a BEE partner
In December 2005, Discovery concluded a BEE transaction pursuant to which 38 725 909 shares were issued to a consortium of BEE parties. 14 226 181 of
these shares were issued to the Discovery Foundation (The Foundation) being one of the BEE consortium members, at R0.001 each, for an initial period of
10 years (initial period).
The difference between the market value of the ordinary shares issued to the BEE parties and the subscription consideration, represented an outstanding
funded amount provided by Discovery shareholders (funded amount). These shares were treated as treasury shares.
At the end of the initial period,
- Discovery had the right to repurchase such number of ordinary shares at R0.001 per share that would provide Discovery with a notional return of the
funded amount.
- In order for The Foundation to retain the full number of Discovery shares originally issued to them, The Foundation then had the right to simultaneously
acquire from Discovery, at the then thirty-day volume-weighted average price per Discovery share, the same number of shares repurchased by Discovery.
The initial period expired in December 2015 and resulted in the following transactions:
- Discovery repurchased 5 666 134 Discovery shares held by The Foundation at a price of R0.001 per Discovery share.
- The issue to The Foundation by Discovery of 5 666 134 new Discovery shares at a price of R144.22 per Discovery share (representing the 30 day VWAP to
9 December 2015). This increased Share Capital and Share Premium by R817.2 million.
Treasury shares have therefore decreased by 14 226 181.
Increase in cash and cash equivalents
The Discovery Unit Trusts are consolidated into Discovery's results for IFRS purposes. At 31 December 2015, the cash held by the Discovery Balanced fund
increased by R1.6 billion to reduce equity exposure in this fund.
Other significant items in these results
Share-based payments
Included in marketing and administration expenses, in employee costs, is R245 million (2014: R203 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 2015, approximately 91.7%
(2014: 92.6%) of this exposure was hedged. Fair value gains of R126 million (2014: R96 million) relating to the hedge were recognised in profit or loss
resulting in a net expense to Discovery of R119 million (2014: R107 million).
Taxation
For South African entities that are in a tax paying position, tax has been provided at 28% (2014: 28%) in the financial statements. No deferred tax assets
have been recognised on the assessed losses in Discovery Insure and The Vitality Group.
At 30 June 2015, a deferred tax asset of R295 million was raised in respect of the VitalityHealth assessed losses. This approximated 50% of the potential
deferred tax asset and was based on forecast taxable income for the next five years. No further asset has been raised in the current results.
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
R2 285 million for the six months ended 31 December 2015 (2014: R2 094 million). Discovery offers the members of DHMS access to the Vitality programme.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss have increased by R3.4 billion due to the sale of Discovery Invest products.
Negative reserve funding
The negative reserve funding liability on Discovery's Statement of Financial Position represents the acquisition costs that are funded by Prudential on
behalf of VitalityLife. 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, VitalityLife would be required to repay these liabilities from other resources.
The decrease in the negative reserve funding liability relates to the repayment of funding by VitalityLife in the current period.
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.
Restatement of earnings per share
In the prior financial year, Discovery raised capital by way of an underwritten renounceable rights issue. This resulted in an increase in capital of R5 billion.
Shares in issue increased by 55 555 556 shares to 647 427 946 shares.
When ordinary shares are issued at a discount to the market price, IAS 33 (Earnings per Share) requires that the discount is treated as a bonus given to
the shareholders in the form of shares for no consideration and this "bonus" element must be separately taken into account in calculating the weighted
average number of shares. Further IAS 33 requires that the "bonus" shares must be added to the previous period in order to reflect the bonus element in
the rights issue. This has resulted in a restatement of the prior period's earnings per share calculations for the "bonus" element of 16 065 241 shares.
31 December
2014 31 December
Previously 2014
Cents per share reported Restated
Weighted number of shares in issue 574 156 946 589 808 415
Diluted weighted number of shares 582 060 251 597 711 720
Earnings per share
- basic 608.7 592.6
- diluted 600.4 584.7
Headline earnings per share
- undiluted 602.6 586.6
- diluted 594.4 578.9
Normalised headline earnings per share
- undiluted 345.0 335.9
- diluted 340.3 331.4
Shareholder information
Directorate
Changes to the Board of Discovery Limited from 1 July 2015 to the date of this announcement are as follows:
- Ms T Slabbert resigned as a non-executive director on 22 October 2015.
- Ms F Khanyile was appointed as a non-executive director on 22 October 2015.
- Mr J Durand resigned as a non-executive director on 13 January 2016.
Dividend policy and capital
The following final dividends were paid during the current period:
- Preference share dividend of 458.699 cents per share, paid on 21 September 2015.
- Ordinary share dividend of 89.0 cents per share, paid on 12 October 2015.
At 31 December 2015, the capital adequacy requirement on the statutory basis for Discovery Life was R549 million (2014: R519 million) and was covered
3.9 times (2014: 3.5 times).
B preference share cash dividend declaration:
On 18 February 2016, the directors declared an interim gross cash dividend of 480.06849 cents (408.05822 cents net of dividend withholding tax) per B
preference share for period 1 July 2015 to 31 December 2015. 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, 4 March 2016
Shares commence trading "ex" dividend Monday, 7 March 2016
Record date Friday, 11 March 2016
Payment date Monday, 14 March 2016
B preference share certificates may not be dematerialised or rematerialised between Monday, 7 March 2016 and Friday, 11 March 2016, both days
inclusive.
Ordinary share cash dividend declaration:
Notice is hereby given that the directors have declared an interim gross cash dividend of 85.5 cents (72.675 cents net of dividend withholding tax) per
ordinary share, out of income reserves for the six month period ended 31 December 2015. 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 647 427 946 ordinary shares.
The salient dates for the dividend will be as follows:
Last day of trade to receive a dividend Friday, 11 March 2016
Shares commence trading "ex" dividend Monday, 14 March 2016
Record date Friday, 18 March 2016
Payment date Tuesday, 22 March 2016
Share certificates may not be dematerialised or rematerialised between Monday, 14 March 2016 and Friday, 18 March 2016, both days inclusive.
Accounting policies
The interim results have been prepared in accordance with International Financial Reporting Standards including IAS 34, as well as the South African
Companies Act 71 of 2008. The accounting policies adopted are consistent with the accounting policies applied in the prior annual financial statements.
Embedded value statement
for the six months ended 31 December 2015
The embedded value of Discovery consists of the following components:
- the free surplus attributed to the 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 covered 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 covered business 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
VitalityLife (previously PruProtect) and VitalityHealth (previously PruHealth). For The Vitality Group (USA), Ping An Health and Discovery Insure, no
published value has been placed on the current in-force business as the businesses have not yet reached suitable scale with predictable experience.
In August 2011, Discovery raised R800 million through the issue of non-cumulative, non-participating, non-convertible preference shares. For embedded
value purposes this capital, net of share issue expenses, has been excluded from the adjusted net worth.
In November 2014, the following events occurred:
- Prudential Assurance Company (Prudential) agreed to sell its remaining 25% shareholding in Prudential Health Holdings Limited (PHHL) to Discovery
Limited for GBP 155 million (R2 790 million). Following the purchase of the remaining 25% in PHHL, PruHealth and PruProtect have been rebranded as
VitalityHealth and VitalityLife respectively.
- During the 2011 financial year, put options were granted to the non-controlling interests of PHHL and TVG LLC, entitling the non-controlling interest to
sell their interests in the subsidiaries to Discovery at contracted dates at fair value. In November 2014, both these put options lapsed, with the purchase
by Discovery of the remaining 25% of PHHL and TVG LLC.
- The HumanaVitality partnership concluded. As a result, Humana purchased The Vitality Group's 25% shareholding in HumanaVitality and The Vitality
Group purchased Humana's 25% shareholding in TVG LLC.
In December 2015, the initial period expired on the BEE transaction that was concluded in September 2005 with the Discovery Foundation. In the
transaction, shares were issued to the Discovery Foundation at R0.001 per share for an initial period of 10 years. At the end of this initial period Discovery
has the right to repurchase these ordinary shares at R0.001 per share which would provide Discovery with the notional return of the funded amount.
Simultaneously, the Discovery Foundation has the right to acquire from Discovery the same number of shares repurchased by Discovery. At the expiry of
the initial period, the above transactions were executed resulting in an increased share capital and premium of R817 million and a decrease of 14 226 181
treasury shares.
The 31 December 2015 embedded value results and disclosures were not subjected to an external review or audit.
Table 1: Group embedded value
31 December 31 December % 30 June
R million 2015 2014 Change 2015
Shareholders' funds 31 311 20 599 52 27 356
Adjustment to shareholders' funds from published basis(1) (19 980) (16 441) (17 784)
Adjusted net worth 11 331 4 158 9 572
- Free surplus 5 732 192 5 188
- Required capital(2) 5 599 3 966 4 384
Value of in-force covered business before cost of required capital 46 700 42 299 44 006
Cost of required capital (1 506) (1 003) (1 283)
Discovery Limited embedded value 56 525 45 454 24 52 295
Number of shares (millions) 644.2 574.2 629.0
Embedded value per share R87.74 R79.16 11 R83.14
Diluted number of shares (millions) 646.7 591.2 646.7
Diluted embedded value per share(3) R87.40 R78.25 12 R82.29
1 A breakdown of the adjustment to shareholders' funds is shown in the table below. Note that where relevant, adjustments have been converted using
the closing exchange rate of R23.18/GBP (June 2015: R19.19/GBP; December 2014: R18.03/GBP):
31 December 31 December 30 June
R million 2015 2014 2015
Life net assets under insurance contracts (14 574) (12 119) (13 208)
VitalityHealth and VitalityHealth Insurance Limited deferred acquisition costs (net of deferred tax) (287) (226) (230)
VitalityLife receivable relating to the Unemployment Cover benefit (net of deferred tax) (50) (43) (44)
Goodwill and intangible assets (net of deferred tax) relating to the acquisition of Standard Life Healthcare and
the Prudential joint venture (4 290) (3 274) (3 523)
Net preference share capital (779) (779) (779)
(19 980) (16 441) (17 784)
2 The required capital at December 2015 for Life is R1 098 million (June 2015: R1 114 million; December 2014: R1 037 million), for Health and Vitality is
R683 million (June 2015: R642 million; December 2014: R653 million), for VitalityHealth and VitalityHealth Insurance Limited is R2 590 million (June 2015: R1
693 million; December 2014: R1 647 million) and for VitalityLife is R1 228 million (June 2015: R935 million; December 2014: R647 million). For Life, the
required capital was set equal to two times the statutory Capital Adequacy Requirement. For Health and Vitality, the required capital was set equal to two
times the monthly renewal expense and Vitality benefit cost. For VitalityHealth, the required capital amount was set equal to 1.4 times the Solvency II Pillar
1 Solvency Capital Requirement. For VitalityLife, the required capital was set equal to the UK Solvency I long term insurance capital requirement as per the
agreement with Prudential.
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 before Value after
cost of Cost of cost of
required required required
R million capital capital capital
at 31 December 2015
Health and Vitality 16 013 (282) 15 731
Life and Invest(1) 23 119 (584) 22 535
VitalityHealth(2) 5 135 (302) 4 833
VitalityLife(2) 2 433 (338) 2 095
Total 46 700 (1 506) 45 194
at 31 December 2014
Health and Vitality 14 670 (207) 14 463
Life and Invest(1) 22 050 (523) 21 527
VitalityHealth(2) 3 996 (122) 3 874
VitalityLife(2) 1 583 (151) 1 432
Total 42 299 (1 003) 41 296
at 30 June 2015
Health and Vitality 15 500 (254) 15 246
Life and Invest(1) 22 464 (556) 21 908
VitalityHealth(2) 4 188 (208) 3 980
VitalityLife(2) 1 854 (265) 1 589
Total 44 006 (1 283) 42 723
1 Included in the Life and Invest value of in-force covered business is R997 million (June 2015: R884 million; December 2014: R800 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 R23.18/GBP (June 2015: R19.19/GBP; December 2014: R18.03/GBP).
Table 3: Group embedded value earnings
Six months ended Year ended
31 December 31 December 30 June
R million 2015 2014 2015
Embedded value at end of period 56 525 45 454 52 295
Less: Embedded value at beginning of period (52 295) (43 050) (43 050)
Increase in embedded value 4 230 2 404 9 245
Net change in capital(1) (813) (1) -
Dividends paid 612 495 1 036
Transfer to hedging reserve 38 (41) (50)
Proceeds from rights-issue - - (5 000)
Rights-issue costs - - 94
Embedded value earnings 4 067 2 857 5 325
Annualised return on opening embedded value 16.2% 13.7% 12.4%
1 The net change in capital includes the R817 million increase in share capital and premium associated with the Discovery Foundation BEE Share
recapture, as well as an offsetting R4 million decrease from the increase in treasury shares.
Table 4: Components of Group embedded value earnings
Six months Year
ended ended
31 December 30 June
Six months ended 31 December 2015 2014 2015
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) (1 500) (86) 2 972 1 386 1 219 2 614
Profit from existing business
- Expected return 2 061 22 147 2 230 1 904 3 989
- Change in methodology and assumptions(1) 955 (35) (2 102) (1 182) 931 (799)
- Experience variances (336) (20) 391 35 505 1 452
Acquisition of Prudential joint venture(2) - - - - (774) (774)
Intangibles no longer allocated to minorities(3) - - - - (765) (765)
Increase in goodwill and intangibles (214) - - (214) (90) (277)
Other initiative costs(4) (368) - 6 (362) (211) (485)
Non-recurring expenses(5) (254) - - (254) (100) (488)
Acquisition costs(6) (28) - (1) (29) (34) (15)
Finance costs 1 - - 1 (19) (103)
Foreign exchange rate movements 1 082 (104) 1 278 2 256 63 581
Other(7) 30 - 3 33 132 169
Return on shareholders' funds(8) 167 - - 167 97 225
Embedded value earnings 1 596 (223) 2 694 4 067 2 857 5 325
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 represents the difference between the purchase price and the minority share of PHHL's tangible net asset value at the acquisition date plus
25% of the value in-force and cost of required capital that Discovery purchased in the transaction at the acquisition date.
3 This item reflects the unwinding of the goodwill and intangible assets (net of deferred tax) relating to the acquisition of Standard Life Healthcare and the
Prudential joint venture allocated to minorities.
4 This item reflects Group initiatives including expenses relating to the investment in The Vitality Group, Discovery Partner Markets, Vitality International,
once-off expenses in Invest, Discovery Insure, other new business initiatives and unallocated head office costs.
5 This item includes rebranding costs, as well as other once-off costs relating to the acquisition of 25% of PHHL.
6 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 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.
7 This item includes the tax benefit that will be obtained as the VitalityHealth DAC and intangible software assets amortise.
8 The return on shareholders' funds is shown net of tax and management charges.
Table 5: Experience variances
Health and Vitality Life and Invest VitalityHealth VitalityLife
Value Value Value Value
Net of Net of Net of Net of
R million worth in-force worth in-force worth in-force worth in-force Total
Renewal expenses 23 - 27 (5) (72) - 30 - 3
Other expenses 6 - - - - - - - 6
Lapses and surrenders 1 34 (130) 124 - 4 (69) (0) (36)
Mortality and morbidity - - 32 12 (94) - 14 - (36)
Policy alterations(1) - (9) (219) 107 - - (28) 23 (126)
Premium and fee income 3 (79) (73) 103 - - - - (46)
Economic assumptions - - (81) (33) - - - - (114)
Commission - - - - 54 - - - 54
Tax(2) (4) - 120 (146) (10) - - - (40)
Reinsurance - - - - 57 - - - 57
Maintain modelling term(3) - 127 - 29 - 27 - - 183
Vitality benefits 25 - - - (4) - - - 21
Other 28 - (16) 53 47 - (3) (0) 109
Total 82 73 (340) 244 (22) 31 (56) 23 35
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, Group Life and VitalityHealth at 31 December 2015 has not been changed from that used in the 30 June
2015 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 VitalityHealth VitalityLife
Value Value Value Value
Net of Net of Net of Net of
R million worth in-force worth in-force worth in-force worth in-force Total
Modelling changes - - (14) (24) - - (89) 70 (57)
Expenses - - - - - - - - -
Lapses - - - - - - - - -
Mortality and morbidity - - - - - 1 - - 1
Benefit enhancements - - (1) (12) - - - - (13)
Vitality benefits - 3 - - - - - - 3
Tax - - - - - 91 - 48 139
Economic assumptions(1) - 58 16 (1 174) - 6 (55) 54 (1 095)
Premium and fee income - - - - - - - - -
Reinsurance(2) - - 512 (498) 238 (281) 33 (78) (74)
Other(3) - - (14) 21 - (38) 329 (384) (86)
Total - 61 499 (1 687) 238 (221) 218 (290) (1 182)
1 The economic assumption change is due to the increase in the risk discount rate following the increase in the South African risk-free rate since 30 June
2015 for Health and Vitality and Discovery Life, and the reduction in the risk discount rate following the decrease in the UK risk-free rate since 30 June
2015 for VitalityHealth and VitalityLife.
2 For Life and VitalityHealth, the reinsurance item primarily relates to the impact of the financing reinsurance arrangements.
3 For VitalityLife, the other item relates to the margin reset as per the accounting policy.
Table 7: Embedded value of new business
Six months ended Year ended
31 December 31 December % 30 June
R million 2015 2014 Change 2015
Health and Vitality
Present value of future profits from new business at point of sale 270 269 606
Cost of required capital (11) (9) (22)
Present value of future profits from new business at point of sale after cost of
required capital 259 260 (0) 584
New business annualised premium income(1) 1 102 1 032 7 2 829
Life and Invest
Present value of future profits from new business at point of sale(2) 651 680 1 268
Cost of required capital (30) (29) (56)
Present value of future profits from new business at point of sale after cost of
required capital 621 651 (5) 1 212
New business annualised premium income(3) 1 366 1 239 10 2 490
Annualised profit margin(4) 5.6% 6.2% 5.9%
Annualised profit margin excluding Invest business 9.1% 9.5% 9.7%
VitalityHealth
Present value of future profits from new business at point of sale 34 22 45
Cost of required capital (15) (6) (20)
Present value of future profits from new business at point of sale after cost of
required capital(5) 19 16 19 25
New business annualised premium income (Rand)(6) 559 345 62 833
Annualised profit margin(4) 0.6% 0.7% 0.6%
VitalityLife(7)
Present value of future profits from new business at point of sale 517 311 850
Cost of required capital (30) (17) (57)
Present value of future profits from new business at point of sale after cost of
required capital(5) 487 294 66 793
New business annualised premium income (Rand) 553 391 41 967
Annualised profit margin(4) 11.5% 9.5% 11.0%
1 Health new business annualised premium income is the gross contribution to the medical schemes. The new business annualised premium income
shown above excludes premiums in respect of members who join an existing employer 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 2015.
The total Health and Vitality new business annualised premium income written over the period was R4 028 million (June 2015: R5 622 million; December
2014: R2 910 million).
2 Included in the Life and Invest embedded value of new business is R48 million (June 2015: R60 million; December 2014: R32 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 to which Life became contractually bound during the reporting
period, including policies whose first premium is due after 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 366 million (June 2015: R2 490 million; December 2014: R1 239 million) (single premium APE: R555
million (June 2015: R1 005 million; December 2014: R481 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 automatic premium increases of R498
million (June 2015: R887 million; December 2014: R457 million) and servicing increases of R274 million (June 2015: R500 million; December 2014: R252
million) was R2 138 million (June 2015: R3 877 million; December 2014: R1 948 million) (single premium APE: R579 million (June 2015: R1 048 million;
December 2014: R502 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 VitalityHealth and VitalityLife new business values have been adjusted to allow for Discovery's ownership increasing from 75% to 100% in November
2014.
6 VitalityHealth 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 2015.
7 VitalityLife new business is defined as policies to which VitalityLife became contractually bound during the reporting period, including policies whose
first premium is due after the valuation date.
Table 8: Embedded value economic assumptions
31 December 31 December 30 June
2015 2014 2015
Beta coefficient 0.55 0.33 0.55
Equity risk premium (%) 3.5 3.5 3.5
Risk discount rate (%)
Health and Vitality 12.175 10.155 10.675
Life and Invest 12.925 10.155 11.175
VitalityHealth 3.96 3.03 4.05
VitalityLife 5.005 4.22 5.045
Rand/GB Pound Exchange Rate
Closing 23.18 18.03 19.19
Average 21.25 17.82 18.04
Medical inflation (%)
South Africa 10.0 8.0 8.25
Expense inflation (%)
South Africa 7.0 5.0 5.25
United Kingdom 3.1 3.0 3.3
Pre-tax investment return (%)
South Africa - Cash 9.50 7.50 7.75
- Life and Invest Bonds 11.00 9.00 9.25
- Health and Vitality Bonds 10.25 9.00 8.75
- Equity 14.50 12.50 12.75
United Kingdom - VitalityHealth investment return 2.04 1.87 2.12
- VitalityLife investment return 3.08 3.26 3.12
Income tax rate (%)
South Africa 28 28 28
United Kingdom - Long Term(1) 18 20 20
Projection term
- Health and Vitality 20 years 20 years 20 years
- Life No cap 40 years No cap
- Group Life 10 years 10 years 10 years
- VitalityHealth 20 years 20 years 20 years
1 The United Kingdom Corporation tax rate assumed is 20% in 2016 to 2017, 19% in 2018 to 2020, and 18% beyond that.
The Discovery Limited embedded value is calculated based on a risk discount rate using the CAPM approach with specific reference to the Discovery beta
coefficient. From 30 June 2015 the methodology to derive the assumed beta was amended. Under this revised methodology, the assumed beta is set with
reference to the observed beta calculated using daily returns over a long time period. The beta will continue to be calculated with reference to the ALSI.
The resulting assumed beta will be fixed at this level unless the observed beta calculated using daily returns over a long time period departs significantly
from this assumption at the financial year end. As beta values reflect the historic performance of share prices relative to the market they 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 these risks which have not
been modelled explicitly.
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 VitalityHealth assumptions were derived from internal experience, augmented by industry information.
VitalityLife assumptions were derived from internal experience, where available, augmented by reinsurance, industry and Discovery Limited 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 embedded 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 VitalityHealth and VitalityLife was based on the single interest rate derived from the risk-free zero
coupon sterling yield curve. 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 VitalityHealth required capital amounts will be fully backed by cash. The VitalityLife required capital
amount is assumed to earn the same return as the assets backing the VitalityLife policyholder liabilities. Allowance has been made for tax and investment
expenses in the calculation of the cost of required capital. In calculating the capital gains tax liability, it is assumed that the portfolio is realised every 5
years. The Life and Invest cost of required 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 VitalityHealth cost of required capital is calculated using the difference between the risk discount rate and the
net of tax cash return. The VitalityLife cost of required 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 practice note, uses the CAPM approach with specific reference to the
Discovery beta coefficient. As beta values reflect the historic performance of share prices relative to the market they 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 these risks which have not been
modelled explicitly. The sensitivity of the embedded value and the embedded value of new business at 31 December 2015 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 VitalityHealth VitalityLife(2)
Cost of Cost of Cost of Cost of
Adjusted Value of required Value of required Value of required Value of required Embedded %
R million net worth in-force capital in-force capital in-force capital in-force capital value Change
Base 11 331 16 013 (282) 23 119 (584) 5 135 (302) 2 433 (338) 56 525
Impact of:
Risk discount rate +1% 11 331 15 048 (310) 20 686 (506) 4 786 (451) 2 200 (424) 52 360 (7)
Risk discount rate -1% 11 331 17 088 (249) 26 157 (684) 5 526 (134) 2 726 (235) 61 526 9
Lapses -10% 11 331 16 577 (296) 25 055 (628) 5 879 (322) 2 577 (381) 59 792 6
Interest rates -1%(1) 11 331 16 112 (270) 23 522 (628) 5 489 (311) 3 093 (403) 57 935 2
Equity and property market value -10% 11 277 16 013 (282) 22 868 (584) 5 135 (302) 2 433 (338) 56 220 (1)
Equity and property return +1% 11 331 16 013 (282) 23 349 (584) 5 135 (302) 2 433 (338) 56 755 0
Renewal expenses -10% 11 331 17 670 (261) 23 410 (582) 5 724 (302) 2 398 (340) 59 048 4
Mortality and morbidity -5% 11 331 16 013 (282) 24 522 (571) 6 820 (302) 2 426 (336) 59 621 5
Projection term +1 year 11 331 16 281 (286) 23 180 (584) 5 194 (303) 2 433 (338) 56 908 1
1 All economic assumptions were reduced by 1%.
2 The sensitivity impact on the VitalityLife value of in-force excludes the net of tax change in negative reserves.
The following table shows the effect of using different assumptions on the embedded value of new business.
Table 10: Value of new business sensitivity
Health and Vitality Life and Invest VitalityHealth VitalityLife
Value of Cost of Value of Cost of Value of Cost of Value of Cost of Value of
new required new required new required new required new %
R million business capital business capital business capital business capital business Change
Base 270 (11) 651 (30) 34 (15) 517 (30) 1 386
Impact of:
Risk discount rate +1% 244 (12) 517 (25) 13 (23) 480 (38) 1 156 (17)
Risk discount rate -1% 297 (10) 815 (34) 56 (7) 561 (20) 1 658 20
Lapses -10% 287 (12) 779 (31) 73 (16) 592 (33) 1 639 18
Interest rates -1%(1) 274 (10) 684 (31) 54 (16) 445 (33) 1 367 (1)
Equity and property return +1% 269 (11) 675 (29) 33 (15) 517 (30) 1 409 2
Renewal expense -10% 317 (10) 669 (29) 59 (15) 536 (30) 1 497 8
Mortality and morbidity -5% 269 (11) 711 (28) 114 (15) 532 (29) 1 543 11
Projection term +1 year 276 (11) 653 (29) 37 (16) 517 (30) 1 397 1
Acquisition costs -10% 279 (11) 711 (29) 49 (16) 567 (30) 1 520 10
1 All economic assumptions were reduced by 1%.
SENS release date: 25 February 2016
Date: 25/02/2016 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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