Wrap Text
Audited results and cash dividend declaration for the year ended 30 June 2016
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
Audited results and cash dividend declaration
for the year ended 30 June 2016
Normalised profit from operations
R6 407 million
up 11%
Gross inflows under management
R104 billion
up 17%
New business API over
R16 billion
The Vitality Shared-Value Insurance model is now present in 14 markets around the world
Transfer secretaries
Computershare Investor Services Pty Limited
(Registration number: 2004/003647/07)
Ground Floor, 70 Marshall Street, Johannesburg 2001
PO Box 61051, Marshalltown 2107
Sponsors
Rand Merchant Bank (A division of FirstRand Bank Limited)
Secretary and registered office
MJ Botha, Discovery Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
Company tax reference number: 9652/003/71/7
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
Annual financial statements
- 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 Strong Group financial performance
The full-year period ending 30 June 2016 witnessed a strong performance by the Group. New business increased by 22% to R16.2 billion (excluding R4.2 billion
in respect of the Bankmed Medical Scheme administration and managed care services contract recorded in the prior year); normalised profit from operations
increased by 11% to R6.4 billion; profit from existing businesses increased 15% to R7.2 billion; and spend on new initiatives grew substantially by 73% to
R823 million.
The financial performance for the period was characterised by three distinctive features:
1. Solid performance by existing businesses, with new business up 20% to R13.3 billion, and operating profit up 15% to R7.2 billion. Coupled with this, an
acceleration of Group performance was witnessed in the second half of the financial year. Group operating profit increased by 14% in the second six
months of the financial year compared to the same period in the prior year, versus 7% in the first six months. This was driven by Discovery Health and
Discovery Life which delivered normalised operating profit growth of 12% and 18% respectively for H2 2016 versus H2 2015; and Discovery Insure, whose
new business grew 14% in H2 2016 versus H2 2015. In addition, VitalityHealth's performance was notable for its progress in the second six months with new
business up 62% and normalised profit up 55% in Rand terms for H2 2016 when compared to the same 6-month period in the prior year.
2. A substantial spend on new initiatives. While gross revenue growth (+20%) (excluding collections on behalf of third parties) and new business growth (+22%)
remained strong, Discovery spent R823 million on new initiatives over the course of the year, funded by both debt and a rights issue. This marked a 73%
increase over the prior year, and 13% of earnings. This investment had a dampening effect on short-term profits, though is expected to be profit enhancing
in the long term. Normalised headline earnings were R4.3 billion (+7%); and normalised headline earnings per share grew 1%, diluted through the additional
capital raised in the rights issue.
3. Robust performance in spite of a volatile economic environment. In Discovery's Primary Market of South Africa, this included a depreciating currency
(ZAR to USD); rising interest rates; and economic assumption changes. In Discovery's second Primary Market of the United Kingdom (UK), Discovery faced
both currency sensitivity (ZAR to GBP) and a record-low interest rate environment, the result of the UK's intended exit from the European Union. Headline
earnings and solvency levels remained robust in spite of this economic volatility; with the environment predominantly impacting Embedded Value growth,
which came out fairly flat (+2% to R53 billion). This is consistent with Discovery's view that the business model is well immunised against economic
fluctuations. The Embedded Value growth stripping out these effects would have been 10.5% to R58 billion.
02 The Vitality Shared-Value Insurance Model is now well developed and is being replicated globally
The Group's performance is contextualised by Discovery's business model - "Vitality Shared-Value Insurance". Over the period, the efficacy of the Vitality
Shared-Value Insurance model matured, in terms of Discovery's understanding of the mathematics that underpin value creation in a shared-value insurance
context. This includes Discovery's proprietary methodology in structuring incentives to optimise behaviour change, and its understanding of the behavioural
impact on insurance risk.
The model's relevance is validated by the success in both of Discovery's Primary Markets, which continued to gain market share and demonstrate robustness in
new business and financial performance; and in the expansion of the Vitality Network for Discovery's Partner Markets. The Vitality Shared-Value Insurance
model is now present in 14 markets around the world, with Generali going live during the past six months, and more recently, the announcement of a
partnership with Sumitomo Life in Japan ($31,100 million revenue in 2015 and ranked 335 according to Fortune 500 2016). In addition, past investment is now
yielding evidence of the efficacy of the Vitality Shared-Value Insurance model in the more established Partner Markets.
This justifies Discovery's strategy for existing businesses; for the consistent rollout of the model to new geographies and adjacencies, the most recent being the
intention to enter banking in South Africa; and for continued rollout of the Vitality Active Rewards with Apple Watch methodology, a global collaboration with
Apple. The success of Vitality Active Rewards with Apple Watch in changing wellness behaviour and segmenting insurance risk in South Africa and the United
States has advanced the science underpinning the Vitality Shared-Value Insurance model. Results over the first six months of the Vitality Active Rewards benefit
showed dramatic and sustained behaviour change, with a 20% increase in physical activity for those who engaged in the benefit, and 81% for those who also
took the Apple Watch. This is the most successful benefit to date, as measured by take-up and engagement, and shows strong initial insurance applications,
with engaged members demonstrating significantly lower morbidity and mortality experience than other Vitality members. Last week, the benefit was launched
in China through Ping An Life. The benefit will be attached to Ping An Life's flagship life insurance product, available through its one million strong agency force,
and presents a meaningful opportunity to elevate the Vitality brand in China. Active Rewards will be rolled out globally over the next 12 months.
03 Robust performance by existing businesses
1. South Africa
Discovery Health
Discovery Health's performance exceeded expectation during the period under review. Normalised operating profit increased by 12% to R2,265 million, and
new business API increased off a significant base by 22% to R6,577 million (excluding the Bankmed Medical Scheme taken on in the prior year).
The period was characterised by high healthcare inflation, mainly driven by higher hospital utilisation. Despite these pressures, Discovery Health and Discovery
Health Medical Scheme (DHMS) continued to perform strongly, as a result of ongoing investment in best-in-class health system innovation. In DHMS, lives
administered grew by 1.5% to 2.7 million; and the solvency ratio remained above the statutory 25% of gross annual contribution income, with the Scheme
retaining its industry-leading AA+ rating from Global Credit Ratings for the 15th consecutive year. Discovery Health maintained its strong progress in the
restricted scheme environment, and now has a total of 17 leading corporate schemes under management, comprising a total of 550,943 beneficiaries, and with
several promising prospects for additional clients in the pipeline.
Discovery Health continued its significant investment in digital healthcare assets over the period, with further expansion in the functionality and coverage of
HealthID, the country's leading electronic health record system. This is now in regular use by over one million members and almost 50% of doctors treating
members of Discovery Health's client schemes. The DHMS fully-digital healthcare plan - the Smart Plan - has continued to prove very successful in attracting a
younger demographic (average age four years younger), leveraging Discovery Health's analytic and digital assets.
Discovery Health maintains its strong support for the objectives of the proposed National Health Insurance (NHI) system. It is working closely with the
Department of Health and all other stakeholders with the aim of ensuring that the final NHI policy is optimal and leverages the assets of the private healthcare
system. Over the period, Discovery Health participated actively in the processes of the Health Market Inquiry of the Competition Commission, which is expected
to report by end 2016.
Discovery Life
Discovery Life delivered a strong performance, with an acceleration over the latter half of the financial year. Individual life new business activations (API Rm)
grew by 10% to R383 million compared to H2 2015 (by 5% to R2,347 million for the full-year period), with further acceleration in the fourth quarter. Operating
profit increased by 18% in H2 to R1,780 million compared to the same period in the prior year (by 14% to R3,373 million for the full-year period).
Value In-Force (VIF) increased by 10.9% using constant economic assumptions. When taking the more conservative risk discount rate assumption into account
driven by an increased beta adjustment at the end of the period, the VIF reduced by 1.6% to R18.9 billion. Similarly, a VNB margin of 8.9% as at the end of June
2016 was achieved on the back of improving new business mix. Discovery Life remains well capitalised and generated R2,101 million in cash from the existing
book, which was utilised largely to continue funding further growth of the Discovery Life business through new business acquisition.
Discovery Life has increased its market share in the retail affluent segment to 28.8% as the leading insurer. Underlying this growth is a strong adviser force,
with industry sales statistics indicating that Discovery Life tied advisers are up to three times more productive than their counterparts. In addition, a hybrid
distribution strategy has shown to be effective with strong growth, accompanied by clear cost efficiencies in the direct channel.
Despite a challenging economic environment, the Vitality Shared-Value Insurance model continued to exhibit encouraging results, both for Discovery Life and
its members. Discovery Life benefited from lapse rates that were significantly lower than expected (84% of expected), particularly for policies integrated with
Discovery Health and those with higher Vitality statuses. Members benefited from paybacks from actuarial surplus of 18% of claims value - highlighting the
value derived by healthy clients.
Discovery Invest
The performance of Discovery Invest over the period was excellent. New business grew by 17% to R1,932 million year-on-year; assets under management
increased by 21% to over R60 billion; and operating profit grew by 22% to R563 million. Net asset management fee income increased by 46%, a consequence of
efficiencies from increased scale.
The business saw strong acceptance of the range of shared-value retirement products launched towards the end of 2015. These products recognise higher
retirement needs given increased longevity as a result of better health, and reward clients for responsible withdrawals.
2. United Kingdom
The period was noteworthy for its continued investment in the Vitality brand. This contributed to a strong retail and consumer presence; impressive new
business growth; and in Vitality engagement increasing to record levels. In addition, VitalityHealth was recognised as New Brand of the Year at the Marketing
Society Excellence Awards.
VitalityLife
VitalityLife produced a strong performance in the face of complex changes: a volatile economic climate, including positive exchange rate movements;
record-low interest rates and the impact of Solvency II; and moving onto its own licence. The net effect of this is that new business increased 23% in Rand
terms to R1,332 million (up 4% in GBP) and normalised profit grew by 25% to R678 million (up 5% in GBP). VitalityLife achieved market share of 11.7% in the
Independent Financial Advisor space and continued to grow its distribution footprint, now at 20 franchises.
VitalityLife achieved success in positioning its new-generation risk offering in the market, evident in the strong continued adoption of the Vitality-integrated
model over the period, with the Vitality Optimiser product comprising over 60% of all new business sales. The period also showed that overall claims for Vitality
Optimiser cases were 40% lower compared to non-Vitality Optimiser cases. Furthermore, VitalityLife received an award recognising the innovative nature of its
Interest Rate Optimiser product.
VitalityHealth
VitalityHealth experienced strong new business growth over the period, with new business up by 43% to R1,161 million in Rand terms (up 20% in GBP), with
particularly strong growth in the profitable Individual market - up by 44% - and direct-to-market channels, which now comprise almost 40% of new business.
The business also experienced an accelerated second half of the financial year, with new business up 62% and normalised profit up 55% in Rand terms for H2
2016 when compared to the same six-month period in the prior year. In addition, the existing book is profitable and generated strong cash flow, which in part
was used to fund the sizeable new business strain.
Both lapse rates and loss ratios trend in line with long-run expectation, reflecting the change in business mix and continued focus on quality within the
portfolio. Total insured lives grew by 5% over the period to June, with individual lives growing by 8.5%. The business also started to realise the benefit of the
extensive investment made following the exit of the Transitional Services Agreement (TSA) with Standard Life, with service levels and claims efficiency both
improving over the six-month period.
The combination of improved new business momentum, strong actuarial dynamics, and the emergence of operating efficiencies resulted in a 55%
improvement in Rand terms in operating profit for the second half of the year compared to the same period in the prior year. For the full year, profit was down
17% to R186 million (down 30% in GBP) as a result of the exceptional expenses incurred in the first half of the year related to the exit from the TSA.
Going forward, VitalityHealth expects new business momentum to be maintained, further efficiencies to emerge from the move to a single operating platform
and the benefit of the Healthcare Purchasing Alliance with Aviva to further support the loss ratio.
04 Record spend on new initiatives
1. South Africa
Discovery Insure
Discovery Insure showed strong new business growth in the second half of the year (up 14% to R439 million compared to the same period in the prior year),
resulting in a 7% growth to R841 million in new business volumes for the full-year period. This continues the trend of rapid new business growth experienced
since inception, with over 145,000 cars now covered and inforce growth of 36% to R2.2 billion. The business has achieved scale and quality and is expected to
be profitable in the next financial year.
The hybrid distribution model proved effective, showing growth of 30% for intermediated business for the year. Gross written premium increased year-on-year
by 39% to R1.6 billion, while total expenses grew 31% - a consequence of scale and increased penetration of the mobile app and sensor technology (50% of
new business). Claims frequency continued to decrease as the average policy duration increased and as a result of the Vitalitydrive model, which continues to
add tremendous value (engaged drivers showed a 28% lower loss ratio than unengaged drivers). This was offset to an extent by higher claims severity and
depreciation of the Rand against the US Dollar (which impacts the price of motor parts and hence repairs).
Intent to enter banking
Over the period, progress was made with respect to Discovery's intention to enter banking. The licensing and regulatory processes commenced and while the
licence application is pending regulatory approval, key engagements are underway with the South African Reserve Bank and other regulatory bodies. Discovery
has appointed a combination of senior seasoned bankers and Discovery executives to lead the execution and delivery of the banking business. Discovery is in
the process of building the system and infrastructure needed.
2. Discovery Partner Markets (DPM)
Discovery has evolved its Partner Market Strategy over time. From an initial joint venture with AIA, to a franchise model with partner insurers licencing Vitality
in their markets, to what can now be considered a Global Vitality Network. This comprises an international platform that is underpinned by a repeatable
business model - both economically and technologically; best-of breed global insurers and supply-side partners; the risk capacity and products to pioneer
shared-value insurance in its markets, owning this new category of insurance; and a powerful global repository of data on engagement, mortality and lapses.
Over the period, the efficacy of the model revealed itself through exciting new partnerships, launches in new territories with existing partners, and impressive
penetration levels in existing Partner Market territories.
AIA Vitality
The period was noteworthy for AIA Vitality, with the Vitality Shared-Value Insurance model now part of the core offering in six AIA markets: Singapore, Australia,
Hong Kong, Philippines, Thailand and Malaysia. The response to the launch of Vitality has been positive with significant media coverage, brand awareness and
agent engagement; and encouraging performance in the more established AIA territories. The take-up rate on eligible products is greater than 50% in Hong
Kong and Singapore while a strong positive take-up is seen in Australia. As the business gains traction, plans are to extend the range of insurance products that
integrate with Vitality in these markets.
John Hancock Vitality and Manulife Vitality
John Hancock Vitality continues to see very strong adoption rates and high initial customer engagement in its second year on the market. The Protection
Universal Life, Term, and Indexed Universal Life products are available in the majority of states, and the remaining states are expected to help drive sales, once
approved. Since launch, John Hancock Vitality has received numerous awards and garnered significant media attention for its innovative and transformative
approach to life insurance.
Manulife Vitality is anticipated to launch in September, pioneering the Vitality Shared-Value Insurance model in Canada.
Generali Vitality
Generali Vitality launched to the public in Germany in June 2016 with the first sales occurring in July. The initial market response has been exceptional, with
new business doubling the run-rate leading up to launch. The media response has also been overwhelmingly positive. The business intends to launch in France
on 1 January 2017, followed shortly in Austria.
Ping An Health
The business's impressive performance continued with new business sales of RMB151 million and RMB595 million in the Group and Individual segments for
the full year period. This represented an overall increase of 27% for Group and 50% for Individual sales on the corresponding period in the prior financial year.
Business fundamentals also remained strong, with lapses within expectation, and loss ratios on Individual business better than expected. The number of health
insurance lives covered increased by 33% over the past 12-month period from 418,000 at June 2015 to 555,000 at June 2016.
Healthcare reform has been identified as a key focus in the Chinese government's new five-year plan, with State spending under pressure. Ping An has
identified healthcare as a key strategic investment for the Group. In line with this, Ping An Health has undergone a major management restructure with the
appointment of highly-qualified and experienced leadership to position the business for growth in the coming years.
05 Prospects for growth
Discovery is currently well capitalised to fund its growth ambitions and has buffers to withstand potential adverse experience, while safeguarding future
earnings and maintaining acceptable levels of debt. Given the quantum of growth opportunities facing the Group, however, this plan is carefully and
systematically reviewed and updated. Discovery foresees continued strong performance from existing businesses going forward; and spend on new initiatives
to reduce over time, absent of the intent to enter banking. This combination positions Discovery for continued growth in the future.
On behalf of the Board
MI HILKOWITZ A GORE
Chairperson Group Chief Executive
Sandton
5 September 2016
Statement of financial position
at 30 June 2016
Group Group
2015 2014
Group Audited Audited
2016 and and
R million Audited restated restated
ASSETS
Assets arising from insurance contracts 33 815 28 144 23 044
Property and equipment 1 052 727 666
Intangible assets including deferred acquisition costs 4 584 2 526 2 344
Goodwill 2 447 2 375 2 239
Investment in equity-accounted investees 491 505 551
Financial assets
- Available-for-sale investments 9 794 9 454 7 578
- Investments at fair value through profit or loss 50 948 40 132 32 753
- Derivatives 590 825 588
- Loans and receivables including insurance receivables 4 891 3 884 3 110
Deferred income tax 824 690 406
Current income tax asset 97 5 46
Reinsurance contracts 410 362 266
Cash and cash equivalents 8 634 6 251 3 650
Total assets 118 577 95 880 77 241
EQUITY
Capital and reserves
Ordinary share capital and share premium 8 300 7 488 2 582
Perpetual preference share capital 779 779 779
Other reserves 1 934 2 024 1 501
Retained earnings 19 594 17 065 12 549
30 607 27 356 17 411
Non-controlling interest - - -
Total equity 30 607 27 356 17 411
LIABILITIES
Liabilities arising from insurance contracts 44 673 37 236 30 842
Liabilities arising from reinsurance contracts 4 894 3 827 2 247
Financial liabilities
- Puttable non-controlling interests - - 4 494
- Negative reserve funding 4 248 5 437 4 684
- Borrowings at amortised cost 5 400 954 572
- Investment contracts at fair value through profit or loss 13 514 10 059 8 264
- Derivatives 49 7 10
- Trade and other payables 8 563 5 506 3 752
Deferred income tax 6 035 5 077 4 647
Deferred revenue 291 192 157
Employee benefits 169 152 154
Current income tax liability 134 77 7
Total liabilities 87 970 68 524 59 830
Total equity and liabilities 118 577 95 880 77 241
Income statement
for the year ended 30 June 2016
Group
2015
Group Audited
2016 and %
R million Audited restated change
Insurance premium revenue 33 074 27 694
Reinsurance premiums (4 316) (3 113)
Net insurance premium revenue 28 758 24 581
Fee income from administration business 7 651 6 630
Vitality income 3 844 3 029
Receipt arising from reinsurance contracts - 1 250
Investment income 745 507
- investment income earned on shareholder investments and cash 265 188
- investment income earned on assets backing policyholder liabilities 480 319
Net realised gains on available-for-sale financial assets 5 188
Net fair value gains on financial assets at fair value through profit or loss 2 720 3 124
Net income 43 723 39 309
Claims and policyholders' benefits (19 163) (15 805)
Insurance claims recovered from reinsurers 3 586 2 503
Net claims and policyholders' benefits (15 577) (13 302)
Acquisition costs (6 185) (5 294)
Marketing and administration expenses (14 789) (12 251)
Amortisation of intangibles from business combinations (275) (227)
Recovery of expenses from reinsurers 1 346 447
Transfer from assets/liabilities under insurance contracts (1 745) (2 541)
- change in assets arising from insurance contracts 5 591 4 651
- change in assets arising from reinsurance contracts 41 81
- change in liabilities arising from insurance contracts (6 250) (5 693)
- change in liabilities arising from reinsurance contracts (1 127) (1 580)
Fair value adjustment to liabilities under investment contracts (695) (912)
Profit from operations 5 803 5 229 11
Puttable non-controlling interest fair value adjustment - 1 661
Gain from business combination 8 -
Finance costs (293) (197)
- finance costs raised on puttable non-controlling interest financial liability - (64)
- other finance costs (293) (133)
Foreign exchange gains 18 40
Realised gain from the sale of associate - 7
Share of net (losses)/profits from equity-accounted investments (66) 26
Profit before tax 5 470 6 766 (19)
Income tax expense (1 740) (1 214) (43)
Profit for the year 3 730 5 552 (33)
Profit attributable to:
- ordinary shareholders 3 655 5 480 (33)
- preference shareholders 75 72
- non-controlling interest - -
3 730 5 552 (33)
Earnings per share for profit attributable to ordinary shareholders of the company
during the year (cents):
- undiluted 573,1 914,8 (37)
- diluted 568,8 902,2 (37)
Statement of other comprehensive income
for the year ended 30 June 2016
Group Group
2016 2015 %
R million Audited Audited change
Profit for the year 3 730 5 552
Items that are or may be reclassified subsequently to profit or loss:
Change in available-for-sale financial assets 4 (92)
- unrealised gains 24 72
- capital gains tax on unrealised gains (16) (11)
- realised gains transferred to profit or loss (5) (188)
- capital gains tax on realised gains 1 35
Currency translation differences 62 492
- unrealised gains 86 504
- tax on unrealised gains (24) (12)
Cash flow hedges (195) 58
- unrealised (losses)/gains (129) 143
- tax on unrealised losses/gains 14 (23)
- gains recycled to profit or loss (95) (75)
- tax on recycled gains 15 13
Share of other comprehensive income from equity-accounted investments 39 65
- change in available-for-sale financial assets (11) 13
- currency translation differences 50 52
Other comprehensive income for the year, net of tax (90) 523
Total comprehensive income for the year 3 640 6 075 (40)
Attributable to:
- ordinary shareholders 3 565 6 003 (41)
- preference shareholders 75 72
- non-controlling interest - -
Total comprehensive income for the year 3 640 6 075 (40)
Headline earnings
for the year ended 30 June 2016
Group Group
2016 2015 %
R million Audited Audited change
Normalised headline earnings per share (cents):
- undiluted 676,3 672,2 1
- diluted 671,1 663,0 1
Headline earnings per share (cents):
- undiluted 571,1 882,4 (35)
- diluted 566,7 870,2 (35)
The reconciliation between earnings and headline earnings is shown below:
Net profit attributable to ordinary shareholders 3 655 5 480
Adjusted for:
- gains from business combination (8) -
- gains on disposal of property and equipment net of tax (2) -
- realised gains on available-for-sale financial assets net of CGT (4) (153)
- realised gain from sale of associate including deferred tax reversal - (42)
Headline earnings 3 641 5 285 (31)
- accrual of dividends payable to preference shareholders (4) (1)
- additional 54.99% share of DiscoveryCard profits capitalised to intangible assets 86 -
- amortisation of intangibles from business combinations net of deferred tax 224 170
- 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)
- finance costs raised on puttable non-controlling interest financial liability - 64
- non-controlling interest allocation if no put options - (42)
- rebranding and business acquisitions expenses 365 420
Normalised headline earnings 4 312 4 027 7
Weighted number of shares in issue (000's) 637 608 598 946
Diluted weighted number of shares (000's) 642 534 607 290
Statement of changes in equity
for the year ended 30 June 2016
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
Year ended 30 June 2016
At beginning of year 7 488 779 319 171 1 373 161 17 065 27 356 - 27 356
Total comprehensive income for the year - 75 - (7) 112 (195) 3 655 3 640 - 3 640
Profit for the year - 75 - - - - 3 655 3 730 - 3 730
Other comprehensive income - - - (7) 112 (195) - (90) - (90)
Transactions with owners 812 (75) - - - - (1 126) (389) - (389)
Increase in treasury shares (5) - - - - - - (5) - (5)
Proceeds from treasury shares * - - - - - - * - *
Share issue 817 - - - - - - 817 - 817
Share issue costs * - - - - - - * - *
Share buy-back * - - - - - - * - *
Dividends paid to preference shareholders - (75) - - - - - (75) - (75)
Dividends paid to ordinary shareholders - - - - - - (1 126) (1 126) - (1 126)
At end of year 8 300 779 319 164 1 485 (34) 19 594 30 607 - 30 607
Year ended 30 June 2015
At beginning of year 2 582 779 319 250 829 103 12 549 17 411 - 17 411
Total comprehensive income for the year - 72 - (79) 544 58 5 480 6 075 - 6 075
Profit for the year - 72 - - - - 5 480 5 552 - 5 552
Other comprehensive income - - - (79) 544 58 - 523 - 523
Transactions with owners 4 906 (72) - - - - (964) 3 870 - 3 870
Proceeds from rights-issue 5 000 - - - - - - 5 000 - 5 000
Rights-issue costs (94) - - - - - - (94) - (94)
Delivery of treasury shares * - - - - - - * - *
Dividends paid to preference shareholders - (72) - - - - - (72) - (72)
Dividends paid to ordinary shareholders - - - - - - (964) (964) - (964)
At end of year 7 488 779 319 171 1 373 161 17 065 27 356 - 27 356
1 This relates to the fair value adjustments of available-for-sale financial assets
* Amount is less than R500 000
Statement of cash flows
for the year ended 30 June 2016
Group Group
2016 2015
R million Audited Audited
Cash flow from operating activities 985 3 415
Cash generated by operations 8 481 5 340
Receipt arising from reinsurance contracts - 1 250
Net purchase of investments held to back policyholder liabilities (9 597) (5 232)
Working capital changes 1 699 1 711
583 3 069
Dividends received 171 499
Interest received 1 478 923
Interest paid (277) (131)
Taxation paid (970) (945)
Cash flow from investing activities (2 428) (2 229)
Net proceeds/(purchase) of financial assets 286 (1 656)
Purchase of property and equipment (465) (172)
Proceeds from disposal of property and equipment 20 7
Purchase of intangible assets (2 253) (559)
Proceeds from disposal of intangible assets 4 9
Increase in investment in associate - (59)
Disposal of investment in associate - 201
Purchase of businesses (20) -
Cash flow from financing activities 4 009 1 485
Proceeds from rights-issue - 5 000
Rights-issue costs - (94)
Proceeds from issuance of ordinary shares 817 -
Share buy-back * -
Share issue costs * -
Dividends paid to ordinary shareholders (1 130) (964)
Dividends paid to preference shareholders (75) (72)
Settlement of puttable non-controlling interest liability - (2 844)
Increase in borrowings 7 608 1 992
Repayment of borrowings (3 211) (1 533)
Net increase in cash and cash equivalents 2 566 2 671
Cash and cash equivalents at beginning of year 6 251 3 520
Exchange (losses)/gains on cash and cash equivalents (203) 60
Cash and cash equivalents at end of year 8 614 6 251
Reconciliation to statement of financial position
Cash and cash equivalents 8 634 6 251
Bank overdraft included in borrowings at amortised cost (20) -
Cash and cash equivalents at end of year 8 614 6 251
* Amount is less than R500 000
Additional information
at 30 June 2016
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.
30 June 2016
R million (audited) Level 1 Level 2 Level 3 Total
Financial assets
Financial instruments at fair value through profit or loss:
- Equity securities 20 049 - - 20 049
- Equity linked notes - 2 462 - 2 462
- Debt securities 10 238 731 - 10 969
- Inflation linked securities 429 - - 429
- Money market securities 601 4 157 - 4 758
- Mutual funds 12 281 - - 12 281
Available-for-sale financial instruments:
- Equity securities 151 - - 151
- Equity linked notes - 5 - 5
- Inflation linked securities 5 - - 5
- Debt securities 91 189 - 280
- Money market securities 299 1 571 - 1 870
- Mutual funds 7 483 - - 7 483
Derivative financial instruments at fair value:
- Hedges - 521 - 521
- Non-hedges - 69 - 69
51 627 9 705 - 61 332
Financial liabilities
Derivative financial instruments at fair value:
- Hedges - 29 - 29
- Non-hedges - 20 - 20
- 49 - 49
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
There were no transfers between level 1 and 2 during the current financial year.
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.
Exchange rates used in the preparation of these results
USD GBP
30 June 2016
- Average 14,60 21,44
- Closing 14,73 19,78
30 June 2015
- Average 11,49 18,04
- Closing 12,18 19,19
Segmental information
for the year ended 30 June 2016
IFRS reporting adjustments
Normalised
SA SA SA SA UK UK All other Segment UK profit IFRS
R million Health Life Invest Vitality Health Life segments total Life(2) DUT(3) adjustments(4) total
Income statement
Insurance premium revenue 16 11 008 8 934 - 8 530 3 854 1 558 33 900 (826) - - 33 074
Reinsurance premiums (1) (2 014) - - (2 030) (884) (213) (5 142) 826 - - (4 316)
Net insurance premium revenue 15 8 994 8 934 - 6 500 2 970 1 345 28 758 - - - 28 758
Fee income from administration business 5 582 284 1 274 - 41 - 470 7 651 - - - 7 651
Vitality income - - - 2 253 561 67 963 3 844 - - - 3 844
Investment income earned on assets backing policyholder liabilities - 349 - - 62 - 69 480 - - (480) -
Finance charge on negative reserve funding - - - - - (632) - (632) 632 - - -
Inter-segment funding(1) - (452) 452 - - - - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 675 1 248 - - 59 - 1 982 - 738 - 2 720
Net income 5 597 9 850 11 908 2 253 7 164 2 464 2 847 42 083 632 738 (480) 42 973
Claims and policyholders' benefits (1) (6 401) (5 010) - (6 357) (781) (1 043) (19 593) 430 - - (19 163)
Insurance claims recovered from reinsurers 1 1 658 - - 1 771 436 150 4 016 (430) - - 3 586
Net claims and policyholders' benefits - (4 743) (5 010) - (4 586) (345) (893) (15 577) - - - (15 577)
Acquisition costs - (1 760) (710) (82) (617) (2 218) (166) (5 553) (632) - - (6 185)
Marketing and administration expenses
- depreciation and amortisation (253) (23) - - (197) (1) (117) (591) - - - (591)
- other expenses (3 079) (1 523) (454) (2 127) (2 637) (1 264) (2 372) (13 456) (214) (163) (365) (14 198)
Recovery of expenses from reinsurers - - - - 686 660 - 1 346 - - - 1 346
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 3 429 - - - 1 035 - 4 464 1 127 - - 5 591
- change in assets arising from reinsurance contracts - 17 - - 6 10 15 48 (7) - - 41
- change in liabilities arising from insurance contracts - (1 518) (5 053) - 366 (17) (35) (6 257) 7 - - (6 250)
- change in liabilities arising from reinsurance contracts - (354) - - - 354 - - (1 127) - - (1 127)
Fair value adjustment to liabilities under investment contracts - (2) (118) - - - - (120) - (575) - (695)
Share of net (losses)/profits from equity-accounted investments - - - - 1 - (67) (66) - - - (66)
Normalised profit/(loss) from operations 2 265 3 373 563 44 186 678 (788) 6 321 (214) - (845) 5 262
Investment income earned on shareholder investments and cash 90 77 19 14 7 14 44 265 - - 480 745
Net realised gains on available-for-sale financial assets - 1 4 - - - - 5 - - - 5
Rebranding and business acquisitions expenses - - - - (365) - - (365) - - 365 -
Gain from business combination - - - - - - 8 8 - - - 8
Amortisation of intangibles from business combinations - - - - - - (275) (275) - - - (275)
Finance costs (37) (15) - - (7) (18) (216) (293) - - - (293)
Foreign exchange gains/(losses) - - (1) - (30) - 49 18 - - - 18
Profit before tax 2 318 3 436 585 58 (209) 674 (1 178) 5 684 (214) - - 5 470
Income tax expense (646) (954) (163) (16) 29 (237) 33 (1 954) 214 - - (1 740)
Profit for the year 1 672 2 482 422 42 (180) 437 (1 145) 3 730 - - - 3 730
1 The inter-segment funding of R452 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 in respect of the business written on the statement of financial position of Prudential Assurance Company Limited, 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 earned 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
for the year ended 30 June 2015
IFRS reporting adjustments
Audited and restated All other Normalised
SA SA SA SA UK UK segments Segment UK profit IFRS
R million Health Life Invest Vitality Health Life Restated(5) total Life(2) DUT(3) adjustments(4) total
Income statement
Insurance premium revenue 16 9 711 7 821 - 6 958 2 629 1 102 28 237 (543) - - 27 694
Reinsurance premiums (2) (1 579) - - (1 314) (543) (218) (3 656) 543 - - (3 113)
Net insurance premium revenue 14 8 132 7 821 - 5 644 2 086 884 24 581 - - - 24 581
Fee income from administration business 4 881 248 1 106 - 97 - 298 6 630 - - - 6 630
Vitality income - - - 2 051 323 25 630 3 029 - - - 3 029
Receipt arising from reinsurance contracts - 1 250 - - - - - 1 250 - - - 1 250
Investment income earned on assets backing policyholder liabilities - 240 3 - 50 - 26 319 - - (319) -
Finance charge on negative reserve funding - - - - - (314) - (314) 314 - - -
Inter-segment funding(1) - (457) 457 - - - - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 688 1 680 - - - - 2 368 - 756 - 3 124
Net income 4 895 10 101 11 067 2 051 6 114 1 797 1 838 37 863 314 756 (319) 38 614
Claims and policyholders' benefits (1) (5 173) (5 296) - (4 393) (471) (715) (16 049) 244 - - (15 805)
Insurance claims recovered from reinsurers 1 1 226 - - 1 140 244 136 2 747 (244) - - 2 503
Net claims and policyholders' benefits - (3 947) (5 296) - (3 253) (227) (579) (13 302) - - - (13 302)
Acquisition costs (5) (1 606) (713) (64) (535) (1 914) (143) (4 980) (314) - - (5 294)
Marketing and administration expenses
- depreciation and amortisation (211) (28) - - (107) - (67) (413) - - - (413)
- other expenses (2 648) (1 490) (430) (1 945) (2 125) (860) (1 657) (11 155) (176) - (420) (11 751)
Recovery of expenses from reinsurers - - - - 316 - 131 447 - - - 447
Transfer from assets/liabilities under insurance contracts
- change in assets arising from insurance contracts - 2 899 - - - 10 - 2 909 1 742 - - 4 651
- change in assets arising from reinsurance contracts - (8) - - 89 7 - 88 (7) - - 81
- change in liabilities arising from insurance contracts - (1 370) (4 015) - (276) (13) (26) (5 700) 7 - - (5 693)
- change in liabilities arising from reinsurance contracts - (1 580) - - - 1 742 - 162 (1 742) - - (1 580)
Fair value adjustment to liabilities under investment contracts - (3) (153) - - - - (156) - (756) - (912)
Share of net profits from equity accounted investments - - - - - - 26 26 - - - 26
Normalised profit/(loss) from operations 2 031 2 968 460 42 223 542 (477) 5 789 (176) - (739) 4 874
Investment income earned on shareholder investments and cash 67 33 15 9 6 - 58 188 - - 319 507
Net realised gains on available-for-sale financial assets - 187 1 - - - - 188 - - - 188
Rebranding and business acquisitions expenses - - - - (366) - (54) (420) - - 420 -
Costs relating to AIA restructure - - - - - - (87) (87) - - - (87)
Amortisation of intangibles from business combinations - - - - - - (227) (227) - - - (227)
Puttable non-controlling interest fair value adjustment - - - - - - 1 661 1 661 - - - 1 661
Finance costs (29) (7) - - (4) - (157) (197) - - - (197)
Foreign exchange gains/(losses) - 1 4 - (23) - 58 40 - - - 40
Realised gain from sale of associate - - - - - - 7 7 - - - 7
Profit before tax 2 069 3 182 480 51 (164) 542 782 6 942 (176) - - 6 766
Income tax expense (595) (877) (132) (15) 295 (176) 110 (1 390) 176 - - (1 214)
Profit for the year 1 474 2 305 348 36 131 366 892 5 552 - - - 5 552
1 The inter-segment funding of R457 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 in respect of the business written on the statement of financial position of Prudential Assurance Company Limited, 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 earned 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.
5 Change in presentation
At each reporting date, Discovery must review whether the segments being disclosed still comply with IFRS8-Segment reporting. Based on this review, the operating segments that were previously reported in the "New Business Development" segment no longer meet the aggregation criteria. As they do not meet
the quantitative thresholds either, they have moved to the "All other segments" column. Comparative disclosure has been updated to be consistent with the current year disclosure. New business development previously included The Vitality Group in the United States of America, Ping An Health in China, AIA
Vitality in Asia and Discovery Insure in South Africa, as well as expenses incurred to investigate new products and markets.
Review of Group results
for the year ended 30 June 2016
New business annualised premium income
New business annualised premium income decreased 7% for the year ended 30 June 2016 when compared to the same period in the prior year. However,
when excluding R4.2 billion in respect of the Bankmed Medical Scheme administration and managed care services contract taken on in the prior year, new
business annualised premium income increased 22%.
June June %
R million 2016 2015 change
Discovery Health - DHMS 4 901 4 442 10
Discovery Health - Closed Schemes excluding Bankmed take-on 1 676 956 75
Discovery Life 2 347 2 231 5
Discovery Invest 1 932 1 646 17
Discovery Insure 841 789 7
Discovery Vitality 187 223 (16)
VitalityHealth 1 161 814 43
VitalityLife 1 332 1 079 23
The Vitality Group 122 161 (24)
Ping An Health 1 732 991 75
New business API of Group excluding Bankmed take-on 16 231 13 332 22
Bankmed take-on - 4 200
New business API of Group 16 231 17 532 (7)
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.
The new business API in the table above differs from the new business API disclosed in the embedded value largely as a result of:
- The timing of inclusion of policyholders in the calculation of new business API. In the embedded value, new business is included from the earlier of the date
that the first premium has been received or when the policy is on risk, whereas in the table above, new business is included when the policy has been
contractually committed.
- Inclusion of automatic premium increases and servicing increases on existing life policies. These are excluded in the embedded value, but included in the
table above.
For The Vitality Group and Ping An Health, the embedded value definition of new business is used in the table above.
Refer to the footnotes to Table 7: Embedded Value of New Business for a more detailed description of the differences in new business disclosures between the
Embedded Value and the table above.
Gross inflows under management
Gross inflows under management measures the total funds collected by Discovery. Gross inflows under management increased 17% for the year ended 30
June 2016 when compared to the same period in the prior year.
June June %
R million 2016 2015 change
Discovery Health 59 303 51 891 14
Discovery Life 11 292 9 959 13
Discovery Invest 15 517 13 520 15
Discovery Insure 1 583 1 118 42
Discovery Vitality 2 253 2 051 10
VitalityHealth 9 132 7 378 24
VitalityLife 3 921 2 654 48
The Vitality Group 952 634 50
Other partner markets 456 278 64
Gross inflows under management 104 409 89 483 17
Less: collected on behalf of third parties (59 014) (51 587) 14
Discovery Health (53 705) (46 994) 14
Discovery Invest (5 309) (4 593) 16
Gross income of Group per the segmental information 45 395 37 896 20
Gross income is made up as follows:
- Insurance premium revenue 33 900 28 237 20
- Fee income from administration business 7 651 6 630 15
- Vitality income 3 844 3 029 27
Gross income of Group per the segmental information 45 395 37 896 20
Normalised profit from operations
The following table shows the main components of the normalised profit from operations for the year ended 30 June 2016:
June June %
R million 2016 2015 change
Discovery Health 2 265 2 031 12
Discovery Life 3 373 2 968 14
Discovery Invest 563 460 22
Discovery Vitality 44 42 5
VitalityHealth 186 223 (17)
VitalityLife 678 542 25
Normalised profit from established businesses 7 109 6 266 14
All other segments (excluding additional 54.99% share of DiscoveryCard profits) (823) (477) 73
Additional 54.99% share of DiscoveryCard profits 121 -
- Included in profit or loss in 'All other segments' 35 -
- Included in intangible assets 86 -
Normalised profit from operations(1) 6 407 5 789 11
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 explained below.
Significant transactions affecting the current results
Increase in the DiscoveryCard profit share arrangement
Prior to 1 July 2015, Discovery and FirstRand Bank Limited (FRB) had a joint arrangement in place that makes a "Discovery" branded FNB credit card
(DiscoveryCard) available to the clients of Discovery. In terms of this arrangement, FRB paid Discovery an amount equal to 20% of the profits generated by the
DiscoveryCard.
During the current year, both parties agreed that Discovery will increase its economic interest in the DiscoveryCard by subscribing for redeemable preference
shares in the share capital of FRB. This entitles Discovery to receive an additional 54.99% of the profits generated by the DiscoveryCard effective from 1 July
2015. In December 2015, Discovery subscribed for R1.4 billion FRB redeemable preference shares and in April 2016 the contractual rights under the preference
shares were finalised.
In terms of IAS 38: Intangible Assets, the preference shares have been disclosed as an intangible asset in the Statement of financial position as the substance of
the arrangement is a right to receive additional 54.99% of the profits generated by the DiscoveryCard. This intangible asset will be amortised through profit or
loss as profits are expected to emerge and R26 million has been recognised for the current financial year. This has been added back in the calculation of
Normalised Headline Earnings. At 30 June 2016, there was no indication of impairment.
R121 million is receivable in respect of the 54.99% profits generated by the DiscoveryCard from 1 July 2015 to 30 June 2016. As the contractual rights under the
preference shares were only finalised in April 2016, any profits earned prior to that, being R86 million, represents an adjustment to the purchase price of the
intangible asset rather than income received and as such has reduced the value of the intangible asset recognised. This has been added to Normalised
Headline Earnings.
Increase in borrowings
United Kingdom borrowings
During the year ended 30 June 2015, Discovery entered into a GBP 100 million term facility with HSBC Bank Plc which will 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 year, the remaining balance of GBP 73.6 million was
utilised. In addition, a new facility of GBP 50 million was entered into during the current financial year, of which GBP 20 million was utilised by year-end.
Discovery repaid GBP 7.5 million (R173 million) of the original facility on 31 May 2016, as per the agreed terms. The balance owing to HSBC Bank Plc at year-end
was R2 226 million (2015: R506 million). The increase in these borrowings is partially offset by a reduction in Negative reserve funding, outlined in more detail
on the next page.
Finance charges of R60 million in respect of these borrowings have been recognised in profit or loss.
South African borrowings
Discovery concluded a bank syndicated loan programme in June 2016, whereby the existing RMB term loan of R400 million entered into in 2010, which was due
to mature in September 2017, and a bridge loan facility of R2.6 billion entered into in December 2015, were refinanced through the following long-term
facilities:
- A fixed rate term loan facility of R1.6 billion has been entered into with Rand Merchant Bank, a division of FirstRand Bank Limited. The facility has the
following profile:
- R500 million at a fixed interest rate of 10.79% per annum, payable quarterly in arrears, with capital repayable on 10 June 2021.
- R1.1 billion at a fixed interest rate of 10.44% per annum, payable quarterly in arrears, with an amortising capital profile, having the first repayment on
10 June 2019 and final settlement on 10 June 2021.
- A subsidiary in the Discovery Group issued 1 400 A preference shares at an issue price of R1 million each, by way of private placement to Investec Bank
Limited. The preference shares were issued at a fixed coupon rate of 8.015% per annum, paid bi-annually. The shares are cumulative, non-participating,
non-convertible preference shares and redeemable on 29 June 2021.
Since the shares are mandatorily redeemable on a specified date, they have been recognised as Borrowings in the Statement of Financial Position. The value
of the preference shares has been reduced by share issue costs of R6.7 million. As the dividends are cumulative, they have been accrued for in the current
financial year and disclosed in finance costs in profit or loss.
Finance charges of R155 million in respect of these South African borrowings have been recognised in profit or loss.
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 financial year.
Refinancing of BEE transaction by a BEE partner
In September 2005, Discovery concluded a BEE transaction pursuant to which 38 725 909 shares were issued to a consortium of BEE parties. 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 (VWAP) 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.
Consolidation of Discovery Unit Trusts
The Discovery Unit Trusts are consolidated into Discovery's results in both the current and prior financial year. The following large increases in the Discovery
Unit Trusts Statement of financial position have had a direct impact on the Group's Statement of financial position:
- Cash and cash equivalents increased by R510 million.
- Loans and receivables increased by R545 million.
- Trade and other payables increased by R1 525 million.
- Investments at fair value through profit or loss increased by R9 203 million.
- Investment contracts at fair value through profit or loss increased by R8 726 million.
Other significant items in these results
Taxation
For South African entities that are in a tax paying position, tax has been provided at 28% (2015: 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 R4 711 million
for the year ended 30 June 2016 (2015: R4 374 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 R10.8 billion due to the sale of Discovery Invest products. This includes the impact of
consolidating the Discovery Unit Trusts into the Group's results. The increase in the financial assets at fair value through profit or loss has been presented in
‘Net purchase of investments held to back policyholder liabilities' of R9 597 million in the Statement of cash flows.
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.
The future basis for taxation of Life companies is currently being reviewed by National Treasury.
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.
- Mr R Farber will relinquish his role as Chief Financial Officer and Group Financial Director of Discovery with effect from 31 December 2016. Mr Farber will
remain a director on the Board of Discovery.
Dr V Maphai, Mr T Mboweni, Mr L Owen and Ms S de Bruyn Sebotsa retire by rotation at the forthcoming Annual General Meeting of shareholders and are
eligible and available for re-election.
Dividend policy and capital
Interim dividends paid
The following interim dividends were paid during the current financial year:
- B preference share dividend of 480.06849 cents per share (408.05822 cents net of dividend withholding tax), paid on 14 March 2016.
- Ordinary share dividend of 85.5 cents per share (72.675 cents net of dividend withholding tax), paid on 22 March 2016.
At 30 June 2016, the capital adequacy requirement on the statutory basis for Discovery Life was R628 million (2015: R557 million) and was covered 3.6 times
(2015: 3.9 times).
Final dividend declaration
B preference share cash dividend declaration:
On 25 August 2016, the directors declared a final gross cash dividend of 514.24658 cents (437.10959 cents net of dividend withholding tax) per B preference
share for period 1 January 2016 to 30 June 2016, payable from the income reserves of the Company. 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 Tuesday, 13 September 2016
Shares commence trading "ex" dividend Wednesday, 14 September 2016
Record date Friday, 16 September 2016
Payment date Monday, 19 September 2016
B preference share certificates may not be dematerialised or rematerialised between Wednesday, 14 September 2016 and Friday, 16 September 2016, both
days inclusive.
Ordinary share cash dividend declaration:
Notice is hereby given that the directors have declared a final gross cash dividend of 90 cents (76.5 cents net of dividend withholding tax) per ordinary share,
out of income reserves for the year ended 30 June 2016. 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 Tuesday, 4 October 2016
Shares commence trading "ex" dividend Wednesday, 5 October 2016
Record date Friday, 7 October 2016
Payment date Monday, 10 October 2016
Share certificates may not be dematerialised or rematerialised between Wednesday, 5 October 2016 and Friday, 7 October 2016, both days inclusive.
Accounting policies
The Annual Financial Statements have been prepared in accordance with International Financial Reporting Standards including IAS 34, as well as the South
African Companies Act 71 of 2008. The accounting policies adopted are consistent with the accounting policies applied in the prior Annual Financial Statements.
Change in comparatives
When Discovery Life launched the Discovery Retirement Optimiser, it sold it as an add-on to the Discovery Life Plan. As the Discovery Life Plan (DLP) and the
Discovery Retirement Optimiser (DRO) were covered under one policy, the insurance liabilities for both these portions of the policy were therefore disclosed
together in the Statement of financial position. The DLP portion would result in an insurance asset and the DRO portion would result in an insurance liability.
The net value would be disclosed in Assets arising from insurance contracts.
Following the launch of Discovery Invest the DRO product and the administration system were restructured over time. The single policy referred to above, was
eventually split into two policies and the policyholder now had a DLP policy and a DRO policy. Either policy could now be cancelled individually. From that date,
the insurance asset for the DLP policy and the insurance liability for the DRO policy should have been disclosed separately, but has not been given the gradual
evolution of the DRO product and processes. The historic practice was reconsidered in the current financial year and disclosure in both the current and prior
year Statement of financial positions have been updated to disclose the insurance asset and insurance liability separately.
The restatement to the comparative Statement of financial position results in an increase of R6 418 million to Assets arising from insurance contracts and a
corresponding equal increase in the Liabilities arising from insurance contracts. The restatement has no impact on the Group's comparative net profit, nor the
Group's comparative basic and diluted earnings per share, nor the Group's comparative cash flows.
The adjustment is analysed in the table below.
June 2015
Original Adjusted
R million comparative Adjustment comparative
Statement of financial position:
Assets arising from insurance contracts 21 726 6 418 28 144
Liabilities arising from insurance contracts (30 818) (6 418) (37 236)
(9 092) - (9 092)
Income statement:
Transfer from assets/liabilities under insurance contracts:
- change in assets arising from insurance contracts 3 278 1 373 4 651
- change in liabilities arising from insurance contracts (4 320) (1 373) (5 693)
(1 042) - (1 042)
Audit
The consolidated financial statements are considered preliminary based on the JSE Listings Requirements and are summarised from a complete set of the
Group financial statements on which the Independent Auditors, PricewaterhouseCoopers Inc., have expressed an unqualified audit opinion, which is available
for inspection at the Company's registered office.
This report is extracted from audited information, but is not itself audited. The Auditor's Report does not necessarily report on all of the information contained
in this announcement. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor's engagement they should
obtain a copy of the Auditor's Report together with the accompanying financial information from the Company's registered office.
The directors of Discovery take full responsibility for the preparation of this report and that the financial information has been correctly extracted from the
underlying Annual Financial Statements.
A copy of the Annual Financial Statements that have been summarised in this report can be obtained from the Company's registered office.
Embedded value statement
for the twelve months ended 30 June 2016
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, 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
and VitalityHealth. 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 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.
In 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 and with reference to the ALSI. The resulting assumed beta is then 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. At 30 June 2016
the observed beta has departed materially from the previous assumption, resulting in a change to the beta assumption. The beta assumption used at 30 June
2016 is 0.75 (30 June 2015: 0.55).
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.
In January 2016, the European insurance regulation Solvency II came into effect and Vitality Life Limited was granted a life insurance licence in the United
Kingdom on which it commenced writing new business. These two changes required that the embedded value methodology for VitalityLife be reviewed. The
key methodology change was the zeroisation of the negative reserves emerging under insurance contracts in Vitality Life Limited and Discovery funded
VitalityLife business on the Prudential licence. This effectively moves the negative reserve from net worth to the value of in-force. The value of negative reserves
under insurance contracts that were set to zero at 30 June 2016 was R3.1 billion.
In June 2016, the United Kingdom European Union membership referendum voted in favour of the United Kingdom departing from the European Union. This
event, coined "Brexit", resulted in economic environmental impacts for VitalityHealth and VitalityLife. The embedded value calculation at 30 June 2016 includes
the impacts of lower UK risk-free rates and depreciation of the British Pound relative to the South African Rand.
The 30 June 2016 embedded value results and disclosures were subjected to an external review.
Table 1: Group embedded value
30 June 30 June %
R million 2016 2015 Change
Shareholders' funds 30 607 27 356 12
Adjustment to shareholders' funds from published basis(1) (23 583) (17 784)
Adjusted net worth 7 024 9 572
- Free surplus 1 479 5 188
- Required capital(2) 5 545 4 384
Value of in-force covered business before cost of required capital 48 121 44 006
Cost of required capital (2 065) (1 283)
Discovery Limited embedded value 53 080 52 295 2
Number of shares (millions) 644.2 629.0
Embedded value per share R82.40 R83.14 (1)
Diluted number of shares (millions) 646.7 646.7
Diluted embedded value per share(3) R82.17 R82.29 (0)
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 R19.78/GBP (June 2015: R19.19/GBP):
30 June 30 June
R million 2016 2015
Discovery Life net assets under insurance contracts (15 768) (13 208)
Vitality Life Limited and Discovery funded VitalityLife business on the Prudential licence net assets
under insurance contracts (3 090) -
VitalityHealth and VitalityHealth Insurance Limited deferred acquisition costs (net of deferred tax) (290) (230)
VitalityLife receivable relating to the Unemployment Cover benefit (net of deferred tax) (41) (44)
Goodwill and intangible assets (net of deferred tax) relating to the acquisition of Standard Life
Healthcare and the Prudential joint venture (3 615) (3 523)
Net preference share capital (779) (779)
(23 583) (17 784)
2 The required capital backed by tangible assets at June 2016 for Life is R1 255 million (June 2015: R1 114 million), for Health and Vitality is R725 million
(June 2015: R642 million), for VitalityHealth and VitalityHealth Insurance Limited is R2 212 million (June 2015: R1 693 million) and for VitalityLife is
R1 353 million (June 2015: R935 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 the VitalityLife business on the Prudential licence, the required
capital was set equal to the UK Solvency I long term insurance capital requirement as per the agreement with Prudential. For the business sold on the
Vitality Life Limited licence, the required capital was set equal to the excess of 1.4 times the Solvency II Pillar 1 Solvency Capital Requirement over the
negative Solvency II technical provisions.
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 30 June 2016
Health and Vitality 16 834 (315) 16 519
Life and Invest(1) 22 411 (723) 21 688
VitalityHealth(2) 4 421 (377) 4 044
VitalityLife(2, 3) 4 455 (650) 3 805
Total 48 121 (2 065) 46 056
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 R1 100 million (June 2015: R884 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 R19.78/GBP (June 2015: R19.19/GBP).
3 Included in the VitalityLife value of in-force covered business is an increase of R2 200 million in respect of the zeroisation of the negative
reserves in VitalityLife Limited and the Discovery funded VitalityLife business on the Prudential licence.
Table 3: Group embedded value earnings
Year ended
30 June 30 June
R million 2016 2015
Embedded value at end of period 53 080 52 295
Less: Embedded value at beginning of period (52 295) (43 050)
Increase in embedded value 784 9 245
Net change in capital(1) (812) -
Dividends paid 1 201 1 036
Transfer to hedging reserve 171 (50)
Proceeds from rights-issue - (5 000)
Rights-issue costs - 94
Embedded value earnings 1 345 5 325
Annualised return on opening embedded value 2.6% 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 R5 million from an increase in treasury shares.
Table 4: Components of Group embedded value earnings
Year ended
Year ended 30 June 2016 30 June 2015
Value of
Cost of in-force
Net required covered Embedded Embedded
R million worth capital business value value
Total profit from new business (at point of sale) (5 432) (477) 8 241 2 332 2 614
Profit from existing business
- Expected return 4 240 (39) 421 4 622 3 989
- Change in methodology and assumptions(1) 1 363 (358) (4 769) (3 764) (799)
- Experience variances (471) 61 232 (178) 1 452
Impairment, amortisation and fair value
adjustment(2) (37) - - (37) -
Acquisition of Prudential joint venture(3) - - - - (774)
Intangibles no longer allocated to minorities(4) - - - - (765)
Increase in goodwill and intangibles (366) - - (366) (277)
Other initiative costs(5) (887) - 9 (878) (485)
Non-recurring expenses(6) (508) - - (508) (488)
Acquisition costs(7) (24) - 1 (23) (15)
Finance costs (107) - - (107) (103)
Foreign exchange rate movements (30) 31 (40) (39) 581
Other(8) 36 - 20 56 169
Return on shareholders' funds(9) 235 - - 235 225
Embedded value earnings (1 988) (782) 4 115 1 345 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 reflects the amortisation of the intangible assets reflecting the DiscoveryCard profit share arrangement, banking costs and the
PrimeMed acquisition.
3 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.
4 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.
5 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.
6 This item includes rebranding costs, as well as other once-off costs relating to the acquisition of 25% of PHHL.
7 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.
8 This item includes the tax benefit that will be obtained as the VitalityHealth DAC and intangible software assets amortise.
9 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
Net Value of Net Value of Net Value of Net Value of
R million worth in-force worth in-force worth in-force worth in-force Total
Renewal expenses 64 - 28 (4) (108) - 4 - (16)
Other expenses 18 - - - - - - - 18
Lapses and surrenders 14 125 (193) 197 - (35) (158) 99 49
Mortality and morbidity - - 48 (54) (185) - 20 - (171)
Policy alterations(1) - 55 (434) 167 - - (44) 41 (215)
Premium and fee income 9 (138) (130) 84 - - - - (175)
Economic assumptions - - 29 (275) - - - - (246)
Commission - - - - 50 - - - 50
Tax(2) 3 - 250 (294) 66 - 7 - 32
Reinsurance - - - - 107 (110) - - (3)
Maintain modelling term(3) - 268 - 63 - 62 - - 393
Vitality benefits 36 - - - (39) - - - (3)
Other 95 - (93) 42 61 - 4 - 109
Total 239 310 (495) (74) (48) (83) (167) 140 (178)
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 30 June 2016 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 twelve months.
Table 6: Methodology and assumption changes
Health and Vitality Life and Invest VitalityHealth VitalityLife
Net Value of Net Value of Net Value of Net Value of
R million worth in-force worth in-force worth in-force worth in-force Total
Modelling changes(1) - - (19) 79 - - (421) 602 241
Expenses - 450 (2) (29) - - (1) 3 421
Lapses - - 13 (592) - - 90 8 (481)
Mortality and morbidity - - (225) 44 - - - - (181)
Benefit enhancements - - (1) (11) - - - - (12)
Vitality benefits - (44) - - - (23) - - (67)
Tax - - 12 (58) - 93 - 50 97
Economic assumptions(2) - (417) 24 (2 235) - (82) (787) 64 (3 433)
Premium and fee income - - (24) (64) - - - - (88)
Reinsurance(3) - - 1 251 (1 352) 549 (528) 31 (88) (137)
Other(4) - - (57) 64 - (54) 930 (1 007) (124)
Total - (11) 972 (4 154) 549 (594) (158) (368) (3 764)
1 For VitalityLife, the key modelling change relates to the zeroisation of the intangible negative reserves for Vitality Life Limited and Discovery
funded VitalityLife business on the Prudential licence to reflect the shareholder cash flows on these policies. This effectively moves the
negative reserve from net worth to the value of in-force.
2 The economic assumption changes include the following items:
- A change in the beta coefficient from 0.55 at 30 June 2015 to 0.75 at 30 June 2016.
- For Health and Vitality and Discovery Life, there has been an increase in the South African risk-free rate since 30 June 2015.
- For VitalityHealth and VitalityLife, there has been a reduction in the UK risk-free rate since 30 June 2015.
- For VitalityLife, there is a realised loss in the net worth relating to the whole of life reinsurance structure.
3 For Life and VitalityHealth, the reinsurance item primarily relates to the impact of the financing reinsurance arrangements.
4 For VitalityLife, the other item relates to the margin reset as per the accounting policy.
Table 7: Embedded value of new business
Twelve months ended
30 June 2016
on
30 June 2015
30 June 30 June % economic %
R million 2016 2015 change basis(1) change
Health and Vitality
Present value of future profits from new business at point of sale 844 606 887
Cost of required capital (48) (22) (42)
Present value of future profits from new business at point of sale after cost of
required capital 796 584 36 845 45
New business annualised premium income(2) 7 415 2 829 162
Life and Invest
Present value of future profits from new business at point of sale(3) 1 263 1 268 1 539
Cost of required capital (67) (56) (51)
Present value of future profits from new business at point of sale after cost of
required capital 1 196 1 212 (1) 1 488 23
New business annualised premium income(4) 2 798 2 490 12
Annualised profit margin(5) 5.3% 5.9%
Annualised profit margin excluding Invest business 8.9% 9.7%
VitalityHealth
Present value of future profits from new business at point of sale 109 45 101
Cost of required capital (47) (20) (30)
Present value of future profits from new business at point of sale after cost of
required capital 62 25 148 71 184
New business annualised premium income (Rand)(6) 1 071 833 29
Annualised profit margin(5) 0.9% 0.6%
VitalityLife(7)
Present value of future profits from new business at point of sale 593 850 710
Cost of required capital (315) (57) (127)
Present value of future profits from new business at point of sale after cost of
required capital 278 793 (65) 583 (26)
New business annualised premium income (Rand) 1 083 967 12
Annualised profit margin(5) 3.5% 11.0%
1 There have been a number of movements in the economic assumptions since 30 June 2015, most notably the increase in the Discovery beta coefficient
from 0.55 at 30 June 2015 to 0.75 at 30 June 2016.
2 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 30 June 2016. Excluding contributions from Bankmed, the new business
annualised premium income was R2 913 million.
The total Health and Vitality new business annualised premium income written over the period was R6 764 million (June 2015: R5 622 million), excluding
Bankmed.
3 Included in the Life and Invest embedded value of new business is R159 million (June 2015: R60 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.
4 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 R2 798 million (June 2015: R2 490 million) (single premium APE: R1 175 million (June 2015: R1 005 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 R966 million (June 2015: R887 million) and servicing increases of R516 million
(June 2015: R500 million) was R4 279 million (June 2015: R3 877 million) (single premium APE: R1 218 million (June 2015: R1 048 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.
5 The annualised profit margin is the value of new business expressed as a percentage of the present value of future premiums.
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 30 June 2016.
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
30 June 30 June
2016 2015
Beta coefficient 0.75 0.55
Equity risk premium (%) 3.5 3.5
Risk discount rate (%)
Health and Vitality 11.875 10.675
Life and Invest 12.625 11.175
VitalityHealth 3.77 4.05
VitalityLife 4.695 5.045
Rand/GB Pound exchange rate
Closing 19.78 19.19
Average 21.44 18.04
Medical inflation (%)
South Africa 9.00 8.25
Expense inflation (%)
South Africa 6.0 5.25
United Kingdom 2.9 3.3
Pre-tax investment return (%)
South Africa - Cash 8.50 7.75
- Life and Invest bonds 10.00 9.25
- Health and Vitality bonds 9.25 8.75
- Equity 13.50 12.75
United Kingdom - VitalityHealth investment return 1.15 2.12
- VitalityLife investment return 2.07 3.12
Income tax rate (%)
South Africa 28 28
United Kingdom - long term(1) 18 20
Projection term
- Health and Vitality 20 years 20 years
- Life No cap No cap
- Group Life 10 years 10 years
- VitalityHealth 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. The assumed beta is set with reference to the observed beta calculated using daily returns over a long time period. The beta is 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. At 30 June 2016 the observed beta had departed materially from the assumption, resulting
in a change to the beta assumption. The beta assumption used at 30 June 2016 is 0.75 (30 June 2015: 0.55). 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, VitalityHealth and Vitality Life Limited required capital amounts will be fully backed by cash. The VitalityLife
business on the Prudential licence 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, Vitality, VitalityHealth and Vitality Life Limited cost of required capital is calculated
using the difference between the risk discount rate and the net of tax cash return. The VitalityLife business on the Prudential licence 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 30 June 2016 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
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(2) in-force capital in-force capital in-force capital in-force capital value change
Base 7 024 16 834 (315) 22 411 (723) 4 421 (377) 4 455 (650) 53 080
Impact of:
Risk discount rate +1% 7 024 15 837 (344) 20 066 (633) 4 119 (496) 4 183 (767) 48 989 (8)
Risk discount rate -1% 7 024 17 943 (282) 25 316 (838) 4 755 (239) 4 642 (414) 57 907 9
Lapses -10% 7 089 17 414 (330) 24 309 (774) 5 047 (405) 4 593 (750) 56 193 6
Interest rates -1%(1) 5 357 16 778 (303) 22 773 (787) 4 740 (348) 4 644 (861) 51 993 (2)
Equity and property market value -10% 6 963 16 834 (315) 22 170 (721) 4 421 (377) 4 455 (650) 52 780 (1)
Equity and property return +1% 7 024 16 834 (315) 22 640 (723) 4 421 (377) 4 455 (650) 53 309 0
Renewal expenses -10% 7 234 18 548 (292) 22 700 (721) 4 884 (376) 4 449 (640) 55 786 5
Mortality and morbidity -5% 7 247 16 834 (315) 23 826 (711) 5 807 (376) 4 443 (651) 56 104 6
Projection term +1 year 7 024 17 094 (319) 22 463 (723) 4 472 (377) 4 455 (650) 53 439 1
1 All economic assumptions were reduced by 1%.
2 The sensitivity impact on the VitalityLife net of tax change in negative reserves is included in the adjusted net worth column.
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 844 (48) 1 263 (67) 109 (47) 593 (315) 2 332
Impact of:
Risk discount rate +1% 772 (52) 1 001 (59) 65 (62) 467 (367) 1 765 (24)
Risk discount rate -1% 924 (42) 1 583 (78) 158 (31) 733 (231) 3 016 29
Lapses -10% 901 (50) 1 513 (72) 193 (51) 707 (375) 2 766 19
Interest rates -1%(1) 854 (45) 1 322 (73) 155 (43) 654 (382) 2 442 5
Equity and property return +1% 844 (47) 1 301 (67) 109 (47) 593 (315) 2 371 2
Renewal expense -10% 1 055 (45) 1 298 (67) 164 (47) 624 (300) 2 682 15
Mortality and morbidity -5% 844 (47) 1 384 (66) 280 (47) 618 (316) 2 650 14
Projection term +1 year 864 (48) 1 267 (67) 118 (48) 593 (315) 2 364 1
Acquisition costs -10% 868 (47) 1 384 (67) 139 (52) 707 (309) 2 623 12
1 All economic assumptions were reduced by 1%.
SENS date: 6 September 2016
Date: 06/09/2016 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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