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DSY
DSY
DSY - Discovery Holdings Limited - Discovery Holdings audited results
announcement and cash dividend declaration for the year ended 30 June 2010
DISCOVERY HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
ISIN: ZAE000022331
Share Code: DSY
("Discovery" or "the company")
DISCOVERY HOLDINGS AUDITED RESULTS ANNOUNCEMENT AND CASH DIVIDEND DECLARATION
FOR THE YEAR ENDED 30 JUNE 2010
Headlines
Profit from operations: + 36% to R2 514 million
New business API excluding Destiny: + 32% to R7 618 million
Headline earnings per share: + 24% to 278.8 cents
Gross inflows under management: + 23%, to over R41 billion
Introduction
The past year has been one of importance and significant activity for Discovery.
The Group`s results were pleasing, despite the uncertain macro-economic
environment. Given this instability and the prospect of further economic
decline, Discovery focused, in both its established and emerging businesses, on
ensuring the Group remains strongly positioned for continued growth and
profitability.
While effort has been invested during the period to grow the Group`s
geographical footprint, Discovery`s local businesses remain central to its
strategy and command the lion`s share of capital and operational investment. At
the core of Discovery`s model is its commitment to making people healthier and
enhancing their lives. Each of the Group`s subsidiaries, in South Africa and
offshore, leverage off the platform of wellness and consumer-engagement created
by Vitality. The result is an integrated approach that melds together wellness
and risk management, creating highly differentiated and consumer-centric
financial services offerings.
This approach has resulted in a strong financial performance during the period
under review, with new business growing by 32% to a record level of R7.6bn and
operating profit increasing by 36% to R2.5bn. Headline earnings increased by 24%
to R1.5bn and the group embedded value increased by 8% from December 2009 to
R22.6bn. Importantly, significant positive experience variances were achieved
within the embedded value, illustrating clearly that Discovery continues to
exceed the actuarial expectation in its performance.
Local operations
In Discovery`s local businesses, the year featured substantial investment in
innovation and infrastructure to support future growth and work was done on
potential new businesses in this market.
Discovery Health
Discovery Health`s performance exceeded expectations across all key performance
indicators, with new business levels at the highest in the company`s history.
Despite the impact of economic pressure on consumers, the increase in new
business derived from entirely new members and companies joining the Discovery
Health Medical Scheme was 95% to R2.5bn.
During the period, Discovery Health focused on four distinct strategic thrusts:
1. Significant investment in people and infrastructure: Given the record levels
of new business, low lapse rates and the efficiencies achieved in previous
years, Discovery Health focused on building its infrastructure in the period to
facilitate future growth.
2. Building a better quality, more cost-efficient healthcare system for members
of the schemes Discovery Health administers: Discovery Health has created unique
and sustainable healthcare assets that enable the company to achieve greater
scale and sophistication relative to competitors. During the past year, the
company continued to build and grow these assets. Discovery Health`s GP network
and proprietary direct payment arrangements with specialists, for example, have
continued to grow with the percentage of GP and specialist visits covered this
way now exceeding 86% and 87% respectively. The combination of these assets has
increased value and lowered healthcare costs for consumers, with the costs for
Discovery Health members estimated at about 8% lower than competing companies.
During the period, the competitive advantage in these areas has attracted a
number of large closed medical schemes to Discovery Health, including Altron
Medical Scheme and Remedi Medical Scheme.
3. Balancing clinical and actuarial management to lower costs for all schemes
under management: Healthcare is uniquely skewed in that 19% of the membership
base consumes 80% of the healthcare bill. To ensure sustainability, it is
therefore critical to keep healthy members in the system. Vitality plays a key
role in maintaining an appropriate balance between cost and value for both
healthy and sick members. Members who engage in managing their health are able
to enjoy benefits within the Discovery Health system. Importantly this is true
regardless of their health status. The combination of the benefits offered
through the medical scheme and Vitality therefore encourages both healthy and
sick members to stay in the system. Vitality`s role in retaining healthy members
is evident from the lapse rate, which during the period reduced to 4.1%. 4.
Engaging with stakeholders to help build a better healthcare system:
Importantly, in the context of ongoing public debates around potential
healthcare reform, Discovery Health continues to play a positive role in helping
to build an inclusive and successful healthcare system for all South Africans,
fundamental to our country`s future.
Discovery Life
During the year under review, Discovery Life maintained and enhanced its
leadership position through a continued focus on the quality and efficiency of
the business, thereby ensuring its robustness during periods of economic
uncertainty. This resulted in operating profit growing by 9% to R1.4bn. To allow
Discovery to grow without recourse to additional external capital, the Group has
utilised a portion of Discovery Life`s negative reserves through appropriate
financial reinsurance structures. The benefits of this approach are a de-risking
of that part of the negative reserve asset, a reduction in the overall capital
required and an increase in the return-on-capital. However, at the Discovery
Life level, there is a reduction in earnings as Discovery Life does not get the
benefit of the portion of the negative reserve used for this purpose. The cost
to Discovery Life in the year under review was R127m. Normalised operating
profit grew 15% to R1.6bn. Core new risk business grew by 10% to R853m with
overall new business up 2%. This reflects the effect of reducing inflation on
contribution increases (accounted for in the overall new business volumes).
From a strategic perspective, Discovery Life focused on three key areas during
the financial year:
1. Innovation and new product growth: Discovery Life continued to focus on
product innovation with the launch of the Financial Integrator during the first
half of the financial year, and the launch of the lower-priced Essential Plans
in the latter half. The strategy has proven successful, with 27% of new business
taking up the Financial Integrator.
2. Structural changes to reduce policy lapses: Discovery Life undertook
significant analysis to understand and address the key factors that impact on
lapse rates. The analysis showed clients with lower credit ratings are more
likely to lapse their policies in a difficult economic environment, whereas
clients who integrate their policies with Vitality and use more benefits across
Discovery`s product range are less likely to lapse. As a result of these
findings, Discovery Life did considerable work in the period to incorporate
credit risk in underwriting and risk management, while enhancing and promoting
integration opportunities for customers across the Discovery product range. This
strategy, coupled with a lessening of pressure in the economic environment
during the period, has resulted in a reduction in lapse rates of 1.2% in the
second half of the year.
3. Increasing Vitality engagement to positively impact on mortality and
morbidity: Discovery Life also focused on encouraging positive selection to
ensure superior mortality and morbidity experience. While premium pricing is
fundamental, management of lapses and the integration of Vitality were important
in this regard. Vitality and its integration ability not only reduced lapses
among healthy lives by providing them with value, but it also engaged people in
managing their health, which improved morbidity and mortality experience. As a
result, the overall risk experience of Discovery Life was significantly better
than expected with mortality experience running at 87% of expectation.
The combination of innovative products, competitive pricing points, lower lapse
rates and better mortality experience has created a robust platform for future
growth.
Discovery Vitality and Discovery Card
In terms of Vitality`s performance, two key themes emerged during the year.
Firstly, the period saw continued investment in understanding and enhancing the
wellness and behavioural science that underlies Vitality. During the period, the
Vitality team in collaboration with experts from leading academic and scientific
institutions continued to study Vitality`s effects on behaviour and the
correlation between engagement in the programme and health outcomes. Across
Discovery`s businesses, clear evidence is emerging that engagement in Vitality
reduces health-related risk, lowers healthcare costs and, as a by-product of the
programme`s powerful benefits, improves customer retention rates. As a result,
the Vitality model represents a unique and significant asset that Discovery is
able to export into diverse international markets like the USA, UK and China.
Secondly, the scale and usage of Vitality is increasingly substantial,
demonstrating the tremendous value generated for Discovery clients through the
programme. Over 1,6 million clients internationally make use of the programme`s
health and lifestyle benefits. Locally, Vitality members represent a significant
proportion of our Vitality partners` client bases.
DiscoveryCard has similarly proven itself an important value creator for
Discovery clients. During the year, DiscoveryCard`s market share increased to
8%, making it the fifth largest player in the South African credit card market
and the only significant non-bank competitor in this sector. Despite the
continuing economic pressure faced by consumers and the concomitant strain on
many lending institutions, DiscoveryCard`s credit experience has improved
considerably and the quality of the client base provides opportunities for
additional value propositions to consumers. The period saw extensive focus on
ensuring a cutting-edge service offering for clients, and on positioning the
DiscoveryCard as a premier card offering. This drive will continue into the
future, with further innovation in this regard planned for the period ahead.
Discovery Invest
Discovery Invest`s performance was exceptional and exceeded expectation, with
the company generating its maiden profit in the second half of the financial
year. Discovery Invest operates in the retail long-term savings market, where,
despite lower volumes of business, margins are higher. In this context, gross
inflows increased by 109% to over R6bn with assets under management increasing
by 262% to R11bn. New business increased by 90% to R761bn on an annual premium
equivalent basis, with single premiums written during the period amounting to
R4.8bn.
The company generated an operating profit of R7m compared with an operating loss
of R119m during the previous period. Importantly, the take-up of Discovery
Invest`s products has been remarkable, with positive feedback from the
independent intermediary community. During the latest Financial Intermediaries`
Association survey, Discovery Invest achieved the highest scores in terms of
broker feedback across virtually every category - a reflection of the quality of
the business being built.
From a distribution perspective, Discovery Invest continues to gain traction
rapidly with the number of supporting brokers increasing during the period by
41% to over 2 500 brokerages. Of the top 1 000 supporting brokerages, 48% had
increased their Discovery Invest business written with a further 37% writing
Discovery Invest business for the first time.
With regard to profitability, the percentage of funds allocated to Discovery
Funds exceeded the premium-basis expectations, increasing Discovery Invest`s
profit margin as a percentage of premium from 2.5% to 2.8%.
The company continues to enhance its profile with initiatives such as the
Discovery Invest Leadership Summit and its links to Moneyweb. Based on the
increasing distribution support for Discovery Invest, its increasing brand
credibility and the positive response to its product offerings, the prospects
for continued growth and profitability are positive.
3. International operations
In the United Kingdom: PruHealth and PruProtect
Discovery`s strategy in South Africa of building quality business of scale with
significant integration capability is increasingly mirrored by our approach in
the UK, where we plan to leverage the wellness and integration foundation of
Vitality to offer enhanced health and protection offerings.
During the period, Discovery restructured its business to facilitate this
approach and significantly increased its shareholding in the UK joint venture
with Prudential plc from 50% to 75%, thereby boosting the scale and capability
of its business in the UK market. This was achieved by Discovery purchasing
Standard Life Healthcare and merging it into PruHealth, in return for a 25%
increase in its share of PruProtect and PruHealth.
PruHealth
PruHealth`s operating losses widened during the past financial year, exacerbated
by the economic recession, which has been shown to result in declining
membership and increasing loss ratios. In terms of PruHealth`s long-term
prospects, this was a period of significant restructuring of the business and
the implementation of a number of initiatives aimed at liberating the powerful
franchise built in the UK.
Although the short-term effect of the difficult macro-economic conditions has
been to decrease demand for private medical insurance, in the longer term it
presents a significant opportunity. This is because increased public debt and
budget deficits in the UK and the government`s austerity measures to address
these problems are likely to result in less public spending on the NHS.
Government expenditure on healthcare is unlikely to keep pace with increasing
healthcare costs, creating a greater need for privately funded healthcare.
To address the environmental and performance issues experienced and to ensure
PruHealth is positioned to capitalise on the market opportunities, a number of
key strategies were employed during the period:
1. PruHealth focused on attracting and retaining quality new business. Actuarial
estimates show the quality of new business was significantly enhanced as a
result.
2. During the previous financial year and the first six months of the reporting
period, work was done around Vitality and product features to bring down the
cost of benefits. These measures were put in place for policies renewing from 1
January 2010. The effects will therefore not be felt during the period under
review, but will materialise from the second half of the 2011 financial year.
3. During the period under review, certain operational functions were
incorporated into the South African operational environment leading to a
significant reduction in operational costs per life. The business also incurred
further restructuring costs that will position PruHealth for future operational
cost reductions. As above, the positive effects of this strategy will
materialise in the next 6 to 12 months.
4. Finally, PruHealth`s acquisition of Standard Life Healthcare - given the
quality of the business, its low loss ratios and established infrastructure -
presented an excellent opportunity for PruHealth to increase its scale. Standard
Life Healthcare offers many complementary assets to PruHealth and collectively,
the combination of the two creates a compelling new business. Standard Life`s
product strategy is based on modular ancillaries and the company focuses
strongly on service and distribution through agency and direct channels. These
strengths complement PruHealth`s Vitality and integration assets, product and
innovation capabilities and independent financial adviser distribution channel.
While Standard Life Healthcare`s distribution is weighted more towards the
individual market and smaller groups, PruHealth has attracted larger SMEs and
corporates. The result of combining the businesses is a complementary model and
expanded distribution footprint with the ability to yield substantial volumes of
new business. Importantly, increased scale also provides the opportunities for
expense economies and greater negotiation power with healthcare providers. The
acquisition has seen a significant and substantial transformation of the
PruHealth business from 226 000 lives to 700 000 lives.
While some of the effects of these strategies applied in the period are already
starting to filter through, the full benefits will only be realised in the next
18 to 24 months. As they come to fruition, PruHealth is expected to grow
significantly and, in the longer term, to achieve a margin of 4% to 5%.
PruProtect
PruProtect performed exceptionally well, exceeding expectation with the company
reducing its operating losses significantly and moving rapidly towards
profitability. New business increased by 116% to R227m and operating losses
were cut by 70% to R40m. Importantly, the rate of new business increased - the
average daily applications for the second half of the financial year amounted to
275 applications, compared to 200 applications received for the first six months
of the financial year and around 130 for the previous period.
During the period under review, PruProtect took a number of innovative products
to market - most notably the Health Cover Optimiser that extends Discovery`s
approach of integrating products. The Health Cover Optimiser combines
PruHealth`s private medical insurance cover with PruProtect`s severe illness
benefit and offers the savings from expense economies and benefit overlap to
policyholders. Although early in the product`s roll-out, the company is
optimistic about the potential growth of the first integrated product in the UK
market.
In China and the USA
Discovery in the period announced its acquisition of a 20% stake of Ping An
Health - the health subsidiary of China`s Ping An Group. The joint venture will
see Ping An Health deploy Discovery`s product innovation and consumer-engaged
model to a potential market of 83 million families. Given the ability for
Discovery to tap into Ping An`s brand credibility and distribution footprint,
and based on the Chinese government`s regulatory support of private healthcare,
the opportunity in China is compelling.
Discovery has also maintained a small US presence over the past three years,
where it markets the Vitality wellness programme as a standalone offering to
corporate firms and health insurers. This approach of strategic partnerships,
coupled with US regulatory reforms that place the emphasis on cost management
through wellness and prevention, create opportunities for Discovery to deploy
Vitality`s assets without requiring capital or incurring significant fixed
costs.
4. Prospects
The work done over the past financial year positions the Discovery Group
strongly for continued growth and profitability into the future.
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
Income statement
for the year ended 30 June 2010
R million Group Group %
2010 2009 change
Insurance premium revenue 7 860 5 186 52
Premium revenue from investment contracts 1 865 -
transferred to insurance contracts
Reinsurance premiums (1 172) (870) 35
Net insurance premium revenue 8 553 4 316
Fee income from administration business 3 380 2 885 17
Receipt arising from reinsurance contracts - 750
Investment income 239 236
Net realised gains on available-for-sale 200 65
financial assets
Net fair value gains/(losses) on financial 276 (9)
assets at fair value through profit or loss
Vitality income 1 182 944 25
Net income 13 830 9 187
Claims and policyholders` benefits (2 586) (2 583)
Insurance claims recovered from reinsurers 841 707
Net claims and policyholders` benefits (1 745) (1 876)
Acquisition costs (1 961) (1 313) 49
Marketing and administration expenses (4 807) (4 329) 11
Recovery of expenses from reinsurers 95 223 (57)
Transfer from assets/liabilities under (2 717) 106
insurance contracts
- change in assets arising from insurance 1 639 1 292
contracts
- change in liabilities arising from (4 291) (327)
insurance contracts
- change in liabilities arising from (65) (859)
reinsurance contracts
Fair value adjustment to liabilities under (175) (35)
investment contracts
Profit before impairment and BEE expenses 2 520 1 963 28
Impairment of financial instruments held as - (96)
available-for-sale
BEE expenses (6) (13)
Profit from operations 2 514 1 854 36
Finance costs (14) (16)
Foreign exchange loss (3) (23)
Share of loss from associate - (1)
Profit before tax 2 497 1 814 38
Income tax expense (782) (590) 33
Profit for the year 1 715 1 224 40
Profit attributable to:
- equity holders 1 717 1 212 42
- non-controlling interests (2) 12
1 715 1 224 40
Earnings per share for profit attributable
to the equity holders of the company during
the year (cents):
- basic 309.9 219.9 41
- diluted 308.7 219.3 41
Statement of comprehensive income
for the year ended 30 June 2010
R million Group Group %
2010 2009 change
Profit for the year 1 715 1 224 40
Other comprehensive income:
Change in available-for-sale financial 33 (187) 118
assets
- unrealised gains/(losses) 238 (253)
- capital gains tax on unrealised (33) 39
gains/losses
- realised gains transferred to profit or (200) (65)
loss
- capital gains tax on realised gains 28 9
- impairment transferred to profit or loss - 96
- capital gains tax on impairment - (13)
Currency translation differences (20) (55) 64
Cash flow hedges 12 43 (72)
- realised losses transferred to profit or 2 12
loss
- tax on realised losses - (2)
- unrealised gains 22 34
- tax on unrealised gains (12) (1)
Other comprehensive income for the year, net 25 (199) 113
of tax
Total comprehensive income for the year 1 740 1 025 70
Attributable to:
- equity holders 1 742 1 013 72
- non-controlling interests (2) 12
Total comprehensive income for the year 1 740 1 025 70
Headline earnings
for the year ended 30 June 2010
R million Group Group %
2010 2009 change
Headline earnings per share (cents):
- undiluted 278.8 224.7 24
- diluted 277.7 224.1 24
The reconciliation between earnings and
headline earnings is shown below:
Net profit attributable to equity 1 717 1 212
shareholders
Adjusted for:
- realised profit on available-for-sale (172) (56)
investments net of CGT
- impairment on available-for-sale - 82
investments net of CGT
Headline earnings 1 545 1 238 25
Weighted number of shares in issue (000`s) 554 117 551 043 1
Diluted weighted number of shares (000`s) 556 257 552 591 1
Statement of financial position
at 30 June 2010
R million Group Group
2010 2009
ASSETS
Assets arising from insurance contracts 7 076 5 449
Property and equipment 220 199
Investment property 19 20
Intangible assets including deferred acquisition 325 520
costs
Financial assets
- Equity securities 2 892 2 469
- Equity linked notes 2 861 693
- Debt securities 714 488
- Inflation linked securities 68 20
- Money market 1 453 958
- Derivatives 111 68
- Loans and receivables including insurance 1 885 1 846
receivables
Deferred income tax 303 239
Current income tax asset 101 83
Reinsurance contracts 121 142
Cash and cash equivalents 2 845 1 737
Total assets 20 994 14 931
EQUITY
Capital and reserves
Share capital and share premium 1 541 1 548
Other reserves 574 540
Retained earnings 6 267 4 925
Total equity 8 382 7 013
LIABILITIES
Liabilities arising from insurance contracts 6 198 1 778
Liabilities arising from reinsurance contracts 1 160 1 104
Financial liabilities
- Investment contracts at fair value through 1 544 2 161
profit or loss
- Borrowings at amortised cost 23 32
- Derivatives 12 12
Deferred income tax 1 849 1 402
Deferred revenue 75 86
Employee benefits 70 65
Trade and other payables 1 681 1 278
Total liabilities 12 612 7 918
Total equity and liabilities 20 994 14 931
Statement of cash flows
for the year ended 30 June 2010
R million Group Group
2010 2009
Cash flow from operating activities 1 630 1 211
Cash generated by operations 4 472 2 547
Policyholder net investments (2 988) (1 270)
Working capital changes 330 102
1 814 1 379
Dividends received 31 67
Interest received 226 216
Interest paid (14) (16)
Taxation paid (427) (435)
Cash flow from investing activities (105) (50)
Net disposals of financial assets 112 105
Purchase of equipment (127) (21)
Purchase of intangible assets (90) (134)
Cash flow from financing activities (396) (177)
Proceeds from issuance of ordinary shares 2 111
Dividends paid to equity holders (389) (278)
Non-controlling interests` share buy-back - (5)
Repayment of borrowings (9) (5)
Net increase in cash and cash equivalents 1 129 984
Cash and cash equivalents at beginning of year 1 737 812
Exchange losses on cash and cash equivalents (21) (59)
Cash and cash equivalents at end of year 2 845 1 737
Statement of changes in equity
for the year ended 30 June 2010
Attributable to equity holders of the
Company
R million Share Share- Revalua-
capital based tion
and payment reserve*
share reserve
premium
Year ended 30 June 2009
At beginning of year 1 468 289 299
Profit for the year - - -
Other comprehensive income - - (187)
Total comprehensive income for the - - (187)
year
Transactions with owners:
Increase in treasury shares (23) - -
Non-controlling interest share buy- - - -
back
Realised profit from non- - - -
controlling interest share buy-
back
Employee share option schemes:
- Proceeds from shares issued 103 - -
- Value of employee services - 18 -
Dividends paid to equity holders - - -
Total transactions with owners 80 18 -
At end of year 1 548 307 112
Year ended 30 June 2010
At beginning of year 1 548 307 112
Profit for the year - - -
Other comprehensive income - - 33
Total comprehensive income for the - - 33
year
Transactions with owners:
Increase in treasury shares (13) - -
Non-controlling interest share - - -
issues
Realised gains from treasury 6 - -
shares
Employee share option schemes:
- Value of employee services - 9 -
Dividends paid to equity holders - - -
Total transactions with owners (7) 9 -
At end of year 1 541 316 145
Attributable to equity holders of
the Company
R million Trans- Hedging Retained Total
lation reserve earnings
reserve
Year ended 30 June 2009
At beginning of year 151 (18) 3 975 6 164
Profit for the year - - 1 212 1 212
Other comprehensive income (55) 43 - (199)
Total comprehensive income for the (55) 43 1 212 1 013
year
Transactions with owners:
Increase in treasury shares - - - (23)
Non-controlling interest share buy- - - - -
back
Realised profit from non- - - 7 7
controlling interest share buy-
back
Employee share option schemes:
- Proceeds from shares issued - - - 103
- Value of employee services - - - 18
Dividends paid to equity holders - - (269) (269)
Total transactions with owners - - (262) (164)
At end of year 96 25 4 925 7 013
Year ended 30 June 2010
At beginning of year 96 25 4 925 7 013
Profit for the year - - 1 717 1 717
Other comprehensive income (20) 12 - 25
Total comprehensive income for the (20) 12 1 717 1 742
year
Transactions with owners:
Increase in treasury shares - - - (13)
Non-controlling interest share - - - -
issues
Realised gains from treasury - - - 6
shares
Employee share option schemes:
- Value of employee services - - - 9
Dividends paid to equity holders - - (375) (375)
Total transactions with owners - - (375) (373)
At end of year 76 37 6 267 8 382
R million Non- Total
con-
trolling
interests
Year ended 30 June 2009
At beginning of year - 6 164
Profit for the year 12 1 224
Other comprehensive income - (199)
Total comprehensive income for the year 12 1 025
Transactions with owners:
Increase in treasury shares - (23)
Non-controlling interest share buy-back (12) (12)
Realised profit from non-controlling interest - 7
share buy-back
Employee share option schemes:
- Proceeds from shares issued - 103
- Value of employee services - 18
Dividends paid to equity holders - (269)
Total transactions with owners (12) (176)
At end of year - 7 013
Year ended 30 June 2010
At beginning of year - 7 013
Profit for the year (2) 1 715
Other comprehensive income - 25
Total comprehensive income for the year (2) 1 740
Transactions with owners:
Increase in treasury shares - (13)
Non-controlling interest share issues 2 2
Realised gains from treasury shares - 6
Employee share option schemes:
- Value of employee services - 9
Dividends paid to equity holders - (375)
Total transactions with owners 2 (371)
At end of year - 8 382
* This reserve relates to the revaluation of available-for-sale financial
assets.
Segmental information
for the year ended 30 June
R million SA SA SA SA
Health Life Invest Vitality
30 June 2010
Income statement
Insurance premium revenue 29 4 310 2 848 -
Premium revenue for
investment contracts
transferred to insurance
contracts - - 1 865 -
Reinsurance premiums (2) (870) - -
Net insurance premium revenue
27 3 440 4 713 -
Fee income from
administration business 3 114 95 104 44
Investment income 26 56 116 16
Net realised gains on
available-for-sale financial
assets - 200 - -
Net fair value gains on
financial assets at fair
value through profit or loss
- 67 209 -
Vitality income - - - 1 102
Net income 3 167 3 858 5 142 1 162
Claims and policyholders`
benefits (14) (1 816) (200) -
Insurance claims recovered
from reinsurers 1 562 - -
Net claims and policyholders`
benefits (13) (1 254) (200) -
Acquisition costs - (1 201) (449) (64)
Marketing and administration (1 928) (1 026) (152) (1 072)
expenses
Recovery of expenses from - - - -
reinsurers
Transfer from
assets/liabilities under
insurance contracts
- change in assets arising - 1 479 (2) -
from insurance contracts
- change in liabilities - (131) (4 162) -
arising from insurance
contracts
- change in liabilities
arising from reinsurance
contracts - (78) - -
Fair value adjustment to - (5) (170) -
liabilities under investment
contracts
Profit/(loss) before BEE 1 226 1 642 7 26
expenses
BEE expenses (5) (1) - -
Profit/(loss) from operations 1 221 1 641 7 26
Finance costs (1) - - -
Foreign exchange loss (1) (2) - -
Profit/(loss) before tax 1 219 1 639 7 26
Income tax expense (343) (416) (2) (6)
Profit/(loss) for the year 876 1 223 5 20
30 June 2009
Income statement
Insurance premium revenue 25 4 001 217 -
Reinsurance premiums (2) (730) - -
Net insurance premium revenue 23 3 271 217 -
Fee income from 2 747 57 44 29
administration business
Receipt arising from - 750 - -
reinsurance contract
Investment income 31 144 16 14
Net realised gains on - 65 - -
available-for-sale financial
assets
Net fair value gains/(losses) - (76) 67 -
on financial assets at fair
value through profit or loss
Vitality income - - - 907
Net income 2 801 4 211 344 950
Claims and policyholders` (10) (1 673) (6) -
benefits
Insurance claims recovered 1 638 - -
from reinsurers
Net claims and policyholders` (9) (1 035) (6) -
benefits
Acquisition costs - (1 060) (36) (58)
Marketing and administration (1 688) (899) (151) (837)
expenses
Recovery of expenses from - - - -
reinsurers
Transfer from
assets/liabilities under
insurance contracts
- change in assets arising - 1 407 (198) -
from insurance contracts
- change in liabilities - (479) - -
arising from insurance
contracts
- change in liabilities - (788) - -
arising from reinsurance
contracts
Fair value adjustment to - 36 (71) -
liabilities under investment
contracts
Profit/(loss) before BEE 1 104 1 393 (118) 55
expenses
BEE expenses (11) (2) - -
Impairment on financial - (96) - -
instruments held as available-
for-sale
Profit/(loss) from operations 1 093 1 295 (118) 55
Finance costs (1) - (1) -
Foreign exchange loss (20) (3) - -
Share of loss from associate - - - -
Profit/(loss) before tax 1 072 1 292 (119) 55
Income tax expense (300) (337) 33 (15)
Profit/(loss) for the year 772 955 (86) 40
R million UK UK USA
Health Life Health
30 June 2010
Income statement
Insurance premium revenue 587 85 1
Premium revenue for investment contracts - - -
transferred to insurance contracts
Reinsurance premiums (276) (24) -
Net insurance premium revenue 311 61 1
Fee income from administration business 2 8 -
Investment income - 1 -
Net realised gains on available-for-sale - - -
financial assets
Net fair value gains on financial assets at - - -
fair value through profit or loss
Vitality income 50 - -
Net income 363 70 1
Claims and policyholders` benefits (513) (9) (34)
Insurance claims recovered from reinsurers 270 7 1
Net claims and policyholders` benefits (243) (2) (33)
Acquisition costs (53) (169) -
Marketing and administration expenses (278) (114) (29)
Recovery of expenses from reinsurers 95 - -
Transfer from assets/liabilities under
insurance contracts
- change in assets arising from insurance - 162 -
contracts
- change in liabilities arising from (32) - 34
insurance contracts
- change in liabilities arising from - 13 -
reinsurance contracts
Fair value adjustment to liabilities under - - -
investment contracts
Profit/(loss) before BEE expenses (148) (40) (27)
BEE expenses - - -
Profit/(loss) from operations (148) (40) (27)
Finance costs (5) - (1)
Foreign exchange loss - - -
Profit/(loss) before tax (153) (40) (28)
Income tax expense 10 11 -
Profit/(loss) for the year (143) (29) (28)
30 June 2009
Income statement
Insurance premium revenue 679 30 234
Reinsurance premiums (115) (12) (11)
Net insurance premium revenue 564 18 223
Fee income from administration business 4 - -
Receipt arising from reinsurance contract - - -
Investment income 6 3 1
Net realised gains on available-for-sale - - -
financial assets
Net fair value gains/(losses) on financial - - -
assets at fair value through profit or loss
Vitality income - - -
Net income 574 21 224
Claims and policyholders` benefits (515) (3) (376)
Insurance claims recovered from reinsurers 29 2 37
Net claims and policyholders` benefits (486) (1) (339)
Acquisition costs (52) (75) (10)
Marketing and administration expenses (371) (144) (54)
Recovery of expenses from reinsurers 188 35 -
Transfer from assets/liabilities under
insurance contracts
- change in assets arising from insurance - 83 -
contracts
- change in liabilities arising from 50 20 82
insurance contracts
- change in liabilities arising from - (71) -
reinsurance contracts
Fair value adjustment to liabilities under - - -
investment contracts
Profit/(loss) before BEE expenses (97) (132) (97)
BEE expenses - - -
Impairment on financial instruments held as - - -
available-for-sale
Profit/(loss) from operations (97) (132) (97)
Finance costs - (3) (2)
Foreign exchange loss - - -
Share of loss from associate - - -
Profit/(loss) before tax (97) (135) (99)
Income tax expense (10) 53 -
Profit/(loss) for the year (107) (82) (99)
R million New business All other Total
development segments
30 June 2010
Income statement
Insurance premium revenue - - 7 860
Premium revenue for investment contracts - - 1 865
transferred to insurance contracts
Reinsurance premiums - - (1 172)
Net insurance premium revenue - - 8 553
Fee income from administration business - 13 3 380
Investment income - 24 239
Net realised gains on available-for-sale - - 200
financial assets
Net fair value gains on financial assets - - 276
at fair value through profit or loss
Vitality income 30 - 1 182
Net income 30 37 13 830
Claims and policyholders` benefits - - (2 586)
Insurance claims recovered from - - 841
reinsurers
Net claims and policyholders` benefits - - (1 745)
Acquisition costs (25) - (1 961)
Marketing and administration expenses (180) (28) (4 807)
Recovery of expenses from reinsurers - - 95
Transfer from assets/liabilities under
insurance contracts
- change in assets arising from insurance - - 1 639
contracts
- change in liabilities arising from - - (4 291)
insurance contracts
- change in liabilities arising from - - (65)
reinsurance contracts
Fair value adjustment to liabilities - - (175)
under investment contracts
Profit/(loss) before BEE expenses (175) 9 2 520
BEE expenses - - (6)
Profit/(loss) from operations (175) 9 2 514
Finance costs - (7) (14)
Foreign exchange loss - - (3)
Profit/(loss) before tax (175) 2 2 497
Income tax expense 8 (44) (782)
Profit/(loss) for the year (167) (42) 1 715
30 June 2009
Income statement
Insurance premium revenue - - 5 186
Reinsurance premiums - - (870)
Net insurance premium revenue - - 4 316
Fee income from administration business - 4 2 885
Receipt arising from reinsurance contract - - 750
Investment income - 21 236
Net realised gains on available-for-sale - - 65
financial assets
Net fair value gains/(losses) on - - (9)
financial assets at fair value through
profit or loss
Vitality income 37 - 944
Net income 37 25 9 187
Claims and policyholders` benefits - - (2 583)
Insurance claims recovered from - - 707
reinsurers
Net claims and policyholders` benefits - - (1 876)
Acquisition costs (22) - (1 313)
Marketing and administration expenses (165) (20) (4 329)
Recovery of expenses from reinsurers - - 223
Transfer from assets/liabilities under
insurance contracts
- change in assets arising from insurance - - 1 292
contracts
- change in liabilities arising from - - (327)
insurance contracts
- change in liabilities arising from - - (859)
reinsurance contracts
Fair value adjustment to liabilities - - (35)
under investment contracts
Profit/(loss) before BEE expenses (150) 5 1 963
BEE expenses - - (13)
Impairment on financial instruments held - - (96)
as available-for-sale
Profit/(loss) from operations (150) 5 1 854
Finance costs - (9) (16)
Foreign exchange loss - - (23)
Share of loss from associate - (1) (1)
Profit/(loss) before tax (150) (5) 1 814
Income tax expense 9 (23) (590)
Profit/(loss) for the year (141) (28) 1 224
Review of Group results
New business annualised premium income and gross inflows under management
include flows of the schemes Discovery administers and 100% of the business
conducted together with its joint venture partners.
New business annualised premium income excluding Destiny increased 32% for the
year ended 30 June 2010.
New business annualised premium income
R million June June %
2010 2009 Change
Discovery Health 4 502 3 039 48
Discovery Life 1 542 1 519 2
Discovery Invest 761 401 90
Discovery Vitality 177 163 9
PruHealth 409 559 (27)
PruProtect 227 105 116
New business API excluding Destiny 7 618 5 786 32
Destiny Health * 80
New business API of Group 7 618 5 866 30
*Amount is less than R500 000
New business API is calculated as 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.
Gross inflows under management increased 23% for the year ended 30 June 2010.
Gross inflows under management
R million June June %
2010 2009 Change
Discovery Health 28 101 23 853 18
Discovery Life 4 405 4 058 9
Discovery Invest 6 083 2 907 109
Discovery Vitality 1 176 936 26
Destiny Health 4 411
PruHealth 1 278 1 366 (6)
PruProtect 188 60 213
Gross inflows under management 41 235 33 591 23
Less: collected on behalf of third parties (28 813) (24 576) 17
Discovery Health (24 945) (21 077)
Discovery Invest (3 131) (2 646)
Destiny Health (3) (140)
PruHealth (639) (683)
PruProtect (95) (30)
Gross income of Group 12 422 9 015 38
LifeBooster benefit
In December 2009, the LifeBooster benefit was added to all Discovery Invest
Endowment Plans, Recurring RetirementPlans and Linked Retirement Income Plans.
The LifeBooster was added to existing and new policies. The LifeBooster
differentiates the Discovery Invest offering in an otherwise commoditised
environment by introducing a death benefit linked to Vitality status. Given that
significant insurance risk is introduced by this benefit the status of the
affected contracts change from Investment management contracts to Insurance
contracts under IFRS.
The policyholder liabilities relating to these Discovery Invest policies were
previously accounted for in terms of IAS 39: Financial instruments, as
Investment contracts at fair value through profit or loss. Insurance contracts
are accounted for under IFRS 4: Insurance contracts.
This had the following effect on the year-end results:
- Policyholder liabilities under investment contracts were reduced by R1.8
billion, being the value of the Investment contracts as at 30 November 2009.
- R1.8 billion was included in insurance premium income and then transferred to
liabilities arising from insurance contracts, in the income statement.
- Deferred acquisition costs and deferred revenue liability previously raised in
respect of the investment contracts were reversed to acquisition costs and fee
income respectively, and an asset under insurance contracts (negative reserve)
was raised in respect of the insurance contracts. The net effect on the income
statement is an increase in acquisition costs deferred of approximately R58
million (R46 million relates to contracts in-force at 30 June 2009).
Impairment of available-for-sale financial instruments
Discovery has classified its shareholder investments as available-for-sale
financial instruments. As such, gains and losses are ordinarily taken directly
to the statement of comprehensive income, until realised. When realised, the
resulting gain or loss is taken to profit and loss but excluded from the
calculation of headline earnings.
Due to the significant decrease in the equity markets during the last six months
of the 2008 calendar year, Discovery had to assess whether objective evidence
existed that the equity instruments classified as available-for-sale financial
assets were impaired at 30 June 2009. A significant or prolonged decline in the
fair value of an investment in an equity instrument below its cost is objective
evidence of impairment. Discovery has taken the view that a 30% decline in the
fair value of an investment in an equity instrument below cost would be
classified as significant and a period of nine months or more would be a
prolonged decline.
Based on this view, Discovery impaired equity instruments classified as
available-for-sale financial assets that had a decline of 30% or more in the
fair value of the asset below cost or has met the prolonged decline criteria.
This amounted to R96 million at 30 June 2009 and was taken through profit and
loss.
Subsequent to June 2009, the equity market has recovered somewhat and many of
the shares are above the June 2009 price. As noted previously, the adjustment
will be taken directly to the Statement of comprehensive income and will only be
realised in the income statement when the shares are sold. No further
impairments have been recorded in the income statement for the year ended 30
June 2010.
Share-based payments
The issue of 38.7 million shares by Discovery in terms of its BEE transaction in
2005 has been accounted for in terms of IFRS2. These shares are not accounted
for as issued in the consolidated accounts of Discovery but rather as a share
option transaction. These shares have been considered in the calculation of
diluted headline earnings per share and diluted earnings per share.
The BEE transaction has resulted in a charge to the income statement of R6
million in the year ended 30 June 2010 (2009: R13 million) in accordance with
the requirements of IFRS 2.
An additional R226 million (2009: R64 million) in respect of options granted
under share incentive schemes has been expensed in the income statement for the
year in accordance with the requirements of IFRS 2.
The Group entered into transactions to hedge its exposure in the phantom share
scheme related to changes in the Discovery share price. As at 30 June 2010,
approximately 50.8% (2009: 51.4%) of this exposure was hedged.
Reinsurance contracts
Discovery Life entered into reinsurance contracts in December 2008 and January
2010 to reinsure lapse risk of up to R1.1 billion and R0.6 billion respectively,
of the negative reserve. The term of each contract is for five years from
inception.
Taxation
All South African entities are in a tax paying position. South African income
tax has been provided at 28% (2009: 28%) and secondary tax on companies at 10%
in the financial statements and embedded value statements.
Discovery obtained tax relief for half of the PruHealth losses in respect of the
calendar year ending 31 December 2009, as this tax asset was ceded to Prudential
Assurance Company in the UK ("Prudential"). R10 million in respect of this tax
relief has been included in income tax at 30 June 2010.
For the year to 30 June 2009 however, Discovery obtained no tax relief for the
PruHealth losses in respect of the calendar year ending 31 December 2008. As
Discovery recognised a tax benefit at 30 June 2008 in respect of these losses,
R10 million was reversed to income tax at 31 December 2008.
Tax relief is obtained for 100% of the PruProtect losses through Prudential.
Statement of financial position
Financial assets have increased due to the sale of Discovery Invest products.
The increase in the assets arising from insurance contracts of R1 588 million
(2009: R1 284 million) is as a result of profitable new business written by
Discovery Life.
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
temporary difference between the tax base and the accounting base.
At 30 June 2009, Destiny Health raised a Premium Deficiency Reserve of US$2.4
million (R21 million). This related to future losses that would be incurred on a
block of business due to an onerous contract. This reserve was included in
liabilities arising from insurance contracts and has been reversed in full in
the six months ending 31 December 2009.
Directorate
Mr Hylton Kallner was appointed as an executive director of the board of
Discovery with effect from 3 June 2010.
Mr Vhonani Mufamadi was appointed as a non-executive director to the board of
Discovery. Mr Mufamadi brings with him years of experience as an attorney and
consultant, and strong business acumen as a founding member of investment
company Muvoni Investment Holdings. Mr Mufamadi`s appointment as a director is
effective from 3 June 2010.
Dividend policy and capital
An interim dividend of 33 cents per share was paid on 23 March 2010.
The directors are of the view that the Discovery Group is adequately capitalised
at this time. On the statutory basis the capital adequacy requirements of
Discovery Life was R275 million (2009: R230 million) and was covered 8.0 times
(2009: 7.7 times).
Cash dividend declaration:
The board has declared a final dividend of 36 cents per share. The salient dates
are as follows:
- Last date to trade "cum" dividend Friday, 8 October 2010
- Date trading commences "ex" dividend Monday, 11 October 2010
- Record date Friday, 15 October 2010
- Date of payment Monday, 18 October 2010
Share certificates may not be dematerialised or rematerialised between Monday,
11 October 2010 and Friday, 15 October 2010, both days inclusive.
Subsequent events
Standard Life Healthcare
On 31 July 2010, Discovery acquired the entire share capital of Standard Life
Healthcare, a wholly-owned subsidiary of the Standard Life Group, for R1.56
billion (GBP138 million).
Discovery contributed Standard Life Healthcare to PruHealth as a capital
investment. This resulted in Discovery increasing its interest in both PruHealth
and PruProtect from 50% to 75%.
Ping An
As announced on 24 August 2010, Discovery will acquire 20% of Ping An Health for
R210 million.
Accounting policies
The annual financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) including IAS 34, as well as
the South African Companies Act 61 of 1973, as amended, and are consistent with
the accounting policies applied in the annual report and the corresponding prior
year except as follows:
IAS 1 (Revised) Presentation of Financial Statements
The financial information set out herein incorporates changes introduced as a
result of the publication of a revised version of IAS 1 `Presentation of
Financial Statements`, effective for accounting periods commencing on or after 1
January 2009. The principal change is that an entity must present all non-owner
changes in equity in a statement of comprehensive income. All owner changes in
equity are recognised in a statement of changes in equity. There were no impacts
on the Group`s results or net assets as a result of the introduction of the
revised standard.
IFRS 8 Operating segments
The Group has prepared its Segmental information using IFRS 8 Operating
Segments, which requires the disclosure of information based on the "management
approach" to reporting on the financial performance of operating segments.
Generally, the information to be reported would be what management uses
internally for evaluating segment performance and deciding how to allocate
resources to operating segments.
Reclassifications of comparative segment information have been made to align to
the Group management reporting structure described above. There was no impact on
net profit or net assets.
Comparative figures
There have been no changes to comparative figures except for the disclosure
changes mentioned above.
Audit
The auditors, PricewaterhouseCoopers Inc., have issued their opinion on the
Group financial statements for the year ended 30 June 2010. A copy of the
auditors` unqualified report is available for inspection at the company`s
registered office.
Embedded value statement
for the year ended 30 June 2010
The embedded value of Discovery at 30 June 2010 consists of the following
components:
*?the free surplus attributed to the covered business at the valuation date;
*?plus: the required capital to support the in-force covered business at the
valuation date;
*?plus: the present value of future shareholder cash flows from the in-force
business;
*?less: the cost of required capital and secondary tax on companies ("STC").
The present value of future shareholder cash flows from the in-force covered
business is calculated as the value of projected future after-tax shareholder
cash flows of the business in force at the valuation date, discounted at the
risk discount rate.
The value of new business is the present value, at the point of sale, of the
projected future after-tax shareholder cash flows of the new business written by
Discovery, discounted at the risk discount rate, less an allowance for the
reserving strain (for Life), initial expenses, cost of capital and STC. The
value of new business is calculated using the current reporting date
assumptions.
For Life, the shareholder cash flows are based on the release of margins under
the Statutory Valuation Method ("SVM") basis.
The embedded value includes the insurance and administration profits of the
subsidiaries in the Discovery Holdings Group. In particular, it covers business
written through Discovery Life, Discovery Invest, Discovery Health, Discovery
Vitality and PruHealth. The values for PruHealth reflect Discovery`s 50%
shareholding in PruHealth at the valuation date. For the Vitality Group (USA)
and PruProtect, no published value has been placed on the current in-force
business.
The auditors, PricewaterhouseCoopers Inc., have reviewed the consolidated value
of in-force business and value of new business of Discovery Holdings Limited and
its subsidiaries as included in the embedded value statement for the year ended
30 June 2010. A copy of the auditors` unqualified report is available for
inspection at the company`s registered office.
Table 1: Group embedded value
R million 30 June 30 June %
2010 2009 change
Shareholders` funds 8 382 7 013 20
Adjustment to shareholders` funds from (4 883) (4 012)
published basis(1)
Adjusted net worth 3 499 3 001 17
- Free Surplus 2 440 2 096
- Required Capital(2) 1 059 905
Run-down costs for Destiny Health - (42)
Value of in-force covered business 19 996 17 939
before cost of capital
Cost of required capital (351) (327)
Cost of STC(3) (586) (531)
Discovery Holdings embedded value 22 558 20 040 13
Number of shares (millions) 553.9 553.6
Embedded value per share R40.72 R36.20 12
Diluted number of shares (millions) 591.3 591.3
Diluted embedded value per share(4) R40.31 R35.83 13
(1)?The published Shareholders` funds has been adjusted to eliminate net
assets under insurance contracts, deferred tax and deferred acquisition
costs at June 2010 of R4 858 million (June 2009: R3 984 million) in respect
of Life and R25 million (June 2009: R28 million) in respect of PruHealth.
(2)?The required capital at June 2010 for Life is R550 million (June 2009:
R460 million), for Health and Vitality is R395 million (June 2009: R333
million) and for PruHealth is R114 million (June 2009: R112 million). For
Life, the required capital was set equal to two times the statutory Capital
Adequacy Requirement ("CAR"). For Health and Vitality, the required capital
was set equal to two times the monthly renewal expense and Vitality benefit
cost. For PruHealth, the required capital was set equal to the statutory
requirement and was calculated as 18% of the annualised premium income.
(3)?In line with Discovery`s current dividend policy, the cost of STC is
calculated assuming a 4.5 times dividend cover on the after-tax profits as
they emerge over the projection term. An STC rate of 10% is assumed. The
total STC charge has been allocated between the different business entities
based on their contribution to the total value of in-force covered
business.
(4)?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
R million Value Cost of Cost of Value
before required STC after
cost of capital cost of
capital capital
and STC and STC
at 30 June 2010
Health and Vitality 9 896 (145) (289) 9 462
Life and Invest(1) 9 902 (174) (291) 9 437
PruHealth(2) 198 (32) (6) 160
Total 19 996 (351) (586) 19 059
at 30 June 2009
Health and Vitality 8 531 (115) (252) 8 164
Life and Invest(1) 9 118 (162) (270) 8 686
PruHealth(2) 290 (50) (9) 231
Total 17 939 (327) (531) 17 081
(1)?Included in the Life and Invest value of in-force covered business is
R226 million (June 2009: R172 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 PruHealth value of in-force has been converted using the closing
exchange rate of R11.48/GBP (June 2009: R12.71/GBP).
Table 3: Group embedded value earnings
R million Year ended
30 June 30 June
2010 2009
Embedded value at end of period 22 558 20 040
Less: Embedded value at beginning of period (20 040) (17 881)
Increase in embedded value 2 518 2 159
Net increase in capital 7 (80)
Dividends paid 375 269
Non-controlling share buy-back - 5
Shares issued to non-controlling interests (2) -
Transfer to hedging reserve (12) (43)
Embedded value earnings 2 886 2 310
Annualised return on opening embedded value 14.4% 12.9%
Table 4: Components of Group embedded value earnings
R million Net worth Cost of Value of Embedded
required in-force value
capital covered
business
less cost
of STC
Total profit from new (1 808) (57) 3 202 1 337
business (at point of sale)
Profit from existing business
*?Expected return 1 955 12 (56) 1 911
*?Change in methodology 872 6 (1 922) (1 044)
and assumptions(1)
*?Experience variances (25) 11 804 790
Other initiative costs(2) (206) - - (206)
Non-recurring expenses(3) (137) - - (137)
Acquisition costs(4) (8) - - (8)
Foreign exchange rate (16) 4 (25) (37)
movements
Cost of STC (37) - 1 (36)
Return on shareholders` 316 - - 316
funds(5)
Embedded value earnings 906 (24) 2 004 2 886
(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 5 below (for previous periods refer to previous embedded
value statements).
(2)?This item reflects the expenses relating to the acquisition of Standard
Life Healthcare, the investment in Ping An Health, the establishment of the
Vitality Group in the United States, PruProtect and Discovery Invest. These
costs have not been projected on a recurring basis in the embedded value due
to the fact that income from business sold under these initiatives has not
been projected or the costs are not expected to recur.
(3)?Non-recurring expenses include Group costs related to one-off marketing
events, professional fees and one-off costs related to the take-on of new
administration contracts in Discovery Health.
(4)?Acquisition costs relate to commission paid on Life business that has been
written over the period but that will only be activated and on risk after the
valuation date. These policies are not included in the embedded value or the
value of new business and therefore the costs are excluded.
(5)?Return on shareholders` funds is shown net of tax and management charges.
Table 5: Methodology and assumption changes
Health and Life and Invest PruHealth
Vitality
R million Net Value Net Value Net Value Total
worth of worth of worth of
in- in- in-
force force force
Modelling - - (6) (76) - - (82)
changes
Economic - (160) 4 (306) - 9 (453)
assumptions
Benefit - - (83) (85) - - (168)
enhancements
Lapse - 229 33 (228) - (106) (72)
assumption
(1)
Premium and - - 3 21 - - 24
benefit
increases
Mortality and - - (37) 18 - (83) (102)
morbidity
Expenses - 145 (20) (101) - - 24
Commission - - - - - 3 3
Tax - - - - - 15 15
Reinsurance - - 888 (1 018) 90 (71) (111)
(2)
Vitality - (131) - - - 9 (122)
Total - 83 782 (1 775) 90 (224) (1 044)
(1)?To allow for the potential impact of the economic climate on policyholder
lapses in Life, the June 2009 lapse assumption allowed for an increased lapse
rate for 24 months until June 2011. Although actual lapse experience has been
better than assumed, the term of the additional lapse assumption has been
extended to December 2011. The Life lapse assumption has further been
strengthened in areas where the improvement in experience has been slower than
expected.
For Health, the lapse assumption previously allowed for the probability of the
medical schemes administered by Discovery terminating their administration
contracts. The lapse assumption now allows only for the likelihood of
individuals and employer groups terminating their membership of the medical
schemes administered by Discovery.
(2)?The reinsurance item relates to the impact of the financing reinsurance
arrangements.
Table 6: Experience variances
Health and Life and PruHealth
Vitality Invest
R million Net Value Net Value Net Value Total
worth of worth of worth of
in- in- in-
force force force
Renewal expenses 11 - (28) - (6) (5) (28)
Economic 6 97 22 84 - - 209
assumptions(1)
Extended modelling - 219 - 12 - 28 259
term
Lapses and 29 357 (7) 54 - - 433
surrenders(2)
Policy alterations(3) - 2 (214) 85 - - (127)
Mortality and - - 132 9 (29) (38) 74
morbidity
Backdated - - (21) - - - (21)
cancellations
Tax(4) (15) - 210 (115) (48) 10 42
Reinsurance - - (20) 15 16 - 11
Premium income - - 4 (47) - - (43)
Other 21 4 (62) 46 (26) (2) (19)
Total 52 679 16 143 (93) (7) 790
(1)?For Life and Invest, the economic assumptions variance relates primarily
to higher than expected premium and benefit increases due to higher than
expected inflation over the period. For Health and Vitality, it relates to the
inflation-linked administration and managed care fee increase in 2010 which
was higher than the long-term inflation assumption in the embedded value model
due to higher than expected inflation over the period.
(2)?The total Health and Vitality lapse experience variance of R386 million
consists of a positive variance of R112 million due to lower than expected
lapses and a positive variance of R274 million due to the net growth in
existing employer groups (i.e. R767 million in respect of members joining
existing employer groups during the period offset by an amount of negative
R493 million in respect of members leaving existing employer groups).
(3)?Policy alterations relate to changes to existing benefits at the request
of the policyholder.
(4)?The tax variance for Life and Invest arises due to a movement in the
deferred tax asset.
Table 7: Embedded value of new business
R million Year ended %
change
30 June 30 June
2010 2009
Health and Vitality
Present value of future profits from new 541 295
business at point of sale
Cost of required capital (18) (11)
Cost of STC (16) (9)
Present value of future profits from new 507 275 84
business at point of sale after cost of
required capital and STC
New business annualised premium income(1) 2 254 1 204 87
Life and Invest
Present value of future profits from new 879 863
business at point of sale(2)
Cost of required capital (33) (34)
Cost of STC (26) (23)
Present value of future profits from new 820 806 2
business at point of sale after cost of
required capital and STC
New business annualised premium income(3) 1 621 1 246 30
Annualised profit margin(4) 5.9% 7.7%
Annualised profit margin excluding Invest 8.4% 9.9%
Business
PruHealth
Present value of future profits from new 16 41
business at point of sale
Cost of required capital (6) (17)
Cost of STC (0) (1)
Present value of future profits from new 10 23 (57)
business at point of sale after cost of
required capital and STC
New business annualised premium income(5) 147 188 (22)
Annualised profit margin(4) 0.7% 0.9%
(1)?Health new business annualised premium income is the gross contribution to
the medical schemes. For embedded value purposes, Health new business is
defined as individuals and members of new employer groups, and includes
additions to first year business. There have been no changes to the definition
of new business since the previous valuation.
The new business annualised premium income shown above excludes premiums in
respect of members who join an existing employer after the first year, as well
as premiums in respect of new business written during the period but only
activated after 30 June 2010.
The total Health and Vitality new business annualised premium income written
over the period was R4 679 million (June 2009: R3 202 million).
(2)?Included in the Life and Invest value of new business is R22 million (June
2009: R58 million) in respect of investment management services provided on
off balance sheet investment business.
(3)?Life new business is defined as Life policies or Discovery Retirement
Optimiser policies which incepted during the reporting period and which are on
risk at the valuation date. Invest new business is defined as business where
at least one premium has been received and which has not been refunded after
receipt.
The new business annualised premium income of R1 621 million (June 2009: R1
246 million) (single premium APE: R480 million (June 2009: R198 million))
shown above excludes automatic premium increases and servicing increases in
respect of existing business. The total Life new business annualised premium
income written over the period, including both automatic premium increases of
R392 million (June 2009: R415 million) and servicing increases of R290 million
(June 2009: R259 million) was R2 303 million (June 2009: R1 920 million)
(single premium APE: R480 million (June 2009: R198 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 6 as experience variances and not
included as new business.
Risk business written prior to the valuation date allows certain Invest
business to be written at financially advantageous terms, the impact of which
has been recognized in the value of new business.
Term extensions on existing contracts are not included as new business.
(4)?The annualised profit margin is the value of new business expressed as a
percentage of the present value of future premiums.
(5)?PruHealth new business is defined as individuals and employer groups which
incepted during the reporting period. The new business annualised premium
income shown above has been adjusted to exclude premiums in respect of members
who join an existing employer group after the first month as well as premiums
in respect of new business written during the period but only activated after
30 June 2010. There have been no changes to the definition of new business
since the previous valuation.
Table 8: Embedded value economic
assumptions
30 June 30 June
2010 2009
Beta coefficient
South Africa 0.54 0.45
United Kingdom 0.54 0.45
Equity risk premium
South Africa 3.50 3.50
United Kingdom 4.00 4.00
Risk discount rate (%)
- Health and Vitality 10.89 10.575
- Life and Invest 10.89 10.575
- PruHealth 6.62 6.40
Rand/GB Pound Exchange Rate
Closing 11.48 12.71
Average 11.96 14.08
Medical inflation (%)
South Africa 8.00 8.00
United Kingdom 7.00 Current levels
reducing to
7.00% over
the projection
period
Expense inflation and CPI (%)
South Africa 5.00 5.00
United Kingdom 3.75 3.75
Pre-tax investment return (%)
South Africa - Cash 7.50 7.50
- Bonds 9.00 9.00
- Equity 12.50 12.50
United Kingdom - Risk free 3.96 4.10
Dividend cover ratio 4.5 times 4.5 times
Income tax rate (%)
South Africa 28.00 28.00
United Kingdom 28.00% 28.00
reducing to
24.00% in
April 2014
Projection term
- Health and Vitality 20 years 20 years
- Group Life 10 years 10 years
- PruHealth 20 years 20 years
Life mortality, morbidity and lapse assumptions were derived from internal
experience, where available, augmented by reinsurance and industry information.
An additional lapse rate is assumed over the next 18 months to allow for the
potential impact of the current economic climate on policyholder lapses.
The Health lapse assumptions were based on the results of recent experience
investigations. The lapse rate for the projection term after 10 years was set
above current experience. An additional lapse rate is assumed over the next 12
months to allow for the potential impact of the current economic climate on
lapses.
The PruHealth assumptions were derived from internal experience augmented by
industry information. Best estimate morbidity assumptions and forecast Vitality
costs allow for the impact of management actions. The lapse rate over the short-
term is assumed to be higher than the long-term expected lapse rate to allow for
the impact of the current economic climate on lapses.
Renewal expense assumptions were based on the results of the latest expense and
budget information.
The initial expenses included in the calculation of the value of new business
are the actual costs incurred, except for Invest business where the initial
expenses are based on medium term expectations which are lower than the current
total costs. This reflects a realistic position for Invest.
The 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.
It is assumed that, for the purposes of calculating the cost of required
capital, the Life required capital amount will be backed by surplus assets
consisting of 100% equities and the Health, Vitality and PruHealth required
capital amounts will be fully backed by cash. Allowance has been made for tax
and investment expenses in the calculation of the cost of capital. In
calculating the capital gains tax ("CGT") liability, it is assumed that the
portfolio is realised every 5 years. The Life cost of capital is calculated
using the difference between the gross of tax equity return and the equity
return net of tax and expenses. The Health and PruHealth cost of capital is
calculated using the difference between the risk discount rate and the net of
tax cash return.
Sensitivity to the embedded value assumptions
The embedded value has been calculated in accordance with the Actuarial Society
of South Africa`s Professional Guidance Note PGN 107: Embedded Value Reporting.
The updated guidance note was applied for the first time in December 2008. The
risk discount rate, calculated in accordance with the updated guidance note,
uses the CAPM approach with specific reference to the Discovery beta
coefficient. The Discovery beta coefficient reflects the historic performance of
the Discovery share price relative to the market and infers a lower allowance
for non-market related and non-financial risk. Previously, the potential cost of
these risks to shareholders was allowed for through a higher margin in the risk
discount rate. Investors may want to form their own view on an appropriate
allowance for the non-financial risks which have not been modelled explicitly.
The sensitivity of the embedded value and the value of new business at 30 June
2010 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
R million Ad- Health and Vitality Life
justed
net
worth
Value Cost of Cost Value Cost of Cost
of in- capital of of in- capital of
force STC force STC
Base 3 499 9 896 (145) (289) 9 902 (174) (291)
Impact of:
Risk discount 3 499 9 339 (161) (260) 8 858 (154) (249)
rate + 1%
Risk discount 3 499 10 513 (126) (325) 11 179 (199) (348)
rate - 1%
Lapses - 10% 3 499 10 255 (152) (296) 10 874 (190) (318)
Interest 3 499 9 864 (138) (307) 10 328 (182) (324)
rates - 1%(1)
Equity and 3 362 9 896 (145) (289) 9 842 (174) (289)
property
market value
- 10%
Equity and 3 499 9 896 (145) (272) 9 923 (163) (268)
property
return + 1%
Renewal 3 499 10 833 (134) (315) 10 031 (174) (294)
expenses - 10%
Mortality and 3 499 9 896 (145) (286) 10 605 (174) (309)
morbidity - 5%
Health, Vitality 3 499 9 999 (146) (291) 9 902 (174) (291)
and PruHealth:
Projection term
+ 1 year
R million PruHealth
Value Cost of Cost Em- %
of in- capital of bedded change
force STC value
Base 198 (32) (6) 22 558
Impact of:
Risk discount 159 (40) (4) 20 987 (7)
rate + 1%
Risk discount 243 (21) (8) 24 407 8
rate - 1%
Lapses - 10% 259 (34) (8) 23 889 6
Interest 174 (32) (4) 22 878 1
rates - 1%(1)
Equity and 198 (32) (6) 22 363 (1)
property
market value
- 10%
Equity and 198 (32) (6) 22 630 0
property
return + 1%
Renewal 225 (32) (6) 23 633 5
expenses - 10%
Mortality and 440 (32) (17) 23 477 4
morbidity - 5%
Health, Vitality 219 (33) (6) 22 678 1
and PruHealth:
Projection term
+ 1 year
(1)?All economic assumptions were reduced by 1%.
Table 10: Value of new business sensitivity
R million Health and Vitality Life
Value Cost of Cost Value Cost of Cost
of in- capital of of in- capital of
force STC force STC
Base 541 (18) (16) 879 (33) (26)
Impact of:
Risk discount rate 498 (20) (14) 673 (29) (22)
+ 1%
Risk discount rate 590 (16) (18) 1 125 (37) (31)
- 1%
Lapses - 10% 571 (19) (16) 1 062 (36) (28)
Interest rates - 539 (18) (17) 980 (34) (29)
1%(1)
Equity and 541 (18) (15) 884 (31) (24)
property return
+ 1%
Renewal expense - 640 (17) (19) 907 (33) (26)
10%
Mortality and 541 (18) (16) 1 003 (33) (27)
morbidity - 5%
Health, Vitality 549 (18) (16) 879 (33) (26)
and PruHealth:
Projection term
+ 1 year
Acquisition costs 553 (18) (16) 952 (33) (21)
- 10%
R million PruHealth
Value Cost of Cost Value %
of in- capital of of new change
force STC business
Base 16 (6) (0) 1 337
Impact of:
Risk discount rate 9 (8) (0) 1 087 (19)
+ 1%
Risk discount rate 25 (4) (1) 1 633 22
- 1%
Lapses - 10% 27 (7) (1) 1 553 16
Interest rates - 12 (6) (0) 1 427 7
1%(1)
Equity and property 16 (6) (0) 1 347 1
return + 1%
Renewal expense - 22 (6) (1) 1 467 10
10%
Mortality and 61 (6) (2) 1 503 12
morbidity - 5%
Health, Vitality 20 (6) (1) 1 348 1
and PruHealth:
Projection term + 1
year
Acquisition costs - 21 (6) (1) 1 431 7
10%
(1)?All economic assumptions were reduced by 1%.
Transfer secretariesComputershare Investor Services (Pty)?(Registration number
2004/003647/07)? Ground Floor, 70 Marshall Street,?Limited PO Box 61051,
Marshalltown 2107 Johannesburg 2001
Sponsors
Rand Merchant Bank (A division of FirstRand Bank Limited)
Secretary and registered office
MJ Botha, Discovery Holdings Limited, 155 West Street, Sandton 2146 Fax:?PO Box
786722, Sandton 2146?1999/007789/06) Tel: (011) 529 2888?(011) 529 2958
Directors
MI Hilkowitz (Chairperson), A Gore* (Chief Executive Officer), Dr BA Brink, P
Cooper, SB Epstein (USA), R Farber*, HD Kallner*#, NS Koopowitz*, Dr TV Maphai,
HP A Pollard*,?Mayers*, V Mufamadi#, AL Owen (UK), JM Robertson* (CIO), SE
Sebotsa, T Slabbert, B Swartzberg*, SV Zilwa #Appointed *Executive?3 June 2010
Date: 02/09/2010 10:00:01 Produced by the JSE SENS Department.
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