Wrap Text
Unaudited interim results and cash dividend declaration for the six months ended 31 December 2017
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
JSE bond code: DSY01 ISIN: ZAG000148362
JSE bond code: DSY02 ISIN: ZAG000148347
JSE bond code: DSY03 ISIN: ZAG000148354
Unaudited interim results and cash dividend declaration
for the six months ended 31 December 2017
Normalised profit from operations
up 19% to R4 059 million
Core new business annualised premium income (API)
up 16% to R9 303 million
Embedded value
up 13% to R60.4 Billion
Transfer secretaries
Computershare Investor Services Pty Limited
(Registration number 2004/003647/07)
Rosebank Towers, 15 Biermann Avenue, Rosebank 2196, PO Box 61051, Marshalltown 2107
Sponsors Rand Merchant Bank (A division of FirstRand Bank Limited)
Secretary and registered office MJ Botha, Discovery Limited
1 Discovery Place, Sandton 2146
PO Box 786722, Sandton 2146
Tel: (011) 529 2888
Fax: (011) 539 5503
Directors MI Hilkowitz (Chairperson), A Gore* (Chief Executive Officer), HL Bosman, Dr BA Brink, SE de Bruyn Sebotsa, R Enslin (USA), R Farber*, HD Kallner*, F Khanyile,
NS Koopowitz*, Dr TV Maphai, HP Mayers*, TT Mboweni, Dr A Ntsaluba*, AL Owen (UK), A Pollard*, JM Robertson*, B Swartzberg*, DM Viljoen* (Financial Director),
SV Zilwa
*Executive
Interim financial results
- prepared by L van Jaarsveldt CA(SA) and A Nel CA(SA)
- supervised by DM Viljoen CA(SA)
Embedded value statement
- prepared by M Curtis FASSA, FIA
- supervised by A Rayner FASSA, FIA
Commentary
Strong Group performance and acceleration towards 2018 Ambition
Discovery's performance over the six months ended 31 December 2017 exceeded expectation, enabling it to track strongly towards its stated 2018 Ambition.
Normalised operating profit increased by 19% to R4 059 million; normalised headline earnings increased by 30% to R2 829 million; and core new business Annualised
Premium Income (API) (which excludes Discovery Health's take-on of new closed medical schemes and gross revenue of Vitality Group) increased by 16% to R9 303
million. The Embedded Value grew by 13% on an annualised basis to R60.4 billion.
Over the period, the Group continued to make substantive progress against all three Ambition criteria:
1) Financial and social impact, targeting R10 billion in normalised profit from operations, with growth of CPI + 10%; return on capital of risk-free + 10%; and making 10
million people around the world healthier.
2) A unique foundation, comprising a sophisticated data and science capability; an aspirational global Vitality brand; exceptional talent, particularly in terms of critical
skills; and an entrenched values-based culture.
3) Brilliant businesses that are 1) insurgent in their markets; 2) offer sustainable products that meet complex consumer needs; 3) generate excellent member
engagement; 4) deliver superior actuarial dynamics; and 5) offer an exceptional service ecosystem.
In terms of financial impact, the Group surpassed its growth methodology targets. The established businesses delivered combined growth in operating profit of 15%
- well above the guidance of CPI + 5%; the emerging businesses exceeded their target of CPI + 30%, and 8% of earnings was invested in new initiatives, including
Discovery Bank, Umbrella Funds, Vitality Invest, and Discovery Insure Commercial Insurance - all of which are within budget and on track for launch in 2018.
The Group also continued to meet the requirements of its capital allocation model in terms of solvency capital, allocated capital, and maintaining an above-guidance
buffer of R2.5 billion as at 31 December 2017. During the period, Discovery came to market for its inaugural Domestic Medium Term Note issuance to diversify its
funding sources, and this was oversubscribed. The Financial Leverage Ratio (FLR) as at 31 December 2017 was 26.5%, remaining below the limit of 28%.
The third tier of Discovery's operating model is its cash management approach. The Group generated R6.1 billion in cash, and after payment of tax, dividends and
interest on debt, invested R3.8 billion in new business and R1.1 billion in new initiatives. Both these investments meet the criteria of risk-free + 10%, validating the
approach to continue to invest significantly without breaching the FLR or cash buffer.
The above financial performance illustrates how the 2018 Ambition has been instrumental in framing and driving financial outcomes and scale since 2013. During the
currency of the Ambition, sizeable businesses (Discovery Invest, VitalityLife and VitalityHealth) moved into the established category; high-potential businesses (Discovery
Insure, Ping An Health and Vitality Group) became emerging; and ongoing investment took place in new ventures to ensure a pipeline for future growth.
Discovery's unique foundation and Shared-Value Insurance model - the manifestation of its core purpose - continued to create competitive advantage across markets,
in spite of economic complexity and volatility. Considerable investment took place through the Global Vitality Network (GVN), ensuring repeatability and scalability
across adjacencies and geographies. Among the GVN's activities and initiatives, three notable developments include:
Firstly, from an architecture perspective, progress was made towards a universal behavioural platform through a common status and points currency that manifests in
a simple, digital user journey based on Active Rewards. This is being powered by a configurable global technology platform - Vitality One - currently tracking over 1 000
activities and 50 biometric readings every minute.
Secondly, Vitality Active Rewards with Apple Watch continued to exemplify Discovery's sophisticated data and science asset, leveraging the Group's two decades of
expertise in behaviour change to drive powerful changes in risk and lifestyle. Vitality members using the Apple Watch benefit across SA, the UK and the US have shown
consistent and sustained increases in engagement and behaviour change (35% - 100% more active following take-up of benefit; 22% - 63% more active in the long run).
Thirdly, as an evolution of its healthy ageing agenda, Discovery completed work to quantify the most influential interventions that extend life and quality of life at older
ages, and this is being consolidated into a sophisticated wellness product. In addition, these insights are being used to shape a retirement planning proposition
incorporating financial security and wellness; with learnings being applied to Vitality Invest's impending launch in the UK.
Finally, the businesses continued to make progress against their Group-set performance measures.
Performance of established businesses
Discovery Health
Discovery Health delivered excellent results for the period to 31 December 2017, with normalised operating profit increasing by 12% to R1 332 million; new business
API increasing by 10% to R3 324 million (excluding take-on of new closed schemes); and lives under management reaching 3.44 million. Discovery Health Medical
Scheme (DHMS) also performed excellently, announcing a highly-competitive contribution increase of 7.9%.
Discovery Health's ongoing investment in risk management assets and systems ensured that DHMS ended the calendar year with a surplus of R2.45 billion, taking
solvency to 27.45% of gross contributions - well above the statutory level of 25%. DHMS is now in the strongest financial position in its history, with membership of 2.78
million lives at year-end. Discovery Health is also creating ongoing value for its schemes - in 2016 alone, Discovery Health saved DHMS R6.2 billion through its managed
care initiatives and Vitality programme, equating to 14% savings in risk claims.
Over the period, Discovery Health continued to grow its restricted medical scheme client base, now at 18 with over 660 000 lives under management. Immediately
following the review period, Discovery Health was awarded the tender for BP Medical Aid Society, to be administered by DH from 1 July 2018.
Discovery Health has made significant investments in initiatives aimed at maintaining and improving the quality of care, including programmes tailored to members
with diabetes, heart disease, kidney failure and those undergoing joint replacement surgery - all with demonstrative outcomes. In addition, Discovery Health's
investment in technology and expertise to address medical scheme fraud led to recoveries of over R538 million for its client medical schemes during the 2017 calendar
year. The business also made significant new investments in big data analytics and artificial intelligence capabilities.
Finally, several innovative changes were developed for the 2018 DHMS and Discovery Health launch. These included benefit changes to enhance cover for young
families; extending the Vitality programme to lower-income segments; and introducing a fully-integrated corporate health offering.
Discovery Health maintains its strong support for the objectives of the proposed National Health Insurance (NHI), and continues to work closely with the National
Department of Health and other stakeholders to ensure optimal outcomes of the NHI policy process. Discovery Health also continues to participate actively in the
processes of the Health Market Inquiry of the Competition Commission, which is expected to report its findings in the latter half of 2018.
Discovery Life
Over the period, Discovery Life continued to utilise the Shared-Value Insurance model to maintain its market-leading position. New business API increased by 6% to R1
121 million and earnings increased by 4% to R1 839 million, despite the impact of claims volatility. Market share increased to 27.5%(1) in the retail affluent protection
segment, while the value of new business grew by 11%, reflecting a continued focus on quality of new business.
The second quarter of the financial year saw a rapid acceleration in new business, driven by the annual product launch, with Individual new business increasing by 7%
compared with the same quarter in the prior year. The launch of the new Global Education Protector, Vitality Purple and the Purple Plan range has been very well
received. Annual premiums collected exceeded R10 billion for the first time.
The higher-than-expected claims experience was due primarily to a small, but increased, number of large non-natural deaths and claims. Apart from this, the business
delivered positive experience variances across both expenses and lapses, with policy lapses at 87% of expectation, emphasising the value of integration.
The clinical refinement of the Vitality points structure, which was accelerated over the period, has resulted in strong health behaviour change, as clients strive to
maintain their integration benefits (PayBacks of R511 million were paid to policyholders) - demonstrating the efficacy of the Shared-Value Insurance model. This is
further validated by an independent reinsurance report showing a distinction between Discovery Life's population and the rest of the industry.
Discovery Life remains well-capitalised at 3.8x CAR and generated cash of R1.9 billion (including Discovery Invest) from the inforce book over the period (before
reinsurance and acquisition-related costs). It invested the majority of this in new business growth, ending in a net cash generation of R354 million.
1 NMG Life Insurance New Sales Report Q1-Q4 2017.
Discovery Invest
The business performed strongly over the period. While new business decreased by 5%, reflecting an environment of weakened inflows, Discovery Invest's net flows
grew by 20% to R3.3 billion. Its gross LISP flows market share increased from 4.3% to 5.2% for the six months compared to the same prior period. Operating profit grew
29% to R419 million, driven by growth in assets under administration of 22% to R77.8 billion, with 77% of linked funds in Discovery funds, and an improvement in the
value of new business since June 2017.
The Discovery Balanced Fund continued to perform well and remains in the top 10 retail flow taking SA Unit Trusts in each quarter for the past two years. In the
PlexCrown Ratings, a widely-quoted unit trust rating agency in SA, Discovery Invest climbed from 12th to 4th place (out of 17) in the final quarter of 2017 - Discovery's
highest rating to date.
The recent product launch saw the introduction of investment offerings tailored to specific client segments. This included a more accessible product for younger clients;
an enhanced offering for clients who reinvest their Discovery Life cash back; and a Purple range with unique benefits targeted to high net worth clients.
Discovery Card
The Discovery Card business exceeded expectation. Profits for the Discovery Card JV with FNB grew by 16% to R207 million and revenue increased by 7% to R500
million.
Discovery's credit card base is less sensitive to negative market conditions due to a substantially better risk profile. The credit loss ratio to advances was 1.5% compared
to the market average of 6% for tier 1 credit providers. Over the period, turnover spend on the Discovery Card was up 4.6% and advances were up 3.8%.
Vitality UK
Discovery's UK business, comprising VitalityLife and VitalityHealth, continued to deliver robust results during the period under review. Combined new business sales
grew 6% to a record £61.0 million (R1 079 million); and operating profit grew 55% to £35 million (R616 million). Insured lives exceed one million members.
The UK business continued its strategic development, with significant investment made to enhance the resonance and reach of the Vitality brand; the adoption and
impact of Vitality; the relevance of the product construct to members given emerging risk profiles and needs; the move towards greater digitisation and use of
self-servicing channels; and to more extensively deliver the composite Discovery model in the UK.
Significant progress was made in each of these areas. Prompted brand awareness reached nearly 50%, accompanied by significant growth in business derived through
direct channels; and engagement in Vitality increased by 58% to over 30 million activities in the 2017 calendar year. The business launched Vitality Kids in partnership
with Disney, a new Healthy Mind component of Vitality, and new digital platforms. Finally, Vitality UK received regulatory approval for the launch of a long-term savings
business during 2018, which will leverage behavioural learnings from the UK, as well as the experience of Discovery Invest in South Africa.
VitalityLife
VitalityLife showed a resilient half-year performance with normalised operating profit increasing by 2% to £14.8 million - a positive result considering the low interest
rate environment and negative impact of higher-than-expected lapses. New business sales were £31.5 million, 4% lower than the comparative prior year volumes.
VitalityLife has reconfigured and priced its business for a low-interest-rate environment, with a focus on Term products and Vitality integration. As a result, sales
performance picked up strongly in the second quarter of the financial year.
The fundamentals of the VitalityLife business remained strong over the period, with claims ratios below expectation (both gross and net of reinsurance). The steady and
continued adoption of the Vitality Shared-Value Insurance model (Vitality-linked products comprise approximately 73% of new business), has been a key driver of the
increasing value of new business margin, which improved to 49% (compared with an H1 2017 margin of 36%). VitalityLife's continued product innovation saw a drive
towards more capital-efficient products with a focus on business mix.
VitalityHealth
VitalityHealth recorded an excellent half-year performance across new business, claims, loss ratio and operating profit. New business was 18% higher than the prior
period, at £29.5 million, with continued strong growth in the more profitable individual (+14%) and SME (+13%) markets. Operating profit of £20.1 million was up from
£8 million for the comparative period in the prior year, on the back of a continuing strong loss ratio and tight control of operating expenses. The business was also
strongly cash flow positive, generating £47.7 million of cash from the inforce book, relative to acquisition costs of £21.8 million, resulting in a net cash position of £25.9
million for the six months.
Notably, there was a significant improvement in the quality of business both written and retained. This was driven by greater sophistication in the application of the
value over volume approach; the impact of Vitality on member selection; and targeted retention strategies. In addition, claims performed well as a result of the
combined effect of the improved risk profile of new business; sophisticated care pathways that enhance member experience and quality of care, at reduced cost per
claim; and increased levels of wellness engagement that have resulted in a reduction in member risk across the book.
In addition, the business continued to invest in digital assets essential to achieving service ambitions, including sophisticated machine learning techniques in sales and
retention. These investments will ensure the business keeps up with changing member demands, removes barriers to engagement and creates cost efficiencies across
service operations.
Performance of emerging businesses
Discovery Insure
Discovery Insure delivered a profit of R29 million for the six months, with Gross Premium Income growing 30% to R1.3 billion, and new business increasing by 22% with
R495 million in API written in the period. The business is also growing at five times the rate of the South African short-term insurance industry growth rate.
The excellent performance over the period was driven by the continued progress of the Vitality Shared-Value Insurance model, as well as management efficiencies.
Premium income growth continued to exceed total claims plus expenses growth, leading to the strong emergence of operating profit.
Offering a competitive premium, telematics and exceptional rewards for good driving behaviour has resulted in: 1) selection of better risks; 2) behaviour change, with a
significant improvement in driver scores; 3) lower claims frequency and severity; and 4) selective lapsation, evidenced by a shift to higher driver scores over time. This
has culminated in a low loss ratio and appealing value of new business, leading to the existing Discovery Insure book (excluding the impact of new business) producing
R99 million in profit over the six months.
Discovery Insure has codified its model and data asset (with over 200 000 clients insured as at February 2018 and more than six billion kilometres of driving data). The
business is exploring the opportunity to extend the model into the commercial and fleet insurance market in 2018, as well as into international markets as an extension
of the Global Vitality Network.
Vitality Group
Vitality Group produced strong results, with significant growth in Insurance Partner Markets, and Vitality membership growing by 49% to over 1.7 million. The business
has broken even in its own right, with operating profit of $0.1 million, largely driven by new business growth of insurance partners and efficiencies gained from merging
the US and SA international operations. Vitality Group is also investing substantially in the Vitality One Platform, which will enable accelerated rollout of innovation
across the world.
The financial dynamics of Vitality Group involve a largely fixed cost base and rapidly-growing fee income from insurance partners (up 39% over the half-year). This gives
Discovery confidence that Vitality Group will reach its target of achieving R300 million to R500 million operating profit (including Ping An Health) in two to four years'
time.
There have been substantial efforts to develop partnerships with additional insurers in Latin America, Europe and Asia, under Vitality Group's partnership with
Hannover Re. There is a strong pipeline of insurers at different stages of the sales process. Vitality Group has already concluded one new partnership with a launch
planned before the end of FY2018, and aims to conclude another partnership in the same timeframe.
AIA Vitality
AIA had record sales with a profound increase in membership, which grew by 63%, and engagement in Vitality by 12%. Revenue from AIA integrated products increased
by 18% and some AIA markets now offer more than twice the number of integrated products compared to a year ago.
Generali
Generali continued to see strong sales, positive media reaction and high client engagement in Germany, France and Austria. Over the period Annualised Premium
Equivalent grew by 8%, total membership grew by 45%, and engagement grew by 5%. Substantial growth is expected following the January launch of Vitality to the
Deutsche Vermogensberatung network in Germany, which services six million clients.
John Hancock and Manulife
These businesses produced a strong result, with API growing 26% over the period; membership up 160%; and a notable increase in engagement after the launch of the
Apple Watch benefit.
Vitality USA
The corporate wellness business performed well during the period, contributing $1 million to Vitality Group profits. As Vitality USA continues to create value for US
employers by improving employee health promotion, it is also focused on expanding its future customer base beyond employers, by investigating opportunities to
serve other stakeholders interested in incentivising health and wellness behaviours among consumers.
Ping An Health
Ping An Health (PAH) continued to perform exceptionally over the six months, with membership growing by 60% from 1 July 2017. Discovery's interest in PAH is now
profitable, with operating profit of R36 million (an increase of 500%) for the period. This substantial growth was driven by the success of e-Sheng Bao (high deductible
health cover sold largely online), which contributed more than 68% of the R2 billion in new business volumes during the period. Ping An Health's distribution model
with the Ping An Group (PAG) is changing as PAH leverages its reinsurance licence to participate directly in sales, enabling it to access PAG's full distribution network.
This will result in higher new business strain as the reinsured book builds.
The opportunity in China is compelling, with private health insurance set to grow substantially given the underdeveloped market; favourable government policies; and
demographic trends, including an ageing society. Ping An Health is set to take advantage of this opportunity, with access to a massive distribution network throughout
Ping An, and a segmented product suite consisting of internet, Group high-end, and intermediate offerings. Ping An Health is also prioritising product development,
operations and technology capabilities, while PAG is investing heavily in broader healthcare assets, which will work in harmony with PAH. Discovery continues to
support PAH through its health insurance expertise.
Furthermore, PAH is growing its own distribution channels to sustain this rapid growth. In support of this, it opened two branches during the period, collectively
covering a population of almost 20 million people, with plans to open two additional branches during the first half of 2018.
Vitality continues to gain traction throughout Ping An. The membership of Vitality Active Rewards within Ping An Life passed the three-million-member mark within 14
months of launching. There are now more Vitality members in China than any country where Vitality is present.
New initiatives
Discovery Bank
On 16 October 2017, Discovery Bank was granted a banking licence from the Registrar of Banks in terms of the Banks Act, Act No. 94 of 1990 and the South African
Reserve Bank (SARB) subsequently published in the Government Gazette, on Friday 10 November 2017, the granting of a banking licence to Discovery Bank.
As previously announced, the licence is subject to certain conditions imposed by the Registrar relating to the shareholding in Discovery Bank. Shareholders of the Bank
are currently in discussions to agree how best to manage these conditions. The proposed purchase of the Discovery-branded FirstRand Bank-issued credit card
business and book is subject to Competition Commission approval. The outcome of the above-mentioned discussions may also potentially impact this approval.
Over the six-month period, management worked alongside regulators and industry associations to obtain the required licences and perform associated testing. The
support of these regulatory and industry bodies enabled Discovery Bank to build and demonstrate compliance in parallel with obtaining a bank licence. The alternative
would have required obtaining a licence and only thereafter being eligible to join the various fora and prove capability. This would have resulted in considerable extra
time and costs.
In addition to its banking licence, Discovery Bank has received the following licences/memberships:
- National Credit Act (NCA), which facilitates the advancement of credit to the public.
- SAMOS (South African Multiple Options Settlement), which allows Discovery Bank to settle transactions with other banks within South Africa; and enables it to be a
settlement bank from date of launch.
- SWIFT (Society of Worldwide Interbank Financial Telecommunication), which allows Discovery Bank to transact on the SAMOS systems with the SARB.
- PASA (Payments System of South Africa), reflecting that the business is able to conform to the rules and conventions necessary to process specified payments, e.g.
EFT transactions, debit orders.
- Visa Principal Issuer licence, with Discovery Bank receiving its globally unique six-digit BIN-number for both credit and debit cards.
- 'Restricted Authorised Dealer in Foreign Exchange' granted by the Financial Surveillance Department of the SARB Exchange Control.
Discovery Bank is testing its capabilities with live testing of system infrastructure, operating processes and regulatory engagement. Discovery will launch its proposed
banking offering to the public during 2018. Spend to date is R1.2 billion and this is expected to reach R1.5 billion by launch.
Prospects for growth
Prospects for continued growth are compelling. Discovery's established businesses are all well positioned in their respective markets, its emerging businesses are
insurgent, and four substantial businesses will be launched during 2018. This gives the Group confidence of ongoing growth and performance into the future.
Any forecast financial information contained in this announcement has not been reviewed or reported on by the Group's external auditors.
On behalf of the Board
MI HILKOWITZ A GORE
Chairperson Group Chief Executive
Sandton
19 February 2018
Statement of financial position
at 31 December 2017
Group Group
December June
2017 2017
R million Unaudited Audited
Assets
Assets arising from insurance contracts 39 687 37 691
Property and equipment 3 967 1 210
Intangible assets including deferred acquisition costs 5 615 5 096
Goodwill 2 060 2 107
Investment in equity accounted investments 1 045 979
Financial assets
- Available-for-sale investments 7 565 7 298
- Investments at fair value through profit or loss 66 836 58 948
- Derivatives 876 392
- Loans and receivables including insurance receivables 7 117 6 470
Deferred income tax 1 819 1 337
Current income tax asset 27 34
Reinsurance contracts 278 263
Cash and cash equivalents 9 771 9 098
Total assets 146 663 130 923
Equity
Capital and reserves
Ordinary share capital and share premium 8 306 8 306
Perpetual preference share capital 779 779
Other reserves 244 346
Retained earnings 24 883 22 859
34 212 32 290
Non-controlling interest * *
Total equity 34 212 32 290
Liabilities
Liabilities arising from insurance contracts 57 813 52 477
Liabilities arising from reinsurance contracts 7 536 6 746
Financial liabilities
- Negative reserve funding 195 847
- Borrowings at amortised cost 12 429 8 524
- Investment contracts at fair value through profit or loss 17 108 14 867
- Derivatives 136 135
- Trade and other payables 8 783 7 369
Deferred income tax 7 757 6 963
Deferred revenue 293 291
Employee benefits 224 191
Current income tax liability 177 223
Total liabilities 112 451 98 633
Total equity and liabilities 146 663 130 923
* Amount is less than R500 000.
Income statement
for the six months ended 31 December 2017
Group Group Group
Six months Six months Year
ended ended ended
December December June
2017 2016 % 2017
R million Unaudited Unaudited change Audited
Insurance premium revenue 17 758 16 652 33 533
Reinsurance premiums (2 127) (1 949) (3 837)
Net insurance premium revenue 15 631 14 703 6 29 696
Fee income from administration business 4 477 4 002 8 372
Vitality income 2 199 2 129 4 267
Investment income 446 392 758
- investment income earned on shareholder investments and cash 117 62 150
- investment income earned on assets backing policyholder liabilities 329 330 608
Net realised gains on available-for-sale financial assets 8 5 8
Net fair value gains on financial assets at fair value through profit or loss 4 806 172 2 108
Net income 27 567 21 403 29 45 209
Claims and policyholders' benefits (9 767) (9 388) (19 237)
Insurance claims recovered from reinsurers 1 366 1 436 2 816
Recapture of reinsurance - (882) (858)
Net claims and policyholders' benefits (8 401) (8 834) (17 279)
Acquisition costs (2 846) (2 703) (5 237)
Marketing and administration expenses (8 449) (7 707) (15 652)
Amortisation of intangibles from business combinations (63) (87) (171)
Recovery of expenses from reinsurers 1 237 1 999 2 985
Net transfer to/from assets and liabilities under insurance contracts (4 031) (987) (3 362)
- change in assets arising from insurance contracts 2 278 2 629 5 346
- change in assets arising from reinsurance contracts 21 (132) (109)
- change in liabilities arising from insurance contracts (5 442) (2 537) (6 625)
- change in liabilities arising from reinsurance contracts (888) (947) (1 974)
Fair value adjustment to liabilities under investment contracts (1 155) 165 (248)
Profit from operations 3 859 3 249 19 6 245
Finance costs (390) (232) (478)
Foreign exchange losses (17) (17) (21)
Share of net profits from equity accounted investments 82 16 26
Profit before tax 3 534 3 016 17 5 772
Income tax expense (837) (947) 12 (1 278)
Profit for the period 2 697 2 069 30 4 494
Profit attributable to:
- ordinary shareholders 2 656 2 028 31 4 411
- preference shareholders 41 41 83
- non-controlling interest * * *
2 697 2 069 30 4 494
Earnings per share for profit attributable to ordinary shareholders of the company during the
period (cents):
- undiluted 411.7 314.8 31 684.2
- diluted 411.5 314.4 31 683.6
* Amount is less than R500 000.
Statement of comprehensive income
for the six months ended 31 December 2017
Group Group Group
Six months Six months Year
ended ended ended
December December June
2017 2016 % 2017
R million Unaudited Unaudited change Audited
Profit for the period 2 697 2 069 30 4 494
Items that are or may be reclassified subsequently to profit or loss:
Change in available-for-sale financial assets 27 (7) 17
- unrealised gains/(losses) 54 (11) 32
- capital gains tax on unrealised (gains)/losses (21) 8 (9)
- realised gains transferred to profit or loss (8) (5) (8)
- capital gains tax on realised gains 2 1 2
Currency translation differences (315) (1 646) (1 575)
- unrealised losses (321) (1 657) (1 581)
- tax on unrealised losses 6 11 6
Cash flow hedges 205 (78) 33
- unrealised gains/(losses) 393 (7) 159
- tax on unrealised (gains)/losses (71) 2 (25)
- gains recycled to profit or loss (140) (86) (123)
- tax on recycled gains 23 13 22
Share of other comprehensive income from equity accounted investments (24) (41) (58)
- change in available-for-sale financial assets (4) (1) (1)
- currency translation differences (20) (40) (57)
Other comprehensive losses for the period, net of tax (107) (1 772) (1 583)
Total comprehensive income for the period 2 590 297 772 2 911
Attributable to:
- ordinary shareholders 2 549 256 896 2 828
- preference shareholders 41 41 83
- non-controlling interest * * *
Total comprehensive income for the period 2 590 297 772 2 911
* Amount is less than R500 000.
Headline earnings
for the six months ended 31 December 2017
Group Group Group
Six months Six months Year
ended ended ended
December December June
2017 2016 % 2017
R million Unaudited Unaudited change Audited
Normalised headline earnings per share (cents):
- undiluted 438.5 339.0 29 722.2
- diluted 438.3 338.6 29 721.5
Headline earnings per share (cents):
- undiluted 426.1 314.0 36 683.1
- diluted 425.8 313.7 36 682.5
The reconciliation between earnings and headline earnings is shown below:
Net profit attributable to ordinary shareholders 2 656 2 028 4 411
Adjusted for:
- gain on disposal of property and equipment net of tax - (1) (1)
- impairment of intangible assets net of tax 99 - -
- realised gains on available-for-sale financial assets net of CGT (6) (4) (6)
Headline earnings 2 749 2 023 36 4 404
- accrual of dividends payable to preference shareholders - (1) (1)
- amortisation of intangibles from business combinations net of deferred tax 55 78 154
- duplicate building costs 25 - -
- rebranding and business acquisitions expenses - 84 99
Normalised headline earnings 2 829 2 184 30 4 656
Weighted number of shares in issue (000's) 644 986 644 350 - 644 651
Diluted weighted number of shares (000's) 645 344 645 080 - 645 236
Statement of changes in equity
at 31 December 2017
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 (unaudited) premium capital reserve investments(1) reserve reserve earnings Total interest Total
Period ended 31 December 2017
At beginning of the period 8 306 779 314 180 (147) (1) 22 859 32 290 * 32 290
Total comprehensive income for the period - 41 - 23 (335) 205 2 656 2 590 * 2 590
Profit for the period - 41 - - - - 2 656 2 697 * 2 697
Other comprehensive income - - - 23 (335) 205 - (107) * (107)
Transactions with owners - (41) 5 - - - (632) (668) - (668)
Employee share option schemes:
- Value of employee services - - 5 - - - - 5 - 5
Dividends paid to preference shareholders - (41) - - - - - (41) - (41)
Dividends paid to ordinary shareholders - - - - - - (632) (632) - (632)
At end of the period 8 306 779 319 203 (482) 204 24 883 34 212 * 34 212
Period ended 31 December 2016
At beginning of the period 8 300 779 319 164 1 485 (34) 19 594 30 607 * 30 607
Total comprehensive income for the period - 41 - (8) (1 686) (78) 2 028 297 * 297
Profit for the period - 41 - - - - 2 028 2 069 * 2 069
Other comprehensive income - - - (8) (1 686) (78) - (1 772) * (1 772)
Transactions with owners 10 (41) 9 - - - (591) (613) - (613)
Increase in treasury shares (1) - - - - - - (1) - (1)
Delivery of treasury shares 11 - - - - - (11) - - -
Share buy-back * - - - - - - * - *
Employee share option schemes:
- Value of employee services - - 9 - - - - 9 - 9
Dividends paid to preference shareholders - (41) - - - - - (41) - (41)
Dividends paid to ordinary shareholders - - - - - - (580) (580) - (580)
At end of the period 8 310 779 328 156 (201) (112) 21 031 30 291 * 30 291
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 six months ended 31 December 2017
Group Group Group
Six months Six months Year
ended ended ended
December December June
2017 2016 2017
R million Unaudited Unaudited Audited
Cash flow from operating activities 1 736 (2 140) (832)
Cash generated by operations 5 034 4 666 9 672
Net purchase of investments held to back policyholder liabilities(1) (3 697) (3 205) (7 084)
Working capital changes 236 (3 884) (4 146)
1 573 (2 423) (1 558)
Dividends received 92 61 197
Interest received 1 007 896 1 711
Interest paid (307) (214) (437)
Taxation paid (629) (460) (745)
Cash flow from investing activities (1 613) (82) 15
Net (purchase)/disposal of financial assets(2) (283) 682 2 125
Purchase of equipment (426) (224) (239)
Proceeds from the sale of property and equipment 1 2 5
Purchase of intangible assets (885) (399) (1 353)
Proceeds from the sale of intangible assets - - 7
Increase in investment in equity accounted investments (20) (143) (530)
Cash flow from financing activities 566 763 1 913
Share buy-back - * *
Dividends paid to ordinary shareholders (632) (581) (1 152)
Dividends paid to preference shareholders (41) (41) (83)
Increase in borrowings 1 655 1 548 3 514
Repayment of borrowings (416) (163) (366)
Net increase/(decrease) in cash and cash equivalents 689 (1 459) 1 096
Cash and cash equivalents at beginning of period 9 097 8 614 8 614
Exchange losses on cash and cash equivalents (16) (610) (613)
Cash and cash equivalents at end of period 9 771 6 545 9 097
Reconciliation to statement of financial position
Cash and cash equivalents 9 771 6 545 9 098
Bank overdraft included in borrowings at amortised cost - - (1)
Cash and cash equivalent at end of period 9 771 6 545 9 097
1. Net purchase of investments held to back policyholder liabilities (3 697) (3 205) (7 084)
Purchase of investments held to back policyholder liabilities (16 634) (11 804) (32 104)
Disposal of investments held to back policyholder liabilities 12 937 8 599 25 020
2. Net (purchase)/disposal of financial assets (283) 682 2 125
Purchase of financial assets (13 191) (9 374) (14 083)
Disposal of financial assets 12 908 10 056 16 208
* Amount is less than R500 000.
Additional information
at 31 December 2017
Fair value hierarchy of financial instruments
The Group's financial instruments measured at fair value have been disclosed using a fair value hierarchy. The hierarchy has three levels that reflect the significance of
the inputs used in measuring fair value. These are as follows:
Level 1 includes financial instruments that are measured using unadjusted, quoted prices in an active market for identical financial instruments. Quoted prices are
readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly
occurring market transactions on an arm's length basis.
Level 2 includes financial instruments that are valued using techniques based significantly on observable market data. Instruments in this category are valued using:
(a) quoted prices for similar instruments or identical instruments in markets which are not considered to be active or
(b) valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable market data.
Level 3 includes financial instruments that are valued using valuation techniques that incorporate information other than observable market data and where at least
one input (which could have a significant effect on instruments' valuation) cannot be based on observable market data.
31 December 2017
R million (unaudited) Level 1 Level 2 Level 3 Total
Financial assets
Financial instruments at fair value through profit or loss:
- Equity securities 26 175 - - 26 175
- Equity linked notes - 2 758 - 2 758
- Debt securities 13 071 986 - 14 057
- Inflation linked securities 279 20 - 299
- Money market securities 281 8 415 - 8 696
- Mutual funds 14 851 - - 14 851
Available-for-sale financial instruments:
- Equity securities 155 - - 155
- Equity linked notes - 15 - 15
- Debt securities 142 165 - 307
- Money market securities 1 312 1 662 - 2 974
- Mutual funds 4 114 - - 4 114
Derivative financial instruments at fair value:
- Hedges - 766 - 766
- Non-hedges - 110 - 110
60 380 14 897 - 75 277
Financial liabilities
Derivative financial instruments at fair value:
- Hedges - 73 - 73
- Non-hedges - 63 - 63
- 136 - 136
There were no transfers between level 1 and 2 during the current financial period.
Specific valuation techniques used to value financial instruments in level 2
- Discovery has invested in equity linked notes offered by international banks in order to back certain unit-linked contract liabilities. The calculation of the daily value of
the equity linked investments is made by the provider of the note. Discovery has procedures in place to ensure that these prices are correct. Aside from the daily
reasonableness checks versus similar funds and movement since the prior day's price, the fund values are calculated with reference to a specific formula or index,
disclosed to the policyholders, which is recalculated by Discovery in order to check if the price provided by the provider is correct.
- If a quoted market price is not available on a recognised stock exchange or from a broker for non-exchange traded financial instruments, the fair value of the
instrument is estimated by the asset managers, using valuation techniques including the use of recent arm's length market transactions, reference to the current fair
value of another instrument that is substantially the same, discounted cash flow techniques, option pricing models or other valuation techniques that provide a reliable
estimate of prices obtained in actual market transactions.
- The fair value of the hedged derivatives is calculated as follows:
(a) The fair value of call options is calculated on a Black-Scholes model.
(b) The fair value of the return swaps is calculated by discounting the future cash flows of the instruments.
(c) The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves.
30 June 2017
R million (audited) Level 1 Level 2 Level 3 Total
Financial assets
Financial instruments at fair value through profit or loss:
- Equity securities 24 069 - - 24 069
- Equity linked notes - 2 557 - 2 557
- Debt securities 11 815 462 - 12 277
- Inflation linked securities 386 - - 386
- Money market securities 590 5 628 - 6 218
- Mutual funds 13 441 - - 13 441
Available-for-sale financial instruments:
- Equity securities 145 - - 145
- Equity linked notes - 17 - 17
- Debt securities 94 147 - 241
- Inflation linked securities 5 - - 5
- Money market securities 642 1 588 - 2 230
- Mutual funds 4 660 - - 4 660
Derivative financial instruments at fair value:
- Hedges - 354 - 354
- Non-hedges - 38 - 38
55 847 10 791 - 66 638
Financial liabilities
Derivative financial instruments at fair value:
- Hedges - 29 - 29
- Non-hedges - 106 - 106
- 135 - 135
Exchange rates used in the preparation of these results
USD GBP
31 December 2017
- Average 13.32 17.67
- Closing 12.32 16.65
30 June 2017
- Average 13.61 17.29
- Closing 13.12 17.03
31 December 2016
- Average 13.97 17.76
- Closing 13.74 16.92
SEGMENTAL INFORMATION
for the six months ended 31 December 2017
IFRS reporting adjustments
Normalised
SA SA SA SA UK UK All other Segment UK profit IFRS
R million (unaudited) Health Life Invest Vitality Health Life segments total Life(2) DUT(3) adjustments(4) total
Income statement
Insurance premium revenue 12 5 416 5 656 - 3 776 1 992 1 264 18 116 (358) - - 17 758
Reinsurance premiums (1) (1 081) - - (575) (744) (84) (2 485) 358 - - (2 127)
Net insurance premium revenue 11 4 335 5 656 - 3 201 1 248 1 180 15 631 - - - 15 631
Fee income from administration business 3 330 14 919 - 19 - 186 4 468 - - 9 4 477
Vitality income - - - 1 303 224 47 625 2 199 - - - 2 199
Investment income on assets backing policyholder liabilities - 236 21 - 5 6 61 329 - - - 329
Finance charge on negative reserve funding - - - - - (119) - (119) 119 - - -
Inter-segment funding(1) - (339) 339 - - - - - - - - -
Net fair value gains on financial assets at fair value through profit or loss 1 351 3 356 - - 75 (13) 3 770 - 1 056 (20) 4 806
Net income 3 342 4 597 10 291 1 303 3 449 1 257 2 039 26 278 119 1 056 (11) 27 442
Claims and policyholders' benefits (1) (3 325) (3 425) - (2 010) (402) (806) (9 969) 202 - - (9 767)
Insurance claims recovered from reinsurers 4 768 - - 445 235 116 1 568 (202) - - 1 366
Net claims and policyholders' benefits 3 (2 557) (3 425) - (1 565) (167) (690) (8 401) - - - (8 401)
Acquisition costs (2) (846) (520) (43) (276) (915) (125) (2 727) (119) - - (2 846)
Marketing and administration expenses
- depreciation and amortisation (158) (4) - - (126) (7) (121) (416) - - - (416)
- impairment of intangible assets - - - - (109) - - (109) - - - (109)
- other expenses (1 856) (799) (393) (1 203) (1 422) (734) (1 363) (7 770) (7) (105) (42) (7 924)
Recovery of expenses from reinsurers - - - - 300 937 - 1 237 - - - 1 237
Net transfer to/from assets and liabilities under insurance contracts
- change in assets arising from insurance contracts - 1 518 - - - 1 083 - 2 601 (323) - - 2 278
- change in assets arising from reinsurance contracts - 4 - - 13 4 - 21 - - - 21
- change in liabilities arising from insurance contracts - (53) (5 311) - 90 (6) (22) (5 302) - - (140) (5 442)
- change in liabilities arising from reinsurance contracts - (20) - - - (1 191) - (1 211) 323 - - (888)
Fair value adjustment to liabilities under investment contracts - (1) (223) - - - - (224) - (951) 20 (1 155)
Share of profits from equity accounted investments 3 - - - 1 - 78 82 - - - 82
Normalised profit/(loss) from operations 1 332 1 839 419 57 355 261 (204) 4 059 (7) - (173) 3 879
Investment income earned on shareholder investments and cash 37 23 13 17 1 2 24 117 - - - 117
Net realised gains on available-for-sale financial assets - 5 - - - - 3 8 - - - 8
Amortisation of intangibles from business combinations - - - - - - (63) (63) - - - (63)
Finance costs (29) (4) - - (1) - (364) (398) - - 8 (390)
Foreign exchange losses (1) - (4) - - - (12) (17) - - - (17)
Profit before tax 1 339 1 863 428 74 355 263 (616) 3 706 (7) - (165) 3 534
Income tax expense (349) (472) (120) (21) (37) (48) 63 (984) 7 - 140 (837)
Profit for the period 990 1 391 308 53 318 215 (553) 2 722 - - (25) 2 697
1 The inter-segment funding of R339 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 contractual arrangement, for business written on Prudential Assurance Company's (PAC's) life insurance license (up to 31 December 2015), is reclassified 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 Normalised profit adjustments include:
- The effects of eliminating intercompany linked assets on consolidation.
- Discovery has not completed the move to the new head office and full occupancy of the building is only expected by March 2018. Duplicate building costs of R25 million have been excluded from normalised profit from operations.
- The accounting impact of the recognition of a deferred tax asset arising from the Discovery Life Individual Policyholder Fund ('IPF'), has been excluded from normalised profit from operations for segmental purposes.
SEGMENTAL INFORMATION continued
for the six months ended 31 December 2016
IFRS reporting adjustments
Normalised
SA SA SA SA UK UK All other Segment UK profit IFRS
R million (unaudited) Health Life Invest Vitality Health Life segments total Life(2) DUT(3) adjustments(4) total
Income statement
Insurance premium revenue 8 4 844 5 727 - 3 641 1 824 972 17 016 (364) - - 16 652
Reinsurance premiums (1) (867) - - (806) (541) (98) (2 313) 364 - - (1 949)
Net insurance premium revenue 7 3 977 5 727 - 2 835 1 283 874 14 703 - - - 14 703
Fee income from administration business 3 014 10 799 - 10 - 169 4 002 - - - 4 002
Vitality income - - - 1 180 269 40 640 2 129 - - - 2 129
Investment income on assets backing policyholder liabilities - 258 - - 10 11 51 330 - - - 330
Finance charge on negative reserve funding - - - - - (26) - (26) 4 - - (22)
Inter-segment funding(1) - (269) 269 - - - - - - - - -
Net fair value gains on financial assets at fair value through profit or loss - 184 120 - - (101) - 203 - (31) - 172
Net income 3 021 4 160 6 915 1 180 3 124 1 207 1 734 21 341 4 (31) - 21 314
Claims and policyholders' benefits (1) (2 927) (3 405) - (2 195) (326) (683) (9 537) 149 - - (9 388)
Insurance claims recovered from reinsurers 1 585 - - 699 167 133 1 585 (149) - - 1 436
Recapture of reinsurance - - - - (882) - - (882) - - - (882)
Net claims and policyholders' benefits - (2 342) (3 405) - (2 378) (159) (550) (8 834) - - - (8 834)
Acquisition costs - (823) (510) (43) (294) (936) (93) (2 699) (4) - - (2 703)
Marketing and administration expenses
- depreciation and amortisation (148) (8) - - (108) - (79) (343) - - - (343)
- other expenses (1 685) (757) (319) (1 104) (1 248) (698) (1 316) (7 127) (65) (88) (84) (7 364)
Recovery of expenses from reinsurers - - - - 1 296 703 - 1 999 - - - 1 999
Net transfer to/from assets and liabilities under insurance contracts
- change in assets arising from insurance contracts - 1 735 - - - 394 - 2 129 500 - - 2 629
- change in assets arising from reinsurance contracts - (11) - - (123) 4 - (130) (2) - - (132)
- change in liabilities arising from insurance contracts - 11 (2 402) - (127) (6) (15) (2 539) 2 - - (2 537)
- change in liabilities arising from reinsurance contracts - (196) - - - (251) - (447) (500) - - (947)
Fair value adjustment to liabilities under investment contracts - (1) 47 - - - - 46 - 119 - 165
Share of profits from equity accounted investments - - - - - - 16 16 - - - 16
Normalised profit/(loss) from operations 1 188 1 768 326 33 142 258 (303) 3 412 (65) - (84) 3 263
Investment income earned on shareholder investments and cash 24 7 11 7 1 4 8 62 - - - 62
Net realised gains on available-for-sale financial assets - - 5 - - - - 5 - - - 5
Rebranding and business acquisitions expenses - - - - (76) - (8) (84) - - 84 -
Amortisation of intangibles from business combinations - - - - - - (87) (87) - - - (87)
Finance costs (17) (4) - - - (7) (182) (210) - - - (210)
Foreign exchange losses - - (10) - - - (7) (17) - - - (17)
Profit before tax 1 195 1 771 332 40 67 255 (579) 3 081 (65) - - 3 016
Income tax expense (327) (502) (92) (11) (6) (126) 52 (1 012) 65 - - (947)
Profit for the period 868 1 269 240 29 61 129 (527) 2 069 - - - 2 069
1 The inter-segment funding of R269 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 (CEO) of the reportable segments. The segment total, as reported to the Chief Executive Officers, is adjusted for accounting reclassifications and entries required to produce IFRS compliant results. These
adjustments include the following:
2 The contractual arrangement, for business written on Prudential Assurance Company's (PAC's) life insurance license (up to 31 December 2015), is reclassified 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 Rebranding and business acquisitions expenses are excluded from normalised profit from operations, but are included in marketing and administration expenses for IFRS purposes.
Review of group results
for the six months ended 31 December 2017
New business annualised premium income
Core new business annualised premium income (API) increased 16% for the six months ended 31 December 2017 when compared to the same period in the prior year.
December December %
R million 2017 2016 change
Discovery Health - DHMS 2 763 2 552 8
Discovery Health - Closed Schemes(1) 561 478 17
Discovery Life 1 121 1 053 6
Discovery Invest 1 220 1 278 (5)
Discovery Insure(2) 495 406 22
Discovery Vitality 78 81 (4)
VitalityHealth 522 443 18
VitalityLife 557 581 (4)
Ping An Health 1 986 1 169 70
Core new business API of Group 9 303 8 041 16
New Closed Schemes(1) 78 487 (84)
New business API of Group including new Closed Schemes 9 381 8 528 10
Gross revenue Vitality Group(3) 324 316 3
Total new business API and other new business 9 705 8 844 10
1 The new business API for Closed Schemes includes additional lives on existing Closed Schemes. The new business API for New Closed Schemes includes contracted
new business API and business in the first twelve months of on-boarding. Closed Schemes are those restricted to certain employers and industries.
2 In line with June 2017 reporting, the comparative for Discovery Insure has been restated to only include first year servicing and is net of indirect taxes.
3 Vitality Group new business includes gross recurring and lump sum revenues earned by Vitality Group and specifically excludes fees collected for administrative and
implementation services.
Calculation of new business annualised premium income
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 long-term insurance policies. The amounts exclude indirect taxes and the comparatives
have been restated where necessary.
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 included in the table above but excluded in the embedded value
API values disclosed.
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 10% for the six months ended 31
December 2017 when compared to the same period in the prior year.
December December %
R million 2017 2016 change
Discovery Health 36 283 32 239 13
Discovery Life 5 430 4 854 12
Discovery Invest 9 506 9 364 2
Discovery Insure 1 279 980 31
Discovery Vitality 1 303 1 180 10
VitalityHealth 4 019 3 920 3
VitalityLife 2 039 1 864 9
All other businesses 796 801 (1)
Gross inflows under management 60 655 55 202 10
Less: collected on behalf of third parties (35 872) (32 055) 12
Discovery Health (32 941) (29 217) 13
Discovery Invest (2 931) (2 838) 3
Gross income of Group per the segmental information 24 783 23 147 7
Gross income is made up as follows:
- Insurance premium revenue 18 116 17 016 6
- Fee income from administration business 4 468 4 002 12
- Vitality income 2 199 2 129 3
Gross income of Group per the segmental information 24 783 23 147 7
Normalised profit from operations
The following table shows the main components of the normalised profit from operations for the six months ended 31 December 2017:
December December %
R million 2017 2016 change
Discovery Health 1 332 1 188 12
Discovery Life 1 839 1 768 4
Discovery Invest 419 326 29
Discovery Vitality 57 33 73
VitalityHealth 355 142 150
VitalityLife 261 258 1
Additional 54.99% share of DiscoveryCard after tax profit 82 71 15
Normalised profit from established businesses 4 345 3 786 15
All other segments(1) (286) (374) 24
- Emerging businesses 66 (130) 151
- Development and other segments (352) (244) (44)
Normalised profit from operations 4 059 3 412 19
1 The total of 'All other segments' in the table above 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 after tax profit in Established businesses.
Emerging businesses are those businesses that have achieved sufficient scale to be profitable or profitable in the near future, although not yet significant in cash
generation for the Group and likely to require funds to support new business growth. These businesses are approximately 5 years into their launch. Discovery Insure,
excluding commercial insurance, and Vitality Group have been disclosed as Emerging businesses.
Development and other segments include costs of start-up businesses and expenses incurred to investigate new products and markets. Start-up costs include costs in
relation to the Discovery Bank, the planned UK investment business, a commercial offering in Discovery Insure and an Umbrella Fund offering in Discovery Invest. Head
office costs are also included in this segment.
Significant transactions affecting the current results
Discovery's new head office
Discovery has entered into a 15 year lease agreement for its new head office. The lease commenced November 2017 and Discovery started taking occupancy of the
building at that date, on a phased approach.
IAS 17: Leases, requires a lessee to classify a lease as either a finance lease or an operating lease, at the commencement of the lease term. A lease is classified as a
finance lease if it transfers substantially all the risks and rewards incidental to ownership. All other leases are classified as operating leases.
In terms of the indicators provided in IAS 17.10 and IAS 17.11, Discovery has classified the lease as a finance lease given that the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the leased asset. This accounting treatment has resulted in the recognition of an asset of R2 549
million, which has been disclosed in 'Property and equipment' and a corresponding lease liability, which has been disclosed in 'Borrowings' in the Statement of financial
position. It should be noted that ownership of the building does not transfer at the end of the lease period but remains that of the landlord. The accounting treatment
does not impact Discovery's covenant compliance.
The treatment under IFRS 16: Leases, effective for annual periods beginning on or after 1 January 2019, would result in a similar treatment with the lease capitalised
and as a result the accounting treatment in respect of this particular lease is aligned with future changes.
The building is depreciated over the lease term, using the straight-line method. R28 million depreciation has been recognised in profit or loss for the two months since
beneficial occupancy. Finance charges of R47 million have been recognised in profit or loss in respect of the finance lease liability.
Discovery has not completed the move to the new head office and full occupancy of the building is only expected by March 2018. Various building costs, such as rental,
have therefore been duplicated in the current financial period. For the calculation of normalised headline earnings, duplicate building costs of R25 million have been
added back.
Borrowings at amortised cost
December June
R million Reference 2017 2017
Bank borrowings 8 051 6 774
- United Kingdom borrowings i 1 784 2 174
- South African borrowings ii 6 267 4 600
Redeemable preference shares 1 402 1 400
Finance lease liability 2 976 349
- New building lease (refer above) 2 596 -
- General 380 349
Bank overdraft - 1
Total borrowings at amortised cost 12 429 8 524
i. United Kingdom borrowings
Discovery previously entered into term facilities totalling GBP 150 million. These borrowings have been used to fund the new business acquisition costs incurred by
VitalityLife, which were previously funded by The Prudential Assurance Company Limited (Prudential) and disclosed as 'Negative Reserve Funding' in the Statement of
financial position.
Discovery repaid GBP 22.5 million of this facility in previous financial periods and a further GBP 20.5 million of this facility on 30 November 2017, of which GBP 13
million was a voluntary repayment. The balance owing at 31 December 2017 amounts to GBP 107 million (R1 784 million) (30 June 2017: GBP 127.5 million (R2 174
million)).
Interest rates on these facilities are floating, linked to 3 month LIBOR, payable quarterly in arrears. Finance charges of R21 million (2016: R29 million) in respect of these
borrowings have been recognised in profit or loss.
ii. South African borrowings
December
R million Reference 2017
Balance at beginning of the period 4 600
Issuance of listed debt a. 1 500
Draw down on existing facility b. 155
Repayment of borrowings b. (26)
Accrued interest 38
Balance at end of the period 6 267
a. During the current financial period, Discovery registered an unsecured R10 billion Domestic Medium Term Note (DMTN) programme. In preparation of this inaugural
issuance, Discovery Limited obtained a credit rating from Moody's who assigned a Aa3.za issuer rating on 20 October 2017. In terms of the DMTN programme,
Discovery issued R1.5 billion JSE Listed Notes in its inaugural issuance on 21 November 2017, with the following profile:
Interest
payable in Amount
Interest arrears Capital repayment maturity date (R million)
Floating rate linked to 3 month JIBAR, plus 161 bps1 Quarterly 21 November 2022 500
Floating rate linked to 3 month JIBAR, plus 191 bps2 Quarterly 21 November 2024 800
Fixed rate at 10.46% per annum Semi-annually 21 November 2024 200
1 500
1 Interest rates on these notes have been fixed at 9.71% per annum, through an interest rate swap.
2 Interest rates on these notes have been fixed at 10.31% per annum, through an interest rate swap.
b. Discovery Central Services, a subsidiary of the Discovery Group, concluded a 10 year loan facility agreement of R650 million in December 2016, of which R495 million
was utilised in the previous financial year. The remaining portion of this facility of R155 million was utilised during this financial period and R26 million was repaid in
terms of the agreement. Interest rates on the facility are fixed at a weighted average rate of 11.44% per annum, with capital and interest repayable in instalments over
the duration of the loan facility.
Finance charges of R290 million (2016: R96 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 were 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.
In terms of the level premium reinsurance treaty that VitalityLife entered into, the reinsurer is required to place a security deposit with Prudential to reduce
counterparty risk. At 31 December 2017, Prudential held GBP 157 million (30 June 2017: GBP 147 million) as a security deposit. The contractual arrangement in respect
of the business written on the Prudential license is accounted for as a reinsurance contract under IFRS 4 and as a result, the 'deposit back' held by Prudential has been
disclosed as a reduction of the negative reserve funding liability. The corresponding liability to the reinsurer has been accounted for in 'Trade and other payables'.
The decrease in the negative reserve funding liability in the current financial period, relates to the repayment of funding by VitalityLife as well as an increase in the
amount of deposit back held by Prudential.
Consolidation of Discovery Unit Trusts
The Discovery Unit Trusts are consolidated into Discovery's results for accounting purposes, in both the current and prior financial period. These assets and liabilities
are however attributable to third party unitholders. 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 decreased by R582 million.
- Loans and receivables increased by R526 million.
- Trade and other payables increased by R760 million.
- Investments at fair value through profit or loss increased by R2 724 million.
- Investment contracts at fair value through profit or loss increased by R1 887 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% (2016: 28%) in the financial statements. No deferred tax assets have been
recognised on the assessed losses in Discovery Insure and Vitality Group and no further deferred tax asset has been raised in respect of the VitalityHealth assessed
losses.
In addition, the effective tax rate of the comparative period was abnormally high due to amongst other items, an adjustment to the tax charged by Prudential in respect
of business written on Prudential's life insurance license.
Material transactions with related parties
Discovery Health administers the Discovery Health Medical Scheme (DHMS) and provides managed care services for which it charges an administration fee and a
managed healthcare fee respectively. These fees are determined on an annual basis and approved by the trustees of DHMS. The fees totalled R2 662 million for the six
months ended 31 December 2017 (2016: R2 448 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 R7 888 million due to market growth and 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 R3 697 million in the Statement of cash flows.
Deferred tax
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.
A new tax basis for Life companies was promulgated in January 2017. The effective date of the new 'adjusted IFRS' tax valuation basis will align with the implementation
of Solvency Assessment and Management (SAM) and has had no impact on the results of the current period.
Deferred tax asset
As reported in the results for June 2017, recent tax amendments for Life companies introduced a Risk Policy Fund for all new risk business written, effective 1 July 2016.
In terms of the legislation, Discovery Life has elected to move existing risk business to this fund. This election was made in the first quarter of 2017. A portion of the
assessed loss of R16.1 billion (30 June 2017: R16.5 billion) in the Individual Policyholder Fund is now expected to be utilised over time. A value of R702 million (30 June
2017: R562 million), implicit in the valuation of insurance contract liabilities have therefore been recognised as an explicit deferred tax asset in terms of IAS 12: Income
Taxes.
Shareholder information
Directorate
There have been no changes to the Board of Discovery Limited during the current period.
Dividend policy and capital
Final dividends paid
The following final dividends were paid during the current period:
- B preference share dividend of 520.68493 cents per share (416.54794 cents net of dividend withholding tax), paid on 18 September 2017.
- Ordinary share dividend of 98 cents per share (78.4 cents net of dividend withholding tax), paid on 9 October 2017.
Interim dividend declaration
B preference share cash dividend declaration:
On 15 February 2018, the directors declared an interim gross cash dividend of 518.15068 cents (414.52054 cents net of dividend withholding tax) per B preference
share for the period 1 July 2017 to 31 December 2017, payable from the income reserves of the Company. A dividend withholding tax of 20% 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, 6 March 2018
Shares commence trading "ex" dividend Wednesday, 7 March 2018
Record date Friday, 9 March 2018
Payment date Monday, 12 March 2018
B preference share certificates may not be dematerialised or rematerialised between Wednesday, 7 March 2018 and Friday, 9 March 2018, both days inclusive.
Ordinary share cash dividend declaration:
Notice is hereby given that the directors have declared an interim gross cash dividend of 101 cents (80.8 cents net of dividend withholding tax) per ordinary share, out
of income reserves for the six month period ended 31 December 2017. A dividend withholding tax of 20% will be applicable to all shareholders who are not exempt.
The issued ordinary share capital at the declaration date is 646 844 992 ordinary shares.
The salient dates for the dividend will be as follows:
Last day of trade to receive a dividend Tuesday, 13 March 2018
Shares commence trading "ex" dividend Wednesday, 14 March 2018
Record date Friday, 16 March 2018
Payment date Monday, 19 March 2018
Share certificates may not be dematerialised or rematerialised between Wednesday, 14 March 2018 and Friday, 16 March 2018, both days inclusive.
Capital
The table below summarises the capital adequacy requirement (CAR) on the statutory basis, across the Group subsidiaries, and the actual solvency capital held in
relation to this requirement, at 31 December:
2017 2016
CAR CAR cover CAR CAR cover
Discovery Life Limited R791 million 3.8 times R684 million 3.2 times
Discovery Insure Limited R548 million 2.2 times R405 million 2.4 times
Vitality Health Limited GBP 84.3 million (R1 404 million) 1.6 times GBP 83.3 million (R1 409 million) 1.3 times
Vitality Life Limited GBP 104.1 million (R1 733 million) 1.9 times GBP 62.1 million (R1 058 million) 2.1 times
Accounting policies
The interim results have been prepared in accordance with International Financial Reporting Standards including IAS 34: Interim Financial Reporting, as well as the
South African Companies Act 71 of 2008. The accounting policies adopted are consistent with the accounting policies applied in the prior Annual Financial Statements.
Embedded value statement
for the six months ended 31 December 2017
The embedded value of Discovery consists of the following components:
- the adjusted net worth attributed to the 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 required capital are the assets attributed to the covered business above the amount required to back covered business liabilities, whose distribution to
shareholders is restricted as they are allocated to cover regulatory and internal capital requirements.
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 ("Life"), Discovery Invest ("Invest"), Discovery Health ("Health") and Discovery Vitality ("Vitality"), and in the United Kingdom
through VitalityLife and VitalityHealth. For Vitality Group, 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.
The 31 December 2017 embedded value results and disclosures were not subjected to an external review or audit.
Table 1: Group embedded value
31 December 31 December % 30 June
R million 2017 2016 Change 2017
Shareholders' funds 34 212 30 291 13 32 290
Adjustment to shareholders' funds from published basis(1) (29 196) (25 815) (27 558)
Adjusted net worth(2) 5 016 4 476 4 732
Value of in-force covered business before cost of required capital 57 691 50 970 54 756
Cost of required capital (2 299) (2 137) (2 194)
Discovery Limited embedded value 60 408 53 309 13 57 294
Number of shares (millions) 645.0 645.0 645.0
Embedded value per share R93.66 R82.65 13 R88.83
Diluted number of shares (millions) 646.2 646.2 646.2
Diluted embedded value per share(3) R93.49 R82.60 13 R88.67
1 A breakdown of the adjustment to shareholders' funds is shown in the table below. An additional adjustment has been included as at 31 December 2017 to reverse
the IAS 17 accounting treatment of the 1 Discovery Place lease contract. Future rental payments in respect of the covered businesses under the lease are capitalised in
the value of in-force for covered business, consistent with the treatment of other renewal expenses. Note that where relevant, adjustments have been converted using
the closing exchange rate of R16.65/GBP (June 2017: R17.03/GBP; December 2016: R16.92/GBP):
31 December 31 December 30 June
R million 2017 2016 2017
Life net assets under insurance contracts (19 854) (17 258) (18 354)
Vitality Life Limited and Discovery funded VitalityLife business on the Prudential licence net assets under
insurance contracts (3 891) (3 176) (3 620)
VitalityHealth financial reinsurance asset (1 568) (1 279) (1 440)
VitalityHealth and VitalityHealth Insurance Limited deferred acquisition costs (net of deferred tax) (254) (233) (252)
VitalityLife receivable relating to the Unemployment Cover benefit (net of deferred tax) (26) (32) (27)
Goodwill and intangible assets (net of deferred tax) relating to the acquisition of Standard Life Healthcare
and the Prudential joint venture (2 899) (3 058) (3 086)
Net preference share capital (779) (779) (779)
Reversal of 1 Discovery Place IAS 17 financial lease accounting 75 - -
(29 196) (25 815) (27 558)
2 The following table sets out the capital position of the covered businesses with the required capital on a consistent basis to that used in the embedded value:
31 December 31 December 30 June
R million 2017 2016 2017
Shareholders' funds 34 212 30 291 32 290
Adjustment to shareholders' funds (29 196) (25 815) (27 558)
Adjusted net worth 5 016 4 476 4 732
Excess of available regulatory capital over adjusted net worth 4 292 3 708 4 100
Available regulatory capital 9 308 8 184 8 832
Regulatory required capital 4 743 4 024 4 477
Required capital buffer 2 755 2 414 2 664
Required capital 7 498 6 438 7 141
Excess available capital 1 810 1 746 1 691
The excess of available regulatory capital over adjusted net worth reflects the difference between the adjusted net worth and the available regulatory capital. This
includes the net preference share capital of R779 million which is included as available regulatory capital. At 31 December 2017, this adjustment also includes the
difference between Vitality Life Limited's Solvency II Pillar 1 Own Funds and its adjusted net worth and adds back the negative reserves eliminated on the Discovery
funded VitalityLife business on the Prudential licence.
The required capital at December 2017 for Life is R1 584 million (June 2017: R1 409 million; December 2016: R1 369 million), for Health and Vitality is R778 million
(June 2017: R797 million; December 2016: R751 million), for VitalityHealth is R1 899 million (June 2017: R1 984 million; December 2016: R1 931 million) and for
VitalityLife is R3 237 million (June 2017: R2 951 million; December 2016: R2 387 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 1.35 times (previously 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. The Regulatory Required Capital is calculated as the relevant regulatory solvency capital requirement for each insurance business.
3 The diluted embedded value per share allows for Discovery's BEE transaction where the impact is dilutive i.e. where the current embedded value per share exceeds
the current transaction value.
Table 2: Value of in-force covered business
Value before Value after
cost of Cost of cost of
required required required
R million capital capital capital
at 31 December 2017
Health and Vitality 19 246 (358) 18 888
Life and Invest(1) 27 358 (843) 26 515
VitalityHealth(2) 5 849 (288) 5 561
VitalityLife(2) 5 238 (810) 4 428
Total 57 691 (2 299) 55 392
at 31 December 2016
Health and Vitality 17 415 (329) 17 086
Life and Invest(1) 23 901 (796) 23 105
VitalityHealth(2) 5 028 (320) 4 708
VitalityLife(2) 4 626 (692) 3 934
Total 50 970 (2 137) 48 833
at 30 June 2017
Health and Vitality 18 595 (352) 18 243
Life and Invest(1) 25 102 (780) 24 322
VitalityHealth(2) 5 959 (307) 5 652
VitalityLife(2) 5 100 (755) 4 345
Total 54 756 (2 194) 52 562
1 Included in the Life and Invest value of in-force covered business is R1 272 million (June 2017: R1 153 million; December 2016: R1 155 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 R16.65/GBP (June 2017: R17.03/GBP; December 2016: R16.92/GBP).
Table 3: Group embedded value earnings
Six months ended Year ended
31 December 31 December 30 June
R million 2017 2016 2017
Embedded value at end of period 60 408 53 309 57 294
Less: Embedded value at beginning of period (57 294) (53 080) (53 080)
Increase in embedded value 3 114 229 4 214
Net change in capital(1) - 1 4
Dividends paid 673 621 1 231
Transfer to hedging reserve (168) 67 (29)
Employee share option schemes (5) (9) (7)
Embedded value earnings 3 614 909 5 413
Annualised return on opening embedded value 13.0% 3.5% 10.2%
1 The net change in capital reflects an increase in treasury shares in the period.
Table 4: Components of Group embedded value earnings
Six months Year
ended ended
31 December 30 June
Six months ended 31 December 2017 2016 2017
Value of
Cost of in-force
Net required covered Embedded Embedded Embedded
R million worth capital business value value value
Total profit from new business (at point of sale) (2 290) (102) 3 667 1 275 1 156 2 437
Profit from existing business
- Expected return 2 870 11 5 2 886 2 431 5 220
- Change in methodology and assumptions(1) 565 (12) (261) 292 (44) 858
- Experience variances 349 (30) (179) 140 (195) 66
Impairment, amortisation and fair value adjustment(2) (28) - - (28) (54) (95)
Increase in goodwill and intangibles (84) - - (84) (69) (203)
Other initiative costs(3) (243) - 7 (236) (478) (691)
Non-recurring expenses(4) (15) - - (15) (83) (103)
Acquisition costs(5) (26) - (1) (27) (94) (196)
Finance costs (385) - - (385) (68) (500)
Foreign exchange rate movements (121) 27 (263) (357) (1 599) (1 569)
Other(6) 14 1 (40) (25) (6) 4
Return on shareholders' funds(7) 178 - - 178 12 185
Embedded value earnings 784 (105) 2 935 3 614 909 5 413
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 reflects Group initiatives including expenses relating to the investments in Vitality Group, Discovery Bank, the planned UK investment business, a
commercial offering in Discovery Insure, an Umbrella Fund offering in Discovery Invest, other new business initiatives and unallocated head office costs.
4 This item includes once-off costs relating to systems development spend in Discovery Health.
5 Acquisition costs relate to commission paid on the VitalityLife and 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.
6 This item includes, among other items, the tax benefit that will be obtained as the VitalityHealth DAC and intangible software assets amortise.
7 The return on shareholders' funds is shown net of tax and management charges.
Table 5: Experience variances
Health and Vitality Life and Invest VitalityHealth VitalityLife
Value Value Value Value
Net of Net of Net of Net of
R million worth in-force worth in-force worth in-force worth in-force Total
Renewal expenses 76 - 31 (6) (8) - 9 - 102
Lapses and surrenders 1 7 (12) 15 - (39) (71) (75) (174)
Mortality and morbidity(1) - - (78) 33 320 - 40 - 315
Policy alterations - (12) (238) 140 - - (19) (4) (133)
Premium and fee income(2) (2) (520) (58) (1) - - 1 11 (569)
Economic assumptions - - 80 126 - - - - 206
Commission - - - - - - - - -
Tax(3) 34 - 105 (88) 36 - 51 2 140
Reinsurance - - - - 5 - 17 (2) 20
Maintain modelling term(4) - 144 - 33 - 3 - - 180
Vitality benefits 25 - - - - - - - 25
Other 64 (1) (81) 63 18 - 3 (38) 28
Total 198 (382) (251) 315 371 (36) 31 (106) 140
1 The mortality and morbidity experience for VitalityHealth arises due to improvements in risk management, sales and retention models, claim payment processes, and
an increase in Vitality engagement, resulting in lower experience loss ratios over those expected.
2 The premium and fee income experience for Health and Vitality reflects the impact on administration and managed care fees due to the in-period inflation being
lower than that assumed. For Life, the experience arises largely due to the impact of Vitality distribution shifts compared to expected levels.
3 The tax variance for Life and Invest arises due to a movement in the deferred tax asset which delays the payment of tax.
4 The projection term for Health and Vitality, Group Life and VitalityHealth at 31 December 2017 has not been changed from that used in the 30 June 2017 embedded
value calculation. Therefore, an experience variance arises because the total term of the in-force covered business is effectively increased by six months.
Table 6: Methodology and assumption changes
Health and Vitality Life and Invest VitalityHealth VitalityLife
Value Value Value Value
Net of Net of Net of Net of
R million worth in-force worth in-force worth in-force worth in-force Total
Modelling changes - - (13) 21 - - (71) (41) (104)
Expenses(1) - 396 - - - - 81 22 499
Lapses - - - - - - - - -
Mortality and morbidity - - - - - - - - -
Benefit enhancements - - (20) (42) - - - - (62)
Vitality benefits - (2) - - - - - - (2)
Tax - - - - - - - - -
Economic assumptions - 30 (2) 122 - (10) (189) 66 17
Premium and fee income - - - - - - (3) (57) (60)
Reinsurance(2) - - 636 (638) (17) (12) - - (31)
Other(3) - - 5 2 - - 158 (130) 35
Total - 424 606 (535) (17) (22) (24) (140) 292
1 For Health and Vitality, the expenses item reflects a revision to the renewal expense assumption in light of the lower in-period inflation relative to expected.
2 For Life the reinsurance item primarily relates to the impact of the financing reinsurance arrangements.
3 For VitalityLife, the other item relates to the margin reset to offset acquisition costs and assumption and methodology changes, as per the accounting policy, and an
alignment of the compulsory margins in VitalityLife to those used by Discovery Life (based on SAP 104).
Table 7: Embedded value of new business
Six months ended Year ended
31 December 31 December % 30 June
R million 2017 2016 Change 2017
Health and Vitality
Present value of future profits from new business at point of sale 402 333 820
Cost of required capital (14) (15) (31)
Present value of future profits from new business at point of sale after cost of required
capital 388 318 22 789
New business annualised premium income(1) 1 781 1 685 6 4 533
Life and Invest
Present value of future profits from new business at point of sale(2) 716 689 1 304
Cost of required capital (37) (37) (73)
Present value of future profits from new business at point of sale after cost of required
capital 679 652 4 1 231
New business annualised premium income(3) 1 382 1 437 (4) 2 840
Annualised profit margin(4) 6.1% 5.8% 5.5%
Annualised profit margin excluding Invest business(5) 11.5% 10.5% 10.2%
VitalityHealth
Present value of future profits from new business at point of sale 12 27 157
Cost of required capital (23) (17) (46)
Present value of future profits from new business at point of sale after cost of required
capital (11) 10 (210) 111
New business annualised premium income (Rand)(6) 492 418 18 958
Annualised profit margin(4) (0.3%) 0.4% 1.8%
VitalityLife(7)
Present value of future profits from new business at point of sale 247 243 432
Cost of required capital (28) (67) (126)
Present value of future profits from new business at point of sale after cost of required
capital 219 176 24 306
New business annualised premium income (Rand) 443 490 (9) 844
Annualised profit margin(4) 6.7% 5.1% 5.2%
1 Health new business annualised premium income is the gross contribution to the medical schemes. The new business annualised premium income shown above
excludes premiums in respect of members who join an existing employer where the member has no choice of medical scheme, as well as premiums in respect of new
business written during the period but only activated after 31 December 2017.
The total Health and Vitality new business annualised premium income written over the period was R3 402 million (June 2017: R6 276 million; December 2016: R3 122
million).
2 Included in the Life and Invest embedded value of new business is R49 million (June 2017: R109 million; December 2016: R93 million) in respect of investment
management services provided on off balance sheet investment business.
Risk business written prior to the valuation date allows certain Invest business to be written at financially advantageous terms, the impact of which has been
recognised in the value of new business.
3 Life new business is defined as Life policies 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. Invest
new business also includes Discovery Retirement Optimiser policies to which Life and Invest became contractually bound during the reporting period, including policies
whose first premium is due after the valuation date.
The new business annualised premium income of R1 382 million (June 2017: R2 840 million; December 2016: R1 437 million) (single premium APE: R559 million (June
2017: R1 169 million; December 2016: R592 million)) shown above excludes automatic premium increases and servicing increases in respect of existing business. The
total new business annualised premium income written over the period, including automatic premium increases of R638 million (June 2017: R1 172 million; December
2016: R574 million) and servicing increases of R316 million (June 2017: R659 million; December 2016: R320 million), was R2 337 million (June 2017: R4 671 million;
December 2016: R2 331 million) (single premium APE: R588 million (June 2017: R1 277 million; December 2016: R620 million)). Single premium business is included at
10% of the value of the single premium.
Policy alterations and internal replacement policies, including Discovery Retirement Optimisers added to existing Life Plans, are shown in Table 5 as experience
variances and not included as new business. Term extensions on existing contracts are not included as new business.
4 The annualised profit margin is the value of new business expressed as a percentage of the present value of future premiums.
5 From 30 June 2017, Discovery Retirement Optimiser policies fall under Invest. Therefore, the "Annualised profit margin excluding Invest business" at 31 December
2017 and 30 June 2017 excludes Discovery Retirement Optimiser policies, whereas these policies are included in the 31 December 2016 comparative period. On a
like-for-like basis to the 31 December 2016 comparative period the "Annualised profit margin excluding Invest business" at 31 December 2017 would have been 10.7%
(June 2017: 9.5%).
6 VitalityHealth new business is defined as individuals and employer groups which incepted during the reporting period. The new business annualised premium
income shown above has been adjusted to exclude premiums in respect of members who join an existing employer group after the first month, as well as premiums in
respect of new business written during the period but only activated after 31 December 2017.
7 VitalityLife new business is defined as policies to which VitalityLife became contractually bound during the reporting period, including policies whose first premium is
due after the valuation date.
Table 8: Embedded value economic assumptions
31 December 31 December 30 June
2017 2016 2017
Beta coefficient 0.75 0.75 0.75
Equity risk premium (%) 3.5 3.5 3.5
Risk discount rate (%)
Health and Vitality 11.875 12.125 12.125
Life and Invest 12.625 12.625 12.875
VitalityHealth 3.91 3.93 3.90
VitalityLife 4.635 4.725 4.755
Rand/GB Pound exchange rate
Closing 16.65 16.92 17.03
Average 17.67 17.76 17.29
Medical inflation (%)
South Africa 9.00 9.00 9.25
Expense inflation (%)
South Africa 6.00 6.00 6.25
United Kingdom 3.27 3.35 3.25
Pre-tax investment return (%)
South Africa - Cash 8.50 8.50 8.75
- Life and Invest bonds 10.00 10.00 10.25
- Health and Vitality bonds 9.25 9.50 9.50
- Equity 13.50 13.50 13.75
United Kingdom - VitalityHealth investment return 1.29 1.31 1.28
- VitalityLife investment return 2.01 2.10 2.13
Income tax rate (%)
South Africa 28 28 28
United Kingdom - long term(1) 17 17 17
Projection term
- Health and Vitality 20 years 20 years 20 years
- Life No cap No cap No cap
- Group Life 10 years 10 years 10 years
- VitalityHealth(2) 20 years 20 years 20 years
1 The United Kingdom Corporation tax rate assumed is 20% in 2017, 19% in 2018 to 2020, and 17% beyond that.
2 VitalityHealth policies are projected for 20 years from the original date of inception.
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 capital structure of the Group and 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. 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 for Life and Invest and Health and Vitality 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.
The embedded value has been calculated in accordance with the Actuarial Society of South Africa's Advisory Practice Note ("APN") 107: Embedded Value Reporting,
except the recommended disclosure of Free Surplus and Required Capital has been adjusted to take into account the revised capital requirements and resources
arising from Solvency II in the United Kingdom as can be seen in Table 1 note 2.
Sensitivity to the embedded value assumptions
The risk discount rate uses the CAPM approach with specific reference to the Discovery beta coefficient. As beta values reflect the historic performance of share prices relative to the market they may not allow fully for non-market related and non-financial risk.
Investors may want to form their own view on an appropriate allowance for these risks which have not been modelled explicitly. The sensitivity of the embedded value and the embedded value of new business at 31 December 2017 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
Value Cost of Value Cost of Value Cost of Value Cost of
Adjusted of required of required of required of required Embedded %
R million net worth(2) in-force capital in-force capital in-force capital in-force capital value Change
Base 5 016 19 246 (358) 27 358 (843) 5 849 (288) 5 238 (810) 60 408
Impact of:
Risk discount rate +1% 5 016 18 107 (391) 24 458 (739) 5 484 (382) 4 949 (953) 55 549 (8)
Risk discount rate -1% 5 016 20 511 (321) 30 947 (975) 6 254 (184) 5 561 (620) 66 189 10
Lapses -10% 4 883 19 907 (375) 29 603 (900) 6 531 (309) 5 492 (922) 63 910 6
Interest rates -1%(1) 3 873 19 357 (343) 27 920 (911) 6 234 (287) 5 263 (1 272) 59 834 (1)
Equity and property market value -10% 4 999 19 246 (358) 27 011 (842) 5 849 (288) 5 238 (810) 60 045 (1)
Equity and property return +1% 5 016 19 246 (358) 27 675 (843) 5 849 (288) 5 238 (810) 60 725 1
Renewal expenses -10% 5 098 21 177 (332) 27 728 (842) 6 255 (288) 5 283 (788) 63 291 5
Mortality and morbidity -5% 5 195 19 246 (358) 29 096 (828) 6 803 (288) 5 304 (802) 63 368 5
Projection term +1 year 5 016 19 551 (364) 27 422 (843) 5 849 (288) 5 238 (810) 60 771 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 402 (14) 716 (37) 12 (23) 247 (28) 1 275
Impact of:
Risk discount rate +1% 367 (15) 563 (33) (19) (31) 192 (29) 995 (22)
Risk discount rate -1% 440 (13) 903 (43) 48 (15) 308 (22) 1 606 26
Lapses -10% 425 (15) 871 (40) 80 (25) 349 (36) 1 609 26
Interest rates -1%(1) 408 (14) 755 (40) 47 (23) 233 (46) 1 320 4
Equity and property return +1% 402 (14) 736 (37) 12 (23) 247 (28) 1 295 2
Renewal expenses -10% 466 (13) 736 (37) 58 (23) 281 (26) 1 442 13
Mortality and morbidity -5% 402 (14) 782 (37) 86 (23) 290 (26) 1 460 15
Projection term +1 year 411 (14) 718 (37) 16 (23) 247 (28) 1 290 1
Acquisition costs -10% 414 (14) 784 (37) 29 (23) 293 (28) 1 418 11
1 All economic assumptions were reduced by 1%.
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