DSY - Discovery Holdings Limited - Discovery Holdings audited results
DSY
DSY
DSY - Discovery Holdings Limited - Discovery Holdings audited results
announcement and cash dividend declaration for the year ended 30 June 2010
DISCOVERY HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
ISIN: ZAE000022331
Share Code: DSY
("Discovery" or "the company")
DISCOVERY HOLDINGS AUDITED RESULTS ANNOUNCEMENT AND CASH DIVIDEND DECLARATION
FOR THE YEAR ENDED 30 JUNE 2010
Headlines
Profit from operations:
+ 36% to R2 514 million
New business API excluding Destiny: + 32% to R7 618 million
Headline earnings per share: + 24% to 278.8 cents
Gross inflows under management: + 23%, to over R41 billion
Introduction
The past year has been one of importance and significant activity for Discovery.
The Group`s results were pleasing, despite the uncertain macro-economic
environment. Given this instability and the prospect of further economic
decline, Discovery focused, in both its established and emerging businesses, on
ensuring the Group remains strongly positioned for continued growth and
profitability.
While effort has been invested during the period to grow the Group`s
geographical footprint, Discovery`s local
businesses remain central to its
strategy and command the lion`s share of capital and operational investment. At
the core of Discovery`s model is its commitment to making people healthier and
enhancing their lives. Each of the Group`s subsidiaries, in South Africa and
offshore, leverage off the platform of wellness and consumer-engagement created
by Vitality. The result is an integrated approach that melds together wellness
and risk management, creating highly differentiated and consumer-centric
financial services offerings.
This approach has resulted in a strong financial performance during the period
under review, with new business growing by 32% to a record level of R7.6bn and
operating profit increasing by 36% to R2.5bn. Headline earnings increased by 24%
to R1.5bn and the group embedded value increased by 8% from December 2009 to
R22.6bn. Importantly, significant positive experience variances were
achieved
within the embedded value, illustrating clearly that Discovery continues to
exceed the actuarial expectation in its performance.
Local operations
In Discovery`s local businesses, the year featured substantial investment in
innovation and infrastructure to support future growth and work was done on
potential new businesses in this market.
Discovery Health
Discovery Health`s performance exceeded expectations across all key performance
indicators, with new business levels at the highest in the company`s history.
Despite the impact of economic pressure on consumers, the increase in new
business derived from entirely new members and companies joining the Discovery
Health Medical Scheme was 95% to R2.5bn.
During the
period, Discovery Health focused on four distinct strategic thrusts:
1. Significant investment in people and infrastructure: Given the record levels
of new business, low lapse rates and the efficiencies achieved in previous
years, Discovery Health focused on building its infrastructure in the period to
facilitate future growth.
2. Building a better quality, more cost-efficient healthcare system for members
of the schemes Discovery Health administers: Discovery Health has created unique
and sustainable healthcare assets that enable the company to achieve greater
scale and sophistication relative to competitors. During the past year, the
company continued to build and grow these assets. Discovery Health`s GP network
and proprietary direct payment arrangements with specialists, for example, have
continued to grow with the percentage of GP and specialist visits covered this
way now exceeding 86% and 87%
respectively. The combination of these assets has
increased value and lowered healthcare costs for consumers, with the costs for
Discovery Health members estimated at about 8% lower than competing companies.
During the period, the competitive advantage in these areas has attracted a
number of large closed medical schemes to Discovery Health, including Altron
Medical Scheme and Remedi Medical Scheme.
3. Balancing clinical and actuarial management to lower costs for all schemes
under management: Healthcare is uniquely skewed in that 19% of the membership
base consumes 80% of the healthcare bill. To ensure sustainability, it is
therefore critical to keep healthy members in the system. Vitality plays a key
role in maintaining an appropriate balance between cost and value for both
healthy and sick members. Members who engage in managing their health are able
to enjoy benefits within the Discovery Health system.
Importantly this is true
regardless of their health status. The combination of the benefits offered
through the medical scheme and Vitality therefore encourages both healthy and
sick members to stay in the system. Vitality`s role in retaining healthy members
is evident from the lapse rate, which during the period reduced to 4.1%. 4.
Engaging with stakeholders to help build a better healthcare system:
Importantly, in the context of ongoing public debates around potential
healthcare reform, Discovery Health continues to play a positive role in helping
to build an inclusive and successful healthcare system for all South Africans,
fundamental to our country`s future.
Discovery Life
During the year under review, Discovery Life maintained and enhanced its
leadership position through a continued focus on the quality and efficiency of
the business, thereby ensuring its robustness during periods of economic
uncertainty. This resulted in operating profit growing by 9% to R1.4bn. To allow
Discovery to grow without recourse to additional external capital, the Group has
utilised a portion of Discovery Life`s negative reserves through appropriate
financial reinsurance structures. The benefits of this approach are a de-risking
of that part of the negative reserve asset, a reduction in the overall capital
required and an increase in the return-on-capital. However, at the Discovery
Life level, there is a reduction in earnings as Discovery Life does not get the
benefit of the portion of the negative reserve used for this purpose. The cost
to Discovery Life in the year under review was R127m. Normalised operating
profit grew 15% to R1.6bn. Core new risk business grew by 10% to R853m with
overall new business up 2%. This reflects the effect of reducing inflation on
contribution increases
(accounted for in the overall new business volumes).
From a strategic perspective, Discovery Life focused on three key areas during
the financial year:
1. Innovation and new product growth: Discovery Life continued to focus on
product innovation with the launch of the Financial Integrator during the first
half of the financial year, and the launch of the lower-priced Essential Plans
in the latter half. The strategy has proven successful, with 27% of new business
taking up the Financial Integrator.
2. Structural changes to reduce policy lapses: Discovery Life undertook
significant analysis to understand and address the key factors that impact on
lapse rates. The analysis showed clients with lower credit ratings are more
likely to lapse their policies in a difficult economic environment, whereas
clients who integrate their policies with Vitality
and use more benefits across
Discovery`s product range are less likely to lapse. As a result of these
findings, Discovery Life did considerable work in the period to incorporate
credit risk in underwriting and risk management, while enhancing and promoting
integration opportunities for customers across the Discovery product range. This
strategy, coupled with a lessening of pressure in the economic environment
during the period, has resulted in a reduction in lapse rates of 1.2% in the
second half of the year.
3. Increasing Vitality engagement to positively impact on mortality and
morbidity: Discovery Life also focused on encouraging positive selection to
ensure superior mortality and morbidity experience. While premium pricing is
fundamental, management of lapses and the integration of Vitality were important
in this regard. Vitality and its integration ability not only reduced lapses
among healthy lives by providing them with value, but it also engaged people in
managing their health, which improved morbidity and mortality experience. As a
result, the overall risk experience of Discovery Life was significantly better
than expected with mortality experience running at 87% of expectation.
The combination of innovative products, competitive pricing points, lower lapse
rates and better mortality experience has created a robust platform for future
growth.
Discovery Vitality and Discovery Card
In terms of Vitality`s performance, two key themes emerged during the year.
Firstly, the period saw continued investment in understanding and enhancing the
wellness and behavioural science that underlies Vitality. During the period, the
Vitality team in collaboration with experts from leading academic and scientific
institutions continued to
study Vitality`s effects on behaviour and the
correlation between engagement in the programme and health outcomes. Across
Discovery`s businesses, clear evidence is emerging that engagement in Vitality
reduces health-related risk, lowers healthcare costs and, as a by-product of the
programme`s powerful benefits, improves customer retention rates. As a result,
the Vitality model represents a unique and significant asset that Discovery is
able to export into diverse international markets like the USA, UK and China.
Secondly, the scale and usage of Vitality is increasingly substantial,
demonstrating the tremendous value generated for Discovery clients through the
programme. Over 1,6 million clients internationally make use of the programme`s
health and lifestyle benefits. Locally, Vitality members represent a significant
proportion of our Vitality partners` client bases.
DiscoveryCard has similarly proven itself an
important value creator for
Discovery clients. During the year, DiscoveryCard`s market share increased to
8%, making it the fifth largest player in the South African credit card market
and the only significant non-bank competitor in this sector. Despite the
continuing economic pressure faced by consumers and the concomitant strain on
many lending institutions, DiscoveryCard`s credit experience has improved
considerably and the quality of the client base provides opportunities for
additional value propositions to consumers. The period saw extensive focus on
ensuring a cutting-edge service offering for clients, and on positioning the
DiscoveryCard as a premier card offering. This drive will continue into the
future, with further innovation in this regard planned for the period ahead.
Discovery Invest
Discovery Invest`s performance was exceptional and exceeded expectation,
with
the company generating its maiden profit in the second half of the financial
year. Discovery Invest operates in the retail long-term savings market, where,
despite lower volumes of business, margins are higher. In this context, gross
inflows increased by 109% to over R6bn with assets under management increasing
by 262% to R11bn. New business increased by 90% to R761bn on an annual premium
equivalent basis, with single premiums written during the period amounting to
R4.8bn.
The company generated an operating profit of R7m compared with an operating loss
of R119m during the previous period. Importantly, the take-up of Discovery
Invest`s products has been remarkable, with positive feedback from the
independent intermediary community. During the latest Financial Intermediaries`
Association survey, Discovery Invest achieved the highest scores in terms of
broker feedback
across virtually every category - a reflection of the quality of
the business being built.
From a distribution perspective, Discovery Invest continues to gain traction
rapidly with the number of supporting brokers increasing during the period by
41% to over 2 500 brokerages. Of the top 1 000 supporting brokerages, 48% had
increased their Discovery Invest business written with a further 37% writing
Discovery Invest business for the first time.
With regard to profitability, the percentage of funds allocated to Discovery
Funds exceeded the premium-basis expectations, increasing Discovery Invest`s
profit margin as a percentage of premium from 2.5% to 2.8%.
The company continues to enhance its profile with initiatives such as the
Discovery Invest Leadership Summit and its links to Moneyweb. Based on the
increasing distribution support for
Discovery Invest, its increasing brand
credibility and the positive response to its product offerings, the prospects
for continued growth and profitability are positive.
3. International operations
In the United Kingdom: PruHealth and PruProtect
Discovery`s strategy in South Africa of building quality business of scale with
significant integration capability is increasingly mirrored by our approach in
the UK, where we plan to leverage the wellness and integration foundation of
Vitality to offer enhanced health and protection offerings.
During the period, Discovery restructured its business to facilitate this
approach and significantly increased its shareholding in the UK joint venture
with Prudential plc from 50% to 75%, thereby boosting the scale and capability
of its business in the UK market. This was achieved by
Discovery purchasing
Standard Life Healthcare and merging it into PruHealth, in return for a 25%
increase in its share of PruProtect and PruHealth.
PruHealth
PruHealth`s operating losses widened during the past financial year, exacerbated
by the economic recession, which has been shown to result in declining
membership and increasing loss ratios. In terms of PruHealth`s long-term
prospects, this was a period of significant restructuring of the business and
the implementation of a number of initiatives aimed at liberating the powerful
franchise built in the UK.
Although the short-term effect of the difficult macro-economic conditions has
been to decrease demand for private medical insurance, in the longer term it
presents a significant opportunity. This is because increased public debt and
budget deficits in the UK and the government`s austerity measures to address
these problems are likely to result in less public spending on the NHS.
Government expenditure on healthcare is unlikely to keep pace with increasing
healthcare costs, creating a greater need for privately funded healthcare.
To address the environmental and performance issues experienced and to ensure
PruHealth is positioned to capitalise on the market opportunities, a number of
key strategies were employed during the period:
1. PruHealth focused on attracting and retaining quality new business. Actuarial
estimates show the quality of new business was significantly enhanced as a
result.
2. During the previous financial year and the first six months of the reporting
period, work was done around Vitality and product features to bring down the
cost of benefits. These
measures were put in place for policies renewing from 1
January 2010. The effects will therefore not be felt during the period under
review, but will materialise from the second half of the 2011 financial year.
3. During the period under review, certain operational functions were
incorporated into the South African operational environment leading to a
significant reduction in operational costs per life. The business also incurred
further restructuring costs that will position PruHealth for future operational
cost reductions. As above, the positive effects of this strategy will
materialise in the next 6 to 12 months.
4. Finally, PruHealth`s acquisition of Standard Life Healthcare - given the
quality of the business, its low loss ratios and established infrastructure -
presented an excellent opportunity for PruHealth to increase its scale. Standard
Life Healthcare offers many complementary assets to
PruHealth and collectively,
the combination of the two creates a compelling new business. Standard Life`s
product strategy is based on modular ancillaries and the company focuses
strongly on service and distribution through agency and direct channels. These
strengths complement PruHealth`s Vitality and integration assets, product and
innovation capabilities and independent financial adviser distribution channel.
While Standard Life Healthcare`s distribution is weighted more towards the
individual market and smaller groups, PruHealth has attracted larger SMEs and
corporates. The result of combining the businesses is a complementary model and
expanded distribution footprint with the ability to yield substantial volumes of
new business. Importantly, increased scale also provides the opportunities for
expense economies and greater negotiation power with healthcare providers. The
acquisition has seen a significant and substantial transformation of the
PruHealth business from 226 000 lives to 700 000 lives.
While some of the effects of these strategies applied in the period are already
starting to filter through, the full benefits will only be realised in the next
18 to 24 months. As they come to fruition, PruHealth is expected to grow
significantly and, in the longer term, to achieve a margin of 4% to 5%.
PruProtect
PruProtect performed exceptionally well, exceeding expectation with the company
reducing its operating losses significantly and moving rapidly towards
profitability. New business increased by 116% to R227m and operating losses
were cut by 70% to R40m. Importantly, the rate of new business increased - the
average daily applications for the second half of the financial year amounted to
275 applications, compared to 200 applications received for the first six months
of the financial year and
around 130 for the previous period.
During the period under review, PruProtect took a number of innovative products
to market - most notably the Health Cover Optimiser that extends Discovery`s
approach of integrating products. The Health Cover Optimiser combines
PruHealth`s private medical insurance cover with PruProtect`s severe illness
benefit and offers the savings from expense economies and benefit overlap to
policyholders. Although early in the product`s roll-out, the company is
optimistic about the potential growth of the first integrated product in the UK
market.
In China and the USA
Discovery in the period announced its acquisition of a 20% stake of Ping An
Health - the health subsidiary of China`s Ping An Group. The joint venture will
see Ping An Health deploy Discovery`s product
innovation and consumer-engaged
model to a potential market of 83 million families. Given the ability for
Discovery to tap into Ping An`s brand credibility and distribution footprint,
and based on the Chinese government`s regulatory support of private healthcare,
the opportunity in China is compelling.
Discovery has also maintained a small US presence over the past three years,
where it markets the Vitality wellness programme as a standalone offering to
corporate firms and health insurers. This approach of strategic partnerships,
coupled with US regulatory reforms that place the emphasis on cost management
through wellness and prevention, create opportunities for Discovery to deploy
Vitality`s assets without requiring capital or incurring significant fixed
costs.
4. Prospects
The work done over the past financial year positions the Discovery Group
strongly for continued growth and profitability into the future.
MI Hilkowitz A Gore
Chairperson Chief Executive Officer
Income statement
for the year ended 30 June 2010
R million Group Group %
2010 2009 change
Insurance premium revenue 7 860 5 186 52
Premium revenue from investment contracts 1 865 -
transferred to insurance contracts
Reinsurance premiums (1 172) (870) 35
Net insurance
premium revenue 8 553 4 316
Fee income from administration business 3 380 2 885 17
Receipt arising from reinsurance contracts - 750
Investment income 239 236
Net realised gains on available-for-sale 200 65
financial assets
Net fair value gains/(losses) on financial 276 (9)
assets at fair value through profit or loss
Vitality income 1 182 944 25
Net income 13 830 9 187
Claims and policyholders` benefits (2 586) (2 583)
Insurance claims recovered from reinsurers 841 707
Net claims and policyholders` benefits
(1 745) (1 876)
Acquisition costs (1 961) (1 313) 49
Marketing and administration expenses (4 807) (4 329) 11
Recovery of expenses from reinsurers 95 223 (57)
Transfer from assets/liabilities under (2 717) 106
insurance contracts
- change in assets arising from insurance 1 639 1 292
contracts
- change in liabilities arising from (4 291) (327)
insurance contracts
- change in liabilities arising from (65) (859)
reinsurance contracts
Fair value adjustment to liabilities under (175) (35)
investment contracts
Profit before impairment and BEE expenses 2 520 1 963 28
Impairment of financial instruments held as - (96)
available-for-sale
BEE expenses (6) (13)
Profit from operations 2 514 1 854 36
Finance costs (14) (16)
Foreign exchange loss (3) (23)
Share of loss from associate - (1)
Profit before tax 2 497 1 814 38
Income tax expense (782) (590) 33
Profit for the year 1 715 1 224 40
Profit
attributable to:
- equity holders 1 717 1 212 42
- non-controlling interests (2) 12
1 715 1 224 40
Earnings per share for profit attributable
to the equity holders of the company during
the year (cents):
- basic 309.9 219.9 41
- diluted 308.7 219.3 41
Statement of comprehensive income
for the year ended 30 June 2010
R million Group Group %
2010 2009 change
Profit for the year 1 715 1 224 40
Other comprehensive income:
Change in available-for-sale financial 33 (187) 118
assets
- unrealised gains/(losses) 238 (253)
- capital gains tax on unrealised (33) 39
gains/losses
- realised gains transferred to profit or (200) (65)
loss
- capital gains tax on realised gains 28 9
- impairment transferred to profit or loss - 96
- capital gains tax on impairment - (13)
Currency translation
differences (20) (55) 64
Cash flow hedges 12 43 (72)
- realised losses transferred to profit or 2 12
loss
- tax on realised losses - (2)
- unrealised gains 22 34
- tax on unrealised gains (12) (1)
Other comprehensive income for the year, net 25 (199) 113
of tax
Total comprehensive income for the year 1 740 1 025 70
Attributable to:
- equity holders 1 742 1 013 72
- non-controlling interests
(2) 12
Total comprehensive income for the year 1 740 1 025 70
Headline earnings
for the year ended 30 June 2010
R million Group Group %
2010 2009 change
Headline earnings per share (cents):
- undiluted 278.8 224.7 24
- diluted 277.7 224.1 24
The reconciliation between earnings and
headline earnings is shown below:
Net profit attributable to equity 1 717 1 212
shareholders
Adjusted for:
- realised profit on available-for-sale (172) (56)
investments net of CGT
- impairment on available-for-sale - 82
investments net of CGT
Headline earnings 1 545 1 238 25
Weighted number of shares in issue (000`s) 554 117 551 043 1
Diluted weighted number of shares (000`s) 556 257 552 591 1
Statement of financial position
at 30 June 2010
R million Group Group
2010 2009
ASSETS
Assets arising from insurance contracts
