DSBP: DISCOVERY LIMITED - Unaudited interim.../03 |
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%. SENS release date: 20 February 2018 Date: 20/02/2018 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS. |
2018-02-20 08:00:00 Source: JSE News Service (SENS) |
Discovery Limited published this content on 20 February 2018 and is solely responsible for the information contained herein.
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