Discovery Limited · JSE:DSY
Discovery — H1 FY2009 Earnings Presentation
89 slides from Discovery's earnings presentation, February 2009
Slide 1: Interim financial results for the 6 months ended 31 December 2008
Interim financial results for the 6 months ended 31 December 2008 Adrian Gore, Discovery
Slide 2: Discovery corporate profile
Discovery corporate profile 2
Slide 3: Vitality is foundational to all of Discovery's businesses
Vitality is foundational to all of Discovery’s businesses South Africa United Kingdom United States 3
Slide 4: Key observations for the 6 months ending 31 December 2008
Key observations for the 6 months ending 31 December 2008 +28% +31% +19% +20% Operating profit New business API Headline Diluted embedded Fi Financial i l (excl Destiny) – established t bli h d earnings value per share businesses Cross- Innovation-driven Capital strength sectional new business and s
Slide 5: Key observations over the period
Key observations over the period Pleasing gpperformance in every y respect, p , and beyond y expectation, p , despite p the Fi Financial i l recessionary climate 5
Slide 6: Performance for the 6 months ended 31 December 2008
Performance for the 6 months ended 31 December 2008 6 months to % 31 Dec 2008 change Comment New business API R2,798m 28% 6
Slide 7: New business API remains robust across the group
New business API remains robust across the group New business API (excluding Destiny) 3,000 28% 2,500 12% 13% 2,000 11% 25% 1,500 1,000 500 0 Rm 2003 2004 2005 2006 2007 2008 Note: Excludes Destiny 7
Slide 8: Performance for the 6 months ended 31 December 2008
Performance for the 6 months ended 31 December 2008 6 months to % 31 Dec 2008 change Comment New business API R2,798m 28% - Discovery Health R475m 22% Excellent performance across all aspects - Discovery Life R618m 29% Continued strong claims experience and business growth - Discovery Vitality R23m
Slide 9: Performance for the 6 months ended 31 December 2008
Performance for the 6 months ended 31 December 2008 6 months to % 31 Dec 2008 change Comment New business API R2,798m 28% - Discovery Health R475m 22% Excellent performance across all aspects - Discovery Life R618m 29% Continued strong claims experience and business growth - Discovery Vitality R23m
Slide 10: Performance for the 6 months ended 31 December 2008
Performance for the 6 months ended 31 December 2008 6 months to % 31 Dec 2008 change Comment New business API R2,798m 28% - Discovery Health R475m 22% Excellent performance across all aspects - Discovery Life R618m 29% Continued strong claims experience and business growth - Discovery Vitality R23m
Slide 11: Progression of embedded value
Progression of embedded value Embedded value 25,000 20,000 14% 6% 19% 15,000 10% 21% 10,000 5,000 0 Rm Jun 2006 Dec 2006 Jun 2007 Dec 2007 Jun 2008 Dec 2008 Methodology change As previously reported Diluted embedded value per share of R36.17 11
Slide 12: Experience variances
Experience variances Experience variances (6 months ended December 2008) 400 300 200 100 0 -100 -200 Rm Total Mortality and Policy Expenses Lapses and Premium morbidity alterations cancellations increases and other 12
Slide 13: Key observations over the period
Key observations over the period Pleasing gpperformance in every y respect, p , and beyond y expectation, p , despite p the Fi Financial i l recessionary climate Innovation- driven new Using the power of innovation to enhance quality, protection and value for money business 13
Slide 14: Using innovation to drive better benefits, lower costs and product differentiation
Using innovation to drive better benefits, lower costs and product differentiation Cover Integrator LifeTime Impact methodology Adjustment to extra cover Integrated Cover flexes 1 2 2 by Vitality status Vitality 20% Integrated 40% Integrated status Cover Cover LifeTime Impact Determine Determine the
Slide 15: Using innovation to drive better benefits, lower costs and product differentiation
Using innovation to drive better benefits, lower costs and product differentiation Personal Pathways Vitality Interactive Enhancement of Vitality partners Product re-change Vitality Lite Premium impact -2.0% -1.5% -1.0% 0% Consistent theme: Differentiation, better value for money, excellence 15
Slide 16: Key observations over the period
Key observations over the period Pleasing gpperformance in every y respect, p , and beyond y expectation, p , despite p the Fi Financial i l recessionary climate Innovation- driven new Using the power of innovation to enhance quality, protection and value for money business Capital Further strengthe
Slide 17: Discovery Group balance sheet
Discovery Group balance sheet Composition of Discovery’s balance sheet 8% 12% 36% Negative Rand reserve Financial assets Cash Other 44% 17
Slide 18: Understanding the negative Rand reserve
Understanding the negative Rand reserve Build-up of the negative Rand reserve 16,000 14 000 14,000 12,000 10,000 , Margins 8,000 6,000 4,000 Negative 2,000 Rand reserve 0 Rm 18
Slide 19: Financial reinsurance of NRR
Financial reinsurance of NRR Monetisation of the NRR 5 B Benefits fit 4 1. Transfer of risk R1.85bn 3 2. Improved cash flow position R850m 2 3. Enhanced flexibility 1 4. Retain margins 0 Rbn Before After NRR Cash Backing retail investment products 19
Slide 20: Overview of capital management philosophy
Overview of capital management philosophy Debt-free capital structure; R1.5bn cash on hand Members reserves of >R5bn ((>25%)) in DHMS invested in cash 6.4 times CAR cover 2.2 times CAR cover 20
Slide 21: Key observations for the 6 months ending 31 December 2008
Key observations for the 6 months ending 31 December 2008 +28% +31% +19% +20% Operating profit New business API Headline Diluted embedded Fi Financial i l (excl Destiny) – established t bli h d earnings value per share businesses Cross- Innovation-driven Capital strength sectional new business and s
Slide 22: Discovery Health
‘y) Discovery Health
Slide 23: Key financial drivers
Key financial drivers 6 months 6 months % to 31 Dec 2008 to 31 Dec 2007 change Operating profit R475m R389m 22% Membership 2,093,434 2,054,270 4% DHMS annualised lapse rate 3.55% 3.57% -1% DHMS reserves* reserves >R5bn R4.2bn DHMS solvency (%)* >25% 23.0% * These results still have to be audited and
Slide 24: Overview of the SA health insurance landscape
Overview of the SA health insurance landscape Average beneficiaries 2007* Net healthcare results 2007* (Rm) 2,000,000 1,500,000 1,000,000 500,000 0 -350 0 350 700 Discovery Bonitas Oxygen Spectramed Medihelp Medshield Fedhealth Momentum Health Sizwe Medicover H Hosmed d Liberty Resolution Health Mun
Slide 25: Discovery Health observations
Discovery Health observations 1 Solvency and performance of DHMS 2 A better healthcare system for members 3 Strong acceptance of product and value philosophies 4 Service quality and efficiency 5 Regulatory positioning in the context of the National Health Insurance 25
Slide 26: Discovery Health observations
Discovery Health observations 1 Solvency and performance of DHMS 2 A better healthcare system for members 3 Strong acceptance of product and value philosophies 4 Service quality and efficiency 5 Regulatory positioning in the context of the National Health Insurance 26
Slide 27: Attainment of 25% solvency target
Attainment of 25% solvency target DHMS solvency and reserves*: December Investment of DHMS reserves: Dec 2008 6,000,000 30% 1.4% 15.8% 5 000 000 5,000,000 25% 4,000,000 20% 3 000 000 3,000,000 15% 2,000,000 10% 82.8% 1,000,000 , , 5% 0 0% Equity portfolio R000 200020012002200320042005200620072008 Mo
Slide 28: Discovery Health observations
Discovery Health observations 1 Solvency and performance of DHMS 2 A better healthcare system for members 3 Strong acceptance of product and value philosophies 4 Service quality and efficiency 5 Regulatory positioning in the context of the National Health Insurance 28
Slide 29: Proprietary Discovery Payment Arrangements
Proprietary Discovery Payment Arrangements General practitioner Specialist Total Western Cape Northern Cape NW Province M Mpumalanga l Limpopo KwaZulu Natal Gauteng Free State Eastern Cape 100% 80% 60% 40% 20% 0% 0% 20% 40% 60% 80% 100% General practitioner: 75% penetration Specialist: 83% penetrati
Slide 30: Structural consistency provides flexibility and widest plan choice
Structural consistency provides flexibility and widest plan choice Executive Comprehensive Priority Saver Core KeyCare Member can choose from varying levels of benefits 30
Slide 31: Distribution of membership by plan type
Distribution of membership by plan type Distribution of DHMS membership by plan type (Dec 2008) 1% 1% 10% 12% KeyCare Comprehensive Core Priority 17% Saver 26% Executive 31
Slide 32: Appropriateness of price points
Appropriateness of price points 8,000 7,000 , Monthly prremium (R) 6,000 Executive plan Classic Comprehensive 5,000 Essential Comprehensive 4,000 Classic Saver Classic Priority 3,000 Essential Saver Essential Priority Classic Delta Saver 2,000 2 000 Essential Core Coastal C Classic Core Saver t lS C
Slide 33: Discovery Health observations
Discovery Health observations 1 Solvency and performance of DHMS 2 A better healthcare system for members 3 Strong acceptance of product and value philosophies 4 Service quality and efficiency 5 Regulatory positioning in the context of the National Health Insurance 33
Slide 34: New distribution channels have been additive to the overall result
New distribution channels have been additive to the overall result Health new business by sales channel (6 months ended December) 1,600,000 1,200,000 800,000 400 000 400,000 0 R000 2006/7 2007/8 2008/9 Corporate brokers General brokers 34
Slide 35: Lapse rate remains well contained
Lapse rate remains well contained Annualised lapse rate 5% 4% 3% 2% 1% 0% Jun 07 Dec 07 Jun 08 Dec 08 35
Slide 36: Members who change plans, on average, buy up to better coverage
Members who change plans, on average, buy up to better coverage Plan changes: 2008 - 2009 4.5% 2.4% 93.1% Plan upgrade Plan downgrade No plan change 93% of members retained their cover, while 65% of movers bought up 36
Slide 37: Discovery Health observations
Discovery Health observations 1 Solvency and performance of DHMS 2 A better healthcare system for members 3 Strong acceptance of product and value philosophies 4 Service quality and efficiency 5 Regulatory positioning in the context of the National Health Insurance 37
Slide 38: Discovery Health achieved additional operating efficiency
Discovery Health achieved additional operating efficiency Expenses per member per month (real) (Dec 2006 = 100%) 100% 90% 80% 70% Dec 2006 Jun 2007 Dec 2007 Jun 2008 Dec 2008 ”This is the first time in myy 15 years y of auditing g that an organisation of this size and complexity … is certified witho
Slide 39: Discovery Health observations
Discovery Health observations 1 Solvency and performance of DHMS 2 A better healthcare system for members 3 Strong acceptance of product and value philosophies 4 Service quality and efficiency 5 Regulatory positioning in the context of the National Health Insurance 39
Slide 40: Revised principles of National Health Insurance in ANC Manifesto
Revised principles of National Health Insurance in ANC Manifesto Funding Suggested tax of 3% - 5% of personal income Primary health care, hospital services and outpatient services, Package of services free at point of service Providers Private and public facilities and providers Independent quality
Slide 41: Implementing full or partial NHI packages in SA is unaffordable in short – medium term
Implementing full or partial NHI packages in SA is unaffordable in short – medium term 350 300 250 200 Projected cost for universal provision 150 of private sector benefits Additional revenue = R325bn from 3% income tax 100 = R21.5bn R21 5b 50 Public sector health budget = R47.5bn 0 Rbn Cost Note: C
Slide 42: Discovery Health observations
Discovery Health observations 1 Solvency and performance of DHMS 2 A better healthcare system for members 3 Strong acceptance of product and value philosophies 4 Service quality and efficiency 5 Regulatory positioning in the context of the National Health Insurance 42
Slide 43: Discovery Life
Slide 44: Key financial metrics
Key financial metrics 6 months 6 months % to 31 Dec 2008 to 31 Dec 2007 change New business R801m R589m 36% Gross inflows R1,880m R1,446m 30% Operating profit R618m R479m 29% Value of in-force in force (SVM basis)* basis) R9,182m R7,626m 20% * Includes Discovery Life and Discovery Invest 44
Slide 45: New business remains robust despite market conditions
New business remains robust despite market conditions Risk new business API (including ACIs and servicing increases) 700 % 38% 600 500 16% 20% 400 5% 19% 300 200 100 0 Rm Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 45
Slide 46: Product excellence: Cover Integrator
Product excellence: Cover Integrator Cover Integrator provides up to a 50% discount on additional cover Adjustment to extra cover Integrated Cover flexes 20% 40% by Vitality status Vitality Integrated Integrated status Cover Cover Blue -0.63% -1.07% Additional cover at half price Bronze -0.33% -0.57
Slide 47: Product excellence: Strong receptivity to Cover Integrator
Product excellence: Strong receptivity to Cover Integrator Cover Integrator take-up % Average sum assured of existing policies 60% 3.5 50% 3.0 40% 2.5 30% 2.0 20% 1.5 10% 1.0 0% 0.5 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 -10% 0.0 Rm Before After Sum assured Cover Integrator 47
Slide 48: Distribution excellence: Investment in distribution
Distribution excellence: Investment in distribution Distribution breakdown: Jul 2008 – Jan 2009 Distribution of API: Jul 2008 – Jan 2009* 183 13.9% 7,173 86.1% A Agents t B k Brokers A Agent t B k Broker Multiplier effect of 5 times * Risk only 48
Slide 49: Recruitment analysis of Discovery agents
Recruitment analysis of Discovery agents Recruitment analysis by previous employer 10% 9% 14% 30% 17% 19% A B C D E F 49
Slide 50: Distribution of annualised commission per agent
0% 4% 8% 12% 16% 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 Estimated market average 500,000 550,000 600,000 650,000 700,000 750,000 800,000 850,000 Distribution of annualised commission per agent 900,000 950,000 1,000,000 1,050,000 1,100,000 Discovery average 1,150,000 1
Slide 51: Discovery Life experience variances
Discovery Life experience variances Experience variances (6 months ended December 2008) 200 150 100 50 0 -50 -100 -150 -200 Rm Lapses and Premium Net premium Mortality and Other variances Total variances cancellations increases variance morbidity 51
Slide 52: Building a business of scale and quality
Building a business of scale and quality Total capital investment in Discovery Life 700 600 500 400 300 200 100 0 Rm 2000 2001 2002 2003 2004 2005 2006 2007 2008 Current EV of R10.6bn is 5 times the investment value 52
Slide 53: Discovery Invest
Slide 54: Key financial metrics
Key financial metrics 6 months 6 months % to 31 Dec 2008 to 31 Dec 2007 change Gross inflows R2,330m R396m 489% Funds under Management R2,066m R406m 408% Operating loss (R83m) (R66m) (26%) 54
Slide 55: Market conditions have worsened over the past 6 months
value Index 12,000 16 000 16,000 20,000 24,000 28,000 32,000 28/10/20 007 25/11/20 007 23/12/20 007 20/01/20 008 17/02/20 008 16/03/20 008 13/04/20 008 11/05/20 008 08/06/20 008 47% d 06/07/20 008 li decline in index value 03/08/20 008 Performance of the Top 40 Index 31/08/20 008 28/09/20 008 26/10/
Slide 56: Gross inflows have grown in line with budget, with good annuity flow
Gross inflows have grown in line with budget, with good annuity flow Gross inflows 2,500 2,000 1 500 1,500 1,000 500 0 Rm Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Single premium Recurring premium 56
Slide 57: Distribution of Funds under Management
Distribution of Funds under Management 32% investment in endowment 80% of assets invested in Discovery funds 5 5% 5.5% 7.5% 7.4% 32.1% 14.1% 21.9% 44 4% 44.4% 6.4% 3.4% 2.0% 34.5% 19.8% 1.0% Discovery Single Manager Discovery Multi Manager Endowments Investment Plan External Funds Alpha Funds Retire
Slide 58: Investment performance
Investment performance 12-month performance: Discovery Equity Unit Trust 0 -5 -10 -15 -20 20 58
Slide 59: Support for gross inflows: Enhanced distribution network
Support for gross inflows: Enhanced distribution network Cumulative number of supporting brokers and agents 2,000 1,500 1,000 500 0 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 59
Slide 60: Discovery Vitality
Y) Discovery Viledity-
Slide 61: Vitality Wellness engagement is increasing
Vitality Wellness engagement is increasing Wellness engagement: 6 months ended December, 2008 vs 2007 2.00 1.60 1.20 0.80 0.40 0 00 0.00 Gyms Run/Walk for Physical Pharmacy Nutrition Non-smoker Goal weight Life activity screening assessments declarations assessments - online 61
Slide 62: Vitality engagement is high across the benefit spectrum
Vitality engagement is high across the benefit spectrum Benefit utilisation: 6 months ended December, 2008 vs 2007 1.30 1.20 1.10 1.00 0 90 0.90 DiscoveryCard Integrator policies Kulula Hotel usage Ster Kinekor discounts 62
Slide 63: The role of healthy living in preventing non-communicable diseases
The role of healthy living in preventing non-communicable diseases Total healthcare costs* Disability adjusted for life years" Occupational Blood pressure, risks cholesterol h l t l Genetic and age related Poor Medical risks scheme diet 30% Excessive benefits alcohol Obesity 70% Modifiable Lack of S
Slide 64: Launching Vitality HealthyFood
Launching Vitality HealthyFood™ 25% saving on nutritional items purchased at Pick n Pay 64
Slide 65: HealthyFood provides the opportunity to demonstrate clinical rigour of Vitality
HealthyFood™ provides the opportunity to demonstrate clinical rigour of Vitality Independent Vitality Nutrition Panel Prof Tim Noakes ESSM University of Cape Town ESSM, Prof Vicki Lambert ESSM, University of Cape Town Prof Marjanne Senekal Faculty of Health Sciences, University of Cape Town Anne Til
Slide 66: HealthyFood provides the opportunity to demonstrate clinical rigour of Vitality
HealthyFood™ provides the opportunity to demonstrate clinical rigour of Vitality Fruit and Chicken, fish and vegetables t bl WHO dietary meatt alternatives lt ti Nutrient recommendations 3,000 products 479 products Saturated fat 10 en% Grains and Vegetable oils cereals Trans fat 1 en% and nuts 1,425
Slide 67: Mechanics of HealthyFood benefit
Mechanics of HealthyFood™ benefit HealthyFood™ purchases marked on till slips 67
Slide 68: Discovery Card
Y) Discovery Card
Slide 69: Overview of DiscoveryCard
Overview of DiscoveryCard Spend per issued card DiscoveryCard’s advances book 6,000 2,000 5,000 1,500 4,000 3,000 1,000 2,000 500 1,000 0 0 R Silver Gold Platinum Rm Dec Jun Dec Jun Dec Jun Dec 05 06 06 07 07 08 08 Spend per card Industry average* 285,000 DiscoveryCards in issue * Across all card ty
Slide 70: Vitality is foundational to all of Discovery's businesses
Vitality is foundational to all of Discovery’s businesses Wellness and consumer engagement g g 70
Slide 71: PruHealth
aS rie) ai {PRUHEALTH
Slide 72: Key financial metrics
Key financial metrics 6 months 6 months % to 31 Dec 2008 to 31 Dec 2007 change New business R271m R248m 9% Membership* 193,547 150,341 29% Operating loss (£) (£4.3m) (£6.0m) 28% Operating loss (Rands) (R64m) (R83m) 23% * Membership as at 18 February 2009 and 21 February 2008 72
Slide 73: Loss ratio trending towards long-term assumption
Loss ratio trending towards long-term assumption Rolling 12 month loss ratio (Jan 2007 = 1) Loss ratio trend: PruHealth vs market 1.00 105 0.98 0.96 100 0.94 95 0.92 0.90 90 0.88 0 86 0.86 85 0.84 0.82 80 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 2005 2006 2007 73
Slide 74: Tight cost management driving operational efficiency
Tight cost management driving operational efficiency Annualised renewal unit costs (£) 400 350 300 250 200 150 100 50 0 £ H1 - 06 H2 - 06 H1 - 07 H2 - 07 H1 - 08 H2 - 08 74
Slide 75: Thought leadership in health and wellness
Thought leadership in health and wellness 75
Slide 76: Industry recognition of product leadership position
Industry recognition of product leadership position 76
Slide 77: Recognition of service excellence
Recognition of service excellence Ranking of Top 10 customer experiences in the UK 7.00 6.90 6.80 6.70 6 60 6.60 6.50 PruHealth HSA BUPA first direct Tesco Standard Lands Lands' Phones Alliance Boden Life End 4u and Leicester PruHealth was the top-rated customer experience in the UK across all indus
Slide 78: Overview of the usage-based gym incentive structure
Overview of the usage-based gym incentive structure REGULAR OCCASIONAL INFREQUENT If you go on average If you go on average If you go on average twice or more between once less than once a week and twice a week a week Standard £0 £25 £38 club membership Standard £0 £25 £38 club membership Standard T
Slide 79: Distribution of gym utilisation – evidence of adverse selection
Distribution of gym utilisation – evidence of adverse selection Distribution of gym utilisation: Status- vs usage-based model 70% 60% 50% 40% 30% 20% 10% 0% Less than once a week 1 - 2 visits a week More than twice a week Status-based model Usage-based model 79
Slide 80: Growth has slowed, but is reflective of strategic product revision
Growth has slowed, but is reflective of strategic product revision PruHealth lives per quarter 200,000 150,000 100,000 50,000 0 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Feb 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 80
Slide 81: Financial overview: Continued progress towards IFRS break even
Financial overview: Continued progress towards IFRS break even PruHealth IFRS loss (50%) Dec 2008 R Dec 2006 June 2007 Dec 2007 June 2008 Dec 2008 (excl gym) 0 -20,000,000 -40,000,000 40 000 000 -60,000,000 -80 000 000 -80,000,000 -100,000,000 -120,000,000 , , -140,000,000 81
Slide 82: PruProtect
3 2/PRUPROTECT
Slide 83: Roll-out of the Franchise distribution channel
0 2 4 6 8 10 12 14 Sep 007 Oct 007 Nov 007 Dec 007 Jan 008 Feb 008 Mar 008 Apr 008 May 008 Jun 008 Jul 0 08 Franchise directors Aug 008 Sep 008 Oct 008 Nov 008 Dec 008 Jan 009 0 10 20 30 40 50 60 70 80 90 100 Sep 007 Oct 007 Roll-out of the Franchise distribution channel Nov 007 Dec 007 Jan 008 Feb
Slide 84: Product enhancement and pricing refinement
Product enhancement and pricing refinement Original Revised Vitality premium premium status impact impact +2.25% 22 % B Bronze 0% 0% Silver -1.0% -1.0% Gold -1.5% -2.25% Platinum -2.0% 84
Slide 85: Impact of product enhancements: Pricing competitiveness
Impact of product enhancements: Pricing competitiveness Current premiums: Level Life + CI Premiums after reprice: Level life + CI Single 30 35 40 45 Single 30 35 40 45 15 4 4 9 6 15 1 1 3 2 Male non non-smoker smoker 20 7 7 9 7 Male non non-smoker smoker 20 1 1 2 2 25 8 11 9 3 25 2 2 2 3 15 2 2 4 2
Slide 86: Step-change in application activity as distribution network is expanded
Step-change in application activity as distribution network is expanded Average daily applications on a weekly basis 120 100 80 60 40 20 0 7 Jan 2008 26 Jan 2009 Week commencing 86
Slide 87: Key observations
Y) Discovery Key observations
Slide 88: Key observations for the 6 months ending 31 December 2008
Key observations for the 6 months ending 31 December 2008 +28% +31% +19% +20% Operating profit New business API Headline Diluted embedded Fi Financial i l (excl Destiny) – established t bli h d earnings value per share businesses Cross- Innovation-driven Capital strength sectional new business and s
Slide 89: Interim financial results for the 6 months ended 31 December 2008
Interim financial results for the 6 months ended 31 December 2008 Adrian Gore, Discovery