Discovery Limited · JSE:DSY
Discovery — Debt Investor Presentation (November 2019)
44 slides from Discovery's debt investor presentation, November 2019
Slide 1: Domestic Medium Term Note Programme Deal Roadshow November 2019
Domestic Medium Term Note Programme Deal Roadshow November 2019 1
Slide 2: Team introduction
Team introduction Group Chief Financial Officer Group Chief Risk Officer Group Corporate Finance 2
Slide 3: Business Model and Financial Performance; Operating Model; Debt Overview
Business Model and Financial Performance Operating Model Debt Overview Discussion Points DMTN Issuance 3
Slide 4: Business Model and Financial Performance
Business Model and Financial Performance 4
Slide 5: Financial results overview | 12 months to 30 June 2019
Financial results overview | 12 months to 30 June 2019 Core new business1 Normalised operating profit Normalised headline Net cash flow earnings Operating cash flow to R18 299m to R7 747m to R5 035m Return on Embedded Earnings investment in Interest cover2 Bank & DMTN Debt Value new initiatives Othe
Slide 6: Core new business
Core new business 12 months 12 months Rm % change to R18 299m to 30 Jun 2019 to 30 Jun 2018 1 6 640 6 573 +1% 18,299 ESTABLISHED BUSINESSES 2 312 2 188 +6% 16,137 2 604 2 454 +6% +5% 14,660 1 346 1 107 +22% 13,303 12,320 1 291 1 172 +10% 1 041 1 047 -1% EMERGING BUSINESS 2 922 645 +43% +43% NEW 3 2
Slide 7: Normalised operating profit
Normalised operating profit Normalised operating profit 12 months 12 months Rm to 30 Jun 2019 to 30 Jun 2018 % change to R7 747m 3 044 2 777 +10% ESTABLISHED BUSINESSES 3 230 3 551 -9% 7,980 966 885 +9% +3% 7,747 6,860 758 589 +29% 6,261 5,703 578 515 +12% 155 68 +128% EMERGING BUSINESS 161 94 +71%
Slide 8: Operating Model
2 Operating Model Group profit growth of
Slide 9: Operating model
Operating model Group profit growth of CPI + 10% Cash Cash cash > 50% ~5 years Investment of 10% of profit Capital Allocated debt Growth Engine ROC RF + 10%) FLR <28% Capital model generated used Cash Funding spent Per business. < 50% Operating cash flow Net cash flow Cash model Additional buffer Lf
Slide 10: Cash management supports growth methodology
Cash management supports growth methodology Net cash flow Cash Funding Cash generated used Debt R1.2bn Tax Equity Raise R1.2bn Finance costs R1.5bn Dividend Cash generated from in-force business New business R14.6bn R8.1bn New businesses R3.6bn Net cash flow1 R1.7bn 10 1 Movement in shareholder free
Slide 11: Operating to net cash flow
Operating to net cash flow Cash from Operations Funding and investment decisions Tax R1.4bn R1.2bn Finance costs Funding R1.2bn Cash generated from in-force R2.6bn Dividend business New business R1.5bn (Excl. One-offs) R8.1bn SAM one-off New businesses R11.1bn R3.5bn R3.6bn Business development Oper
Slide 12: Group's positive cash generating businesses is growing
Group’s positive cash generating businesses is growing Net operating cash flow (Rm) Relative increase in cash contributing business (%) 3 500 80% 3 000 60% 2 500 40% 2 000 1 500 20% R millions 1 000 0% 500 -20% 0 ( 500) -40% (1 000) -60% (1 500) FY2016 FY2017 FY2018 FY2019 FY2016 FY2017 FY2018 FY201
Slide 13: Improving cash generation
Improving cash generation Diversification of cash flow improving Cash conversion above target Cash cover on target Cash from any one business should not contribute more More than 50% of operating profit must be cash Operating cashflow should be enough to at least cover than 50% of the total operatin
Slide 14: De-risking the balance sheet
De-risking the balance sheet Strongly capitalised FLR is decreasing Cash buffer has grown strongly Statutory capital Rm Cover requirements 29% 28% 28% R17 396m 1.6x 27% 26% R789m 1.7x 25% Cash buffer: R1bn – R2bn 24% R1 777m 1.4x 23% 22% R3 810m 1.5x 21% Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-17 Jun
Slide 15: FLR and cash buffer projection
FLR and cash buffer projection FLR is decreasing Cash buffer stabilises over projection period 28% 25.8% 23.3% Cash buffer: R1bn – R2bn FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 15
Slide 16: Key focus areas
Key focus areas The Bank has made Actions taken to mitigate low significant progress since its interest rates in the United public launch in July Kingdom 16
Slide 17: Timeline Bank costs (Rm)
Timeline Bank costs (Rm) Slightly delayed to ensure the delivery of a robust, brilliant bank Within expectation due to the disciplined management of costs ACTUAL S.17 First Gallagher Public roll Media Licence deposit Launch out launch R3 172m R3 212m received VS ~three- Actual cost Expected cost mon
Slide 18: The Bank has made significant progress in the last 8 months
The Bank has made significant progress in the last 8 months Accounts Clients Retail deposits Total credit card facilities R584m Credit used R518m Utilised Credit Credit Facility 18
Slide 19: UK Interest rate exposure
UK Interest rate exposure Recent movement in UK Interest Rates • UK long-term interest rates have decreased to their % 6 during October 2019 25 year GBP IRS Since 2000 • IFRS sensitivity to interest rate movements: 5 (Previously communicated) Global Financial Crisis • Primarily a back book issue, wi
Slide 20: UK Interest rate hedge
UK Interest rate hedge IFRS/Potential Cashflow impact on VitalityLife Illustrative example of IFRS/Cashflow position Impact of Hedge 150 From 25 October 2019 • The payoff profile of the underlying Indicative VL gross earnings sensitivity (£ millions) . 100 30 June 2019 Level • At current rates plus
Slide 21: Debt overview
Debt overview 21
Slide 22: Existing debt maturity profile
Existing debt maturity profile South African debt maturity profile UK debt maturity profile 3,000 45 40 2,500 35 2,000 30 R Millions £ Millions 25 1,500 20 1,000 15 10 500 5 - - FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2020 FY2021 FY2022 FY2023 FY2024 Other Funding DMTN • Syn
Slide 23: Existing bank debt covenants
Existing bank debt covenants Covenant Minimum Requirement 30-Jun-19 30-Jun-18 Group Debt to EBITDA ratio Less than 2.5X 1.59 1.53 Group financial Indebtedness to EV Less than 30% of Group EV 18.4% 19.9% Group EV Greater than R30 billion ZAR 71,217 ZAR 65,624 Discovery Life SCR Cover Current: SCR Cov
Slide 24: Key drivers of known funding requirements
Key drivers of known funding requirements 1-3 years 3-5 years • Transfer of Vitality Life business from Prudential balance sheet to • Refinance maturing South African and UK bank debt Vitality Life Limited (Part VII) arrangements • Vitality Life new business funding • New initiatives • Bank regulato
Slide 25: Group's debt requirements
Group’s debt requirements Group debt projection overlaying DMTN* FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 Other DMTN * The mix between bank and DMTN funding may vary depending on market conditions at the time 25
Slide 26: Discovery's credit rating
Discovery’s credit rating Credit strengths Moody’s Insurance Financial Strength Rating (IFSR) 1. Very and • Baa2 2. and non-insurance from • 1 above the Sovereign (Baa3) Supported by and 3. because of the capital-light nature of its business Moody’s long-term issuer (LT 4. on both Issuer) rating • B
Slide 27: Discussion Points
Discussion Points 27
Slide 28: Discussion Points: NHI
Discussion Points: NHI 28
Slide 29: Section 33 Role of medical schemes; Section 8 (2)
Section 33 Role of medical schemes Once National Health Insurance has been fully implemented as determined by the Minister through regulations in the Gazette, medical schemes may only offer complementary cover to services not reimbursable by the Fund. Section 8 (2) Access to health care services A p
Slide 30: Discovery supports the principles of the NHI, but believes in private medical schemes
Discovery supports the principles of the NHI, but strongly believes in the role of private medical schemes Significant inequality in Implied tax increase to fund access and quality of care Total health expenditure p.a. medical scheme contributions Result is not optimal Healthcare spend per capita, p
Slide 31: Discussion Points: Discovery Life Accounting
Discussion Points: Discovery Life Accounting 31
Slide 32: Cumulative Cashflow
Strong historic cash generation and significant value created in Life & Invest Illustrative example: Annual Cash inflows and outflows Historic net shareholder capital invested in Discovery Life for a new protection policy and Invest Capital invested Cash Inflows and Outflows R5.2bn repaid to group o
Slide 33: Illustrative example: Cashflow profile vs. IFRS emergence
Illustrative example: Cashflow profile vs. IFRS emergence 1. Risk business characterised by significant upfront acquisition costs Cashflow profile (Life & Invest) as at 30 June 2019 (R’millions) 100 50 Includes c.R3.4bn Cashflow 0 SAM release -50 -100 Excluding Cashless Structure and Cash FinRe, exi
Slide 34: Insurance policy fair value principles compared to a Bond instrument
Insurance policy fair value principles are best illustrated when compared to a Bond instrument Bond Insurance Policy Cashflows Simplified 5-year cash flow profile 0 1 2 3 4 5 0 1 2 3 4 5 Initial Investment Coupons Initial expenses (IE) IE loadings Net Cashflows above IE loadings (Margins) Income Sta
Slide 35: IFRS reserve assumptions include significant margins vs Best Estimate assumptions
IFRS reserve assumptions include significant margins vs Best Estimate assumptions Published variances are on a best estimate basis hence Expected to realise the full IFRS Negative Rand Reserve don’t allow for these margins (NRR) in cash in the first 16 years Assumption Prescribed reserving margins**
Slide 36: IFRS NRR exhibits a high degree of resilience
Allowing for these margins in the IFRS basis the IFRS NRR exhibits a high degree of resilience Assumptions Available margin under various 1 in 200 stresses Resilient under 1/200 stresses Compulsory and RESILIENCE TESTING Discretionary margins Base Nominal Int Rate Real Int Rate Up Mortality Morbidit
Slide 37: DMTN Issuance
DMTN Issuance 37
Slide 38: Key features of the DMTN programme
Key features of the DMTN programme ISSUER Discovery Limited SIZE (NOMINAL AMOUNT) R10 billion of which 4 issuances made totalling R2.2 billion GUARANTORS Discovery Health and Discovery Vitality (as per current SA Bank Loans) LISTING The Interest Rate Market of the JSE Limited Notes that can be issue
Slide 39: DMTN issuances to date
DMTN issuances to date Stock code DSY01 DSY02 DSY03 DSY04 Nominal Value (Rm) 500 800 200 700 Tenor (years) 5 7 7 8 Date Issued 21-Nov-17 21-Nov-17 21-Nov-17 29-Aug-18 Maturity Date 21-Nov-22 21-Nov-24 21-Nov-24 29-Aug-26 Type of Notes Floating Rate Floating Rate Fixed Rate Floating Rate Pricing Benc
Slide 40: DMTN - Proposed Termsheet
DMTN - Proposed Termsheet Stock code DSY05 DSY06 DSY07 Nominal Value (Rm) Targeting between R1.25bn and R1.5bn Tenor (years) 3 5 7 Week commencing Week commencing Week commencing Issue Date 18-Nov-19 18-Nov-19 18-Nov-19 Maturity Date Nov-22 Nov-24 Nov-26 Type of Notes Floating/Fixed Rate Floating/Fi
Slide 41: Disclaimer
Disclaimer Strictly private and confidential This presentation has been prepared by Discovery Limited (“Discovery”). The information contained in this presentation is confidential and intended solely for the intended recipient. This presentation may contain information proprietary to Discovery and a
Slide 42: Domestic Medium Term Note Programme Deal Roadshow November 2019
Domestic Medium Term Note Programme Deal Roadshow November 2019 42
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