Review of Group results

R million	December 2011	December 2010	% changed
Discovery Health	2 089	1 974	6
Discovery Life	892	832	7
Discovery Invest	487	397	23
Discovery Vitality	74	70	6
Discovery Insure	118	–
PruHealth	272	313	(13)
PruProtect	218	144	51
Vitality USA	174	17	924
Ping An Health	211	–
New business API of Group	4 535	3 747	21

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 policies. For Vitality USA and Ping An Health, new business API is calculated based on the date of policy inception.

Gross inflows under management increased 16% for the six months ended 31 December 2011.

Gross inflows under management

R million	December 2011	December 2010	% changed
Discovery Health	17 016	15 115	13
Discovery Life	2 952	2 522	17
Discovery Invest	4 612	3 626	27
Discovery Insure	25	–
Discovery Vitality	778	676	15
PruHealth	2 186	1 829	20
PruProtect	274	142	93
Gross inflows under management	27 843	23 910	16
Less: collected on behalf of third parties	(17 833)	(15 356)	(16)
Discovery Health	(15 253)	(13 431)	(14)
Discovery Invest	(2 580)	(1 862)	(39)
PruHealth	-	(53)
PruProtect	-	(10)
Gross income of Group	10 010	8 554	17

Gross inflows under management measures the total funds collected by Discovery and is an accurate measure of the growth of Discovery.

Profit from operations

The following table shows the main components of the Group profit from operations for the six months ended 31 December 2011:

R million	December 2011	December 2010	% changed
Discovery Health	682	619	10
Discovery Life	862	768	12
Discovery Invest	81	44	84
Discovery Vitality	–	1
PruHealth	47	35	34
PruProtect	115	(40)	388
Profit from existing operations	1 787	1 427	25
Development and other segments	(158)	(95)	(66)
Normalised profit from operations	1 629	1 332	22
Amortisation of intangibles from business combinations	(70)	(44)	(59)
Investment income attributable to equity holders	80	76	5
Net realised gains on available-for-sale financial assets	80	192	(58)
Share of profit/(loss) from associates	(5)	–
Finance costs and foreign exchange gains/(losses)	(53)	(60)	12
Recapture of reinsurance	–	(312)
Gains and losses resulting from business combinations	–	609
Write-off of software from business combination	–	(95)
Profit before tax	1 661	1 698	(2)

From 1 August 2010, PruHealth and PruProtect have been accounted for as subsidiaries in the Group results, previously accounted for as joint ventures. This means that the comparatives disclosed include the income, expenses, assets and liabilities of these companies at 50% for July 2010, but at 100% from 1 August 2010.

Significant movements in the Income Statement

Acquisition of Standard Life Healthcare (SLHC)

For a detailed discussion regarding the accounting treatment of the acquisition of SLHC, please refer to the 30 June 2011 Annual Financial Statements.

In terms of IFRS 3 revised, paragraph 45, the initial accounting for an acquisition can be undertaken on a provisional basis. Adjustments to provisional values can be made within one year of the effective date, relating to facts or circumstances at the acquisition date. As such, the acquisition accounting entries were finalised at 30 June 2011 and no further adjustments will be made.

Intangibles identified in the acquisition of SLHC are amortised over their remaining useful lives and tested for impairment at each reporting date. There was no indication of impairment for the current reporting period. Discovery has recorded an amortisation charge of R70 million in profit or loss at 31 December 2011 (2010: R44 million).

Share-based payments

Included in marketing and administration expenses is R106 million (2010: R107 million) in respect of options granted under employee share incentive schemes expensed in accordance with the requirements of IFRS 2.

Discovery entered into transactions to hedge its exposure in the phantom share scheme related to changes in the Discovery share price. As at 31 December 2011, approximately 85% (2010: 67.3%) of this exposure was hedged.

Put options in subsidiaries

During the prior financial year, put options were granted to the non-controlling interests of three of Discovery’s subsidiaries, entitling the non-controlling interest to sell its interest in the subsidiary to Discovery at contracted dates. In accordance with IAS 32, Discovery has recognised the fair value of the non-controlling interest, being the present value of the estimated purchase price, as a financial liability in the Statement of Financial Position (Puttable non-controlling interests). Interest in respect of this liability of R75 million has been recorded in finance charges for the six months ended 31 December 2011, using the effective interest rate method. The estimated purchase prices have been reconsidered and no adjustments to the assumptions were made.

Aggregate effects on Discovery’s results at 31 December 2011:

R million	Total
Value of puttable non-controlling interests as at 1 July 2011	2 314
Further share issues to non-controlling interests	23
Finance charges recognised in the income statement	75
Net exchange differences arising during the period	330
Value of puttable non-controlling interests as at 31 December 2011	2 742

Taxation

All South African entities, excluding Discovery Insure, are in a tax paying position. South African income tax has been provided at 28% (2010: 28%) and secondary tax on companies at 10% in the financial statements. No deferred tax has been accounted for in respect of the Discovery Insure losses.

Discovery obtained no tax relief for the PruHealth losses in respect of the calendar year ending 31 December 2010 and utilised prior losses against current income in PruHealth. Discovery has not accounted for any deferred tax asset in respect of the balance of assessed losses in PruHealth.

Tax relief is obtained for 100% of the PruProtect losses through The Prudential Plc.

Included in the profit before tax for the six months ended 31 December 2010, are non-taxable gains and losses resulting from business combinations.

Material transactions with related parties

Discovery Health administers 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 arm’s length basis and totalled R1 613 million for the six months ended 31 December 2011 (2010: R1 541 million). Discovery offers the members of DHMS access to the Vitality programme.

Significant movements in the Statement of Financial Position

Financial assets

Financial assets have increased due to the sale of Discovery Invest products as well as the transfer of approximately R750 million from cash and cash equivalents to a money market investment portfolio.

Issue of preference shares

On 15 August 2011, Discovery issued 8 million B preference shares at an issue price of R100 each by way of private placement. These preference shares were issued at a coupon rate of 85% of prime rate. These preference shares are non-cumulative, non-participating, non-convertible, voluntarily redeemable no par value preference shares and have therefore been classified as equity. The value of the preference shares in the Statement of Financial Position has been reduced by share issue costs of R21 million.

The first preference share dividend has been declared on 22 February 2012. As these preference shares are non-cumulative, no dividend has been accrued for in the current reporting period. Normalised headline earnings have been adjusted by R23 million, as if the preference share dividends have been accrued for on a day-to-day basis.

Borrowings at amortised cost

Borrowings at amortised cost, includes a long-term loan of R400 million raised as part of the funding to purchase SLHC. Interest on the loan is payable quarterly, at a fixed interest rate. R20 million has been recorded in finance charges for the six months ended 31 December 2011 (2010: R12.6 million). The loan is repayable on 11 September 2017.

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.

Shareholder information

Directorate

Dr Ayanda Ntsaluba was appointed as an executive director with effect from 1 July 2011. Mr Jannie Durand was appointed as a non-executive director with effect from 25 August 2011.

Dividend policy and capital

A final dividend of 48 cents per share was paid on 17 October 2011.

The directors are of the view that the Discovery Group is adequately capitalised at this time. On the statutory basis the capital adequacy requirements of Discovery Life was R342 million (2010: R303 million) and was covered 4.4 times (2010: 3.9 times).

Preference share cash dividend declaration:

The board has declared a dividend of 289.23 cents per share, payable to preference shareholders for the period 15 August 2011 to 31 December 2011. The salient dates are as follows:

- Last date to trade “cum” dividend – Date trading commences “ex” dividend – Record date – Date of payment

Friday, 9 March 2012 Monday, 12 March 2012 Friday, 16 March 2012 Monday, 19 March 2012

Share certificates may not be dematerialised or rematerialised between Monday, 12 March 2012 and Friday, 16 March 2012, both days inclusive.

Ordinary share cash dividend declaration:

The board has declared an interim dividend of 50 cents per share. The salient dates are as follows:

– Last date to trade “cum” dividend – Date trading commences “ex” dividend – Record date – Date of payment

Thursday, 15 March 2012 Friday, 16 March 2012 Friday, 23 March 2012 Monday, 26 March 2012

Share certificates may not be dematerialised or rematerialised between Friday, 16 March 2012 and Friday, 23 March 2012, both days inclusive.

Accounting policies

The interim results have been prepared in accordance with International Financial Reporting Standards including IAS 34, as well as the South African Companies Act 71 of 2008. The accounting policies adopted are consistent with the accounting policies applied in the last annual report and the corresponding prior year period.

Comparative figures

There have been no changes to comparative figures, except for a change in the composition of Discovery’s reportable segments.

In terms of IFRS 8, if a segment no longer meets any of the ten per cent thresholds in the current or prior period, this segment will not be required to be reported on separately in either period. The USA Health segment meets this criteria and has now been aggregated in the ‘All other segments’ column in the Segmental Information in both the current and prior periods.