Discovery significantly increases the scale of PruHealth through the acquisition of Standard Life Healthcare

12 May 2010 Discovery Holdings
Adrian Gore, Discovery?s Chief Executive

Adrian Gore, Discovery?s Chief Executive

· Acquisition of Standard Life Healthcare expected to create new competitor scale in the UK Private Medical Insurance market
· New company to retain PruHealth brand name

Discovery Holdings of South Africa today announced that it has entered into an agreement to acquire the entire share capital of Standard Life Healthcare, a wholly-owned subsidiary of the Standard Life Group, for R1.56bn (£138m). The transaction is strategically consistent with Discovery’s ambition to increase its scale and relevance in the UK, through an increased majority shareholding in PruHealth Holdings Limited, the holding company of PruHealth and PruProtect, the joint ventures between Discovery and Prudential Assurance Company of the United Kingdom.

Standard Life Healthcare is the UK’s fourth-largest private medical insurer, with an 8 per cent market share, 490,000 members, and a tangible net asset value on acquisition of at least R848m (£75m). Standard Life Healthcare has a strong track record of profitability, with IFRS underlying profit before tax of R106m (£9,4m). The transaction creates a new competitor of scale in the UK Private Medical Insurance (PMI) market, covering approximately 700,000 lives, and attracting annual premiums of approximately R4.1bn (£370m).

The effective date of the transaction is expected to be 31 July 2010.

The transaction is consistent with Discovery’s stated objective to establish a substantial presence in the UK

Since the launch of PruHealth in 2004, the UK has been a key focus in Discovery's international strategy. The UK has a large, well developed financial services market which is receptive to the consumer-driven product philosophy that Discovery has brought to both the health insurance and protection industries. The continued trend towards wellness and consumerism, as well as the increased financial pressure that the NHS is expected to face as a result of tighter public spending, creates significant growth opportunities for Discovery’s innovative, integrated model.

Discovery's joint venture with Prudential has created a strong foothold in both the health insurance and protection markets in the UK; the acquisition of Standard Life Healthcare is likely to accelerate the attainment of both PruHealth and PruProtect’s UK strategies. In the protection market, Standard Life Healthcare’s large, high-quality client base provides growth opportunities for PruProtect, and enhances Discovery’s ability to implement its integrated model in the UK.

The acquisition provides PruHealth with complementary assets that significantly strengthen its competitive position

PruHealth and Standard Life Healthcare have pursued complementary strategies in the UK; while PruHealth has focused on product innovation, wellness and consumer engagement, Standard Life Healthcare’s approach has been to offer comprehensive, flexible coverage with a high-touch service. Both approaches have proven successful, and have resulted in PruHealth and Standard Life Healthcare building distinct and highly complementary assets and capabilities in PMI.

Adrian Gore, Discovery’s Chief Executive, said: “While PruHealth has won awards for product innovation, Standard Life Healthcare has been broadly recognised for its excellence in service delivery. The integration of our assets will result in a well-balanced client mix, a comprehensive and complementary product range, a broadening of expertise in the UK, and a national distribution network of agents and brokers. This will significantly strengthen our competitive position, and provide the platform for strong future growth.”

The transaction will enable Discovery to increase its shareholding in the PruHealth and PruProtect joint venture to 75%, while retaining the support of Prudential

Discovery will fund the purchase of the Standard Life Healthcare transaction, and intends to contribute Standard Life Healthcare to PruHealth as a capital investment. Once completed, this will result in Discovery’s shareholding in both PruHealth and PruProtect increasing from the current level of 50 per cent, to 75 per cent. Prudential will have a 25 per cent shareholding in both companies within the joint venture, including Standard Life Healthcare. As well as Prudential providing operational expertise in key areas, the joint venture will continue to benefit from using the Prudential brand.

Andy Crossley, Deputy Chief Executive of Prudential UK and Europe, said: “We believe Discovery’s acquisition of Standard Life Healthcare provides significant opportunities in the UK for both PruHealth and PruProtect and will create value for both Discovery and Prudential. We look forward to working with Discovery to integrate Standard Life Healthcare into the joint venture arrangement.”

The governance structure of PruHealth is being changed to reflect its increased scale and growth potential

Discovery and Prudential previously announced management changes to their UK joint ventures that sought to more closely align the strategic direction of PruHealth and PruProtect. As part of this process, Herschel Mayers was appointed as interim CEO of both PruHealth and PruProtect.

Given PruHealth’s enhanced scale and growth potential following the acquisition of Standard Life Healthcare, it was thought prudent to appoint a dedicated health insurance CEO in the UK. As a result, Neville Koopowitz, currently CEO of Discovery Health, will take over as CEO of PruHealth, and will be relocating to the UK to fulfil this role. Dr Jonathan Broomberg, currently Deputy CEO of Discovery Health, will replace Neville as CEO of Discovery Health on his departure. Herschel Mayers will retain his position as CEO of PruProtect.

The deal will be concluded subject to fulfilment of the conditions precedent

The conclusion of this transaction is subject to obtaining the necessary regulatory approvals from the Financial Services Authority (UK) and the South African Reserve Bank, which are expected to take approximately 3 months.

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