Organic growth and consumer engagement fuels strong performance from Discovery

Discovery announces results for the year ended June 2008

Highlights

•Operating profit from established businesses +39% to R1 763 million
•Two new businesses launched, Discovery Invest and PruProtect
•New business API excluding Destiny +18% to R4 799 million
•Net profit before tax +14% to R1 664 million
•Diluted embedded value per share +15% to R29,61
•Final dividend of 23 cents per share

Discovery today announced annual results for the year ended June 2008 with strong performances from established businesses.

During the year under review, Discovery launched two new businesses, Discovery Invest and PruProtect (the UK life insurance joint venture with the Prudential plc), and began the wind-down of Destiny Health, its US health insurance subsidiary.

Operating profits of established businesses – Discovery Health, Discovery Life, Vitality and PruHealth – increased by 39% to R1.8bn. After the costs of launching Discovery Invest and PruProtect, and the wind-down costs of Destiny Health, operating profits increased by 13% to R1.3bn.

Annual recurring new business increased by 18% to R4.8bn (excluding Destiny Health).

The embedded value grew by 16% to R16.4bn (despite an increase in the risk discount rate of 2.25% due to increasing interest rates).

According to group CEO Adrian Gore (pictured), Discovery’s core purpose of “making people healthier and enhancing and protecting their lives” has manifested in a consumer-engaged approach to life and health insurance and financial services. This, he says, has created significant competitive advantage, enabling strong organic growth across its businesses and has provided a wide range of opportunities for the future.

Gore says: “The quality of the businesses is clearly illustrated by the increase in embedded value - a clear indication of performance exceeding expectation.’’

Existing Businesses

Discovery Health

Discovery Health’s performance exceeded expectations with operating profits up 21% to R819m (2007: R736m).

Membership grew by 3.2% from 896,143 families to 924,725 families and the lapse rate, remained stable at 4% - despite difficult economic conditions. Gore says efficiencies increased dramatically with the staff headcount per 1 000 lives covered, decreasing by 9%.

Reserves within the Discovery Health Medical Scheme increased to the R5bn level as at 30 June 2008, and the scheme is on target to achieve the 25% level by December 2008.

Gore says: “We made considerable gains in operating efficiencies during the period. These were achieved through a combination of scale and the use of technology. The Discovery Health team achieved this without compromising service levels – in fact, they are at their highest levels in the company’s history.”

“But Discovery Health’s real challenge is to ensure that members have access to the best quality healthcare, at an affordable price. To this end, Discovery Health has invested – and continues to invest – in actuarial, clinical and technological skills and infrastructure.’’

Discovery Life

Discovery Life’s performance exceeded expectations, with operating profit up by 38% to R978m (2007: R707m). New business (including Discovery Invest) grew by 45% to R1.4bn (2007: R971m) and the value of in-force business grew by 21% to R7.0bn (2007: R5 826 million).

Gore says: “The company’s performance was exceptional: new business performance exceeded target; the distribution channels performed well and the quality of the business transacted was pleasing. In addition, Discovery Life rolled out several important innovations within its core product range. The only area in which the environment had a somewhat negative effect, was the lapse rates. It moved upwards slightly, but not significantly above expectation,” says Gore.

Discovery Life is confident that it is positioned well for the year ahead.

PruHealth

PruHealth, performed strongly. During the period, the UK health insurer - a joint venture between Discovery and Prudential plc – applied an intense focus to new business production, innovation and the drivers of quality and profitability.

New business increased by 28% from R418m to R533m, bringing to 190 000 the number of lives covered (2007: 117 535). Industry statistics illustrate that PruHealth captured 11% of total new business transacted in the UK private medical insurance market.

Gore says: “The fundamental barometers of quality and sustainability, such as the claim-loss-ratio, lapse rates, and expense efficiencies, all improved dramatically, positioning the business for substantial embedded value growth going forward.”

Operating losses were cut by 29% from R218m to R155m, and Discovery’s share of the losses decreased by 37% from £7.2m to £4.6m when compared to the same period last year.

A crucial component of a health insurer’s quality is its loss ratio, says Gore. During the period, PruHealth invested strongly in its managed care capabilities, reducing the loss ratio by 7%.

Vitality

Vitality performed well again, establishing itself as the differentiating factor for Discovery, and the platform for product integration. While operating profit increased by 14% to R49m (2007: R43m) and the number of members increased by 2% from 1.28m to 1.3m ,it was encouraging to see members engaging more with the programme. This includes an 8% increase in the number of members exercising at Virgin Active and Planet Fitness gyms.

Vitality also made considerable progress in developing its core clinical capabilities and the structures used to create behavioural change. The wellness programme remains a key market differentiator for Discovery, increasing loyalty, lowering morbidity and mortality rates, lowering costs and providing valuable data to both the life and health insurance businesses within the group.

New Businesses

Discovery Invest

In October 2008, Discovery launched its investment business, Discovery Invest, and spent R157 million on developing, launching and transacting Discovery Invest’s initial new business.

Total new business amounted to R1.2bn, consisting of R181m in recurring premium business, and R984m in single premiums – this yielded R206.1m in annual premium equivalent (APE). Total assets under management, including Discovery Invest initial capital, exceeded R1.4bn at the year end.

Importantly, from an acceptance and profit perspective, Discovery Invest’s performance exceeded expectations, with 55% of all funds flowing through Discovery’s on balance sheet products, and 88% of funds flowing into Discovery’s in-house portfolios.

Industry surveys illustrated that in the “Endowment and Voluntary Annuity Linked Investment Services Platforms” category in which the bulk of Discovery Invest’s business resides, it managed to capture 11% market share of new business.

Says Gore: “Discovery expects an accelerating pace of growth from Discovery Invest in the year ahead. Two important innovations will benefit the investor by significantly reducing the asset management and operational fees – integration with Vitality and the LIFE PLAN – and secondly, the unique Discovery products – the RightChoice Investments and Escalator Funds, which provide the upside of the chosen investment markets, but with unique and dynamic downside protection.”

PruProtect

PruProtect, Discovery’s UK life assurance joint venture with Prudential plc was launched on 25 September 2007.

The new business performed below expectation - while the amount spent on PruProtect is in line with budget, the new business production is lower than anticipated.

Says Gore: “We’ve taken steps to accelerate the distribution of the product. This includes a significant increase and intensity in sales leadership resources and an injection of key Discovery distribution skills. PruProtect has also recruited many leading resources from within the UK life assurance market for our UK sales force.”

“We’ve seen real progress in the PruProtect distribution channel, with 10 distribution franchises created. We expect to have 100 account managers operational by December 2008 to service the independent financial advisers who distribute our products in the UK. This channel is also being supported by active telephonic account management. As these channels gain traction, we expect business to move in line with expectation.”

The wind-down of Destiny Health

During the period under review, Discovery announced its intention to stop transacting health insurance business in the US and as a result, Destiny Health would exit the US retail insurance market.

Gore said: “The pace of the wind-down is slightly ahead of schedule, and we are satisfied that every employer group will be offered state-approved alternative coverage with a credible carrier.”

Costs of the wind-down have been achieved within the financial budgets. The cost of the wind down amounted to US$10m out of a total budget of US$30m. A further US$20m will be spent over the next 20 months on the wind-down.