DISCOVERY LIMITED | DMTN ROADSHOW - 23 & 24 October 2017 DEON VILJOEN (GROUP CFO) AND ANDREW RAYNER (GROUP CRO)
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DISCOVERY LIMITED | DMTN ROADSHOW 23 & 24 October 2017 DEON VILJOEN (GROUP CFO) AND ANDREW RAYNER (GROUP CRO)
Team introduction
01 Deon Viljoen: Group Chief Financial Officer
02 Andrew Rayner: Group Chief Risk Officer
03 Fareed Chothia: Group Corporate Finance
04 Michael Curtis: Group Head Quants and Actuarial
05 Jackie Symons: Group Head Investor Relations
2
Overview
Discovery is a global integrated financial services organisation that uses our pioneering
Shared-Value Insurance model across businesses. Our growth has largely been organic.
Funding to date has been sourced from relationship banks and Prudential in the UK
The Group’s debt is managed within a prudent risk framework
The DMTN program is a key element of Discovery’s long-term funding strategy as the Group
continues to invest for growth
The DMTN programme is being set-up to diversify funding sources
The inaugural issuance will be used primarily for VitalityLife (UK) and general corporate purposes
in SA
Strong cash generation in Discovery Health (SA) supports debt servicing requirements
Moody’s have assigned a Aa3.za national scale credit rating to Discovery Limited
3
01 Introduction and strategic focus
02 Governance and risk management
03 Financial performance
04 Debt overview and DMTN issuance
4
Introduction and strategic focus
Our Ambition
Be the best insurer in the world and a
force for social good with powerful group assets and
brilliant businesses resulting in a profound impact
Our Core Purpose
Make people healthier and enhance and protect their lives
6
Evolution of the group
June 2016
AIA Vitality is launched in Thailand and Malaysia
March 1992 September 2007 August 2010 July 2016
Discovery Limited Discovery and Prudential PLC Discovery acquires Generali Vitality launches Vitality in Germany
established launch PruProtect Standard Life
October 1997 October 2000 Healthcare and merges
June 2012 November 2014
Vitality launched Discovery Life launched its insurance book with Discovery launches Discovery full ownership of
that of PruHealth Vitality to Ping An PruHealth and PruProtect in
Health clients the UK and rebrands to Vitality
UK
July 2016
Discovery enters a strategic partnership with
October 2007 Sumitomo Life Insurance Co. and SoftBank
Discover Invest launched Corporation
1992 1995 2000 2005 2010 2015 2020
February 1993 April 2004 2009 July 2013 November 2014
Discovery Health starts Discovery and Prudential plc Discovery acquires a Discovery launches Discovery announces an
writing new business announce their JV and launch a JV with AIA Group intent to enter a strategic
September PruHealth
25% share in Ping An
Health
May 2011 Limited in partnership with the
April 2015 September 2016 January 2017
1999 Discovery Insure
launched
Singapore Generali Group
Discovery and John
Hancock enters into a
Vitality launches in Canada Generali Vitality becomes
as Manulife Vitality available to corporate
Discovery lists on the JSE
strategic partnership clients in France
October 2013
October 2004 AIA Vitality is launched in July 2017
Discovery Card launched Australia MyOwn launches in
Australia
October 2017
Bank licence granted
October 2015
AIA Vitality is launched in
the Philippines, Hong Kong
and Macau
7
Group operational structure
DISCOVERY PING VITALITY
PRIMARY MARKETS AN GROUP
HEALTH
Core purpose Footprint
16 countries
Make people healthier and enhance c10m clients
and protect their lives Adding ~150k every month
Discovery Health is administrator to Discovery Health Medical Scheme & 18 closed medical schemes
8
Discovery Card will integrate into Discovery Bank on launch
Operating model
Why & How Growth Methodology Capital Philosophy
Core purpose
Make people healthier
and enhance and
protect their lives
Vitality Shared-Value
Insurance Model
Target group profit Separation of Solvency Capital,
growth of known initiatives and buffer for
CPI + 10% unplanned events
9
The Vitality Shared-Value model
WHY HOW WHAT
Make people Health insurance
healthier and Life insurance
enhance and Long-term savings
protect their lives
Short-term insurance
Intent to enter banking
10Consequence of the Vitality Shared-Value Insurance
Model
Competitive advantage
Initial selection
Selective lapsation
Behaviour change
Bent lapse and claims
experience
Healthier society
11Organic growth engine
Profit growth of
ESTABLISHED CPI + 5%
~3 years
Targeted group
Investment Profit growth of profit growth of
of 10% of
profit EMERGING CPI + 30%
CPI + 10%
~5 years
Growth in investment of
NEW CPI + 10%
Mathematical derivation
CPI + 10% = X(CPI+5%) + Y(CPI + 30%) + Z (CPI + 10%)
X + Y + Z = 1; Z < 0
12Capital management philosophy
Three pillars of capital Targeted capital measures
Solvency Allocated
Capital Capital
Return on capital
Dedicated capital and reserves Dedicated risk free + 10%
capital for
5 Year Capital Plan Projection planned
initiatives Additional
Individual business ORSA Solvency
1 in 200 5 Year Buffer FLR
assessment including new
Capital Plan
< 28%
year event
business written
Projection
Earning a rate of: risk free + 10% New initiatives
and safety
margins in
emerging and
new businesses Cash buffer
R1bn - R2bn
13Deconstructing our Ambition
BRILLIANT BUSINESSES PROFOUND IMPACT
1 Insurgent 1 CPI + 10% profit growth
2 Significant 2 Risk free + 10% return on capital
engagement
3 10m Vitality members
Superior actuarial
3 dynamics
4 Meeting complex
consumer needs
5 Exceptional service
FOUNDATION
1 Global platform, science and data
BUSINESSES
2 Powerful brand
3 Employer of choice for critical skills
4 Values-based culture
14Governance and risk management
Governance structure
Capital Allocation Committee
UK operations have an independent Board and governance structure
The Discovery Bank governance structure is separately defined in line with SARB guidelines 16Leadership team
Group Executive Executive Directors Non-executive Directors
17Group risk management framework
Risk Appetite and Strategy
ERM Framework and Risk Policies
Risk Management Process
Assess
Enterprise wide
Identify Manage Modelling and projection capability
Stress testing and scenario analysis
Own Risk and Solvency Assessment
Report Monitor
Risk Governance
Boards and Sub-Committees
Management Oversight and Assurance
First Line of Defence Second Line of Defence Third Line of Defence
18Management of Financial Risks
01 02 03
Leverage Funding Liquidity
Debt is a key part of the funding 5-year financial projections Non-insurance entities - Detailed
strategy maintained 12-month cashflow forecast
– Known funding requirements maintained to manage liquidity
Manage FLR within Board approved are built into plan
risk appetite limit of 28% Insurance entities - Risk framework
– Sources of funding identified sets minimum liquidity for
Debt covenants impose an external operational cashflows (incl. claims
constraint Internal target for Group cash and expenses)
buffer is R1bn to R2bn
Aim to optimize the cost of funding – Buffer for volatility and Each business maintains cash
unknown future investments resources for operational liquidity
19Management of Financial Risks
04 05 06
Capital allocation Interest rates Asset liability matching
Group produces cash on existing Policyholder assets subject to
business and re-invests into new interest rate risk (discounted Asset-liability management policy
business (new insurance policies or cashflow valuation) establishes matching approach
new initiatives) – Nature of long term insurance and governance
business Positions are matched by nature,
Capital allocation decisions made in
the context of the growth Policyholder liabilities closely amounts, timing and currency
methodology, capital management matched so low residual risk
philosophy and risk appetite
Interest rate sensitive shareholder
Decisions consider return, profit assets – Risk accepted for yield
growth, cash generation, capital and
risk metrics Low appetite for interest rate risk in
finance costs – Hedging instruments
used
20Challenges and Opportunities
UK’s exit from EU impacts our UK
Macro-economic pressure
business
Economic International
Slow pace of economic growth
Uncertainty Markets Low interest rates
Negative impact on consumers
Currency fluctuations
SA political uncertainty driving
Political economic uncertainty Growth Key focus area
Uncertainty Enhanced focus on perceived Strategy Shared-Value Insurance and
slow pace of transformation 2018 Ambition drive operations
National Health Insurance
Role of the private healthcare
Healthcare
system
System
Sustainability of the overall
healthcare system
21Financial performance
Financial results overview | Year ended 30 June 2017
Core new business Normalised operating profit Normalised headline Dividend declaration
earnings
+16% +10% +8% +11%
to R 16 993m to R 7 048m to R 4 656m to 98cpsm (+6% FY)
5 year CAGR: 15.2%1 5 year CAGR: 15.5% 5 year CAGR: 13.7% 5 year CAGR: 10.6%
Return on Embedded Investment in new Interest cover2
Bank Borrowings
Value initiatives
R8 524m
+10.2% 8% 13.1x Other Borrowings3
closing EV R 57 294m to R 577m
R3 251m
5 year CAGR: 12.5%
1 Appliedto core new business. Total new business 5 year CAGR (including closed schemes and fees earned by VG) is 16.6%
2 Interest
Cover = EBIT / Finance Costs
3 Other Borrowings is made up of R3 080m owed to Prudential in respect of historic new business liquidity funding and R171m in respect of recourse financial reinsurance balances
23Core new business
+16% Rm
12 months
to 30 Jun
2017
12 months
to 30 Jun
2016
%
change
to R 16 993m
+11% total new business incl. DH take-on of new closed
schemes and gross revenue for the Vitality Group of R18 250m
16,993 6 1091 5 1871 +18%
2 175 1 866 +17%
Established
14,602
13,064 2 496 2 413 +3%
11,335 562 542 +4%
9,864
622 622 -1%
895 749 +19%
Emerging
6343 5123 +24%
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
3 111 1 732 +80%
1Excludes new scheme take-ons
2 In GBP terms
3 Includes gross revenue in respect of the Vitality Group 24Strong operating profit growth
+10% Rm
12 months
to 30 Jun
2017
12 months
to 30 Jun
2016
% change
to R 7 048m 2 505 2 265 +11%
7,048
3 588 3 271 +10%
Established
6,407
744 665 +12%
5,789
1401 121 +16%
4,962 16.42 8.72 +89%
28.12 31.62 -11%
4,030
(21) (151) +86%
Emerging
(116) (189) +39%
(33) (99) +66%
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 New OTHER (577) (384) -50%
1 54.99% share of DiscoveryCard. Card will be moved to the Banking Segment in time
2 In GBP terms 25Strong SA Health profit and cash generation
Profit after tax (Rm)
+9% Cash Generation
to R 1 826m
1,826 Strong cash generation in SA Health supports debt
1,672 servicing requirements
1,474
1,341
1,220 Profit for the year reasonable proxy for cash
generation
Continued strong growth in profit and cash generation
2013 2014 2015 2016 2017
26Performance against the organic growth methodology
Target Performance
In constant currency terms
CPI* +6%
CPI* +55%
8%
of earnings
Group profit growth of
CPI + 10% CPI* +7%
* Weighted average CPI rate of 4.8% based on CPI rates in markets
27Performance against the capital management philosophy
Three pillars of capital Target Performance
Solvency Allocated
Capital Capital
Return on capital
Return on
5 Year Capital Plan Projection Dedicated capital risk free +
Individual business ORSA
assessment including new
Solvency
1 in 200
year event
capital for
planned
risk free + 10%
9.3%
business written initiatives Additional
26% R14bn 5 Year Buffer
Solvency Reserves
Capital FLR =
FLR < 28%
Plan
3.9x CAR
Projection New 26.7%
2.2x CAR Banking
initiatives and
safety margins
145% SCR Global Vitality in emerging
Network and new Cash buffer Cash buffer
215% SCR Commercial
insurance
businesses
R1bn-R2bn R1.6bn
A- A.M Best rating etc.
28Debt overview and DMTN issuance
Group Funding Plan
FLR* projection Group debt projection
5-year financial
projections maintained
Funding strategy 26.7%
includes debt subject to
FLR cap of 28%
Debt levels remain well
within risk appetite and
existing debt covenants
Interest cover in FY2017
is 13.1x and remains
FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2018 FY2019 FY2020 FY2021 FY2022
above 6x through the
projection FLR FLR Cap of 28%
* Financial Leverage Ratio (“FLR”) = Debt (Excl. Lease Liability) / [Debt (Excl. Lease Liability) + Equity]
30Key Drivers of Funding Requirements
1-2 years 2-3 years 3-5 years
Vitality Life new business Transfer of Vitality Life business Refinance maturing South African
from Prudential balance sheet to and UK bank debt arrangements
General corporate purposes Vitality Life Limited (Part VII)
Refinance maturing South African
and UK bank debt arrangements
All included in 5-year financial projections
31Vitality Life Funding Requirements
Vitality Life new business funding required Vitality Life Part VII funding
Strengthen VLL Balance
Sheet
Liability to PAC Refinanced
Part VII Funding Required
0 0 0
FY2018 FY2019 FY2020 FY2021 FY2022 Funding Required Funding Use
New business funding required Part VII Funding required:
– Life insurance pays significant up-front commission – Historic new business liquidity funding provided by the
– Recovered over the life of the policy Prudential
– Paid back over 8-10 years – On transfer this “debt balance” needs to be refinanced
– Results in a liquidity strain Part VII expected to be complete by November 2020
Post Part VII (FY19) the business is expected to be self-funding
The two charts above have the same y-axis scale
32Existing Bank Debt Repayment Profile
South African debt refinance profile UK debt refinance profile
70
3,500
3,000 60
2,500 50
R millions
£ millions
2,000 40
1,500
30
1,000
20
500
10
-
-
FY2018 FY2019 FY2020 FY2021 FY2022 FY2023
FY2018 FY2019 FY2020 FY2021 FY2022 FY2023
Other Funding DMTN Funding
South African bank loan syndicate established in FY2016 Two bank loans with HSBC
– R5bn of 5-year bullet and amortising – £100m 5-year amortising loan
Investec Funding (R0.5bn) on 5-year basis raised in FY2017 – £50m 5-year bullet loan
DMTN Programme to refinance existing debt
33DMTN programme will broaden funding base for the
Group’s debt requirements
Group debt projection overlaying DMTN*
FY2017 FY2018 FY2019 FY2020 FY2021 FY2022
Other Funding DMTN Funding
* The mix between bank and DMTN funding may vary depending on market conditions at the time
34Debt Programme Objectives
Broaden funding base
Optimise cost of funding
Ensure funding capacity for Group over 5-year time horizon
– New funding requirements
– Refinance of existing debt arrangements
35Existing Bank Debt Covenants
Covenant Minimum Requirement As at 30 June 2017 As at 30 June 2016
Group Debt to EBITDA ratio Less than 2.5X 1.74 1.76
Group financial Less than 30% of Group EV 21% 21%
Indebtedness to Embedded
Value
Group Embedded Value Greater than R30 billion ZAR 57.3 billion ZAR 53.1 billion
Discovery Life Capital Greater than 1.5 times 3.9 times 3.6 times
Adequacy Requirement
Value of New Business (VNB) Positive VNB for 3 Jun 2017: R1 281 million Jun 2016: R946 million
consecutive 6-month period
Dec 2016 : R1 156 million Dec 2015: R1 386 million
Jun 2016: R946 million Jun 2015: R1 393 million
36Group structure: Key operations Guarantors SA Ops
Bank International
Discovery Limited (JSE Listed) UK
Issuer
South Africa
Guarantors
Discovery Discovery Pref
Discovery Discovery Discovery Discovery Discovery Connect Discovery Finance
Purple Holding
Health Vitality Life Insure Distribution Co Europe
Holdings Ltd Company (Pty)
Services Limited (UK SPV)
(Bank Hold Co) Ltd (Card 55% JV)
100% 100% 100% 100% 100% 100% 100% 100%
Discovery
Bank
UK
Discovery Group Vitality Group
AIA Vitality Hong
Europe Limited International Inc. United Ping An Health
Kong Ltd.
States of America
100% 100% 44% 24.99%
Discovery Vitality
Vitality Health Vitality Life Vitality Corporate
Australia
Limited Limited Services Limited
(Australia)
100% 100% 100% 100%
37Discovery Credit rating
Credit strengths
Moody’s Insurance Financial
Strength Rating (IFSR) 1. Very strong franchise in South Africa and a growing global
footprint
• Baa2
• 1 above the Sovereign (Baa3) 2. Strong profitability and significant non-insurance fee income
from SA Health
Moody’s long-term issuer (LT 3. Moderate exposure to local investments because of the
Issuer) rating capital-light nature of its business
• Ba1 (global) / Aa3.za (national) 4. Good capitalisation on both regulatory and economic basis
Strength offsets
1. Challenging operating environment in South Africa
Rating outlook
2. Complexity inherent in shared-value insurance model
• Negative outlook reflects
outlook on South African 3. Ambitious expansion initiatives
sovereign
38Key Features of the DMTN Programme
ISSUER Discovery Limited
SIZE (NOMINAL AMOUNT) R10 billion
GUARANTORS Discovery Health and Discovery Vitality (as per current SA Bank Loans)
LISTING The Interest Rate Market of the JSE Limited
Notes to be issued under the Programme may comprise:
• Senior notes (the “Senior Notes”);
TYPES OF NOTES • Subordinated notes which are subordinated to the Senior Notes (the “Subordinated Notes”); and/or
• Capital subordinated notes with terms capable of qualifying the proceeds of such Notes as Regulatory Capital. Regulatory Capital Notes will require FSB
approval at the time of Issuance.
CROSS DEFAULT The cross default will be triggered by a default by Discovery Limited and or its Guarantors in relation to the greater of R50m or 1% of EBITDA
A material subsidiary is defined as:
• any Guarantor; and
• any Subsidiary
MATERIAL SUBSIDIARY • of which the Issuer owns more than 50% (fifty percent) of the ordinary shares and
• which has EBITDA (calculated on an unconsolidated basis), representing 10% (ten percent) or more of the EBITDA of the Discovery Group
(calculated on a consolidated basis), according to the methodology used in the latest audited financial statements of the Issuer, consistently
applied, but excluding any Subsidiary
Investors will have the option to redeem their Notes should the following events occur:
OPTIONAL REDEMPTION • Issuer is no longer listed on a Financial Exchange
EVENTS • The Notes are no longer listed on a financial Exchange
• There is no rating assigned to the Notes
Standard events of default including but not limited to non-payment, breach of the negative pledge, liquidation or winding up, judicial proceedings, cross
EVENTS OF DEFAULT
default, inability to continue to operate the whole or substantial part of the business
39Indicative Issuance Terms
ISSUER Discovery Limited
GUARANTORS Discovery Health and Discovery Vitality (as per current SA Bank Loans)
LISTING Interest Rate Market of the JSE Limited
ISSUER RATING Aa3.ZA
RANKING Senior
INDICATIVE SIZE R1.25bn to R1.75bn
• 5-year;
TENOR
• or a combination of 5-year and 7-year notes
INTEREST RATE PROFILE Floating rate notes
PROPOSED AUCTION DATE 15 November 2017
40Notes
41Notes
42Notes
43DISCOVERY LIMITED | DMTN ROADSHOW
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