Discovery Limited (PDI.AX) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Discovery Trading Update. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Adrian Gore. Please go ahead, sir.

Thank you for that, and welcome, and good afternoon to everybody. Really appreciate the time. The call is about 45 minutes long, we hope, and is aimed at clarifying our trading update of SENS announcement as we sent out early today. I'll try my best and kind of run through it and pull out, I think, positively perhaps in clarification and embellishment and give you a bit more context. There's a number of my key executives that are on the call with us. The core of us, Andy Rayner, our Chief Risk Officer; and Deon Viljoen, our CFO, are on call with me and other key executives as well. Also, I apologize on a kind of a dialogue which is between the weekend and the public holiday. We just finished all of our Board meetings on Thursday evening and then a supplementary met on Friday, going through all of those issues, and we've tried our best to give you the most up-to-date numbers. So some of the numbers, as you can see from the announcement are to the end of May. So we really have tried to get as best a picture as possible because the update is about trying to forecast, we will end our year that ends June 30, 2020. So we did want to get out this information as soon as possible, after clarifying where we got to over the weekend. Let me start by just maybe positioning the context, obviously, the COVID pandemic is the context. And as an insurer, I think we face unique challenges, both from a kind of mortality, morbidity perspective, but also as well from a perspective of economic fluctuations and volatility, and of course, difficulty. And so the context of this announcement must be kept in mind. I would also say that from a Discovery perspective, our core focus is making people healthier. This is a fundamental call to action for us. So we don't underestimate to underrate our social responsibility in this. And at the same time, we are all very happy to step up and illustrate our relevance in a very difficult time, help our clients and help broader society. I would also say that from the outset of the pandemic, I think our governance structures and our approach, I think, was fairly precise and deliberate. We're focused on 3 issues: our staff, our customers and the communities in which we operate, and we focused on a foundational financial strength. So really, the government structure is focused on 3 things across the top in the sense, our customers, our staff and our communities. And we're focused concurrently on making sure that we're financially strong through the entire cycle of the pandemic. From a staff perspective, just a few comments. I think our staff done been remarkably well. We've managed to keep business as usual. I think service levels have been very good operating really well across all of our markets, with, I think, 80% or 90% of our staff working from home. At the same time, we've used all of our modeling and structures to help keeping 2,000 vulnerable staff to the virus, stay protected. So we work through hard and then, of course, going forward, companies like ours will focus hard on protecting our people. From our customer perspective, we have used our margin given the data we have to isolate out 30,000 kind of super-valuable customers, and we have outreached and tried our best to protect these customers from home. We worked hard on changing our product suite to be relevant in these times in markets like the U.K., we've offered hospital cash benefits where private hospital is not available. We've done a huge amount on the employees side to facilitate contact tracing to help employees manage the process from their side. And importantly, we've reworked Vitality completely, which is something that can be operated from the home in a sense. And we've had, I think, over 300,000 workouts in the home during this time. So we really developed, I think consumable sites around moving physical activity, nutrition, et cetera, into the home, and you may have seen it if you followed us around the benefit. I do think the rush online on some of the fundamental trends that will follow around devices, et cetera. We will be very well positioned in the kind of the post-COVID world. I'll also pledge you that the shared value model around which people kind of acquire value in their products for the healthy behavior has proven to be remarkably resilient. And I think also powerful in terms of offering people concessions around affordability of premiums and the like. So in the context of our life products, our payback benefits are being used to fund premiums. In the context of our insured products, our EFA product that allows you to store your fuel rewards and has been used to pay premiums for people. Inside the Discovery of Medical scheme, then this could drawdown in the medical savings accounts as funded premium. So the structural -- I think the structural advantage of the shared value model has helped us through this time of being able to offer people concessions I think in a fairly deliberate way. And there may be one last problem if I turn to the actual sales announcement. I think the model of focusing on wellness and health and resilience, places us I believe very strongly in a post-COVID world. I do think the rush online, I do think the relevance of people being resilient and healthy is going to be a fundamental issue going forward. It's interesting to just make the point that we develop our model, and the idea of focusing on 4 or 5 key behaviors that drive mortality. We're focused on noncommunicable diseases. But what the COVID pandemic has shown us is that this resilience is important also for infectious diseases. And so I think the model is relevant is amplifying dramatically and I think with our partners globally, there's very good work about positioning. So they have a shared value insurance model as a model rather than a product, so to speak. So the privilege one -- it's not a pleasant run society is going through a difficult time, but we are committed to playing our role in that. If I turn to the SENS announcement, I thought it's best for me to just run through some of the topics in the announcement. I'll go through in order and just point out some of the things that we felt collectively, we should clarify. I guess we faced a market of potential pressure on new business, lessens claims. Obviously, a very, very complex economic environment. And nothing in this presentation should snack up in hubris. We are in the early stages of this, the COVID only about to hit South Africa. We don't know how the environment will play out. But we really have structured ourselves in a way that we hope to be resilient. And you will see from the announcement of all of [ the state be ] under point 2, the first 3 bullets. Just trying to illustrate the components of the financial performance. I mean the first is, we think, a very resilient operating performance in a very complex environment. And we've tried our best in this presentation to give you a sense of some of the data that might provide some of the kind of the input data into what has created this resilience. The second is a kind of explicit decision that we've tried our best to create a provision that all of the known things we can understand around the virus at this point are providers for now. So if we get that right, the idea is that, in a sense, all of this taken care of industry or you can grow off a strong base. So we have spent a lot of time modeling various aspects of the economic effect of the mortality, morbidity effect. And I think we've -- as you would have seen, you're set aside a considerable provision of ZAR 3.3 billion. And then the interest rate environment is particularly difficult for us. And it's a volatile long-term rate escalating in South Africa and long-term rate in the U.K. going down over the last number of years since the Brexit problem, but continuing to be very, very low. And in fact, both of those are not good for us. And in a sense, that made the environment very, very complex. So one of the important things, and I'll touch on that later, is we've normalized out the effect of long-term interest rates. In fact, I'll actually, relate it. It doesn't affect our operating performance. It doesn't affect solvency liquidity or any of the cash flows. And so when you see many of these numbers when we talk about normalized, we are referring you to the numbers without the effect of noninterest rates. So just to summarize, we're trying to be to make it as simple as possible. I know there's a lot in this announcement. But we're trying to make it feel clear. New business, despite the difficulty environment, it's gone up 4%. And there's -- I think quite a bit of data in the SENS that shows you how that's played out. The normalized profit from operations before the provision for COVID illustrates, I think, the resilience of the performance. So ignoring the investment in the bank, but including all other new initiatives, is up 15% to 25% -- we expect it to be up 15% to 25% year-on-year and including investment in the bank, which is at its highest level of investment in our plan. That -- this reduces down to an increase of 5% to 15% we expect by June, including the investment in the bank. We set aside ZAR 3.3 billion, and we expect to set aside by ZAR 3.3 billion in terms of the COVID impact. And after taking that into account, deducting that from the operating profits and normalized profit, we expect to decline by 18% to 28%. That translates into normalized headline earnings, down 20% to 30% than the prior year. And then when you take the effect of long-term interest rates. Obviously, this can only be known it's a formulating. We plugged these -- the long-term rates into the algorithms and comes up with the -- what the result is. You can see that if they stay where they are as at 31 May, the affect would be to reduced headline earnings by between 70% to 90% year-on-year. At the bottom of table one, we tried our best to make the numbers as clear as possible. There's simply a table that lays out all of these issues, as I've just described in, and we've tried to our best in the rest of the announcement just to lay out the kind of input that go into this. If I turn to point 4 on the SENS announcement, funding results is very important as to illustrate the actual dynamics. I mean there's a lot of commentary and discussion about this and I think this is a broader interest in just financial numbers. I think it talks to many of the social aspects as well. But really trying to give a sense of the metrics claims levels, et cetera, through the early cycle of the pandemic. Bear in mind, we're only 2 or 3 months into it. And in South Africa, it's really been locked down rather than the real effect to pandemic. U.K. is in a different phases, as you well know. I think we wanted to talk about 4 important points about the strength of the Discovery business model that we believe makes us resilient in this environment. The obvious issue is the necessity -- the essential need of our products around life and health insurance. We do think that through these difficult times of the pandemic there's an escalated awareness of the need for these products. But there's a bit of a trade-off between affordability and need. And so the with the lapse rates kind of illustrates this tussle between people really needing these products and people that have to afford them. But I think you'll see certainly in our segment, we think that the need goes through and we've managed to keep [indiscernible] stable. The other point is the specific shared value approach of offering people value if you're managing your health and if you're sick. So across the health spectrum makes the product a lot stickier. And fundamentally, the Discovery model, integration of the products working together, perhaps a very, very sticky composite. So we've quoted some [ natural peer ] there that people that have more product with us tend to stick a lot more well -- seen in the data that people have more products with us deposits more in the bank. So there is a very strong correlation between kind of the integrated model and levels of stickiness. And then the third point, the point about valuable concessions, I think we've been very, very careful about offering people concessions and, therefore, obtaining less rates and helping people afford their premiums. And then the final point, the segment, we are -- we have a very strong foothold in the mass affluent segment. And again, that plays well to affordability, obviously, through very, very difficult times. The title at the -- the title 2 and the point 4, we hope gives you a sense of the dynamics that we are seeing playing out. Not all of them are intuitive, [ how to plot ] confusing that table, the focus of 2 months of April and May. That's the best we can do, obviously, at this stage, to show you how our performance played out through the early cycles of the pandemic. A few comments I think Discovery last proved to be very robust. I think the offering of the payback as being able to fund premium concessions has proven to be very good. In addition, claims levels were fairly low and in line with expectations. So obviously, Discovery Life hasn't yet felt the effect of the virus. I think we have 5 or 6x in total to date. So this is very early in the cycle. And we mentioned by saying new business at a fairly strong level of 80% to 90%. Bear in mind, you're seeing the lower table. That include automatic contribution increases, which is an important part of our business model. It does illustrate the robustness of the model. So we continue to see a very high tick-up in those ACIs. And therefore, total new business wasn't that dramatically affected about 10% to 20% off the previous year. Lapse rates about also actually lower than previous years. As you can see lower than expected. And then Schemes administered by Discovery Health, essentially Discovery Health Medical Scheme. There is a typo in the table in the middle Schemes administered by Discovery Health, the lesser economy is less than 60%, not less than 0%. We hope it's less than 0%. And unfortunately, that's not possible. That is the typo in the translation. But maybe to make a point that I think the intuitively the claims inside the Discovery Health Medical Scheme, the loss ratios are a lot lower than expected, simply because people are putting off at this stage elective health care, discretionary health care because of the concerns of our hospitals, et cetera. So there's been a significant drop-off in claims to the Discovery Health Medical Scheme. But obviously, the expectations that will be made up. So the Scheme itself allow only commenting on that the service scheme itself and the trust fees, obviously, modeling very carefully and the effect of this and how that will affect going forward. So provisions going forward inside the scheme or how that will play out in the future is very, very important. But it's important also to note that the lapse rates inside of the Discovery Health Medical Scheme was very, very tight. So our new business was difficult. A lot of our employer groups that join our members of the Discovery Health Medical Scheme are shrinking, not growing. So new business is very tight, as you can see, the actual lapse rate tightened as well. So we had a kind of a counterbalancing effect. Discovery Insure performed also well. A difficult part for our motor insure because people aren't driving, and therefore, the value for money is questioned. We have very good experience. You can see lapse rates also very tight. And we use the ability for people to fund their premiums through the APIs and other structures to offer value. Now one of the important things about the model is that we actually know how people are driving -- exactly how much mileage they're driving. So we can offer the ability to give people benefits based on how much they're not driving. And so value for money can be provided. I've mentioned Vitality Health in the U.K., you can see that the claims levels were very low, less than 60% of expected. That is not an intuitive. The U.K., as you know, and the private hospitals have been essentially used by the NHS. And therefore, people can't go to hospital for elective surgery, which is the primary purpose of the product. Having said that, the team restructured the products to offer Vitality Home. And at the same time, offer cash benefits for COVID and, therefore, value for money was not in question. So the lapse rates stayed fairly low. And then finally, Vitality Life, although it had a very, very difficult years. I think you know if you followed us. Claims levels actually -- sorry, lapse levels actually came down during the period. And claims do reflect, as you can see from the table, there's been a number of debts, obviously, in the U.K. in our experience. I think about 60 or so debt and the U.K. is in a much more cycle of the pandemic. So there's nothing in that that's unexpected. So on the table, we tried our best to give you a sense of the actuarial dynamics that are driving the business. On 4.2, I wanted to give you a sense of the new business. I think it's really strong at 4%, overall, as you can see in the previous table, we're showing just the effect of new business on the 2 months. So we wanted to give you both a sense of how new business is going through the COVID cycle. But at the same time, just trying to give you a sense of where we're at this point for the full 11 months to 31 May. And you can see in both the SA and the U.K. composite businesses, business -- new business is down about 5% to 10%, as you can see. It does reflect the obvious issue of a difficult economic environment. And a lot of our businesses driven by brokers and agents, where there's a physical relationship with the customer. So lockdowns in the current environment does not bode well for the ability to sell business. We have seen a drop-off and overall, quite manageable. Ping An Health, which was at the epicenter of the start of the virus, obviously in China, interestingly, has had a very strong new business period. Especially in January and February, and to an extent, the awareness of health insurance is a fairly new market in China, just coming out of COVID it was actually increased, as you'd expect. So counterintuitively, the rate in new business actually went up in the early part of this calendar year. At the same time, a lot of that new business is done online. So while you had the disadvantage of agents and interviews, nothing else to move around, we structured P&L, this facilitate new business. And then our other businesses, our new businesses Umbrella Funds, our commercial, insurance business, et cetera, have got reasonable traction, a lot of good work on their core. So if you look at all the other new businesses, a fairly strong growth in that regard. You add them all together, you get the results I mentioned to you. Turning to our profit from operations. I hope this table is clear. I think the performance has been, I think, fairly well at a difficult environment. You can see it from the table, SA composite up 5% to 15%. The U.K. composite really reflecting some of the effect of Vitality Health. The effect of the loss ratios are very low. And we are reserving that as part of the COVID provision, which, as I said earlier, people can't effectively claim for certain bits of elective surgery, et cetera. And therefore, those loss ratios are lower. So you get a kind of a boosting of the profitability that we've increased the provision based on modeling as best we understand is how that will play out in the year ahead. As overtime, hopefully, private hospitals will become available to elective surgery again. What we've done here in the table is we felt it's important to show the group normalized operating profit with new initiatives, but excluding the bank. The bank is now by a long shot, the largest new initiative. It's at its apex of stand according to transfer. We will have invested about ZAR 1 billion over this [ we checked in ] about ZAR 1 billion over those 12 months. So it's really significantly bigger than all the others. So I wanted to give you a sense of where we expect profitability to end. All in all new initiatives, excluding the bank, up about 15% to 25%, as you can see. When you bring the bank in that goes down to about an increase of 5% to 15%. So trying our best to give you the sense of where we think the numbers will end. There's a number of comments that we've made in the SENS. And I hope I have explained them. I do want to just stress, in the case of the U.K. composite, Vitality Life is in the middle of a very complex period. We did at the half year results explain, the difficulties and the need to rightsize Vitality Life. There's been considerably good work done by the team around a number of key initiatives to right-size the business, most of them will be complete by the year-end, by this June. And therefore, we are confident of Vitality Life going forward profitably. But it has been affected by lowering as shows post the Brexit vote and now a very complex COVID environment in kind of the [indiscernible] to make it a very difficult trading environment. Having said that, I think that over time our team has been very strong. And while this year will be painful, we hope that we get into the '21 financial year of Vitality Life will be strong and profitable. And this new business will illustrate a triple rate of return. The comment also to make on Discovery Bank, I think, a very strong period for the bank. The rate -- the migration of the Discovery Card book [ was historic ] from FRB systems and from the value of FRB into Discovery Bank, we are kind of 2 out of 4 them into the process. At the same time, we're attracting new clients into the bank. So that process has gone very, very well. We expect it to be complete by the end of July, early August. The next one will come into barely, I think, in the next 2 weeks or thereabout. So the number of clients has used about 177,000 with over 330,000 accounts. And the actual bank, which I think is important, is deposit-led. We've attracted about ZAR 2.1 billion of deposits. And the structural idea of dynamic interest rates that really gives you a different rate of interest based on how well you manage your money. It's proving to be a very, very strong competitive advantage. And kind of in the structure, the message is that if you manage your money well, the rate of interest that you get on deposits is going to be higher than anywhere else. And so it's not competing on price but competing on structure and appealing to a segment that manages their money well. And we're seeing in that diamond category of Vitality Money, considerable, considerable gathering of deposits. At the same time, the credit utilization has declined, as you would expect. But we've watched the book very, very carefully. I think given the quality of the book, the nonperforming loans are largely within expectation. So we are pretty comfortable about the resilience of Discovery Bank and how that's grown. We are being very, very careful about granting of new credit. So while we obviously want to grow during this period, we're very, very scared of offering new clients access to credits. That's being watched very, very carefully. So that is a handbrake to an extent on growth, but I think we can overcome that. And that's something we won't compromise on a [ call. ] We understand how the environment goes out. On section 4.4, and the result is important. I think the ZAR 3.3 billion is obviously a very, very large number. I think it's bigger than we've seen out there, but we've taken a view that as best as possible. We would like to play it forward in a way, we'd like to make enough provision now that the effects for COVID are fully taken into account. In a sense, we've -- I think you will know we've been at the epicenter of modeling a lot of these things. I think we've developed a considerable competence around trying to understand the effect on mortality and morbidity and health claims. And I think the strategy has been very, very clear. We've kind of developed 3 scenarios, a stressed, a central and the low in effect, and effectively may be the central scenario, the best estimate scenario. So basing our provisions on what we felt was a central set of assumptions. At the same time, making sure that the stressed scenario forms a basis and we suggest capital and liquidity and solvency strength. So really using, I think, the modeling very, very well. I am actually joined here with [indiscernible] helped actually, but who's headed up the model. Maybe put out just a real thought, literally, it's very accretive just give a sense of the modeling and its level of prudence and your sense of it.

Sure. Thanks, and good afternoon, everybody. So what we've done is to follow an SEIR multistate model. So that sort of underlying foundational structure. Our assumptions on mortality, we've taken a lot of colors from Imperial College as infection Fatality Rates. But I think if you look at the experience internationally as well, we see a lot of evidence in international countries. So the epidemics from [ demonstrations ] supported by the data. So we think as we go along, that these [indiscernible] are actually being confirmed internationally. But I think the negative -- the bottom line to understand is that the epidemic in South Africa really has not started yet. So if South Africa was at the same point in epidemic as the U.K., we would have had probably more than about 15,000 people who have already died. And yet, at the moment, we have only 1,500. So what we wanted to do is to reflect the underlying reproductive rates that we observed in the population -- in the South African population and also in the U.K., where we have more experiences to how that develops, project that forward for quite a long period. So a lot longer than one. [Technical Difficulty] Can you hear me?

Yes. I can hear you.

Part of it longer than what many other modelers are projecting forward. The basis of that, we basically -- I think it is fair to say that our provisions here are fairly prudent. So even on the central scenario, what we are assuming is that the reproduction rate will increase. And that basically is -- that basically anticipates a second wave in both countries, in the U.K. and in South Africa. And on the highest scenario we made to predict that -- a significant increase in the reproduction rate. So I think the model to be fairer, I think, is on the prudent side. At the same time, I think it is very much facing the side to what we're seeing developing in both of these countries. So I hope that's okay as an overall [indiscernible].

Well, no offense, just thought it's worth it giving some context on that. In addition, we model the economic effect from lapses. And so part of the provision is the setting up of provisions for policy lapses. And as we said in the SENS announcement, about 2/3 of the ZAR 3.3 billion is rate of mortality and sickness impacts. The other 1/3 is effectively from the economic impact and the cost and effect of lapses. It's important to say that I think the 2 obviously, material aspects of the results is the COVID provision and the effect of long-term interest rate. In the case of the COVID provision, we are not normalizing that out. We see that as a fundamental part of the operating of the organization going forward. It can affect cash flow moving forward. In that result, we have not normalized out this provision at all. Turning to the long-term rates of interest. This is, of course, an important issue. And as I said is the outset, this is a complex environment in which rates were up in SA and going down in the U.K. We had in the announcement, given some guidance around is wait 31 May 2020, effectively took the negative reserve asset down by ZAR 2.7 billion versus what it would have been, if rates were where they were at the December period. But having said that, this is really an accounting valuation of the negative reserve. The rates of interest flexing up or down doesn't affect cash flows, doesn't affect solvency, liquidity, capital or anything like that. And so it's just fairly an algorithmic valuation of an asset, and that's the nature of the business. So it is what it is. In the case of the U.K., it's slightly more complex in the sense that the interest rate is going down. Doesn't only fit the IFRS numbers, but in fact, does have a cash flow insolvency issue. And you will know that at the half year, we told you about a hedging strategy, when effectively hedged out largely a couple of basis or risk largely that cash flow and solvency risk. So -- and price of that as well. We used an interest rate that was a passivated interest. So to an extent, fluctuating rates of interest haven't affected us from an IFRS perspective, but they have posed a risk from a solvency perspective. Post the hedging strategy that risk doesn't exist in so in effect, Vitality market. It's a similar dynamic to Discovery Life. Both have obviously changed, don't affect solvency and cash flows but do affect the IFRS numbers. So obviously, these are important numbers, important fluctuations, but we have normalized them out, management's view that these don't affect cash flows or any assets of the operating parts of the business. So in normalized headline earnings, that's the major effect we've normalized enough. But hopefully, effect is cleared. And obviously, we'll have to wait till the end of the period 30 June to discern what the rate of interest actually is. But given that it's a few weeks away, it would seem that rates have currently prevail or likely to be in place at the valuation date. A comment on capital and liquidity, I made the comment that we really have stressed the scenarios and through some of the modeling that in real raised around debts and lapses. And made sure that the group is strong from a liquidity perspective, from a solvency perspective. All of the solvency numbers and capital ratios remain above target through the cycle and through the stressed scenario. So we're very comfortable about that, the cash [ process ] is expected to remain within the guide range, as we said. And so we've done other extreme modeling and stressing are very comfortable with the capital strength of the group. On dividend policy, just to say our view, and I think it's a responsible view, given the uncertainty and just the volatile environment that we're in, the decision or the decision will be made likely not to pay dividends. And we will consider or reconsider acquisition from time to time as the environment becomes more certain, and we are all starting to develop. I think that's fairly standard. Our sense is that it is prudent and responsible. And then finally, before taking questions, just the outlook. Obviously, stating again, no [indiscernible]. There is an unknown quality about what -- how the economy plays out, et cetera. I think we do have a sense of the mortality sickness numbers from the model. But I think we are cautiously optimistic about growth going forward. I think 2 explicit points. One is we've tried our best to this provision to make sure that the cost of operating going forward are taking into account this year, and therefore, going forward, with that provision, if the assumptions underlying that provision are correct, our growth should recover in 2021. And then the second point, the very strong conviction that the business model is more and more relevant. And I think the science and the technology and a lot of the products that we built during this time, and we are thinking during the start, will bode go well, both in market share in the U.K. and with our partners across the world. So while it's a complex and volatile environment, we remain optimistic about our ability to grow offer space into '21 and '22. Obviously, depending on how the environment goes out. On the flip side, we have stretched things very, very carefully. And if the environment is much tougher, the group is strong to weather that storm. Sorry for the long-winded explanation, we thought just given the amount of data and stuff in the SENS announcement, so it was important to kind of contextualize and give it a bit more airtime and clarity. So I've finished my remarks. We are very happy to take questions. We thought it would be 45 minutes but happy to stay on as long as you need. So I'll hand back to the operator.

[Operator Instructions] First question comes from Michael Christelis from UBS.

Great. Four questions, if I can. Just firstly, this COVID provision, I mean, clearly, that's quite a large unexpected debt to earnings and presumably equity as well. What does that do to your debt covenants and your SLR targets? And do -- are you at any risk of breaching any of those? And may be just give us some comment on that? The second one, just around the mortality/mobility effect. The last rate is almost staying in line with what I would have expected. But the mortality/mobility side over ZAR 2 billion looks very high. I was wondering if you can maybe just give us a rough split of that between SA life, U.K. life, and U.K. Health? Then on the bank, you guys have seen an update on the number of clients, how many of those 177,000 clients are new-to-bank clients versus transfers from [ post-rand? ] And lastly, Vitality Group, the growth there in operating earnings was quite surprising given how -- my understanding is that model is entirely based on new business. And if various countries across the globe are in lockdown, how are you able to generate that sort of operating earnings growth if they're not writing much of the new business maybe just sort of given dynamics as to what's driving that growth there?

I'll make some comments on the debt and covenants. We see debt staying fairly stable. As it is for the covenant, I don't see any issue. The covenants are based on operating profit, which, as you can see, is pretty strong. On the second comment -- the second question, I actually didn't hear properly but let me deal with the others. The bank, I'm being -- I'm giving you accrued numbers but of the 177,000 there are really 3 buckets. There are -- there's new to bank entirely. There's migrated clients have come across into the bank. And there's clients in our belly that are still sitting on the Discovery Card, and that's just come across. So to come across the interbank, you got to go through the AIA process. So I think new to bank is about 1/3 of that, I think. And then fully at about 111,000 are -- I think 111,000 have actually gone through the process into our belly. So I'm doing the mathematics barely, Michael. I'm sorry. As I said 1/3 of the 177,000 are new to bank. And probably about 80,000 of the balance have actually come across into the bank itself as it is now. So they've made the decision to come across both of AIA process and take a bank account to use the card. On issue of Vitality Group, while you're right, I think the various markets have been in various stages of lockdown. The growth has been quite strong prior to the COVID environment. And in fact, posted in elements of Asia, it is picking up again. Also, the revenue is in dollars. So the weakening of the rand plays an effect in the growth of the profitability. So the dynamics is both growth and currency weakness from a rand to dollar perspective. So your second point, Michael, I just -- I couldn't fully understand. Are you happy to just restate it?

Yes. Just around the mortality and mobility component of your frequency preliminary provision? I mean, if you can give us a rough split of SA life, U.K. life and U.K. health, just trying to understand what's driving that. It seems quite a large provision for mortality and mobility.

I'm not sure we are disclosing that. As Viljoen said, I think it's a fairly conservative number. And Viljoen, I don't know -- Viljoen is there anything you want to say on this? We haven't broken it out.

Thank you, Michael. Our reluctance is just that the epidemic is still in very early stages. So it's a wide range of possible outcomes. And it's quantified for each of the markets separately on 3 different scenarios. So I think maybe the range is probably better. But I don't know, Deon, if you want to comment. Go ahead.

Yes. I think it is an overall range that we established. So we haven't broken that down at the moment, Mike.

Michael, let us get closer to results and more into the cycle, and we'll see what closeout. But I mean, our view is it's not inappropriate, but it's probably conservative.

The next question comes from Francois Du Toit from Renaissance Capital.

Excellent. Just quickly on your discretionary margins. In the past, you've used discretionary margins to smooth out the impact of economic basis changes. The ZAR 2.7 billion impact that you are rather using a different methodology to smooth out this time. Is -- does it relate to maybe the level of discretionary margins being available, not being enough to smooth that out or is that not the case? And you do also -- you mentioned that you have used the discretionary margins have cushioned the impact of the ZAR 3.3 billion COVID-19 provision. Can you also maybe just explain why there would be other discretionary margins used to smooth out -- to cushion that impact, given that your variances are positive. And usually, that discretion margins are used to smooth out negative variances? Yes. And then thirdly just around Ping An Health profit increasing 30% to 40% after increasing 467% in the first half of the year. And given what the rand has done and given what volumes are done in the second half of the year. It's obviously a lower level of profit compared to the first half. Do you think second half is more indicative of the margins that we should expect in that business? I think if you can give us a bit of guidance of what is normal, whether there were any abnormal impact during this period on margins, leasing and health? And then my fourth question. If you can maybe just explain the new business volumes in SA life, excluding automatic contribution increases. In other words, on the embedded value basis, what was your new business volume impacting April and May in SA life. You mentioned 80% to 90% of expected levels, but that increase of [ automatic premium decreases ]. Just one further question. Also maybe if you likely to comment. You said -- you mentioned that the Invest business will be impacted by weak markets. In the Fast margin reset or capitalization of discretionary margins slowed that impact out why not this time? Does it also maybe reflect the level of available discretionary margins? Or is there a different reason for that this time around. And just one question, last question, just on the ZAR 3.3 billion provisions, and maybe related to a question Michael had as well. If you're not telling us how much is in respect of the different business is coming at least in future over the next 2 years that those provisions are released, show us how much of the earnings is because of the release of those provisions.

Yes. So I'll make a few comments. Thanks for that, Francois. I mean on the -- on your last comment I think that's correct. I think we will disclose how those margins play out carefully and not -- and be pretty gives to how they -- how they perform against assumptions. So the source of profit are clear. Maybe just to Ping An, maybe hand over to some of my colleagues on the other. I mean I think the Ping An Health business is complex. I think you shouldn't read too much into the margins at this stage. The -- it's a complex market that is nascent. The Ping An Health team has Ping An believe very strongly in our continued investment in growth. And that investment is around a lot of online capability. So a lot of the business is now being gathered online, and there's a lot of movements around AliPay and WeShare in the [indiscernible] table as well. So there's envisaged considerable investment into the capability in Ping An Health. And therefore, I mean, I don't think we've given any guidance. I mean with the margins to play out normally, we think the 5% profit margin is a reasonable thing to assume in the long term. But I do believe in the next few years, the investment in infrastructure will be significant. And therefore, I think the profit growth will be fairly flat. So I don't know, Deon, I'm not sure we need to know we communicate that more with more insight, but I don't think you should extrapolate from this performance any sense of the margins. The business is going through rapid growth with a commitment to a consumer investment in infrastructure. In the case of a suggestion, I don't know, Andy, maybe deal with the margin issues, if you're comfortable?

Yes. I will do. Thanks, Adrian. Francois, just on your last question, the provisions by company. I am thinking at large, you will see them in the embedded value disclosures because you'll get to see the change in basis for each company. So it should well come through there. And obviously, you will see as they unwind in future, the experience against those assumptions. So hopefully, that will be what you're looking for. In terms of the discretionary margins. So in the book, we -- in the life book, we look separately at different categories of business that you'll have individual life has maintained separate margins from Invest. And the DRO products would be separate again. And we sort of -- we don't dip into the -- each of those margins. So you will see that the majority of the provisions for future lapses and claims relate to the individual life business. So that's why I think your question was around why is there some margins remaining, whereas, in other businesses, they might be expired. So that's the reason for that. And then in terms of the economic basis, yes, I mean, I think just given the size of the adjustments for the claims and lapse provisions, it does eat through the margins. And therefore, the economic basis -- we've not ever had a situation before where the economic basis change would be completely burned through the margin. So that's why there is this treatment this year, and we'll continue to do that in the future. Adrian or Deon, we answered Francois question, right?

I'm just looking at the Invest margins and...

Yes. I think for the Invest margins, so there is -- where we've given some indications around Invest earnings, the in period experience around lower investment management fees would not be taken through margins. Where there's a -- where we've got a balance sheet amount of assets under management at the end of the period, which we used to project future fee income, that would generally go through the margin. So that's the difference there, Francois.

Am I correct to interpret to answer so that you -- the ZAR 2.7 billion impact would have beaten through all of the discretionary margins?

In the individual life sort of category of business, not across the entire life license.

Any other questions?

The next question comes from Warwick Bam from Avior Capital Markets.

Three questions from my side. You mentioned taking strategic shifts in new initiative investments to allow for the different market conditions. Can you just elaborate on these shifts and how that might impact the rate of capital deployed, especially in relation to operating profit, which is the metric that you normally use to give us some guidance? That's question number one. Question number two, just in terms of the mortality and mobility provision, the ZAR 2.2 billion, have you effectively changed the mortality rates for a specified time period? Or are you changing those mortality rates indefinitely? And can you help me with the percentage, give me a percentage change in your mortality assumptions so that I can use the sensitivities that you published in the financial results to understand the impact? And then just last one on the dividend. You spoke briefly about it, but can you just elaborate on the key reasons to see dividend? And then how should shareholders think about that decision? Is it effectively a delay in the dividend or a cancellation for the time being? And then does that -- how are you thinking about your preference shareholders with -- in that regard?

Thanks, Warwick. I think the shift in the new initiatives is just a very, very careful focus on prudence. I think we've made sure that the business plans as they stand now going forward, achieve a superior return on capital. We've cut areas where we think there's any way snitch at all. So we've battened down every single aspect. And across all of the new initiatives, they are really in the steepest -- that cost is the steepest is part of the investment. So the extent at spending the initiatives including the bank has really got bigger and bigger, to an extent with profitability, especially like this year has got smaller. So the denominator has gone down. But effectively, the spending initiatives should come down quite quickly. But at the same time, I think we've got much more certainty of confidence about returning to profitability and adding to growth of the group. So it really has been a focus on, I think, on prudence on cutting waste and on driving much harder when investing in distribution and marketing and getting scale. In the case of the bank, the bank is largely, from a capital perspective, on track. The focus is very much on the migration and bringing those across into the belly of Discovery Bank. So that is -- we haven't seen much of a change. I think the shift there has been more prudence around credit granting and very carefully making sure the bank is strong through the process. On the third point, maybe I'll hand back to [indiscernible] maybe on the mortality and mobility. But on the dividend issue, I think it's a fairly straightforward decision. I think the view of the Board at this stage is minded much as a dividend because the environment is very, very uncertain. It will be considered from time to time. So it is a cancellation of the dividend. I'm going to skip the [indiscernible] use of the word, I'm not sure what that means. It will be a decision probably not to pay the dividend that's where the Board is at, and essentially, we reconsider from time to time. So I mean that's kind of where we're at. We think it's responsible. It doesn't affect the pref dividends, it's simply the ordinary dividend, and the pref dividends will continue to be paid. So nothing dramatic in it. We think it's appropriate in these times. The capital plan is strong. Debt levels are where they are. We don't see them going up. In fact, we see the epilogue overtime coming down quite quickly. So we think it's part of a package of prudence in this uncertain time. Maybe [indiscernible], just talk to the modeling of the mortality and mobility and how it should be thought about.

Sure. So, Warwick, it's very much a temporary effect. So with our model with that skill, we basically model the second wave with the epidemic. And depending on how severe the epidemic is, we either reach herd immunity in the population, but it's all over and done with or alternatively it carries on for [indiscernible] there. So in all these scenarios, we basically [ plotted ] out until there's anymore progress until there is a vaccine available, which as you may know, very hard to predict at this stage, but there are more realistic patients that will be [indiscernible]. So what we've done in mortality scenarios is to project it for a temporary effect. We are seeing some interest in mortality effects. So in South Africa, for instance, there in lockdown, we saw mortality actually decreasing. So there are offtaking effects. The same wasn't true for the U.K. It might be in South Africa because there's car accidents and there is [indiscernible]. So all those are fixed payouts within the model itself. I'm actually not sure what the percentage change of the model of mortality be. So just focus on the COVID claims antibody. But I'm not sure if Viljoen can maybe add to that.

I think in terms of the mortality modeling, we haven't expressed that as a percentage addition to the mortality. We've actually modeled the COVID with -- extra mortality as a separate event. So I don't think it would be right to and compare that to a normal mortality addition. So, unfortunately, can't really help you, Warwick.

The next question comes from [indiscernible] from [indiscernible].

Can I quickly [indiscernible]

Sorry, [indiscernible], you're breaking up. Is there any chance you can just repeat that. I'm finding it very difficult to hear the question.

Okay. [indiscernible]

Right. [indiscernible], thank you for that. I can't hear much of it. I'm sorry. Can anyone help me?

Yes. Adrian, I think the question is, I think it's about are we intending to invest further capital in building and getting the bank up to its full potential. I think that's the question.

Yes. Yes.

So [indiscernible], the bank plan is fully intact. So we -- there will be additional capital investment. This is the highest, hopefully, the turning point of the investment in the bank at about ZAR 1 billion this year. There is that effect in the IFRS numbers. A lot of that, of course, is just depreciation coming through from past investment. But there's additional investment in the bank that is according to the plan. So we are not moving off the plan we set out with the bank. So there is additional investments that are according to plan. And I think the next year or so, the bank has really been in operations properly for about 10, 11 months. The next year of course is critical about kind of betting down the migration and about attracting new clients and getting clients into the belly of the bank in its accounts. So sorry, a long answer. We're quite comfortable. It's on plan. We require additional investment, but it's all part of the plan. I hope that's helpful. Sorry, but I think you get the granularity of your question and I do hope that's okay?

The next question comes from Musa Malwandla from Differential Capital.

Just one quick question the ZAR 1.1 billion. So I mean, presumably that's driven by macroeconomic expectations, so higher. Most of your sort of impact the macroeconomics would lead to higher lapses and so on. So I just want to get a sense of, if you can, what kind of assumptions are you looking at? How speedy that recovery is embedded in that ZAR 1.1 billion. I think and ask this because the other insurance I hear to give more detail on how lapses specifically will unfold or do you expect them to unfold. So I just want to get a sense of in your minds, how is that ZAR 1.1 billion justified?

Andy, are you happy to...

Yes. I'm happy to go -- yes, happy with that. Yes. So we've really modeled through the next 2 years, so the next 2 full financial years, that's additional lapses. So that gives you some insights to our thinking around how long the economic impacts will last at this stage. And when we've set that assumption, we've referenced the experience we had under the global financial crisis. And how that played through. But I think it's probably fair to say that we're expecting a more severe slowdown in the experience on the country experience under the global financial crisis. Musa, hopefully, that helps.

Yes. So I want just to get a sense. You're thinking, it may be about 4% down for the year because I mean that's roughly, I mean if I were to net it back to and then quickly recovering over the next 2 years. Is that sort of...

So we haven't really sort of set out with -- if you're thinking 4% GDP reduction, we haven't really set out our assumptions around the GDP, although that's been part of the input to our thinking. In fact, I would suggest there's a much bigger slowdown in GDP than that. But we've really looked at what we think the consequent lapse experience would be on our book, given the demographic of the book, the makeup by the type of clients and so on. And we've played that through an additional lapse rate, as I say, for the next 12 months and then the 12 months thereafter that. But we're not going to give you the exact incremental lapse rate. I think it's also important is it to understand what we do in our business. Lapses aren't the only -- isn't the only end of it because you've also got policy buydowns. So you may well retain a policy on a slightly lower premium and not have the lapse. So it's really looking at the balance of those moving parts, given the flexibility of the products.

The next question comes from Sarine Barnard from Ninety One.

And just on the new initiatives, from a comment on Warwick's question, are you saying that you can stick to the previous guidance on how your initiatives think will develop despite the lower expectation from revenue. So the cost-cutting exercise that you're talking about will offset that, also across that. And then in the provision, you talk about [ COVID-19 ] client for the UK health business. Can you just explain that are those health clients are covered by the NHS for COVID-19. And Deon, can you tell us anything about your EV at the end of May?

Sorry. Repeat that again, I'm sorry, the last part.

Sorry, Deon. The embedded value. Can you comment on the embedded value at the end of May or otherwise, can you just confirm that all these changes for the last earnings, so the earnings of the company are similar to what we should expect in the EV?

Okay. I'll be very brief. Thank you, thank you. The new initiatives, I think the absolute scheme new initiatives, we expect not to be far out of the base of the absolute scheme. The denominator is dramatically lower than we'd assumed. So if you look at the even the normalized earnings is down 18% to 28%. So we'd expect that the percentage spend against guidance to be higher, but we expect the quantum of [indiscernible] what we expected. And the cost-cutting that we have done, we think, will affect dramatically 2021. First point. The second point, I think, is just the confidence of around how we turn those new initiatives around. So there's a dramatically more aggressive strategy in a few key areas. So we think that 2021 will be an important year for all those new initiatives. And then maybe to make the point, I think, over the 5-year cycle, 2018 to 2022, which is our planning cycle. That was the 10%. If you look at our expectation, we think we'll be at about 13% to 14% over the period. So if you look at over the period, we think we'll be at about 13% to 14%, including building of the bank. So it is very volatile during these times now with fluctuating profitability. It really is hard to compare it to the 10%. But I think we will be higher, but in absolute terms is probably very much in line. In terms of the health business in the U.K., just to make the point, the issue here is that people have -- it's not the COVID claims. The effect of COVID that people are not having elective surgery now. So you've got a lower loss ratio now in the health business. But because by nature, someone needs a hip replacement, they're going to go for it in the future. So the provision in the modeling is and I try to understand the additional claims in future years due to the delay caused by COVID. So it's not the COVID case. On the issue of EV and the earnings of life, maybe Deon, do you want to just make a comment on that?

Yes. I mean I think you're right that you should expect to see similar type of impacts on the embedded value.

The final question comes from [indiscernible] from [indiscernible].

I think my question is just more of a follow up on Malwandla question. I think previously, you had guided that the [ planning ] period is about 3 to 5 years, so for the bank. I just want to understand what is really that is happening. Do you still mention that few with regard to the [indiscernible] for the bank? And then the second question was just a [indiscernible] question on the FSCA went to looking the policy [indiscernible] to insurance company. And is that likely because due concern of this [ COVID?]

On the banking issue, I think it's important me to start, I hope we don't -- there's no [indiscernible]. It's not business as usual. It's a very difficult time. So sticking to original terms is difficult. In the new initiatives, we were not happy with the cost basis and then addressed them quite significantly during this kind of COVID number of months. And just trying to point again, I think we are confident that we can get the right traction going forward. But it does depend on the environment being in line with our central assumptions. In the case of the bank, we said by 2022, 2024, we should get to profitable to a breakeven position. That's still among the plan. Again, it is in the backdrop of a fairly volatile environment. But we think if we can continue doing what we're doing and the plans we're laying out. Performance, we hope that lay out. We're trying to stick to that original plan. On the policy wording, maybe health and trauma, you want to say something on this.

Sorry, I missed the actual -- the FSCA documents on, and you just repeat that?

So [indiscernible], can you -- the policy waiting challenges where I proposed FSCA, what is our view on that. ?[indiscernible], just repeat your question a bit more granularity.

Unfortunately, we do not have [indiscernible] on the line.

And I think as just reading between the lines, I think it might be around kind of the pushback on the business interruption claims that are being declined by the providers. I think.

Okay. That actually isn't a line of business that we've written up until now, I think for now. So we actually -- we don't have any business interruption cover on our books. And our commercial business is quite embryonic. It's one of the startups. So we don't have any exposure in that area as these stand today.

All right. I hope that was the question. Everybody [indiscernible]. Thanks for the phone. So we have run over quite significantly. Appreciate the time and hopefully, the disclosures and the announcements were fairly clear. Thank you, operator, and thanks to everybody for attending.

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.