Good morning. It's really a wonderful pleasure and an honor for me, as always, to present Discovery's Interim Results to 31 December 2025 this morning. Appreciate your time. We should spend, I guess, about an hour on the results. I'm joined by our Group CFO, Deon Viljoen, who's with me here. David Danilowitz, who's Head of our Investor Relations and Strategy, will anchor later the Q&A session. All of our key executives are online, who will take questions. Once again, thanks from all of us for your time, and I hope we give you insight into what has been a very, very good period for our group. Let me begin by just showing the numbers. I think they are hopefully self-evident.
It has been an excellent, strong, and robust period for our group. You can see Normalized Operating Profit up 24%, Normalized Headline Earnings up 27%, new business up 12%. I'll take you through obviously a lot of that through the presentation. I thought obviously, to provide some context, it's almost axiomatic to say that we live in a, in a complex and changing and volatile environment. Certainly two dramatic forces are shaping virtually everything we do, and to an extent, how things play out going forward will be determined by these two very substantial trends: geopolitical rupture, with conflict coming through as well as we've seen over the last number of days, and at the same time, and overlapping that, the proliferation of AI. Both of those have the ability to really change humanity in profound ways.
We're operating in a very complex environment. I would put it to you, and I am proud of our group in this regard. I think success at a strategic level and an execution level is the ability for an organization to operate on two parallel fronts. One is prudence, resilience, and careful allocation of capital. The other is innovation and really capitalizing on the proliferation of AI and what opportunities that really offers. I think to an extent, and I hope you will see that through the presentation, I think our group is focused on both of those simultaneously, and that I think is evidenced by the results that are coming through from the group.
The manifestation, and I wanted to take you through this, is kind of a coherent strategy, and I hope it is clear of what we've focused on. Again, in the period under review, we really are playing this out carefully. From the context of a complex world, the macro trends that affect our industry, and we've spoken about these over many, many results presentations, are in fact intensifying significantly, particularly driven by AI, technology, data, et cetera. We are really drilling down on our Vitality Shared-Value model, and during the period, we launched Vitality AI, a partnership with Google that is a critical piece and foundation for our group.
That has created a very different value chain, and I want to, in the presentation, spend a bit of time talking about the concept of alpha, an analog from the investment markets about the ability of this value chain to really create better margins within the businesses in which we operate and better results for our customers, which is critical. Then that capability cycling through our two composites, Discovery South Africa, Vitality Global, and that's what really is driving the results. Into two very, I think, focused strategies. Discovery Bank is a super bank that is the composite maker in South Africa and the face of Vitality in all of our other markets working with our partners. That is the strategy, and to an extent, that has framed everything that we've done. I'm going to go through the numbers in a moment.
The three themes that have shaped the last six months. Firstly, I think it's a very good strong performance delivery ahead of our five-year growth targets, as you will see. Second piece is a very strong focus on evolving the Vitality Shared-Value model. I think the cornerstone of it, Vitality AI, of a lot of the work done in many markets will be brought together and launched globally, I think in November of the period. In the composites, a very strong focused execution. Great discipline, careful focus on pricing discipline, allocation of capital. I think that has driven the results. There's a lot of numbers to show you. I hope they're pretty self-evident.
There's nothing overly complex, and I'd like to use the time, if I can, to maybe highlight some of the numbers and not do all of them. The presentation we sent to you is, I think comprehensive. I'd like to spend a bit more time on strategy if I can. Let me go forward and just pull out some of the key issues. Firstly, operating performance up 24%. If you look at the numbers, I think very robust performance across the board. You can see in South Africa, Discovery South Africa growing by 19%. Vitality Global growing by 41%. The two together, given the different size, giving you the 24% growth in operating profit.
If you scan the slide, you can see robust profit, robust performance across the board. A number of standouts. The bank now strongly generating profitability, and that should grow very strongly going forward. Discovery Insure having an excellent period. Vitality Health in the U.K. really turning massive amounts of profitability, as you can see. We had some issues of matching in Vitality Network, and I'll take you through it later. The yen depreciation against the dollar had quite a significant effect. It's not of great scale to the group, but it does create that volatility on the face of this, of the slide. I think a very, very robust performance across the board. You can see Vitality AI. We've included a specific line item there.
There's a lot of AI work taking through place through the group, but this is the cornerstone of our business model, and so we're spending carefully in that regard and making sure that we actually can use that capability, and that should come through in the presentation. You can see from that the performance. If you look at it graphically, I think it's a very pleasing slide. The group has managed to grow our earnings by 15% compound over the last five years and 13% over the last 15. I think you went back 20 or even more, I think the compound growth rate is even higher with very little recourse to additional capital. I think we're very pleased with the organic growth of the group, and again, it's evidenced by the power of the model.
New business, as you can see, up 10% in South Africa, up 16% in Vitality Global. We also show the non-insurance income. You can see the Bank growth up significantly, the income up 31%. We'll see that later in the presentation. At the highest level, I would argue that I think we've applied kind of pricing discipline, careful allocation of capital with the pursuit of growth. I think we've come up, I think, pretty well in that regard. You can see the graphic play out of the new business up 12% to just over ZAR 14 billion. Client growth, strong, 7% in South Africa. Unique clients to over ZAR 6.5 million. Despite the scale of our business, we are continuing to grow.
In the U.K. up 15%, sorry, globally up 15% outside of China. China up 17% to just over 34 million. The group has been strong throughout. If you look at the embedded value, a very strong growth, I think a very clean growth. Significant improvement in Value of New Business. Strong positive experience variances. The key issue that has really played out in the EV is two countervailing forces. One is lower interest rates in South Africa, lower long-term rates, significantly lower, over 200 basis points lower, really driving up the embedded value. On the other hand, in the U.K., the pound appreciating against the rand, bringing down the EV in rand terms. You get this counterbalancing force.
On balance, 17.3% annual return on EV, that's very, very strong. Very pleased with that. The cash conversion has been strong, over 70%. You can see 71%. We wanted to show you kind of the last number of years of cash generation just to show you the growth of it. I think pleasingly, it's coming from all of the businesses, almost in proportion to their contribution to profitability. I think we're getting good balance across the businesses. You can see the cash uses of new business growth has been fairly controlled as we focus carefully on allocation of capital. In this particular period, the timing of our taxation has created a greater spend. That's somewhat muted the cash conversion to a net ZAR 4.6 billion, but very strong cash conversion across the board.
If you look at the kind of key measures of the group's capitalization and its structure, you can see the development of cash conversion strong over previous periods, slightly dipping due to the taxation. No issue there. Strongly capitalized all of our entities. The FLR, the level of debt coming down strongly. We have said in our guidance that 15%-20% is probably the optimal point of debt in terms of returns on capital. We're kind of in the low end of it, and the group continues to keep that stable or reducing it over time, and you can see that coming down in reducing financial leverage ratio.
If you look at the kind of below-the-line performance, the face of the income statement, I'm not gonna get detailed into this, but to point out, you can see the Normalized Operating Profit at the top, up 24%. That's what I've just shown you. There's a slight gearing effect because the finance charges are now flat or slightly down, so you get this boosting from the fact of 24% growth with a flat deduction. You get profit before tax up 29%, all the way down to Headline Earnings up 29%. We said in the initial chart, Normalized Headline Earnings up 27%. In terms of the dividend, we've been completely algorithmic here. We simply have taken the previous interim dividend and grown it by the Normalized Headline Earnings. There's a slight rounding.
I think it's ZAR 0.01 either way that creates the 28% rather than the 27%. Essentially, we've been completely algorithmic with the dividend at the interim stage, and you get 28% growth in the dividend. I wanted to turn to growth and to an extent, what is, what is driving that growth? We've used this table in the previous results announcement. I think it is important just to give a sense of how the group is in a different phase of growth. This table shows kind of phases of growth and the key KPIs and value drivers of that growth. In the first part of the ten years ago, you can see organic growth was very strong.
We then spent 10 years on investing in a number of startups, Discovery Bank the most notable. Now we're in the second year of a scaled growth phase, we've been pretty clear about our ability to grow at 15%-20% over the five year period. We've been clear about the performance growth, cash conversion, how we allocate capital between spend on new debt, dividends, and then ultimately, yeah, returns on equity. You can see the targets on the right-hand side of the chart. The performance actually in the period has been excellent, as you can see across all of them. We are either within plan or above plan. You can see the 24% growth. We started the year well. We're at interims. We'll see how that plays out.
All the momentum is working well. I wanted to point out the spend on new. We've spoken about 5% spend on new as kind of a guideline for us. We spent 3% in the period, some of that on Vitality AI. The reality is, and I think we're very pleased with this, a lot of the growth is embedded now in the businesses. Many are just turning to profitability like the Discovery Bank. I'll talk about Vitality U.S. There's a number of things playing out that should grow strongly. Our U.K. business is coming out of IFRS 17 now, should grow strongly, et cetera. There's a lot playing out in the group. There is no need, we think, to be investing in new starts, J curves.
There's a lot of embedded growth in the group. Despite the pursuit of considerable growth, there isn't a need to spend dramatic amounts on new initiatives, and we're happy with that 5%. In the period, I think kind of better than plan. You can see the ROE coming up nicely, and as said on the dividend, we're simply being algorithmic at this point in time. I think importantly, beside the phases of growth, you know, internally our micro issues, the reality is the environment is changing, and it's been framed a lot by a number of different vectors we've spoken about. Those forces are accelerating significantly.
To our mind, we are very, very comfortable with the Vitality Shared-Value model of how it is fitting into these exact trends. At the highest level, I would argue that life insurance today often results in suboptimal returns on capital. It is based on kind of pre-existing risk or once-off underwriting approach, a once off, you know, pricing approach. In a world of kind of really dynamism, customer engagement, understanding wellness causality, the power of AI, et cetera, it's anathema to that business volume, and we can do better. I think our Vitality Shared-Value model shows the way. I think in health insurance, the massive complexity of funding curative care, of course, is a complex issue.
Again, prevention and wellness and dynamism and making people healthier alongside that is fundamental, and it creates a very, very different dynamic. All of the forces we're seeing that are coming through, a completely different personalized, quantified self, the power of all of this, is creating a very different, very different environment. I think we are squarely in a space where our model can lead globally in terms of what we set out to do in the different product lines that we are in. It really does talk to the performance in this period because it's interesting.
If you look at the actual growth of the group and you go and find out where it came from, which business, you actually find the contributors to growth, as you can see on this chart, are across the board. All of our businesses have kind of outperformed expectation in our own internal view, and the fundamental driver behind that outperformance is our Vitality Shared-Value model. The dynamics it creates is fundamentally different. And we wanted to share the kind of the mathematics or the actuarial science behind what that does. I mean, the construct of what we've done, and we've spoken about this for many, many years, has been this kind of taking the excellent insurance businesses or banks, whatever it might be, and putting them on the frame of the Vitality capability.
That creates the shared value, good for customers, good for shareholders, and creates a very, very different dynamic. That has been the approach. Internally, it's been the approach we use with our partners. That's the structure. The manifestation over time with AI, with data, with all of the capabilities and understanding has been this idea of Vitality AI, really personalizing and making it dramatically more precise. But the effect of this is not just on the actual, end client of making them healthier. It's actually on the entire economic structure, the entire actuarial structure of the value chain. That manifests in this alpha, this kind of extra margin that either drives internal rates of return on capital or drives operating margin. I think over this period, and that's a crucial issue, we are much more precise how...
about our ability to quantify, demonstrate, calculate that alpha and really demonstrate it to society, to partners, particularly. That's very, very important. We did want to show you or share with you the kind of actuarial science behind this and explain how this alpha plays out. It plays out in a few value drivers. The first is pricing, dynamic pricing. The second is behavior change of the customer. The third is optimizing retention. The fourth is in sharing incentives. To an extent, the value is created by the pricing plus the behavior change effect, plus the retention effect, less the cost of incentives and rewards and structures to get customers to actually engage in that behavior. Then deciding how best to use that margin in terms of new business. Do we offer differentiated products with more incentives?
Do we use it on a price play, et cetera? All of that is to optimize volume. That value times the volume is the alpha, and that should be quantifiable. The power of it is it, as I said, results in a better return on capital or better margins for the insurer. The critical thing for the customer, if you look at the behavior change and the value they get, they're healthier and they live longer. That is really the shared value. Playing it out differently, the mathematics of it gives you the shared value. You can see the formula in each of them. It plays out differently. You're seeing essentially on dynamic pricing, maximizing premium per unit of risk. You're changing behavior for a given risk factor. You're changing.
You're trying to have less, less lapsation or higher retention and higher retention of healthier lives versus total lives. Critically, you're trying to maximize volume and optimize volume. It plays out differently in life insurance, where essentially you can really mix and you can really change premiums on underwriting at the point of sale. In our case here, you actually get better yield through dynamic pricing. In health insurance, it often manifests in better selection. The premium is set by community rating. You want to attract better lives. In health insurance, optimized retention on keeping healthier lives in the pool is absolutely critical. In both cases, making people healthier works better. We're playing out the same science in banking, in motor insurance, et cetera.
This is essentially the value chain that has been developed and comes out of the Vitality Shared-Value model. What is remarkable now is the ability to accurately determine how it works and how we play out that model to get the right kind of performance. I think one of the standout performances of the period has been Vitality Life's new business production. Great volumes of new business in a very complex market. The British life insurance market is the fourth largest in the world. It is highly commoditized. Intermediaries use portals for price plays, it is a very complex market where the returns on capital are often suboptimal. You can see that our value of new business has climbed by 110%.
It's been a remarkable performance. We now can actually work out exactly the contribution to that 110% by the various factors. The dynamic pricing using actually the kind of dynamic pricing models that really creates dynamic underwriting in a very price competitive model gives us between 20%-50% more yield on premium. We're getting 18% lower claims by people engaging in the structure and working with our reinsurers to kind of bake that in. We're getting dramatically better lapsation and selective lapsation effects taking place, and we worked out well how to share that value with customers in appealing and powerful way. Of course, the critical thing in that market is price elasticity. Price is everything. It's a 5x elasticity.
For every 1% change in price drives a 5% change in the quantum of new business. I think the team have done a remarkable job of using the structure and the Vitality Shared-Value model to really drive up that value of new business. And essentially alpha is return on invested capital. We need to be very careful about how we invest capital. Getting risk-free + 9% is I think an exceptional return on that capital. And for customers, we're demonstrating and in fact advertising above the line that people are five years longer from the effects we can have on them. It really is taking, I think, a complex actuarial value chain, but make it simple in terms of the alpha throws out and of course the benefits to clients.
If you take it across the business, it's interesting that across the entire group, we can demonstrate and see the alpha in better mortality, morbidity, lower credit defaults. It plays out exactly in internal rate return on invested capital for the long, long-term businesses, better operating margins for the short-term business. You'll see Discovery Insure up to over 15%, Vitality Health up to over 11%. That's seasonal. I'll touch on that a bit later. In the Discovery Health context, the Discovery Health Medical Scheme is a not-for-profit entity. Its alpha is about the cost of healthcare. In our calculations, per unit of benefit, people pay 17.7% less. We are working hard to be able to define what that alpha is and exactly how we get there.
You can see the lower line, the EX line, the actual idea of life expectancy and across all of our businesses having a profound effect on our clients. A considerable focus on the Vitality Shared-Value model, the ability to graphically demonstrate the so-called shared value waterfall that illustrates that graphically. Of course, in terms of working with potential partners, this is what we demonstrate. If you take the capability as it is, you can put it into the value chain and dramatically improve the return or margins and improve the lives of the people that you serve. I think that is, to an extent, the power of the story of shared value playing through our two composites, Discovery South Africa and Vitality globally.
I'd like to take you through some of the observations of the businesses. The two composites, as you saw, have performed really well, 19% growth in South Africa, over 40% growth, Vitality Global. I think we're very pleased with how that has played out. I do have to say that there has been a very disciplined approach to the strategy. Each of the businesses in the composite works on exactly the same way, the inverted T of the business built on the Vitality frame. Very importantly, making sure our business is excellent to the Vitality AI capability really is the evolution of Vitality. The two important things or the outputs of this are quite simple. In South Africa, as I mentioned, kind of the super bank is the face of the composite.
Globally, we like the ability to actually generate this interface for customers where whatever partner you're in, we really engage you in the right way, in a unified way, in a three-dimensional way that I'll touch on a bit later when I describe Vitality AI. Let me turn to Discovery South Africa. I think it's had an exceptionally strong period. I do want to make a call-out though for where the state of the country is. I think for the first time in over a decade, we're seeing some green shoots. I'm really proud that we are part of the business government partnership that is driving, I think, a lot of really good development, assisting in execution. Reforms are happening quicker. To an extent, for the first time, as I say, I think we're seeing green shoots.
Load shedding is gone. We've kind of, I think, stabilized the ship somewhat in terms of SOEs like energy, transport, and logistics, a lot of work throughout, and all of the economic variables are looking better. Some, hopefully, economic growth coming through, bond yields coming down, insurance coming down, government, issuing of debt being oversubscribed, et cetera. We're in a volatile period. Things can change, but it would appear, really strong green shoots that we need to capitalize on. Very proud working with my colleagues, other businesses, together with government, the government of national unity on this. I think this is a very important phase for our country. Our business, has always been well-positioned.
We were clear to investors a number of months ago about the key, kind of the key KPIs that we are focused on, the operating profit of the bank, the return on invested capital in Discovery Life, the margin in Insure, et cetera. We set out these KPIs. We expect a growth of between 12% - 12.5% to 17.5%, and that's the expectation. In the six months, the growth has been 19%. Across the board, we've kind of overshot on the KPIs. I think we're very pleased with the performance. Let me take you through a few observations of each of the businesses. I want to turn to Discovery Bank as the start and just maybe just contextualize the strategy here. It is important.
The initial investment thesis was three tiers. We're gonna build a bank on shared value, number one. Number two, a full-service bank. Number three, on a digital sophisticated frame, with advanced AI capabilities. They are somewhat sequential, and they flow from each other. I think that has been the success of Discovery Bank. Once you offer shared value, by definition, you have to offer a full-service bank to encompass engaged clients. Once you do that, you require the digital and AI capabilities in order to do that and maximize that. The three have played out well. What we're seeing is a bank that's growing at a rapid rate. It's really the fastest growing bank. Customer outcomes and opinions and surveys shows just how well the bank is doing.
To an extent, that first phase of creating a bank of scale and one that can really grow is something we're pleased. I think during this period, it's been fundamental. The bank is now profitable, and that profit is expected to grow as we've been clear and I think guided over the future mathematically. We're very pleased with that. I think the numbers back up the strategy. If you look at the kind of highest level numbers, I think these will hopefully be obvious to you. Strong growth in clients to over 1.4 million clients, up 28%. You can see the growth in deposits and advances. The profit now really turning from loss to profit, and that grows.
We've given kind of a heuristic of like ZAR 400 million a year of that growth as the bank scales. Revenue in total growing by 34% over the period. A very, very strong growth. A few points to make. If you look at the actual sales and quality of sales, we've got to about 1,500 new customers per day joining. What's interesting is second from the right, the sales mix is very interesting. Now, close to 70% of our customers are not Discovery clients at all. It's bringing customers of similar quality, but completely new to the group, and that offers obviously considerable opportunities for Discovery Bank. For the group, I mean, total.
Again, coming to the idea of a super bank, a composite maker, bringing in that scale and quality of customers offers massive growth opportunity. Deposits and advances growing strongly, as you can see. I'll leave you with the detail. Impairments staying very much under control. Engagement is a critical issue. It turns out that when people join Discovery Bank, we are getting primacy by people joining and over time becoming more and more engaged. Over the period, customers bought nearly 600,000 flights through Discovery Bank. It shows kind of the power of the ecosystem, the power of the shared value model, the power of the economics of how it works. You can see over time, people spend per client more and ARPC client by duration climbs.
All of the kind of the nudges and structures in the bank tend to get people in, and over time, they use the bank more and more, and that's critical. I guess this is an important slide because what it shows is kind of the mathematics of how the bank grows, and it alludes to the alpha that we are trying to create. Just let me just take you through this very quickly. On the extreme left-hand side is client growth, as I said, up to 1.4 million clients. On the extreme right is the profitability. As you see, half by half as it turned around. Before acquisition costs, you can see the strength of the kind of operating profit. It's in the middle, I guess, it illustrates the dynamics.
The revenue per client tends to climb over time, and that illustrates the kind of increasing engagement. On the right-hand side, sorry, second from the right, the impairments tend to be flat or fairly flat. In fact, slightly down sloping over time. The digital capability and how Discovery Bank is built is despite all of this functionality, you can see the expenses per client comes down dramatically as Discovery Bank tends to scale. If you roll this up mathematically, and you've seen this from us before, at 2 million-2.5 million clients, we expect an operating profit of about ZAR 3 billion. That's what we've said. The alpha issue is actually the cost-to-income ratio.
If you think about the Shared-Value Model, the whole hypothesis is that people will use the bank substantially, so it drives income in the bank, it drives usage. At the same time, the whole structure in the digital frame should be very cost-effective, as you can see. If you plot the mathematics at that scale, at 2 million- 2.5 million members, we expect a cost-to-income ratio of 40%-50%. To an extent, I would say to you, the phase I of the bank is building a capability. It can really scale and profit but generate an alpha in terms of cost-to-income ratio at the same time, and that is what we are focusing on. As it plays out, that's kind of what we are aiming to achieve.
The second phase, and this is something over the last year certainly, but now will accelerate over this calendar year through a variety of product launches, is really positioning the bank as the composite maker. The idea of a super bank that really is a super app, a super bank that really brings in all of the products, and it really is the phase II of how the bank will play out. We think that the logic behind this is incredibly powerful and the effect on the bank itself, on all of our businesses in Discovery South Africa, particularly on our customers, is powerful. I mean, three enablers just to make clear of how this plays out. The first is all of our products are leaders in their market.
All of them are on exactly the same architecture, so they fit on the face of the bank perfectly. Secondly, the data of the entire group and the AI capabilities, Vitality AI, all the stuff that we're doing, fits onto the bank as well. The entire data set the bank uses in the right way to manage things, and there's a lot of incredibly powerful use cases to show how that is playing out. Thirdly, the rails of the bank offer unique differentiation. Security, payments, ecosystems like travel, linkages to the healthcare system, et cetera. All of those can be accessed on the rails of the bank. When you think about, you know, kind of increasing AI, increasing cyber risk, the idea of product houses making payments outside of this, you know, isn't rational.
Pulling this all into the banking rails creates much better security, creates much better functionality. The value drivers for customers, acquisition being much easier, much more simple for us. We're seeing that already. Much greater functionality, almost killer functionality between each product house and the bank. The idea of sharing all the economic centers into the center, the same kind of idea. Next best action, do the right thing, get incentivized, get considerable value. Security, as I mentioned, and of course, service. In-app, for example, in-app servicing in a world of considerable security risk is we think, massively powerful. We are in the process of rolling a lot of this out. You will see that play out over the next year or for 18 months as we have significant steps that the bank will take.
We're seeing amazing data from the early roll out of this. If you are a Bank client, you may see at the top of the Bank app, it actually lets you see all of your various products. A simple thing that we've done is kind of if you don't have one of the products, it simply puts a red cross next to that icon. You can see on the top of the slide, and I'll leave it with you to read, just the uplift in the leads coming through that process, be it Discovery Insure, Discovery Health, it is remarkable. People are using that at a rapid rate to actually kind of reach to us and give us ability to actually call out and close those deals down.
The actual size of this has shocked us in a way. It may be pent-up demand, it may be just the first time we do this, but it's an amazing, powerful distribution channel that will grow and allow us to service our clients at the same time. The other point is security. Our trust technology, it takes all of the data and actually applies it every single transaction that takes place in the bank. It actually works out statistically based on all the data. Is there potential fraud? You can see on the slide just the EFT fraud, how that has come down by 80% over a few months from the use of that technology. Applying that to other areas like healthcare offers massive opportunity.
The concept of a super bank and how the bank scales in its first form but then starts to suck in everything into the rails of the bank is where we're heading. You'll see that play out in the next number of launches as we go forward. That's a good segue to Discovery Health. I wanna move a bit faster here. I think hopefully the numbers are fairly clear. I think an excellent period. Very strong new business in Discovery Health despite its size. Normalized profit up 5%. Actually was affected by the. You'll be aware that over the period, we overpaid 16,000 beneficiaries of the Discovery Health Medical Scheme, 16,000 members of the Discovery Health Medical Scheme. The communication was suboptimal.
We took a view to actually pay for that on behalf of members to the Discovery Health Medical Scheme at a cost of ZAR 125 million. It was based on meeting the needs of our members. We took that decision quickly, and I'm happy that we did that, but you can see it did have an effect of ZAR 125 million off that operating profit. In fact, without that, the growth would have been close to 11%, which is excellent, but we're pleased with the overall performance of Discovery Health. It's important to say, I'm coming back to the value drivers of the model inside the Discovery Health Medical Scheme.
If you think back on the issue of behavior change, of selection, of keeping the risk pool whole, we are focusing like a laser beam on making sure that we get that done. Two things that I think illustrate how the model works well. One is focusing on making sure the risk pool is right, focusing on getting the right risk per unit of premium. In effect, we've done that through the Active Smart plan, a focus on the kind of benefits that attracts the right kind of members. It's moved remarkably well. We've grown that plan at a rapid rate, faster than any of our other plans. That is dramatically younger, healthier, as you can see. Nearly six and a half years younger, 60% lower chronicity.
Really bringing into the Discovery Health Medical Scheme young, healthy members. That is crucial for the old and sick. It provides the cross-subsidies and the structures necessary to keep the scheme where it should be. At the same time, the idea of Vitality AI manifestation in Discovery Health is Personal Health Pathways. It's the same methodology. We're getting tremendous results from this. 575,000 activated lives. You can see on the right-hand side of the slide just the health actions completed. The multiple of kind of the completion of the various screening prevention tests and things that we ask people to do. It's been remarkable. We plan to accelerate that. We're learning also about how to reach out to people, WhatsApp, email, how to talk to them the right way that's highly personalized.
Really focusing on two issues, making people healthier and making sure the risk pool stays whole. The effects on the Discovery Health Medical Scheme are very, very strong. Despite all of the complexity, considerable stability that you've seen in previous periods, very little buyups and buydowns. In fact, the buydowns have come down to under 2% in the red on the left-hand side. The key issue is that people pay less for healthcare than they would elsewhere. We've put through a contribution increase of 7.2% for the 2026 year, we've given people a three month holiday on that, it's taking place in April. The effective contribution increase therefore is kind of nine-twelfths of that or 5.4% as you can see. It's dramatically lower than the 10% in the market.
At the same time, the solvency of the scheme and its market share remains quite remarkably strong and high. The key issue though, the alpha, is people pay 17.7% less per unit of benefit. Again, coming back to what we're trying to do, make sure that behavior change takes place, make sure that people are healthier, make sure that the risk pool stays appropriate for the given, for the given premium. Excellent period. I wanted to mention NHI very, very briefly. Obviously this is an important development. I think we are more optimistic about a rational outcome. It is very important to restate that our position has always been, I think organized business position has been that NHI is not workable without private sector collaboration. We need to strengthen the healthcare system.
There's a process going through now that I think is rational and provides a lot more space and room to debate how NHI should be implemented. We are not obstacles to it, quite the opposite. We are trying our best to offer assistance, advice and structures that make NHI workable. There's a constitutional court hearing now on the first piece about the parliamentary public participation. That will take a few months. Depending on the outcome of that case will determine whether the other litigation cases take place. We'll see how that process goes through, but I think we are feeling a lot more confident that there's space to debate how to make NHI workable. It's of course a very, very important issue for our country.
I would want to say that despite all of the narrative, it would seem one directional that the spend on healthcare is likely to increase quite substantially over time. Certainly as the country becomes more prosperous, that's a critical thing to do. The, the quality, the depth, the sophistication of Discovery Health, the strength of the Discovery Health Medical Scheme is crucial going forward. Let me turn to Discovery Life. I keep saying I wanna go faster here, but I keep getting caught on detail, but let me try and keep going. Discovery Life I think had a very robust period. Operating profit up 15%. Individual life profit up 6%. The core of that, of that performance was exceptional mortality experiences. I think you will see if you go through the detail.
Coming again to the, I think, the power of the model. Cash generation up 9%. New business up on the embedded value basis, up 16%. Overall new business up 1%. If you look at the breakdown there on the right-hand side of the chart, you'll see that's interesting. The automatic contribution increases in the individual life business are now 2/3 of the new business. With inflation coming down, those automatic contribution increases come down, bringing new business down by 1%. I think we're happy with the momentum of new business going forward. The dynamics of Discovery Life's profitability and performance, you can see in the build-up of the embedded value. Positive experience variances, positive operating non-economic variances of just under ZAR 390 million.
The economic variances are substantial, taking total positive operating variances of over ZAR 1 billion as you can see. The VNB margin improved from 3.8% to about 5.5%. As I said before, for us that's the alpha factor. Internal rate of return on capital +3%, +8%. The EV grew by a remarkable 31.3%. The drive behind that, of course, is significantly reducing long-term rates of interest that drove up the present value of the Embedded Value. Beside that, a very clean development of the EV, good Value of New Business, strong operating variances, and the economic factors driving that from the unwind, of course, taking the EV up to just under ZAR 59 billion.
It's an important point to make because the value of Discovery Life is significant, and we have to enhance and make sure that value emerges. If you go back to the operating variances on the left-hand side, I wanted to just illustrate this analysis to you to show you where the focus is. I mean, there's a lot of issues taking place that we're focused on. Two distinct things. Essentially, we wanna make sure that our mortality profitability continues. At the same time, this issue of alterations and policy lapses, there is always a negative variance, diminishes and disappears over time. That is the focus of the group. You can see there is kind of interplay between the two.
There's been a huge amount of work done over the last year and over the last six months, particularly to actually focus on policy alteration and relaxation. In the middle of that, in the middle of that chart, we illustrate where the alterations are at the moment, policy alts are now, and how we expect that to diminish given the actions we've taken on. On commission arbitrage, on all kinds of selective effects, on alterations, et cetera. Some excellent work done by the team that will manifest over the next year or so, and that should reduce that effect quite significantly. At the other end, on mortality, the team has done exceptional work on the shared value model. Much more precision in terms of how people move from status to status.
You can see on the top right-hand side, engagement has increased in terms of gold and diamond. Mortality in those categories has come down significantly, 20% and 35% respectively. When you look at the mortality and morbidity experience of Discovery Life, it is quite remarkable. Essentially, how we're driving that value going forward is minimizing policy alterations and lapsation effect. Driving up the power of the model to make people healthy, ensure we continue and grow the mortality experience. That looks, for us, very, very optimistic. Let me end Discovery Life by just illustrating the IFRS 17 numbers. Importantly to say, we opted for OCI. The IFR treatments are essentially economic fluctuations, go through the IFR and ultimately recycle into P&L over time.
It creates a lot less volatile set of results. If you do that and you think about store of value, to understand the growth in the store of value, you must add the CSM, the Risk Adjustment, and the IFR to see the total store of value. You can see how that has grown in the case of Discovery Life at 47%. Really a function of lower rates of interest. You can see the build-up on the various components of the store of value. What is important to point out on the right-hand side is mortality profits emerge through P&L. Policy alts actually are a deduction of the CSM. You can see the effect of that, and I hope that's clear in the numbers.
Our team, of course, will be available to discuss it further one on one. Let me make some comments on Discovery Invest. I think an exceptionally robust period. Assets under administration up 20%. Very strong net inflows. We're getting great results from people, kind of the behavioral change, the boost that they're getting. You see that in the operating results. The normalized profit up 1%. It really is a function of a one-off up in terms of asset liability mismatching in the period. Previous period that increased the base, and in this period, in fact, due to interest rates going up, actually had a reduction effect. It created this 1% growth in Normalized Operating Profit. If you take the effect out, you're close to the 20% increase in assets under management.
Essentially our fixed annuity book, which is relatively small, the liabilities are longer than the assets. You just can't find assets long enough. There's an inherent mismatch. It's pretty small in the context of the group. It provides some volatility in Discovery Invest. We're very happy with the performance. Discovery Insure had a remarkable period and really is, I think in this period, a wonderful example of how the Vitality shared value model plays out. You can see Normalized Operating Profit up 34%. Really is the operating margin growing by 15%. If you look at how that played out, the first issue is that we have been very careful on new business pricing.
That cost us some volume of new business. You can see that the loss ratio of new business there for Insure is 28% lower than in previous years. We're being very careful on pricing discipline. You will see that how the model plays out is that people engage in Vitality Drive. Over time, that engagement goes up. The third panel, the actual accident frequency in high statuses is dramatically lower. The lapsation effect of the value chain. Healthier, better lives or better driving lives tend to stay, and the others tend to lapse. You get this kind of improving quality of the book and the dynamics over time. The manifestation in the period was a dramatic drop in the loss ratio to 43% in the period. There's some seasonality in that.
You can see on the right-hand side of the chart at the bottom, weather, which is a very important volatile piece of it, was fairly not. I wouldn't call it benign, but not dramatic in that period. Still the drop illustrated really the effect on the non-weather loss ratio. I think the steps taken, the management of the team, but the dynamic is created by the Shared-Value model. I think an excellent period, and I think the team is very confident of how we play that out going forward. Enough of Discovery South Africa. As I said, I think we're very pleased with the performance. I wanna turn to Vitality Global. This is a very important, obviously, time for us.
We've amalgamated all of the businesses into one structure. A lot of work has taken place over the last 15 months in terms of our Vitality Global business into three distinct capabilities. We operate across markets that have all kinds of complexities, and you all know this, and I'm not going to waste time going through all different issues. To an extent, in each of the markets, we're in this complex trade-offs. In the case of the U.K., the subdued growth is increasing payroll taxes on employers and SMEs, so there's affordability issues. At the same time, the NHS is facing difficult pressures, so there's a demand for private healthcare. In China, slower growth, potential deflation, government pushing and supporting health insurance growth, and of course, that's a good thing.
In the U.S., resilient GDP growth, complicated healthcare set with very different policies at a public policy level coming out of the Trump administration. At the same time, a focus on wellness, massively increasing loss ratios and medical expenses in the health insurance space. A lot of dynamics there that we're trying to navigate very carefully. To an extent, I think a very complex environment, as I said, but a bunch of trade-offs that offer strategic opportunity across the board. I wanted to just illustrate to you, we sent out these KPIs a number of months ago. Again, I think the performance has been very strong. The only area we're falling behind or have not performed in line is Vitality Network.
There's a lot of work being done there to restructure a lot of that, of that business. The driver behind that primarily has been just a currency issue between the yen and the dollar that I'll touch on in a moment. I think the work done in Vitality Global has been quite remarkable. There are five things we set out to do, and it's important you understand them. The first is Vitality AI as the kind of the core structure of our ability to drive all our business itself, but in a box, have it available for our partners so we can grow that capability. Secondly, to take Vitality U.K., make it excellent, make it the kind of the center of excellence for everything we do globally.
The third is to restructure, realign Vitality Network with our partners and to grow the partner base. I think excellent work has taken place there by the team. Vitality Health International, we are scaling up in the U.S., quite substantially, excited about the potential of that market. Of course, fifthly, to drive Ping An Health in China. That's been a tremendous performer. Let me give you some insight. Firstly, Vitality AI. I did want to just mention this in a bit more detail, if I can. It has been a very important step for the group. It's been a partnership with Google, and it really is at the core of our ability to really offer customers a very different Vitality. The...
At the highest level, it's about taking an individual and the ability to determine exactly their risk factors, to determine exactly what they should do, how to communicate that action, how to incentivize that action in a personalized way, and to make sure we get the right engagement in the right way using all of the data that we have, and the ability then to kind of take out that value chain and populate it with all of our actuarial science components that gives us the alpha. That is the aim of Vitality AI. The construct on the left-hand side is essentially five levels: data, risk, the Vitality AI recommender, our partner engagement structure, and then the layer that interfaces with insurance, kind of the actual insurance layer.
Just to give you some insight into each, I mean, the basis of working with Google, of course, has been the power of the data. I think there's no group globally that has the quality and scale of the data we've collected over three decades. It is over 60 million life years, many different dimensions of health data, clinical data, wellness data, financial data, behavioral data. That's unique data set that allows us to longed truly understand correlations and causality, and that's at the core of the Vitality, of the Vitality AI model. Of course, AI requires the data to work. The first layer is about the ability to take that, to package it, to move it into different markets efficiently.
The second layer then is essentially kind of the recommender, the ability to get a single point of optimization of the value of an activity, and the propensity of the member to do it, and to populate the face of the mobile in the right way that members react to that. It uses our data as the core of it. It uses all of Google's clinical LLMs based on Gemini's technology and all of the stuff they understand in the healthcare system, the ability to take the specific member data from us, then to build the LLMs around that to actually be able to communicate, provide context to the member in the right way creates considerable power at a single point of optimization. In Vitality AI, we've built out a massive, I think, powerful global partner strategy, as you can see.
Enablement partners, device partners like Apple, Ōura, Garmin, et cetera. Gym partners, other partners, as you can see, that facilitate healthy activity. Reward partners, travel partners, lifestyle partners, et cetera. Again, making the point about context, working with Google and LLMs to make sure that the messaging about what you should do, why you should do it, how you get rewarded, is completely and totally personalized. Finally, the fifth layer, the insurance layer, the translation layer. The variety of different mortality curves, how we build them is now personalized. Dynamic pricing models that we have that can be applied in different markets. Working with reinsurers.
We have now four key reinsurers on the panel that provides upfront selection discounts and provide the kind of engagement discounts that we need that can offer to our partners and us allow us to actually price, in a sense, bank the ability to change behavior and drive mortality and morbidity. This layer provides the real translation into health and life insurance. The core of it, though, is at the client level. You know, if you go up from the bottom of, you know, fairly healthy all the way through to disease management, the design features of Vitality are manifest on the face of the mobile in three dimensions. Firstly, two hyper-personalized rings, physical activity and sleep. Sleep has been one of the big things that we've used our data to actually personalize.
The second is priority actions. In the case of life insurance, early detection. In the case of health insurance, healthy actions. High-risk management. In the case of health insurance, disease management, et cetera. Really a simple interface that brings all of this onto the face of the mobile for the client. They just do this, and they get incentivized and rewarded for doing it. The effect on their health, the effect on the value chain is profound. Vitality AI is a process that was launched or a product that was launched, a capability, during this period. We're in the process now of rolling it out to partners and internally.
Vitality U.K. The second piece of the strategy has been about creating a brilliant business in the U.K., growing it, scaling it, and to a large extent, making it the center of excellence for how the group globalizes. The performance in the period has been staggering, as you can see, operating profit growing 65%, lives covered to over 2 million, premium income climbing nicely about 14%. Excellent performance on new business. Vitality Health had I think an exceptional period, as you can see. A complex market, despite that 8% growth in new business. Normalized profit growing by 97%, really an exceptional performance in terms of managing the medical loss ratio, managing claims carefully, and again, the dynamics of the model.
If you play out the model as opposed to pricing, behavior change, optimizing retention, and then the alpha of the margin, you can see how it played out. We had this tremendous increase in claims costs over the last number of years as the NHS experienced pressure. The ability to price optimize and in health insurance, in most cases, 80% of people don't claim. In the Vitality model, even if they haven't claimed, we understand their factors through the engagement in the programs. The ability to optimize pricing for their benefit and for the benefit of the economics of Vitality Health you see coming through. We actually managed to get the pricing right, but at the same time retaining the right clients.
The engagement has been exceptional, we see the correlation to the hospital claims, and we're getting, again, as I showed you in all of the other businesses, healthier lives, engaged lives. Not healthier lives, engaged lives tend to stay with us longer. We had a exceptional margin of 11%. It is seasonal, we are guiding now to above the 7.5% that we set as our target. We're feeling good about how Vitality Health will grow. Vitality Life had a tremendous period. Operating profit up 7%. I mean, that's the unwind of the CSM over time. Hopefully, over time that will grow, but that's quite mathematical. The new business is really has been exceptional. Growth of 35%. Tremendous Value of New Business.
We're feeling really good about the returns on capital in that. Again, it's the same value chain. The ability to compete on the portals with intermediaries has let us grow our market share to nearly 15%. We've seen a growth of 50% in the advisors, number of advisors writing for us. You can see the actual improvement in mortality between the lowest status and the highest, 47%. Coincidentally, we're getting a similar kind of selective lapsation effect where there's a difference of lapsation of 47% between engaged and unengaged people. The key issue of this on the right-hand side is the Value of New Business climbing to GBP 34.6 million. Considerable volumes of business being written at great Value of New Business, and that, of course, is important.
When you go to the store of value, showing it in the same form, the total store of value, CSM plus Risk Adjustment plus the IFR, a 9% growth. The important KPI here is making sure that the new business added ZAR 37.3 million, exceeds the release to earnings, the CSM continues to grow. Really, I think a very, very good period for Vitality Life, again, boding well for the future. Let me turn to Vitality Network. I did make the point that the profit was affected by a currency impact in Japan. Sumitomo Life is an absolutely brilliant partner of Discovery and Vitality.
They've rolled out Vitality meticulously, but the growth of it and the scale of it is important, and the dynamics of it means that when the yen depreciated, it did affect the operating results. There's been much more done to Vitality Network to really scale it for the future, and that's important. If you look, there's kind of a juxtaposition of our, of our progress, but the progress of our partners has been absolutely tremendous. Second from the left, the integrated API new business written by our partners at 13% over $1 billion. You can see the scale of the partner network using the Vitality product. Membership grew by 11% to just under 7 million. Our partners are growing nicely.
If you look at our major partners, very strong growth in the U.S., 23%. AIA grew its Vitality integrated business by 10%. Sumitomo up 14% off a very high base. The work done, though, in Vitality Network is profound. We are pushing really hard now to scale this business. We've been pretty clear about this ultimately is a margin business. It's revenue and expenses. We're really using this opportunity of Vitality AI to really restructure things, realign, and grow the partner base. The first thing, of course, was the launch of Vitality AI. The second is a rebasing of the Sumitomo Life contract into one that shares the value slightly differently. I think it's very good for both parties. It creates the right kind of alignment.
I'll touch on that now. The third is an agreement of an invest back with AIA. Both parties are investing into the technology. We're working a lot of the Vitality AI product across the region around getting the shared value right, restructuring certain of the products, modernizing many of the systems. It's a considerable initiative, but we're excited about its potential growth, its growth potential. Fourth, after the end of the Generali partnership, we've been active over this period, talking to many insurers across Europe, and building hopefully a very strong partner network, new carrier network across Europe. We remain focused on North America. The John Hancock partnership has been exceptional. We're working on a few key partners that we may bring on, we hope to bring on over time.
There's been a considerable amount of work taking place in Vitality Network. I wanted to make the point about Sumitomo Life. How the contract works now is that essentially we get a share, we get a percentage of every premium paid, not just of new business, but of all premiums guaranteed. New business written plus the back book. As the Vitality integrated business of Sumitomo grows, we kind of get a growing revenue stream. The present value of that stream now is about $62 million. It's very conservatively calculated. It's kind of a present value of future flow of the existing book at risk-free + 10%. It also ignores all future business. It's a fairly conservative asset, but it is a substantial asset, as you can see.
Therefore, when the yen dropped 9% and the risk-free rate went up 63 basis points off a very low base, that dropped the entire value of the asset by 10%. That's what you see having an effect on the Vitality Network profit. It's not material in the context of the group. It would cost a lot to hedge it out, so we're quite comfortable with some volatility. I think the key point to make is on the right-hand side. You can see how this asset reduces over time in gray, kind of how the JPY 62 million plays out over time, and then in red, the expected new business and how that adds over time.
It illustrates, I think, some volatility, but importantly the scale of the partnership with Sumitomo Life, its potential going forward, and to an extent, the blueprint of the type of deals we'd like to do going forward with other carriers. A lot of work taking place in Vitality Network. We remain very, very positive and excited by Vitality AI and the ability to partner with many companies globally, given the capability of what's been built. Let me turn to Vitality Health International and end off on this and just make the point that there's been a considerable drive across the different businesses. We've had a fairly benign presence in the U.S. through Vitality Health, through firstly employer-based business. We've accelerated that quite dramatically over the last 18 months or so.
In the last six months in this period, there's been a considerable acceleration. Three distinct issues. Number one has been the successful acquisition of WellSpark. The second has been a focus on working with U.S. health plans as partners. The third, of course, is taking Vitality AI as the core and really playing that a lot more in the U.S. market around coaching, around care navigation, et cetera, and using that capability and data to do that. We're very pleased with the results. The business should be profitable. I think will be profitable in 2027 and should grow off that base. You can see in that graph the membership base has climbed now considerably, and we've had great success with a number of very good health plans, and we plan to build that out going forward.
The acquisition of WellSpark has been excellent. We're working really well with them, with EmblemHealth plan around actually working out how Vitality AI plays out. It's working very well. We're optimistic about that. Amplify Health with AIA, there's been a strong focus on accelerating its implementation across four markets. We expect the business to be profitable towards the end of calendar 2027. Finally, Ping An Health continues to perform excellently. Two distinct themes. One is excellent performance in Ping An Health. The other is an important transition in the distribution strategy that we do want to mention. Let me just give you the key numbers. Ping An Health grew its operating profit by 59%. The performance is really quite staggering.
You can see, we've broken up kind of the investment growth, the operating profit in red. The equity markets were very strong, and that created a lot of growth. The actual operating performance was up 123% on the back of exceptional focus on loss ratio, on expenses. Just operating performance has been staggering. You can see the growth across everything has been strong. The growth in new business somewhat muted, up 8%, but still to a substantial figure. The key issue in Ping An Health is during the period, Ping An Life, due to compliance issues related to related parties, stopped selling the Ping An Health Yi Sheng Bao product line. We had to then start focusing on actually how we replace that.
Ping An Health for the last number of years has built a very powerful multi-channel distribution capability. During this period, that change was made. We are now moving strongly from that. A few points to make. Firstly, on the left-hand side, to illustrate the exceptional performance, the margin against other health insurers. On the distribution, you can see that Ping An Life share of new business through its Yi Sheng Bao product was in 2024 quite substantial in the gray. Very, very quickly, over the last 18 months or so, Ping An Health has built an exceptional distribution capability, working with large brokers, working with Ant, Tencent, JD, et cetera, and others, building its own capability.
You can see by the middle of 2026, when the change was made, Ping An Health, Ping An Life's share was about 22% of the Yi Sheng Bao product suite. We are pretty comfortable the effect of this will be pretty moderate going forward, and we should see growth off that base. An exceptional performance, I think, of Ping An Health. It's gone through a number of phases and changes over many years. This is another one of them. It opens up the opportunity for broader distribution channels. It opens up the opportunity for different products. There's a bank insurance health plan now being rolled out with a number of banks, so we're excited about its potential growth. Let me end where I started, with the numbers.
With the numbers that are strong. As you can see, we are, I think, performing strongly based on the model, declaring a dividend completely in line with the growth algorithmically, as you can see. Maybe end Deon and David, where I started with the strategy. I hope I got across to you that we see kind of a very, very complex environment rolling out. We see the proliferation of AI and those kinds of technologies as fundamental to the trends that we are building our model on. We've accelerated dramatically the business model. We've applied precision to the value chain to be able to ascertain exactly what that alpha is and how you get it, and that softens through our composites.
Hopefully, I got across to you the kind of simplicity of the idea of the super bank of Discovery Bank, and importantly, how Vitality AI manifests in our businesses and our partners' businesses. Been a great period. I'm on time, I think, at one hour.
Exactly.
Purely coincidentally. Let me just say that. Thank you for that. I'm gonna turn over to David, who David, you'll anchor the questions. David Danilowitz.
Great. Thanks, Adrian. We have got a series of questions coming through. Again, please as a reminder, please post your questions live on the webcast. I'll start off with the first question, which is for Deon. The first question comes from Baron at JP Morgan. Deon, to you, given the strong growth in operating profits, how open is management to lowering the dividend cover in FY 2026? What specific trigger metrics would prompt these changes?
Thank you, David. Good morning, everybody, thanks for the question, Baron. I'd like to refer you back to the one slide that Adrian covered earlier, and you've seen that now in a number of our results presentations, where we talk about the phases of growth of the group, and now very clearly coming out of that deep investment phase into a growth phase. We also indicated that during that phase, as profit sort of gain momentum, the cash flow generation of the group obviously gains momentum. The FLR is actually tracking downwards. You know, on that basis, we indicated that that will certainly create an opportunity for us to reduce the dividend cover ratio, increasing the dividend payout over over this over this period.
Great. Thanks, Deon. I'll move to the next question. The next question is from Francois du Toit from Anchor Stockbrokers. This is for Riaan on the SA Life business. Why did the SA Life revenues increase by only 3.8% in spite of the 16% increase in regular premium new business volumes and 1.9% increase individual life policyholder count? Is the impact of low inflation being seen on revenue growth?
Great. Thanks for the question. I think it's important to start with the definition of Insurance Revenue under IFRS 17, which is quite different to what one would be used to as considering insurance premium. The definition of revenue under IFRS 17 actually reflects the consideration of insurance coverage rather than premiums. It includes expected claims in the next period and then other services. I think if you track that back to fits with it as the flow inflation on automatic premium increases. We believe it
Just-
Okay.
Yeah.
Sorry.
Okay. Thank you. Riaan.
Yeah.
It seems, maybe if you can come through.
Just to come through.
... to the room we're in right now, and 'cause I think the question was jumpy a bit. We'll go back to the question. I'll move on to the U.K., over to Neville. Neville from Michael Christelis from UBS. How do you reconcile the current Vitality Health margins of 11% with your long-term target of 7.5%? What is once off in this, and should we expect increased volumes rather than sustainably higher margins over time?
Thanks, David. Let me start by saying that Vitality Health has had a brilliant performance, and it really is a great example of shared value in action. We've had a very disciplined approach to the model, from pricing, to making sure that, you know, our care pathways and the managing of the claims has been exceptional. If you look at the seasonality, we all know that the vast majority of the profits come through in the first half of the year. Having said that, we are well on track to exceed the 7.5% margin for the full year period. Importantly, it gives us choices.
The one thing is we'll continue to have a very disciplined approach to risk selection, and we're certainly not going to sacrifice the quality of the earnings with volume just for the sake of it. You know, expect good continued performance, but obviously, over the period, it will actually, you know, average out at a level that we believe is going to be slightly higher than the guidance that we've given you.
Great. Thanks, Neville. I'll stick with you. There's a question from Faizan from HSBC. For the U.K. business Vitality Life, how much of this very strong performance would you put down to seasonality, actions taken, and broader market trends?
I think once again, Vitality Life has had an exceptional performance around the implementation in a very disciplined way of the Shared-Value model. If we look at, you know, everything from pricing to retention to every single aspect of the business, it really is generating significant value around the new business that is being written. I would say that the market has grown slightly. We have significantly overperformed against our peers in the marketplace. If we look at the growth of new business and the market share of new business for Vitality Life has actually doubled in the last three and a half, four years. This is certainly something that the team have worked exceptionally hard on. We have grown our distribution footprint, we have diversified our distribution.
In the nature of a commoditized marketplace, we've actually using the Shared-Value model to cut through and enjoy significant growth, and we have no reason to believe that we can't continue that going into the future.
Great. Thank you, Neville. We have Riaan in the room, so I'll return to the question posed by Francois du Toit for Riaan, just to make sure we got the answer clearly. The SA Life revenues increased by only 3.8%. The new business volumes were up, and there's increase in policyholder count. Is the impact of low inflation being seen in revenue growth?
Great. Let's try again. Hopefully, you can hear me better this time. I think it's important to just start with the definition of revenue under IFRS 17. The definition under IFRS 17 actually does not reflect premiums collected over the period. It reflects the consideration of insurance coverage. This includes the unwind of a CSM, expected claims in the period, deferred acquisition costs unwinding, and other servicing costs. Just to be clear, there's not a direct definition on the IFRS 17 link of revenue to premiums. Even if we consider premiums in Discovery Individual Life over the period, that actually grew by 6%. We're very comfortable with a strong period and strong premium growth.
Adrian touched on the impact of inflation on automatic premium increases over time, and we're very confident and comfortable that lower inflation, although leading to lower premium and lower claims, is great for our customers. That should play out well over time.
Great, Riaan. Since we've got you, I'm gonna Francois, had a follow-up question on the SA Life and Invest solvency ratio, and the question was, the ratio reduced from 192%- 180% during the period. How much cash was extracted from these two businesses in this period?
I think there are a number of questions really rolled up into the question. The primary reason for the SCR coverage reducing from a very strong 190 to a still incredibly strong 180% over the period is the impact of interest rate. As interest rates reduce, the present value of your projected future cash flows increase, and that's really the driver behind your solvency capital requirement leading to the reduction. I mean, just touching to the, I guess, the second part of the question, the dividend that Discovery Life funded to the group was about ZAR 800 million over this period.
I think it's also important to link that in your capital requirement calculation, we allow for the impact of foreseeable or expected future dividends in that calculation. Overall, we're very comfortable with the solvency coverage ratio, the position of a company from a capital liquidity point of view, and it's way above our set risk appetite metrics.
All right. I'm gonna stick with sequence. Thank you, Riaan. Francois did ask a third question. I'm gonna keep you on the mic there. Can you split the ZAR 493 million mortality experience variances in SA Life between group life and individual life? How sustainable do you see the experience variances to be? What was the IFRS earnings before tax impact of the mortality experience variances?
Right. Thank you. Turning to claims, both individual life and the group life business experienced a very favorable claims over this period as and similar to the previous period. I think again, Adrian has touched on some of the drivers behind why we believe we are seeing improving and favorable claims experience. We see increased engagement in the Vitality program in our base, and importantly, through the refinements in the points metrics and the incentive model, we also see a better correlation of claims when measured within each of those Vitality statuses. We're quite comfortable with the drivers of a claim.
A useful metric might be considering the longer-term claims experience as measured over a five and a half year period of individual life business seeing claims in the low 90% of actual to expected experience. I think that gives confidence in the combined impact of the drivers of this claims experience, as well as looking at claims over a longer term period. I hope that covers the question.
Great. Thanks, Riaan. The next question is I'm going to hand over to Andy online. Andy, the question is also from Francois. The EV statement shows a ZAR 103 million addition to SA Health earnings from a tax variance. Is it fair to assume that the SA Health earnings were 7% above normal with the help of this tax variance?
Thanks, David, and thanks, Francois. Good to hear from you again. The short answer is no. It didn't give a lift to the IFRS earnings.
Under the embedded value, we prepare the projections allowing for 27% tax throughout the projection. In the period, just given various intercompany transactions, the effective tax rate in health under the EV basis was 24%. You see that lift coming through the embedded value experience variance. Under the IFRS, obviously, the profit from operations is gross of tax. The 5% growth that Adrian referred to is before the tax. If you look at the segmentals, you'll see we've fully provided for an income tax expense of 27% on the health segment. No, it didn't provide any sort of lift to that reported result that we had. Thanks, David. Thanks, Francois.
Great. Thank you, Andy. The next question is for Hylton on Discovery Bank. It's from Tapelo. What level of profitability are you achieving month-on-month on the bank, and what is the level of primacy?
Thanks for the question. The bank, you know, I think the bank, as you saw, had a fairly significant swing to profitability from last year. We currently have a run rate which tends to be slightly seasonal, as you would expect, given the kind of breakthrough to profitability, but kind of an overall profit of around about ZAR 20 million-ZAR 30 million per month, and about ZAR 60 million-ZAR 70 million per month before new business acquisition costs. Starting to scale really nicely now, and reflecting the model.
From an engagement perspective, we have, around about 35%-40% of the client base that is kindly engaged or what you would call, I suppose, prime, from an activity perspective. You know, and I think that obviously is a key focus area for us, as the duration of the base starts to increase, and you saw that in Adrian's slides earlier today.
Excellent. Thank you. We have a question from Faizan for Riaan in the room. The question is, for the life business, how do you expect policy alterations, mortality experience to develop over the next few years? Is the quantum of improvement sustainable?
I think it's a great question and an aspect that we spent a lot of time on over the past period. Adrian has shown in the slide the back testing really through our actions and how things have played out when considered for experience against the past six months. I think if we consider the combined impact of policy alterations experience, lapses, the impact of actions that we have already implemented, the expected impact from future actions, the unwind of the stress lapse assumption, as well as the claims experience, the experience over the period progressed broadly in line with what we would have expected.
This gives us a fair amount of confidence in the plans that we have implemented and are implementing and how that will play out in future. I think with the glide path that we've shown, I think it was on slide 41, should hopefully give you a fair indication how things will develop over time if that play out against expected. We remain very confident in the action plan to resolve policy alterations experience going forward.
Great. Thank you. A question from Michael Christelis from UBS for Riaan. Can you comment on the drivers of the growth of IFIE in the SA Life operations relative to guidance provided last year? What is the outlook for this next year if yields stay where they are as at half one?
I think it's a great question, and it really touches on the impact of interest rates throughout the business. I think there are various items to consider. Over the period, we saw both nominal and real interest rates reduce materially, and that has a very positive impact on all the value metrics within Discovery Life. I mean, you will see that playing out in an increase in the Embedded Value, an increase in the Value of New Business, the new business margin, and really all the value metrics turning to IFRS 17, a positive impact and an improvement in the Best Estimate Liability.
I think importantly, given our election of OCI, the positive impact in the Best Estimate Liability manifest through an improved Insurance and Financing Reserve through the use of OCI. I think from a value metric point of view, you see all the positive supply. From a consumer point of view, lower inflation is good for our, for the economic environment, good for our customers. Moving to the income statement, we do not see any material impact within the current period, given our election of OCI, where the significant gain in Best Estimate Liability is really absorbed through an improvement in the Insurance and Financing Reserve, so giving stability to the current period's earnings.
To Michael's specific question, the guidance that we've given in the previous period on the impact of IFIE of about ZAR 80 million through this half year period has played out exactly as expected. If you consider that same impact towards future periods, I think it really depends on the unknown of where the real and nominal yields and the implied inflation rate as a result would end up at the end of this financial period.
To give more information around that, we have included a sensitivity analysis and more detailed description of just the impact of interest rates on value metrics and on IFRS 17 metrics in the additional analyst information pack that's available on our website and hopefully that would give you a good sense of sensitivities of where interest rates impact future earnings periods.
Great. Thanks, Riaan. The next question comes from Warwick Bam from RMB Morgan Stanley. Can you explain the revenue drivers and revenue recognition policy for the Vitality Network, given the mark-to-market impact on the Sumitomo Life book? Are you recognizing an insurance asset as the partner sells Vitality integrated product?
Okay. Sorry. My apologies. Thank you for the question, Warwick. As Adrian mentioned on the call, the way we value the Sumitomo contract is using prudent sets of assumptions. Specifically, it's treated as an insurance asset, and we discount the cash flows at risk-free + 10%. What that means is, as new business gets added into the, gets written by Sumitomo, it forms part of our insurance asset, which gradually gets realized through the cash flow. That's specific to Sumitomo. The wider question, around all the other partners, each of them gets valued on a different basis, and we're happy to pick that up outside of the call 'cause it's quite a detailed response on how each one gets valued.
Thank you, Justin. The next question, in fact, there's two questions related to the acquisition of 1 Discovery Place. The first is from Francois. I will ask the question and then ask the second question. Can you discuss the funding for the Discovery 1 building acquisition and the cost saving in year one by comparing rent with finance costs in year one? The second question comes from Jared Houston from All Weather Capital. Please explain the rationale for buying the head office versus other uses of capital.
Thank you, David, and thank you for the questions. Maybe just to stand back to give context, we did announce this transaction a while back and gave some of the rationale and our thinking behind it, but maybe just for everybody's benefit. We a number of years ago signed up to a lease in this building. It's a 15-year lease. We're sort of halfway through that lease currently. Just a business of our size and scale, obviously, these kind of decisions in terms of whether one renews, find alternative accommodation, or whether we buy or rent, obviously those kind of decisions have to be made now. If you compare the markets also, when we originally signed the lease, absolutely the right decision at the time.
I think a number of things that actually worked in our favor and gave us a number of options this time around, including also having optimized our space usage in the building, and it gave us the opportunity as part of this transaction also to exit phase II or The Ridge part of this building, and that's inherent in this in this transaction. A lot of the thinking is about pure financial benefit, et cetera. I think it's also important that the building has served us very well, and it certainly meets our needs. A combination of those of those criteria got us to make make this decision. Just to answer Francois' question about the funding and the structure.
This is fully self-funded. The building will be bought into a subsidy called Discovery PropCo. It's fully backed with arranged funding. The cost of that funding compared to the rental, and bear in mind that the rental in the existing lease that still has seven years to run, is on an escalation trajectory. Just to give a general sense of that, in our calculations, we would even at the beginning in year one, look at a cash flow saving of approximately ZAR 100 million per annum. You know, considering all of that, considering the fact that the building really serves us well, we believe this is a good place to be certainly for the long term.
We made the decision to capitalize on the opportunity. As I said, you know, it's fully funded. There's no capital necessarily going into this. Over time, it actually serves out the borrowing. David, I hope that answers it.
Great.
Adrian, I don't know if there's anything-
Thank you.
...else to add to that.
Thank you. Thank you, Deon. We've got a series of questions from Harry Botha from Bank of America Securities. I'm gonna start with one of them for Emile Stipp in the U.K. How do you see the risks versus benefits from AI as some global insurance shares have been impacted by AI disruption fears?
Thank you, Harry, for the question. I think, I mean, in your question, you also refer to cost-cutting. You know, we don't really see AI mainly as a cost-cutting tool. I think a lot of companies think about it like that. For us, it's about engagement. It's really about making people healthier. The thing is that the risks with AI arise if you don't have a good ground truth in your data. Now, we've invested over more than two decades in this longitudinal data set that develops a view of how risks are correlated with behaviors and certainly how behavior change causes different risk outcomes. That ground truth is very important because if you think about an LLM, it doesn't necessarily aim to be truthful.
All that it does is it produces really good language for a particular purpose. What we're doing is we're building the power of AI on top of a really powerful, truthful data set that links behavior change to outcomes. Which means that our focus with AI is purely on engagement. It's to make people healthier. Now, in that process, you can do a lot more because it's an incredibly powerful technology. You can reach more people, you can talk to them in a personalized way. That could well lead to some efficiencies in very many processes. The main outcome is that it gives people to interact with us. It rewards them for doing so. They share the data for it with us because there's a reason to. They get a reward for it
They get really useful advice on their healthcare. That's why our approach is quite different, and hence we don't really see those sort of risks arising in the same way as in many other insurance companies. Hope that's helpful.
Emile, thank you very much. Faizan from HSBC had a follow-up question. Looking at your additional analyst statement, the EV reconciliation to the income statement, the life segment benefited from strong methodology and assumption changes both on EV and the income statement. Could you explain what the driver behind this is, and how should we translate this from an IFRS 17 building block perspective?
David, I couldn't hear if that was directed at me. I lost a little bit early, but I'll take it anyway. thanks, Faizan. Yeah. The only basis change we really make at the interim stage is on the economics where we follow the market interest rates for risk-free and the implied inflation. In the EV, that comes through fully, and that's the only real material basis change coming through there. Under the IFRS, that will largely go through OCI and is dealt with there. I hope that answers the question, David.
Great. Thanks, Andy. We've got two connected questions. The one from Marius Strydom from Austin Lawrence Gidon. The question from Harry Botha, both of which to Deon relating to first half and second half. I'll ask them together. From Marius: Which of your segments will struggle in the second half to match the high base delivered for the first half, considering seasonality, super risk profits and strong currency? From Harry: Can you quantify the net one-off benefits in the first half, such as markets and low claims versus core earnings growth? Clearly, Deon somewhat connected those questions.
Yeah. Maybe to just point out, in terms of the growth in H1 and H2, if you go back to the, to the 25-year, which in itself overall, was a very strong delivery and a strong growth rate. If you look at the H1, H2 dynamic, I think it is important to bear that in mind. Obviously, a very strong H2 delivery also, from, you know, overall from the group, in the, in the prior year. I think other than the items that we highlighted in our, in our presentation, obviously favorable, mortality experience and the likes, to a large extent, quality of earnings, is very high.
The interest rate impact is something that we always flag, and under IFRS 17, not all of those impacts will be seen necessarily in the current year, but in your systematic rate going forward. That's an important one to bear in mind as well. Clearly the exchange rate will impact. We've seen a lot of volatility in the network business, for instance, where there's exposure to various currencies and the weakening of the yen that Adrian mentioned against the dollar, for instance, impacting that quite significantly. If you look at the group in that conversion of all of our international businesses, if the rand strengthening holds, particularly the translation of the U.K. result, it will be the average rate that impacts.
If you look at the H1, a lot of that strengthening of the rand happened towards the end, whereas that average rate is more likely to play out over H2. That's something to bear in mind. Obviously, that does not impact the translation of the balance sheets, et cetera, for consolidation. That goes through the Foreign Currency Translation Reserve, but your income for the period will, in general terms, will be impacted by that. Yeah, I don't know if there's anything else that we should flag at this point. The other point made in the question is what are the potential automation and digitalization, and how do we see the risks versus benefits from AI? I'm sure others will add to that.
I think, as Adrian illustrated, the Shared-Value model clearly is so well positioned for the future. The ability to take that into a new dimension through AI is something that we've been working on for a long time already. In general terms, I think the benefits here significantly outweigh any threats. In the background, we see a lot of opportunity and, you know, a lot of new initiatives also in some of the operational areas bringing efficiency through in call centers, et cetera. I'm sure some of the others may want to add to that. David, does that answer.
Yep
all of those?
I think we're done. Adrian, we are actually right on time, in fact, as well. We will have to call it. Thanks very much. Back over to Adrian.
David, thanks. I'm not sure there's much more I can do, but thank you all for your time for the one-off hours. I hope we dealt with the questions. There'll be one-on-ones, obviously, David, over the next number of days. Maybe for me to just thank our Discovery people and Vitality people. Easy to present the results. It's the hard work of our team that achieve them. Very grateful to them. Thanks to all of you, we're shutting the session down. Deon, David, thank you.