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A sound set of numbers

31 August 2004 Angelo Coppola

Discovery reported a 102% growth in operating profit in the year to 30 June 2004 although headline earnings per share before abnormal items rose by 18% to 77.4 cents, on a fully diluted basis.

  • Headline earnings per share up 18%
  • Discovery Life profits up 138%
  • Embedded value up 40%
  • Staff levels at 2900
  • Vitality up 52%
  • Profit after tax up 55%
  • Net profit to shareholders up 15%
  • CAR now at 2 times cover level 

“The disparity between the 102% increase in operating and per share profit can largely be explained by the issue of new shares in July 2003, which raised R875m, but increased the weighted average number of shares in issue by 29%,” says Discovery CEO Adrian Gore.

“We have grown organically this year,” says Gore, “and not growth through acquisition.”

Discovery Life increased profits 138%, while US subsidiary Destiny Health achieved profitability in its core Illinois business and solid growth was achieved in the core Discovery Health business.

Embedded value grew by 40% to R6.876bn (2003: R4.928bn), but the change in the number of shares in issue also affected the per share calculation, putting embedded value per share on a diluted basis at R12.89 up only slightly from the 2003 number of R12.20.

Discovery Life’s annualised new business premium increased to R554m (2003: R423 million). The number of policyholders increased by 91% to 119 884 (2003: 62 914). The company’s market share of new business of the entire life assurance market now exceeds 6.1%.

The life business shows that the value of the in-force book is up 46%. This is a competitive industry, with massive players, with all of them using the Discovery Life developed product – with the investment element stripped out of the offering.

There are now 110 000 members. They claim to own 30% of the broker risk market.

“We are not a company that believes in cross selling for the sake of it. Having said that, the products work well together with an increased number of life clients now also health clients.

“New business growth in Discovery Life was up 7%, due to a strong 2nd half. The life business was up 31% in terms of recurring new business,” says Gore.

Discovery Health continued to grow market share in the period under review, rising to 22.8% (2003: 20.8%), and membership now stands in excess of 1.6 million members. This growth and improved administration efficiencies helped grow operating profits 40% to R522 million (2003: R372 million).

“Vitality is a tactically integrated business, it infiltrates everything that we do. While it reports as a separate business. It is there as a support structure, although the numbers will fluctuate from year to year.”

Discovery Health’s product structures and sound risk management helped grow the Discovery Health Medical Scheme surplus by a healthy R1.52 billion over the financial year to over R2.5 billion at 30 June 2004. The Scheme is on track to meet the 25% statutory reserve level required by 31 December.

Progress in meeting these reserve levels has meant that Discovery Health and the Discovery Health Medical Scheme announced a 5.4% contribution increase for 2005, its lowest since inception.

Discovery now claims to hold 22.8% market share, and Gore is confident that they have the opportunity to grab even more of the market share.

At the same time member benefits were significantly enhanced and remuneration for specialists and general practitioners increased by some 40%. In terms of affordability KeyCare, which is aimed at employees earning less than R5 000 per month, continues to grow in line with projections, with approximately 67 000 members.

The health business is a highly politicized environment as there are conflicting interests of the members, corporate investors and the medical professionals. Balancing the needs of all parties can be quite tricky.

Destiny Health, Discovery’s healthcare insurance subsidiary in the US, turned a small profit in the Illinois business.

Discovery is also involved in two new initiatives, set to roll out in the coming financial year. This includes PruHealth, a joint venture between Discovery and Prudential plc.

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The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?

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