Highlights for the six months ended 31 December 2010
- Normalised headline earnings up 25% to R941 million
- Normalised operating earnings increased by 28% from R1 044m to R1 332m (excluding the once-off effects of Standard Life Healthcare acquisition)
- New business API up 15% to R3 747m
- Interim dividend declared of 42 cents per share
Discovery Holdings today announced strong growth thanks to its focus on quality scale and innovation across its South African businesses and a strategy shift to achieve scale, profitability and relevance in international operations.
Adrian Gore, Discovery’s Chief Executive Officer, said: “While the period under review has been complex, impacted by both the lingering effects of the financial crisis and the considerable policy debates that affect the markets in which Discovery operates, we are satisfied with the overall performance and continue to focus on providing our customers with high quality, innovative and relevant products.”
Local businesses
Discovery Health
Discovery Health’s performance exceeded expectations. Despite the previous period’s high base new business grew strongly by 10% and operating profits increased by 12% from R555m to R619m.
Total medical scheme membership managed by Discovery Health increased by 12% to 2.5 million lives.
Discovery Healthy Medical Scheme, the largest medical scheme in South Africa, posted the lowest contribution rate increase among major medical schemes and grew membership by 10%, while lapses reduced to the lowest levels yet experienced in the business. Almost 98% of members maintained or increased their benefit choices for 2011 with only 2% buying down.
Gore said: “Discovery Health is performing exceptionally in a complex environment. During the period, Discovery Health invested significantly in the healthcare system, providing members with enhanced access to affordable, high-quality differentiated care.”
“A fundamental goal for Discovery Health is also to improve access to private healthcare for the low-income sector of the population and the progress that has been made is excellent.”
KeyCare, Discovery Health’s product for the entry level market, grew by 34% to 340 000, its scale is equivalent to the third largest medical scheme in the country.
Discovery Health remains committed to contribute to the successful implementation of a National Health Insurance system for South Africa, while also ensuring the sustainability and strength of the private healthcare sector as an integral part of the overall national healthcare system.
Discovery Life
Discovery Life’s performance over the period was pleasing. Operating profit grew by 14% from R675m to R768m and core risk new business grew by 9% from R481m to R526m.
Discovery Life’s integrated product strategy had a positive effect on lapse rates. An improvement in the mortality and morbidity of policies was also experienced with policy duration, an important factor in the sustainability and profitability of the business going forward.
Gore said: “Discovery Life achieved an important improvement in policy lapses to below the embedded value assumptions set for 2011. This has been an important strategy given the industry’s escalated levels of lapses during the economic slowdown. These strategies show the importance of Discovery’s integrated model and benefits of policyholders’ engagement in Vitality.”
Discovery Life also continued to focus on its business model to achieve improved capital efficiency and expects to reduce capital requirements by R3 billion over the medium term as a result of changes made to its operating model.
Discovery Invest
Discovery Invest’s performance exceeded expectations with strong new business growth, mix, as well as fund performance, driving profitability for the company.
New business increased from R334m to R397m, resulting in operating profit of R44m compared to an operating loss of R24m during the prior period.
Gore said: “Discovery Invest’s strategy has been to focus on the retail long-term savings market and to provide added value to consumers in an environment that offers investors considerable choice and investment performance.”
Recently, Discovery Invest brought new products to market, including the Guaranteed Escalator Annuity and the Classic Flexible Investment Plan. Discovery Invest expects to continue to grow in scale, quality and profitability in the year ahead.
Vitality
Vitality’s role of achieving superior levels of mortality and morbidity experience for the Group through integration and high levels of engagement, was further entrenched during the six-month period.
Engagement levels of key Vitality benefits increased with gym membership rising by 20% from 296 116 to 356 533 and HealthyFood™ activations exceeding 228 000.
DiscoveryCard captured 8% of the point-of-sale market share with members currently spending almost R1bn per month on their DiscoveryCards.
International operations
PruHealth
A change in strategy to achieve scale, relevance and profitability boosted PruHealth in the period under review.
The acquisition of Standard Life Healthcare provides immediate scale and opportunity for PruHealth in the UK Private Medical Insurance market. Discovery also took the opportunity to increase its shareholding in the Prudential JV from 50% to 75%.
Said Gore: “The quality of the Standard Life Healthcare business surpassed our expectations, with the loss ratio, levels of lapses and profitability levels exceeding our expectation. The combination of the management action undertaken within PruHealth, and the acquisition of Standard Life Healthcare, has created a business with strong fundamental drivers of value and one that represents significant prospects for Discovery.”
PruHealth turned in an operating profit of R35m (100% of profit) versus a loss of R53m (50% of loss) during the comparative period. New business increased by 90% from R165m to R313m; and removing the effects of the Standard Life Healthcare, new business increased by 35%.
PruHealth’s combined Vitality and claims loss ratio reduced by 15%, while expenses per policy reduced by 27% on a calendar year basis.
PruProtect
PruProtect delivered an excellent operating performance with strong growth in both new business and earnings. New business grew by 44% from R100m to R144m and operating losses narrowed to R40m (100% of loss).
“Our strategy is to build a quality business based on the Discovery Life business model. In this way, PruProtect will deliver value to consumers in the UK market,” said Gore.
“PruProtect’s performance exceeded expectations in all key areas. Lapses were lower than expected, mortality and morbidity experiences were better than expected, and the product mix was acceptable. Additionally, given the businesses increasing scale, expenses per policy decreased by 57%.”
During the period under review, PruProtect concentrated on strengthening and increasing the breath of the Independent Financial Adviser distribution channel through PruProtect’s franchises, and was once again recognised as the leading protection provider in the UK.
The Vitality Group
Over the last few years, Discovery maintained a small presence in the United States via The Vitality Group, developing and marketing Vitality to large employers and health carriers.
“Given the uniqueness and potential of Vitality and the importance of wellness in a post healthcare-reform environment in the US, we took a decision to accelerate The Vitality Group’s development. We expanded the wellness and reward network and refined the clinical and actuarial pathways that support the programme,” Gore said.
Despite a relatively insignificant distribution capability, The Vitality Group client base grew to 140 000 members by the end of 2010. Importantly, the structure of the business minimises Discovery’s exposure to capital and earnings risks.
To up-scale the business and capitalise on emerging opportunities, Discovery concluded a transaction with Humana, the fourth largest health insurer in the US, covering 18m members. In terms of the transaction, Humana will capitalise a new entity, US-based Humana-Vitality, in which Discovery will hold a 25% stake. Humana–Vitality will provide members with access to the Vitality programme.
Ping An Health
Over the past six months significant work has taken place to operationalise Ping An Health.
The necessary regulatory approvals have been received from the Chinese Insurance Regulatory Commission and operationally the process of transferring the necessary product and system capabilities to Ping An Health began with the Discovery team deployed successfully.
Gore said: “From a product perspective, significant work has taken place to tailor Discovery’s capabilities to the Chinese market. We remain excited by the potential of the Chinese private health insurance market in the long-term.”