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Discovery excels locally, gains traction in UK and announces US structural change

27 February 2008 Discovery


*Profit after tax up 34% to R541 million (2006: R404 million)

*Discovery Life strongest driver of growth with operating profits up 46% to R479 million

*Discovery Health operating profits up 14 % to R389 million
  **Discovery Health Medical Scheme on track to meet solvency requirement of 25% at end of 2008

*Transfer of US retail insurance; maintain stand alone Vitality
  **Approximate cost of $25 – 30 million

*PruHealth provides maiden EV of R1.25 billion

Discovery today announced interim results underpinned by strong South African operational performances, increasing member traction in the UK – through PruHealth, its joint venture with Prudential plc – and the restructuring of its US business to focus on the Vitality wellness programme.

In addition, Discovery had two successful business launches during the period – that of Discovery Invest on the 23rd October 2007, the South African based long-term savings business, and PruProtect, a UK Protection joint venture, on the 24th September 2007.

Destiny Health

Discovery will transfer Destiny Health’s insurance arm, to a reputable US health insurance carrier. Its wellness programme, Vitality, is being launched as a stand-alone business. The move follows an announcement late last year that Discovery would review its Destiny strategy given losses stemming from structural pricing disadvantage in the US retail insurance market relative to more established players in the market.

Current members will be entitled to renew at policy anniversary with the new carrier or switch to another carrier of their choice and will by serviced by Destiny’s South African based administration team until their annual renewal date. These employees, over time, will be absorbed by the growing requirements of the South African and UK businesses.

Discovery has estimated a cost of $25 - 30 million to taper off this business over the next 18 months.

The growing portion of Discovery’s US business, its Vitality programme with its first-mover advantage, will continue to be marketed as a stand-alone product. The wellness programme has earned employer support over the past six months with some big corporate clients, like AOL and Alcon, already signing on.

CEO Adrian Gore noted, “This streamlined focus plays to Discovery’s strengths in administration and wellness-plan design, with the additional benefit of annuity-based revenue. The business is both low risk and low cost”.

The wellness programme will be available to all companies, regardless of the geographic boundaries and insurance affiliations.

Discovery Health

Discovery Health exceeded expectations with operating profits up by 14% to R389 million (2006: R342 million) and new business improving to R1 265 million (2006: R1 233 million). The number of lives under management grew to 2 056 106 in total (2006: 1 981 867). During the period under review, more than 98% of members of the Discovery Health Medical Scheme either remained on their current plan or bought up to a higher benefit levels.

Several initiated strategies have come to fruition including:

* The number of GPs in the Discovery GP Network and the number of specialists contracted to the specialist payment arrangement exceeded target and approached 80% of all doctors in the private sector servicing Discovery Health Medical Scheme members by January 2008. Discovery Health Medical Scheme members will now have certainty of cover and limited out-of-pocket expenses when visiting these doctors. A foundation has been built from which to work with doctors more widely and constructively.
* Utilising its scale, Discovery Health has entered into structures and contracts throughout the private healthcare system, which allow for improved quality and contained-cost benefits.
* Reduction of administration fees through significant efficiencies in the operational, administrative and risk management structures within Discovery Health.
* The significant investment in risk-management and managed care has meant that medical costs have been controlled, and the resulting medical inflation contained, despite the adverse selection and aging population of the private healthcare system.
* The Discovery Health Medical Scheme generated in excess of R1.1 billion in surpluses for the calendar year 2007. It is on track to achieve the 25% statutory solvency requirement at December 2008.

Discovery Life

The strongest contributor to Discovery Holdings’ profit growth was from Discovery Life, which showed a 46% increase in operating profits to R479 million (2006: R327 million) while gross inflows under management increased by 31% to R1 446 million (2006: R1 107million). Annualised new business premium income increased by 31% to R627 million (2006: R480 million). The value of business in force improved significantly, growing by 31% to R6 623 million.

“We believe we are the strongest transactor in the pure risk market. This is a large market with considerable scope for growth”, said Gore.

Gore believes that innovation, relevant benefit structures and the integration of Vitality to enable dynamic pricing are the differentiating factors that give Discovery its competitive edge in this market. “This business model also lends itself to better risk selection for both new business as well as lapses,” he said.

Discovery Invest

Discovery launched its investment business, Discovery Invest, on 26 October 2007 and initiated business in early November, using the asset management capabilities of Investec Asset Management and Deutsche Bank (London).

“This new venture has exceeded our expectations. Despite launching during difficult and volatile time for the markets as well as the middle of the holiday season, we have managed to write almost R300m worth of business in 12 weeks” said Gore.

“Discovery Invest offers a full range of investment products to cater to any investment requirement, but the real differentiator is our ability to use Vitality as an integrator with other Discovery products. This offers our investment clients a reduction in their administration and asset management fees”.

The Discovery Invest product range has proved to be particularly appealing and competitive. Investment choices like Right Choice, which gives investors the benefit of hindsight, and the Escalator Products, which allow the benefit of dynamic guarantees, have proved particularly popular. Also, the Integrated Endowment, which enables investors who are Discovery Life policyholders to invest without any asset management or administrative fees, has been well received.

PruHealth

The performance of PruHealth demonstrated a concerted focus on the quality of the business. Significant progress has been made in creating a foundation for profitability and growth.

PruHealth continues to achieve strong leadership in the UK private medical insurance market with new business growth to R248 million in annualised premium income (2006:
R198 million). Lives covered increased to 150 341 (2006:103 914) and Discovery’s share of operating losses was cut by 33% to £6 million (2006: £9 million).

Gore noted, “In PruHealth, Discovery has forged a strong partnership with Prudential, representing a well-known and credible UK brand. PruHealth’s leadership position was once again recognised at an industry level, where it was rated as the UK’s Health Insurance Company of the Year in 2007”.

Considerable investment was made in risk management and managed care which had the effect of reducing the loss ratio by 12%. Management of lapses resulted in lapse rates of 5% lower than that of the industry. Vitality assisted in ensuring a positive lapse selection. A 40% reduction in per-member-operating-cost levels was achieved, with further efficiencies expected in 2008, with the renewal cost per member, per month projected to be 12% less than in 2007.

PruProtect

PruProtect, Discovery’s UK life assurance joint venture with the Prudential was launched in September. Initial market feedback has been positive. PruProtect’s strategy mirrors that of Discovery Life, as it is based on the Vitality structure and enables dynamic pricing to be employed in the UK life assurance market. Premium levels are therefore competitive and risk-selection will be improved.

PruProtect requires a dedicated high-advice distribution channel in the broker market and has created owner managed branch offices to market PruProtect to independent financial advisors across the UK. By the end of the period 11 franchises had been launched. Discovery is optimistic of its ability to build PruProtect successfully and to link it to PruHealth, achieving in the UK what Discovery has set out to achieve in South Africa.

Vitality
Vitality’s revenue over the period was up 9% to R387 million (2006: R355 million). Operating profits were down 19% to R21 million (2006: R26 million).

Vitality continues to contribute to the group’s success is in its role as differentiator and integrator for Discovery’s other subsidiaries. Vitality tangibly manifests Discovery’s core purpose of making people healthier and underpins each of our businesses

The DiscoveryCard progresses well despite a challenging credit market.

 

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